Eversource 2015 Annual Report Download - page 73

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classification of assets and liabilities measured at fair value on a quarterly basis, and Eversource’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.
Determination of Fair Value: The valuation techniques and inputs used in Eversource’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,” and Note 13, “Fair Value of Financial Instruments” 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 a contract as normal, 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 a contract as normal (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
a contract cannot be considered normal 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.
All changes in the fair value of derivative contracts are recorded as regulatory assets or liabilities and do not impact net income.
For further information regarding derivative contracts, see Note 4, “Derivative Instruments,” to the financial statements.
J. Equity Method Investments
Equity investments are included in Other Long-Term Assets on the balance sheets and net earnings related to these equity investments are included in
Other Income, Net on the statements of income.
Regional Decommissioned Nuclear Companies: CL&P, NSTAR Electric, PSNH and WMECO own common stock in three regional nuclear
generation companies (CYAPC, YAEC and MYAPC, collectively referred to as the Yankee Companies), each of which owned a single nuclear
generating facility that has been decommissioned. For CL&P, NSTAR Electric, PSNH and WMECO, the respective investments in CYAPC, YAEC
and MYAPC are accounted for under the equity method. Eversource consolidates CYAPC and YAEC because CL&P’s, NSTAR Electric’s, PSNH’s
and WMECO’s combined ownership interest in each of these entities is greater than 50 percent. Intercompany transactions between CL&P, NSTAR
Electric, PSNH and WMECO and the CYAPC and YAEC companies have been eliminated in consolidation of the Eversource financial statements.
CL&P’s, NSTAR Electric’s, PSNH’s and WMECO’s ownership interests in the Yankee Companies and the total carrying values, which were
included in Other Long-Term Assets on their respective balance sheets, were as follows:
Ownership Interests (percent)
Carrying Amount (in millions)
As of December 31, 2015 and 2014 As of December 31,
CYAPC YAEC MYAPC 2015 2014
CL&P 34.5 % 24.5 % 12.0 % $ 1.2 $ 1.2
NSTAR Electric
14.0 14.0 4.0 0.5 0.5
PSNH 5.0 7.0 5.0 0.3 0.3
WMECO 9.5 7.0 3.0 0.3 0.3
For further information on the Yankee Companies, see Note 11C, “Commitments and Contingencies - Contractual Obligations - Yankee
Companies,” to the financial statements.