Derivative Instruments and Hedging

Our Networks and Renewables activities are exposed to certain risks, which are managed by using derivative instruments. All derivative instruments are recognized as either assets or liabilities at fair value on our condensed consolidated balance sheets in accordance with the accounting requirements concerning derivative instruments and hedging activities.

(a) Networks activities

The tables below present Networks' derivative positions as of March 31, 2019 and December 31, 2018, respectively, including those subject to master netting agreements and the location of the net derivative positions on our condensed consolidated balance sheets:



As of March 31, 2019	Current Assets			Noncurrent Assets			Current Liabilities			Noncurrent Liabilities
(Millions)
Not designated as hedging instruments
Derivative assets	$	13		$	4		$	7		$	2
Derivative liabilities	(7		)	(2		)	(18		)	(95		)
	6			2			(11		)	(93		)
Designated as hedging instruments
Derivative assets	—			—			—			—
Derivative liabilities	—			—			(1		)	—
	—			—			(1		)	—
Total derivatives before offset of cash collateral	6			2			(12		)	(93		)
Cash collateral receivable	—			—			—			2
Total derivatives as presented in the balance sheet	$	6		$	2		$	(12	)	$	(91	)



As of December 31, 2018	Current Assets			Noncurrent Assets			Current Liabilities			Noncurrent Liabilities
(Millions)
Not designated as hedging instruments
Derivative assets	$	18		$	6		$	10		$	3
Derivative liabilities	(10		)	(3		)	(21		)	(93		)
	8			3			(11		)	(90		)
Designated as hedging instruments
Derivative assets	—			—			—			—
Derivative liabilities	—			—			(2		)	—
	—			—			(2		)	—
Total derivatives before offset of cash collateral	8			3			(13		)	(90		)
Cash collateral receivable	—			—			—			—
Total derivatives as presented in the balance sheet	$	8		$	3		$	(13	)	$	(90	)

The net notional volumes of the outstanding derivative instruments associated with Networks activities as of March 31, 2019 and December 31, 2018, respectively, consisted of:



	March 31,	December 31,
As of	2019	2018
(Millions)
Wholesale electricity purchase contracts (MWh)	4.5	4.9
Natural gas purchase contracts (Dth)	7.0	7.8
Fleet fuel purchase contracts (Gallons)	2.1	2.1

Derivatives not designated as hedging instruments

NYSEG and RG&E have an electric commodity charge that passes through rates costs for the market price of electricity. They use electricity contracts, both physical and financial, to manage fluctuations in electricity commodity prices in order to provide price stability to customers. We include the cost or benefit of those contracts in the amount expensed for electricity purchased when the related electricity is sold. We record changes in the fair value of electric hedge contracts to derivative assets and/or liabilities with an offset to regulatory assets and /or regulatory liabilities, in accordance with the accounting requirements concerning regulated operations.

NYSEG and RG&E have purchased gas adjustment clauses that allow them to recover through rates any changes in the market price of purchased natural gas, substantially eliminating their exposure to natural gas price risk. NYSEG and RG&E use natural gas futures and forwards to manage fluctuations in natural gas commodity prices to provide price stability to customers. We include the cost or benefit of natural gas futures and forwards in the commodity cost that is passed on to customers when the related sales commitments are fulfilled. We record changes in the fair value of natural gas hedge contracts to derivative assets and/or liabilities with an offset to regulatory assets and/or regulatory liabilities in accordance with the accounting requirements for regulated operations.

The amounts for electricity hedge contracts and natural gas hedge contracts recognized in regulatory liabilities and assets as of March 31, 2019 and December 31, 2018 and amounts reclassified from regulatory assets and liabilities into income for the three months ended March 31, 2019 and 2018 are as follows:



(Millions)	Loss (Gain) Recognized in Regulatory Assets/Liabilities					Location of Loss (Gain) Reclassified from Regulatory Assets/Liabilities into Income	Loss (Gain) Reclassified from Regulatory Assets/Liabilities into Income
As of						Three Months Ended March 31,
March 31, 2019	Electricity			Natural Gas		2019	Electricity			Natural Gas
Regulatory assets	$	2		$	—	Purchased power, natural gas and fuel used	$	4		$	—
Regulatory liabilities	$	(4	)	$	—

December 31, 2018						2018
Regulatory assets	$	5		$	—	Purchased power, natural gas and fuel used	$	(6	)	$	2
Regulatory liabilities	$	—		$	—

Pursuant to a PURA order, UI and Connecticut’s other electric utility, The Connecticut Light and Power Company (CL&P), each executed two long-term CfDs with certain incremental capacity resources, each of which specifies a capacity quantity and a monthly settlement that reflects the difference between a forward market price and the contract price. The costs or benefits of each contract will be paid by or allocated to customers and will be subject to a cost-sharing agreement between UI and CL&P pursuant to which approximately 20% of the cost or benefit is borne by or allocated to UI customers and approximately 80% is borne by or allocated to CL&P customers.

