Accounting for Derivative Instruments and Hedging Activities | 9 Months Ended |
Sep. 30, 2014 |
Accounting for Derivative Instruments and Hedging Activities | ' |
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12. Accounting for Derivative Instruments and Hedging Activities |
From time to time, TECO Energy and its affiliates enter into futures, forwards, swaps and option contracts for the following purposes: |
— | to limit the exposure to price fluctuations for physical purchases and sales of natural gas in the course of normal operations at Tampa Electric, PGS and NMGC, | | | | | | | | | | | | | | |
— | to limit the exposure to interest rate fluctuations on debt securities at TECO Energy and its affiliates, and | | | | | | | | | | | | | | |
— | to limit the exposure to price fluctuations for physical purchases of fuel at TECO Coal. | | | | | | | | | | | | | | |
TECO Energy and its affiliates use derivatives only to reduce normal operating and market risks, not for speculative purposes. The company’s primary objective in using derivative instruments for regulated operations is to reduce the impact of market price volatility on ratepayers. |
The risk management policies adopted by TECO Energy provide a framework through which management monitors various risk exposures. Daily and periodic reporting of positions and other relevant metrics are performed by a centralized risk management group which is independent of all operating companies. |
The company applies the accounting standards for derivative instruments and hedging activities. These standards require companies to recognize derivatives as either assets or liabilities in the financial statements, to measure those instruments at fair value and to reflect the changes in the fair value of those instruments as either components of OCI or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of the instrument’s settlement. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the market change of the amount paid or received on the underlying physical transaction. |
The company applies the accounting standards for regulated operations to financial instruments used to hedge the purchase of natural gas for its regulated companies. These standards, in accordance with the FPSC and NMPRC, permit the changes in fair value of natural gas derivatives to be recorded as regulatory assets or liabilities reflecting the impact of hedging activities on the fuel recovery clause. As a result, these changes are not recorded in OCI (see Note 3). |
A company’s physical contracts qualify for the NPNS exception to derivative accounting rules, provided they meet certain criteria. Generally, NPNS applies if the company deems the counterparty creditworthy, if the counterparty owns or controls resources within the proximity to allow for physical delivery of the commodity, if the company intends to receive physical delivery and if the transaction is reasonable in relation to the company’s business needs. As of Sept. 30, 2014, all of the company’s physical contracts qualify for the NPNS exception. |
The NMPRC allows, and generally expects, NMGC to have a commodity hedging program in order to hedge against increases in natural gas prices. Each year, NMGC develops an annual gas hedging plan, reviews that plan with the Staff of the NMPRC and representatives of the Attorney General of the State of New Mexico, and includes certain aspects of that plan in a report on NMGC’s annual gas supply plan which is filed with the NMPRC. As discussed in Note 3 under the caption NMGC’s PGAC, unless there are program-related disallowances, all costs associated with NMGC’s commodity hedging program are recoverable from customers through the PGAC, and any income or savings associated with the commodity hedging program are credited to customers through the PGAC. The instruments NMGC uses in its commodity hedging program are generally limited to fixed-price gas purchase contracts and call options. The fixed-price gas purchase contracts into which NMGC enters to serve its gas sales service customers qualify for the normal purchase and sales exception discussed previously and, therefore, those contracts are not recognized at fair value in the company’s Consolidated Condensed Balance Sheet. |
