Eversource 2005 Annual Report Download - page 72

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when the forecasted transaction being hedged is no longer probable of
occurring, or when there is accumulated other comprehensive loss and
the hedge and the forecasted transaction being hedged are in a loss
position on a combined basis.
Select Energy maintains natural gas service agreements with certain
retail customers to supply gas at fixed prices for terms extending through
2010. Select Energy has hedged its gas supply risk under these agree-
ments through NYMEX futures contracts. Under these contracts, which
also extend through 2010, the purchase price of a specified quantity of
gas is effectively fixed over the term of the gas service agreements.
At December 31, 2005 the NYMEX futures contracts had notional
values of $210.5 million and were recorded at fair value as derivative
assets totaling $8.2 million and derivative liabilities of $0.3 million.
Select Energy also maintains various physical and financial instruments
to hedge its electric and gas purchases and sales through April of 2008.
These instruments include forwards, futures and swaps. These hedging
contracts, which are valued at the mid-point of bid and ask market
prices, were recorded as derivative assets of $24.4 million and derivative
liabilities of $4.8 million at December 31, 2005.
Select Energy hedges certain amounts of natural gas inventory with
gas futures which are accounted for as fair value hedges. Changes in
the fair value of hedging instruments and natural gas inventory are
recorded in earnings. The change in fair value of the futures were
included in derivative liabilities and amounted to $3.4 million at
December 31, 2005. The change in fair value of the hedged natural
gas inventory was recorded as an increase to fuel, materials and
supplies of $1.2 million at December 31, 2005.
Utility Group – Gas – Non-Trading: Yankee Gas’ non-trading derivatives
consist of peaking supply arrangements to serve winter load obligations
and firm retail 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,
because of the optionality in the contract terms. Non-trading derivatives
at December 31, 2005 included assets of $0.1 million and liabilities of
$0.4 million. At December 31, 2004, non-trading derivatives included
assets of $0.2 million and liabilities of $0.1 million.
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, 2005 include a derivative
asset with a fair value of $391.2 million and a derivative liability with a
fair value of $32.3 million. An offsetting regulatoryliability and an off-
setting 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. At December 31, 2004,
the fair values of these IPP non-trading derivatives included a derivative
asset with a fair value of $191.3 million and a derivative liability with a
fair value of $47.2 million.
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 (loss)/income.
The cumulative change in the fair value of the hedged debt of $5.2
million is included as a decrease to long-term debt on the consolidated
balance sheets. The hedge is recorded as a derivative liability of $5.2
million at December 31, 2005, and as a derivative asset of $0.1 million
at December 31, 2004. The resulting changes in interest payments
made are recorded as adjustments to interest expense.
7. 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. NU uses a December 31st measurement date
for the Pension Plan. Pension (income)/expense attributable to earnings
is as follows:
For the Years Ended December 31,
(Millions of Dollars) 2005 2004 2003
Total pension expense/(income) $54.2 $8.0 $(31.8)
Amount capitalized as utility plant (11.5) 2.6 15.4
Total pension expense/(income),
net of amounts capitalized $42.7 $10.6 $(16.4)
Amounts above include pension curtailments and termination benefits
expense of $11.7 million in 2005 and $2.1 million in 2004.
Pension Curtailments and Termination Benefits: As a result of the decision to
pursue a fundamentally different business strategy,and align the structure
of the company to support this business strategy, NU recorded a
$2.7 million pre-tax curtailment expense in 2005. NU also accrued
certain related termination benefits and recorded a $2.8 million pre-tax
charge in 2005.
On December 15, 2005, the NU Board of Trustees approved a benefit
for new non-union employees hired on and after January 1, 2006 to
receive retirement benefits under a new 401(k) benefit rather than
under the Pension Plan. Non-union employees actively employed on
December 31, 2005 will be given the choice in 2006 to elect to continue
participation in the Pension Plan or instead receive a new employer
contribution under the 401(k) Savings Plan effective January 1, 2007.
If the new benefit is elected, their accrued pension liability in the Pension
Plan will be frozen as of December 31, 2006. Non-union employees
will make this election in the second half of 2006. This decision resulted
in the recording of an estimated pre-tax curtailment expense of $6.2
million in 2005, as a certain number of employees are expected to elect
the new 401(k) benefit, resulting in a reduction in aggregate estimated
future years of service under the Pension Plan. Management estimated
the amount of the curtailment expense associated with this change
based upon actuarial calculations and certain assumptions, including
the expected level of transfers to the new 401(k) benefit.
In April of 2004, as a result of litigation with nineteen former employees,
NU was ordered by the court to modify its Pension Plan to include
special retirement benefits for fifteen of these former employees
retroactive to the dates of their retirement and provide increased
future monthly benefit payments. NU recorded $2.1 million in
termination benefits related to this litigation in 2004 and made a lump
sum benefit payment totaling $1.5 million to these former employees.