Eversource 2004 Annual Report Download - page 59

57
Non-derivative contracts are recorded at the time of delivery or settlement.
Most of the contracts comprising Select Energy’s wholesale and retail
marketing activities are derivatives. The application of derivative
accounting under SFAS No. 133, as amended, is complex and requires
management’s judgment. Judgment is applied in the election and
designation of the normal purchases and sale exception (and resulting
accounting upon delivery or settlement), which 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
accounting upon delivery or settlement would be terminated and fair
value accounting would be applied.
Both long-term non-derivative contracts and long-term derivative contracts
that are normal are recorded in revenues when these contracts represent
sales, and recorded in fuel, purchased and net interchange power when
these contracts represent purchases, except for sales contracts that
relate to procurement activities. These contracts are recorded in fuel,
purchased and net interchange power when settled.
Derivative contracts that are entered into for trading purposes are
recorded on the consolidated balance sheets at fair value, and changes in
fair value impact earnings. Revenues and expenses for these contracts
are recorded on a net basis in revenues. Derivative contracts that are
not held for trading purposes and that do not qualify as normal purchases
and sales or hedges are non-trading derivative contracts. These contracts
are recorded on the consolidated balance sheets at fair value, and changes
in fair value for these contracts are recorded primarily in expenses.
Contracts that are hedging an underlying transaction and that qualify as
cash flow hedges are recorded on the consolidated balance sheets at fair
value with changes in fair value generally reflected in accumulated other
comprehensive income. Hedges impact 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.
For further information regarding these contracts and their accounting,
see Note 3, “Derivative Instruments,” to the consolidated financial
statements.
G. Utility Group Regulatory Accounting
The accounting policies of NU’s Utility Group conform to accounting
principles generally accepted in the United States of America applicable
to rate-regulated enterprises and historically reflect the effects of the
rate-making process in accordance with SFAS No. 71, “Accounting for
the Effects of Certain Types of Regulation.”
The transmission and distribution businesses of CL&P, PSNH and
WMECO, along with PSNH’s generation business and Yankee Gas’
distribution business, continue to be cost-of-service rate regulated.
New Hampshire’s electric utility industry restructuring laws have been
modified to delay the sale of PSNH’s fossil and hydroelectric generation
assets until at least April of 2006. There has been no regulatory action
to the contrary, and management currently has no plans to divest of
these generation assets. As the New Hampshire Public Utilities
Commission (NHPUC) has allowed and is expected to continue to allow
rate recovery of a return on and recovery of these assets, as well as all
operating expenses, PSNH meets the criteria for the application of
SFAS No. 71. Stranded costs related to generation assets, to the extent
not currently recovered in rates, are deferred as Part 3 stranded costs
under the “Agreement to Settle PSNH Restructuring” (Restructuring
Settlement). Part 3 stranded costs are non-securitized regulatory
assets that must be recovered by a recovery end date determined in
accordance with the Restructuring Settlement or be written off.
Management believes the application of SFAS No. 71 to the portions of
those businesses continues to be appropriate. Management also believes
it is probable that NU’s Utility Group companies will recover their
investments in long-lived assets, including regulatory assets. In addition,
all material net regulatory assets are earning an equity return, except
for securitized regulatory assets, which are not supported by equity.
Regulatory Assets: The components of regulatory assets are as follows:
At December 31,
(Millions of Dollars) 2004 2003
Recoverable nuclear costs $ 52.0 $ 82.4
Securitized assets 1,537.4 1,721.1
Income taxes, net 316.3 253.8
Unrecovered contractual obligations 354.7 378.6
Recoverable energy costs 255.0 255.7
Other 230.5 282.4
Totals $2,745.9 $2,974.0
Additionally, the Utility Group had $11.6 million and $12.3 million of
regulatory costs at December 31, 2004 and 2003, respectively, that are
included in deferred debits and other assets — other on the accompanying
consolidated balance sheets. These amounts represent regulatory costs
that have not yet been approved by the applicable regulatory agency.
Management believes that these costs are recoverable in future rates.
Recoverable Nuclear Costs: In March of 2001, CL&P and WMECO sold their
ownership interests in the Millstone nuclear units (Millstone). The
gains on the sale in the amounts of approximately $521.6 million and
$119.8 million, respectively, for CL&P and WMECO were used to offset
recoverable nuclear costs. These unamortized recoverable nuclear costs
amounted to $22.5 million at December 31, 2003, and were fully recovered
by December 31, 2004. Additionally, PSNH recorded a regulatory asset
in conjunction with the sale of Millstone 3 with an unamortized balance
of $29.7 million and $33.3 million at December 31, 2004 and 2003,
respectively, which is included in recoverable nuclear costs. Also included
in recoverable nuclear costs for 2004 and 2003 are $22.3 million and
$26.6 million, respectively, primarily related to Millstone 1 recoverable
nuclear costs associated with the undepreciated plant and related assets
at the time Millstone 1 was shutdown.
Securitized Assets: In March 2001, CL&P issued $1.4 billion in rate reduction
certificates. CL&P used $1.1 billion of the proceeds from that issuance
to buyout or buydown certain contracts with independent power producers
(IPP). The unamortized CL&P securitized asset balance is $850 million
and $960.5 million at December 31, 2004 and 2003, respectively. CL&P
used the remaining proceeds from the issuance of the rate reduction
certificates to securitize a portion of its SFAS No. 109, “Accounting for
Income Taxes,” regulatory asset. The securitized SFAS No. 109 regulatory
asset had a balance remaining of $144.3 million and $163.2 million at
December 31, 2004 and 2003, respectively.