Eversource 2004 Annual Report Download - page 35

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Counterparty Credit: Counterparty credit risk relates to the risk of loss that
Select Energy would incur because 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 condition (including credit ratings),
collateral requirements under certain circumstances (including cash
advances, LOCs, and parent guarantees), and the use of standardized
agreements that 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’s entering into contracts.
The appropriateness of these limits is subject to continuing review.
Concentrations among these counterparties may affect 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, 2004, approximately
77 percent of Select Energy’s counterparty credit exposure to wholesale
and trading counterparties was collateralized or rated BBB- or better.
Select Energy was provided $57.7 million and $46.5 million of counterparty
deposits at December 31, 2004 and December 31, 2003, respectively.
For further information, see Note 1Y, “Summary of Significant
Accounting Policies — Counterparty Deposits,” to the consolidated
financial statements.
Select Energy’s Credit: A number of Select Energy’s contracts require the
posting of additional collateral in the form of cash or LOCs 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 levels
to sub-investment grade, Select Energy could, under its present
contracts, be asked to provide at December 31, 2004 approximately
$361 million of collateral or LOCs to various unaffiliated counterparties
and approximately $140 million to several independent system
operators and unaffiliated LDCs, which management believes NU
would currently be able to provide, subject to the Securities and
Exchange Commission (SEC) limits. NU’s credit ratings outlooks are
currently stable or negative, but management does not believe that
at this time there is a significant risk of a ratings downgrade to
sub-investment grade levels.
Consolidated Edison, Inc. Merger Litigation
On March 5, 2001, Consolidated Edison, Inc. (Con Edison) advised NU
that it was unwilling to close its merger with NU on the terms set forth
in the parties’ 1999 merger agreement (Merger Agreement). On March 12,
2001, NU filed suit against Con Edison seeking damages in excess of
$1 billion.
On May 11, 2001, Con Edison filed an amended complaint seeking
damages for breach of contract, fraudulent inducement and negligent
misrepresentation in an unspecified amount, but which Con Edison’s
Chief Financial Officer has testified is at least $314 million. NU disputes
both Con Edison’s entitlement to any damages as well as its method
of computing its alleged damages.
The companies completed discovery in the litigation and submitted
cross motions for summary judgment. The court denied Con Edison’s
motion in its entirety, leaving intact NU’s claim for breach of the
Merger Agreement, and partially granted NU’s motion for summary
judgment by eliminating Con Edison’s claims against NU for fraud
and negligent misrepresentation.
An intervener in this litigation has made the claim that NU shareholders
at March 5, 2001 are entitled to damages from Con Edison, if any, and
not current NU shareholders.
Appeals on this and other issues are now pending and no trial date
has been set. At this stage of the litigation, management can predict
neither the outcome of this matter nor its ultimate effect on NU.
Off-Balance Sheet Arrangements
Utility Group: The CL&P Receivables Corporation (CRC) was incorporated
on September 5, 1997, and is a wholly owned subsidiary of CL&P. CRC
has an agreement with CL&P to purchase and has an arrangement
with a highly-rated financial institution under which CRC can sell up
to $100 million of an undivided interest in accounts receivable and
unbilled revenues. At December 31, 2004 and 2003, CRC had sold an
undivided interest in its accounts receivable and unbilled revenues of
$90 million and $80 million, respectively, to that financial institution
with limited recourse.
CRC was established for the sole purpose of selling CL&P’s accounts
receivable and unbilled revenues and is included in the consolidated
NU financial statements. On July 7, 2004, CRC renewed its Receivables
Purchase and Sale Agreement with CL&P and the financial institution
through July 6, 2005, and the termination date of the facility was
extended to July 3, 2007. Management plans to renew this agreement
prior to its expiration. CL&P’s continuing involvement with the receivables
that are sold to CRC and the financial institution is limited to the
servicing of those receivables.
The transfer of receivables to the financial institution under this
arrangement qualifies for sale treatment under SFAS No. 140.
Accordingly, the $90 million and $80 million outstanding under this
facility are not reflected as debt or included in the consolidated
financial statements at December 31, 2004 and 2003, respectively.
This off-balance sheet arrangement is not significant to NU’s liquidity
or other benefits. There are no known events, demands, commitments,
trends, or uncertainties that will, or are reasonably likely to, result in
the termination, or material reduction in the amount available to the
company under this off-balance sheet arrangement.
NU Enterprises: During 2001, SESI created HEC/CJTS Energy Center,
LLC (HEC/CJTS) which is a special purpose entity (SPE). SESI created
HEC/CJTS for the sole purpose of providing a bankruptcy remote entity
for the financing of a construction project. The construction project
was the construction of an energy center to serve the Connecticut
Juvenile Training School (CJTS). The owner of CJTS, the State of
Connecticut, entered into a 30-year lease with HEC/CJTS for the energy
center. Simultaneously, HEC/CJTS transferred its interest in the lease
with the State of Connecticut to investors who are unaffiliated with NU