National Grid 2006 Annual Report Download - page 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Goodwill:
National Grid plc’s acquisitions of the Company’s subsidiaries including the 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, 2006 and 2005, 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, 2006, management determined that no adjustment to the goodwill carrying value was
required. During fiscal year 2006, the Company made adjustments to reduce goodwill by approxi-
mately $32 million. This amount primarily related to (i) an adjustment to Niagara Mohawk goodwill
of $9 million due to the settlement of an Internal Revenue Service (IRS) audit of pre-merger years
related to a pre-merger tax contingency and (ii) an adjustment to Massachusetts Electric Company
(Massachusetts Electric), Narragansett, and NEP goodwill of $15 million, $7 million and $1 million
respectively, which related to the reclassification of long-term balance sheet accounts.
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 unbilled revenue included in
accounts receivable at March 31, 2006 and 2005 was approximately $288 million and $243 mil-
lion, respectively. 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 Company recognizes changes in unbilled electric revenues in its results of operations.
Pursuant to Niagara Mohawk’s 2000 multi-year gas settlement (which ended December 2004,
with Niagara Mohawk having the right to request a change in rates at any time, if needed),
changes in accrued unbilled gas revenues are deferred. At March 31, 2006 and 2005, approxi-
mately $6 million and $7 million, respectively, of unbilled gas revenues remain unrecognized in
results of operations. Management cannot predict when unbilled gas revenues will be allowed to
be recognized 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 Company capitalizes AFUDC as part of construction costs in amounts equivalent to the cost
of funds devoted to plant under construction for its regulated businesses. 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 (deductions), net” and “Other interest.” This method is in
accordance with an established rate making practice under which a utility is permitted a return on,
and the recovery of, prudently incurred capital costs through their ultimate inclusion in rate base
and in the provision for depreciation. The composite AFUDC rates were approximately 6.2%,
4.8% and 4.5% for the years ended March 31, 2006, 2005 and 2004, respectively.
37
National Grid USA / Annual Report