Eversource 2004 Annual Report Download - page 32

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NU Enterprises
Business Segments: NU Enterprises aligns its businesses into two business
segments: the merchant energy business segment and the energy
services and other business segment. The merchant energy business
segment includes Select Energy’s wholesale and retail marketing
businesses. Also currently included in the merchant energy segment
are 1,443 MW of generation assets, including 1,296 MW of pumped
storage and hydroelectric generation assets at NGC and 147 MW of
coal-fired generation assets at HWP. The wholesale business primarily
serves full requirements sales to LDCs and bilateral sales to other load
serving counterparties. To serve these customers, Select Energy relies
on its own generation and an inventory of energy contracts.
The energy services business segment includes the operations of SESI,
NGS, and Woods Network. SESI performs energy management services
for large commercial customers, institutional facilities and the United
States government and energy-related construction services. NGS
operates and maintains NGC’s and HWP’s generation assets and provides
third-party electrical services. Woods Network is a network design,
products and services company.
Results: NU Enterprises lost $15.1 million in 2004. This loss includes
a $48.3 million mark-to-market loss associated with certain wholesale
natural gas positions. In 2003, NU Enterprises lost $3.4 million. This
loss includes a $35.6 million charge associated with SMD. NU
Enterprises’ merchant energy retail marketing business earnings
improved to net income of $4.9 million in 2004, compared with a loss
of $1.8 million in 2003.
NU Enterprises’ energy services business segment lost $2.3 million
in 2004 compared with earnings of approximately $2.6 million in 2003.
The 2004 earnings decrease is the result of losses recorded on a major
construction contract.
Outlook: On March 9, 2005, NU completed its previously announced
comprehensive review of its competitive energy businesses and
decided that NU Enterprises will exit the wholesale marketing business.
NU also concluded that NU Enterprises’ energy services businesses
are not central to NU’s long-term strategy and do not meet the company’s
expectations of profitability. As a result, the company will explore ways
to divest those businesses in a manner that maximizes their value.
NU will retain its competitive generation and retail energy marketing
businesses because it believes that the generation assets and retail
business are competitively positioned to create significant opportunities
for those businesses over the next several years.
NU Enterprises’ 2005 earnings will be impacted by many factors,
including the amount of asset impairments or losses on disposals
that could result from the decision to explore divesting the services
segment, the mark-to-market loss that may result from the application
of mark-to-market accounting to certain wholesale marketing contracts
until those contracts are sold or until the commodities are delivered,
and other closure costs.
Intercompany Transactions: CL&P’s standard offer purchases from Select
Energy represented $502 million for the year ended December 31,
2004, compared with $558 million during the same period in 2003.
Other energy purchases between CL&P and Select Energy totaled
$109.3 million for the year ended December 31, 2004 and $130 million
during the same period in 2003. Additionally, WMECO’s purchases from
Select Energy represented $108.5 million for the year ended December 31,
2004, compared with $143 million during the same period in 2003.
These amounts are eliminated in consolidation.
NU Enterprises’ Market and Other Risks
Overview: The decision to exit the wholesale marketing business will
change the risk profile of NU Enterprises in 2005. Subsequent to the
sale of the wholesale marketing business, NU Enterprises will continue
to be exposed to certain market risks; however, management believes
that those risks will be reduced. The merchant energy business segment
will be comprised of generation assets and the retail marketing segment,
which will enter into contracts of varying lengths of time to buy and sell
energy commodities, including electricity, natural gas, and oil to retail
customers. Market risk represents the loss that may affect the merchant
energy business segment’s financial results, primarily Select Energy,
due to adverse changes in commodity market prices.
Risk management within Select Energy has been organized to address
the market, credit and operational exposures arising from the merchant
energy business segment. The framework for managing these risks is
set forth in NU’s risk management policies and procedures, which are
reviewed by the NU Board of Trustees on an as needed basis.
A significant portion of Select Energy’s merchant energy marketing
activities has been providing electricity to full requirements customers,
which are primarily regulated LDCs and commercial and industrial
retail customers. Under the terms of full requirements contracts,
Select Energy is required to provide a percentage of the LDC’s
electricity requirements at all times. The volumes sold under these
contracts vary based on the usage of the LDC’s retail electric customers,
and usage is dependent upon factors outside of Select Energy’s control,
such as the weather. The varying sales volumes could be different than
the supply volumes that Select Energy expected to utilize, either from
its limited generation or from electricity purchase contracts, to serve
the full requirements contracts. Differences between actual sales
volumes and supply volumes can require Select Energy to purchase
additional electricity or sell excess electricity, both of which are subject
to market conditions such as weather, plant availability, transmission
congestion, and potentially volatile price fluctuations that can impact
prices and, in turn, Select Energy’s margins.
The pricing terms of full requirement contracts and of supply contracts
can affect the timing of Select Energy’s margins. Many full requirements
contracts have higher prices in certain months, while many supply
contracts have one price for the entire contract term. Accordingly,
Select Energy’s margins will tend to be higher in the months when
the full requirements contract price is higher and lower or could be
negative when the full requirements contract price is lower.
Energy Sourcing Activities: In June 2004, Select Energy began purchasing
fixed-price electricity and some electricity with prices indexed to gas
for 2005 and 2006 in anticipation of winning full requirements contract
sales and sales to load-serving entities. Purchasing electricity in
advance creates the risk of electricity price decreases before the
full requirement quantities are contracted and before contract prices
are known.