Eversource 1999 Annual Report Download - page 52

In 1999, CL&P divested substantially all of its fossil and hydro-
electric generation assets and agreed to transfer the rights and
obligations related to the long-term negotiated energy contracts
to an unregulated affiliate. Accordingly, 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.
Credit Risk: These agreements have been made with various
financial institutions, each of which is rated “A3” or better
by Moody’s rating group. NAEC is exposed to credit risk on
its respective market risk management instruments if the coun-
terparties fail to perform their obligations. Management anticipates
that the counterparties will fully satisfy their obligations under
the agreements.
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 operations or cash flows
due to adverse changes in commodity market prices. In 1999,
the companies increased their volume of the electricity and gas
marketing activities, increasing their risks. Policies and pro-
cedures have been established to manage these exposures including
the use of risk management instruments.
9. MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARY
CL&P Capital LP (CL&P LP), a subsidiary of CL&P, previously
had issued $100 million of cumulative 9.3 percent Monthly
Income Preferred Securities (MIPS), Series A. CL&P has the
sole ownership interest in CL&P LP, as a general partner, and
is the guarantor of the MIPS securities. Subsequent to the MIPS
issuance, CL&P LP loaned the proceeds of the MIPS issuance,
along with CL&P’s $3.1 million capital contribution, back to
CL&P in the form of an unsecured debenture. CL&P con-
solidates CL&P LP for financial reporting purposes. Upon
consolidation, the unsecured debenture is eliminated, and the
MIPS securities are accounted for as a minority interest.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each of the following financial instruments:
Cash and cash equivalents: The carrying amounts approx-
imate fair value due to the short-term nature of cash and cash
equivalents.
Supplemental Executive Retirement Plan (SERP) Investments:
Investments held for the benefit of the SERP are recorded at
fair market value. The investments having a cost basis of $5.8
million and $5.4 million held for benefit of the SERP were recorded
at their fair market values at December 31, 1999 and 1998 of
$9.2 million and $8.7 million, respectively.
Nuclear decommissioning trusts: The investments held in
the NU system companies’ nuclear decommissioning trusts
were marked-to-market by $129 million as of December 31,
1999 and $110.4 million as of December 31, 1998, with corre-
sponding offsets to the accumulated provision for depreciation.
The amounts adjusted in 1999 and in 1998 represent cumu-
lative net unrealized gains. The cumulative gross unrealized
holding losses were immaterial for both 1999 and 1998.
Estimated Annual Costs: The estimated annual costs of the
NU system’s significant long-term contractual arrangements,
absent the effects of any contract terminations or buydowns
are as follows:
(Millions of Dollars) 2000 2001 2002 2003 2004
VYNPC $ 24.1 $ 21.8 $ 21.9 $ 21.5 $ 21.0
NUGs 472.6 480.2 489.2 500.1 487.3
Hydro-Quebec 31.3 30.3 29.6 28.7 27.8
Select Energy: Select Energy maintains long-term agreements
to purchase both wholesale and retail energy in the normal course
of business. The notional amount of these purchase contracts
is $3.1 billion at December 31, 1999. These contracts extend
through 2004 as follows:
(Millions of Dollars)
Year
2000 $1,271
2001 638
2002 573
2003 499
2004 101
Total $3,082
H. NEW ENGLAND POWER POOL (NEPOOL)
GENERATION PRICING
Disputes with respect to interpretation and implementation of
the NEPOOL market rules have arisen with respect to various
competitive product markets. In certain cases, Select Energy
and the NU operating companies stand to gain as a result of
resolution of such disputes. In other cases, Select Energy and
the NU operating companies could incur additional costs as the
result of resolution of the disputes. The various disputes are in
various stages of resolution through alternative dispute resolution
and regulatory review. It is too early to tell the level of poten-
tial gain or loss that may result upon resolution of these issues.
8. MARKET RISK AND RISK
MANAGEMENT INSTRUMENTS
Interest Rate Risk Management: NAEC uses swap instruments
with financial institutions to hedge against interest rate risk
associated with its $200 million variable-rate bank note. Under
the agreements, NAEC exchanges quarterly payments based
on a differential between a fixed contractual interest rate and
the 3-month LIBOR rate at a given time. As of December 31,
1999 and 1998, NAEC had outstanding agreements with a total
notional value of $200 million and mark-to-market positions
of positive $0.5 million and negative $2.3 million, respectively.
Energy Price Risk Management: Beginning in 1997 through
1999, CL&P used swap instruments with financial institutions
to hedge the energy price risk created by long-term negotiated
energy contracts. These agreements were intended to minimize
exposure associated with rising fuel prices by managing a portion
of CL&P’s cost of producing power for these negotiated
energy contracts.
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