Eversource 2012 Annual Report Download - page 100

87
Credit Risk
Certain of NU’s contracts contain credit risk contingent features. These features require NU to maintain investment grade credit ratings
from the major rating agencies and to post collateral for contracts in a net liability position over specified credit limits. The following
summarizes the fair value of derivative contracts that were in a net liability position and subject to credit risk contingent features, the fair
value of cash collateral, and the additional collateral that would be required to be posted by NU if the unsecured debt credit ratings of
NU parent were downgraded to below investment grade as of December 31, 2012 and 2011:
As of December 31, 2012 As of December 31, 2011
Additional Collateral
Additional Collateral
Fair Value Subject
Required if
Fair Value Subject
Required if
to Credit Risk
Cash
Downgraded Below
to Credit Risk
Cash
Downgraded Below
(Millions of Dollars)
Contingent Features
Collateral Posted
Investment Grade
Contingent Features
Collateral Posted
Investment Grade
NU
$
(15.3)
$
-
$
17.4
$
(23.5)
$
4.1
$
19.9
Fair Value Measurements of Derivative Instruments
Valuation of Derivative Instruments: Derivative contracts classified as Level 2 in the fair value hierarchy relate to the financial contracts
for natural gas futures and the remaining unregulated wholesale marketing sourcing contracts to purchase energy for periods in which
prices are quoted in an active market. Prices are obtained from broker quotes and are 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 fair value of derivative contracts classified as Level 3 utilize significant unobservable inputs. The 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 in future years for which quoted prices in an
active market exist. Fair value measurements categorized in Level 3 of the fair value hierarchy are prepared by individuals with
expertise in valuation techniques, pricing of energy and energy-related products, and accounting requirements. The future power and
capacity prices for periods that are not quoted in an active market or established at auction are based on available market data and are
escalated based on estimates of inflation to address the full time period of the contract.
Valuations of derivative contracts using discounted cash flow methodology include assumptions regarding the timing and likelihood of
scheduled payments and also reflect non-performance 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. Valuations incorporate estimates of premiums or
discounts that would be required by a market participant to arrive at an exit price, using historical market transactions adjusted for the
terms of the contract.
The following is a summary of NU’s, including CL&P’s, NSTAR Electric’s and WMECO’s, Level 3 derivative contracts and the range of
the significant unobservable inputs utilized in the valuations over the duration of the contracts:
Range
Period Covered
Energy Prices:
NU
$43 - $90 per MWh
2018 - 2028
CL&P
$50 - $55 per MWh
2018 - 2020
WMECO $43 - $90 per MWh 2018 - 2028
Capacity Prices:
NU $1.40 - $10.53 per kW-Month 2016 - 2028
CL&P
$1.40 - $9.83 per kW-Month
2016 - 2026
NSTAR Electric
$1.40 - $3.39 per kW-Month
2016 - 2019
WMECO
$1.40 - $10.53 per kW-Month
2016 - 2028
Forward Reserve:
NU, CL&P
$0.35 - $0.90 per kW-Month
2013 - 2024
REC Prices:
NU $25 - $85 per REC 2013 - 2028
NSTAR Electric
$25 - $71 per REC
2013 - 2018
WMECO
$25 - $85 per REC
2013 - 2028
Exit price premiums of 11 percent through 32 percent are also applied on these contracts and reflect the most recent market activity
available for similar type contracts.
Significant increases or decreases in future power or capacity prices in isolation would decrease or increase, respectively, the fair value
of the derivative liability. Any increases in the risk premiums would increase the fair value of the derivative liabilities. Changes in these
fair values are recorded as a regulatory asset or liability and would not impact net income.
Valuations using significant unobservable inputs: The following tables present changes for the years ended December 31, 2012 and
2011, 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 fair value as of January 1, 2012 reflects a reclassification of remaining
unregulated wholesale marketing sourcing contracts that had previously been presented as a portfolio along with the unregulated