NMGC enters into numerous natural gas call option contracts for hedging purposes during the winter heating season. These call options allow NMGC to hedge specific quantities of natural gas at specified prices during the period from December through February. The premiums NMGC pays to enter into these call options are deferred at the time of payment in the company’s Consolidated Condensed Balance Sheet. These call option premiums are amortized in equal monthly amounts through the PGAC over the period from October through March. Cash received by NMGC from call options at expiration is credited to customers through the PGAC in the month in which the call options expire. Unamortized call option premiums are generally recorded as derivative assets, but when there are mark-to-market losses associated with these derivative assets, a portion, or all, of derivative assets are reclassified to regulatory assets in the company’s Consolidated Condensed Balance Sheet due to the recoverability of the unamortized call option premiums through the PGAC. The mark-to-market losses are limited to the amount of unamortized call option premiums at any point in time due to the regulatory treatment given to NMGC’s natural gas call options. |
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The following table presents the derivatives that are designated as cash flow hedges at Sept. 30, 2014 and Dec. 31, 2013: |
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Total Derivatives (1) | | | | | | | | | | |
| Sep 30, | | | Dec 31, | | | | | | | | | |
(millions) | 2014 | | | 2013 | | | | | | | | | |
Current assets | $ | 0.2 | | | $ | 9.7 | | | | | | | | | |
Long-term assets | | 0 | | | | 0.3 | | | | | | | | | |
Total assets | $ | 0.2 | | | $ | 10 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Current liabilities | $ | 4.1 | | | $ | 0.1 | | | | | | | | | |
Long-term liabilities | | 1.6 | | | | 0.2 | | | | | | | | | |
Total liabilities | $ | 5.7 | | | $ | 0.3 | | | | | | | | | |
-1 | Amounts presented above are on a gross basis, with asset and liability positions netted by counterparty in accordance with accounting standards for derivatives and hedging. | | | | | | | | | | | | | | |
The following table presents the gross amounts of derivatives and their related offset amounts as permitted by their respective master netting agreements at Sept. 30, 2014 and Dec. 31, 2013. There was no collateral posted with or received from any counterparties. |
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Offsetting of Derivative Assets and Liabilities | | | | | | | | | | | | | | | |
(millions) | | | | | | | | | | | | | | | |
| Gross Amounts of Recognized Assets (Liabilities) | | | Gross Amounts offset on the Balance Sheet | | | Net Amounts of Assets (Liabilities) Presented on the Balance Sheet | | | | | |
30-Sep-14 | | | | | | | | | | | | | | | |
Description | | | | | | | | | | | | | | | |
Derivative assets | $ | 1.4 | | | $ | (1.2 | ) | | $ | 0.2 | | | | | |
Derivative liabilities | $ | (6.9 | ) | | $ | 1.2 | | | $ | (5.7 | ) | | | | |
| | | | | | | | | | | | | | | |
31-Dec-13 | | | | | | | | | | | | | | | |
Description | | | | | | | | | | | | | | | |
Derivative assets | $ | 10.5 | | | $ | (0.5 | ) | | $ | 10 | | | | | |
Derivative liabilities | $ | (0.8 | ) | | $ | 0.5 | | | $ | (0.3 | ) | | | | |
The following table presents the derivative hedges of diesel fuel contracts at Sept. 30, 2014 and Dec. 31, 2013 to limit the exposure to changes in the market price for diesel fuel used in the production of coal. All diesel fuel derivatives are expected to be settled prior to the closing of the sale of TECO Coal. |
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Diesel Fuel Derivatives | | | | | | | | | | |
| | Sep 30, | | | Dec 31, | | | | | | | | |
(millions) | | 2014 | | | 2013 | | | | | | | | |
Current assets | | $ | 0.1 | | | $ | 0.2 | | | | | | | | |
Long-term assets | | | 0 | | | | 0 | | | | | | | | |
Total assets | | $ | 0.1 | | | $ | 0.2 | | | | | | | | |
| | | | | | | | | | | | | | | |
Current liabilities | | $ | 0.1 | | | $ | 0.1 | | | | | | | | |
Long-term liabilities | | | 0 | | | | 0 | | | | | | | | |
