Eversource 2013 Annual Report Download - page 93

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(2) As of December 31, 2012, NU had $4.1 million of cash posted related to these contracts, which was not offset against the
derivative liability and is recorded as Prepayments and Other Current Assets on the balance sheets.
The business activities that result in the recognition of derivative assets also create exposure to various counterparties. As of
December 31, 2013, NU and CL&P's derivative assets were exposed to counterparty credit risk. Of the total derivative assets, $80
million and $79 million, respectively, were contracted with investment grade entities.
For further information on the fair value of derivative contracts, see Note 1H, "Summary of Significant Accounting Policies - Fair Value
Measurements," and Note 1I, "Summary of Significant Accounting Policies - Derivative Accounting," to the financial statements.
Derivatives Not Designated as Hedges
Commodity Supply and Price Risk Management: As required by regulation, CL&P has capacity-related contracts with generation
facilities. These contracts and similar UI contracts have an expected capacity of 787 MW. CL&P has a sharing agreement with UI, with
80 percent of each contract allocated to CL&P and 20 percent allocated to UI. The capacity contracts extend through 2026 and
obligate both CL&P and UI to make or receive payments on a monthly basis to or from the generation facilities based on the difference
between a set capacity price and the forward capacity market price received in the ISO-NE capacity markets. In addition, CL&P has a
contract to purchase 0.1 million MWh of energy per year through 2020.
NSTAR Electric has a renewable energy contract to purchase 0.1 million MWh of energy per year through 2018 and a capacity related
contract to purchase up to 35 MW per year through 2019.
WMECO has a renewable energy contract to purchase 0.1 million MWh of energy per year through 2029 with a facility that has not yet
achieved commercial operation.
As of December 31, 2013 and 2012, NU had NYMEX future contracts in order to reduce variability associated with the purchase price
of approximately 9.1 million and 11.5 million MMBtu of natural gas, respectively.
As of December 31, 2012, NU had approximately 24 thousand MWh of supply volumes remaining in its unregulated wholesale portfolio
when expected sales were compared with supply contracts. These contracts expired on December 31, 2013.
The following table presents the current change in fair value, primarily recovered through rates from customers, associated with NU’s
derivative contracts not designated as hedges:
Location of Amounts
Amounts Recognized on Derivatives
Recognized on Derivatives
For the Years Ended December 31,
(Millions of Dollars)
2013
2012
2011
NU
Balance Sheet:
Regulatory Assets and Liabilities
$
160.6
$
(29.0)
$
(162.0)
Statement of Income:
Purchased Power, Fuel and Transmission
1.0
(0.7)
0.5
Credit Risk
Certain of NU’s derivative contracts contain credit risk contingent features. These features require NU to maintain investment grade
credit ratings from the major rating agencies and to post collateral for contracts in a net liability position over specified credit limits. As
of December 31, 2013, there were no derivative contracts in a net liability position that were subject to credit risk contingent features.
As of December 31, 2012, NU had $15.3 million of derivative contracts in a net liability position that were subject to credit risk
contingent features and would have been required to post additional collateral of $17.4 million if NU parent’s unsecured debt credit
ratings had been downgraded to below investment grade.
Fair Value Measurements of Derivative Instruments
Valuation of Derivative Instruments: Derivative contracts classified as Level 2 in the fair value hierarchy relate to the financial contracts
for natural gas futures and forward contracts to purchase energy. Prices are obtained from broker quotes and are based on actual
market activity. The contracts are valued using the mid-point of the bid-ask spread. Valuations of these contracts also incorporate
discount rates using the yield curve approach.
The fair value of derivative contracts classified as Level 3 utilizes significant unobservable inputs. The fair value is modeled using
income techniques, such as discounted cash flow valuations adjusted for assumptions relating to exit price. Significant observable
inputs for valuations of these contracts include energy and energy-related product prices in future years for which quoted prices in an
active market exist. Fair value measurements categorized in Level 3 of the fair value hierarchy are prepared by individuals with
expertise in valuation techniques, pricing of energy and energy-related products, and accounting requirements. The future power and
capacity prices for periods that are not quoted in an active market or established at auction are based on available market data and are
escalated based on estimates of inflation to address the full time period of the contract.
Valuations of derivative contracts using a discounted cash flow methodology include assumptions regarding the timing and likelihood of
scheduled payments and also reflect non-performance risk, including credit, using the default probability approach based on the
counterparty's credit rating for assets and the Company's credit rating for liabilities. Valuations incorporate estimates of premiums or