Eversource 2013 Annual Report Download - page 81

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Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities as of the reporting date.
Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide
pricing information on an ongoing basis.
Level 2 - Inputs are quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-derived valuations in which all significant inputs are observable.
Level 3 - Quoted market prices are not available. Fair value is derived from valuation techniques in which one or more
significant inputs or assumptions are unobservable. Where possible, valuation techniques incorporate observable market
inputs that can be validated to external sources such as industry exchanges, including prices of energy and energy-related
products.
Determination of Fair Value: The valuation techniques and inputs used in NU's fair value measurements are described in Note 2,
"Merger of NU and NSTAR," Note 5, "Derivative Instruments," Note 6, "Marketable Securities," Note 7, "Asset Retirement Obligations,"
and Note 14, "Fair Value of Financial Instruments," to the financial statements.
I. Derivative Accounting
Many of the Regulated companies' contracts for the purchase and sale of energy or energy-related products are derivatives. The
accounting treatment for energy contracts entered into varies and depends on the intended use of the particular contract and on
whether or not the contract is a derivative. For the Regulated companies, regulatory assets or regulatory liabilities are recorded to
offset the fair values of derivative contracts, as costs are recovered from, or refunded to, customers in future rates.
The application of derivative accounting is complex and requires management judgment in the following respects: identification of
derivatives and embedded derivatives, election and designation of the normal exception, and determination of the fair value of
derivative contracts. All of these judgments can have a significant impact on the financial statements.
The judgment applied in the election of the normal exception (and resulting accrual accounting) includes the conclusion that it is
probable at the inception of the contract and throughout its term that it will result in physical delivery of the underlying product and that
the quantities will be used or sold by the business in the normal course of business. If facts and circumstances change and
management can no longer support this conclusion, then the normal exception and accrual accounting is terminated and fair value
accounting is applied prospectively.
The fair value of derivative contracts is based upon the contract terms and conditions and the underlying market price or fair value per
unit. When quantities are not specified in the contract, the Company determines whether the contract has a determinable quantity by
using amounts referenced in default provisions and other relevant sections of the contract. The fair value of derivative assets and
liabilities with the same counterparty are offset and recorded as a net derivative asset or liability on the balance sheets. Changes in the
fair value of derivative contracts are recorded as regulatory assets or liabilities and do not impact net income.
For further information regarding derivative contracts, see Note 5, "Derivative Instruments," to the financial statements.
J. Equity Method Investments
Regional Decommissioned Nuclear Companies: CL&P, NSTAR Electric, PSNH and WMECO own common stock in three regional
nuclear generation companies (CYAPC, YAEC and MYAPC, collectively referred to as the Yankee Companies), each of which owned a
single nuclear generating facility that has been decommissioned. Upon consummation of the merger with NSTAR, NSTAR Electric's
ownership interests in CYAPC and YAEC combined with CL&P's, PSNH's and WMECO's respective ownership interests in CYAPC and
YAEC totaled greater than 50 percent, requiring NU to consolidate CYAPC and YAEC beginning April 10, 2012. The investments in
CYAPC and YAEC had previously been accounted for under the equity method of accounting by NU. For CL&P, NSTAR Electric,
PSNH and WMECO, the investment in CYAPC and YAEC, as well as MYAPC, continues to be accounted for under the equity method.
At the NU consolidated level, intercompany transactions between CL&P, NSTAR Electric, PSNH and WMECO and the CYAPC and
YAEC companies have been eliminated in consolidation.
Ownership interests in the Yankee Companies as of December 31, 2013 and 2012 were as follows:
(Percent)
CYAPC
YAEC
MYAPC
CL&P
34.5
24.5
12.0
NSTAR Electric
14.0
14.0
4.0
PSNH
5.0
7.0
5.0
WMECO
9.5
7.0
3.0