Eversource 2006 Annual Report Download - page 74

72 NU 2006 ANNUAL REPORT
•Abenefit of $30 million for the year ended December 31, 2005
associated with contracts previously designated as wholesale that
were redesignated to support the retail marketing business.
• A charge of $36.4 million for the year ended December 31, 2005 for
contract asset write-offs and a contract termination payment in
March of 2005.
Included in the mark-to-market on long-term wholesale electricity
contracts is a $12.5 million pre-tax mark-to-market charge for the
year ended December 31, 2005 related to an intercompany contract
between Select Energy and CL&P. This contract was included in the
portfolio of contracts Select Energy assigned to a third-party wholesale
power marketer, and Select Energy stopped serving CL&P on
December 31, 2005. This contract was part of CL&P’s stranded costs,
and benefits received by CL&P under this contract were provided to
CL&P’s ratepayers in the form of lower-than-market standard offer
service rates. A $2.8 million pre-tax mark-to-market charge in 2005
was recorded as wholesale contract market changes by Select Energy
for the intercompany contract between Select Energy and WMECO for
default service from April to June of 2005. WMECO’s benefits under
this contract wereprovided to its ratepayers in the form of lower-than-
market default service rates. These charges were not eliminated
in consolidation because on a consolidated basis NU retained the
over-market obligation to the ratepayers of CL&P and WMECO.
In addition tothe wholesalecontract market charges described above,
NU recorded additional charges to fuel, purchased and net interchange
power of $4.5 million and $8.5 million related towholesaleand retail
contracts, respectively, for the year ended December 31, 2006. Similar
amounts for 2005 are a charge of $43.7 million and a benefit of
$12.7 million for wholesaleand retail contracts, respectively.
NU Enterprises – Retail: On June 1, 2006, Select Energy closed on the
saleof its retail marketing business to Hess, and the related derivative
assets and liabilities were transferred to Hess, except in cases where a
customer has not yet consented to assignment. These remaining retail
derivativeassets and liabilities are recorded on the accompanying
consolidated balance sheets at fair value using information from
available external sources. At December 31, 2006, Select Energy
had current derivative assets and liabilities totaling $0.2 million and
$0.1 million, respectively, related to administrative agreements for
one remaining sourcing contract for which Select Energy has not yet
received consent from the counterparty and retail gas sales contracts
where the customer has not yet consented to the assignment to Hess.
The net fair value position of the retail portfolio at December 31, 2005
was an asset of $17 million.
At December 31, 2005, Select Energy maintained natural gas service
agreements with certain retail customers to supply gas at fixed prices
for terms extending through 2010. New York Mercantile Exchange
(NYMEX) futures contracts acquired to meet these commitments
were recorded at fair value as derivative assets totaling $8.2 million
and derivative liabilities of $0.3 million. Select Energy also maintained
various financial instruments to hedge its electric and gas purchases
and sales which included forwards, futures and swaps. At December
31, 2005, these hedging contracts, which were valued at the mid-point
of bid and ask market prices, were recorded as derivative assets of
$24.4 million and derivative liabilities of $4.8 million. These amounts
werezeroat December 31, 2006 because the contracts expired or were
assigned to Hess.
In 2005, Select Energy hedged certain amounts of natural gas inventory
with gas futures that were accounted for as fair value hedges. Changes
in the fair value of hedging instruments and natural gas inventory were
recorded in fuel, purchased and net interchange power. The change
in fair value of the futures were included in derivative liabilities and
amounted to $3.4 million at December 31, 2005. These amounts were
zero at December 31, 2006 because the contracts expired or were
assigned to Hess.
NU Enterprises – Generation: On November 1, 2006, NU closed on
the sale of the competitive generation business, and the related
derivative assets and liabilities were transferred to the buyer. At
December 31, 2005, these derivative contracts included generation
asset-specific sales and forward sales of electricity at hub trading
points. These contracts had a net fair value position at December 31,
2005 of a liability of $11.4 million. The fair value of these contracts
was determined by prices from external sources for the period of the
contracts. Certain of these short-term forward purchase and sales
contracts were recorded at fair value in revenues since inception.
They represented market transactions at liquid points, while other
generation-asset-specific sales and forward sales of electricity
qualified for accrual accounting until the fourth quarter of 2005 when
Select Energy marked them tomarket because the probability of
physical delivery and the normal election could no longer be asserted.
Changes in fair value of generation contracts formerlyaccounted
for on an accrual basis were recorded in fuel, purchased and net
interchange power for those contracts that were part of continuing
operations. Changes in fair value of generation contracts that are
held for salewere included in discontinued operations. These amounts
were zero at December 31, 2006 because the contracts expired or were
transferred tothe buyer of the competitive generation business.
Utility Group – Gas – Non-Trading: Yankee Gas’non-trading
derivatives consist of peaking supply arrangements to serve winter
load obligations and firm retail sales contracts with options to curtail
delivery.These contracts aresubject to fair value accounting as
these contracts are derivatives that cannot be designated as normal
purchases and sales because of the optionality in the contract terms.
Non-trading derivatives at December 31, 2006 included assets of
$0.1 million and liabilities of $0.2 million. At December 31, 2005,
non-trading derivatives included assets of $0.1 million and liabilities
of $0.4 million.
Utility Group – Electric – Non-Trading: CL&P has contracts with two
IPPs to purchase power that contain pricing provisions that are not
clearly and closely related to the price of power and therefore do not
qualify for the normal purchases and sales exception. The fair values
of these IPP non-trading derivatives at December 31, 2006 include
aderivative asset with a fair value of $289.6 million and a derivative
liability with a fair value of $35.7 million. An offsetting regulatory
liability and an offsetting regulatory asset were recorded, as these
contracts are part of the stranded costs, and management believes
that these costs will continue to be recovered or refunded in cost-of-
service, regulated rates. At December 31, 2005, the fair values of
these IPP non-trading derivatives included a derivative asset with a
fair value of $391.2 million and a derivative liability with a fair value
of $32.3 million.