Eversource 2001 Annual Report Download - page 21

light of the increasing size of the energy marketing and trading
businesses, NU has applied to the SEC for authority to exempt
Select Energy and SENY from this limitation.
Competitive Energy Subsidiaries’ Market and Other Risks
NU’s competitive energy subsidiaries, as major providers of elec-
tricity and natural gas, are exposed to certain market risks inher-
ent in their business activities. The competitive energy subsidiaries
enter into contracts of varying lengths of time to buy and sell
energy commodities, primarily electricity, natural gas and oil.
Market risk represents the risk of loss that may impact the compa-
nies’ financial statements due to adverse changes in commodity
market prices.
The competitive energy subsidiaries manage their portfolio of
contracts and assets to maximize value and minimize associated
risks. The lengths of contracts to buy and sell energy vary in dura-
tion from daily/hourly to several years. At any point in time, the
portfolio may be long (purchases exceed sales) or short (sales
exceed purchases). Portfolio and risk management disciplines are
used to manage exposures to market risks. Policies and procedures
have been established to manage these risks. At market spot prices
in effect at December 31, 2001, the portfolio had a positive mark-
to-market position. There is significant volatility in the energy
commodities market, and for certain of the energy products and
contracts there has been limited liquidity. The position increased
in value due to the decline in energy prices in the region and new
transactions entered into during 2001.
Select Energy also engages in the trading of commodity deriva-
tives, which are accounted for using the mark-to-market method
under Emerging Issues Task Force Issue No. 98-10, “Accounting
for Energy Trading and Risk Management Activities.” All other
nontrading transactions are recognized when settled.
All trading positions are marked-to-market daily at the end of
each trading day. All NYMEX futures and options are marked to
closing exchange prices. Over-the-counter forwards and options
are marked to the mid-point of bid and ask quotes. In most cases
there are multiple sources of over-the-counter and broker quotes.
Options, for which specific quotes are not available, are marked-
to-market using a forward volatility curve derived from other
options for which quotes are available.
As of and for the year ended December 31, 2001, the sources
of the fair value of these trading activities and the change in fair
value of these trading activities are as follows:
(Millions of Dollars) Fair Value of Contracts at December 31, 2001
Maturity Maturity Maturity in
Less than of One to Excess of Total
Sources of Fair Value One Year Four Years Four Years Fair Value
Prices actively quoted $1.0 $ 0.2 $ — $ 1.2
Prices provided by
external sources 6.5 15.9 20.8 43.2
Prices based on model or
other valuation method — — — —
Totals $7.5 $16.1 $20.8 $44.4
(Millions of Dollars) Total Fair Value
Fair value at beginning of period
(January 1, 2001) $13.8
Contracts realized or otherwise
settled during the period (7.9)
Fair value of new contracts entered
into during the period 17.7
Changes in fair value of contracts
that existed at the beginning of
the period 20.8
Fair value at end of period
(December 31, 2001) $44.4
For further information see Note 1J, “Summary of Signifi-
cant Accounting Policies - Accounting for Competitive Energy
Contracts,” Note 9, “Market Risk and Risk Management Instru-
ments,” and Note 12, “Other Comprehensive Income,” to the
consolidated financial statements.
Business Development and Capital Expenditures
In 2001, NU system companies announced a number of initia-
tives to significantly increase their investment in regulated electric
transmission and natural gas distribution facilities, particularly in
Connecticut. CL&P announced that it planned to construct two
new 345,000 volt transmission line facilities totaling approxi-
mately 85 miles into Norwalk, Connecticut at a combined cost of
approximately $520 million. An application to construct one of
the facilities, an approximately 20 mile facility from Bethel, Con-
necticut to Norwalk, Connecticut, was filed in October 2001
with the Connecticut Siting Council. A decision is expected by
the fall of 2002. The application related to a second facility from
Middletown, Connecticut to Norwalk, Connecticut will be filed
with the Connecticut Siting Council later in 2002. CL&P also
has proposed replacing the existing 138,000 volt transmission line
beneath Long Island Sound between Norwalk, Connecticut and
Northport - Long Island, New York. CL&P, which owns an equal
share of the existing line with the Long Island Power Authority,
would bear approximately half of the cost of the $80 million pro-
ject. That project would require Connecticut, New York and fed-
eral regulatory approvals. This application was filed with the Con-
necticut Siting Council in February 2002. If approved, these three
projects would increase CL&P’s capital expenditures. CL&P’s
capital investments in electric utility plant totaled $237.4 million
in 2001 and $208.2 million in 2000, well above the $132.2 mil-
lion level of 1998, primarily as a result of increased spending on
CL&P’s distribution system. CL&P’s capital expenditures are
expected to total $244 million in 2002 and higher in 2003
through 2005, if the transmission projects are approved.
In addition to the three CL&P transmission projects noted
above, the NU system announced plans for a fourth project
involving construction of a new undersea direct-current line
between Norwalk, Connecticut and western Long Island that is
projected to be in service by no later than 2005. The cost of that
line, which will require several regulatory approvals, depends on a
number of factors, including its size and route. Management
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