Eversource 2004 Annual Report Download - page 61

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The regulatory liabilities offsetting derivative assets relate primarily 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.
H. 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.
Details of income tax expense are as follows:
For the Years Ended December 31,
(Thousands of Dollars) 2004 2003 2002
The components of the federal and state income tax provisions are:
Current income taxes:
Federal $(53,531) $143,349 $197,426
State (6,422) 37,116 34,204
Total current (59,953) 180,465 231,630
Deferred income taxes, net
Federal 120,285 (90,005) (114,597)
State (4,768) (35,909) (15,591)
Total deferred 115,517 (125,914) (130,188)
Investment tax credits, net (3,808) (3,819) (26,592)
Total income tax expense $ 51,756 $ 50,732 $ 74,850
A reconciliation between income
tax expense and the expected tax
expense at the statutory rate
is as follows:
Expected federal income tax $ 60,866 $ 62,105 $ 81,381
Tax effect of differences:
Depreciation 5,805 4,010 10,404
Amortization of regulatory assets 1,795 1,795 11,518
Investment tax credit amortization (3,808) (3,819) (26,592)
State income taxes, net of
federal benefit (5,377) 785 12,098
Dividends received deduction (1,255) (1,370) (3,237)
Tax asset valuation allowance/
reserve adjustments 1,914 (5,379) (111)
Other, net (8,184) (7,395) (10,611)
Total income tax expense $ 51,756 $ 50,732 $ 74,850
NU and its subsidiaries file a consolidated federal income tax return.
Likewise NU and its subsidiaries file state income tax returns, with
some filing in more than one state. NU and its subsidiaries are parties
to a tax allocation agreement under which taxable subsidiaries pay no
more taxes than they would have otherwise paid had they filed a stand-
alone tax return. Subsidiaries generating tax losses are similarly paid
for their losses when utilized.
The tax effects of temporary differences that give rise to the current and
long-term net accumulated deferred tax obligations are as follows:
At December 31,
(Millions of Dollars) 2004 2003
Deferred tax liabilities — current:
Change in fair value of energy contracts $ 74.7 $ 55.4
Other 33.0 22.1
Total deferred tax liabilities — current 107.7 77.5
Deferred tax assets — current:
Change in fair value of energy contracts 76.3 59.1
Other 14.7 8.4
Total deferred tax assets — current 91.0 67.5
Net deferred tax liabilities — current 16.7 10.0
Deferred tax liabilities — long-term:
Accelerated depreciation and
other plant-related differences 1,105.5 904.4
Employee benefits 169.2 151.4
Regulatory amounts:
Securitized contract termination
costs and other 252.1 247.0
Income tax gross-up 215.1 178.6
Other 239.8 254.7
Total deferred tax liabilities — long-term 1,981.7 1,736.1
Deferred tax assets — long-term:
Regulatory deferrals 365.0 341.5
Employee benefits 86.7 72.1
Income tax gross-up 32.6 20.8
Other 63.0 24.4
Total deferred tax assets — long-term 547.3 458.8
Net deferred tax liabilities — long-term 1,434.4 1,277.3
Net deferred tax liabilities $1,451.1 $1,287.3
At December 31, 2004, NU had state net operating loss carry forwards
of $206.2 million that expire between December 31, 2006 and December
31, 2024. At December 31, 2004, NU also had state credit carry forwards
of $9.3 million that expire on December 31, 2009.
At December 31, 2003, NU had state net operating loss carry forwards
of $119.5 million that expire between December 31, 2006 and December
31, 2023. The state net operating losses produced a deferred tax asset
of $17.2 million and $10.4 million at December 31, 2004 and 2003,
respectively.
NU had established a valuation allowance of $12.6 million and $9.4 million
as of December 31, 2004 and 2003, respectively.
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 regulated customers are issued by the Treasury Department.
Proposed regulations 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 proposed regulations, a company could elect to
apply the regulation retroactively. The Treasury Department is currently