XML 44 R9.htm IDEA: XBRL DOCUMENT v2.4.0.8
DERIVATIVE INSTRUMENTS
 6 Months Ended
Jun. 30, 2014
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 and nonderivative contracts.

 

Many of the derivative contracts meet the definition of, and are designated as, normal and qualify for accrual accounting under the applicable accounting guidance. The costs and benefits of derivative contracts that meet the definition of normal are recognized in Operating Expenses or Operating Revenues on the statements of income, as applicable, as electricity or natural gas is delivered.

 

Derivative contracts that are not designated as normal are recorded at fair value as current or long-term Derivative Assets or Derivative Liabilities on the balance sheets. For the Regulated companies, regulatory assets or regulatory liabilities are recorded to offset the fair values of derivatives, as costs are recovered from, or refunded to, customers in their respective energy supply rates. For NU's unregulated wholesale marketing contracts that expired on December 31, 2013, changes in fair values of derivatives were included in Net Income.

 

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, on the 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 amount recorded as current or long-term derivative asset or liability:

  As of June 30, 2014
  Commodity Supply and    Net Amount Recorded as
(Millions of Dollars)Price Risk Management Netting (1) Derivative Asset/(Liability)
Current Derivative Assets:        
Level 2:        
 NU (1)$ 0.4 $ (0.1) $ 0.3
Level 3:        
 NU, CL&P (1)  16.4   (4.8)   11.6
          
Long-Term Derivative Assets:        
Level 3:         
 NU, CL&P (1)$ 111.7 $ (17.0) $ 94.7
          
Current Derivative Liabilities:        
Level 2:        
 NU (1)$ (0.7) $ 0.2 $ (0.5)
Level 3:        
 NU  (87.8)   -   (87.8)
 CL&P  (85.6)   -   (85.6)
 NSTAR Electric  (2.2)   -   (2.2)
          
Long-Term Derivative Liabilities:        
Level 3:        
 NU$ (449.4) $ - $ (449.4)
 CL&P   (445.3)   -   (445.3)
 NSTAR Electric  (4.1)   -   (4.1)

  As of December 31, 2013
  Commodity Supply and    Net Amount Recorded as
(Millions of Dollars)Price Risk Management Netting (1) Derivative Asset/(Liability)
Current Derivative Assets:        
Level 2:        
 NU (1)$ 1.9 $ (0.3) $ 1.6
Level 3:        
 NU (1)  18.4   (9.8)   8.6
 CL&P (1)  17.1   (9.8)   7.3
 NSTAR Electric  1.2   -   1.2
          
Long-Term Derivative Assets:        
Level 2:        
 NU$ 0.2 $ - $ 0.2
Level 3:         
 NU (1)  116.2   (42.2)   74.0
 CL&P (1)  113.6   (42.2)   71.4
          
Current Derivative Liabilities:        
Level 3:        
 NU$ (93.7) $ - $ (93.7)
 CL&P  (92.2)   -   (92.2)
 NSTAR Electric  (1.5)   -   (1.5)
          
Long-Term Derivative Liabilities:        
Level 3:        
 NU$ (624.1) $ - $ (624.1)
 CL&P   (617.1)   -   (617.1)
 NSTAR Electric  (7.0)   -   (7.0)

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

 

For further information on the fair value of derivative contracts, see Note 1D, "Summary of Significant Accounting Policies - Fair Value Measurements," to the financial statements.

 

Derivatives Not Designated as Hedges

Commodity Supply and Price Risk Management: As required by regulation, CL&P, along with UI, has capacity-related contracts with generation facilities. 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 combined capacity of these contracts is 787 MW. The capacity contracts extend through 2026 and obligate both CL&P and UI 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 and a capacity-related contract to purchase up to 35 MW per year through 2019.

 

As of June 30, 2014 and December 31, 2013, NU had NYMEX future contracts in order to reduce variability associated with the purchase price of approximately 6.6 million and 9.1 million MMBtu of natural gas, respectively.

