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DERIVATIVE INSTRUMENTS
 3 Months Ended
Mar. 31, 2012
Notes To Consolidated Financial Statements [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

5.       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 unaudited condensed 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 capacity prices, regional congestion costs, and the development of renewable energy that are not specific to CL&P and WMECO, 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 unaudited condensed 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 unaudited condensed 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.

 

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 unaudited condensed 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 March 31, 2012
   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 3:               
 CL&P $ 17.7 $ 0.3 $ - $ (11.8) $ 6.2
 Other   -   6.7   -   -   6.7
Total Current Derivative Assets $ 17.7 $ 7.0 $ - $ (11.8) $ 12.9
                 
Long-Term Derivative Assets:               
Level 3:                
 CL&P $ 166.5 $ - $ - $ (75.9) $ 90.6
 Other   -   3.7   -   -   3.7
Total Long-Term Derivative Assets $ 166.5 $ 3.7 $ - $ (75.9) $ 94.3
                 
Current Derivative Liabilities:               
Level 2:               
 Other $ - $ (17.6) $ - $ 7.5 $ (10.1)
Level 3:               
 CL&P   (97.5)   -   -   -   (97.5)
 WMECO   (0.7)   -   -   -   (0.7)
Total Current Derivative Liabilities $ (98.2) $ (17.6) $ - $ 7.5 $ (108.3)
                 
Long-Term Derivative Liabilities:               
Level 2:               
 Other $ - $ (13.8) $ - $ - $ (13.8)
Level 3:               
 CL&P    (898.9)   -   -   -   (898.9)
 WMECO   (11.6)   -   -   -   (11.6)
Total Long-Term Derivative Liabilities $ (910.5) $ (13.8) $ - $ - $ (924.3)

  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)

(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 unaudited condensed consolidated balance sheets. WMECO derivative liabilities are included in Other Current Liabilities and Other Long-Term Liabilities on the accompanying unaudited condensed consolidated balance sheets.

 

For further information on the fair value of derivative contracts, see Note 1E, "Summary of Significant Accounting Policies - Fair Value Measurements," to the unaudited condensed 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 March 31, 2012 and December 31, 2011, CL&P had 0.5 million and 0.6 million MWh, respectively, remaining under FTRs that extend through December 2012 and require monthly payments or receipts.

 

As of March 31, 2012 and December 31, 2011, NU had approximately 38 thousand MWh and 123 thousand MWh, respectively, of supply volumes remaining in its unregulated wholesale portfolio when expected sales are compared with supply contracts.

 

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 Three Months Ended
(Millions of Dollars) Recognized on Derivative March 31, 2012 March 31, 2011
NU        
Commodity and Capacity Contracts         
 Required by Regulation Regulatory Assets $ 6.1 $ (30.1)
Commodity Supply and Price Risk         
 Management Regulatory Assets   (0.1)   (0.3)
Commodity Supply and Price Risk  Fuel, Purchased and Net       
 Management  Interchange Power   (0.8)   0.3
          
CL&P        
Commodity and Capacity Contracts         
 Required by Regulation Regulatory Assets   11.1   (30.1)
Commodity Supply and Price Risk         
 Management Regulatory Assets   (0.2)   (1.0)
          
WMECO        
Commodity and Capacity Contracts        
 Required by Regulation Regulatory Assets   (5.0)   -

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 unaudited condensed 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 had a fixed to floating interest rate swap on its $263 million, fixed rate senior notes that matured on April 1, 2012. This interest rate swap qualified and was designated as a fair value hedge and required semi-annual cash settlements. The changes in fair value of the swap and the interest component of the hedged long-term debt instrument were recorded in Interest Expense on the accompanying unaudited condensed consolidated statements of income. There was no ineffectiveness for the periods ended March 31, 2012 and 2011. The cumulative changes in fair values of the swap and the Long-Term Debt were recorded as a Derivative Asset and as an adjustment to Long-Term Debt – Current Portion as of December 31, 2011. As of April 2, 2012, the interest rate swap was settled.