Total liabilities | | $ | 0.1 | | | $ | 0.1 | | | | | | | | |
The following table presents the derivative hedges of natural gas contracts at Sept. 30, 2014 and Dec. 31, 2013 to limit the exposure to changes in market price for natural gas used to produce energy and natural gas purchased for resale to customers: |
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Natural Gas Derivatives | | | | | | | | | | |
| | Sep 30, | | | Dec 31, | | | | | | | | |
(millions) | | 2014 | | | 2013 | | | | | | | | |
Current assets | | $ | 0.1 | | | $ | 9.5 | | | | | | | | |
Long-term assets | | | 0 | | | | 0.3 | | | | | | | | |
Total assets | | $ | 0.1 | | | $ | 9.8 | | | | | | | | |
| | | | | | | | | | | | | | | |
Current liabilities | | $ | 4 | | | $ | 0 | | | | | | | | |
Long-term liabilities | | | 1.6 | | | | 0.2 | | | | | | | | |
Total liabilities | | $ | 5.6 | | | $ | 0.2 | | | | | | | | |
The ending balance in AOCI related to the cash flow hedges and interest rate swaps at Sept. 30, 2014 is a net loss of $7.4 million after tax and accumulated amortization. This compares to a net loss of $7.8 million in AOCI after tax and accumulated amortization at Dec. 31, 2013. |
The following tables present the fair values and locations of derivative instruments recorded on the balance sheet at Sept. 30, 2014 and Dec. 31, 2013. All diesel fuel derivatives are expected to be settled prior to the closing on the sale of TECO Coal. |
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Derivatives Designated as Hedging Instruments | | | | | | | | | | | | | | | |
| Asset Derivatives | | | Liability Derivatives | | | | | |
(millions) | Balance Sheet | | Fair | | | Balance Sheet | | Fair | | | | | |
30-Sep-14 | Location | | Value | | | Location | | Value | | | | | |
Commodity Contracts: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Diesel fuel derivatives: | | | | | | | | | | | | | | | |
Current | Derivative assets | | $ | 0.1 | | | Derivative liabilities | | $ | 0.1 | | | | | |
Long-term | Derivative assets | | | 0 | | | Derivative liabilities | | | 0 | | | | | |
| | | | | | | | | | | | | | | |
Natural gas derivatives: | | | | | | | | | | | | | | | |
Current | Derivative assets | | | 0.1 | | | Derivative liabilities | | | 4 | | | | | |
Long-term | Derivative assets | | | 0 | | | Derivative liabilities | | | 1.6 | | | | | |
Total derivatives designated as hedging instruments | | | $ | 0.2 | | | | | $ | 5.7 | | | | | |
| | | | | | | | | | | | | | | |
| Asset Derivatives | | | Liability Derivatives | | | | | |
(millions) | Balance Sheet | | Fair | | | Balance Sheet | | Fair | | | | | |
31-Dec-13 | Location | | Value | | | Location | | Value | | | | | |
Commodity Contracts: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Diesel fuel derivatives: | | | | | | | | | | | | | | | |
Current | Derivative assets | | $ | 0.2 | | | Derivative liabilities | | $ | 0.1 | | | | | |
Long-term | Derivative assets | | | 0 | | | Derivative liabilities | | | 0 | | | | | |
| | | | | | | | | | | | | | | |
Natural gas derivatives: | | | | | | | | | | | | | | | |
Current | Derivative assets | | | 9.5 | | | Derivative liabilities | | | 0 | | | | | |
Long-term | Derivative assets | | | 0.3 | | | Derivative liabilities | | | 0.2 | | | | | |
Total derivatives designated as hedging instruments | | | $ | 10 | | | | | $ | 0.3 | | | | | |
The following tables present the effect of energy related derivatives on the fuel recovery clause mechanism in the Consolidated Condensed Balance Sheets as of Sept. 30, 2014 and Dec. 31, 2013: |
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Energy Related Derivatives | | | | | | | | | | | | | | | |
| Asset Derivatives | | | Liability Derivatives | | | | | |
(millions) | Balance Sheet | | Fair | | | Balance Sheet | | Fair | | | | | |
30-Sep-14 | Location (1) | | Value | | | Location (1) | | Value | | | | | |
Commodity Contracts: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Natural gas derivatives: | | | | | | | | | | | | | | | |
Current | Regulatory liabilities | | $ | 0.1 | | | Regulatory assets | | $ | 4 | | | | | |
Long-term | Regulatory liabilities | | | 0 | | | Regulatory assets | | | 1.6 | | | | | |
Total | | | $ | 0.1 | | | | | $ | 5.6 | | | | | |
