Eversource 2005 Annual Report Download - page 34

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As a result of NU’s decision to exit the competitive generation business,
certain competitive generation contracts to sell plant output in future
periods previously accounted for under accrual accounting were
required to be marked-to-market in the fourth quarter of 2005. The
contracts whose changes in fair value flow through operating revenues
are primarily sales contracts used to hedge competitive generation.
The $4.2 million change in fair value is the result of high priced sales
positions in the third quarter of 2005 combined with falling market
prices during the fourth quarter of 2005.
For further information regarding Select Energy’s derivative
contracts, see Note 6, “Derivative Instruments,” to the consolidated
financial statements.
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 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, 2005, approximately 72 percent of
Select Energy’s counterparty credit exposure to wholesale and trading
counterparties was collateralized or rated BBB- or better. Select Energy
was provided $28.9 million and $57.7 million of counterparty deposits
at December 31, 2005 and 2004, respectively. For further information,
see Note 1Y, “Summary of Significant Accounting Policies –
Counterparty Deposits,” to the consolidated financial statements.
Consolidated Edison, Inc. Merger Litigation
On March 5, 2001, 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.
In an opinion dated October 12, 2005, a panel of three judges at the
Second Circuit held that the shareholders of NU had no right to sue
Con Edison for its alleged breach of the parties’ Merger Agreement.
NU’s request for rehearing was denied on January 3, 2006. This ruling
left intact the remaining claims between NU and Con Edison for breach
of contract, which include NU’sclaim for recoveryof costs and expenses
of approximately $32 million and Con Edison’s claim for damages of
“at least $314 million.” NU is currently considering whether to seek
review by the United States Supreme Court. At this stage, NU cannot
predict the outcome of this matter or 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 subsidiaryof CL&P.CRC
has an agreement with CL&P to purchase and has an arrangement with
ahighly-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, 2005 and 2004, CRC had sold an
undivided interest in its accounts receivable and unbilled revenues of
$80 million and $90 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 6, 2005, CRC renewed its Receivables
Purchase and Sale Agreement with CL&P and the financial institution
through July 5, 2006. 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 Statement of Financial
Accounting Standards (SFAS) No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities – A
Replacement of SFAS No. 125.” Accordingly, the $80 million and
$90 million outstanding under this facility are not reflected as debt
or included in the consolidated financial statements at December 31,
2005 and 2004, 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 an energy center to serve the Connecticut Juvenile
Training School (CJTS). The owner of CJTS, the State of Connecticut,
entered into a 20-year lease with a 10-year renewal option with HEC/
CJTS for the energy center. Simultaneously, HEC/CJTS transferred its
interest in the lease with the State of Connecticut to investors who
areunaffiliated with NU in exchange for the issuance of $19.2 million
of Certificates of Participation. The transfer of HEC/CJTS’ interest in
the lease was accounted for as a sale under SFAS No. 140. The debt
of $19.2 million created in relation to the transfer of interest and
issuance of the Certificates of Participation was derecognized and is
not reflected as debt or included in the consolidated financial statements.
No gain or loss was recorded. HEC/CJTS does not provide any guarantees
or on-going services, and there are no contingencies related to this
arrangement. SESI has a separate contract with the State of Connecticut
to operate and maintain the energy center. The transaction was structured
in this manner to obtain tax-exempt financing and therefore to reduce
the State of Connecticut’slease payments. This off-balance sheet
arrangement is not significant to NU’s liquidity, capital resources or
other benefits.
SESI entered into a master purchase agreement with an unaffiliated
third party on April 30, 2002 under which SESI may sell certain
receivables that are due or become due under delivery orders issued
pursuant to federal energy savings performance contracts. At
December 31, 2005, SESI had sold $38.6 million of receivables related
to the installation of the energy efficiency projects under this arrangement.
The transfer of receivables to the unaffiliated third party under this
arrangement qualified as a sale under SFAS No. 140. Accordingly, the