 

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, were as follows:

 For the Three Months Ended
 March 31, 2012 March 31, 2011
(Millions of Dollars)Swap Hedged Debt Swap Hedged Debt
Changes in Fair Value$ - $ - $ 0.4 $ (0.4)
Interest Recorded in Net Income  -   2.5   -   2.7

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. NU, CL&P, PSNH and WMECO did not enter into any interest rate swap agreements for the three months ended March 31, 2012. In 2011, PSNH and WMECO entered into cash flow hedges related to a portion of their respective 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 $160 million long-term debt issuance, 2.804 percent on the remaining $80 million of the $160 million long-term debt issuance and 3.6 percent on $120 million of long-term debt 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 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 $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 was as follows:

 Gains Recognized in AOCI  Losses Reclassified from AOCI     
 on Derivative Instruments into Interest Expense    
 For the Three Months Ended For the Three Months Ended    
(Millions of Dollars)March 31, 2011 March 31, 2012 March 31, 2011    
NU$1.9 $ (0.7) $ (0.1)    
CL&P  -   (0.2)   (0.2)    
PSNH 1.5   (0.5)   -    
WMECO 0.4   (0.1)   -    

The losses reclassified from AOCI represent the amortization of previously settled interest rate swap agreements for the periods ended March 31, 2012 and 2011. For the three months ended March 31, 2012, these amounts represent the total change in AOCI related to cash flow hedging activity.

 

The change in AOCI related to qualified cash flow hedging activities was as follows:

 

  For the Three Months Ended March 31, 2011
(Millions of Dollars)NU  PSNH  WMECO
Balance as of Beginning of Period$ (4.2) $ (0.6) $ (0.1)
 Cash Flow Hedging Transactions Entered into for the Period  1.2   0.9   0.2
Net Change Associated with Hedging Transactions  1.2   0.9   0.2
Total Fair Value Adjustments Included in Accumulated        
 Other Comprehensive Loss as of End of Period$ (3.0) $ 0.3 $ 0.1

Credit Risk

Certain of NU's contracts relating to the remaining wholesale marketing sourcing contracts contain credit risk contingent features. These features require NU 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 were in a liability position and subject to credit risk contingent features, the fair value of cash collateral and the additional collateral in the form of LOCs that would be required to be posted by NU if the unsecured debt credit ratings of NU parent were downgraded to below investment grade as of March 31, 2012 and December 31, 2011:

 As of March 31, 2012 As of December 31, 2011
       Additional Standby       Additional Standby
 Fair Value    LOCs Required if Fair Value    LOCs Required if
 Subject to Credit Cash  Downgraded  Subject to Credit Cash  Downgraded
   Risk Contingent  Collateral  Below Investment   Risk Contingent  Collateral  Below Investment
(Millions of Dollars)Features Posted Grade Features Posted Grade
NU$ (25.1) $ 7.5 $ 17.4 $ (23.5) $4.1 $ 19.9
                  

Fair Value Measurements of Derivative Instruments:

Valuation of Derivative Instruments: Derivative contracts classified as Level 2 in the fair value hierarchy relate to the remaining wholesale marketing sourcing contracts to purchase energy for periods in 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.

 

The derivative contracts classified as Level 3 utilize significant unobservable inputs and include the Regulated companies' Commodity and Capacity Contracts Required by Regulation and Commodity Supply and Price Risk Management contracts (primarily NU's remaining wholesale marketing sales contract). For Commodity and Capacity Contracts Required by Regulation and NU's remaining unregulated wholesale marketing sales contract, fair value is modeled using income techniques, such as discounted cash flow approaches adjusted for assumptions relating to exit price. Significant observable inputs for valuations of these contracts include energy and energy-related product prices in future years for which quoted prices in an active market exist. Fair value measurements categorized in Level 3 of the fair value hierarchy are prepared by individuals with expertise in valuation techniques, pricing of energy and energy-related products, and accounting requirements. NU does not engage in the purchase or sale of Level 3 derivative contracts. For Commodity and Capacity Contracts Required by Regulation, the future power and capacity prices for periods that are not quoted in an active market or established at auction are based on available market data and are escalated based on estimates of inflation to address the full time period of the contract.

 

Valuations of derivative contracts using discounted cash flow methodology include assumptions regarding the timing and likelihood of scheduled payments and also reflect non-performance 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. Valuations incorporate estimates of premiums or discounts that would be required by a market participant to arrive at an exit price, using historical market transactions adjusted for the terms of the contract.

