Eversource 2003 Annual Report Download - page 65

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Credit Risk Management: Credit risk relates to the risk of loss that NU
would incur as a result of non-performance by counterparties pursuant
to the terms of their contractual obligations. NU serves 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
NU realizes 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 which,
in turn, requires NU to manage the portfolio of market risk inherent in
those transactions in a manner consistent with the parameters
established by NU’s risk management process.
The Utility Group has a lower level of credit risk related to providing
electric and gas distribution service than NU Enterprises. However, Utility
Group companies are subject to credit risk from certain long-term or
high-volume supply contracts with energy marketing companies.
Credit risks and market risks at NU Enterprises are monitored regularly
by a Risk Oversight Council operating outside of the business lines that
create or actively manage these risk exposures to ensure compliance
with NU’s stated risk management policies.
NU tracks and re-balances the risk in its 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.
NYMEX traded futures and option contracts are guaranteed by the
NYMEX and have a lower credit risk. 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, letters of credit, and parent guarantees), and the use of
standardized agreements, which allow for the netting of positive and
negative exposures associated with a single counterparty. 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.
At December 31, 2003 and 2002, Select Energy maintained collateral
balances from counterparties of $46.5 million and $16.9 million, respectively.
These amounts are included in both unrestricted cash from counterparties
and other current liabilities on the accompanying consolidated balance
sheets.
4. Employee Benefits
A. Pension Benefits and Postretirement Benefits Other
Than Pensions
Pension Benefits: NU’s subsidiaries participate in a uniform noncontributory
defined benefit retirement plan (Pension Plan) covering substantially all
regular NU employees. Benefits are based on years of service and the
employees’ highest eligible compensation during 60 consecutive months
of employment. Pre-tax pension income was $31.8 million in 2003,
$73.4 million in 2002, and $101 million in 2001. These amounts exclude
pension settlements, curtailments and net special termination income of
$22.2 million in 2002 and expense of $2.6 million in 2001. NU uses a
December 31 measurement date for the Pension Plan. Pension income
attributable to earnings is as follows:
For the Years Ended December 31,
(Millions of Dollars) 2003 2002 2001
Pension income before
settlements, curtailments
and special termination benefits $(31.8) $(73.4) $(101.0)
Net pension income
capitalized as utility plant 15.4 26.2 36.8
Net pension income before
settlements, curtailments
and special termination
benefits (16.4) (47.2) (64.2)
Settlements, curtailments and
special termination benefits
reflected in earnings —— 7.5
Total pension income
included in earnings $(16.4) $(47.2) $ (56.7)
Pension Settlements, Curtailments and Special Termination Benefits:
There were no settlements, curtailments or special termination benefits
in 2003.
On November 1, 2002, CL&P, NAEC and certain other joint owners
consummated the sale of their ownership interests in Seabrook to a
subsidiary of FPL Group, Inc. (FPL), and North Atlantic Energy Service
Corporation (NAESCO), a wholly owned subsidiary of NU, ceased having
operational responsibility for Seabrook at that time. NAESCO employees
were transferred to FPL, which significantly reduced the expected service
lives of NAESCO employees who participated in the Pension Plan. As a
result, NAESCO recorded pension curtailment income of $29.1 million in
2002. As the curtailment related to the operation of Seabrook, NAESCO
credited the joint owners of Seabrook with this amount. CL&P recorded
its $1.2 million share of this income as a reduction to stranded costs,
and as such, there was no impact on 2002 CL&P earnings. PSNH was
credited with its $10.5 million share of this income through the
Seabrook Power Contracts with NAEC. PSNH also credited this income
as a reduction to stranded costs, and as such, there was no impact on
2002 PSNH earnings.
Additionally, in conjunction with the divestiture of its generation assets,
NU recorded $1.2 million in curtailment income in 2002, all of which
was recorded as a regulatory liability and did not impact earnings.