Eversource 2010 Annual Report Download - page 70

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Information
Commodity Price Risk Management: Our Regulated companies enter into energy contracts to serve our customers and the economic
impacts of those contracts are passed on to our customers. Accordingly, the Regulated companies have no exposure to loss of future
earnings or fair values due to these market risk-sensitive instruments.
Select Energy's Wholesale Portfolio: The remaining wholesale portfolio held by Select Energy includes contracts that are market-risk
sensitive, including a wholesale energy sales contract through 2013 with an agency comprised of municipalities with approximately 0.3
million remaining MWh of supply contract volumes, net of related sales volumes. Select Energy also has a non-derivative energy
contract that expires in mid-2012 to purchase output from a generation facility, which is also exposed to market price volatility.
As Select Energy's contract volumes are winding down, and as the wholesale energy sales contract is substantially hedged against
price risks, we have limited exposure to commodity price risks. We have not entered into any energy contracts for trading purposes.
For Select Energy's wholesale energy portfolio derivatives, we utilize the sensitivity analysis methodology to disclose quantitative
information for our commodity price risks. Sensitivity analysis provides a presentation of the potential loss of future pre-tax earnings
and fair values from our market risk-sensitive contracts due to one or more hypothetical changes in commodity price components, or
other similar price changes. As of December 31, 2010, assuming hypothetical 30 percent increases and decreases in forward energy,
capacity and ancillary market prices, the nominal adjusted impact on pre-tax earnings would be $0.1 million and $(0.8) million,
respectively.
The impact of a change in electricity prices on wholesale derivative transactions as of December 31, 2010 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.
Other Risk Management Activities
We have implemented an Enterprise Risk Management methodology for identifying the principal risks of the Company. Enterprise Risk
Management involves the application of a well-defined, enterprise-wide methodology that enables our Risk and Capital Committee,
comprised of our senior officers, to oversee the identification, management and reporting of the principal risks of the business.
However, there can be no assurances that the Enterprise Risk Management process will identify or manage every risk or event that
could impact our financial condition, results of operations or cash flows. The findings of this process are periodically discussed with our
Board of Trustees.
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, 2010, 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, 2010, we
maintained a fixed-to-floating interest rate swap at NU parent 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.
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, 2010, our
Regulated companies neither held cash collateral nor deposited cash 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. For further information, see Note 12E, "Commitments and Contingencies - Guarantees and Indemnifications," to the
consolidated financial statements.
Select Energy has also established written credit policies with regard to its counterparties to minimize overall credit risk on all types of
transactions. These policies require collateral 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