1.0.0.3falseDERIVATIVE INSTRUMENTSfalse1$falsefalseu000Standardhttp://www.xbrl.org/2003/iso4217USDiso42170u001Standardhttp://www.xbrl.org/2003/instancesharesxbrli0u002Dividehttp://www.xbrl.org/2003/iso4217USDiso4217http://www.xbrl.org/2003/instancesharesxbrli020fe_DerivativeInstrumentsAbstractfefalsenadurationstringNo definition available.falsefalsefalsefalsefalsetruefalsefalsefalse1falsefalse00falsefalseNo definition available.false31us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlockus-gaaptruenadurationstringNo definition available.falsefalsefalsefalsefalsefalsefalsefalsefalse1falsefalse005. DERIVATIVE INSTRUMENTS
FirstEnergy is exposed to financial risks resulting from fluctuating interest rates and commodity prices, including prices for electricity, natural gas, coal and energy transmission. To manage the volatility relating to these exposures, FirstEnergy uses a variety of derivative instruments, including forward contracts, options, futures contracts and swaps. The derivatives are used for risk management purposes. In addition to derivatives, FirstEnergy also enters into master netting agreements with certain third parties. FirstEnergy's Risk Policy Committee, comprised of members of senior management, provides general management oversight for risk management activities throughout FirstEnergy. The Committee is responsible for promoting the effective design and implementation of sound risk management programs and oversees compliance with corporate risk management policies and established risk management practices.
FirstEnergy accounts for derivative instruments on its Consolidated Balance Sheets at fair value unless they meet the normal purchase and normal sales criteria. Derivatives that meet those criteria are accounted for at cost. The changes in the fair value of derivative instruments that do not meet the normal purchase and normal sales criteria are included in other expense, unrealized gain (loss) on derivative hedges in other comprehensive income (loss), or as part of the value of the hedged item.
Interest Rate Derivatives
Under the revolving credit facility, FirstEnergy, and its subsidiaries, incur variable interest charges based on LIBOR. FirstEnergy currently holds swaps with a notional value of $200 million to hedge against changes in associated interest rates. Hedges with a notional value of $100 million expire in November 2009 and $100 million expire in January 2010. The swaps are accounted for as cash flow hedges. As of September 30, 2009, the fair value of outstanding swaps was $(2) million.
FirstEnergy uses forward starting swap agreements to hedge a portion of the consolidated interest rate risk associated with issuances of fixed-rate, long-term debt securities of its subsidiaries. These derivatives are treated as cash flow hedges, protecting against the risk of changes in future interest payments resulting from changes in benchmark U.S. Treasury rates between the date of hedge inception and the date of the debt issuance. For the three months and nine months ended September 30, 2009, FirstEnergy terminated forward swaps with a notional value of $2.3 billion and $2.4 billion, respectively. FirstEnergy recognized losses of approximately $17 million and $18 million, respectively - of which the ineffective portion recognized as an adjustment to interest expense was immaterial. The remaining effective portions will be amortized to interest expense over the life of the hedged debt.
As of September 30, 2009 and December 31, 2008, the fair value of outstanding interest rate derivatives was $(2) million and $(3) million, respectively. Interest rate derivatives are included in "Other Noncurrent Liabilities" on FirstEnergy's consolidated balance sheets. The effects of interest rate derivatives on the consolidated statements of income and comprehensive income during the three months and nine months ended September 30, 2009 and 2008 were:
Three Months Ended Nine Months Ended September 30 September 30 2009 2008 2009 2008 (In millions) Effective Portion Loss Recognized in AOCL $ (17) $ (2) $ (18) $ (11) Loss Reclassified from AOCL into Interest Expense (26) (4) (37) (11) Ineffective Portion Loss Recognized in Interest Expense - - - (5)
Total unamortized losses included in AOCL associated with prior interest rate hedges totaled $94 million ($57 million net of tax) as of September 30, 2009. Based on current estimates, approximately $11 million will be amortized to interest expense during the next twelve months. FirstEnergy's interest rate swaps do not include any contingent credit risk related features.
