Eversource 2010 Annual Report Download - page 85

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NU, CL&P, PSNH and WMECO have established credit policies regarding counterparties to minimize overall credit risk. These policies
require an evaluation of potential counterparties, financial condition, collateral requirements and the use of standardized agreements
that allow for the netting of positive and negative exposures associated with a single counterparty. These evaluations result in
established credit limits prior to entering into a contract. As of December 31, 2010 and 2009, there were no counterparty deposits for
these companies.
CL&P, PSNH and WMECO had amounts on deposit related to subsidiaries used to facilitate the issuance of RRBs. In addition, CL&P,
PSNH and WMECO had other cash deposits held with unaffiliated parties as of December 31, 2010 and 2009. These amounts were as
follows:
As of December 31,
2010 2009
(Millions of Dollars) NU NU
Rate Reduction Bond Deposits $ 53.1 $ 40.2
Other Deposits 7.3 8.1
As of December 31,
2010 2009
(Millions of Dollars) CL&P PSNH WMECO CL&P PSNH WMECO
Rate Reduction Bond Deposits $ 22.1 $ 26.9 $ 4.1 $16.8 $ 19.7 $ 3.7
Other Deposits 2.1 2.8 1.2 5.0 2.2 -
These amounts are included in Other Long-Term Assets on the accompanying consolidated balance sheets.
I. Fair Value Measurements
NU, including CL&P, PSNH, and WMECO, applies fair value measurement guidance to all derivative contracts recorded at fair value
and to the marketable securities held in the NU supplemental benefit trust and WMECO's spent nuclear fuel trust. Fair value
measurement guidance is also applied to investment valuations used to calculate the funded status of NU's Pension and PBOP plans
and non-recurring fair value measurements of NU's non-financial assets and liabilities, such as AROs and Yankee Gas' goodwill.
Upon adoption of fair value measurement guidance, the Company recorded a pre-tax charge to Net Income of $6.1 million as of
January 1, 2008 related to derivative liabilities for its remaining unregulated wholesale marketing contracts. In 2010, 2009 and 2008,
the Company recorded benefits of $0.8 million, $0.7 million and $0.8 million, respectively, to partially reverse the exit price impact
recorded as the Company served out rather than exited its one remaining fixed price forward sales contract. In 2008, the Company
also recorded a benefit of $1.8 million related to a contract that expired in May 2008.
Fair Value Hierarchy: In measuring fair value, NU 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 the terms of the contracts. Inputs
used in fair value measurements are 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. NU evaluates the
classification of assets and liabilities measured at fair value on a quarterly basis, and NU's policy is to recognize transfers between
levels of the fair value hierarchy as of the end of the reporting period. 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 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. 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 valuation techniques and inputs used in NU's fair value measurements are described in Note 4,
"Derivative Instruments," and Note 5, "Marketable Securities," to the consolidated financial statements. There were no changes to the
valuation methodologies for derivative instruments or marketable securities as of December 31, 2010 and 2009.