Eversource 2014 Annual Report Download - page 71

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period. SO2and NOxemissions allowances are obtained through an annual allocation from the federal and state regulators that are granted at no cost
and through purchases from third parties. CO2emissions allowances are obtained through an annual allocation from the state regulator that are
granted at no cost and are acquired through auctions and through purchases from third parties. SO2, CO2, and NOxemissions allowances are charged
to expense based on their weighted average cost as they are utilized against emissions volumes at PSNH's generating units.
SO2, CO2, and NOx emissions allowances are recorded within Fuel, Materials and Supplies and are classified on the balance sheet as short-term or
long-term depending on the period in which they are expected to be utilized against actual emissions. As of December 31, 2014and 2013, PSNH had
$20.1 million and $19.4 million, respectively, of long-term SO2and CO2 emissions allowances classified as Other Long-Term Assets on the balance
sheets.
G. Restricted Cash and Other Deposits
As of December 31, 2014, NU,CL&P and PSNH had $3.2 million, $2.1 million, and $1 million,respectively, of restricted cash relating to amounts
held in escrow, which were included in Prepayments and Other Current Assets on the balance sheets. As of December 31, 2013, these amounts were
$1.7 million and $1.4 million for NU and CL&P, respectively.
As of December 31, 2014, NU, CL&P and PSNH had $9.9 million, $1.2 million and $2.5 million, respectively, of cash collateral posted not subject
to master netting agreements, primarily with ISO-NE, which were included in Prepayments and Other Current Assets on the balance sheets. As of
December 31, 2013, these amounts were $17.9million and $9 million for NU and NSTAR Electric, respectively.
H. Fair Value Measurements
Fair value measurement guidance is applied to derivative contracts that are not elected or designated as "normal purchases or normal sales" (normal)
and to the marketable securities held in trusts. Fair value measurement guidance is also applied to valuations of the investments used to calculate the
funded status of pension and PBOP plans and nonrecurring fair value measurements of nonfinancial assets such as goodwill and AROs, and is also
used to estimate the fair value of preferred stock and long-term debt.
 In measuring fair value, NU uses observable market data when available and minimizes the use of unobservable inputs.
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.
 The valuation techniques and inputs used in NU's fair value measurements are described in Note 4, "Derivative
Instruments," Note 5, "Marketable Securities," Note 6, "Asset Retirement Obligations," Note 9A, "Employee Benefits –Pension Benefits and
Postretirement Benefits Other Than Pensions," Note 13, "Fair Value of Financial Instruments," and Note 21, "Merger of NU and NSTAR,"to the
financial statements.
I. Derivative Accounting
Many of the Regulated companies'contracts for the purchase and sale of energy or energy-related products are derivatives. 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.
For the Regulated companies, regulatory assets or regulatory liabilities are recorded to offset the fair values of derivative contracts, as contract
settlements are recovered from, or refunded to, customers in future rates.
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 exception, and determination of the fair value of derivative contracts. All of these
judgments can have a significant impact on the financial statements.
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 in the normal course of business. 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.
The fair value of derivative contracts 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 the contract has a determinable quantity by using amounts referenced in
default provisions and other relevant sections of the contract. The fair value of derivative assets and liabilities with the same counterparty are offset
and recorded as a net derivative asset or liability on the balance sheets. Changes in the fair value of derivative contracts are recorded as regulatory
assets or liabilities and do not impact net income.