Eversource 2009 Annual Report Download - page 51

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(Millions of Dollars) Fair Value of Wholesale Contracts as of December 31, 2008
Sources of Fair Value
Maturity Less
than One Year
Maturity of One
to Four Years
Maturity in
Excess
of Four Years
Total Fair
Value
Prices actively quoted $ (10.1) $(7.3) $(1.2) $ (18.6)
Prices provided by external sources (2.7) (21.2) (10.0) (33.9)
Model-based (1.7) (6.7) (3.0) (11.4)
Totals $ (14.5) $(35.2) $(14.2) $ (63.9)
(1) Excludes $2.1 million of cash collateral posted under master netting agreements.
For the years ended December 31, 2009 and 2008, the changes in fair value of these contracts are included in the following table:
Total Portfolio Fair Value
2009 2008
(Millions of Dollars)
Fair value of wholesale contracts outstanding at the beginning of the year $ (63.9) $ (94.0)
Pre-tax effects of implementing fair value measurement accounting
guidance ($3.2 million after-tax) (1) - (6.1)
Contracts realized or otherwise settled during the year (2) 12.4 29.2
Change in unrealized gains included in pre-tax earnings 6.3 7.0
Fair value of wholesale contracts outstanding at the end of the year $ (45.2) $ (63.9)
(1) Pre-tax effect recorded in Fuel, purchased and net interchange power on the accompanying consolidated statements of income.
(2) Amount includes purchases, issuances and settlements of $12.5 million and $24.2 million for the years ended December 31, 2009
and 2008, respectively, and net realized intra-month (losses)/gains of $(0.1) million and $5 million for the years ended
December 31, 2009 and 2008, respectively.
For further information regarding Select Energy's derivative contracts, see Note 3, "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 in economic, regulatory or
other conditions. As of December 31, 2009, approximately 98 percent of Select Energy's counterparty credit exposure to wholesale
counterparties was non-rated, and approximately 2 percent was collateralized. All of the non-rated credit exposure is comprised of one
counterparty, which is a non-rated public entity that we have assessed as creditworthy. To date, this counterparty has met all of its
contractual obligations.
Off-Balance Sheet Arrangements
Letters of Credit: NU parent provides standby LOCs for the benefit of its subsidiaries under its revolving credit agreement. PSNH posts
such LOCs as collateral with counterparties and ISO-NE. As of December 31, 2009, PSNH had posted $39 million in such NU parent
LOCs, which includes $10 million with ISO-NE. In addition, Select Energy had posted a $2 million NU parent LOC with ISO-NE as of
December 31, 2009.
Competitive Businesses: We have various guarantees and indemnification obligations outstanding on behalf of former subsidiaries in
connection with the exit from our competitive businesses. See Note 7E, "Commitments and Contingencies - Guarantees and
Indemnifications," to the consolidated financial statements for information regarding the maximum exposure and amounts recorded
under these guarantees and indemnification obligations.
Enterprise Risk Management
We have implemented an Enterprise Risk Management (ERM) methodology for identifying the principal risks to the Company. ERM
involves the application of a well-defined, enterprise-wide methodology that will enable our Risk and Capital Committee, comprised of
our senior 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 and manage every risk or event that could impact our financial condition, results of
operations or cash flows. The findings of this process are periodically discussed with our Board of Trustees.