Eversource 2014 Annual Report Download - page 80

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The business activities that result in the recognition of derivative assets also create exposure to various counterparties. As of December 31, 2014, NU
and CL&P's derivative assets were exposed to counterparty credit risk. Of NU's and CL&P'sderivative assets, $64 million was contracted with
investment grade entities.
For further information on the fair value of derivative contracts, see Note 1H, "Summary of Significant Accounting Policies -Fair Value
Measurements," and Note 1I, "Summary of Significant Accounting Policies -Derivative Accounting," to the financial statements.
Derivative Contracts At Fair Value with Offsetting Regulatory Amounts
: As required by regulation, CL&P, along with UI, has capacity-related contracts with generation
facilities. CL&P has a sharing agreement with UI, with 80 percent of each contract allocated to CL&P and 20 percent allocated to UI. The combined
capacity of these contracts is 787 MW. The capacity contracts extend through 2026 and obligate both CL&P and UI to make or receive payments on
a monthly basis to or from the generation facilities based on the difference between a set capacity price and the capacity market price received in the
ISO-NE capacity markets. In addition, CL&P has a contract to purchase 0.1 million MWh of energy per year through 2020.
NSTAR Electric has a renewable energy contract to purchase 0.1 million MWh of energy per year through 2018 and a capacity-related contract to
purchase up to 35 MW per year through 2019.
As of December 31, 2014 and 2013, NU had NYMEX future contracts in order to reduce variability associated with the purchase price of
approximately 8.8 million and 9.1 million MMBtu of natural gas, respectively.
The following table presents the current change in fair value, primarily recovered through rates from customers, associated with NU's derivative
contracts:
Gain/(Loss) Recognized on Derivatives
 For the Years Ended December 31,
NU 2014 2013 2012
Balance Sheets:
Regulatory Assets and Liabilities $134.4 $160.6 $
(29.0)
Statements of Income:
Purchased Power, Fuel and Transmission -1.0
(0.7)
Credit Risk
Certain of NU's derivative 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. As of December 31, 2014, NU
had approximately $10 million of derivative contracts in a net liability position that were subject to credit risk contingent features and would have
been required to post additional collateral of approximately $10 million if NU parent's unsecured debt credit ratings had been downgraded to below
investment grade. As of December 31, 2013, there were no derivative contracts in a net liability position that were subject to credit risk contingent
features.
Fair Value Measurements of Derivative Instruments
Derivative contracts classified as Level 2 in the fair value hierarchy relate to the financial contracts for natural gas futures. Prices are obtained from
broker quotes and are based on actual market activity. The contracts are valued using NYMEX natural gas prices. Valuations of these contracts also
incorporate discount rates using the yield curve approach.
The fair value of derivative contracts classified as Level 3 utilizes significant unobservable inputs. The fair value is modeled using income
techniques, such as discounted cash flow valuations 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 a 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.