National Grid 2005 Annual Report Download - page 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Goodwill:
The acquisition of the Company by National Grid Transco (NGT), and the subsequent acquisitions
by the Company of Eastern Utilities Associates (EUA) and Niagara Mohawk, were accounted for
by the purchase method, the application of which includes the recognition of goodwill. Goodwill
was approximately $3.2 billion at March 31, 2005 and 2004, respectively. In accordance with the
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 142, “Goodwill and Other Intangible Assets”, the Company reviews its goodwill annual-
ly for impairment and when events or circumstances indicate that the asset may be impaired. The
Company utilized a discounted cash flow approach incorporating its most recent business plan
forecasts in the performance of the annual goodwill impairment test. Upon the annual analysis at
March 31, 2005, management determined that no adjustment to the goodwill carrying value was
required.
6. Electric and Gas Utility Revenue:
The Company’s regulated subsidiaries charge customers for electric and gas service in accor-
dance with rates approved by the FERC and the applicable state regulatory commissions.
All of the Company’s distribution subsidiaries, except for Granite State Electric, follow the policy of
accruing the estimated amount of base rate revenues for electricity delivered but not yet billed
(unbilled revenues), to match costs and revenues more closely. The distribution subsidiaries record
revenues in amounts management believes to be recoverable pursuant to provisions of approved
settlement agreements and state legislation. The distribution subsidiaries normalize the difference
between revenue and expenses from energy conservation programs, commodity purchases,
transmission service and contract termination charges (CTCs). The unbilled revenue included in
accounts receivable at March 31, 2005 and 2004 was approximately $154 million and $169 mil-
lion, respectively.
Pursuant to Niagara Mohawk’s 2000 multi-year gas settlement (ending December 2004), changes
in accrued unbilled gas revenues are deferred. At March 31, 2005 and 2004, approximately $7
million and $9 million, respectively, of unbilled gas revenues remain unrecognized in results of
operations. Niagara Mohawk cannot predict when unbilled gas revenues will be allowed to be rec-
ognized in results of operations.
7. Utility Plant:
The cost of additions to utility plant and replacements of retired units of property are capitalized.
Costs include direct material, labor, overhead and AFUDC (see below). Replacement of minor
items of utility plant and the cost of current repairs and maintenance are charged to expense.
Whenever utility plant is retired, its original cost, together with the cost of removal, less salvage, is
charged to accumulated depreciation.
8. Allowance for Funds Used During Construction (AFUDC):
The utility subsidiaries capitalize AFUDC as part of construction costs. AFUDC represents the
composite interest and equity costs of capital funds used to finance that portion of construction
costs not yet eligible for inclusion in rate base. AFUDC is capitalized in "Utility plant" with offsetting
non-cash credits to “Other income” and “Interest.” This method is in accordance with an estab-
lished rate making practice under which a utility is permitted a return on, and the recovery of, pru-
dently incurred capital costs through their ultimate inclusion in rate base and in the provision for
depreciation. The composite AFUDC rates were approximately 4.8 percent, 4.5 percent and 4.1
percent for the years ended March 31, 2005, 2004 and 2003, respectively.
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National Grid USA / Annual Report