Eversource 2012 Annual Report Download - page 73

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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.
The remaining unregulated wholesale portfolio held by Select Energy includes contracts that are market risk-sensitive, including a
wholesale energy sales contract through December 31, 2013 with an agency comprised of municipalities and related purchase
agreements. We have not entered into any energy contracts for trading purposes. 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. For Select Energy's wholesale energy portfolio derivatives, we utilize the sensitivity analysis methodology to disclose
quantitative information of the potential loss of future pre-tax earnings for one or more hypothetical changes in commodity price
components. A hypothetical 30 percent increase or decrease in forward energy, ancillary or capacity prices would not have a material
impact on earnings. 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. Our
management analyzes risks to determine materiality and other attributes such as likelihood and impact, velocity, and mitigation
strategies. Management broadly considers our business model, the utility industry, the global economy and the current environment to
identify risks.
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 position, results of operations or cash flows. The findings of this process are periodically discussed with our
Board of Trustees.
Interest Rate Risk Management: As of December 31, 2012, approximately 91 percent 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 $8.7 million.
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 monitor contracting risks, including credit risk. As of December 31, 2012, our Regulated companies did not hold cash
collateral from counterparties. As of December 31, 2012, NU had cash posted with ISO-NE related to energy purchase transactions. In
addition, Select Energy has also established written credit policies with regard to its counterparties to minimize overall credit risk on its
remaining contracts. These policies require collateral under certain circumstances (including cash in advance 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.
For further information on cash collateral deposited and posted with counterparties as well as any cash collateral netted against the fair
value of the related derivative contracts, see Note 1G, "Summary of Significant Accounting Policies - Restricted Cash and Other
Deposits," and Note 5, "Derivative Instruments," to the consolidated financial statements.
If the respective unsecured debt ratings of NU or its subsidiaries were reduced to below investment grade by either Moody’s or S&P,
certain of NU’s contracts would require additional collateral in the form of cash to be provided to counterparties and independent
system operators. NU would have been and remains able to provide that collateral.