Commodity Derivatives
FirstEnergy uses both physically and financially settled derivatives to manage its exposure to volatility in commodity prices. Commodity derivatives are used for risk management purposes to hedge exposures when it makes economic sense to do so, including circumstances in which the hedging relationship does not qualify for hedge accounting. Derivatives that do not qualify under the normal purchase or sales criteria or for hedge accounting as cash flow hedges are marked to market through earnings. FirstEnergy's risk policy does not allow derivatives to be used for speculative or trading purposes. FirstEnergy hedges forecasted electric sales and purchases and anticipated natural gas purchases using forwards and options. Heating oil futures are used to hedge both oil purchases and fuel surcharges associated with rail transportation contracts. FirstEnergy's hedge term is typically two years. The effective portions of all cash flow hedges are initially recorded in AOCL and are subsequently included in net income as the underlying hedged commodities are delivered.
The following tables summarize the fair value of commodity derivatives in FirstEnergy's Consolidated Balance Sheets:
Derivative Assets Derivative Liabilities
Fair Value Fair Value September 30 December 31 September 30 December 31 2009 2008 2009 2008Cash Flow Hedges (In millions) Cash Flow Hedges (In millions)Electricity Forwards Electricity Forwards Current Assets $ 13 $ 11 Current Liabilities $ 5 $ 27Natural Gas Futures Natural Gas Futures Current Assets - - Current Liabilities 8 4 Long-Term Deferred Charges - - Noncurrent Liabilities 1 5Other Other
Current Assets - - Current Liabilities 5 12 Long-Term Deferred Charges - - Noncurrent Liabilities 2 4 $ 13 $ 11 $ 21 52 Derivative Assets Derivative Liabilities Fair Value Fair Value September 30 2009 December 31 2008 September 30 2009 December 31 2008
Economic Hedges (In millions) Economic Hedges (In millions)NUG Contracts NUG Contracts Power Purchase Power Purchase Contract Asset $ 220 $ 434 Contract Liability $ 685 $ 766Other Other
Current Assets - 1 Current Liabilities - 1 Long-Term Deferred Charges 19 28 Noncurrent Liabilities - - $ 239 $ 463 $ 685 $ 767Total Commodity Derivatives $ 252 $ 474 Total Commodity Derivatives $ 706 $ 819
Electricity forwards are used to balance expected retail and wholesale sales with expected generation and purchased power. Natural gas futures are entered into based on expected consumption of natural gas, primarily used in FirstEnergy's peaking units. Heating oil futures are entered into based on expected consumption of oil and the financial risk in FirstEnergy's coal transportation contracts. Derivative instruments are not used in quantities greater than forecasted needs. The following table summarizes the volume of FirstEnergy's outstanding derivative transactions as of September 30, 2009.
Purchases Sales Net Units (In thousands) Electricity Forwards 156 (2,913 ) (2,757 ) MWH Heating Oil Futures 5,880 - 5,880 Gallons Natural Gas Futures 3,000 (2,500 ) 500 mmBtu
The effect of derivative instruments on the consolidated statements of income and comprehensive income for the three months and nine months ended September 30, 2009 and 2008, for instruments designated in cash flow hedging relationships and not in hedging relationships, respectively, are summarized in the following tables:
Derivatives in Cash Flow Hedging Relationships Electricity Natural Gas Heating Oil Forwards Futures Futures Total Three Months Ended September 30, 2009 (in millions) Gain (Loss) Recognized in AOCL (Effective Portion) $ 15 $ (2 ) $ - $ 13
Effective Gain (Loss) Reclassified to:(1) Purchased Power Expense 11 - - 11 Fuel Expense - (4 ) (2 ) (6 ) Nine Months Ended September 30, 2009 Gain (Loss) Recognized in AOCL (Effective Portion) $ 19 $ (9 ) $ - $ 10
Effective Gain (Loss) Reclassified to:(1) Purchased Power Expense (6 ) - - (6 ) Fuel Expense - (9 ) (10 ) (19 ) Three Months Ended September 30, 2008 Gain (Loss) Recognized in AOCL (Effective Portion) $ 42 $ (2 ) $ - $ 40
Effective Gain (Loss) Reclassified to:(1) Purchased Power Expense 3 - - 3 Fuel Expense - 3 - 3 Nine Months Ended September 30, 2008 Gain (Loss) Recognized in AOCL (Effective Portion) $ 12 $ 4 $ - $ 16 Effective Gain (Loss) Reclassified to:(1) Purchased Power Expense (10 ) - - (10 ) Fuel Expense - 4 - 4 (1) The ineffective portion was immaterial.