| | | | | | | | | | | | | | | |
(millions) | Balance Sheet | | Fair | | | Balance Sheet | | Fair | | | | | |
31-Dec-13 | Location (1) | | Value | | | Location (1) | | Value | | | | | |
Commodity Contracts: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Natural gas derivatives: | | | | | | | | | | | | | | | |
Current | Regulatory liabilities | | $ | 9.5 | | | Regulatory assets | | $ | 0 | | | | | |
Long-term | Regulatory liabilities | | | 0.3 | | | Regulatory assets | | | 0.2 | | | | | |
Total | | | $ | 9.8 | | | | | $ | 0.2 | | | | | |
-1 | Natural gas derivatives are deferred in accordance with accounting standards for regulated operations and all increases and decreases in the cost of natural gas supply are passed on to customers with the fuel recovery clause mechanism. As gains and losses are realized in future periods, they will be recorded as fuel costs in the Consolidated Condensed Statements of Income. | | | | | | | | | | | | | | |
Based on the fair value of the instruments at Sept. 30, 2014, net pretax losses of $3.9 million are expected to be reclassified from regulatory assets or liabilities to the Consolidated Condensed Statements of Income within the next 12 months. |
The following table presents the effect of hedging instruments on OCI and income for the three and nine months ended Sept. 30. All diesel fuel derivatives are expected to be settled prior to the closing on the sale of TECO Coal. |
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Effect of Hedging Instruments on OCI and Income | | | | | | | | | | | | | | | |
For the three months ended Sep 30: | Amount of | | | Location of | | Amount of | | | | | | | |
| Gain/(Loss) on | | | Gain/(Loss) | | Gain/(Loss) | | | | | | | |
| Derivatives | | | Reclassified | | Reclassified | | | | | | | |
| Recognized in | | | From AOCI | | From AOCI | | | | | | | |
(millions) | OCI | | | Into Income | | Into Income | | | | | | | |
Derivatives in Cash Flow Hedging | Effective Portion (1) | | | | | Effective Portion (1) | | | | | | | |
Relationships | | | | | | |
2014 | | | | | | | | | | | | | | | |
Interest rate contracts | $ | 0 | | | Interest expense | | $ | (0.3 | ) | | | | | | |
Commodity contracts: | | | | | | | | | | | | | | | |
Diesel fuel derivatives | | (0.2 | ) | | Loss from discontinued operations | | | 0 | | | | | | | |
Total | $ | (0.2 | ) | | | | $ | (0.3 | ) | | | | | | |
2013 | | | | | | | | | | | | | | | |
Interest rate contracts | $ | 0 | | | Interest expense | | $ | (0.2 | ) | | | | | | |
Commodity contracts: | | | | | | | | | | | | | | | |
Diesel fuel derivatives | | 0.7 | | | Loss from discontinued operations | | | 0.1 | | | | | | | |
Total | $ | 0.7 | | | | | $ | (0.1 | ) | | | | | | |
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For the nine months ended Sep 30: | Amount of | | | Location of | | Amount of | | | | | | | |
| Gain/(Loss) on | | | Gain/(Loss) | | Gain/(Loss) | | | | | | | |
| Derivatives | | | Reclassified | | Reclassified | | | | | | | |
| Recognized in | | | From AOCI | | From AOCI | | | | | | | |
(millions) | OCI | | | Into Income | | Into Income | | | | | | | |
Derivatives in Cash Flow Hedging | Effective Portion (1) | | | | | Effective Portion (1) | | | | | | | |
Relationships | | | | | | |
2014 | | | | | | | | | | | | | | | |
Interest rate contracts | $ | 0 | | | Interest expense | | $ | (0.5 | ) | | | | | | |
Commodity contracts: | | | | | | | | | | | | | | | |
Diesel fuel derivatives | | (0.2 | ) | | Loss from discontinued operations | | | (0.1 | ) | | | | | | |
Total | $ | (0.2 | ) | | | | $ | (0.6 | ) | | | | | | |
2013 | | | | | | | | | | | | | | | |
Interest rate contracts | $ | 0 | | | Interest expense | | $ | (0.7 | ) | | | | | | |
Commodity contracts: | | | | | | | | | | | | | | | |
Diesel fuel derivatives | | 0.4 | | | Loss from discontinued operations | | | 0 | | | | | | | |
Total | $ | 0.4 | | | | | $ | (0.7 | ) | | | | | | |
(1) Changes in OCI and AOCI are reported in after-tax dollars. | | | | | | | |
For derivative instruments that meet cash flow hedge criteria, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or period during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. For the three and nine months ended Sept. 30, 2014 and 2013, all hedges were effective. |