PURA has determined that costs associated with these CfDs will be fully recoverable by UI and CL&P through electric rates, and UI has deferred recognition of costs (a regulatory asset) or obligations (a regulatory liability), including carrying costs. For those CfDs signed by CL&P, UI records its approximate 20% portion pursuant to the cost-sharing agreement noted above. As of March 31, 2019, UI has recorded a gross derivative asset of $4 million ($0 of which is related to UI’s portion of the CfD signed by CL&P), a regulatory asset of $99 million, a gross derivative liability of $103 million ($98 million of which is related to UI’s portion of the CfD signed by CL&P) and a regulatory liability of $0. As of December 31, 2018, UI had recorded a gross derivative asset of $5 million ($0 of which is related to UI’s portion of the CfD signed by CL&P), a regulatory asset of $97 million, a gross derivative liability of $102 million ($96 million of which is related to UI’s portion of the CfD signed by CL&P) and a regulatory liability of $0.

The unrealized gains and losses from fair value adjustments to these derivatives, which are recorded in regulatory assets, for the three months ended March 31, 2019 and 2018, respectively, were as follows:



	Three Months Ended March 31,
	2019			2018
(Millions)
Derivative assets	$	(1	)	$	(2	)
Derivative liabilities	$	(1	)	$	(9	)

Derivatives designated as hedging instruments

The effect of derivatives in cash flow hedging relationships on Other Comprehensive Income (OCI) and income for the three months ended March 31, 2019 and 2018, respectively, consisted of:



Three Months Ended March 31,	Gain Recognized in OCI on Derivatives (a)		Location of Loss Reclassified from Accumulated OCI into Income	Loss Reclassified from Accumulated OCI into Income		Total amount per Income Statement
(Millions)
2019
Interest rate contracts	$	—	Interest expense	$	2	$	78
Commodity contracts	1		Purchased power, natural gas and fuel used	—		563
Total	$	1		$	2
2018
Interest rate contracts	$	—	Interest expense	$	2	$	74
Total	$	—		$	2

(a) Changes in accumulated OCI are reported on a pre-tax basis.

The net loss in accumulated OCI related to previously settled forward starting swaps and accumulated amortization is $58.8 million and $60.8 million as of March 31, 2019 and December 31, 2018, respectively. We recorded $2.0 million in net derivative losses related to discontinued cash flow hedges for both the three months ended March 31, 2019 and 2018. We will amortize approximately $3.8 million of discontinued cash flow hedges for the remainder of 2019.

The unrealized loss of $0.9 million on hedge derivatives is reported in OCI because the forecasted transaction is considered to be probable as of March 31, 2019. We expect that $0.9 million of those losses will be reclassified into earnings within the next twelve months. The maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted fleet fuel transactions is twelve months.

(b) Renewables activities

We sell fixed-price gas and power forwards to hedge our merchant wind assets from declining commodity prices for our Renewables business. We also purchase fixed-price gas and basis swaps and sell fixed-price power in the forward market to hedge the spark spread or heat rate of our merchant thermal assets. We also enter into tolling arrangements to sell the output of our thermal generation facilities.

Renewables has proprietary trading operations that enter into fixed-price power and gas forwards in addition to basis swaps. The intent is to speculate on fixed-price commodity and basis volatility in the U.S. commodity markets.

Renewables will periodically designate derivative contracts as cash flow hedges for both its thermal and wind portfolios. The fair value changes are recorded in OCI. For thermal operations, Renewables will periodically designate both fixed price NYMEX gas contracts and natural gas basis swaps that hedge the fuel requirements of its Klamath Plant in Klamath, Oregon. Renewables will also designate fixed price power swaps at various locations in the U.S. market to hedge future power sales from its Klamath facility and various wind farms.

