Eversource 2008 Annual Report Download - page 66

An osetting regulatory asset of $677.8 million was
recorded, as management believes these amounts will
be recovered from or refunded to customers in cost-of-
service, regulated rates. The value of CL&P’s CfDs at
December 31, 2008 included approximately $100 million
of initial gains and losses, previously deferred due to the
use of significant unobservable inputs in the valuation,
that were recorded upon adoption of SFAS No. 157 on
January 1, 2008. At December31, 2007, changes in CfD
fair values since inception were recorded as a long-term
derivative liability of $107.1 million, and UI’s share and one
CL&P CfD were recorded as long-term derivative assets
of $20.8 million. Osetting regulatory assets of $86.7
million and regulatory liabilities of $0.4 million were also
recorded at December 31, 2007. A 2007 NRG Energy, Inc.
(NRG) appeal of the DPUC’s decision selecting the CfDs
was taken into consideration in valuing the CfDs as of
December 31, 2007, reducing the net negative derivative
values by approximately $215 million. In February 2008,
the appeal was denied, which increased derivative
liabilities in 2008.
PSNH has electricity procurement contracts that are
derivatives. The fair values of these contracts are
calculated based on market prices and were recorded
as short-term and long-term derivative liabilities totaling
$76.8 million and $14.9 million, respectively, at December
31, 2008. At December31, 2007, the fair value was
recorded as a short-term derivative asset of $1.5 million
and a short-term derivative liability of $2.5 million. An
osetting regulatory asset/liability was recorded as
management believes that these costs will be recovered/
refunded in rates as the energy is delivered.
PSNH has a contract to assign its transmission rights in
a direct current transmission line in exchange for two
energy call options that expire in 2010. These energy call
options are derivatives that do not qualify for the normal
purchases and sales exception and are accounted for at
fair value based on option value modeling. At December
31, 2008, the options were recorded as a short-term and
long-term derivative asset of $0.8 million and $3.8 million,
respectively, which include mark-to-market losses of
$11.1 million in 2008. The initial gain of $13.5 million on
this transaction was recorded as a derivative asset and
regulatory liability. Short-term and long-term derivative
assets at December 31, 2007 were $3.6 million and $12.1
million, respectively, which include $2.2 million in mark-
to-market gains in 2007. An osetting regulatory liability
was recorded, as management believes the benefit of this
arrangement will be refunded to customers in rates.
PSNH has entered into FTR contracts to limit the
congestion costs associated with its delivery service.
At December 31, 2008, the FTRs were recorded as a
short-term derivative asset of $0.1 million and a short-
term derivative liability of $0.6 million. Osetting these
amounts are a payable and receivable to the ISO-NE of
$0.1 million and $0.2 million, respectively, related to the
initial auction price of the FTRs and a regulatory asset
of $0.4 million related to the mark-to-market of the FTR.
Management believes that these costs will continue to
be recovered or refunded in cost-of-service rates. There
were no similar amounts for 2007.
Regulated Companies - Electric - Interest Rate Hedging:
At December 31, 2007, CL&P had two forward interest
rate swap agreements to hedge the interest cash
outflows associated with its debt issuance of $300
million in May 2008. PSNH had a forward interest rate
swap agreement to hedge the interest cash outflows
associated with its debt issuance of $110 million in May
2008. Prior to termination in May 2008, the interest
rate swaps were based on a 10-year LIBOR swap rate
and matched the index used for the debt issuances. As
cash flow hedges, the fair values of these hedges were
recorded as derivative assets at December31, 2007 on
the accompanying consolidated balance sheet with an
osetting amount, net of tax, included in accumulated
other comprehensive income.
NU Parent - Interest Rate Hedging: In March 2003, to
manage the interest rate characteristics of the company’s
long-term debt, NU parent entered into a fixed to floating
interest rate swap on its $263 million, 7.25 percent fixed
rate senior notes that mature on April 1, 2012. Under fair
value hedge accounting, the changes in fair value of the
swap and the interest component of the hedged long-
term debt instrument are recorded in interest expense,
which generally oset each other in the consolidated
statements of income. The cumulative change in the fair
value of the swap and the long-term debt was recorded
as a derivative asset and an increase to long-term debt of
$20.8 million and $4.2 million at December 31, 2008 and
2007, respectively.
NU parent had a forward interest rate swap agreement
to hedge the interest cash outflows associated with its
planned debt issuance in June 2008. Prior to termination
in June 2008, the interest rate swap was based on a
5-year LIBOR swap rate and a notional amount of $200
million, and matched the index used for the debt issuance.
As a cash flow hedge at December31, 2007, the fair value
of the hedge was recorded as a $0.9 million derivative
asset on the accompanying consolidated balance
sheet with an osetting amount, net of tax, included in
accumulated other comprehensive income.
4. Fair Value Measurements
Items Measured at Fair Value on a Recurring Basis: The
company’s assets and liabilities recorded at fair value on
a recurring basis have been categorized based upon the
fair value hierarchy in accordance with SFAS No. 157. See
Note 1F, “Summary of Significant Accounting Policies
- Fair Value Measurements,” for further information
regarding the hierarchy and fair value measurements.
The following table presents the amounts of assets and
liabilities carried at fair value at December 31, 2008 by the
level in which they are classified within the SFAS No. 157
valuation hierarchy:
(Millions of Dollars)
Derivative Assets:
Level 1 $ -
Level 2 20.8
Level 3 252.4
Total $ 273.2
Derivative Liabilities:
Level 1 $ -
Level 2 (91.7 )
Level 3 (921.6 )
Total $(1,013.3)
Marketable Securities:
Level 1 $ 42.1
Level 2 67.1
Level 3 -
Total $ 109.2
Not included in the table above are $81.6 million of cash
equivalents held by NU parent in an unrestricted money
market account and included in cash and cash equivalents
on the accompanying consolidated balance sheet, which
are classified as Level 1 in the fair value hierarchy.
The following table presents changes for the year ended
December 31, 2008 in the Level 3 category of assets and
liabilities measured at fair value on a recurring basis. This
category includes derivative assets and liabilities, which
are presented net. The derivative amounts at January 1,
2008 reflect the fair values after initial adoption of SFAS
No. 157. The company classifies assets and liabilities in
Level 3 of the fair value hierarchy when there is reliance
on at least one significant unobservable input to the
valuation model. In addition to these unobservable
inputs, the valuation models for Level 3 assets and
liabilities typically also rely on a number of inputs that
are observable either directly or indirectly. Thus, the
gains and losses presented below include changes in
fair value that are attributable to both observable and
unobservable inputs. There were no transfers into or
out of Level 3 assets and liabilities for the year ended
December 31, 2008:
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