Eversource 2004 Annual Report Download - page 68

66
natural gas inventory are recorded in earnings. The fair value of the
futures, options and swaps were recorded as derivative assets of
$0.8 million at December 31, 2004. The fair value of the hedged natural
gas inventory was recorded as a reduction to fuel, materials and supplies
of $1.5 million at December 31, 2004. For the year ended December 31,
2004, Select Energy recorded a negative pre-tax of $0.6 million in
earnings related to its hedging instruments and natural gas inventory.
In 2004, certain of these fair value hedges were redesignated as cash
flow hedges, and future changes in fair value during the hedge designation
will be included in other comprehensive income (equity), unless ineffective.
Utility Group — Gas — Non-Trading: Yankee Gas’ non-trading derivatives
consist of peaking supply arrangements to serve winter load obligations
and firm sales contracts with options to curtail delivery. These contracts
are subject to fair value accounting because these contracts are derivatives
that cannot be designated as normal purchases or sales, as defined,
because of the optionality in the contract terms. Non-trading derivatives
at December 31, 2004 included assets of $0.2 million and liabilities of
$0.1 million.
Utility Group — Gas — Hedging: Yankee Gas maintains a master swap
agreement with a financial counterparty to purchase gas at fixed prices.
Under this master swap agreement, the purchase price of a specified
quantity of gas for an unaffiliated customer is effectively fixed over the
term of the gas service agreements with that customer for a period not
extending beyond 2005. At December 31, 2004, the commodity swap
agreement had a notional value of $2.3 million and was recorded at fair
value as a derivative asset of $1.5 million. The firm commitment contract
that is hedged is also recorded as a liability on the accompanying
consolidated balance sheets, and changes in fair values of the hedge
and firm commitment have offsetting impacts in earnings.
Utility Group — Electric — Non-Trading: CL&P has two IPP contracts to
purchase power that contain pricing provisions that are not clearly and
closely related to the price of power and therefore do not qualify for the
normal purchases and sales exception. The fair values of these IPP
non-trading derivatives at December 31, 2004 include a derivative asset
with a fair value of $191.3 million and a derivative liability with a fair
value of $47.2 million. An offsetting regulatory liability and an offsetting
regulatory asset were recorded, as these contracts are part of the
stranded costs, and management believes that these costs will continue
to be recovered or refunded in rates.
NU Parent — Hedging: In March of 2003, NU parent entered into a fixed to
floating interest rate swap on its $263 million, 7.25 percent fixed rate
note that matures on April 1, 2012. As a matched-terms fair value
hedge, the changes in fair value of the swap and the hedged debt
instrument are recorded on the consolidated balance sheets but are
equal and offsetting in the consolidated statements of income. The
cumulative change in the fair value of the hedged debt of $0.1 million is
included as an increase to long-term debt on the consolidated balance
sheets. The hedge is recorded as a derivative asset of $0.1 million.
The resulting changes in interest payments made are recorded as
adjustments to interest expense.
4. Employee Benefits
A. Pension Benefits and Postretirement Benefits
Other Than Pensions
Pension Benefits: NU’s subsidiaries participate in a uniform noncontributory
defined benefit retirement plan (Pension Plan) covering substantially all
regular NU employees. Benefits are based on years of service and the
employees’ highest eligible compensation during 60 consecutive months
of employment. Pre-tax pension expense/(income) was expense of
$5.9 million in 2004, income of $31.8 million in 2003, and income of
$73.4 million in 2002. These amounts exclude pension settlements,
curtailments and net special termination benefit expense of $2.1 million
in 2004 and income of $22.2 million in 2002. NU uses a December 31
measurement date for the Pension Plan. Pension (income)/expense
attributable to earnings is as follows:
For Years Ended December 31,
(Millions of Dollars) 2004 2003 2002
Pension expense/(income) before
settlements, curtailments
and special termination benefits $ 5.9 $(31.8) $(73.4)
Pension income capitalized
as utility plant 2.6 15.4 26.2
Net pension expense/(income)
before settlements,
curtailments, and special
termination benefits 8.5 (16.4) (47.2)
Settlements, curtailments, and
special termination benefits
reflected in earnings 2.1 — —
Total pension expense/(income)
included in earnings $10.6 $(16.4) $(47.2)
Pension Settlements, Curtailments and Special Termination Benefits: As a result of
litigation with nineteen former employees, in April 2004, NU was
ordered by the court to modify its retirement plan to include special
retirement benefits for fifteen of these former employees retroactive
to the dates of their retirement and increased future monthly benefit
payments. In the third quarter of 2004, NU withdrew its appeal of the
court’s ruling. As a result, NU recorded $2.1 million in special termination
benefits related to this litigation in 2004. NU made a lump sum benefit
payment totaling $1.5 million to these former employees.
There were no settlements, curtailments or special termination benefits
in 2003 and none in 2002 that impacted earnings.
On November 1, 2002, CL&P, NAEC and certain other joint owners
consummated the sale of their ownership interests in Seabrook to a
subsidiary of FPL Group, Inc. (FPL) and North Atlantic Energy Service
Corporation (NAESCO), a wholly owned subsidiary of NU, ceased having
operational responsibility for Seabrook at that time. NAESCO employees
were transferred to FPL, which significantly reduced the expected service
lives of NAESCO employees who participated in the Pension Plan. As a
result, NAESCO recorded pension curtailment income of $29.1 million in
2002. As the curtailment related to the operation of Seabrook, NAESCO
credited the joint owners of Seabrook with this amount. CL&P recorded
its $1.2 million share of this income as a reduction to stranded costs,
and as such, there was no impact on 2002 CL&P earnings. PSNH was
credited with its $10.5 million share of this income through the Seabrook
Power Contracts with NAEC. PSNH also credited this income as a
reduction to stranded costs, and as such, there was no impact on 2002
PSNH earnings.