Eversource 2002 Annual Report Download - page 28

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Under the terms of these asset divestitures, the purchasers agreed to
assume responsibility for decommissioning their respective units.
For further information regarding these divestitures and nuclear
decommissioning, see Note 7, “Nuclear Generation Asset Divestitures,”
and Note 8F, “Nuclear Decommissioning and Plant Closure Costs,” to
the consolidated financial statements. For further information regarding
spent nuclear fuel disposal costs, see Note 8C, “Commitments and
Contingencies – Spent Nuclear Fuel Disposal Costs,” to the consolidated
financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and at times difficult,
subjective or complex judgments. Changes in these estimates, assumptions
and judgments, in and of themselves, could materially impact the financial
condition of NU.The following describes accounting policies and estimates
that management believes are the most critical in nature:
Presentation: In accordance with current accounting pronouncements,
NU’s consolidated financial statements include all subsidiaries upon
which significant control is maintained and all intercompany transactions
between these subsidiaries are eliminated as part of the consolidation
process. NU has less than 50 percent ownership interests in the
Connecticut Yankee Atomic Power Company, Yankee Atomic Electric
Company, Maine Yankee Atomic Power Company,VYNPC, two companies
that transmit electricity imported from the Hydro-Quebec system, NEON,
Acumentrics, and R.M. Services, Inc., which are classified as variable
interest entities under Financial Accounting Standards Board Interpretation
No. 46, “Consolidation of Variable Interest Entities,” and for which NU
was not classified as the primary beneficiary. As a result, management
does not expect the adoption of Interpretation No. 46 to result in the
consolidation of any currently unconsolidated entities or to have any
other material impacts on NU’s consolidated financial statements.
Revenue Recognition: Regulated utility revenues are based on rates
approved by the state regulatory commissions. These regulated rates are
applied to customers’accounts based on their use of energy. In general,
rates can only be changed through formal proceedings with the state
regulatory commissions.
The determination of the energy sales to individual customers is based on
the reading of their meters, which occurs on a systematic basis throughout
the month. At the end of each month, amounts of energy delivered to
customers since the date of the last meter reading are estimated and the
corresponding unbilled revenue is estimated. This unbilled revenue is
estimated each month based on generation volumes, estimated customer
usage by class, line losses, and applicable customer rates.
Competitive energy subsidiary revenues are recognized at different times
for the different businesses. Wholesale and retail marketing revenues are
recognized when energy is delivered. Trading revenues are recognized as
the fair value of trading contracts changes. Service revenues are recognized
as services are provided, often on a percentage of completion basis.
Energy Trading and Derivative Accounting: On October 1, 2002, NU adopted
EITF Issue No. 02-3. The consensuses in EITF Issue No. 02-3 require net
reporting of trading revenues and expenses, and rescinded EITF Issue
No. 98-10, “Accounting for Energy Trading and Risk Management
Activities,” which had allowed contracts to be marked-to-market based
on trading intent. On July 1, 2002, NU adopted net reporting of trading
revenues and expenses, as then allowed by EITF Issue No. 98-10. The
rescission of EITF Issue No. 98-10 by EITF Issue No. 02-3 also required
that contracts that are not derivatives as defined under SFAS No. 133 be
removed from the consolidated balance sheets as a cumulative effect of
accounting change and no longer recorded at fair value. The adoption of
EITF Issue No. 02-3 did not have a material impact on NU’s consolidated
financial statements.
However, in implementing EITF Issue No. 02-3, Select Energy performed
a review of all contracts previously recorded under EITF Issue No. 98-10.
In connection with management’s review of the contracts in the trading
portfolio, the significant changes in the energy trading market and the
change in the focus of the energy trading business, certain long-term
derivative energy contracts that were included in the trading portfolio and
valued at $33.9 million at November 30, 2002, were designated as normal
purchases and sales. The impact of the normal purchases and sales
designation is that the contracts were adjusted to fair value at
November 30, 2002 and were not and will not be adjusted subsequently
for changes in fair value. The $33.9 million carrying value of these
contracts was reclassified from trading derivative assets to other long-term
assets and will be amortized on a straight-line basis to fuel, purchased
and net interchange power expense over the remaining terms of the
contracts, some of which extend to 2011.
Select Energy uses derivative investments in its trading, wholesale, and
retail marketing businesses. The application of derivative accounting
under SFAS No. 133 is complex and requires management judgment
in the following respects: identification of derivatives and embedded
derivatives, election and designation of the normal purchases and
sales exceptions, identifying hedge relationships and assessing hedge
effectiveness, determining the fair value of derivatives, and measuring
hedge ineffectiveness. All of these judgments, depending upon their timing
and effect, can have a significant impact on NU’s consolidated net income.
During 2002, approximately $7 million of transmission congestion contracts,
which were included in Select Energy’s marketing portfolio, were
determined to be derivatives. These contracts were recorded at fair value
using a valuation model and, at the same time, a valuation reserve on
these contracts was recorded due to the lack of available market data.
Management continues to believe the amount paid for the contracts best
represents their market value. If these assumptions regarding the
classification of the contracts change or if new accounting guidance is
issued, there may be an impact on NU’s consolidated financial statements.
Regulatory Accounting and Assets: The accounting policies of NU’s regulated
utility companies historically reflect the effects of the rate-making process
in accordance with SFAS No. 71, “Accounting for the Effects of Certain
Types of Regulation.” CL&P’s, PSNH’s and WMECO’s transmission and
distribution businesses continue to be cost-of-service rate regulated, and
management believes the application of SFAS No. 71 to that portion of
those businesses continues to be appropriate. Management must reaffirm
this conclusion at each balance sheet date. If, as a result of a change in
circumstances, it is determined that any portion of these companies no
longer meets the criteria of regulatory accounting under SFAS No. 71,
that portion of the company will have to discontinue regulatory accounting
and write off regulatory assets. Such a write-off could have a material
impact on NU’s consolidated financial statements.