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Minnesota Municipal Power Agency <br />Notes to Financial Statements <br />December 31, 2022 and 2021 <br />Note 5: Derivatives and Financial Instruments <br />The Agency has entered into financial futures contracts to manage the risk of volatility of future cash <br />flows associated with the purchase of energy because of commodity price volatility. By entering into <br />these arrangements, the Agency will receive and make payments based on market prices without actually <br />entering into the related commodity transactions. These arrangements are considered derivative <br />instruments under the provisions of GASB Codification Section D40, Derivative Instruments. In <br />accordance with this guidance, as the Agency's derivative instruments are considered effective hedges, <br />the accumulated change in fair value of these derivative instruments is recognized as a deferred inflow <br />or outflow of resources on the statements of net position. The fair value of these contracts is determined <br />by comparing the contract price to the forward market prices quoted by an independent external pricing <br />service. Realized gains and losses from derivative instruments are recognized as power acquisition <br />expense on the statements of revenues, expenses and changes in net position in the month the contract <br />expires. <br />Notional Values — As of December 31, 2022 and 2021, the Agency had 200 and 63 total outstanding <br />contracts, respectively. These contracts are structured with a standard quantity of 10,000 MMBtu per <br />contract. <br />Credit risk — Credit risk is the risk that results when counterparties or the clearing agent are unable or <br />unwilling to fulfill their obligations. The Agency addresses this risk with the counterparties by executing <br />these contracts using an independent clearing agent, which requires collateral and will spread any unfilled <br />obligations across all participants utilizing their services. The risk of default by the clearing agent is <br />mitigated by their membership in the commodities clearing house, which requires collateral and guaranty <br />funds by each clearing agent to be used to offset any socialized unfilled obligations between member <br />clearing agents. <br />Basis risk— Basis risk is the risk that arises when variable rates or prices of a derivative instrument and <br />the risk exposure being managed are based on different reference rates. The Agency is exposed to this <br />risk because of a difference in commodity value between different generating sites and delivery points <br />or between cash market prices and the pricing points used in the MISO financial market. <br />26 <br />164 <br />