Eversource 2003 Annual Report Download - page 56

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NU currently has authorization from the SEC to provide up to $500 million
of guarantees for NU Enterprises through June 30, 2004, and has
applied for authority to increase this amount to $750 million through
September 30, 2007. The guarantees to the Utility Group are subject to
a separate $50 million SEC limitation apart from the current $500 million
guarantee limit. The amount of guarantees outstanding for compliance
with the SEC limit for NU Enterprises is $288.5 million, which is calculated
using different criteria than the maximum level of exposure required to
be disclosed under FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.”
E. Accounting for R.M. Services, Inc. Variable Interest Entity
On June 30, 2001, NU sold RMS, a provider of consumer collection services,
for $10 million in the form of convertible cumulative 5 percent preferred
stock and a warrant to buy 25 percent of the outstanding common stock
of RMS for $1,000 that expires in 2021. NU also agreed to guarantee a
$3 million line of credit for RMS through 2005. Beginning in the second
quarter of 2003, RMS began drawing on this line of credit.
In January 2003, the FASB issued FIN 46, which was effective for NU on
July 1, 2003. RMS is a VIE, as defined. FIN 46 requires that the party to a
VIE that absorbs the majority of the VIE’s losses, defined as the “primary
beneficiary,” consolidate the VIE. Upon adoption of FIN 46 on July 1, 2003,
management determined that NU was the “primary beneficiary” of RMS
under FIN 46 and that NU was now required to consolidate RMS into its
financial statements. To consolidate RMS, NU eliminated the carrying
value of its preferred stock investment in RMS and recorded the assets
and liabilities of RMS. This adjustment resulted in a negative $4.7 million
after-tax cumulative effect of an accounting change in the third quarter
of 2003, and is summarized as follows (in millions):
Assets and Liabilities Recorded:
Current assets $0.6
Net property, plant and equipment 1.7
Other noncurrent assets 1.5
Current liabilities (0.6)
3.2
Elimination of investment at July 1, 2003 10.5
Pre-tax cumulative effect 7.3
Income tax effect (2.6)
Cumulative effect of an accounting change $4.7
Prior to the consolidation of RMS on July 1, 2003, NU recorded $0.9
million of after-tax impairment losses on the investment balance. After
RMS was consolidated, $1.9 million of after-tax operating losses were
included in earnings.
NU has no other VIE’s for which it is defined as the “primary beneficiary.”
For further information regarding NU’s investments in other VIEs, see
Note 1K, “Summary of Significant Accounting Policies — Equity
Investments and Jointly Owned Electric Utility Plant,” to the consolidated
financial statements.
F. Revenues
Utility Group: Utility Group retail revenues are based on rates approved
by the state regulatory commissions. These regulated rates are applied to
customers’ use of energy to calculate a bill. In general, rates can only be
changed through formal proceedings with the state regulatory commissions.
Certain Utility Group companies utilize regulatory commission-approved
tracking mechanisms to track the recovery of certain incurred costs.
The tracking mechanisms allow for rates to be changed periodically, with
overcollections refunded to customers or undercollections collected from
customers in future periods.
Unbilled revenues represent an estimate of electricity or gas delivered to
customers that has not been billed. Unbilled revenues represent assets
on the balance sheet that become accounts receivable in the following
month as customers are billed. Billed revenues are based on meter readings.
Unbilled revenues are estimated monthly using the requirements
method. The requirements method utilizes the total monthly volume of
electricity or gas delivered to the system and applies a delivery efficiency
factor to reduce the total monthly volume by an estimate of delivery
losses in order to calculate total estimated monthly sales to customers.
The total estimated monthly sales amount less total monthly billed sales
amount results in a monthly estimate of unbilled sales. Unbilled revenues
are estimated by applying an average rate to the estimate of unbilled sales.
In 2003, the unbilled sales estimates for all Utility Group companies were
tested using the cycle method. The cycle method uses the billed sales from
each meter reading cycle and an estimate of unbilled days in each month
based on the meter reading schedule. The cycle method is historically
more accurate than the requirements method when used in a mostly
weather-neutral month. The cycle method resulted in adjustments to the
estimate of unbilled revenues that had a net positive after-tax earnings
impact of approximately $4.6 million in 2003. The positive after-tax
impacts on CL&P, PSNH, and WMECO were $7.2 million, $3.3 million,
and $0.3 million, respectively. There was a negative after-tax impact on
Yankee Gas of $6.2 million including certain gas cost adjustments.
Wholesale transmission revenues are based on rates and formulas that
are approved by the FERC. Most of NU’s wholesale transmission revenues
are collected through a combination of the New England Regional
Network Service (RNS) tariff and NU’s Local Network Service (LNS) tariff.
The RNS tariff, which is administered by the New England Independent
System Operator (ISO-NE), recovers the revenue requirements associated
with transmission facilities that are deemed by the FERC to be Pool
Transmission Facilities. The LNS tariff which was accepted by the FERC on
October 22, 2003, provides for the recovery of NU’s total transmission
revenue requirements, net of revenue credits received from various rate
components, including revenues received under the RNS rates.
NU Enterprises: NU Enterprises’ revenues are recognized at different times
for its different business lines. 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.