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DERIVATIVE INSTRUMENTS
 12 Months Ended
Dec. 31, 2011
Notes To Consolidated Financial Statements [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

4.       DERIVATIVE INSTRUMENTS

 

The costs and benefits of derivative contracts that meet the definition of and are designated as "normal purchases or normal sales" (normal) are recognized in Operating Expenses or Operating Revenues on the accompanying consolidated statements of income, as applicable, as electricity or natural gas is delivered.

 

Derivative contracts that are not recorded as normal under the applicable accounting guidance are recorded at fair value as current or long-term derivative assets or liabilities. For the Regulated companies, regulatory assets or liabilities are recorded for the changes in fair values of derivatives, as these contracts are part of current regulated operating costs, or have an allowed recovery mechanism, and management believes that these costs will continue to be recovered from or refunded to customers in cost-of-service, regulated rates. Changes in fair values of NU's remaining unregulated wholesale marketing contracts are included in Net Income.

 

The Regulated companies are exposed to the volatility of the prices of energy and energy-related products in procuring energy supply for their customers. The costs associated with supplying energy to customers are recoverable through customer rates. The Company manages the risks associated with the price volatility of energy and energy-related products through the use of derivative contracts, many of which are accounted for as normal, and the use of nonderivative contracts.

 

CL&P and WMECO mitigate the risks associated with the price volatility of energy and energy-related products through the use of SS, LRS, and basic service contracts, which fix the price of electricity purchased for customers for periods of time ranging from three months to three years for CL&P and from three months to one year for WMECO and are accounted for as normal. CL&P has entered into derivatives, including FTR contracts, to manage the risk of congestion costs associated with its SS and LRS contracts. As required by regulation, CL&P has also entered into derivative and nonderivative contracts for the purchase of energy and energy-related products and contracts related to capacity and WMECO has entered into a contract to purchase renewable energy that is a derivative. While the risks managed by these contracts relate to regional congestion costs, capacity prices and the development of renewable energy, electric distribution companies, including CL&P and WMECO, are required to enter into these contracts. The costs or benefits from these contracts are recoverable from or refundable to customers, and, therefore changes in fair value are recorded as Regulatory Assets and Regulatory Liabilities on the accompanying consolidated balance sheets.

 

PSNH mitigates the risks associated with the volatility of energy prices in procuring energy supply for its customers through its generation facilities and the use of derivative contracts, including energy forward contracts and FTRs. PSNH enters into these contracts in order to stabilize electricity prices for customers by mitigating uncertainties associated with the New England spot market. The costs or benefits from these contracts are recoverable from or refundable to PSNH's customers, and, therefore changes in fair value are recorded as Regulatory Assets and Regulatory Liabilities on the accompanying consolidated balance sheets.

 

NU, through Select Energy, has one remaining fixed price forward sales contract to serve electrical load that is part of its remaining unregulated wholesale energy marketing portfolio. NU mitigates the price risk associated with this contract through the use of forward purchase contracts. The contracts are accounted for at fair value, and changes in their fair values are recorded in Fuel, Purchased and Net Interchange Power on the accompanying consolidated statements of income.

 

NU is also exposed to interest rate risk associated with its long-term debt. From time to time, various subsidiaries of the Company enter into forward starting interest rate swaps, accounted for as cash flow hedges, to mitigate the risk of changes in interest rates when they expect to issue long-term debt. NU parent has also entered into an interest rate swap on fixed rate long-term debt in order to balance its fixed and floating rate debt. This interest rate swap is accounted for as a fair value hedge.

 

The gross fair values of derivative assets and liabilities with the same counterparty are offset and reported as net Derivative Assets or Derivative Liabilities, with current and long-term portions, in the accompanying consolidated balance sheets. Cash collateral posted or collected under master netting agreements is recorded as an offset to the derivative asset or liability. The following tables present the gross fair values of contracts and the net amounts recorded as current or long-term derivative assets or liabilities, by primary underlying risk exposures or purpose:

