Eversource 2008 Annual Report Download - page 35

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 our continuing review. Concentrations among these
counterparties may aect Select Energy’s overall exposure
to credit risk, either positively or negatively, in that the
counterparties may be similarly aected by changes in
economic, regulatory or other conditions. At December
31, 2008, approximately 99 percent of Select Energy’s
counterparty credit exposure to wholesale counterparties
was non-rated, and approximately one percent was
collateralized. The bulk 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.
O-Balance Sheet Arrangements
Letters of Credit: PSNH has LOCs posted as collateral with
counterparties and ISO-NE. At December 31, 2008, PSNH
had $85 million in LOCs outstanding. In addition, Select
Energy has a $2 million LOC posted at December31, 2008.
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 7F, “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 ocers, 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 every risk
or event that could impact our financial condition or results
of operations. The findings of this process are periodically
discussed with our Board of Trustees.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates,
assumptions and at times dicult, subjective or complex
judgments. Changes in these estimates, assumptions
and judgments, in and of themselves, could materially
impact our financial position or results of operations.
Our management communicates to and discusses with
our Audit Committee of the Board of Trustees critical
accounting policies and estimates. The following are
the accounting policies and estimates that we believe
are the most critical in nature. See Note 1, “Summary
of Significant Accounting Policies,” to our consolidated
financial statements for further discussions of these
policies and estimates as well as other accounting policies,
estimates and assumptions used in the preparation of our
consolidated financial statements.
Accounting for Environmental Reserves: Environmental
reserves are accrued when assessments indicate that
it is probable that a liability has been incurred and an
amount can be reasonably estimated. Adjustments made
to environmental reserves could have a significant eect
on earnings. Our approach estimates these liabilities
based on the most likely action plan from a variety of
available options, ranging from no action to establishing
institutional controls, full site remediation and long-term
monitoring. The estimates associated with each possible
action plan are based on findings through various phases
of site assessments.
These estimates are based on currently available
information from presently enacted state and federal
environmental laws and regulations and several cost
estimates from third-party engineering and remediation
contractors. These estimates also take into consideration
prior experience in remediating contaminated sites
and data released by the United States Environmental
Protection Agency and other organizations. These
estimates are subjective in nature partly because there
are usually several dierent remediation options from
which to choose when working on a specific site. These
estimates are subject to revision in future periods based
on actual costs or new information concerning either the
level of contamination at the site or newly enacted laws
and regulations. The amounts recorded as environmental
liabilities on the consolidated balance sheets represent our
best estimate of the liability for environmental costs based
on current site information from site assessments and
remediation estimates. These liabilities are recorded on an
undiscounted basis.
HWP, a subsidiary of NU, continues to evaluate additional
potential remediation requirements at a river site in
Massachusetts containing tar deposits associated with a
manufactured gas plant, which it sold to Holyoke Gas and
Electric (HG&E), a municipal electric utility, in 1902. HWP
is at least partially responsible for this site, and has already
conducted substantial investigative and remediation
activities. HWP first established a reserve for this site in
1994. A pre-tax charge of approximately $3 million was
recorded in 2008 to reflect the estimated cost of further
tar delineation and site characterization studies, as well
as certain remediation costs that are considered to be
probable and estimable as of December 31, 2008. The
cumulative expense recorded to this reserve through
December 31, 2008 was approximately $15.9 million, of
which $13.9 million had been spent, leaving approximately
$2 million in the reserve as of December31, 2008.
The Massachusetts Department of Environmental
Protection (MA DEP) issued a letter on April 3, 2008
to HWP and HG&E, which share responsibility for the
site, providing conditional authorization for additional
investigatory and risk characterization activities and
providing detailed comments on HWP’s 2007 reports and
proposals for further investigations. MA DEP also indicated
that further removal of tar in certain areas was necessary
prior to commencing many of the additional studies and
evaluation. This letter represents guidance from the MA
DEP, rather than mandates. HWP has developed and
begun to implement plans for additional investigations
in conformity with MA DEP’s guidance letter, including
estimated costs and schedules. These matters are subject
to ongoing discussions with MA DEP and HG&E and may
change from time to time.
At this time, we believe that the $2 million remaining in
the reserve is at the low end of a range of probable and
estimable costs of approximately $2 million to $2.7 million
and will be sucient for HWP to conduct the additional
tar delineation and site characterization studies, evaluate
its approach to this matter and conduct certain soft tar
remediation. The additional studies are expected to occur
through 2009.
There are many outcomes that could aect our estimates
and require an increase to the reserve, or range of costs,
and a reserve increase would be reflected as a charge to
pre-tax earnings. However, we cannot reasonably estimate
the range of additional investigation and remediation costs
because they will depend on, among other things, the
level and extent of the remaining tar that may be required
to be remediated, the extent of HWP’s responsibility and
the related scope and timing, all of which are dicult to
estimate because of a number of uncertainties at this time.
Further developments may require a material increase to
this reserve.
HWP’s share of the remediation costs related to this site is
not recoverable from customers.
Fair Value Measurements: We adopted SFAS No. 157 as of
January 1, 2008. SFAS No. 157 defines fair value as the price
that would be received for the sale of an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price). It
establishes a framework for measuring fair value, using a
three level hierarchy based upon the observability of inputs
to the valuations. See Note 1F, “Summary of Significant
Accounting Policies - Fair Value Measurements,” and
Note 4, “Fair Value Measurements,” to the accompanying
consolidated financial statements for further information.
As of January 1, 2008, we applied SFAS No. 157 to our
regulated and unregulated companies’ derivative contracts
that are recorded at fair value and to the marketable
securities held in our supplemental benefit trust and
WMECO’s spent nuclear fuel trust. We have also applied
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