Eversource 2005 Annual Report Download - page 36

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selected October 1st as the annual goodwill impairment testing date.
Goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value and if the implied fair
value of goodwill based on the estimated fair value of the reporting
unit is less than the carrying amount of the goodwill. If goodwill is
deemed to be impaired it is written-off to the extent it is impaired.
The impact of this goodwill impairment review would be limited to
Yankee Gas. During 2005, the goodwill and intangible asset balances
previously recorded by NU Enterprises totaling $50.7 million were
written off.
NU has completed its impairment analysis as of October 1, 2005 for
Yankee Gas and has determined that no impairment exists. In performing
the required impairment evaluation, NU estimated the fair value of the
Yankee Gas reporting unit and compared it to the carrying amount of
the reporting unit, including goodwill. NU estimated the fair value of
Yankee Gas using discounted cash flow methodologies and an analysis
of comparable companies or transactions. The discounted cash flow
analysis requires the input of several critical assumptions, including
future growth rates, operating cost escalation rates, allowed ROE, a
risk-adjusted discount rate, and long-term earnings multiples of comparable
companies. These assumptions are critical to the estimate and can
change from period to period.
Modifications to these assumptions in future periods, particularly changes
in discount rates, could result in future impairments of goodwill. Actual
financial performance and market conditions in upcoming periods
could also impact futureimpairment analyses.
For further information, see Note 8, “Goodwill and Other Intangible
Assets,” to the consolidated financial statements.
Revenue Recognition: Utility Group retail revenues arebased on rates
approved by the state regulatory commissions. These regulated rates
areapplied to customers’ use of energy to calculate a bill. In general,
rates can only be changed through formal proceedings with the state
regulatory commissions.
The determination of the energy sales to individual customers is based
on the reading of meters, which occurs on a systematic basis throughout
the month. Billed revenues are based on these meter readings. At the
end of each month, amounts of energy delivered to customers since
the date of the last meter reading are estimated, and an estimated
amount of unbilled revenues is recorded.
Certain Utility Group companies utilize regulatory commission-approved
tracking mechanisms to track the recoveryof certain incurred costs.
The tracking mechanisms allow for rates to be changed periodically,
with overcollections refunded to customers or undercollections
collected from customers in futureperiods.
Wholesale transmission revenues arebased on rates and formulas
that are approved by the FERC. Most of NU’s wholesale transmission
revenues are collected through a combination of the RNS tariff and
NU’sLNS tariff. The RNS tariff, which is administered by ISO-NE,
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, 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. At December 31, 2005, this true-up has resulted
in the recognition of a $2.1 million regulatoryliability,including
approximately $1.5 million due to NU’s electric distribution companies.
Asignificant portion of the NU transmission business revenue comes
from ISO-NE charges to the distribution businesses of CL&P, PSNH
and WMECO. The distribution businesses recover these costs through
the retail rates that are charged to their retail customers. In July of 2005,
CL&P began tracking its retail transmission revenues and expenses
and will adjust its retail transmission rates on a regular basis, thereby
recovering all of its retail transmission expenses on a timely basis.
This new tracking mechanism resulted from the enactment of the
new legislation passed by the Connecticut legislature in 2005.
WMECO implemented its retail transmission tracker and rate
adjustment mechanism in January of 2002 as part of its 2002 rate
change filing. PSNH does not currently have a retail transmission
rate tracking mechanism.
NU Enterprises’ revenues are recognized at different times for its
different business lines. Wholesale marketing revenues were recognized
when energy was delivered up to and including the first quarter of
2005. Subsequent to March 31, 2005, as a result of going to mark-to-
market accounting, these revenues were still recognized when delivered,
however, they were reclassified to fuel, purchased and net interchange
power. Retail marketing revenues are recognized when energy is delivered.
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 the Utility Group
that are related to customers’ needs are recorded net in operating
expenses. For further information regarding the accounting for these
contracts, see Note 1F,“Summaryof 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
yet been billed. Unbilled revenues areincluded in revenue on the
accompanying consolidated statements of (loss)/income and are
assets on the accompanying consolidated balance sheets that are
reclassified to 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.
Through December 31, 2004, the Utility Group estimated unbilled
revenues monthly using the requirements method. The requirements
method utilized the total monthly volume of electricity or gas delivered
to the system and applied 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 resulted in a monthly estimate of unbilled sales. Unbilled
revenues were 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 had a significant impact on estimated
unbilled revenue amounts.