   As of December 31, 2011
   Derivatives Not         
   Designated as Hedges         
   Commodity            
   and Capacity Commodity        Net Amount
   Contracts Supply and        Recorded as
   Required by Price Risk Hedging Collateral  Derivative
(Millions of Dollars) Regulation  Management Instruments and Netting (1) Asset/(Liability) (2)
Current Derivative Assets:               
Level 2:               
 Other $ - $ - $ 2.3 $ - $ 2.3
Level 3:               
 CL&P   17.5   0.4   -   (11.6)   6.3
 Other   -   4.7   -   -   4.7
Total Current Derivative Assets $ 17.5 $ 5.1 $ 2.3 $ (11.6) $ 13.3
                 
Long-Term Derivative Assets:               
Level 3:                
 CL&P $ 174.2 $ - $ - $ (80.4) $ 93.8
 Other   -   4.6   -   -   4.6
Total Long-Term Derivative Assets $ 174.2 $ 4.6 $ - $ (80.4) $ 98.4
                 
Current Derivative Liabilities:               
Level 3:               
 CL&P $ (95.9) $ - $ - $ - $ (95.9)
 WMECO   (0.1)   -   -   -   (0.1)
 Other   -   (16.1)   -   4.5   (11.6)
Total Current Derivative Liabilities $ (96.0) $ (16.1) $ - $ 4.5 $ (107.6)
                 
Long-Term Derivative Liabilities:               
Level 3:               
 CL&P  $ (935.8) $ - $ - $ - $ (935.8)
 WMECO   (7.2)   -   -   -   (7.2)
 Other   -   (17.3)   -   0.4   (16.9)
Total Long-Term Derivative Liabilities $ (943.0) $ (17.3) $ - $ 0.4 $ (959.9)

  As of December 31, 2010
  Derivatives Not Designated         
  as Hedges         
  Commodity            
  and Capacity Commodity        Net Amount
  Contracts Supply and        Recorded as
  Required by Price Risk Hedging Collateral Derivative
(Millions of Dollars)Regulation Management Instruments and Netting (1) Asset/(Liability) (2)
Current Derivative Assets:              
Level 2:              
 Other$ - $ - $ 7.7 $ - $ 7.7
Level 3:              
 CL&P  5.8   2.1   -   -   7.9
 Other  -   1.7   -   -   1.7
Total Current Derivative Assets$ 5.8 $ 3.8 $ 7.7 $ - $ 17.3
                
Long-Term Derivative Assets:              
Level 2:              
 Other$ - $ - $ 4.1 $ - $ 4.1
Level 3:               
 CL&P  195.9   -   -   (80.0)   115.9
 Other  -   3.2   -   -   3.2
Total Long-Term Derivative Assets$ 195.9 $ 3.2 $ 4.1 $ (80.0) $ 123.2
                
Current Derivative Liabilities:              
Level 2:              
 PSNH$ - $ (12.8) $ - $ - $ (12.8)
Level 3:              
 CL&P  (54.3)   (0.2)   -   7.7   (46.8)
 Other  -   (12.4)   -   0.5   (11.9)
Total Current Derivative Liabilities$ (54.3) $ (25.4) $ - $ 8.2 $ (71.5)
                
Long-Term Derivative Liabilities:              
Level 3:              
 CL&P $ (883.1) $ - $ - $ - $ (883.1)
 Other  -   (26.8)   -   0.2   (26.6)
Total Long-Term Derivative Liabilities$ (883.1) $ (26.8) $ - $ 0.2 $ (909.7)

(1)       Amounts represent cash collateral posted under master netting agreements and the netting of derivative assets and liabilities. See "Credit Risk" below for discussion of cash collateral posted under master netting agreements.

 

(2)       Current derivative assets are included in Prepayments and Other Current Assets on the accompanying consolidated balance sheets. WMECO derivative liabilities are included in Other Current Liabilities and Other Long-Term Liabilities on the accompanying consolidated balance sheets.

 

The business activities of the Company that resulted in the recognition of derivative assets also create exposure to various counterparties. As of December 31, 2011, NU and CL&P's derivative assets are exposed to counterparty credit risk. Of these amounts, $102.0 million and $99.7 million, respectively, is contracted with investment grade entities and the remainder is contracted with multiple other counterparties.

 

For further information on the fair value of derivative contracts, see Note 1I, "Summary of Significant Accounting Policies - Fair Value Measurements," and Note 1J, "Summary of Significant Accounting Policies – Derivative Accounting," to the consolidated financial statements.

