Eversource 2004 Annual Report Download - page 37

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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 recognizes revenues at different times for its different
business lines. Wholesale and retail marketing revenues are recognized
when energy is delivered to customers. Trading revenues are typically
recognized as the fair value of trading contracts changes. Service
revenues are recognized as services are provided, often on a percentage
of completion basis.
Revenues and expenses for derivative contracts that are entered into
for trading purposes are recorded on a net basis in revenues when
these transactions settle. The settlement of wholesale non-trading
derivative contracts for the sale of energy or gas by both the Utility
Group and NU Enterprises that are related to customers’ needs are
recorded in operating expenses. Derivative contracts that hedge an
underlying transaction and that qualify for hedge accounting affect
earnings when the forecasted transaction being hedged occurs, when
hedge ineffectiveness is measured and recorded, when the forecasted
transaction being hedged is no longer probable of occurring, or when
there is an accumulated other comprehensive loss and when the hedge
and the forecasted transaction being hedged are in a loss position on
a combined basis. The settlement of hedge derivative contracts is
recorded in the same revenue or expense line as the transaction being
hedged. For further information regarding the accounting for these
contracts, see Note 1F, “Summary of Significant Accounting Policies —
Derivative Accounting,” to the consolidated financial statements.
Utility Group Unbilled Revenues: 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.
The estimate of unbilled revenues is sensitive to numerous factors that
can significantly impact the amount of revenues recorded. Estimating
the impact of these factors is complex and requires management’s
judgment. The estimate of unbilled revenues is important to NU’s
consolidated financial statements as adjustments to that estimate
could significantly impact operating revenues and earnings.
The Utility Group currently estimates unbilled revenues 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 (DE) 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. The
estimated DE factor can have a significant impact on estimated
unbilled revenue amounts.
During 2004 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 testing was
performed in the second and fourth quarters of 2004 but did not have
a material impact on earnings.
During 2003 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. The 2003 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.
Derivative Accounting: Effective January 1, 2001, NU adopted SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,”
as amended.
Most of the contracts comprising Select Energy’s wholesale and retail
marketing activities are derivatives, and many Utility Group contracts
for the purchase or sale of energy or energy-related products are
derivatives. The application of derivative accounting under SFAS No. 133,
as amended, is complex and requires management judgment in the
following respects: election and designation of the normal purchases
and sales exception, identification of derivatives and embedded derivatives,
identifying hedge relationships, assessing and measuring hedge
ineffectiveness, and determining the fair value of derivatives. All of
these judgments, depending upon their timing and effect, can have
a significant impact on NU’s consolidated net income.
The judgment applied in the election of the normal purchases and
sales exception (and resulting accrual accounting) includes the conclusions
that it is probable at the inception of the contract and throughout its
term that it will result in physical delivery and that the quantities will
be used or sold by the business over a reasonable period in the normal
course of business. If facts and circumstances change and management
can no longer support this conclusion, then the normal exception and
accrual accounting would be terminated and fair value accounting
would be applied. Cash flow hedge contracts that are designated as
hedges for contracts for which the company has elected the normal
purchases and sales exception can continue to be accounted for as
cash flow hedges only if the normal exception for the hedged contract
continues to be appropriate. If the normal exception is terminated,
then the hedge designation would be terminated at the same time.
In April 2003, the FASB issued SFAS No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging Activities,”
which amended existing derivative accounting guidance. This new
statement incorporates interpretations that were included in previous
Derivative Implementation Group (DIG) guidance, clarifies certain
conditions, and amends other existing pronouncements. It was effective
for contracts entered into or modified after June 30, 2003. Management
has determined that the adoption of SFAS No. 149 did not change NU’s
accounting for wholesale and retail marketing contracts or the ability
of NU Enterprises to elect the normal purchases and sales exception.
The adoption of SFAS No. 149 resulted in fair value accounting for
certain Utility Group contracts that are subject to unplanned netting
and do not meet the definition of capacity contracts. These non-trading
derivative contracts are recorded at fair value at December 31, 2004
and 2003 as derivative assets and liabilities with offsetting amounts
recorded as regulatory liabilities and assets because the contracts
are part of providing regulated electric or gas service.