 

The following table presents the current change in fair value, primarily recovered through rates from customers, associated with NU's derivative contracts not designated as hedges:

  Amounts Recognized on Derivatives
  For the Three Months Ended June 30,  For the Six Months Ended June 30,
(Millions of Dollars) 2014 2013 2014 2013
NU              
Balance Sheets:              
 Regulatory Assets and Liabilities $ 111.6 $ 22.2  $ 166.0 $ 50.1 
Statements of Income:              
 Purchased Power, Fuel and Transmission   -   0.5    -   0.8 

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. As of June 30, 2014, NSTAR Gas had derivative contracts in a net liability position that were subject to credit risk contingent features. If NSTAR Gas' credit rating was downgraded below investment grade, NU would have been required to post approximately $0.6 million in collateral. As of December 31, 2013, there were no derivative contracts in a net liability position that were subject to credit risk contingent features.

Valuation of Derivative Instruments

Derivative contracts classified as Level 2 in the fair value hierarchy relate to the financial contracts for natural gas futures. Prices are obtained from broker quotes and are based on actual market activity. The contracts are valued using NYMEX natural gas prices. 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 valuations 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 a 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 NSTAR Electric's, Level 3 derivative contracts and the range of the significant unobservable inputs utilized in the valuations over the duration of the contracts:

 As of June 30, 2014 As of December 31, 2013
  Range Period Covered  Range Period Covered
Energy Prices:                 
NU$63-66per MWh 2018 - 2020 $49-77per MWh 2018 - 2029
CL&P$63-66per MWh 2018 - 2020 $56-58per MWh 2018 - 2029
                  
Capacity Prices:                 
NU$3.13-13.00 per kW-Month 2016 - 2026 $5.07-11.82 per kW-Month 2017 - 2029
CL&P$7.00-13.00 per kW-Month 2018 - 2026 $5.07-10.42 per kW-Month 2017 - 2026
NSTAR Electric$3.13-11.13 per kW-Month 2016 - 2019 $5.07-7.38 per kW-Month 2017 - 2019
                  
Forward Reserve:                 
NU, CL&P$3.30-9.50 per kW-Month 2014 - 2024 $3.30-3.30 per kW-Month 2014 - 2024
                  
REC Prices:                 
NU$38-70 per REC 2014 - 2018 $36-87 per REC 2014 - 2029
NSTAR Electric$38-70 per REC 2014 - 2018 $36-70 per REC 2014 - 2018

Exit price premiums of 8 percent through 25 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 energy 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 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.

  For the Three Months Ended June 30, For the Six Months Ended June 30,
  2014 2013 2014 2013
(Millions of Dollars)NU NU NU NU
Derivatives, Net:            
Fair Value as of Beginning of Period$ (564.3) $ (833.1) $ (635.2) $ (878.6)
Net Realized/Unrealized Gains Included in:            
  Net Income  -   1.3   -   7.1
  Regulatory Assets and Liabilities  111.8   22.7   161.3   48.9
Settlements  21.6   21.0   43.0   34.5
Fair Value as of End of Period$ (430.9) $ (788.1) $ (430.9) $ (788.1)

  For the Three Months Ended June 30,
  2014  2013
(Millions of Dollars)CL&P NSTAR Electric  CL&P NSTAR Electric
Derivatives, Net:             
Fair Value as of Beginning of Period$ (557.0) $ (7.3)  $ (819.6) $ (13.6)
Net Realized/Unrealized Gains/(Losses) Included in Regulatory Assets and Liabilities  112.2   (0.4)    21.9   (0.5)
Settlements  20.2   1.4    21.9   1.0
Fair Value as of End of Period$ (424.6) $ (6.3)  $ (775.8) $ (13.1)
              
  For the Six Months Ended June 30,
  2014  2013
(Millions of Dollars)CL&P NSTAR Electric  CL&P NSTAR Electric
Derivatives, Net:             
Fair Value as of Beginning of Period$ (630.6) $ (7.3)  $ (866.2) $ (14.9)
Net Realized/Unrealized Gains/(Losses) Included in Regulatory Assets and Liabilities  164.5   (0.5)    46.3   0.2
Settlements  41.5   1.5    44.1   1.6
Fair Value as of End of Period$ (424.6) $ (6.3)  $ (775.8) $ (13.1)