 

Derivatives not designated as hedges

Commodity and capacity contracts required by regulation: CL&P has capacity-related contracts with generation facilities. These contracts and similar UI contracts have an expected capacity of 787 MW. CL&P has a sharing agreement with UI, with 80 percent of each contract allocated to CL&P and 20 percent allocated to UI. The capacity contracts have terms up to 15 years and obligate the utilities to make or receive payments on a monthly basis to or from the generation facilities based on the difference between a set capacity price and the forward capacity market price received in the ISO-NE capacity markets. The largest of these generation facilities achieved commercial operation in July 2011. In addition, CL&P has a contract to purchase 0.1 million MWh of energy per year through 2020.

 

WMECO has a renewable energy contract to purchase 0.1 million MWh of energy per year through 2027 with a facility that is expected to achieve commercial operation by December 2012.

 

Commodity supply and price risk management: As of December 31, 2011 and 2010, CL&P had 0.6 million and 1.8 million MWh, respectively, remaining under FTRs that extend through December 2012 and require monthly payments or receipts.

 

PSNH has 0.3 million MWh remaining under FTRs as of December 31, 2011 and 2010 that extend through December 2012 and require monthly payments or receipts. PSNH had electricity procurement contracts with delivery dates through 2011 to purchase an aggregate amount of 0.4 million MWh of power as of December 31, 2010.

 

As of December 31, 2011 and 2010, NU had approximately 0.1 million and 0.3 million MWh, respectively, of supply volumes remaining in its unregulated wholesale portfolio when expected sales are compared with contracted supply, both of which extend through 2013.

 

The following table presents the realized and unrealized gains/(losses) associated with derivative contracts not designated as hedges

            
     Amount of Gain/(Loss) Recognized on Derivative Instrument
   Location of Gain or Loss For the Years Ended December 31,
(Millions of Dollars) Recognized on Derivative 2011 2010 2009
NU           
Commodity and Capacity Contracts            
 Required by Regulation Regulatory Assets/Liabilities $ (158.1) $ (74.0) $ (99.9)
Commodity Supply and Price Risk            
 Management Regulatory Assets/Liabilities   (3.9)   (21.7)   (73.2)
Commodity Supply and Price Risk  Fuel, Purchased and Net          
 Management  Interchange Power   0.5   2.7   6.2
             
CL&P           
Commodity and Capacity Contracts            
 Required by Regulation Regulatory Assets/Liabilities   (150.8)   (74.0)   (99.9)
Commodity Supply and Price Risk            
 Management Regulatory Assets/Liabilities   (2.8)   (6.2)   (7.8)
             
PSNH           
Commodity Supply and Price Risk            
 Management Regulatory Assets/Liabilities   (1.0)   (15.0)   (62.6)
             
WMECO           
Commodity and Capacity Contracts           
 Required by Regulation Regulatory Assets/Liabilities   (7.3)  -  -

For the Regulated companies, monthly settlement amounts are recorded as receivables or payables and as Operating Revenues or Fuel, Purchased and Net Interchange Power on the accompanying consolidated financial statements. Regulatory Assets/Liabilities are established with no impact to Net Income.

 

Hedging instruments

Fair Value Hedge: To manage the balance of its fixed and floating rate debt, NU parent has a fixed to floating interest rate swap on its $263 million, fixed rate senior notes maturing on April 1, 2012. This interest rate swap qualifies and was designated as a fair value hedge and requires semi-annual cash settlements. The changes in fair value of the swap and the interest component of the hedged long-term debt instrument are recorded in Interest Expense on the accompanying consolidated statements of income. There was no ineffectiveness recorded for the years ended December 31, 2011, 2010 and 2009. The cumulative changes in fair values of the swap and the Long-Term Debt are recorded as a Derivative Asset/Liability and an adjustment to Long-Term Debt – Current Portion. Interest Receivable is recorded as a reduction of Interest Expense and is included in Prepayments and Other Current Assets.

