Eversource 2005 Annual Report Download - page 32

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The methods used to determine the fair value of wholesale energy
contracts are identified and segregated in the table of fair value of
contracts at December 31, 2005. A description of each method is as
follows: 1) prices actively quoted primarily represent New York
Mercantile Exchange (NYMEX) futures, swaps and options that are
marked to closing exchange prices; and 2) prices provided by external
sources primarily include over-the-counter forwards and options,
including bilateral contracts for the purchase or sale of electricity or
natural gas, and are marked to the mid-point of bid and ask market
prices. The mid-points of market prices are adjusted to include all
applicable market information, such as prior contract settlements with
third parties. Currently, Select Energy has a contract for which a portion
of the contract’s fair value is determined based on a model or other
valuation method. The model utilizes natural gas prices and a conversion
factor to electricity. Broker quotes for electricity at locations for which
Select Energy has entered into transactions are generally available
through the year 2009. 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.
As of and for the years ended December 31, 2005 and 2004, the sources
of the fair value of wholesale contracts and the changes in fair value of
these contracts are included in the following tables:
(Millions of Dollars) Fair Value of Wholesale Contracts at December 31, 2005
Maturity Maturity Maturity
Less than of One to in Excess of Total Fair
Sources of Fair Value One Year Four Years Four Years Value
Prices actively quoted $31.3 $ 19.1 $ — $ 50.4
Prices provided by
external sources (147.5) (94.7) (2.8) (245.0)
Models based 0.7 (10.3) (25.9) (35.5)
Totals $(115.5) $(85.9) $(28.7) $(230.1)
(Millions of Dollars) Fair Value of Wholesale Contracts at December 31, 2004
Maturity Maturity Maturity
Less than of One to in Excess of Total Fair
Sources of Fair Value One Year Four Years Four Years Value
Prices actively quoted $(58.9) $(7.3) $ — $(66.2)
Prices provided by
external sources (6.5) 11.3 12.5 17.3
Totals $(65.4) $ 4.0 $12.5 $(48.9)
Years Ended December 31,
2005 2004
(Millions of Dollars) Total Portfolio Fair Value
Fair value of wholesale contracts outstanding
at the beginning of the year $(48.9) $33.4
Contracts realized or otherwise
settled during the year 254.2 (3.5)
Changes in fair value recorded:
Wholesale contract market changes, net (419.0) —
Fuel, purchased and net interchange power (43.7) (86.3)
Operating revenues 13.1 2.0
Changes in model based assumption
included in operating revenues 14.2 5.5
Fair value of wholesale contracts outstanding
at the end of the year $(230.1) $(48.9)
Changes in the fair value of wholesale contracts that became marked-
to-market as a result of the exit decisions totaling a negative $419 million
in 2005 are recorded as wholesale contract market changes, net,
changes in fair value of natural gas contracts totaling a negative
$43.7 million in 2005 are recorded as fuel, purchased and net interchange
power and changes in fair value of contracts formerly designated as
trading totaling a positive $13.1 million in 2005 are recorded as revenue
on the accompanying consolidated statements of (loss)/income.
During the fourth quarter of 2005, Select Energy assigned a wholesale
contract for $55.9 million with payments commencing in January of
2006 and ending in December of 2008. This amount is included in the
contracts realized or otherwise settled during the year amount of
$254.2 million above. At December 31, 2005, this contractual assignment
was reclassified from short and long-term derivative liabilities to other
current liabilities ($18.5 million) and other long-term liabilities
($37.4 million) on the consolidated balance sheets. This amount is
included in the $419 million of wholesale contract market changes,
net in the table above. The payments under this assignment bear
interest at 12.5 percent. If certain conditions are met, these payments
could be accelerated.
In the first quarter of 2005, the mark-to-market of Select Energy’s
wholesale contracts increased by $14.2 million as a result of the
removal of a modeling reserve for one of its trading contracts. The
change in fair value associated with this removal is included in the
changes in model based assumption included in operating revenues
category in the table above. This contract was subsequently sold
to a third-party wholesale marketer in the third quarter of 2005.
Retail Marketing Activities: Select Energy manages its portfolio of retail
marketing contracts to maximize value while operating within NU’s
corporate risk tolerance. Select Energy generally acquires retail
customers in small increments, which while requiring careful sourcing,
allows energy purchases to be acquired in small increments. However,
fluctuations in prices, fuel costs, competitive conditions, regulations,
weather, transmission costs, lack of market liquidity, plant outages and
other factors can all impact the retail marketing business adversely
from time to time.
In 2005, the retail marketing business was the successful bidder
on more than 30 percent of its bids, from a revenue standpoint,
compared with just under 25 percent in 2004.
For the year ended December 31, 2005, approximately 11 million MWhs
were delivered as compared to approximately 10 million MWhs in
2004. For natural gas, approximately 46 billion cubic feet were delivered
in 2005 as compared to approximately 39.5 billion cubic feet in 2004.
Retail margins ranged from approximately $1.60 to $2.00 per MWh in
2005. For natural gas, sales margins averaged between approximately
$0.20 and $0.25 per thousand cubic feet in 2005.
The retail marketing business periodically enters into supply contracts
that do not immediately meet the criteria for the normal election and
accrual accounting and therefore, changes in fair value are required to
be marked-to-market and included in earnings. At December 31, 2005,
Select Energy had retail derivative assets and liabilities as follows: