Eversource 2008 Annual Report Download - page 65

At December 31, 2007
Assets Liabilities
(Millions of Dollars) Current Long-Term Current Long-Term Net Total
NU Enterprises:
Wholesale $ 36.2 $ 7.2 $ (64.9 ) $ (72.5 ) $ (94.0 )
Regulated Companies -
Gas:
Supply 0.2 - - - 0.2
Interest Rate Hedging 0.9 - - - 0.9
Regulated Companies -
Electric:
Supply/Stranded Costs 59.8 290.8 (6.7 ) (136.0 ) 207.9
Interest Rate Hedging 3.3 - - - 3.3
NU Parent:
Interest Rate Hedging 5.1 - - - 5.1
Totals $ 105.5 $ 298.0 $ (71.6 ) $ (208.5 ) $ 123.4
For the regulated companies, except for interest rate swap agreements, osetting
regulatory assets or liabilities are recorded for the changes in fair value of their
contracts, as these contracts were part of the stranded costs or are current regulated
operating costs, and management believes that these costs will continue to be
recovered or refunded in cost-of-service, regulated rates.
The business activities of NU Enterprises that result in the recognition of derivative
assets also create exposures to credit risk of energy marketing and trading
counterparties. At December 31, 2008, Select Energy had no derivative assets from
wholesale activities that are exposed to counterparty credit risk. The business activities
of the regulated companies that resulted in the recognition of derivative assets also
create exposure to various counterparties. At December 31, 2008, NU consolidated
had $273.2 million of regulated company and NU parent derivative assets exposed
to counterparty credit risk that are contracted with multiple entities, of which $125.5
million is contracted with investment grade entities, $4.6 million is contracted with a
government-backed entity, $131.4 million is contracted with a non-rated subsidiary of
an investment grade company and the remainder are contracted with multiple other
counterparties.
NU Enterprises - Wholesale: Certain electric derivative contracts are part of NU
Enterprises’ remaining wholesale marketing business. These contracts include short-
term and long-term electric supply contracts and a contract to sell electricity to
the New York Municipal Power Agency (NYMPA) (an agency that is comprised of
municipalities) that expires in 2013. A portion of the contract’s fair value is determined
based upon a model. The model utilizes natural gas prices and a heat rate conversion
factor to determine o-peak electricity prices for one New York routinely quoted hub
zone for 2013. For the balance of the hub zones, broker quotes for electricity are
generally available on-peak through 2013 and o-peak through 2012.
The decision to exit the wholesale marketing business changed management’s
conclusion regarding the likelihood that these wholesale marketing contracts would
result in physical delivery to customers and resulted in a change in the first quarter
of 2005 from accrual accounting to mark-to-market accounting for the wholesale
marketing contracts. For the years ended December 31, 2008, 2007 and 2006, NU
recorded a pre-tax benefit of $7 million and pre-tax charges of $7.4 million and $11.7
million, respectively, in fuel, purchased and net interchange power related to these
contracts. In addition, NU recorded a benefit of $1 million to fuel, purchased and net
interchange power related to wholesale marketing contracts for the year ended
December 31, 2007.
Regulated Companies - Gas - Supply: Yankee Gas’ supply derivatives consist of
peaking supply arrangements to serve winter load obligations and firm retail sales
contracts with options to curtail delivery. These contracts are subject 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. An osetting
regulatory liability/asset was recorded for these amounts as management believes that
these costs will be refunded or recovered in rates.
Regulated Companies - Gas - Interest Rate Hedging: Yankee Gas had a forward
interest rate swap agreement to hedge the interest cash outflows associated with its
$100 million debt issuance in October 2008. The interest rate swap was based on
a 10-year LIBOR swap rate and matched the index used for the debt issuance. As a
cash flow hedge, the fair value of the hedge was recorded as a derivative asset on the
accompanying consolidated balance sheets as of December 31, 2007, with an osetting
amount, net of tax, included in accumulated other comprehensive income. The swap
was terminated in September 2008.
Regulated Companies - Electric - Supply/Stranded Costs: 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 derivatives at December 31, 2008 included
short-term and long-term derivative assets with fair values of $20.8 million and $110.6
million, respectively, and short-term and long-term derivative liabilities with fair values
of $6.5 million and $65.6 million, respectively. An osetting regulatory liability and
an osetting regulatory asset were recorded, as these contracts are part of stranded
costs, and management believes that these costs will continue to be recovered or
refunded in cost-of-service, regulated rates. At December 31, 2007, the fair values of
these derivatives included short-term and long-term derivative assets with fair values of
$53.3 million and $257.9 million, respectively, and short-term and long-term derivative
liabilities with fair values of $2.9 million and $28.9 million, respectively.
CL&P has entered into FTR contracts and bilateral basis swaps to limit the congestion
costs associated with its standard oer contracts. At December 31, 2008, the fair value
of these contracts were recorded as a short-term derivative asset of $9.7 million, with
an oset of $9.5 million recorded as a payable and included in other current liabilities
and $0.2 million related to the mark-to-market adjustment recorded as a regulatory
liability on the accompanying consolidated balance sheets. In addition, the fair value of
the bilateral agreements has been recorded as a short-term derivative liability of $2.3
million with a $2.1 million oset to regulatory assets, net of the $0.2 million regulatory
liability described above. Management believes that these costs will continue to be
recovered or refunded in cost of service rates. At December31, 2007, the fair
value of these contracts was recorded as a short-term derivative asset of $1.4 million
and a short-term derivative liability of $1.3 million on the accompanying consolidated
balance sheets.
Pursuant to Public Act 05-01, “An Act Concerning Energy Independence,” in August
2007, the DPUC approved two CL&P contracts associated with the capacity of two
generating projects to be built or modified. The DPUC also approved two capacity-
related contracts entered into by The United Illuminating Company (UI), one with a
generating project to be built and one with a new demand response project. The
total capacity of these four projects is expected to be approximately 787 megawatts
(MW). The contracts, referred to as CfDs, obligate the utilities’ customers to pay the
dierence between a set capacity price and the forward capacity market price that the
projects receive in the ISO-NE capacity markets for periods of up to 15 years beginning
in 2009. As directed by the DPUC, CL&P has an agreement with UI under which it will
share the costs and benefits of these four CfDs, with 80 percent allocated to CL&P and
20 percent to UI. The ultimate cost to CL&P under the contracts will depend on the
capacity prices that the projects receive in the ISO-NE capacity markets. At December
31, 2008, the fair value of the CL&P CfDs was recorded as a long-term derivative
liability of $782.5 million. The fair values of UI’s share of CL&P’s contracts and CL&P’s
share of UI’s contracts were recorded as a long-term derivative asset of $104.7 million. 64