Eversource 2009 Annual Report Download - page 55

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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 different
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 site, 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 and has spent approximately $16 million on this site. At this
time, we believe that the $1.1 million remaining in the reserve is at the low end of a range of probable and estimable costs of
approximately $1.1 million to $1.8 million and will be sufficient for HWP to evaluate the results of additional tar delineation and site
characterization studies, evaluate its approach to this matter and conduct certain soft tar remediation.
Fair Value Measurements: As of January 1, 2008, we adopted fair value measurement guidance that 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). As a result of implementing this guidance, we recorded a net after-tax reduction of 2008 earnings of
$3.2 million related to Select Energy’s remaining wholesale marketing contracts. We also recorded changes in fair value of certain
derivative contracts of CL&P. Because CL&P is a cost-of-service, rate regulated entity, the cost or benefit of the contracts is expected
to be fully recovered from or refunded to CL&P's customers, and an offsetting regulatory asset or liability was recorded to reflect these
changes. If we do not exit but rather serve out our derivative liability contracts, we will not make payments for some portion of the
negative fair value recorded for the contracts. Likewise, we could receive more cash for derivative assets than the fair value recorded.
As of December 31, 2009, we have applied the fair value measurement guidance to the Company's derivative contracts that are
recorded at fair value, marketable securities held in NU’s supplemental benefit trust and WMECO’s spent nuclear fuel trust, our
valuations of investments in our pension and PBOP plans, and nonrecurring fair value measurements of nonfinancial assets such as
goodwill and AROs. See Note 1G, "Summary of Significant Accounting Policies - Fair Value Measurements," and Note 4, "Fair Value
Measurements," to the accompanying consolidated financial statements for further information.
We use quoted market prices when available to determine fair values of financial instruments. If quoted market prices are not available,
fair value is determined using quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments
that are not active and model-derived valuations. Derivative contracts are valued using models when quoted prices in active markets
for the same or similar instruments are not available. These models incorporate both observable and unobservable inputs. Fair value
is modeled using techniques such as discounted cash flow approaches adjusted for assumptions relating to exit price and the Black-
Scholes option pricing model, incorporating the terms of the contracts. Significant unobservable inputs utilized in the models include
energy and energy-related product prices for future years for long-dated derivative contracts, future contract quantities under full
requirements and supplemental sales contracts, and market volatilities. The observable inputs into the valuation include contract
purchase prices and future energy prices for the near term. Discounted cash flow valuations incorporate estimates of premiums or
discounts, reflecting risk adjusted profit that would be required by a market participant to arrive at an exit price, using available historical
market transaction information. Valuations of derivative contracts also reflect nonperformance risk, including credit risk.
Changes in fair value of the remaining wholesale marketing contracts of our unregulated businesses are recorded in Fuel, purchased
and net interchange power on the accompanying consolidated statements of income. For the year ended December 31, 2009, there
were net unrealized gains of $3.8 million ($6.3 million pre-tax) related to the valuation of these contracts. Key drivers of variability in fair
values include changes in energy prices and expected volumes under the contracts. We utilize judgment in estimating expected
volumes that are dependent on a number of factors including options exercised, customer utilization, weather and availability of other
power sources to our counterparty. The valuations of our derivative contracts are highly sensitive to changes in market prices of
commodities. See Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," included in this Annual Report on Form 10-K
for a sensitivity analysis of how changes in the prices of commodities would impact earnings.
Changes in fair value of the regulated company derivative contracts are recorded as Regulatory assets or liabilities, as we expect to
recover the costs of these contracts in rates. These valuations are sensitive to the prices of energy and energy related products in
future years for which markets have not yet developed. Assumptions made in determining fair value have a significant effect on
derivative values.
Derivative assets are a large portion of our total assets measured at fair value (excluding assets held in our external pension and PBOP
trusts), and derivative liabilities comprise almost all of our total liabilities measured at fair value as of December 31, 2009. A significant
portion of our derivative liabilities relate to the regulated companies. Changes in fair value do not affect our earnings and are not
material to our liquidity or capital resources because the costs and benefits of the contracts are recoverable from or refundable to
customers on a timely basis.