Eversource 2015 Annual Report Download - page 82

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subject to credit risk contingent provisions and would have been required to post additional collateral of $5.8 million and $10 million, respectively, if
Eversource parent’s unsecured debt credit ratings had been downgraded to below investment grade.
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 in order 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.
The following is a summary of Eversource’s, including CL&P’s and NSTAR Electric’s, Level 3 derivative contracts and the range of the significant
unobservable inputs utilized in their respective valuations over the duration of the contracts:
As of December 31,
2015 2014
Range Period Covered Range Period Covered
Capacity Prices:
Eversource $ 10.81 - 15.82 per kW-Month 2016 - 2026 $ 5.30 - 12.98 per kW-Month 2016 - 2026
CL&P $ 10.81 - 12.60 per kW-Month 2019 - 2026 $ 11.08 - 12.98 per kW-Month 2018 - 2026
NSTAR Electric $ 10.81 - 15.82 per kW-Month 2016 - 2019 $ 5.30 - 11.10 per kW-Month 2016 - 2019
Forward Reserve:
Eversource, CL&P $ 2.00 per kW-Month 2016 - 2024 $ 5.80 - 9.50 per kW-Month 2015 - 2024
REC Prices:
Eversource, NSTAR Electric $ 45 - 51 per REC 2016 - 2018 $ 38 - 56 per REC 2015 - 2018
Exit price premiums of 5 percent to 22 percent are also applied on these contracts and reflect the uncertainty and illiquidity premiums that would be
required based on the most recent market activity available for similar type contracts.
Valuations using significant unobservable inputs: The following table presents changes 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.
(Millions of Dollars)
Eversource CL&P NSTAR Electric
Derivatives, Net:
Fair Value as of January 1, 2014 $
(635.2)
$ (630.6) $
(7.3)
Net Realized/Unrea
lized Gains Included in
Regulatory Assets and Liabilities 141.3 139.7 4.3
Settlements 78.5 80.0
(1.5)
Fair Value as of December 31, 2014 $
(415.4)
$ (410.9) $
(4.5)
Net Realized/Unrealized Losses Included in
Regulatory Assets and Liabilities
(52.1)
(51.3)
(0.8)
Settlements 86.6 81.4 5.2
Fair Value as of December 31, 2015 $
(380.9)
$ (380.8) $
(0.1)
Significant increases or decreases in future energy or capacity prices in isolation would decrease or increase, respectively, the fair value of the
derivative liability. Any increases in risk premiums would increase the fair value of the derivative liability. Changes in these fair values are recorded
as a regulatory asset or liability and do not impact net income.
5. MARKETABLE SECURITIES
Eversource maintains trusts that hold marketable securities to fund certain non-qualified executive benefits. These trusts are not subject to regulatory
oversight by state or federal agencies. CYAPC and YAEC maintain legally restricted trusts, each of which holds marketable securities, to fund the
decommissioning and spent nuclear fuel removal obligations of their nuclear fuel storage facilities.
WMECO maintained a spent nuclear fuel trust to fund WMECO’s pre-1983 spent nuclear fuel obligation. In late 2015, this trust was liquidated to
satisfy the spent nuclear fuel obligation with the DOE. For further information, see Note 8, “Long-Term Debt.”