Eversource 2004 Annual Report Download - page 67

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The amounts below also do not include option premiums received, which
are recorded as other current liabilities and amounted to $7 million and
$12.2 million related to energy trading activities at December 31, 2004 and
December 31, 2003, respectively, and $1.1 million related to marketing
activities at December 31, 2004. Also not included at December 31, 2004,
are option premiums received of $19 million related to non-trading gas
options.
At December 31, 2004
Assets Liabilities
Long- Long- Net
(Millions in Dollars) Current Term Current Term Total
NU Enterprises:
Trading $49.6 $ 31.7 $ (46.2) $ (5.5) $ 29.6
Non-trading 1.5 — (70.5) (9.6) (78.6)
Hedging 4.5 — (9.1) (0.8) (5.4)
Utility Group — Gas:
Non-trading 0.2 — (0.1) — 0.1
Hedging 1.5 — — — 1.5
Utility Group — Electric:
Non-trading 24.2 167.1 (4.4) (42.8) 144.1
NU Parent: Hedging 0.1 — — — 0.1
Total $81.6 $198.8 $(130.3) $(58.7) $ 91.4
At December 31, 2003
Assets Liabilities
Long- Long- Net
(Millions in Dollars) Current Term Current Term Total
NU Enterprises:
Trading $ 40.0 $ 31.8 $(33.0) $ (6.3) $ 32.5
Non-trading 1.6 — (0.8) — 0.8
Hedging 54.6 1.2 (10.7) (2.0) 43.1
Utility Group — Gas:
Non-trading 0.2 — (0.2) — —
Hedging 2.8 — — — 2.8
Utility Group — Electric:
Non-trading 17.1 99.8 (6.4) (49.6) 60.9
NU Parent: Hedging — — — (3.6) (3.6)
Total $116.3 $132.8 $(51.1) $(61.5) $136.5
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, 2004 and
2003 were assets of $29.6 million and $32.5 million, respectively.
Select Energy’s trading portfolio includes New York Mercantile Exchange
(NYMEX) futures, financial swaps, and options, the fair value of which is
based on closing exchange prices; over-the-counter forwards, financial
swaps, 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 the TCCs included in the trading portfolio is based on published
market data.
NU Enterprises — Non-Trading: Certain non-trading derivative contracts are
used for delivery of energy related to Select Energy’s wholesale and
retail marketing activities. Changes in fair value of a negative $79.4 million
of non-trading derivative contracts were recorded primarily in expenses
in 2004. Of the $79.4 million change in fair value, $77.7 million relates
to natural gas hedges at December 31, 2004. These hedges are used to
mitigate the risk of electricity price changes on Select Energy’s fixed-
price electricity purchase contracts. These hedges do not meet criteria
to be accounted for as cash flow hedges nor do they meet the normal
purchase and sales exception and are accordingly accounted for at fair
value as non-trading contracts. The contracts are natural gas contracts
with fair values determined by prices provided by external sources and
actively quoted markets. Select Energy held none of these contracts at
December 31, 2003.
Market information for the TCCs classified as non-trading is not available,
and those contracts cannot be reliably valued. Management believes the
amounts paid for these contracts, which total $3.2 million at December
31, 2004, and $4.3 million at December 31, 2003 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 and purchase 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 or natural gas. 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. Cash flow 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, 2004 the NYMEX futures contracts had notional values of
$90.7 million and were recorded at fair value as derivative liabilities of
$3.2 million.
Select Energy also maintains various physical and financial instruments
to hedge its electric and gas purchases and sales through 2006. These
instruments include forwards, futures, options, financial collars and swaps.
These hedging contracts, which are valued at the mid-point of bid and
ask market prices, were recorded as derivative assets of $3.7 million
and derivative liabilities of $6.7 million at December 31, 2004.
Select Energy hedges certain amounts of natural gas inventory with gas
futures, options and swaps, some of which are accounted for as fair
value hedges. Changes in the fair value of hedging instruments and