Eversource 1999 Annual Report Download - page 29

MARKET RISK AND RISK MANAGEMENT INSTRUMENTS
The NU system uses swaps and collars to manage the market
risk exposures associated with changes in variable interest rates
and energy prices. The NU system uses these instruments to
reduce risk by essentially creating offsetting market exposures.
Based on the derivative instruments which are currently being
utilized by the NU system companies to hedge some of their
interest rate and energy price risks, there may be an impact
on earnings upon adoption of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” which manage-
ment has not estimated at this time.
INTEREST RATE RISK MANAGEMENT INSTRUMENTS
Several NU subsidiaries hold variable-rate, long-term debt, expos-
ing the NU system to interest rate risk. In order to hedge some
of this risk, interest rate risk management instruments have been
entered into on NAEC’s$200 million variable-rate note. A 10
percent increase in market interest rates above the 1999 weighted
average variable rate during 2000 would result in an immaterial
impact on interest expense.
ENERGY PRICE RISK MANAGEMENT INSTRUMENTS
In the generation of electricity, the most significant segment of
the variable cost component is the cost of fuel. Typically, most
of CL&P’s fuel purchases were protected by a regulatory fuel
price adjustment clause. However, for a specific, well-defined
volume of fuel that was excluded from the energy price adjust-
ment clause, CL&P employed energy price risk management
instruments to protect itself against the risk of rising fuel
prices, thereby limiting fuel costs and protecting its profit margins.
These risks were created by the sale of long-term fixed-price
electricity sales contracts to wholesale customers.
In 1999, CL&P divested substantially all of its fossil and hydro-
electric generation assets and also transferred the rights and
obligations of its long-term fixed-price contracts to an unregulated
affiliate. As a result, the fuel swap positions were marked-to-
market and CL&P recognized a loss of $5.2 million. In January
2000, the fuel swap positions were liquidated.
UNREGULATED ENERGY SERVICES MARKET RISK
NU’s unregulated companies, as major providers of electricity
and natural gas, have certain market risks inherent in their
business activities. Market risk represents the risk of loss that
may impact the companies’ financial position, results of oper-
ations or cash flows due to adverse changes in commodity
market prices. In 1999, the companies increased their volume of
electricity and gas marketing activities, increasing their risks.
Policies and procedures have been established to manage these
exposures including the use of risk management instruments.
OTHER MATTERS
ENVIRONMENTAL MATTERS
NU is subject to environmental laws and regulations struc-
tured to mitigate or remove the effect of past operations and
to improve or maintain the quality of the environment. For
further information regarding environmental matters, see Note
7C, “Commitments and Contingencies — Environmental
Matters,” to the consolidated financial statements.
OTHER COMMITMENTS AND CONTINGENCIES
NU is subject to other other commitments and contingencies
primarily relating to nuclear litigation, nuclear insurance con-
tingencies, its construction program, long-term contractual
arrangements, and the New England Power Pool generation pricing.
For further information regarding these other commitments
and contingencies, see Note 7, “Commitments and Contingencies,”
to the consolidated financial statements.
YEAR 2000 ISSUES
The transition into the year 2000 was a success for the NU
system. Its mission to provide safe, reliable energy to its cus-
tomers and to ensure continued operability of critical business
functions was not affected by any year 2000 related issues.
The projected total cost of the year 2000 program is estimated
at $21 million. The total cost to date was funded through
operating cash flows. The NU system has incurred and expensed
$20 million related to year 2000 readiness efforts.
FORWARD LOOKING STATEMENTS
This discussion and analysis includes forward looking state-
ments, which are statements of future expectations and not facts.
Words such as estimates, expects, anticipates, intends, plans,
and similar expressions identify forward looking statements.
Actual results or outcomes could differ materially as a result
of further actions by state and federal regulatory bodies, com-
petition and industry restructuring, changes in economic
conditions, changes in historical weather patterns, changes in
laws, developments in legal or public policy doctrines,
technological developments, and other presently unknown or
unforeseen factors.
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