Eversource 2002 Annual Report Download - page 24

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The other negative $6 million reflected in changes in fair value attributable
to changes in valuation techniques and assumptions relates to $12 million
of contracts held by SENY at acquisition that were determined to be held
for nontrading purposes by Select Energy. Accordingly the $12 million of
contracts were removed from the trading portfolio. Long-term trading
contracts with maturities in excess of four years and transmission congestion
contracts were revalued during the year based on the availability of market
information, which added $6 million to the value of the trading portfolio.
Late in the fourth quarter of 2002, Select Energy began to receive
reliable market information concerning the impact of LMP in New
England with the implementation of SMD, which is currently scheduled
for March 1, 2003. Select Energy began to use this market information in
its valuation of contracts in the trading portfolio. The impact of using this
information was to reduce the portfolio value by $10.3 million, which is
reflected as a negative amount in changes in fair value of contracts.
Nontrading: Nontrading derivative contracts are for delivery of energy
related to the competitive energy subsidiaries’retail and wholesale
marketing activities. At December 31, 2002, Select Energy had nontrading
derivative assets of $2.9 million and no nontrading derivative liabilities.
At December 31, 2001, Select Energy had no nontrading derivative assets
or liabilities.
Changing Market: The breadth and depth of the market for energy trading
and marketing products in Select Energy’s market has been adversely
affected by the withdrawal or financial weakening of a number of
companies who have historically done significant amounts of business
with Select Energy. In general, the market for such products has become
shorter term in nature with less liquidity, and participants are more often
unable to meet Select Energy’s credit standards without providing cash or
letter of credit support. Select Energy is being adversely affected by these
factors, and there could be a continuing adverse impact on Select Energy’s
business prospects.
Changes are occurring in the administration of transmission systems in
territories in which Select Energy does business. Regional transmission
organizations (RTO) are being contemplated, and other changes are
occurring within transmission regions. For example, the impact of the
implementation of SMD on Select Energy’s existing positions resulted
in a decrease of $10.3 million in the fair value of Select Energy’s trading
portfolio. The impact of SMD on its wholesale marketing business is
potentially more significant. The determination of the energy delivery
points in many wholesale marketing contracts and the location of
generation assets included in the wholesale marketing business could
be significantly affected. As more information regarding the timing and
impact of SMD becomes available, there could be additional adverse
effects that management cannot determine at this time.
Counterparty Credit: Counterparty credit risk relates to the risk of loss that
Select Energy would incur as a result of non-performance by counterparties
pursuant to the terms of their contractual obligations. Select Energy has
established written credit policies with regard to its counterparties to
minimize overall credit risk. These policies require an evaluation of potential
counterparties’financial conditions (including credit ratings), collateral
requirements under certain circumstances (including cash in advance,
letters of credit, and parent guarantees), and the use of standardized
agreements, which allow for the netting of positive and negative exposures
associated with a single counterparty. This evaluation results in establishing
credit limits prior to Select Energy entering into trading activities. The
appropriateness of these limits is subject to continuing review.
Concentrations among these counterparties may impact Select Energy’s
overall exposure to credit risk, either positively or negatively, in that the
counterparties may be similarly affected by changes to economic, regulatory
or other conditions. At December 31, 2002, approximately 83 percent of
Select Energy’s counterparty credit exposure to wholesale marketing and
trading counterparties is cash collateralized or rated BBB- or better. In
excess of half of the remaining credit exposure is to unrated municipalities.
At December 31, 2002, two positions with counterparties collectively
represented approximately 40 percent of the $102.9 million trading
derivative assets. All other counterparties represented less than 10 percent
of the trading derivative assets. Select Energy manages the credit risk of
its trading portfolio in accordance with established credit risk management
policies and procedures.
Select Energy Credit: A number of Select Energy’s contracts require the
posting of additional collateral in the form of cash or letters of credit in
the event NU’s ratings were to decline and in increasing amounts
dependent upon the severity of the decline. At NU’s present investment
grade ratings, Select Energy has not had to post any collateral based on
credit downgrades. Were NU’s unsecured ratings to decline two to three
levels to sub-investment grade, Select Energy could, under its present
contracts, be asked to provide approximately $140 million of collateral or
letters of credit to various unaffiliated counterparties and approximately
$80 million to several ISOs and unaffiliated local distribution companies,
which NU, under present circumstances, would be able to provide from
available sources. NU’s ratings are currently stable, and management does
not believe that at this time there is a significant risk of a ratings down-
grade to sub-investment grade levels.
For further information regarding Select Energy’s activities and risks see
Note 3,“Derivative Instruments, Market Risk and Risk Management,”
and Note 11, “Accumulated Other Comprehensive Income/(Loss),” to
the consolidated financial statements.
Business Development and Capital Expenditures
Consolidated: NU anticipates that it will continue to increase its level
of capital expenditures at its regulated subsidiaries to meet customers’
increasing needs for additional and more reliable energy supplies.
Investments in regulated utility plant, excluding nuclear fuel, totaled
$468.8 million in 2002, compared with $428.3 million in 2001 and $345.6
million in 2000. NU expects that level to reach $640.2 million in 2003
and may be as high as $650 million in 2004, if CL&P’s plans to expand
its 345,000 volt transmission system are approved.
Regulated Utilities: CL&P’s capital expenditures, excluding nuclear fuel,
totaled $242.3 million in 2002, compared with $237.4 million in 2001 and
$208.2 million in 2000. CL&P expects capital expenditures to increase to
$326.9 million in 2003. CL&P spent $141.2 million related to its overhead
and underground electric distribution system in 2002 and expects to
spend a similar amount in 2003. CL&P spent $35.6 million to upgrade
its transmission system in 2002, and expects its transmission capital
expenditures to increase to $95 million in 2003, if its current construction
plans receive regulatory approval. CL&P also spent $20 million on new
meters and customer services, and $17 million on substations in 2002.
In 2001, CL&P announced plans for three transmission projects. In
September 2002, the Connecticut Siting Council (CSC) approved the first
project, a plan to replace an undersea electric transmission line between
Norwalk, Connecticut and Northport – Long Island, New York, at an
estimated cost of $80 million. CL&P owns 50 percent of the line with the