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DERIVATIVE INSTRUMENTS
 3 Months Ended
Mar. 31, 2013
Notes To Consolidated Financial Statements [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]

4.       DERIVATIVE INSTRUMENTS

 

The Regulated companies purchase and procure energy and energy-related products for their customers, which are subject to price volatility. The costs associated with supplying energy to customers are recoverable through customer rates. The Regulated companies manage the risks associated with the price volatility of energy and energy-related products through the use of derivative contracts, many of which meet the definition of and are designated as "normal purchases or normal sales" (normal) under the applicable accounting guidance, and the use of nonderivative contracts.

 

Derivative contracts that are not recorded as normal 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 costs are, and management believes they will continue to be, recovered from or refunded in customer rates. For NU's remaining unregulated wholesale marketing contracts, changes in fair values of derivatives are included in Net Income. The costs and benefits of derivative contracts that meet the definition of normal are recognized in Operating Expenses or Operating Revenues on the consolidated statements of income, as applicable, as electricity or natural gas is delivered.

 

CL&P, NSTAR Electric 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 and are accounted for as normal. CL&P, NSTAR Electric and WMECO have entered into derivative and nonderivative contracts for the purchase of energy and energy-related products and contracts that are derivatives. NU also has NYMEX future contracts in order to reduce variability associated with the purchase price of approximately 5.2 million MMBtu of natural gas.

 

The costs or benefits from all of the Regulated companies' derivative contracts are recoverable from or refundable to customers, and therefore, changes in fair value are recorded as Regulatory Assets or Regulatory Liabilities on the consolidated balance sheets.

 

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 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 categorized by risk type and the net amounts recorded as current or long-term derivative asset or liability:

  As of March 31, 2013
  Commodity Supply and   Net Amount Recorded as
(Millions of Dollars)Price Risk Management Netting (1) Derivative Asset/(Liability) (2)
Current Derivative Assets:        
Level 2:        
 Other (1)$1.6 $ - $ 1.6
Level 3:        
 CL&P (1)  17.5   (10.5)   7.0
 Other  1.9   -   1.9
Total Current Derivative Assets$ 21.0 $ (10.5) $ 10.5
          
Long-Term Derivative Assets:        
Level 3:         
 CL&P (1)$ 152.3 $ (57.3) $ 95.0
Total Long-Term Derivative Assets$ 152.3 $ (57.3) $ 95.0
          
Current Derivative Liabilities:        
Level 2:        
 Other (1) (3)$ (12.0) $ - $ (12.0)
Level 3:        
 CL&P  (95.6)   -   (95.6)
 NSTAR Electric  (1.3)   -   (1.3)
 WMECO  (0.1)   -   (0.1)
Total Current Derivative Liabilities$ (109.0) $ - $ (109.0)
          
Long-Term Derivative Liabilities:        
Level 3:        
 CL&P $ (826.0) $ - $ (826.0)
 NSTAR Electric  (12.3)   -   (12.3)
 WMECO  (1.7)   -   (1.7)
Total Long-Term Derivative Liabilities (4)$ (840.0) $ - $ (840.0)

  As of December 31, 2012
  Commodity Supply and   Net Amount Recorded as
(Millions of Dollars)Price Risk Management Netting (1) Derivative Asset/(Liability) (2)
Current Derivative Assets:        
Level 2:        
 Other (1)$ 0.2 $ - $ 0.2
Level 3:        
 CL&P (1)  17.7   (12.0)   5.7
 Other  5.5   -   5.5
Total Current Derivative Assets$ 23.4 $ (12.0) $ 11.4
          
Long-Term Derivative Assets:        
Level 3:         
 CL&P (1)$ 159.7 $ (69.1) $ 90.6
Total Long-Term Derivative Assets$ 159.7 $ (69.1) $ 90.6
          
Current Derivative Liabilities:        
Level 2:        
 Other (1), (3)$ (19.9) $ 0.6 $ (19.3)
Level 3:        
 CL&P  (96.9)   -   (96.9)
 NSTAR Electric  (1.0)   -   (1.0)
Total Current Derivative Liabilities$ (117.8) $ 0.6 $ (117.2)
          
Long-Term Derivative Liabilities:        
Level 2:        
 Other (1)$ (0.2) $ - $ (0.2)
Level 3:        
 CL&P   (865.6)   -   (865.6)
 NSTAR Electric  (13.9)   -   (13.9)
 WMECO  (3.0)   -   (3.0)
Total Long-Term Derivative Liabilities$ (882.7) $ - $ (882.7)

       Amounts represent derivative assets and liabilities which NU has elected to record net on the consolidated balance sheets. These amounts are subject to master netting agreements or similar agreements for which the right of offset exists.

 

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

 

(3)       As of March 31, 2013 and December 31, 2012, NU had $3.5 million and $4.1 million, respectively, of cash posted related to these contracts, which is not offset against the derivative liability and is recorded as Prepayments and Other Current Assets on the 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 consolidated financial statements.

 

Derivatives Not Designated as Hedges

Commodity Supply and Price Risk Management: As 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 extend through 2026 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. In addition, CL&P has a contract to purchase 0.1 million MWh of energy per year through 2020.

 

NSTAR Electric has a renewable energy contract to purchase 0.1 million MWh of energy per year through 2018. NSTAR Electric also has a capacity related contract for up to 35 MW per year that extends through 2019.

 

WMECO has a renewable energy contract to purchase 0.1 million MWh of energy per year through 2028 with a facility that is expected to achieve commercial operation by November 2013.

