Eversource 2004 Annual Report Download - page 34

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contract for those years that do not have liquid prices to zero. Broker
quotes for electricity at locations that Select Energy has entered into
deals are available through the year 2007. For all natural gas positions,
broker quotes extend through 2013.
Generally, valuations of short-term contracts derived from quotes or
other external sources are more reliable should there be a need to
liquidate the contracts, while valuations for longer-term contracts are
less certain. Accordingly, there is a risk that contracts will not be
realized at the amounts recorded. However, Select Energy has obtained
corresponding purchase or sale contracts for a large portion of the
trading contracts that have maturities in excess of one year.
Because these trading contracts are sourced, changes in the value
of these contracts due to fluctuations in commodity prices are not
expected to significantly affect Select Energy’s earnings.
As of and for the years ended December 31, 2004 and 2003, the
sources of the fair value of trading contracts and the changes in fair
value of these trading contracts are included in the following tables.
Intercompany transactions are eliminated and not reflected in the
amounts below.
(Millions of Dollars) Fair Value of Trading Contracts at December 31, 2004
Maturity Maturity Maturity
Less Than Of One to In Excess of Total
Sources of Fair Value One Year Four Years Four Years Fair Value
Prices actively quoted $0.7 $ — $ — $ 0.7
Prices provided by
external sources 2.8 13.6 12.5 28.9
Totals $3.5 $13.6 $12.5 $29.6
(Millions of Dollars) Fair Value of Trading Contracts at December 31, 2003
Maturity Maturity Maturity
Less Than Of One to In Excess of Total
Sources of Fair Value One Year Four Years Four Years Fair Value
Prices actively quoted $0.2 $0.1 $ — $ 0.3
Prices provided by
external sources 6.9 9.6 15.7 32.2
Totals $7.1 $9.7 $15.7 $32.5
The fair value of energy trading contracts decreased to $29.6 million
at December 31, 2004 from $32.5 million at December 31, 2003. The
change in the fair value of the trading portfolio is primarily attributable
to contracts being settled in 2004, offset by changes in the fair value of
contracts. The change in fair value attributable to changes in valuation
techniques and assumptions of $2.3 million in 2003 resulted from a
change in the discount rate management uses to determine the fair
value of trading contracts. In the second quarter of 2003, the rate
was changed from a fixed rate of 5 percent to a market-based LIBOR
discount rate to better reflect current market conditions.
Years Ended December 31,
2004 2003
(Millions of Dollars) Total Portfolio Fair Value
Fair value of trading contracts
outstanding at the beginning of the year $32.5 $41.0
Contracts realized or otherwise settled
during the period (10.5) (10.7)
Changes in fair values attributable to changes
in valuation techniques and assumptions —2.3
Changes in fair value of contracts 7.6 (0.1)
Fair value of trading contracts outstanding
at the end of the year $29.6 $32.5
For further information regarding Select Energy’s derivative contracts,
see Note 3, “Derivative Instruments,” and Note 12, “Accumulated Other
Comprehensive Income/(Loss),” to the consolidated financial statements.
Changing Market: In general, the market for energy products has become
shorter term in nature with less liquidity, market pricing information is
less readily available and participants are sometimes unable to meet
Select Energy’s credit standards without providing cash or LOC support.
Select Energy is being adversely affected by these factors, and there
could be a continuing adverse impact on Select Energy’s business.
In addition, NU Enterprises has concluded that competition has
increased significantly in the wholesale power market in New England
over the last six months of 2004. This increase in competition may
affect Select Energy’s profitability by reducing the number of bids
won and by reducing the margins on those bids which are won.
Changes are occurring in the administration of transmission systems
in territories in which Select Energy does business. As the market
continues to evolve, there could be additional challenges or
opportunities that management cannot determine at this time.
In March 2004, ISO-NE filed a proposal at the FERC to implement
LICAP requirements. LICAP is an administratively determined electric
generation asset capacity pricing mechanism intended to provide a
revenue stream sufficient to maintain existing generation assets and
encourage the construction of new generation assets at levels
sufficient to serve peak load, plus a reserve margin and a cushion.
In June 2004, the FERC ordered the creation of five LICAP zones and
accepted ISO-NE’s demand curve methodology. The FERC ordered
LICAP to be implemented by January 1, 2006, and set certain issues
pertaining to the demand curve for hearings. Hearings began at the
end of February 2005. A FERC decision is anticipated in the fall of
2005. Management cannot at this time predict the outcome of this
FERC proceeding.
Depending on the pricing curves that are ultimately implemented
LICAP could produce significant benefits for generation assets either
owned or leased by NU Enterprises. NU Enterprises owned or leased
approximately 300 MW of generation assets in Connecticut and
approximately 1,300 MW of generation assets in western Massachusetts.