The following table presents the derivative activity for instruments classified as qualifying cash flow hedges for the nine months ended Sept. 30. All diesel fuel derivatives are expected to be settled prior to the closing on the sale of TECO Coal. |
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Qualifying Cash Flow Hedges | | | | | | | | | | | | | | | |
| | | | | Amount of | | | Amount of | | | | | |
| Fair Value | | | Gain/(Loss) | | | Gain/(Loss) | | | | | |
| Asset/ | | | Recognized | | | Reclassified From | | | | | |
(millions) | (Liability) | | | in OCI (1) | | | AOCI Into Income | | | | | |
2014 | | | | | | | | | | | | | | | |
Interest rate swaps | $ | 0 | | | $ | 0 | | | $ | (0.5 | ) | | | | |
Diesel fuel derivatives | | 0 | | | | (0.2 | ) | | | (0.1 | ) | | | | |
Total | $ | 0 | | | $ | (0.2 | ) | | $ | (0.6 | ) | | | | |
2013 | | | | | | | | | | | | | | | |
Interest rate swaps | $ | 0 | | | $ | 0 | | | $ | (0.7 | ) | | | | |
Diesel fuel derivatives | | 0.1 | | | | 0.4 | | | | 0 | | | | | |
Total | $ | 0.1 | | | $ | 0.4 | | | $ | (0.7 | ) | | | | |
-1 | Changes in OCI and AOCI are reported in after-tax dollars. | | | | | | | | | | | | | | |
The maximum length of time over which the company is hedging its exposure to the variability in future cash flows extends to Dec. 31, 2014 for financial diesel fuel contracts and Dec. 31, 2016 for financial natural gas contracts. The following table presents by commodity type the company’s derivative volumes that, as of Sept. 30, 2014, are expected to settle during the 2014, 2015 and 2016 fiscal years: |
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Derivative Volumes | Diesel Fuel Contracts | | | Natural Gas Contracts | |
(millions) | (Gallons) | | | (MMBTUs) | |
Year | Physical | | | Financial | | | Physical | | | Financial | |
2014 | | 0 | | | | 0.5 | | | | 0 | | | | 11.6 | |
2015 | | 0 | | | | 0 | | | | 0 | | | | 32.2 | |
2016 | | 0 | | | | 0 | | | | 0 | | | | 7.6 | |
Total | | 0 | | | | 0.5 | | | | 0 | | | | 51.4 | |
The company is exposed to credit risk primarily through entering into derivative instruments with counterparties to limit its exposure to the commodity price fluctuations associated with diesel fuel and natural gas. Credit risk is the potential loss resulting from a counterparty’s nonperformance under an agreement. The company manages credit risk with policies and procedures for, among other things, counterparty analysis, exposure measurement and exposure monitoring and mitigation. |
It is possible that volatility in commodity prices could cause the company to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, the company could suffer a material financial loss. However, as of Sept. 30, 2014, substantially all of the counterparties with transaction amounts outstanding in the company’s energy portfolio were rated investment grade by the major rating agencies. The company assesses credit risk internally for counterparties that are not rated. |
The company has entered into commodity master arrangements with its counterparties to mitigate credit exposure to those counterparties. The company generally enters into the following master arrangements: (1) EEI agreements - standardized power sales contracts in the electric industry; (2) ISDA agreements - standardized financial gas and electric contracts; and (3) NAESB agreements - standardized physical gas contracts. The company believes that entering into such agreements reduces the risk from default by creating contractual rights relating to creditworthiness, collateral and termination. |
The company has implemented procedures to monitor the creditworthiness of its counterparties and to consider nonperformance risk in determining the fair value of counterparty positions. Net liability positions are generally not adjusted as the company uses derivative transactions as hedges and has the ability and intent to perform under each of these contracts. In the instance of net asset positions, the company considers general market conditions and the observable financial health and outlook of specific counterparties in evaluating the potential impact of nonperformance risk to derivative positions. As of Sept. 30, 2014, substantially all positions with counterparties were net liabilities. |
