Eversource 2005 Annual Report Download - page 20

18
NU Enterprises recorded a loss of $398.2 million in 2005, or $3.03 per
share, compared with a loss of $15.1 million, or $0.12 per share, in
2004, and a loss of $3.4 million, or $0.03 per share, in 2003. The 2005
loss was primarily due to a net after-tax charge of $278.9 million as a
result of the marking-to-market of various wholesale contracts, including
the approximately $186 million contract payment and the $56 million
obligation noted above. In 2004, NU Enterprises results included an
after-tax loss of $48.3 million associated with mark-to-market accounting
for certain natural gas positions established to mitigate the risk of electricity
purchased in anticipation of winning certain levels of wholesale electric
load in New England. These positions were balanced by entering into
offsetting positions in the first quarter of 2005 and had no impact on
earnings since then.
NU Enterprises 2005 results also reflect $43.7 million of after-tax
restructuring and impairment charges related to both the merchant
energy and the energy services businesses. Those charges include
$16.4 million associated with discontinued operations. There were
no impairment charges in 2004.
Asummary of NU Enterprises’ (losses)/earnings for 2005, 2004, and
2003 is as follows:
For the Years Ended December 31,
(Millions of Dollars) 2005 2004 2003
Merchant Energy $(360.6) $(17.3) $(6.7)
Energy Services,
Parent and Other (1) (37.6) 2.2 3.3
Total NU Enterprises Net Loss $(398.2) $(15.1) $(3.4)
(1) The energy services, parent and other losses include losses totaling $23.3 million
for the year ended December 31, 2005 and earnings totaling $3.6 million and
$4.7 million for the years ended December 31, 2004 and 2003, respectively,
which are classified as discontinued operations.
The merchant energy business lost $360.6 million in 2005, compared
with $17.3 million in 2004 and $6.7 million in 2003. A significant number
of charges impacted NU Enterprises’ merchant energy business results
in 2005. Extreme increases in gas and oil prices in 2005 negatively
affected sale obligations which had not yet been exited.
NU recorded $278.9 million of after-tax ($440.9 million pre-tax) whole-
sale contract market changes for the year ended December 31, 2005,
related to changes in the fair value of wholesale contracts that the
company is in the process of exiting. The changes are comprised of
the following items:
•Acharge of $257.4 million after-tax ($406.9 million pre-tax) related to
the mark-to-market of certain long-dated wholesale electricity contracts
in New England and New York with municipal and other customers.
The charge reflects negative mark-to-market movements on these
contracts through December 31, 2005 as a result of rising energy
prices, partially offset by positive effects of buying out certain
obligations in 2005 at prices less than their marks at the time;
•Acharge of approximately $50.6 million after-tax (approximately
$80 million pre-tax) related to purchases of additional electricity
for an increase in the load forecasts related to a full requirements
contract with a customer in the PJM power pool;
•Abenefitof approximately $24 million after-tax (approximately $38
million pre-tax) related to mark-to-market gains on certain generation
related contracts which the company is in the process of exiting;
• A benefit of $37.9 million after-tax ($59.9 million pre-tax) for mark-to-
market gains primarily related to retail supply contracts that were
previously held by the wholesale business to serve certain retail
electric load, which the company has exited or settled. Included in the
$37.9 million of after-tax gains ($59.9 million pre-tax) is $19 million of
after-tax ($30 million pre-tax) gains related to retail supply contracts
marked-to-market as a result of the March 9, 2005 decision to exit
the wholesale marketing business.
• A charge of $9.8 million after-tax ($15.5 million pre-tax) in the fourth
quarter of 2005 in connection with the decision to exit the competitive
generation business related to marking-to-market two contracts to
sell the output of its generation in 2007 and 2008. NU Enterprises is
in the process of exiting these contracts. These two generation sales
contracts were formerly accounted for under accrual accounting;
however, accrual accounting was terminated in the fourth quarter of
2005 due to the high probability that these contracts would be net
settled instead of physically delivered.
• A charge of $23 million after-tax ($36.4 million pre-tax) for mark-to-
market contract asset write-offs related to long-term wholesale
electricity contracts and a contract termination payment in March of 2005.
The termination of several municipal wholesale contracts in New
England resulted in NU Enterprises having additional generation from
HWP’s Mt. Tom coal-fired plant and NGC’s conventional hydroelectric
plants available for sale in the wholesale market. In 2005, NU Enterprises
signed agreements to sell a total of approximately 1.4 million megawatt-
hours (MWhs) from Mt. Tom to counterparties during the years 2006
through 2008. Approximately 1 million MWhs are generated annually
at Mt. Tom per year. Those sales are at prices significantly in excess
of Mt. Tom’s contracted coal cost.
For further information regarding these derivative assets and liabilities
that are being exited, see Note 2, “Wholesale Contract Market
Changes,” and Note 6, “Derivative Instruments,” to the consolidated
financial statements.
In addition to the mark-to-market, restructuring and impairment
charges noted above, NU Enterprises results in 2005 reflect lower
sales for the wholesale marketing business than in 2004 as a result
of the announced exit from that business in March of 2005.
In 2004, NU Enterprises recorded an after-tax charge of $48.3 million
associated with marking-to-market certain wholesale natural
gas contracts intended to hedge certain wholesale electricity
purchase obligations.
Exclusive of after-tax charges related to wholesale supply totaling
$29.1 million and other after-tax restructuring and impairment charges
totaling $5.8 million, NU Enterprises’ retail marketing business earned
$6.3 million in 2005, compared with earnings of $4.9 million in 2004
and a loss of $1.8 million in 2003. The charges related to wholesale
supply were the result of a requirement to account for the sourcing of
its customers’ electric requirements at March 31, 2005 market prices
for supply contracts signed in the past at lower prices. This was
necessitated by the fact that the source of those contracts, wholesale
marketing, is being divested. As a result, an after-tax gain on those
contracts of $59.9 million was recorded in the first quarter of 2005 that
represented estimated future margins on existing retail transactions.
As a result, futureretail marketing business results will be negatively
affected until the exit from that business is completed.