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16. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation generally limits the use of derivative instruments to those that qualify as accounting or economic hedges. As at March 31, 2013, the Corporation's derivative contracts consisted of fuel option contracts, natural gas swap and option contracts, and gas purchase contract premiums. The fuel option contracts are held by Caribbean Utilities and the remaining derivative instruments are held by the FortisBC Energy companies.
Volume of Derivative Activity
As at March 31, 2013, the following notional volumes related to fuel option contracts and natural gas commodity derivatives that are expected to be settled are outlined below.
2013 2014----------------------------------------------------------------------------Fuel option contracts (millions of imperial gallons) 13 -Gas swaps and options (petajoules) 12 7Gas purchase contract premiums (petajoules) 68 12----------------------------------------------------------------------------
Presentation of Derivative Instruments in the Consolidated Financial Statements
In the Corporation's consolidated balance sheets, derivative instruments are presented on a net basis by counterparty, where the right of offset exists.
The Corporation's outstanding derivative balances were as follows:
As at March 31, December 31,($ millions) 2013 2012----------------------------------------------------------------------------Gross derivatives balance (1) 36 60Netting (2) - -Cash collateral - -----------------------------------------------------------------------------Total derivative balances (3) 36 60 -------------------------------- --------------------------------(1) Refer to Note 17 for a discussion of the valuation techniques used to calculate the fair value of the derivative instruments.(2) Positions, by counterparty, are netted where the intent and legal right to offset exists.(3) Unrealized losses of $36 million on commodity risk-related derivative instruments as at March 31, 2013 were recognized in current regulatory assets (December 31, 2012 - $60 million), which would otherwise be recognized on the consolidated statement of comprehensive income and in accumulated other comprehensive loss.
Cash flows associated with the settlement of all derivative instruments are included in operating cash flows on the Corporation's consolidated statements of cash flows.
17. FAIR VALUE MEASUREMENTS
Fair value is the price at which a market participant could sell an asset or transfer a liability to an unrelated party. A fair value measurement is required to reflect the assumptions that market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risks inherent in a particular valuation technique, such as a pricing model, and the risks inherent in the inputs to the model. A fair value hierarchy exists that prioritizes the inputs used to measure fair value. The Corporation is required to record all derivative instruments at fair value except for those which qualify for the normal purchase and normal sale exception.