Certain TECO Energy derivative instruments contain provisions that require the company’s debt, or in the case of derivative instruments where TEC is the counterparty, TEC’s debt, to maintain an investment grade credit rating from any or all of the major credit rating agencies. If debt ratings, including TEC’s, were to fall below investment grade, it could trigger these 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 company has no other contingent risk features associated with any derivative instruments. Substantially all of the company’s open positions with counterparties as of Sept. 30, 2014 were liability positions. |
Tampa Electric Company [Member] | ' |
Accounting for Derivative Instruments and Hedging Activities | ' |
10. Accounting for Derivative Instruments and Hedging Activities |
From time to time, TEC enters into futures, forwards, swaps and option contracts for the following purposes: |
— | to limit the exposure to price fluctuations for physical purchases and sales of natural gas in the course of normal operations, and | | | | | | | | | | | | | | |
— | to limit the exposure to interest rate fluctuations on debt securities. | | | | | | | | | | | | | | |
TEC uses derivatives only to reduce normal operating and market risks, not for speculative purposes. TEC’s primary objective in using derivative instruments for regulated operations is to reduce the impact of market price volatility on ratepayers. |
The risk management policies adopted by TEC provide a framework through which management monitors various risk exposures. Daily and periodic reporting of positions and other relevant metrics are performed by a centralized risk management group which is independent of all operating companies. |
TEC applies the accounting standards for derivatives and hedging. These standards require companies to recognize derivatives as either assets or liabilities in the financial statements, to measure those instruments at fair value and to reflect the changes in the fair value of those instruments as either components of OCI or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of the instrument’s settlement. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the market change of the amount paid or received on the underlying physical transaction. |
TEC applies accounting standards for regulated operations to financial instruments used to hedge the purchase of natural gas for the regulated companies. These standards, in accordance with the FPSC, permit the changes in fair value of natural gas derivatives to be recorded as regulatory assets or liabilities reflecting the impact of hedging activities on the fuel recovery clause. As a result, these changes are not recorded in OCI (see Note 3). |
A company’s physical contracts qualify for the NPNS exception to derivative accounting rules, provided they meet certain criteria. Generally, NPNS applies if the company deems the counterparty creditworthy, if the counterparty owns or controls resources within the proximity to allow for physical delivery of the commodity, if the company intends to receive physical delivery and if the transaction is reasonable in relation to the company’s business needs. As of Sept. 30, 2014, all of TEC’s physical contracts qualify for the NPNS exception. |
The following table presents the derivative hedges of natural gas contracts at Sept. 30, 2014 and Dec. 31, 2013 to limit the exposure to changes in the market price for natural gas used to produce energy and natural gas purchased for resale to customers: |
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Natural Gas Derivatives | | | | | | | | | | | | | | | |
| Sept. 30, | | | Dec. 31, | | | | | | | | | |
(millions) | 2014 | | | 2013 | | | | | | | | | |
Current assets | $ | 0.1 | | | $ | 9.5 | | | | | | | | | |
Long-term assets | | 0 | | | | 0.3 | | | | | | | | | |
Total assets | $ | 0.1 | | | $ | 9.8 | | | | | | | | | |
Current liabilities (1) | $ | 4 | | | $ | 0 | | | | | | | | | |
Long-term liabilities | | 1.6 | | | | 0.2 | | | | | | | | | |
