Eversource 2005 Annual Report Download - page 40

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Health Care Cost: The health care cost trend assumption used to project
increases in medical costs was 7 percent for 2005 and 8 percent for
2004, decreasing one percentage point per year to an ultimate rate of
5percent in 2007. For December 31, 2005 disclosure purposes, the
health care cost trend assumption was reset for 2006 at 10 percent,
decreasing one percentage point per year to an ultimate rate of 5 percent
in 2011. The effect of increasing the health care cost trend by one
percentage point would have increased service and interest cost
components of the PBOP Plan cost by $0.9 million in 2005 and $1 million
in 2004.
Income Taxes: Income tax expense is calculated each year in each of the
jurisdictions in which NU operates. This process involves estimating
NU’s actual current tax exposures as well as assessing temporary
differences resulting from differing treatment of items, such as timing
of the deduction and expenses for tax and book accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in NU’s consolidated balance sheets. The income tax estimation
process impacts all of NU’s segments and adjustments made to income
taxes could significantly affect NU’s consolidated financial statements.
Management must also assess the likelihood that deferred tax assets
will be recovered from future taxable income, and to the extent that
recovery is not likely, a valuation allowance must be established.
Significant management judgment is required in determining income
tax expense, deferred tax assets and liabilities and valuation allowances.
NU accounts for deferred taxes under SFAS No. 109, “Accounting for
Income Taxes.” For temporary differences recorded as deferred tax
liabilities that will be recovered in rates in the future, NU has established
aregulatory asset. The regulatory asset amounted to $332.5 million
and $316.3 million at December 31, 2005 and 2004, respectively.
Regulatory agencies in certain jurisdictions in which NU’s Utility Group
companies operate require the tax effect of specific temporary differences
to be “flowed through” to utility customers. Flow through treatment
means that deferred tax expense is not recorded on the consolidated
statements of (loss)/income. Instead, the tax effect of the temporary
difference impacts both amounts for income tax expense currently
included in customers’ rates and the company’s net income. Flow through
treatment can result in effective income tax rates that are significantly
different than expected income tax rates. Recording deferred taxes on
flow through items is required by SFAS No. 109, and the offset to the
deferred tax amounts is the regulatoryasset referred to above.
A reconciliation from expected tax expense at the statutory federal
income tax rate to actual tax expense recorded is included in the
accompanying footnotes to the consolidated financial statements.
See Note 1H, “Summaryof Significant Accounting Policies – Income
Taxes,” to the consolidated financial statements for further information.
The estimates that are made by management in order to record income
tax expense, accrued taxes and deferred taxes are compared each
year to the actual tax amounts filed on NU’sincome tax returns. The
income tax returns were filed in the fall of 2005 for the 2004 tax year,
and NU recorded differences between income tax expense, accrued
taxes and deferred taxes on its consolidated financial statements and
the amounts that were on its income tax returns.
Depreciation: Depreciation expense is calculated based on an asset’s
useful life, and judgment is involved when estimating the useful lives
of certain assets. A change in the estimated useful lives of these
assets could have a material impact on NU’s consolidated financial
statements absent timely rate relief for Utility Group assets.
Accounting for Environmental Reserves: Environmental reserves are accrued
using a probabilistic model approach when assessments indicate that
it is probable that a liability has been incurred and an amount can be
reasonably estimated. Adjustments made to environmental liabilities
could have a significant effect on earnings. The probabilistic model
approach estimates the liability based on the most likely action plan
from a variety of available remediation options, ranging from no action
to remedies ranging from establishing institutional controls to full site
remediation and long-term monitoring. The probabilistic model
approach estimates the liabilities associated with each possible action
plan based on findings through various phases of site assessments.
These estimates are based on currently available information from
presently enacted state and federal environmental laws and regulations
and several cost estimates from outside engineering and remediation
contractors. These amounts also take into consideration prior experience
in remediating contaminated sites and data released by the United
States Environmental Protection Agency and other organizations. These
estimates are subjective in nature partly because there are usually
several different remediation options from which to choose when
working on a specific site. These estimates are subject to revisions in
future periods based on actual costs or new information concerning
either the level of contamination at the site or newly enacted laws and
regulations. The amounts recorded as environmental liabilities on the
consolidated balance sheets represent management’s best estimate of
the liability for environmental costs based on current site information
from site assessments and remediation estimates. These liabilities are
estimated on an undiscounted basis.
PSNH and Yankee Gas have regulatory recovery mechanisms in place
for environmental costs. Accordingly, regulatory assets have been
recorded for certain of PSNH’s and Yankee Gas’ environmental liabilities.
As of December 31, 2005 and 2004, $24.7 million and $28 million,
respectively, have been recorded as regulatory assets on the
accompanying consolidated balance sheets. CL&P recovers a certain
level of environmental costs currently in rates but does not have
an environmental cost recovery tracking mechanism. Accordingly,
changes in CL&P’senvironmental reserves impact CL&P’s earnings.
WMECO does not have a regulatory mechanism to recover
environmental costs from its customers, and changes in WMECO’s
environmental reserves impact WMECO’s earnings.
Asset Retirement Obligations: On March 30, 2005, the FASB issued FIN 47,
“Accounting for Conditional Asset Retirement Obligations – an
Interpretation of FASB Statement No. 143.” FIN 47 requires an entity
to recognize a liability for the fair value of an ARO that is conditional on
afuture event if the liability’s fair value can be reasonably estimated.
NU adopted FIN 47 on December 31, 2005. Upon adoption, management
identified several conditional removal obligations that have been
accounted for as AROs. A cumulative effect of an accounting change
reflecting a $1 million after-tax loss related to the adoption of FIN 47 is