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Survey of Energy, Utility and Power companies

Annual Report (Form 10-K)


Quantitative and Qualitative Disclosures about
Derivatives and Risk Management Activities
FAS 133 analysis by
Phillip Green, Senior Business Analyst,
Derivatives Trading Desk, LLC

Qualitative and
Company Quantitative
Risk
Management
Disclosures

DTE Energy Credit quality Roll-forward Analysis of Maturity


of trading of MTM assets and and source
counterparties energy liabilities from of fair value
sensitivity contracts risk mgmt MTM
analysis, VaR trading positions
activities (tenor)

Allegheny NONE Cash flow NONE NONE


hedges MTM
Energy, Inc.
AEP Counterparty Mark to Balance sheet Maturity
credit quality Market of net MTM and source
and VaR assets and positions of fair value
analysis liabilities MTM
positions

Anadarko NONE Carrying NONE NONE


value and
estimated fair
value

CMS NONE NONE Analysis of NONE


assets and
Energy liabilities from
risk mgmt
trading
activities
Constellation VaR analysis NONE NONE NONE
Energy
Exelon NONE NONE Analysis of NONE
assets and
Corp. liabilities from
risk mgmt
trading
activities

Edison Credit quality NONE NONE NONE


of trading
Mission counterparties
Energy
FX Energy, NONE NONE NONE NONE
Inc.
MidAmerican NONE NONE Analysis of NONE
Energy Co. assets and
liabilities from
risk mgmt
trading
activities

Cinergy Sensitivity Changes in Analysis of Maturity


analysis, VaR fair value of assets and and source
Corp. analysis MTM energy liabilities from of fair value
contracts risk mgmt MTM
trading positions
activities (tenor)

Nicor, Inc. Credit quality Changes in NONE Maturity


and credit fair value of and source
ratings of MTM energy of fair value
trading contracts MTM
counterparties positions
(tenor)

OneOK Credit quality Changes in Analysis of Maturity


and credit fair value of assets and and source
ratings of MTM energy liabilities from of fair value
trading contracts risk mgmt MTM
counterparties trading positions
activities

WPS Credit quality NONE NONE Maturity


and credit and source
Energy ratings of of fair value
trading MTM
counterparties positions
Enbridge NONE NONE NONE NONE
Energy

Notes:

MTM = Mark-to-market
FAS 133 = Financial Accounting Standards Board

Accounting for Derivative Instruments and Hedging


Activities
Summary

This Statement establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities.

It requires that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.

Background on Fair Value Disclosures in energy, power and utility


company 10K Annual Reports
The SEC has promised that it will review more Form 10-Ks than it ever has before.
During the past few years, the SEC brought numerous enforcement actions against public
companies and their chief executive and financial officers for allegedly failing to properly
fulfill their MD&A (Management’s Discussion and Analysis of Financial Conditions and
Results of Operations) disclosure requirements. As such, in this environment, companies
need to carefully review their procedures for preparing MD&A. What the company did
last year may not be enough.
Q: How does energy trading competitors and other energy, power and utility
companies do on Fair value disclosure in their 10K’s?

A: Of the 15 companies surveyed, all of the companies except one, Enbridge, included
the Fair Value Disclosure in their 10K Annual Reports, most with substantial detail,
definitions, and strategy.

The Sarbanes-Oxley Act of 2002 requires the CEOs and CFOs of public companies to
make certain certifications relating to the financial statements included in SEC filings.

In view of the required disclosures about the impact of material trends and uncertainties
on an issuer’s financial condition and results, additional information about trading
activities may be necessary. The following additional disclosures about trading contracts
should be considered:

1. Disclosure of both the realized and the unrealized changes in fair value.

2. Identification of the impact changes have in valuation techniques on the fair value.

3. Disclosure of the fair value of both contracts where those values are determined
directly from quoted market prices and contracts where the fair values are estimated.

4. Disclosure of the maturities of the contracts outstanding at the latest balance sheet date.

5. Disclosure of the fair value of claims against counterparties that are in a net asset
position at the most recent balance sheet date, based on the credit quality of the contract
counterparty (e.g., investment grade, non-investment grade, and no external ratings).

6. Balanced disclosures regarding risk management in connection with the trading


activities, including the management of risks related to changes in credit quality or
market fluctuations of underlying financial instruments.

Phillip Green, Senior Business Analyst,


Derivatives Trading Desk

March 9, 2009

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