Total liabilities | $ | 5.6 | | | $ | 0.2 | | | | | | | | | |
-1 | Amounts presented above are on a gross basis, with asset and liability positions netted by counterparty in accordance with accounting standards for derivatives and hedging. | | | | | | | | | | | | | | |
The ending balance in AOCI related to previously settled interest rate swaps at Sept. 30, 2014 is a net loss of $7.3 million after tax and accumulated amortization. This compares to a net loss of $7.8 million in AOCI after tax and accumulated amortization at Dec. 31, 2013. |
The following table presents the gross amounts of derivatives and their related offset amounts as permitted by their respective master netting agreements at Sept. 30, 2014 and Dec. 31, 2013. There was no collateral posted with or received from any counterparties: |
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Offsetting of Derivative Assets and Liabilities | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(millions) | Gross Amounts of Recognized Assets (Liabilities) | | | Gross Amounts offset on the Balance Sheet | | | Net Amounts of Assets (Liabilities) Presented on the Balance Sheet | | | | | |
30-Sep-14 | | | | | | | | | | | | | | | |
Description | | | | | | | | | | | | | | | |
Derivative assets | $ | 1.4 | | | $ | (1.3 | ) | | $ | 0.1 | | | | | |
Derivative liabilities | $ | (6.9 | ) | | $ | 1.3 | | | $ | (5.6 | ) | | | | |
| | | | | | | | | | | | | | | |
31-Dec-13 | | | | | | | | | | | | | | | |
Description | | | | | | | | | | | | | | | |
Derivative assets | $ | 10.3 | | | $ | (0.5 | ) | | $ | 9.8 | | | | | |
Derivative liabilities | $ | (0.7 | ) | | $ | 0.5 | | | $ | (0.2 | ) | | | | |
The following table presents the effect of energy related derivatives on the fuel recovery clause mechanism in the Consolidated Condensed Balance Sheets as of Sept. 30, 2014 and Dec. 31, 2013: |
|
Energy Related Derivatives | | | | | | | | | | | | | | | |
| Asset Derivatives | | | Liability Derivatives | | | | | |
(millions) | Balance Sheet | | Fair | | | Balance Sheet | | Fair | | | | | |
30-Sep-14 | Location (1) | | Value | | | Location (1) | | Value | | | | | |
Commodity Contracts: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Natural gas derivatives: | | | | | | | | | | | | | | | |
Current | Regulatory liabilities | | $ | 0.1 | | | Regulatory assets | | $ | 4 | | | | | |
Long-term | Regulatory liabilities | | | 0 | | | Regulatory assets | | | 1.6 | | | | | |
Total | | | $ | 0.1 | | | | | $ | 5.6 | | | | | |
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(millions) | Balance Sheet | | Fair | | | Balance Sheet | | Fair | | | | | |
31-Dec-13 | Location (1) | | Value | | | Location (1) | | Value | | | | | |
Commodity Contracts: | | | | | | | | | | | | | | | |
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Natural gas derivatives: | | | | | | | | | | | | | | | |
Current | Regulatory liabilities | | $ | 9.5 | | | Regulatory assets | | $ | 0 | | | | | |
Long-term | Regulatory liabilities | | | 0.3 | | | Regulatory assets | | | 0.2 | | | | | |
Total | | | $ | 9.8 | | | | | $ | 0.2 | | | | | |
-1 | Natural gas derivatives are deferred in accordance with accounting standards for regulated operations and all increases and decreases in the cost of natural gas supply are passed on to customers with the fuel recovery clause mechanism. As gains and losses are realized in future periods, they will be recorded as fuel costs in the Consolidated Condensed Statements of Income. | | | | | | | | | | | | | | |
Based on the fair value of the instruments at Sept. 30, 2014, net pretax losses of $3.9 million are expected to be reclassified from regulatory assets or liabilities to the Consolidated Condensed Statements of Income within the next 12 months. |
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The following table presents the effect of hedging instruments on OCI and income for the three months and nine months ended Sept. 30: |
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(millions) | Location of Gain/(Loss) Reclassified From AOCI Into Income | | Amount of Gain/(Loss) Reclassified From AOCI Into Income | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | Effective Portion (1) | | Three months | | | Nine months | | | | | | | |