Three Months Ended September 30 Nine Months Ended September 30 Derivatives Not in Hedging Relationships NUG NUG Contracts Other Total Contracts Other Total 2009 (In millions) Unrealized Gain (Loss) Recognized in: Fuel Expense(1) $ - $ (1 ) $ (1 ) $ - $ 2 $ 2 Regulatory Assets(2) (22 ) - (22 ) (406 ) - (406 ) $ (22 ) $ (1 ) $ (23 ) $ (406 ) $ 2 $ (404 )Realized Gain (Loss) Reclassified to: Fuel Expense(1) $ - $ 1 $ 1 $ - $ - $ - Regulatory Assets(2) (93 ) - (93 ) (273 ) 11 (262 ) $ (93 ) $ 1 $ (92 ) $ (273 ) $ 11 $ (262 )2008 Unrealized Gain (Loss) Recognized in: Fuel Expense(1) $ - $ 2 $ 2 $ - $ 2 $ 2 Regulatory Assets(2) (362 ) 1 (361 ) 314 1 315 $ (362 ) $ 3 $ (359 ) $ 314 $ 3 $ 317 Realized Gain (Loss) Reclassified to: Fuel Expense(1) $ - $ 1 $ 1 $ - $ 1 $ 1 Regulatory Assets(2) (57 ) 1 (56 ) (167 ) 11 (156 ) $ (57 ) $ 2 $ (55 ) $ (167 ) $ 12 $ (155 ) (1) The realized gain (loss) is reclassified upon termination of the derivative instrument. (2) Changes in the fair value of NUG contracts are deferred for future recovery from (or refund to) customers.
Total unamortized losses included in AOCL associated with commodity derivatives were $9 million ($5 million net of tax) as of September 30, 2009, as compared to $44 million ($27 million net of tax) as of December 31, 2008. The net of tax change resulted from a net $7 million decrease related to current hedging activity and a $15 million decrease due to net hedge losses reclassified to earnings during the first nine months of 2009. Based on current estimates, approximately $3 million (after tax) of the net deferred losses on derivative instruments in AOCL as of September 30, 2009 are expected to be reclassified to earnings during the next twelve months as hedged transactions occur. The fair value of these derivative instruments fluctuate from period to period based on various market factors.
Many of FirstEnergy's commodity derivatives contain credit risk features. As of September 30, 2009, FirstEnergy posted $133 million of collateral related to net liability positions and held no counterparties' funds related to asset positions. The collateral FirstEnergy has posted relates to both derivative and non-derivative contracts. FirstEnergy's largest derivative counterparties fully collateralize all derivative transactions. Certain commodity derivative contracts include credit risk-related contingent features that would require FirstEnergy to post additional collateral if the credit rating for its debt were to fall below investment grade. The aggregate fair value of derivative instruments with credit risk-related contingent features that are in a liability position on September 30, 2009 was $2 million, for which $106 million in collateral has been posted. If FirstEnergy's credit rating were to fall below investment grade, it would be required to post $18 million of additional collateral related to commodity derivatives.5. DERIVATIVE INSTRUMENTS
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