Eversource 2015 Annual Report Download - page 62

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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. Eversource’s Energy Supply Risk Committee, comprised of senior officers, reviews and approves all large
scale energy related transactions entered into by its Regulated companies.
Other Risk Management Activities
We have an Enterprise Risk Management (ERM) program for identifying the principal risks of the Company. Our ERM program involves the
application of a well-defined, enterprise-wide methodology designed to allow our Risk Committee, comprised of our senior officers and directors of
the Company, to identify, categorize, prioritize, and mitigate the principal risks to the Company. The ERM program is integrated with other
assurance functions throughout the Company including Compliance, Auditing, and Insurance to ensure appropriate coverage of risks that could
impact the Company. In addition to known risks, ERM identifies emerging risks to the Company, through participation in industry groups,
discussions with management and in consultation with outside advisers. Our management then analyzes risks to determine materiality, likelihood
and impact, and develops mitigation strategies. Management broadly considers our business model, the utility industry, the global economy and the
current environment to identify risks. The Finance Committee of the Board of Trustees is responsible for oversight of the Company’s ERM program
and enterprise-wide risks as well as specific risks associated with insurance, credit, financing, investments, pensions and overall system security
including cyber security. The findings of the ERM process are periodically discussed with the Finance Committee of our Board of Trustees, as well
as with other Board Committees or the full Board of Trustees, as appropriate, including reporting on how these issues are being measured and
managed. 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.
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, 2015, approximately 95 percent of our long-term debt, including fees and interest
due for CYAPC’s 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 rates, annual
interest expense would have increased by a pre-tax amount of $4.7 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 transact with suppliers that include IPPs, industrial companies,
natural 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, 2015, our Regulated companies did not hold collateral (letters of credit) from counterparties related
to our standard service contracts. As of December 31, 2015, Eversource had $17.1 million of cash posted with ISO-NE related to energy purchase
transactions.
For further information on cash collateral deposited and posted with counterparties, see Note 1G, “Summary of Significant Accounting Policies -
Deposits,” and Note 4, “Derivative Instruments,” to the financial statements.
If the respective unsecured debt ratings of Eversource or its subsidiaries were reduced to below investment grade by either Moody’s or S&P, certain
of Eversource’s contracts would require additional collateral in the form of cash to be provided to counterparties and independent system operators.
Eversource would have been and remains able to provide that collateral.