ended Sep 30: | ended Sep 30: | | | | | | |
2014 | | | | | | | | | | | | | | | |
Interest rate contracts: | Interest expense | | $ | (0.3 | ) | | $ | (0.5 | ) | | | | | | |
Total | | | $ | (0.3 | ) | | $ | (0.5 | ) | | | | | | |
2013 | | | | | | | | | | | | | | | |
Interest rate contracts: | Interest expense | | $ | (0.2 | ) | | $ | (0.7 | ) | | | | | | |
Total | | | $ | (0.2 | ) | | $ | (0.7 | ) | | | | | | |
-1 | Changes in OCI and AOCI are reported in after-tax dollars. | | | | | | | | | | | | | | |
For derivative instruments that meet cash flow hedge criteria, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or period during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. For the three and nine months ended Sept. 30, 2014 and 2013, all hedges were effective. |
The maximum length of time over which TEC is hedging its exposure to the variability in future cash flows extends to Dec. 31, 2016 for the financial natural gas contracts. The following table presents by commodity type TEC’s derivative volumes that, as of Sept. 30, 2014, are expected to settle during the 2014, 2015 and 2016 fiscal years: |
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| Natural Gas Contracts | | | | | | | | | |
(millions) | (MMBTUs) | | | | | | | | | |
Year | Physical | | | Financial | | | | | | | | | |
2014 | | 0 | | | | 11.6 | | | | | | | | | |
2015 | | 0 | | | | 32.2 | | | | | | | | | |
2016 | | 0 | | | | 7.6 | | | | | | | | | |
Total | | 0 | | | | 51.4 | | | | | | | | | |
TEC is exposed to credit risk primarily through entering into derivative instruments with counterparties to limit its exposure to the commodity price fluctuations associated with natural gas. Credit risk is the potential loss resulting from a counterparty’s nonperformance under an agreement. TEC manages credit risk with policies and procedures for, among other things, counterparty analysis, exposure measurement and exposure monitoring and mitigation. |
It is possible that volatility in commodity prices could cause TEC to have material credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations under one or more agreements, TEC could suffer a material financial loss. However, as of Sept. 30, 2014, substantially all of the counterparties with transaction amounts outstanding in TEC’s energy portfolio were rated investment grade by the major rating agencies. TEC assesses credit risk internally for counterparties that are not rated. |
TEC has entered into commodity master arrangements with its counterparties to mitigate credit exposure to those counterparties. TEC generally enters into the following master arrangements: (1) EEI agreements- standardized power sales contracts in the electric industry; (2) ISDA agreements- standardized financial gas and electric contracts; and (3) NAESB agreements - standardized physical gas contracts. TEC believes that entering into such agreements reduces the risk from default by creating contractual rights relating to creditworthiness, collateral and termination. |
TEC has implemented procedures to monitor the creditworthiness of its counterparties and to consider nonperformance risk in determining the fair value of counterparty positions. Net liability positions are generally not adjusted as TEC uses derivative transactions as hedges and has the ability and intent to perform under each of these contracts. In the instance of net asset positions, TEC considers general market conditions and the observable financial health and outlook of specific counterparties in evaluating the potential impact of nonperformance risk to derivative positions. As of Sept. 30, 2014, substantially all positions with counterparties were net liabilities. |
Certain TEC derivative instruments contain provisions that require TEC’s debt to maintain an investment grade credit rating from any or all of the major credit rating agencies. If debt ratings were to fall below investment grade, it could trigger these 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. TEC has no other contingent risk features associated with any derivative instruments. Substantially all of TEC’s open positions with counterparties as of Sept. 30, 2014 were liability positions. |