 

The following is a summary of NU's, including CL&P's and WMECO's Level 3 derivative contracts required by regulation and the range of the significant unobservable inputs utilized in the valuations over the duration of the contracts:

  Range  Period Covered   
Energy Prices:        
NU $43 - $82 per MWh  2017 - 2027   
CL&P $49 - $55 per MWh  2017 - 2020   
WMECO $43 - $82 per MWh  2017 - 2027   
         
Capacity Prices:        
NU $1.40 - $10.18 per kW-Month  2015 - 2027   
CL&P $1.40 - $9.50 per kW-Month  2015 - 2026   
WMECO $1.40 - $10.18 per kW-Month  2015 - 2027   
         
Forward Reserve:        
NU, CL&P $0.75 - $1.00 per kW-Month  2012 - 2024   
         
REC Prices:        
NU, WMECO $25 - $85 per REC  2012 - 2027   

NU, CL&P and WMECO also apply an exit price premium of 15 percent through 32 percent on these contracts that extend through 2027.

 

Significant increases or decreases in future power or capacity prices in isolation would decrease or increase, respectively, the values of the derivative liability. Any increases in the risk premiums would increase the fair value of the derivative liabilities. Changes in the fair values of the commodity and capacity contracts required by regulation are recorded as a regulatory asset or liability and would not impact net income.

 

Valuations using significant unobservable inputs: The following tables present changes for the three months ended March 31, 2012 and 2011 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 fair value as of January 1, 2012 reflects a reclassification of remaining unregulated wholesale marketing sourcing contracts that had previously been presented as a portfolio along with the unregulated wholesale marketing sales contract as Level 3 under the highest and best use valuation premise. These contracts are now classified within Level 2 of the fair value hierarchy.

   As of March 31, 2012 As of March 31, 2011
  Commodity       Commodity      
  and Capacity Commodity    and Capacity Commodity   
  Contracts Supply and    Contracts Supply and   
NURequired By  Price Risk Total Required By  Price Risk Total
(Millions of Dollars)Regulation Management Level 3 Regulation Management Level 3
Derivatives, Net:                  
Fair Value as of Beginning of Period$ (939.3) $ (22.9) $ (962.2) $ (808.0) $ (32.2) $ (840.2)
Transfer to Level 2  -   32.2   32.2   -   -   -
Net Realized/Unrealized Gains/(Losses) Included in:                  
  Net Income(1)  -   8.0   8.0   -   0.3   0.3
  Regulatory Assets  6.1   (0.1)   6.0   (30.1)   (1.1)   (31.2)
Settlements  21.0   (6.5)   14.5   (5.8)   4.2   (1.6)
Fair Value as of End of Period$ (912.2) $ 10.7 $ (901.5) $ (843.9) $ (28.8) $ (872.7)

  As of March 31, 2012  As of March 31, 2011
  CL&P WMECO  CL&P
  Commodity       Commodity  Commodity      
  and Capacity Commodity    and Capacity  and Capacity  Commodity   
  Contracts Supply and    Contracts  Contracts  Supply and   
  Required By  Price Risk    Required By  Required By   Price Risk   
(Millions of Dollars)Regulation Management Total Level 3 Regulation  Regulation  Management Total Level 3
Derivatives, Net:                     
Fair Value as of Beginning of Period$ (932.0) $ 0.4 $ (931.6) $ (7.3) $ (808.0) $ 1.9 $ (806.1)
Net Realized/Unrealized                     
 Gains/(Losses) Included in                    
 Regulatory Assets  11.1   (0.2)   10.9   (5.0)   (30.1)   (1.0)   (31.1)
Settlements  21.0   0.1   21.1   -   (5.8)  0.4   (5.4)
Fair Value as of End of Period$ (899.9) $ 0.3 $ (899.6) $ (12.3) $ (843.9) $1.3 $ (842.6)

  • The gains included in Net Income for the period ended March 31, 2012 relate to the unregulated wholesale marketing sales contract and are offset by the losses on the unregulated sourcing contracts classified as Level 2 in the fair value hierarchy, resulting in a net loss of $0.8 million, which is included in Fuel, Purchased and Net Interchange Power for the three months ended March 31, 2012. Included in the gain above is $4.4 million of unrealized gains related to items still held as of March 31, 2012. These gains are offset by unrealized losses of $4.6 million on the contracts classified as Level 2 in the fair value hierarchy. As of March 31, 2011, the total unrealized gains for the unregulated wholesale portfolio were $0.4 million.