Eversource 2005 Annual Report Download - page 31

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NU Enterprises
NU Enterprises currently has two business segments: the merchant
energy business segment and the energy services and other business
segment. NU has decided to exit all aspects of both segments.
Merchant Energy Segment: The merchant energy business segment
includes Select Energy’s retail marketing business, 1,442 MW of
generation assets, including 1,296 MW of primarily pumped storage
and hydroelectric generation assets at NGC and 146 MW of coal-fired
generation assets at HWP, and NGS.
The merchant energy segment also continues to include the wholesale
marketing business, which NU Enterprises is exiting. Prior to the March
2005 decision to exit the wholesale marketing business, this business
was comprised primarily of full requirements sales to LDCs and bilateral
sales to other load-serving counterparties. These sales were sourced
by the generation assets and an inventory of energy contracts.
Energy Services and Other Segment: In March of 2005, NU Enterprises also
announced that it would explore ways to exit the energy services
businesses in a manner that maximizes their value. These businesses
include or have included the operations of SESI, Boulos, Woods
Electrical and SECI. SECI-NH, including Reeds Ferry, and Woods
Network were sold in November of 2005. In January of 2006, the
Massachusetts service location of SECI-CT was sold for approximately
$2 million.
Outlook: NU is not providing 2006 earnings guidance for NU Enterprises
due to many factors, including:
• The application of mark-to-market accounting to certain energy
contracts until those contracts are settled or until the commodities
are delivered. The value of these contracts has fluctuated and will
continue to fluctuate with changes in electricity and capacity values
and with gas prices that are used to value the long-term portions
of the contracts. These changes in value have been reflected in
earnings and have been significant. These changes could continue
to be significant.
• Proceeds and the related gain or loss on the sale of competitive
generation assets should the sale of NU Enterprises generation
assets occur in 2006.
• The recognition of additional mark-to-market gains or losses on
wholesale marketing contracts that have not been recorded yet.
Serving full requirements contracts could result in quantities of
electricity to be delivered in amounts different from the notional
amounts that weremultiplied by current market prices to determine
the mark-to-market gains or losses. Differences have impacted and
are reasonably likely to continue to impact NU Enterprises’ earnings.
In addition, gains or losses may be recorded on the disposition of
these wholesale contracts.
• Additional asset impairments or losses on disposals associated with
the wholesale and retail marketing, competitive generation and energy
service businesses. As these businesses areexited, therecould be
additional impairments or gains or losses on the disposals to the
extent sales areconsummated.
•NU guarantees the performance of certain services companies. The
fair value of those guarantees may be recognized if they become
guarantees to third parties.
• The recognition of additional restructuring costs. Costs associated
with certain restructuring activities and employee costs are expected
to be recognized in future periods as incurred.
Intercompany Transactions: There were no CL&P TSO purchases from
Select Energy in 2005, compared to $502 million of CL&P standard
offer purchases in 2004. Other energy purchases between CL&P and
Select Energy totaled $53.4 million in 2005 compared to $109.3 million
in 2004. WMECO purchases from Select Energy totaled $36.3 million
and $108.5 million for the year ended December 31, 2005 and 2004,
respectively. In February of 2005, WMECO entered into a contract with
Select Energy under which Select Energy provided default service
from April through June of 2005.
Risk Management: Until the exit from the merchant energy business is
completed, NU Enterprises will continue to be exposed to various
market risks which could negatively affect the value of its remaining
assets. These assets include its remaining portfolio of wholesale energy
contracts, its retail energy marketing business and its generation
assets. Market risk at this point is comprised of the possibility of
adverse energy commodity price movements and, in the case of the
wholesale marketing business, unexpected load ingress or egress,
affecting the unhedged portion of these contracts.
NU Enterprises manages these and associated operating risks through
detailed operating procedures and an internal review committee. A
separate, parent-level committee, the Risk Oversight Council (ROC)
meets monthly with NU Enterprises’ leadership and upon the occurrence
of specific portfolio-triggered events to review conformity of NU
Enterprises’ activities, commitments and exposures to NU’s risk
parameters. The ROC in turn is being integrated into NU’s ERM
system, which was instituted in 2005.
Wholesale Marketing Activities: As a result of NU’s decision to exit the
wholesale marketing business, certain wholesale energy contracts
previously accounted for under accrual accounting were required to
be marked-to-market beginning in the first quarter of 2005. Existing
energy trading contracts have been and will continue to be marked-to-
market with changes in fair value reflected in earnings.
At December 31, 2005, Select Energy had wholesale derivative assets
and derivative liabilities as follows:
(Millions of Dollars)
Current wholesale derivative assets $ 256.6
Long-term wholesale derivative assets 103.5
Current wholesale derivative liabilities (369.3)
Long-termwholesale derivative liabilities (220.9)
Portfolio position $(230.1)
Numerous factors could either positively or negatively affect the
realization of the net fair value amounts in cash. These include the
amounts paid or received to exit some or all of these contracts, the
volatility of commodity prices until the contracts areexited, the outcome
of futuretransactions, the performance of counterparties, and
other factors.
Select Energy has policies and procedures requiring all wholesale positions
to be marked-to-market at the end of each business day and segregating
responsibilities between the individuals actually transacting (front office)
and those confirming the trades (middle office). The determination of
the portfolio’s fair value is the responsibility of the middle office
independent from the front office.