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## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER 31, 2003, 2002, 2001 

## Electricity Contracts 

The Company’s wholesale operations entered into various forward physical contracts for the purchase and sale of electricity with the intent to optimize its net generation position. These contracts do not qualify for normal purchase and sale designation pursuant to SFAS 133, and are considered derivatives and marked to market as required by SFAS 133. 

For the year ended December 31, 2003, the Company’s Wholesale Operations settled derivative forward contracts for the sale of electricity that generated $165.9 million of electric revenues by delivering 3.5 million megawatt hours (“MWh”). The Company settled derivative forward contracts for the purchase of electricity of $157.7 million or 3.5 million MWh of electricity to support these contractual sales and other open market sales opportunities. For the year ended December 31, 2002, the Company’s Wholesale Operations settled forward contracts for the sale of electricity that generated $43.9 million of electric revenues by delivering 1.2 million MWh. The Company settled derivative forward contracts for the purchase of electricity of $74.5 million or 1.4 million MWh of electricity to support these contractual sales and other open market sales opportunities. For the year ended December 31, 2001, the Company’s Wholesale Operations settled derivative forward contracts for the sale of electricity that generated $77.9 million of electric revenues by delivering 2.1 million MWh. The Company settled derivative forward contracts for the purchase of electricity of $76.7 million or 1.9 million MWh of electricity to support these contractual sales and other open market sales opportunities. 

As of December 31, 2003, the Company had open derivative forward contract positions to buy $30.6 million and to sell $28.6 million of electricity. At December 31, 2003, the Company had a gross mark-to-market gain (asset position) on these derivative forward contracts of $3.4 million and a gross mark-to-market loss (liability position) of $3.0 million, with a net mark-to-market gain (asset position) of $0.4 million recorded in other current assets and liabilities, respectively. The change in mark-to-market valuation is recognized in earnings each period and is recorded in operating revenues. 

The Company’s Wholesale Operations also entered into forward physical contracts for the sale of the Company’s electric capacity in excess of its retail and wholesale firm requirement needs, including reserves. In addition, the Company entered into forward physical contracts for the purchase of retail needs, including reserves, when resource shortfalls exist. The Company generally accounts for these financial instruments as normal sales and purchases as defined by SFAS 133, as amended. From time to time the Company makes forward purchases to serve its retail needs when the cost of purchased power is less than the incremental cost of its generation. At December 31, 2003, the Company had open forward positions classified as normal sales of electricity of $236.0 million and normal purchases of electricity of $115.6 million, both of which are not recorded in the financial statements. 

The Company’s Wholesale Operations, including both firm commitments and other wholesale sale activities, are managed through a net asset-backed strategy, whereby the Company’s aggregate net open position is covered by its own excess generation capabilities. The Company is exposed to market risk if its generation capabilities were disrupted or if its retail load requirements were greater than anticipated. If the Company were required to cover all or a portion of its net open contract position, it would have to meet its commitments through market purchases. 

The Company is exposed to credit risk in the event of non-performance or non-payment by counterparties of its financial and physical derivative instruments. The Company uses a credit management process to assess and monitor the financial conditions of counterparties. The Company’s credit risk with its largest counterparty as of December 31, 2003 and December 31, 2002 was $23.5 million and $18.7 million, respectively. 

## (7) EARNINGS PER SHARE 

In accordance with SFAS No. 128, Earnings per Share, dual presentation of basic and diluted earnings per share has been presented in the Consolidated Statements of Earnings. The following reconciliation illustrates the impact on the share amounts of potential common shares and the earnings per share amounts (In thousands, except per share amounts): 

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(a) Excludes the effect of average anti-dilutive common stock equivalents related to out of-the-money options of 871,493 and 1,602,277 for the years ended December 31, 2003 and 2002, respectively. There were no anti-dilutive common stock equivalents in 2001. 

## (8) INCOME TAXES 

Income taxes before cumulative effect of changes in accounting principles consist of the following components (In thousands): 

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## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER 31, 2003, 2002, 2001 

