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J. Derivative Accounting
Most of CL&P and PSNH's contracts for the purchase and sale of energy or energy related products are derivatives, along with all but
one of NU Enterprises' remaining wholesale marketing contracts. The accounting treatment for energy contracts entered into varies
and depends on the intended use of the particular contract and on whether or not the contract is a derivative.
The application of derivative accounting is complex and requires management judgment in the following respects: identification of
derivatives and embedded derivatives, election and designation of the "normal purchases or normal sales" (normal) exception,
identifying, electing and designating hedge relationships, assessing and measuring hedge ineffectiveness, and determining the fair
value of derivatives. All of these judgments, depending upon their timing and effect, can have a significant impact on the consolidated
financial statements.
The fair value of derivatives is based upon the contract terms and conditions and the underlying market price or fair value per unit.
When quantities are not specified in the contract, the Company determines whether it is a derivative by using amounts referenced in
default provisions and other relevant sections of the contract. The estimated quantities to be served are updated during the term of the
contract, and such updates can have a material impact on mark-to-market amounts. The fair value of derivative assets and liabilities
with the same counterparty are offset and recorded as a net derivative asset or liability to the consolidated balance sheets.
The judgment applied in the election of the normal exception (and resulting accrual accounting) includes the conclusion that it is
probable at the inception of the contract and throughout its term that it will result in physical delivery of the underlying product and that
the quantities will be used or sold by the business over a reasonable period in the normal course of business. The Company has
elected normal on many derivative contracts, including all of WMECO's derivative contracts. If facts and circumstances change and
management can no longer support this conclusion, then the normal exception and accrual accounting is terminated and fair value
accounting is applied prospectively.
All but one of the contracts that comprise NU Enterprises' wholesale marketing activities are derivatives, and many of NU's regulated
company contracts for the purchase or sale of energy or energy-related products are derivatives. Wholesale marketing contracts,
which are marked-to-market derivative contracts, are not considered to be held for trading purposes, and sales and purchase activity is
reported on a net basis in Fuel, Purchased and Net Interchange Power on the consolidated statements of income.
For further information regarding derivative contracts of NU, CL&P, PSNH and WMECO and their accounting, see Note 4, "Derivative
Instruments," to the consolidated financial statements.
K. Marketable Securities
NU Supplemental Benefit Trust and WMECO Spent Nuclear Fuel Trust: NU maintains a supplemental benefit trust to fund NU's SERP
and non-SERP obligations and WMECO maintains a spent nuclear fuel trust to fund WMECO's prior period spent nuclear fuel liability,
both of which hold marketable securities.
Other-than-temporary impairments on debt securities held in the NU supplemental benefit trust that NU intends to sell or will be
required to sell are recorded in Net Income. Credit losses identified on debt securities held in the NU supplemental benefit trust are
also recorded in Net Income. Unrealized gains and unrealized losses on debt securities held in the NU supplemental benefit trust that
NU does not intend to sell or will not be required to sell are recorded in Accumulated Other Comprehensive Income/(Loss). Realized
gains and losses on debt securities WMECO intends to sell or will be required to sell, credit losses and unrealized gains and losses
associated with the WMECO spent nuclear fuel trust are recorded on the accompanying consolidated balance sheets due to the
regulatory accounting treatment of this trust.
In the second quarter of 2009, NU adopted new accounting guidance related to the recognition and presentation of other- than-
temporary impairments. NU recorded an after-tax cumulative effect of accounting change in accounting principle of $0.7 million as an
increase to Retained Earnings with an offset to Accumulated Other Comprehensive Income relating to unrealized losses previously
recorded in Net Income on debt securities held in the NU supplemental benefit trust, which did not meet the criteria established in the
new accounting guidance.
Prior to the adoption of accounting guidance in the second quarter of 2009, changes in the fair value of debt securities in the NU
supplemental benefit trust and the WMECO spent nuclear fuel trust relating to unrealized losses were considered other-than-temporary
because NU and WMECO did not have the ability to hold the debt securities to maturity. Losses on the NU supplemental benefit trust
were recorded in Net Income and losses on the WMECO spent nuclear fuel trust were recorded on the balance sheet due to the
regulatory nature of the trust.
In 2010 and 2009, under applicable fair value accounting guidance, the Company elected to record changes in fair value of newly
purchased equity securities in the NU supplemental benefit trust in Net Income. Realized and unrealized gains and losses related to
these securities are included in Other Income, Net, on the accompanying consolidated statements of income for the years ended
December 31, 2010 and 2009.
These trusts are not subject to regulatory oversight by state or federal agencies.
For information regarding marketable securities, see Note 5, "Marketable Securities," to the consolidated financial statements.