Unrealized changes in the fair value of financial and non-financial derivatives that do not qualify for hedge accounting and non-financial derivatives that do not qualify for the expected purchase, sale or usage requirements of the contract are recognized in revenues or energy purchases and cost of fuel, as appropriate. The corresponding unrealized changes in the fair value of the associated economically hedged exposures are not recognized in income. Accordingly, derivative instruments that are recorded at fair value can produce volatility in net income as a result of fluctuating forward commodity prices, foreign exchange rates and interest rates which are not offset by the unrealized fair value changes of the exposure being hedged on an economic basis. As a result, accounting gains or losses relating to changes in fair values of derivative instruments do not necessarily represent the underlying economics of the hedging transaction. For example, the Company usually has more physical supply of power in Alberta from its generating stations and power purchased under PPAs than the Company has contracted to physically sell. The Company utilizes financial sales contracts to reduce its exposure to changes in the price of power in Alberta. Economically, the Company benefits from higher Alberta power prices due to the net long position held since the Company’s expected physical supply is in excess of the Company’s physical and financial sales contracts. However, financial sales contracts that are not hedged for accounting purposes are recorded at fair value at each statement of financial position date and the offsetting anticipated future physical supply or economically hedged item is not. Accordingly, an increase in forward Alberta power prices can result in fair value losses for accounting purposes whereas on an economic basis, these losses are offset by unrecognized gains on the physical supply. The economic gains will be recognized in later periods when the power is produced and sold. The opposite is true for forward price decreases in Alberta power. The derivative instruments assets and liabilities held at December 31, 2012 as compared with 2011 and used for risk management purposes were measured at fair value and consisted of the following: At December 31, 2012, the fair value of the energy derivative instruments designated and qualifying for hedge accounting was a net asset of $29 million, an increase from the net liability of $23 million at December 31, 2011. The increase in the net asset primarily reflects the impact of decreased forward Alberta power prices on power derivative contracts relative to the contract prices. Unrealized gains and losses for fair value changes on derivatives that qualify for hedge accounting are recorded in other comprehensive income and reclassified to net income as revenues or energy purchases and fuel, as appropriate, when realized. At December 31, 2012, the fair value of energy derivative instruments not designated as hedges for accounting purposes was a net liability of $16 million as compared with a net liability of $5 million at December 31, 2011. The difference primarily reflected the impact of changes in the fair value of heat rate options related to the Bridgeport plant. Unrealized and realized gains and losses for fair value changes on energy derivative instruments that do not qualify for hedge accounting are recorded in revenues or energy purchases and fuel as appropriate. As at December 31, 2012, the Company did not have any forward bond contracts. At December 31, 2011, the fair value of the Company’s two $100 million forward bond contracts was a derivative instrument liability of $8 million. The unrealized changes in the fair value of these contracts and reversals of these changes were recognized in finance expense as discussed under Consolidated Other Expenses and Non-controlling Interests. In November 2011, the Company disposed of its interest in CPILP as discussed under Significant Events. Accordingly, at December 31, 2012 and 2011, the Company did not have any forward foreign currency contracts outstanding since these contracts were primarily used to economically hedge U.S. dollar denominated revenues and expected future net U.S. dollar cash flows from CPILP’s U.S. plants. Capital Power Corporation Management’s Discussion and Analysis 2012 59 Derivatives not designated as accounting hedges Energy derivatives designated as accounting hedges ($ millions) Energy cash flow hedges Energy non- hedges Interest rate non- hedges Total Derivative instruments net assets (liabilities) at December 31, 2012 29 (16) - 13 Derivative instruments net assets (liabilities) at December 31, 2011 (23) (5) (8) (36)