National Grid 2006 Annual Report Download - page 50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
NOTE E – DERIVATIVES AND HEDGING ACTIVITIES
In the normal course of business, the Company is a party to derivative financial instruments (deriv-
atives) that are principally used to manage commodity prices associated with its natural gas and
electric operations. These financial exposures are monitored and managed as an integral part of
the Company’s overall Financial Risk Management Policy. At the core of the policy is a condition
that the Company will engage in activities at risk only to the extent that those activities fall within
commodities and financial markets to which it has a physical market exposure in terms and vol-
umes consistent with its core business. The Company does not issue or intend to hold derivative
instruments for speculative trading purposes. Derivatives are accounted for according to SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires
derivatives to be reported at fair value as assets or liabilities on the balance sheet. Changes in the
fair value of instruments that qualify for hedge accounting are deferred in Accumulated Other
Comprehensive Income and will be reclassified through purchased electricity or gas expense with-
in the next twelve months. Other instruments are deferred in regulatory assets or liabilities accord-
ing to current rate agreements and are reclassified through purchased electricity or gas expense in
the hedge months. The Company’s rate agreements allow for the pass-through of the commodity
costs of electricity and natural gas, including the costs of the hedging programs.
Niagara Mohawk has eight indexed swap contracts, expiring in fiscal year 2009 (June 2008) that
resulted from the Master Restructuring Agreement (MRA). These derivatives are not designated as
hedging instruments and are covered by regulatory rulings that allow the gains and losses to be
recorded as regulatory assets or regulatory liabilities. As of March 31, 2006 and 2005, Niagara
Mohawk had recorded liabilities at net present value of $537 million and $619 million, respectively,
for these swap contracts and had recorded a corresponding swap contracts regulatory asset. The
asset and liability are amortized over the remaining term of the swaps as nominal energy quantities
are settled and they are adjusted as periodic reassessments are made of energy price forecasts.
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National Grid USA / Annual Report
Unrealized Additional Total
Gains and Minimum Accumulated
($'s in 000's) (Losses) on Pension Other
Available-for- Liability Cash Flow Comprehensive
Sale Securites Adjustment Hedges Income (Loss)
March 31, 2004 3,342$ (184,212)$ 3,025$ (177,845)$
Other comprehensive income (loss):
Unrealized gains on securities,
net of taxes 2,858 2,858
Change in additional minimum pension liability,
net of taxes (4,629) (4,629)
Hedging activity, net of taxes 14,557 14,557
Reclassification adjustment for gain
included in net income, net of tax (2,332) (4,770) (7,102)
March 31, 2005 3,868$ (188,841)$ 12,812$ (172,161)$
Other comprehensive income (loss):
Unrealized gains on securities,
net of taxes 6,217 6,217
Change in additional minimum pension liability,
net of taxes 182,489 182,489
Hedging activity, net of taxes 4,009 4,009
Reclassification adjustment for gain
included in net income, net of tax (3,236) (21,574) (24,810)
March 31, 2006 6,849$ (6,352)$ (4,753)$ (4,256)$