Eversource 2005 Annual Report Download - page 37

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In the first quarter of 2005, management adopted a new method to
estimate unbilled revenues for CL&P, PSNH, WMECO, and Yankee Gas.
The new method allocates billed sales to the current calendar month
based on the daily load for each billing cycle (DLC method). The billed
sales are subtracted from total calendar month sales to estimate
unbilled sales. The impact of adopting the new method was not material.
This new method replaces the requirements method described previously.
Derivative Accounting: Certain of the contracts comprising Select Energy’s
wholesale marketing and competitive generation activities are derivatives,
and certain Utility Group contracts for the purchase or sale of
energy or energy-related products are derivatives. Most retail marketing
contracts with retail customers are not derivatives, while virtually all
contracts entered into to supply these customers are derivatives.
The application of derivative accounting rules 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 fair value of derivatives is based upon the notional amount of a
contract and the underlying market price or fair value per unit. When
quantities are not specified in the contract, the company estimates
notional amounts using amounts referenced in default provisions and
other relevant sections of the contract. The notional amount is updated
during the termof the contract, and updates can have a material
impact on mark-to-market amounts.
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
termthat it will result in physical deliveryand 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 supportthis 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
because deliveryis no longer probable of occurring, then the hedge
designation would be terminated at the same time.
For the period April 1, 2005 to December 31, 2005, Select Energy
reported the settlement of derivative and non-derivative retail sales and
certain other derivative contracts that physically deliver in revenues and
the associated derivative and non-derivative contracts to supply these
contracts in fuel, purchased and net interchange power. In addition,
Select Energy reported the settlement of all derivative wholesale
contracts, including full requirements sales contracts, in fuel, purchased
and net interchange power as a result of applying mark-to-market
accounting to those contracts. Certain generation-related derivative
contracts that are marked-to-market were recorded in revenues.
Prior to April 1, 2005, Select Energy reported the settlement of long-
term derivative contracts, including full requirements sales contracts
that physically delivered and were not held for trading purposes on a
gross basis, generally with sales in revenues and purchases in expenses.
Retail sales contracts are physically delivered and recorded in revenues.
Short-term sales and purchases represent power and natural gas that
was purchased to serve contracts but was ultimately not needed based
on the actual load of the customers. This excess power and natural
gas was sold to the independent system operator or to other counter-
parties. For the years ended December 31, 2004 and 2003, settlements
of these short-term derivative contracts that are not held for trading
purposes, were reported on a net basis in fuel, purchased and net
interchange power.
The Utility Group reports the settlement of all short-term sales contracts
that are part of procurement activities on a net basis in expenses.
Regulatory Accounting: The accounting policies of NU’s regulated utility
companies 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, and management believes the application of SFAS No.
71 to those businesses continues to be appropriate. Management
must reaffirm this conclusion at each balance sheet date. If, as a result
of a change in circumstances, it is determined that any portion of
these companies no longer meets the criteria of regulatory accounting
under SFAS No. 71, that portion of the company will have to discontinue
regulatory accounting and write-off the respective regulatory assets
and liabilities. Such a write-off could have a material impact on NU’s,
CL&P’s, PSNH’s, WMECO’s and Yankee Gas’ financial statements.
The application of SFAS No. 71 results in recording regulatoryassets
and liabilities. Regulatoryassets represent the deferral of incurred
costs that areprobable of future recovery in customer rates. In some
cases, NU records regulatoryassets beforeapproval for recoveryhas
been received from the applicable regulatorycommission. Management
must use judgment to conclude that costs deferred as regulatory assets
areprobable of future recovery.Management bases its conclusion on
certain factors, including changes in the regulatoryenvironment, recent
rate orders issued by the applicable regulatory agencies and the status
of any potential new legislation. Regulatory liabilities represent revenues
received from customers to fund expected costs that have not yet
been incurred or areprobable future refunds to customers.
Management uses its best judgment when recording regulatory assets
and liabilities; however, regulatory commissions can reach different
conclusions about the recovery of costs, and those conclusions could
have a material impact on NU’sconsolidated financial statements.
Management believes it is probable that the Utility Group companies
will recover the regulatory assets that have been recorded.
Presentation: In accordance with current accounting pronouncements,
NU’sconsolidated financial statements include all subsidiaries upon
which control is maintained and all variable interest entities (VIE).
Determining whether the company is the primary beneficiary of a VIE
is subjective and requires management’s judgment. There are certain
variables taken into consideration to determine whether the company
is considered the primary beneficiary of the VIE. A change in any one
of these variables could require the company to reconsider whether
or not it is the primary beneficiary of the VIE. All intercompany
transactions between these subsidiaries are eliminated as part of the
consolidation process.