Eversource 2010 Annual Report Download - page 101

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Fair Value Measurements of Derivative Instruments:
Valuation of Derivative Instruments: Derivative contracts classified as Level 2 in the fair value hierarchy include Other Commodity Price
and Supply Risk Management contracts and Interest Rate Risk Management contracts. Other Commodity Price and Supply Risk
Management contracts include PSNH forward contracts to purchase energy for periods for which prices are quoted in an active market.
Prices are obtained from broker quotes and 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 Interest Rate Risk
Management contract represents an interest rate swap agreement and is valued using a market approach provided by the swap
counterparty using a discounted cash flow approach utilizing forward interest rate curves.
The derivative contracts classified as Level 3 in the tables below include NU Enterprises' Sales Contract and Related Price and Supply
Risk Management contracts, the Regulated companies' Commodity and Capacity Contracts Required by Regulation (which include
CL&P's CfDs and contracts with certain IPPs), and Other Commodity Price and Supply Risk Management contracts (CL&P and PSNH
FTRs). For Commodity and Capacity Contracts Required by Regulation and NU Enterprises' Commodity Sales contract, fair value is
modeled using income techniques such as discounted cash flow approaches adjusted for assumptions relating to exit price. Significant
observable inputs for valuations of these contracts include energy and energy-related product prices for which quoted prices in an
active market exist. Significant unobservable inputs used in the valuations of these contracts include energy and energy-related
product prices for future years for long-dated derivative contracts and future contract quantities under requirements and supplemental
sales contracts. 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 include
assumptions regarding the timing and likelihood of scheduled payments and also reflect nonperformance 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.
Other Commodity Price and Supply Risk Management contracts classified as Level 3 in the tables below are valued using income
approaches. Observable inputs used in valuing options include prices for energy and energy-related products for years for which
quoted prices in an active market exist. Unobservable inputs included in the valuation of options contracts include market volatilities
related to future energy prices and the estimated likelihood that the option will be exercised. FTRs are valued using broker quotes
based on prices in an inactive market.
Valuations using significant unobservable inputs: The following tables present changes for the years ended December 31, 2010 and
2009 in the Level 3 category of derivative assets and derivative liabilities measured at fair value on a recurring basis. The derivative
assets and liabilities are presented on a net basis. The Company classifies assets and liabilities in Level 3 of the fair value hierarchy
when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs,
the valuation models for Level 3 assets and liabilities typically also rely on a number of inputs that are observable either directly or
indirectly. Thus the gains and losses presented below include changes in fair value that are attributable to both observable and
unobservable inputs. There were no transfers into or out of Level 3 assets and liabilities for the years ended December 31, 2010 or
2009:
For the Year Ended December 31, 2010
NU
(Millions of Dollars)
Commodity
and Capacity
Contracts
Required By
Regulation
Commodity
Sales Contract
and
Related Price
and Supply Risk
Management
Other
Commodity
Price and
Supply Risk
Management Total Level 3
Derivatives, Net:
Fair Value as of Beginning of Year $ (720.3) $ (45.2) $ 4.3 $ (761.2)
Net Realized/Unrealized Gains/(Losses) Included in:
Net Income
(1)
- 2.7 - 2.7
Regulatory Assets/Liabilities (74.0) - (7.2) (81.2)
Purchases, Issuances and Settlements (13.7) 9.2 4.0 (0.5)
Fair Value as of End of Year $ (808.0) $ (33.3) $ 1.1 $ (840.2)
Period Change in Unrealized Gains Included in
Net Income Relating to Items Held as of End of Year $ - $ 1.2 $ - $ 1.2