Eversource 2003 Annual Report Download - page 63

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In 2003, there were changes to interpretations of as well as an amendment
to SFAS No. 133, and the FASB continues to consider changes that could
affect the way NU records and discloses derivative and hedging activities.
The tables below summarize the derivative assets and liabilities at
December 31, 2003 and 2002. These amounts do not include option
premiums paid, which are recorded as prepayments and amounted to
$16.7 million and $26.6 million at December 31, 2003 and 2002,
respectively. These amounts also do not include option premiums received,
which are recorded as other current liabilities and amounted to $12.2
million and $33.9 million at December 31, 2003 and 2002, respectively.
The premium amounts relate primarily to energy trading activities.
At December 31, 2003
(Millions of Dollars) Assets Liabilities Total
NU Enterprises:
Trading $123.9 $ (91.4) $ 32.5
Non-trading 1.6 (0.8) 0.8
Hedging 55.8 (12.7) 43.1
Utility Group — Gas:
Non-trading 0.2 (0.2) —
Hedging 2.8 — 2.8
Utility Group — Electric:
Non-trading 116.9 (56.0) 60.9
NU Parent:
Hedging — (3.6) (3.6)
Total $301.2 $(164.7) $136.5
At December 31, 2002
(Millions of Dollars) Assets Liabilities Total
NU Enterprises:
Trading $102.9 $(61.9) $41.0
Non-trading 2.9 — 2.9
Hedging 22.8 (2.0) 20.8
Utility Group – Gas:
Hedging 2.3 — 2.3
Total $130.9 $(63.9) $67.0
NU Enterprises — Trading: To gather market intelligence and utilize this
information in risk management activities for the wholesale marketing
activities, Select Energy conducts limited energy trading activities in
electricity, natural gas and oil, and therefore experiences net open
positions. Select Energy manages these open positions with strict policies
that limit its exposure to market risk and require daily reporting to
management of potential financial exposures.
Derivatives used in trading activities are recorded at fair value and included
in the consolidated balance sheets as derivative assets or liabilities.
Changes in fair value are recognized in operating revenues in the
consolidated statements of income in the period of change. The net fair
value positions of the trading portfolio at December 31, 2003 and 2002
were assets of $32.5 million and $41 million, respectively.
Select Energy’s trading portfolio includes New York Mercantile Exchange
(NYMEX) futures and options, the fair value of which is based on closing
exchange prices; over-the-counter forwards and options, the fair value of
which is based on the mid-point of bid and ask market prices; and bilateral
contracts for the purchase or sale of electricity or natural gas, the fair value
of which is determined using available information from external sources.
Select Energy’s trading portfolio also includes transmission congestion
contracts (TCC). The fair value of certain TCCs is based on published
market data.
NU Enterprises — Non-trading: Non-trading derivative contracts are used
for delivery of energy related to Select Energy’s wholesale and retail
marketing activities. These contracts are subject to fair value accounting
because these contracts are derivatives that cannot be designated as
normal purchases or sales, as defined. These contracts cannot be designated
as normal purchases or sales either because they are included in the New
York energy market that settles financially or because management did
not elect the normal purchase and sale designation. Changes in fair
value of a negative $2.1 million of non-trading derivative contracts were
recorded in revenues in 2003.
Market information for certain TCCs is not available, and those contracts
cannot be reliably valued. Management believes the amounts paid for
these contracts, which total $4.3 million and are included in premiums
paid, are equal to their fair value.
NU Enterprises — Hedging: Select Energy utilizes derivative financial and
commodity instruments, including futures and forward contracts, to
reduce market risk associated with fluctuations in the price of electricity
and natural gas purchased to meet firm sales commitments to certain
customers. Select Energy also utilizes derivatives, including price swap
agreements, call and put option contracts, and futures and forward
contracts to manage the market risk associated with a portion of its
anticipated supply and delivery requirements. These derivatives have
been designated as cash flow hedging instruments and are used to
reduce the market risk associated with fluctuations in the price of electricity,
natural gas, or oil. A derivative that hedges exposure to the variable cash
flows of a forecasted transaction (a cash flow hedge) is initially recorded
at fair value with changes in fair value recorded in accumulated other
comprehensive income. Hedges impact net income when the forecasted
transaction being hedged occurs, when hedge ineffectiveness is measured
and recorded, 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
customers to supply gas at fixed prices for terms extending through 2006.
Select Energy has hedged its gas supply risk under these agreements
through NYMEX futures contracts. Under these contracts, which also
extend through 2006, the purchase price of a specified quantity of gas is
effectively fixed over the term of the gas service agreements. At
December 31, 2003 and 2002, the NYMEX futures contracts had notional
values of $104.5 million and $30.9 million, respectively, and were
recorded at fair value as derivative assets of $11.6 million and
$12.2 million at December 31, 2003 and 2002, respectively.
Select Energy maintains power swaps to hedge purchases in New England
as well as financial gas contracts and gas futures to hedge electricity
purchase contracts that are indexed to gas prices. These hedging
contracts, which are valued at the mid-point of bid and ask market
prices, were recorded as derivative assets of $27.3 million and derivative
liabilities of $5.1 million at December 31, 2003. To hedge the congestion
price differences associated with LMP in the New England and the
Pennsylvania, New Jersey, Maryland and Delaware (PJM) regions, Select
Energy holds FTR contracts recorded as a derivative asset at a fair value
of $3.8 million at December 31, 2003.