 

The realized and unrealized gains/(losses) related to changes in fair value of the swap and Long-Term Debt as well as pre-tax Interest Expense, are as follows:

 For the Years Ended December 31,
 2011 2010 2009
(Millions of Dollars)Swap Hedged Debt Swap Hedged Debt Swap Hedged Debt
Changes in Fair Value$ 1.0 $ (1.0) $ 9.5 $ (9.5) $ 1.6 $ (1.6)
Interest Recorded in Net Income  -   10.5   -   10.9   -   9.1

Cash Flow Hedges: Cash flow hedges are recorded at fair value, and the changes in the fair value of the effective portion of those contracts are recognized in AOCI. When a cash flow hedge is settled, the settlement amount is recorded in AOCI and is amortized into Net Income over the term of the underlying debt instrument. Cash flow hedges also impact Net Income when hedge ineffectiveness is measured and recorded, when the forecasted transaction being hedged is improbable of occurring or when the transaction is settled. In 2011, PSNH and WMECO entered into cash flow hedges related to a portion of their respective planned debt issuances. PSNH entered into three forward starting swaps to fix the U.S. dollar LIBOR swap rate of 3.749 percent on $80 million of a planned $160 million long-term debt issuance, 2.804 percent on the remaining $80 million of the planned $160 million long-term debt issuance and 3.6 percent on $120 million of long-term debt to be issued to refinance outstanding PCRBs. In May 2011, PSNH settled the swap associated with the $120 million refinancing of PCRBs and a $2.9 million pre-tax reduction in AOCI is being amortized over the life of the debt. In September 2011, PSNH settled the two remaining swaps associated with the $160 million long-term debt issuance and a $15.3 million pre-tax reduction in AOCI is being amortized over the life of the debt. WMECO entered into a forward starting swap to fix the U.S. dollar LIBOR swap rate of 3.7624 percent associated with $50 million of a planned $100 million long-term debt issuance. In September 2011, WMECO settled the swap and a $6.9 million pre-tax reduction in AOCI is being amortized over the life of the debt.

 

The pre-tax impact of cash flow hedging instruments on AOCI is as follows:

 Gains/(Losses) Recognized on Gains/(Losses) Reclassified from AOCI    
 Derivative Instruments into Interest Expense   
 For the Year Ended December 31, For the Years Ended December 31,   
(Millions of Dollars)2011 2011 2010 2009   
NU$ (25.1) $ (1.3) $ (0.4) $ (0.4)   
CL&P  -   (0.7)   (0.7)   (0.7)   
PSNH  (18.2)   (0.8)   (0.2)   (0.2)   
WMECO  (6.9)   (0.1)   0.1   0.1   

For further information, see Note 16, "Accumulated Other Comprehensive Income/(Loss)," to the consolidated financial statements.

 

Credit Risk

Certain derivative contracts that are accounted for at fair value, including NU's sourcing contracts related to the remaining wholesale marketing contract and PSNH's electricity procurement contracts, contain credit risk contingent features. These features require these companies to maintain investment grade credit ratings from the major rating agencies and to post cash or standby LOCs as collateral for contracts in a net liability position over specified credit limits. NU parent provides standby LOCs under its revolving credit agreement for NU subsidiaries to post with counterparties. The following summarizes the fair value of derivative contracts that are in a liability position and subject to credit risk contingent features, the fair value of cash collateral and standby LOCs posted with counterparties and the additional collateral in the form of LOCs that would be required to be posted by NU or PSNH if the respective unsecured debt credit ratings of NU parent or PSNH were downgraded to below investment grade as of December 31, 2011 and 2010:

 As of December 31, 2011
          Additional Standby
 Fair Value Subject        LOCs Required if
 to Credit Risk Cash  Standby  Downgraded Below
(Millions of Dollars)Contingent Features Collateral Posted LOCs Posted Investment Grade
NU$ (23.5) $ 4.1 $ - $ 19.9

 As of December 31, 2010
          Additional Standby
 Fair Value Subject        LOCs Required if
 to Credit Risk Cash  Standby  Downgraded Below
(Millions of Dollars)Contingent Features Collateral Posted LOCs Posted Investment Grade
NU$ (30.9) $ 0.5 $ 24.0 $ 18.5
PSNH  (12.8)   -   24.0   -

Fair Value Measurements of Derivative Instruments:

 

Valuation of Derivative Instruments: Derivative contracts classified as Level 2 in the fair value hierarchy include Commodity Supply and Price Risk Management contracts and Interest Rate Risk Management contracts. Commodity Supply and Price Risk Management contracts include PSNH forward contracts to purchase energy for periods for which prices are quoted in an active market. Prices are obtained from broker quotes and based on actual market activity. The contracts are valued using the mid-point of the bid-ask spread. Valuations of these contracts also incorporate discount rates using the yield curve approach. Interest Rate Risk Management contracts represent interest rate swap agreements and are valued using a market approach provided by the swap counterparty using a discounted cash flow approach utilizing forward interest rate curves.

