Eversource 2006 Annual Report Download - page 38

36 NU 2006 ANNUAL REPORT
For further information regarding Select Energy’s derivative contracts,
see Note 5, “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 Select Energy establishing credit limits prior to 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, 2006,
Select Energy’s counterparty credit exposure to wholesale and trading
counterparties was approximately 14 percent collateralized or rated
BBB – or better and approximately 86 percent was non-rated. The
composition of Select Energy’s credit portfolio has shifted from being
largelyinvestment grade-rated to being mostly non-rated. This is
largelydue tothe exit from Select Energy’s wholesale New England and
retail portfolios. The bulk of the non-rated credit exposure is comprised
of one counterparty (98 percent of total) that is a creditworthy, non-rated
public entity.Select Energy was provided $0.1 million and $28.9 million
of counterparty deposits at December 31, 2006 and 2005, respectively.
For further information, see Note1U, “Summary of Significant
Accounting Policies – Counterparty Deposits,” to the consolidated
financial statements.
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 accounts
receivable and unbilled revenues 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, 2005, CRC had sold an undivided interest
in its accounts receivable and unbilled revenues of $80 million to that
financial institution with limited recourse. At December 31, 2006, CL&P
had made no such sales.
CRC was established for the sole purpose of acquiring and selling
CL&P’s accounts receivable and unbilled revenues and is included in
CL&P’s and NU’s consolidated financial statements. On July 5, 2006,
CRC renewed the bank commitment for the Receivables Purchase and
Sale Agreement with CL&P and the financial institution through July 3,
2007, unless otherwise extended. 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 Extinguishments of Liabilities – A
Replacement of SFAS No. 125.” Accordingly, the $80 million outstanding
under this facility at December 31, 2005, is not reflected as debt or
included in the consolidated financial statements.
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: NU has various guarantees and indemnification
obligations outstanding on behalf of former subsidiaries in connection
with the exit from the NU Enterprises businesses. See Note 8H,
“Commitments and Contingencies – Guarantees and Indemnifications,”
for information regarding the maximum exposure and amounts recorded
under these guarantees and indemnification obligations.
Enterprise Risk Management
NU has implemented an ERM methodology for identifying the principal
risks of the company. ERM involves the application of a well-defined,
enterprise-wide methodology that will enable NU’s Risk and Capital
Committee, comprised of senior NU officers, to oversee the identification,
management and reporting of the principal risks of the business.
However, there can be no assurances that the ERM process will identify
every risk or event that could impact the company’s financial condition
or results of operations. The findings of this processareperiodically
discussed with NU’sFinanceCommittee of the Board of Trustees.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generallyaccepted in the United States of America requires
management tomakeestimates, assumptions and at times difficult,
subjective or complex judgments. Changes in these estimates,
assumptions and judgments, in and of themselves, could materially
impact the financial statements of NU. Management communicates
toand discusses with NU’s Audit Committee of the Board of Trustees
all critical accounting policies and estimates. The following are the
accounting policies and estimates that management believes are the
most critical in nature.
Discontinued Operations Presentation: In order for discontinued
operations treatment to be appropriate, management must conclude
that there is a component of a business that is “held for sale” in
accordance with the provisions of SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” and that meets the
criteria for discontinued operations. At December 31, 2006, based on
the status of exiting the NU Enterprises businesses, management
concluded that discontinued operations presentation is appropriate for
NGC, Mt. Tom, SESI, Woods Electrical – Services, SECI-NH and Woods
Network. Discontinued operations treatment remains appropriate for
these entities even though certain assets and liabilities, contingencies
and costs related to projects (including litigation, warranty and other
contingencies), costs related to the valuation and termination of
guarantees, and adjustments under various purchase and sale
agreements remain. Additionally, the company is providing transition
services in connection with the sale of the competitive generation
business, which arenot considered significant.