Eversource 2006 Annual Report Download - page 35

NU 2006 ANNUAL REPORT 33
Energy Services Business: At December 31, 2006, the energy services
business is comprised of NGS, Woods Electrical – Other, Boulos, and
SECI-CT, which is a division of SECI. NGS provides maintenance,
operations and testing services. Boulos provides third-party electrical
services. Woods Electrical – Other and SECI-CT are in the wind
down stage.
For information regarding the current status of the exit from the
merchant energy and energy services businesses in 2005 and 2006,
see “NU Enterprises Divestitures,” included in this management’s
discussion and analysis.
Intercompany Transactions: There were no CL&P TSO purchases
from Select Energy in 2006 or 2005 and $502 million in 2004. Other
energy purchases between CL&P and Select Energy totaled $6.1 million,
$53.4 million and $109.3 million in 2006, 2005 and 2004, respectively.
WMECO was paid $4.4 million by Select Energy in 2006, while WMECO
paid Select Energy $36.3 million and $108.5 million in 2005 and 2004,
respectively.
Select Energy purchases from NGC and Mt. Tom represented $160.7
million, $209.7 million and $195.4 million the yearsended December
31, 2006, 2005, and 2004, respectively. As a result of the sale of NGC
and Mt. Tom, Select Energy’s purchases from NGC and Mt. Tom ended
on November 1, 2006.
Risk Management: From 2000 through 2006, NU Enterprises, through
its subsidiaries, engaged in a broad variety of energy related businesses
including the sale of competitive retail and wholesale gas and electricity
services, electric generation and energy services, primarily in New
England, New York and PJM. Implementation of the decision to exit all
of its competitivebusinesses has reduced significantly the risk profile of
NU Enterprises. NU Enterprises will continue to be exposed to certain
market risks under its remaining wholesale contracts until they expire
or are exited. Market risk at this point is comprised of the possibility of
adverse energy commodity price movements affecting the unhedged
portion of the remaining positions and, in the case of the wholesale
marketing business, unexpected load ingress or egress.
As part of NU’s overall enterprise risk management (ERM) process,
NU Enterprises operates under a risk oversight policy for managing
both the market and credit risk associated with its remaining portfolio.
Under this policy, weekly meetings are held with NU Enterprises’
leadership, and periodic meetings are held with NU leadership to
review conformity tothis policy. In addition, reviews are held with NU
and NU Enterprises leadership upon the occurrence of specific portfolio-
triggered events that result in portfolio losses that exceed risk over-
sight policy losslimits.
WholesaleContracts: As a result of NU’sdecision to exit the whole-
sale marketing business, certain wholesale energy contracts previously
accounted for under accrual accounting began to be marked-to-market
in the firstquarter of 2005 with changes in fair value reflected in the
statements of income/(loss).
At December 31, 2006 and 2005, the fair value of Select Energy’s
wholesale derivative assets and derivative liabilities, which are subject
to mark-to-market accounting, are as follows:
December 31,
(Millions of Dollars) 2006 2005
Current wholesale derivative assets $43.6 $ 256.6
Long-term wholesale derivative assets 22.3 103.5
Current wholesale derivative liabilities (82.3) (369.3)
Long-term wholesale derivative liabilities (110.1) (220.9)
Portfolio position $(126.5) $(230.1)
Numerous factors could either positively or negatively affect the
realization of the net fair value amounts in cash. These factors include
the amounts paid or received to exit some or all of these contracts, the
volatility of commodity prices until the contracts are exited or expire,
the outcome of future transactions, the performance of counterparties,
and other factors.
Select Energy has policies and procedures requiring all of its wholesale
energy positions to be valued daily and segregating responsibilities
between the individuals actually transacting (front office) and those
confirming the trades (middle office). The middle office is responsible
for determining the portfolio’s fair value independent from the front
office.
The methods Select Energy used to determine the fair value of its
wholesaleenergy contracts are identified and segregated in the table
of fair value of contracts at December 31, 2006 and 2005. A description
of each method is as follows: 1) prices actively quoted primarily represent
New York MercantileExchange (NYMEX) futures and swaps that are
marked toclosing exchange prices; and 2) prices provided by external
sources primarily include over-the-counter forwards and options,
including bilateral contracts for the purchase or saleof electricity, and
aremarked tothe 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 thirdparties.
Currently, Select Energy also has a contract for which a portion of
the contract’s fair value is determined based on a model. The model
utilizes natural gas prices and a conversion factor to electricity for the
years 2012 through 2013. Broker quotes for electricity at locations
for which Select Energy has entered into transactions are generally
available through the year 2011.
Generally, valuations of short-term contracts derived from quotes or
other external sources are more reliable should there be a need to
liquidatethe 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.