The net notional volumes of outstanding derivative instruments associated with Renewables activities as of March 31, 2019 and December 31, 2018, respectively, consisted of:



	March 31,	December 31,
As of	2019	2018
(MWh/Dth in millions)
Wholesale electricity purchase contracts	5	5
Wholesale electricity sales contracts	7	6
Natural gas and other fuel purchase contracts	29	29
Financial power contracts	11	11
Basis swaps – purchases	41	42
Basis swaps – sales	3	4

The fair values of derivative contracts associated with Renewables activities as of March 31, 2019 and December 31, 2018, respectively, consisted of:



	March 31,			December 31,
As of	2019			2018
(Millions)
Wholesale electricity purchase contracts	$	32		$	11
Wholesale electricity sales contracts	(32		)	(12		)
Natural gas and other fuel purchase contracts	(2		)	(2		)
Financial power contracts	57			55
Basis swaps – purchases	(4		)	(6		)
Total	$	51		$	46

The tables below present Renewables' derivative positions as of March 31, 2019 and December 31, 2018, respectively, including those subject to master netting agreements and the location of the net derivative position on our condensed consolidated balance sheets:



As of March 31, 2019	Current Assets			Noncurrent Assets			Current Liabilities			Noncurrent Liabilities
(Millions)
Not designated as hedging instruments
Derivative assets	$	21		$	103		$	29		$	16
Derivative liabilities	(3		)	(5		)	(53		)	(36		)
	18			98			(24		)	(20		)
Designated as hedging instruments
Derivative assets	—			1			1			2
Derivative liabilities	(3		)	—			(9		)	(20		)
	(3		)	1			(8		)	(18		)
Total derivatives before offset of cash collateral	15			99			(32		)	(38		)
Cash collateral receivable (payable)	(8		)	(32		)	17			30
Total derivatives as presented in the balance sheet	$	7		$	67		$	(15	)	$	(8	)



As of December 31, 2018	Current Assets			Noncurrent Assets			Current Liabilities			Noncurrent Liabilities
(Millions)
Not designated as hedging instruments
Derivative assets	$	19		$	96		$	29		$	17
Derivative liabilities	(5		)	(3		)	(48		)	(35		)
	14			93			(19		)	(18		)
Designated as hedging instruments
Derivative assets	2			1			2			4
Derivative liabilities	—			—			(7		)	(10		)
	2			1			(5		)	(6		)
Total derivatives before offset of cash collateral	16			94			(24		)	(24		)
Cash collateral receivable (payable)	(8		)	(34		)	9			17
Total derivatives as presented in the balance sheet	$	8		$	60		$	(15	)	$	(7	)

Derivatives not designated as hedging instruments

The effects of trading and non-trading derivatives associated with Renewables activities for the three months ended March 31, 2019, consisted of:



	Three Months Ended
	March 31, 2019
	Trading			Non-trading			Total amount per income statement
(Millions)
Operating Revenues
Wholesale electricity purchase contracts	$	1		$	—
Wholesale electricity sales contracts	—			(9		)
Financial power contracts	(1		)	(13		)
Financial and natural gas contracts	(1		)	(2		)
Total loss included in operating revenues	$	(1	)	$	(24	)	$	1,842

Purchased power, natural gas and fuel used
Wholesale electricity purchase contracts	—			20
Wholesale electricity sales contracts	—			—
Financial power contracts	—			1
Financial and natural gas contracts	—			7
Total gain included in purchased power, natural gas and fuel used	$	—		$	28		$	563

Total (Loss) Gain	$	(1	)	$	4

The effects of trading and non-trading derivatives associated with Renewables activities for the three months ended March 31, 2018, consisted of:



	Three Months Ended
	March 31, 2018
(Millions)	Trading			Non-trading
Wholesale electricity purchase contracts	$	1		$	1
Wholesale electricity sales contracts	1			—
Financial power contracts	(1		)	3
Financial and natural gas contracts	3			5
Total Gain	$	4		$	9

Derivatives designated as hedging instruments

The effect of derivatives in cash flow hedging relationships on accumulated OCI and income for the three months ended March 31, 2019 and 2018, respectively, consisted of:



Three Months Ended March 31,	(Loss) Recognized in OCI on Derivatives (a)			Location of Loss (Gain) Reclassified from Accumulated OCI into Income	(Gain) Loss Reclassified from Accumulated OCI into Income			Total amount per Income Statement
(Millions)
2019
Commodity contracts	$	(20	)	Operating revenues	$	—		$	1,842
Total	$	(20	)		$	—
2018
Commodity contracts	$	(1	)	Operating revenues	$	(19	)	$	1,865
Total	$	(1	)		$	(19	)

(a) Changes in OCI are reported on a pre-tax basis.

