Eversource 2005 Annual Report Download - page 71

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At December 31, 2004
Assets Liabilities
Long- Long- Net
(Millions of Dollars) Current Term Current Term Total
NU Enterprises:
Trading $49.6 $ 31.7 $ (46.2) $ (5.5) $ 29.6
Non-trading 1.5 — (70.5) (9.6) (78.6)
Hedging 4.5 — (9.1) (0.8) (5.4)
Utility Group – Gas:
Non-trading 0.2 — (0.1) — 0.1
Hedging 1.5 — — — 1.5
Utility Group – Electric
Non-trading 24.2 167.1 (4.4) (42.8) 144.1
NU Parent:
Hedging 0.1 — — — 0.1
Totals $81.6 $198.8 $(130.3) $(58.7) $ 91.4
The amounts above do not include option premiums paid, which are
recorded as prepayments and amounted to $29.3 million related to
wholesale activities at December 31, 2004. These amounts also do not
include option premiums received, which are recorded as other current
liabilities and amounted to $27.1 million related to wholesale activities
at December 31, 2004.
NU Enterprises – Wholesale: Certain electricity and natural gas derivative
contracts are part of Select Energy’s wholesale marketing business
that the company is in the process of exiting. These contracts also
include other wholesale short-term and long-term electricity supply and
sales contracts, which include contracts to sell electricity to utilities
under full requirements contracts and contracts to sell electricity to
municipalities with terms up to eight remaining years. The fair value of
electricity contracts was determined by prices from external sources
for years through 2009 and by models based on natural gas prices and
aheat-rate conversion factor to electricity for subsequent periods. The
fair value of the natural gas contracts was primarily determined by
prices provided by external sources and actively quoted markets. In
addition, to gather market intelligence and utilize this information in
risk management activities for the wholesale marketing activities,
Select Energy conducted limited energy trading activities in electricity,
natural gas, and oil. Select Energy manages open trading positions
with strict policies that limit its exposure to market risk and require
daily reporting to management of potential financial exposures.
Derivatives used in wholesale activities are recorded at fair value and
included in the consolidated balance sheets as derivative assets or
liabilities. Changes in fair value are recorded as wholesale contract
market changes, net on the accompanying consolidated statements
of (loss)/income in the period of change. The net fair value position of
the wholesale portfolio at December 31, 2005 was a liability of
$230.1 million.
NU Enterprises – Retail: Select Energy is in the process of exiting its retail
business. Select Energy generally acquires retail customers in smaller
increments than it acquired wholesale customers, which while requiring
careful sourcing, allows energy purchases to be acquired in smaller
increments with lower risk. 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. The retail sales
contracts are generally executory contracts where revenues are
recorded when the electricity or gas is delivered.
From time to time, the retail marketing business enters into contracts
that do not immediately meet the criteria for the normal election and
accrual accounting. Therefore, changes in fair value are required to be
marked-to-market in earnings and included in the consolidated balance
sheets as derivative assets or liabilities. Changes in fair value are
recognized in fuel, purchased and net interchange power in the
consolidated statements of (loss)/income in the period of change.
The net fair value position of the retail portfolio at December 31, 2005
was an asset of $17 million.
Select Energy’s retail portfolio also includes New York Mercantile
Exchange (NYMEX) futures, financial swaps, and physical power
transactions, the fair value of which is based on closing exchange
prices; over-the-counter forwards, and financial swaps, the fair value of
which is based on the mid-point of bid and ask market prices; bilateral
contracts for the purchase or sale of electricity or natural gas, the fair
value of which is determined using available information from external
sources; and financial transmission rights and transmission congestion
contracts, the fair value of which is based on historical settlement
prices as well as external sources.
NU Enterprises – Generation: Select Energy is in the process of exiting
these generation contracts. These derivative contracts include generation
asset-specific sales and forward sales of electricity at hub trading points.
The fair value of generation contracts was determined by prices from
external sources for years through 2009 and by models based on natural
gas prices and a heat-rate conversion factor to electricity for subsequent
periods. The fair value of the natural gas contracts was primarily
determined by prices provided by external sources and actively quoted
markets. As a result of NU’s decision to exit the competitive generation
business in the fourth quarter of 2005, Select Energy began to record
all derivatives related to generation activities, with the exception of
intercompany transactions, at fair value which are included in the
consolidated balance sheets as derivative assets or liabilities as the
company could no longer assert probability of physical delivery. Changes
in fair value are recognized in revenues in the consolidated statements
of (loss)/income in the period of change for the contacts that were
recorded at fair value beginning in the first quarter of 2005, while changes
in fair value of contracts formerly accounted for on an accrual basis are
recorded as wholesale contract market changes, net. The net fair value
position of the generation derivative contract portfolio at December 31,
2005 was a liability of $11.4 million.
NU Enterprises – Hedging: Select Energy utilizes derivative financial and
commodity instruments, including futures and forward contracts, to
reduce market risk associated with fluctuations in the price of
electricity and natural gas purchased to meet firmsales and purchase
commitments to certain retail customers. Select Energy also utilizes
derivatives, including price swap agreements, call and put option
contracts, and futures and forwardcontracts to manage the market
risk associated with a portion of its anticipated supply and delivery
requirements. These derivatives have been designated as cash flow
hedging instruments and areused to reduce the market risk associated
with fluctuations in the price of electricity or natural gas. A derivative
that hedges exposure to the variable cash flows of a forecasted transaction
(a cash flow hedge) is initially recorded at fair value with changes in
fair value recorded in accumulated other comprehensive income. Cash
flow hedges impact net income when the forecasted transaction being
hedged occurs, when hedge ineffectiveness is measured and recorded,