Derivative financial instruments linked to commodity prices
We also enter into derivative financial instruments linked to commodity prices, including index-linked swaps and futures contracts. These derivative financial instruments are used to reduce market price volatility and are principally used to manage commodity prices associated with our gas and electricity delivery operations in the US on behalf of our customers.
Derivative financial instruments are carried at fair value in the balance sheet and mark-to-market changes in the value of these contracts are reflected through earnings with the exception of those related to our West Virginia gas fields that are designated as cash flow hedges.
In addition, we use NYMEX electricity and gas futures to reduce the cash flow variability associated with the purchase price for a portion of future electricity and gas purchases associated with certain of our electricity and gas distribution operations in the US. These had a negative fair value at 31 March 2009 of £59 million (2008: £19 million), but the liability on the balance sheet has been reduced by the amount of collateral paid to counterparties in respect of these contracts due to accounting netting requirements for such instruments.
We also utilise over-the-counter swaps and options to reduce the cash flow variability associated with the purchase price for a portion of future electricity and gas purchases associated with certain of our electricity and gas distribution operations in the US. These had a net negative fair value at 31 March 2009 of £190 million (2008: positive fair value of £39 million).
We also utilise over-the-counter gas swaps in the US to hedge the cash flow variability associated with forecasted sales of a portion of gas production from our West Virginia gas fields. At 31 March 2009, we had hedge positions in place for approximately 66% of our estimated 2009 gas production (2008: 70% of our estimated 2008 and 2009 gas production), net of gathering costs. We use forward prices from a third party vendor to value these swap positions and they are designated as cash flow hedges.