Eversource 2009 Annual Report Download - page 73

64
30% Price Increase 30% Price Decrease
(Millions of Dollars)
Commodity
Nominal Impact
on Pre-Tax Earnings
Nominal Impact
on Pre-Tax Earnings
Energy $ 1.3 $ (3.1)
Capacity (1.7) 1.7
Ancillaries (1.6) 1.6
$ (2.0) $ (0.2)
The impact of a change in electricity prices on wholesale derivative transactions as of December 31, 2009 are not necessarily
representative of the results that will be realized if such a change were to occur. Energy, capacity and ancillaries have different market
volatilities. The method we use to determine the fair value of these contracts includes discounting expected future cash flows using a
LIBOR swap curve. As such, the wholesale portfolio is also exposed to interest rate volatility. This exposure is not modeled in
sensitivity analyses, and we do not believe that such exposure is material. The energy contracts in the wholesale portfolio are
accounted for at fair value, and changes in market prices impact earnings.
Other Risk Management Activities
Interest Rate Risk Management: We manage our interest rate risk exposure in accordance with our written policies and procedures by
maintaining a mix of fixed and variable rate long-term debt. As of December 31, 2009, approximately 93 percent (87 percent including
the long-term debt subject to the fixed-to-floating interest rate swap as variable rate long-term debt) of our long-term debt, including fees
and interest due for spent nuclear fuel disposal costs, was at a fixed interest rate. The remaining long-term debt is at variable interest
rates and is subject to interest rate risk that could result in earnings volatility. Assuming a one percentage point increase in our variable
interest rate, annual interest expense would have increased by a pre-tax amount of $3.3 million. As of December 31, 2009, we
maintained a fixed-to-floating interest rate swap at NU parent to manage the interest rate risk associated with $263 million of its fixed-
rate long-term debt.
Credit Risk Management: Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties
pursuant to the terms of our contractual obligations. We serve a wide variety of customers and suppliers that include IPPs, industrial
companies, gas and electric utilities, oil and gas producers, financial institutions, and other energy marketers. Margin accounts exist
within this diverse group, and we realize interest receipts and payments related to balances outstanding in these margin accounts. This
wide customer and supplier mix generates a need for a variety of contractual structures, products and terms that, in turn, require us to
manage the portfolio of market risk inherent in those transactions in a manner consistent with the parameters established by our risk
management process.
Credit risks and market risks at NU Enterprises are monitored regularly by a Risk Oversight Council. The Risk Oversight Council is
comprised of members of management from other areas of NU that do not create these risk exposures and functions to ensure
compliance with our stated risk management policies.
We track and re-balance the risk in our portfolio in accordance with fair value and other risk management methodologies that utilize
forward price curves in the energy markets to estimate the size and probability of future potential exposure.
The NYMEX traded futures and option contracts cleared off the NYMEX exchange are ultimately guaranteed by NYMEX to Select
Energy. Select Energy has established written credit policies with regard to its counterparties to minimize overall credit risk on all types
of transactions. These policies require an evaluation of potential counterparties' financial condition (including credit ratings), collateral
requirements under certain circumstances (including cash in advance, LOCs, and parent guarantees), and the use of standardized
agreements, which allow for the netting of positive and negative exposures associated with a single counterparty in the event of default.
This evaluation results in establishing credit limits prior to Select Energy entering into energy contracts. The appropriateness of these
limits is subject to continuing review. Concentrations among these counterparties may impact 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.
Due to the exposure of counterparties to Select Energy, Select Energy had cash collateral balances deposited with its NYMEX broker of
$28.1 million and $26.3 million as of December 31, 2009 and 2008, respectively, which are included in Current assets - prepayments
and other on the accompanying consolidated balance sheets. As of December 31, 2009, Select Energy also had $2.1 million of
collateral posted with a counterparty under a master netting agreement. This collateral is netted against the fair value of its net
derivative position. Select Energy held no collateral balances received from counterparties as of December 31, 2009 and 2008. In
addition, Select Energy had posted a $2 million NU parent LOC as of December 31, 2009 in favor of ISO-NE.
Our regulated companies are subject to credit risk from certain long-term or high-volume supply contracts with energy marketing
companies. Our regulated companies manage the credit risk with these counterparties in accordance with established credit risk
practices and maintain an oversight group that monitors contracting risks, including credit risk. As of December 31, 2009, CL&P had
$0.5 million in cash collateral deposited with a counterparty that has been netted against the fair value of the related derivative. As of
December 31, 2008, our regulated companies neither held cash collateral nor deposited collateral with counterparties. 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.