Eversource 2004 Annual Report Download - page 58

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Utility Group Unbilled Revenues: Unbilled revenues represent an estimate of
electricity or gas delivered to customers that has not been billed.
Unbilled revenues are assets on the balance sheet that become
accounts receivable in the following month as customers are billed.
Such estimates are subject to adjustment when actual meter readings
become available, when changes in estimating methodology occur and
under other circumstances.
The Utility Group 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 the
total monthly billed sales amount results in a monthly estimate of unbilled
sales. Unbilled revenues are estimated by first allocating sales to the
respective rate classes, then applying an average rate to the estimate of
unbilled sales. The estimated DE factor can have a significant impact on
estimated unbilled revenue amounts.
In accordance with management’s policy of testing the estimate of
unbilled revenues twice each year using the cycle method of estimating
unbilled revenues, testing was performed in the second and fourth
quarters of 2004 but did not have a material impact on earnings. 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 more accurate than the requirements
method when used in a mostly weather-neutral month.
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.
Utility Group Transmission Revenues: 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, recovers the revenue
requirements associated with transmission facilities that are deemed
by the FERC to be regional facilities. This regional rate is reset on June
1st of each year. The LNS tariff provides for the recovery of NU’s total
transmission revenue requirements, net of revenues received from
other sources, including those revenues received under RNS rates. NU’s
LNS tariff is also reset on June 1st of each year to coincide with the
change in RNS rates. Additionally, NU’s LNS tariff provides for a true-up
to actual costs which ensures that NU recovers its total transmission
revenue requirements, including an allowed ROE.
A significant portion of NU’s transmission businesses’ revenue is from
charges to NU’s distribution businesses. These distribution businesses
recover these charges through rates charged to their retail customers.
WMECO has a rate tracking mechanism to track transmission costs
charged in distribution rates to the actual amount of transmission
charges incurred. The 2004 rates set in the CL&P distribution rate case
contained a level of transmission revenue sufficient to recover CL&P’s
anticipated 2004 transmission costs. The June 1, 2005 PSNH retail rate
increase includes revenues to recover expected transmission costs.
Neither CL&P nor PSNH have transmission cost tracking mechanisms.
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.
F. Derivative Accounting
SFAS Nos. 133 and 149: In April 2003, the FASB issued SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging
Activities,” which amended SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS No. 149 incorporated
interpretations that were included in previous Derivative Implementation
Group guidance, clarified certain conditions, and amended 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 of 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 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 and because management
believes that these amounts will be recovered or refunded in rates.
EITF Issue No. 03-11: In August of 2003, the FASB ratified the consensus
reached by its EITF in July 2003 on EITF Issue No. 03-11, “Reporting
Realized Gains and Losses on Derivative Instruments That Are Subject
to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ as
Defined in Issue No. 02-3.” Prior to Issue No. 03-11, no specific guidance
existed to address the classification in the income statement of derivative
contracts that are not held for trading purposes. The consensus stated
that determining whether realized gains and losses on contracts that
physically deliver and are not held for trading purposes should be reported
on a net or gross basis was a matter of judgment that depended on the
relevant facts and circumstances. NU Enterprises and the Utility Group
have derivative sales contracts, and though these contracts may result
in physical delivery, management has determined, based on the relevant
facts and circumstances, that because these transactions are part of
the respective companies’ procurement activities, inclusion in operating
expenses better depicts these sales activities. At December 31, 2004,
2003 and 2002, the settlement of these derivative contracts that are not
held for trading purposes are reported on a net basis in expenses.
In EITF Issue No. 03-11, the EITF did not provide transition guidance,
which management could have interpreted as becoming applicable on
October 1, 2003 for revenues from that date forward. However, management
applied its conclusion on net or gross reporting to all periods presented
to enhance comparability. Operating revenues and fuel, purchased and
net interchange power for the years ended December 31, 2004, 2003
and 2002 reflect net reporting. The adoption of net reporting had no
effect on net income.
Accounting for Energy Contracts: The accounting treatment for energy contracts
entered into varies between contracts and depends on the intended use of
the particular contract and on whether or not the contracts are derivatives.