 

The derivative contracts classified as Level 3 in the tables below include the Regulated companies' Commodity and Capacity Contracts Required by Regulation, and Commodity Supply and Price Risk Management contracts (CL&P and PSNH FTRs and NU's remaining wholesale marketing portfolio). For Commodity and Capacity Contracts Required by Regulation and NU's remaining unregulated wholesale marketing portfolio, fair value is modeled using income techniques such as discounted cash flow approaches. Significant observable inputs for valuations of these contracts include energy and energy-related product prices for which quoted prices in an active market exist. Significant unobservable inputs used in the valuations of these contracts include energy and energy-related product prices for future years for long-dated Commodity and Capacity Contracts Required by Regulation and future contract quantities. Discounted cash flow valuations incorporate estimates of premiums or discounts that would be required by a market participant to arrive at an exit price, using available historical market transaction information. Valuations of derivative contracts include assumptions regarding the timing and likelihood of scheduled payments and also reflect nonperformance risk, including credit, using the default probability approach based on the counterparty's credit rating for assets and the Company's credit rating for liabilities.

 

The remaining contracts included in Commodity Supply and Price Risk Management and classified as Level 3 in the tables below are valued using broker quotes based on prices in an inactive market.

 

Valuations using significant unobservable inputs: The following tables present changes for the years ended December 31, 2011 and 2010 in the Level 3 category of derivative assets and derivative liabilities measured at fair value on a recurring basis. The derivative assets and liabilities are presented on a net basis. The Company classifies assets and liabilities in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 assets and liabilities typically also rely on a number of inputs that are observable either directly or indirectly. Thus the gains and losses presented below include changes in fair value that are attributable to both observable and unobservable inputs. There were no transfers into or out of Level 3 assets and liabilities for the years ended December 31, 2011 and 2010.

  NU
  Commodity      
  and Capacity Commodity   
  Contracts Supply and   
  Required By  Price Risk   
  Regulation Management Total Level 3
(Millions of Dollars)        
Derivatives, Net:         
Fair Value as of January 1, 2010$ (720.3) $ (40.9) $ (761.2)
Net Realized/Unrealized Gains/(Losses) Included in:         
 Net Income(1)  -   2.7   2.7
 Regulatory Assets/Liabilities  (74.0)   (7.2)   (81.2)
Settlements  (13.7)   13.2   (0.5)
Fair Value as of December 31, 2010$ (808.0) $ (32.2) $ (840.2)
Net Realized/Unrealized Gains/(Losses) Included in:         
 Net Income(1)  -   0.5   0.5
 Regulatory Assets/Liabilities  (158.1)   (2.9)   (161.0)
Settlements  26.8   11.7   38.5
Fair Value as of December 31, 2011$ (939.3) $ (22.9) $ (962.2)
          
Gains Included in Net Income Relating to        
Items Held as of End of Year:        
 2011  -   0.7   0.7
 2010  -   1.2   1.2

  CL&P WMECO
  Commodity       Commodity
  and Capacity Commodity    and Capacity
  Contracts Supply and    Contracts
  Required By  Price Risk    Required By
(Millions of Dollars)Regulation Management Total Level 3 Regulation
Derivatives, Net:            
Fair Value as of January 1, 2010$ (720.3) $ 4.5 $ (715.8) $ -
Net Realized/Unrealized Losses Included in:           
 Regulatory Assets/Liabilities  (74.0)   (6.2)   (80.2)   -
Settlements  (13.7)   3.6   (10.1)   -
Fair Value as of December 31, 2010$ (808.0) $ 1.9 $ (806.1) $ -
Net Realized/Unrealized Losses Included in:           
 Regulatory Assets/Liabilities  (150.8)   (2.8)   (153.6)   (7.3)
Settlements  26.8   1.3   28.1   -
Fair Value as of December 31, 2011$ (932.0) $ 0.4 $ (931.6) $ (7.3)

(1)       Gains and losses on derivatives included in Net Income relate to NU's remaining wholesale marketing contracts and are reported in Fuel, Purchased and Net Interchange Power on the accompanying consolidated statements of income.