Eversource 2003 Annual Report Download - page 59

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Under SFAS No. 71, regulated utilities, including NU’s Utility Group
companies, currently recover amounts in rates for future costs of
removal of plant assets. Historically, these amounts were included as a
component of accumulated depreciation until spent. These amounts
were reclassified to regulatory liabilities on the accompanying
consolidated balance sheets.
The Competitive Transition Assessment (CTA) allows CL&P to recover
stranded costs, such as securitization costs associated with the rate
reduction bonds, amortization of regulatory assets, and IPP over market
costs while the Generation Service Charge (GSC) allows CL&P to recover
the costs of the procurement of energy for standard offer service. The
System Benefits Charge (SBC) allows CL&P to recover certain regulatory
and energy public policy costs, such as public education outreach costs,
hardship protection costs, transition period property taxes, and displaced
workers protection costs. The Stranded Cost Recovery Charge (SCRC)
allows PSNH to recover its stranded costs. CL&P LMP overcollections rep-
resent amounts that are refundable to ratepayers related to the imple-
mentation of standard market design (SMD) on March 1, 2003. Yankee
Gas’ Infrastructure Expansion Rate Mechanism (IERM) tracks the rev-
enues and expenses associated with its system expansion program.
The regulatory liabilities offsetting derivative assets relate to the fair value
of CL&P IPP contracts and PSNH purchase and sales contracts used for
market discovery of future procurement activities that will benefit ratepayers
in the future. CL&P and PSNH also have financial transmission rights (FTR)
contracts which are derivative assets offset by a regulatory liability.
I. Income Taxes
The tax effect of temporary differences (differences between the
periods in which transactions affect income in the financial statements
and the periods in which they affect the determination of taxable
income) is accounted for in accordance with the rate-making treatment
of the applicable regulatory commissions and SFAS No. 109.
The tax effects of temporary differences that give rise to the net
accumulated deferred tax obligation are as follows:
At December 31,
(Millions of Dollars) 2003 2002
Deferred tax liabilities:
Accelerated depreciation and
other plant-related differences $ 904.4 $ 893.0
Regulatory amounts:
Securitized contract termination
costs and other 247.0 267.5
Income tax gross-up 178.6 220.2
Employee benefits 151.4 142.8
Other 332.2 306.6
Total deferred tax liabilities 1,813.6 1,830.1
Deferred tax assets:
Regulatory deferrals 341.6 238.3
Employee benefits 72.1 64.3
Income tax gross-up 20.8 25.6
Other 91.7 65.4
Total deferred tax assets 526.2 393.6
Totals $1,287.4 $1,436.5
In 2000, NU requested from the Internal Revenue Service (IRS) a Private
Letter Ruling (PLR) regarding the treatment of unamortized investment tax
credits (ITC) and excess deferred income taxes (EDIT) related to generation
assets that have been sold. EDIT are temporary differences between book
and taxable income that were recorded when the federal statutory tax
rate was higher than it is now or when those differences were expected
to be resolved. The PLR addresses whether or not EDIT and ITC can be
returned to customers, which without a PLR management believes would
represent a violation of current tax law. The IRS declared a moratorium on
issuing PLRs until final regulations on the return of EDIT and ITC to regu-
lated customers are issued by the Treasury Department. Proposed regula-
tions were issued in March 2003, and a hearing took place in June 2003.
The proposed new regulations would allow the return of EDIT and ITC to
regulated customers without violating the tax law. Also, under the pro-
posed regulations, a company could elect to apply the regulation retroac-
tively. The Treasury Department is currently deliberating the comments
received at the hearing. If final regulations consistent with the proposed
regulations are issued, then there could be an impact on NU’s financial
statements.
J. Depreciation
The provision for depreciation on utility assets is calculated using the
straight-line method based on the estimated remaining useful lives of
depreciable plant-in-service, which range primarily from 3 years to 75
years, adjusted for salvage value and removal costs, as approved by the
appropriate regulatory agency where applicable. Depreciation rates are
applied to plant-in-service from the time it is placed in service. When
plant is retired from service, the original cost of the plant, including costs
of removal less salvage, is charged to the accumulated provision for
depreciation. Cost of removal is now classified as a regulatory liability. The
depreciation rates for the several classes of electric utility plant-in-service
are equivalent to a composite rate of 3.4 percent in 2003, 3.2 percent in
2002 and 3.1 percent in 2001.
NU also maintains other non-utility plant which is being depreciated
using the straight-line method based on estimated remaining useful
lives, which range primarily from 15 years to 120 years.
In 2002, NU Enterprises concluded a study of the depreciable lives of
certain generation assets. The impact of this study was to lengthen the
useful lives of those generation assets by 32 years to an average of 70
years. In addition, the useful lives of certain software was revised and
shortened to reflect a remaining life of 1.5 years. As a result of these
studies, NU Enterprises’ operating expenses decreased by $8.6 million in
2003 and $5.1 million in 2002 as compared to 2001.
K. Equity Investments and Jointly Owned Electric Utility Plant
Regional Nuclear Companies: At December 31, 2003, CL&P, PSNH and
WMECO own common stock in three regional nuclear companies (Yankee
Companies). NU’s ownership interests in the Yankee Companies at
December 31, 2003, which are accounted for on the equity method are
49 percent of the CYAPC, 38.5 percent of the Yankee Atomic Electric
Company (YAEC) and 20 percent of the Maine Yankee Atomic Power
Company (MYAPC). Effective November 7, 2003, CL&P, PSNH and WMECO
sold their collective 17 percent ownership interest in Vermont Yankee
Nuclear Power Corporation (VYNPC). NU’s total equity investment in the
Yankee Companies at December 31, 2003 and 2002, is $32.2 million and
$48.9 million, respectively. Each of the remaining Yankee Companies owns
a single nuclear generating plant which is being decommissioned.