Eversource 2010 Annual Report Download - page 61

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We determined the discount rate using the capital asset pricing model methodology. This methodology uses a weighted average cost
of capital in which the ROE is developed using risk-free rates, equity premiums and a beta representing Yankee Gas' volatility relative
to the overall market. The resulting discount rate is intended to be comparable to a rate that would be applied by a market participant.
The discount rate may change from year to year as it is based on external market conditions. The discount rate decreased in 2010, as
compared to 2009, as a result of lower beta and risk-free treasury rates.
Income Taxes: Income tax expense is estimated annually for each of the jurisdictions in which we operate. This process involves
estimating current and deferred income tax expense or benefit and the impact of temporary differences resulting from differing
treatment of items. Such differences are the result of timing of the deduction for expenses, as well as any impact of permanent
differences resulting from tax credits, non-tax deductible expenses, in addition to various other items, including items that directly
impact our tax return as a result of a regulatory activity (flow-through items). The temporary differences and flow-through items result in
deferred tax assets and liabilities that are included in the consolidated balance sheets. The income tax estimation process impacts all
of our segments. We record income tax expense quarterly using an estimated annualized effective tax rate. Adjustments to these
estimates can significantly impact our consolidated financial statements.
A reconciliation of expected tax expense at the statutory federal income tax rate to actual tax expense recorded is included in Note 11,
"Income Taxes," to the consolidated financial statements.
We also account for uncertainty in income taxes, which applies to all income tax positions previously filed in a tax return and income tax
positions expected to be taken in a future tax return that have been reflected on our balance sheets. We follow generally accepted
accounting principles to address the methodology to be used in recognizing, measuring and classifying the amounts associated with tax
positions that are deemed to be uncertain, including related interest and penalties. The determination of whether a tax position meets
the recognition threshold under this guidance is based on facts, circumstances and information available to us. Once a tax position
meets the recognition threshold, the tax benefit is measured using a cumulative probability assessment. Assigning probabilities in
measuring a recognized tax position and evaluating new information or events in subsequent periods requires significant judgment and
could change previous conclusions used to measure the tax position estimate. New information or events may include tax
examinations or appeals, developments in case law, settlements of tax positions, changes in tax law and regulations, rulings by taxing
authorities and statute of limitation expirations. Such information or events may have a significant impact on our financial position,
results of operations and cash flows.
Accounting for Environmental Reserves:
Accounting for Environmental Reserves: Environmental reserves are accrued when assessments indicate that it is probable that a
liability has been incurred and an amount can be reasonably estimated. Adjustments made to environmental reserves could have a
significant impact on earnings. We estimate these liabilities based on findings through various phases of the assessment, considering
the most likely action plan from a variety of available options (ranging from no action to full site remediation and long-term monitoring),
current site information from our site assessments, remediation estimates from third party engineering and remediation contractors, and
our prior experience in remediating contaminated sites. Our estimates incorporate currently enacted state and federal environmental
laws and regulations and data released by the EPA and other organizations. The estimates associated with each possible action plan
are judgmental in nature partly because there are usually several different remediation options from which to choose. Our estimates
are subject to revision in future periods based on actual costs or new information from other sources, including the level of
contamination at the site.
For further information, see Note 12A, "Commitments and Contingencies - Environmental Matters," to the consolidated financial
statements.
Fair Value Measurements: We follow 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). We have applied this 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.
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, 2010. 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 and assumptions are made. A significant portion of our derivative liabilities relate to the
Regulated companies, for which 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.
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. When quoted prices in active markets for the same or similar instruments are not
available, we value derivative contracts using models that incorporate both observable and unobservable inputs. 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. Discounted cash
flow valuations incorporate estimates of premiums or discounts, reflecting risk adjusted profit that would be required by a market