Eversource 2008 Annual Report Download - page 56

Fair Value Hierarchy: As required by SFAS No. 157,
in measuring fair value the company uses observable
market data when available and minimizes the use
of unobservable inputs. Unobservable inputs are
needed to value certain derivative contracts due to
complexities in contractual terms and the long duration
of contracts. SFAS No. 157 requires inputs used in fair
value measurements to be categorized into three fair
value hierarchy levels for disclosure purposes. The entire
fair value measurement is categorized based on the
lowest level of input that is significant to the fair value
measurement.
The three levels of the fair value hierarchy are described
below:
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 sucient
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. Significant unobservable inputs are used
in the valuations, including items such as energy and
energy-related product prices in future years for which
observable prices are not yet available, future contract
quantities under full-requirements or supplemental sales
contracts, and market volatilities. Items valued using
these valuation techniques are classified according to
the lowest level for which there is at least one input that
is significant to the valuation. Therefore, an item may
be classified in Level 3 even though there may be some
significant inputs that are readily observable.
Determination of Fair Value: The following is a
description of the valuation techniques utilized in NU’s
fair value measurements:
Derivative contracts: Many of the company’s derivative
positions that are recorded at fair value are classified
as Level 3 within the fair value hierarchy and are valued
using models that 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 valuations 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. Discounted cash flow valuations
incorporate estimates of premiums or discounts 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. The derivative
contracts classified as Level 3 include NU Enterprises’
remaining wholesale marketing contract and its related
supply contracts, CL&P’s CfDs, CL&P’s contracts with
certain independent power producers (IPPs), PSNH
and Yankee Gas options and CL&P and PSNH financial
transmission rights (FTRs).
Other derivative contracts recorded at fair value are
classified as Level 2 within the fair value hierarchy.
An active market for the same or similar contracts
exists for these contracts, which include PSNH forward
contracts to purchase energy and interest rate swap
agreements for the regulated companies and NU parent.
For these contracts, valuations are based on quoted
prices in the market and include some modeling using
market-based assumptions.
For further information on derivative contracts, see Note
3, “Derivative Instruments,” to the consolidated financial
statements.
Marketable securities: NU and WMECO hold in trust
marketable securities, which include equity securities,
mutual funds and cash equivalents, and fixed maturity
securities.
Equity securities, mutual funds and cash equivalents are
classified as Level 1 in the fair value hierarchy. These
investments are traded in active markets and quoted
prices are available for identical investments.
Fixed maturity securities classified as Level 2 within
the fair value hierarchy include U.S. Treasury securities,
corporate bonds, collateralized mortgage obligations, U.S.
pass-through bonds, asset-backed securities, commercial
mortgage-backed securities, and commercial paper.
The fair value of these instruments is estimated using
pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. The pricing
models utilize observable inputs such as recent trades for
the same or similar instruments, yield curves, discount
margins and bond structures.
For further information see Note 4, “Fair Value
Measurements,” and Note 9,”Marketable Securities,” to the
consolidated financial statements.
G. Regulatory Accounting
The accounting policies of the regulated companies
conform to accounting principles generally accepted
in the United States of America applicable to rate-
regulated enterprises and historically reflect the eects
of the rate-making process in accordance with SFAS
No. 71, “Accounting for the Eects of Certain Types of
Regulation.”
The transmission and distribution segments of CL&P,
PSNH and WMECO, along with Yankee Gas’ distribution
segment, continue to be cost-of-service, rate regulated.
Management believes that the application of SFAS
No. 71 to those segments continues to be appropriate.
Management also believes it is probable that NU’s
regulated companies will recover their investments in
long-lived assets, including regulatory assets. All material
net regulatory assets are earning an equity return, except
for securitized regulatory assets, the majority of deferred
benefit costs and regulatory assets osetting regulated
company derivative liabilities, which are not supported by
equity. Amortization and deferrals of regulatory assets/
(liabilities) are included on a net basis in amortization
expense on the accompanying consolidated statements
of income.
Regulatory Assets: The components of regulatory assets
are as follows:
At December 31,
(Millions of Dollars) 2008 2007
Securitized assets $ 677.4 $ 907.0
Income taxes, net 355.4 335.5
Deferred benefit costs 1,140.9 201.4
Unrecovered contractual obligations 169.1 189.9
Regulatory assets offsetting
regulated company derivative
liabilities 844.2 122.3
CL&P undercollections 75.2 90.6
Other regulatory assets 240.4 210.4
Totals $ 3,502.6 $ 2,057.1
Additionally, the regulated companies had $68.3 million
and $11.9 million of regulatory costs at December 31, 2008
and 2007, respectively, which were included in deferred
debits and other assets - other on the accompanying
consolidated balance sheets. These amounts represent
incurred costs that have not yet been approved for
recovery by the applicable regulatory agency. Of the
$68.3 million, $62.7 million relates to costs incurred at
PSNH relating to December 2008 storm restorations
that met the New Hampshire Public Utilities Commission
(NHPUC) specified criteria for deferral to a major storm
cost reserve. Management believes these costs are
recoverable in future cost-of-service regulated rates.
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