Eversource 2002 Annual Report Download - page 49

Guarantees: NU provides credit assurance in the form of guarantees
and letters of credit in the normal course of business for the financial
performance obligations of certain of its competitive energy subsidiaries
of which most are revocable with no term specifications. NU would
be required to perform under these guarantees in the event of non-
performance under these obligations by the competitive energy
subsidiaries. NU currently has authorization from the SEC to provide
up to $500 million of guarantees through September 30, 2003, and has
applied for authority to increase this amount to $750 million. At
December 31, 2002, payments guaranteed by NU, primarily on behalf
of its competitive businesses, totaled $183.1 million. Additionally, NU
had $6.7 million of letters of credit outstanding at December 31, 2002
and in conjunction with its investment in RMS, NU guarantees a $3
million line of credit through 2005. Also, in conjunction with its
investment in SESI, NU guarantees up to $30 million of SESI debt
under arrangements with a third-party financing of long-term receivables.
3. Derivative Instruments, Market Risk and Risk Management
A. Derivative Instruments
Effective January 1, 2001, NU adopted SFAS No. 133, as amended.
Derivatives that are utilized for trading purposes are recorded at fair
value with changes in fair value included in earnings. Other contracts
that are derivatives but do not meet the definition of a cash flow hedge
and cannot be designated as being used for normal purchases or normal
sales are also recorded at fair value with changes in fair value included
in earnings. For those contracts that meet the definition of a derivative
and meet the cash flow hedge requirements, the changes in the fair
value of the effective portion of those contracts are generally recognized
in accumulated other comprehensive income until the underlying
transactions occur. For contracts that meet the definition of a derivative
but do not meet the hedging requirements, and for the ineffective portion
of contracts that meet the cash flow hedge requirements, the changes
in fair value of those contracts are recognized currently in earnings.
Derivative contracts that are entered into as a normal purchase or sale
and will result in physical delivery, and are documented as such, are
recorded under accrual accounting. For information regarding accounting
changes related to trading activities, see Note 1C, “Summary of
Significant Accounting Policies – New Accounting Standards,” to the
consolidated financial statements.
During 2002, a positive $17 million, net of tax, was reclassified from
other comprehensive income in connection with the consummation
of the underlying hedged transactions and recognized in earnings. An
additional $0.9 million, net of tax, was recognized in earnings for those
derivatives that were determined to be ineffective and for the ineffective
portion of cash flow hedges. Also during 2002, new cash flow hedge
transactions were entered into which hedge cash flows through 2005.
As a result of these new transactions and market value changes since
January 1, 2002, other comprehensive income increased by $52.4 million,
net of tax. Accumulated other comprehensive income at December 31,
2002, was a positive $15.5 million, net of tax (increase to equity), relating
to hedged transactions, and it is estimated that $9.3 million of this balance,
net of tax, will be reclassified as an increase to earnings within the next
twelve months. Cash flows from the hedge contracts are reported in
the same category as cash flows from the underlying hedged transaction.
There have been changes to interpretations of SFAS No. 133, and the
FASB continues to consider changes and amendments which could
affect the way NU records and discloses derivative and hedging activities
in the future.
During 2001, a positive $4.5 million, net of tax, was reclassified from
other comprehensive income in connection with the consummation of
the underlying hedged transactions and recognized in earnings. An
additional $1.3 million, net of tax, was recognized in earnings for those
derivatives that were determined to be ineffective and for the ineffective
portion of cash flow hedges. Also during 2001, new cash flow hedge
transactions were entered into which hedge cash flows through 2027.
As a result of these new transactions and market value changes since
January 1, 2001, other comprehensive income decreased by $36.9 million,
net of tax. Accumulated other comprehensive income at December 31,
2001, was a negative $36.9 million, net of tax (decrease to equity), relating
to hedged transactions, and it is estimated that $29.4 million of this
balance, net of tax, will be reclassified as a decrease to earnings within
the next twelve months. Cash flows from the hedge contracts are
reported in the same category as cash flows from the underlying
hedged transaction.
The tables below summarize the derivative assets and liabilities at
December 31, 2002 and 2001. These amounts do not include premiums
paid, which are recorded as prepayments and amounted to $26.6 million
and $8.3 million at December 31, 2002 and 2001, respectively. These
amounts also do not include premiums received, which are recorded
as liabilities and amounted to $29.5 million and $44.2 million at
December 31, 2002 and 2001, respectively. These amounts relate primarily
to energy trading activities.
At December 31, 2002
(Millions of Dollars) Assets Liabilities Total
Competitive Energy Subsidiaries:
Trading $102.9 $(61.9) $41.0
Nontrading 2.9 — 2.9
Hedging 22.8 (2.0) 20.8
Regulated Gas Utility:
Hedging 2.3 — 2.3
Total $130.9 $(63.9) $67.0
At December 31, 2001
(Millions of Dollars) Assets Liabilities Total
Competitive Energy Subsidiaries:
Trading $147.2 $ (90.8) $56.4
Hedging 2.9 (58.4) (55.5)
Regulated Gas Utility:
Hedging 0.2 (2.3) (2.1)
NU Parent:
Hedging — (0.1) (0.1)
Total $150.3 $(151.6) $ (1.3)
Competitive Energy Subsidiaries Trading: As a market participant in the
Northeast United States, Select Energy conducts energy trading activities
in electricity, natural gas and oil, and therefore, experiences net open
positions. Select Energy manages these open positions with strict policies
that limit its exposure to market risk and require daily reporting to
management of potential financial exposure. Derivatives used in trading
activities are recorded at fair value and included in the consolidated
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