Amounts are reclassified from accumulated OCI into income in the period during which the transaction being hedged affects earnings or when it becomes probable that a forecasted transaction being hedged would not occur. Notwithstanding future changes in prices, approximately $10.6 million of loss included in accumulated OCI at March 31, 2019, is expected to be reclassified into earnings within the next twelve months. The net loss in accumulated OCI related to a discontinued cash flow hedge is $0.4 million as of March 31, 2019, out of which no amount will be amortized in the remainder of 2019. We did not record any net derivative losses related to discontinued cash flow hedges for both the three months ended March 31, 2019 and 2018.

AVANGRID uses financial derivative instruments from time to time to alter its fixed and floating rate debt balances or to hedge fixed rates in anticipation of future fixed rate issuances. In 2018, AVANGRID entered into two forward interest rate swaps, with a total notional amount of $500 million, to hedge the issuance of forecasted fixed rate debt in 2019. In the first quarter of 2019, AVANGRID entered into one additional interest rate swap, with a notional amount of $250 million, for the same purpose. The forward interest rate swaps are designated and qualify as cash flow hedges, have mandatory termination dates of June 28, 2019, and are expected to be settled upon the forecasted debt issuance. The gain or loss on the interest rate swap derivative is reported as a component of accumulated OCI and reclassified into earnings in the period or periods during which related payments of the forecasted debt will occur.

The tables below present our interest rate swap derivative positions as of March 31, 2019 and December 31, 2018, respectively, including the location of the net derivative positions on our condensed consolidated balance sheets:



As of March 31, 2019	Current Liabilities
(Millions)
Designated as hedging instruments
Derivative liabilities	$	(36	)

As of December 31, 2018
Designated as hedging instruments
Derivative liabilities	$	(16	)

The effect of derivatives in cash flow hedging relationships on accumulated OCI for the three months ended March 31, 2019 and 2018, respectively, consisted of:



Three Months Ended March 31,	Loss Recognized in OCI on Derivatives (a)
(Millions)
2019
Interest rate contracts	$	(20	)
2018
Interest rate contracts	$	—

(a) Changes in OCI are reported on a pre-tax basis. The amount in accumulated OCI is expected to be reclassified into earnings upon interest rate swap settlement over the underlying debt maturity period.

(d) Counterparty credit risk management

NYSEG and RG&E face risks related to counterparty performance on hedging contracts due to counterparty credit default. We have developed a matrix of unsecured credit thresholds that are applicable based on the respective counterparty’s or the counterparty guarantor’s credit rating, as provided by Moody’s or Standard & Poor’s. When our exposure to risk for a counterparty exceeds the unsecured credit threshold, the counterparty is required to post additional collateral or we will no longer transact with the counterparty until the exposure drops below the unsecured credit threshold.

The wholesale power supply agreements of UI contain default provisions that include required performance assurance, including certain collateral obligations, in the event that UI’s credit rating on senior debt were to fall below investment grade. If such an event had occurred as of March 31, 2019, UI would have had to post an aggregate of approximately $18 million in collateral.

We have various master netting arrangements in the form of multiple contracts with various single counterparties that are subject to contractual agreements that provide for the net settlement of all contracts through a single payment. Those arrangements reduce our exposure to a counterparty in the event of a default on or termination of any single contract. For financial statement presentation purposes, we offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim or the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement. The amounts of cash collateral under master netting arrangements that have not been offset against net derivative positions were $35 million and $26 million as of March 31, 2019 and December 31, 2018, respectively. Derivative instruments settlements and collateral payments are included throughout the “Changes in operating assets and liabilities” section of operating activities in our condensed consolidated statements of cash flows.

Certain of our derivative instruments contain provisions that require us to maintain an investment grade credit rating on our debt from each of the major credit rating agencies. If our debt were to fall below investment grade, we would be in violation of those provisions and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit risk related contingent features that are in a liability position as of March 31, 2019 is $2.5 million, for which we have posted collateral.