 

As of March 31, 2013 and December 31, 2012, NU had approximately 5 thousand MWh and 24 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 NU's derivative contracts not designated as hedges (See Level 3 tables in the "Valuations using significant unobservable inputs" section for CL&P, NSTAR Electric and WMECO gains and losses on derivative contracts):

          
Location of Amounts  Amounts Recognized on Derivatives
Recognized on Derivatives  For the Three Months Ended March 31,
(Millions of Dollars)  2013 2012 
NU        
Balance Sheet:        
 Regulatory Assets  $ 28.0 $ 6.0 
Statement of Income:        
 Purchased Power, Fuel and Transmission    0.3   (0.8) 

Hedging

Fair Value Hedge: NU parent had a fixed to floating interest rate swap on its $263 million, fixed rate senior note that matured on April 1, 2012. This interest rate swap qualified and was designated as a fair value hedge. Prior to the settlement of the swap on April 2, 2012, $2.5 million of interest benefit was recorded in Net Income in the first quarter of 2012.

 

Cash Flow Hedges: For information on the treatment of previously settled cash flow hedges, see Note 11, “Accumulated Other Comprehensive Income/(Loss),” to the consolidated financial statements.

 

Credit Risk

Certain of NU's derivative contracts contain credit risk contingent features. These features require NU to maintain investment grade credit ratings from the major rating agencies and to post collateral for contracts in a net liability position over specified credit limits. The following summarizes the fair value of derivative contracts that were in a net liability position and subject to credit risk contingent features, the fair value of cash collateral, and the additional collateral 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, 2013 and December 31, 2012:

 As of March 31, 2013 As of December 31, 2012
       Additional Collateral       Additional Collateral
 Fair Value Subject     Required if Fair Value Subject     Required if
 to Credit Risk Cash  Downgraded Below to Credit Risk Cash  Downgraded Below
(Millions of Dollars)Contingent Features Collateral Posted Investment Grade Contingent Features Collateral Posted Investment Grade
NU$ (8.4) $ - $ 9.4 $ (15.3) $ - $ 17.4

Fair Value Measurements of Derivative Instruments

Valuation of Derivative Instruments: Derivative contracts classified as Level 2 in the fair value hierarchy relate to the financial contracts for natural gas futures and the remaining unregulated 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 are 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 fair value of derivative contracts classified as Level 3 utilizes significant unobservable inputs. The 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. 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, NSTAR Electric's and WMECO's, Level 3 derivative contracts and the range of the significant unobservable inputs utilized in the valuations over the duration of the contracts:

 Range Period Covered Range Period Covered
Energy Prices:       
NU$44 - $90 per MWh 2018 - 2028 $43 - $90 per MWh 2018 - 2028
CL&P$50 - $54 per MWh 2018 - 2020 $50 - $55 per MWh 2018 - 2020
WMECO$44 - $90 per MWh 2018 - 2028 $43 - $90 per MWh 2018 - 2028
        
Capacity Prices:       
NU$1.40 - $10.53 per kW-Month 2016 - 2028 $1.40 - $10.53 per kW-Month 2016 - 2028
CL&P$1.40 - $9.83 per kW-Month 2016 - 2026 $1.40 - $9.83 per kW-Month 2016 - 2026
NSTAR Electric$1.40 - $3.39 per kW-Month 2016 - 2019 $1.40 - $3.39 per kW-Month 2016 - 2019
WMECO$1.40 - $10.53 per kW-Month 2016 - 2028 $1.40 - $10.53 per kW-Month 2016 - 2028
        
Forward Reserve:       
NU, CL&P$3.00 per kW-Month 2013 - 2024 $0.35 - $0.90 per kW-Month 2013 - 2024
        
REC Prices:       
NU$25 - $85 per REC 2013 - 2028 $25 - $85 per REC 2013 - 2028
NSTAR Electric$25 - $71 per REC 2013 - 2018 $25 - $71 per REC 2013 - 2018
WMECO$25 - $85 per REC 2013 - 2028 $25 - $85 per REC 2013 - 2028

Exit price premiums of 11 percent through 32 percent are also applied on these contracts and reflect the most recent market activity available for similar type contracts.

 

Significant increases or decreases in future power or capacity prices in isolation would decrease or increase, respectively, the fair value of the derivative liability. Any increases in the risk premiums would increase the fair value of the derivative liabilities. Changes in these fair values 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, 2013 and 2012 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.

  For the Three Months Ended 
  March 31, 2013 March 31, 2012 
(Millions of Dollars)NU NU 
Derivatives, Net:       
Fair Value as of Beginning of Period$ (878.6) $ (962.2) 
Transfer to Level 2  -   32.2 
Net Realized/Unrealized Gains Included in:       
  Net Income (2)  5.7   8.0 
  Regulatory Assets  26.2   6.0 
Settlements  13.6   14.5 
Fair Value as of End of Period$ (833.1) $ (901.5) 

  For the Three Months Ended
  March 31, 2013 March 31, 2012
(Millions of Dollars)CL&P NSTAR Electric WMECO CL&P NSTAR Electric(1) WMECO
Derivatives, Net:                  
Fair Value as of Beginning of Period$ (866.2) $ (14.9) $ (3.0) $ (931.6) $ (3.4) $ (7.3)
Net Realized/Unrealized Gains/(Losses)                 
 Included in Regulatory Assets  24.3   0.7   1.2   10.9   (3.4)   (5.0)
Settlements  22.3   0.6   -   21.1   1.4   -
Fair Value as of End of Period$ (819.6) $ (13.6) $ (1.8) $ (899.6) $ (5.4) $ (12.3)

(1)       NSTAR Electric amounts are not included in NU consolidated for the three months ended March 31, 2012.

 

(2)       The Net Income impact for the three months ended March 31, 2013 and 2012 relates to the unregulated wholesale marketing sales contract and is offset by the gains/(losses) on the unregulated sourcing contracts classified as Level 2 in the fair value hierarchy, resulting in total net gains of $0.3 million and net losses of $0.8 million, respectively