Eversource 2003 Annual Report Download - page 36

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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates, assumptions and at times difficult,
subjective or complex judgments. Changes in these estimates, assump-
tions and judgments, in and of themselves, could materially impact the
financial statements of NU. Management communicates to and discusses
with NU’s Audit Committee of the Board of Trustees all critical accounting
policies and estimates. The following are the accounting policies and
estimates that management believes are the most critical in nature.
Presentation: In accordance with current accounting pronouncements,
NU’s consolidated financial statements include all subsidiaries upon
which control is maintained and all variable interest entities (VIE) for
which NU is the primary beneficiary, as defined. All intercompany
transactions between these subsidiaries are eliminated as part of the
consolidation process.
NU has less than 50 percent ownership interests in the Connecticut
Yankee Atomic Power Company, Yankee Atomic Electric Company,
Maine Yankee Atomic Power Company, and two companies that transmit
electricity imported from the Hydro-Quebec system. NU does not control
these companies and does not consolidate them in its financial statements.
NU accounts for the investments in these companies using the equity
method. Under the equity method, NU records its ownership share of
the earnings or losses at these companies. Determining whether or not
NU should apply the equity method of accounting for an investee
company requires management judgment.
NU has investments in NEON and Acumentrics. These investments are
carried at cost, and these companies are VIEs, as defined by FIN 46. NU
adopted FIN 46 on July 1, 2003. FIN 46 requires that the party to a VIE
that absorbs the majority of the VIE’s losses, defined as the primary
beneficiary, consolidate the VIE. NU is not the primary beneficiary of
NEON or Acumentrics and is not required to consolidate them.
NU also has a preferred stock investment in R. M. Services, Inc. (RMS).
Upon adoption of FIN 46, management determined that NU was the primary
beneficiary of RMS and that NU would have to consolidate RMS into its
financial statements. The consolidation of RMS resulted in a negative $4.7
million after-tax cumulative effect of an accounting change in the third
quarter of 2003. For more information on RMS, see Note 1E, “Summary
of Significant Accounting Policies — Accounting for R.M. Services, Inc.
Variable Interest Entity,” to the consolidated financial statements.
The required adoption date of FIN 46 was delayed from July 1, 2003 to
December 31, 2003 for NU. However, NU elected to adopt FIN 46 at
the original adoption date, which impacted both the amount of the
cumulative effect of the accounting change and the classification of
losses NU recorded after RMS became a consolidated entity.
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 to 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.
In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R).
FIN 46R could result in fewer NU investments meeting the definition of a
VIE. FIN 46R is effective for NU for the first quarter of 2004, but is not
expected to have an impact on NU’s consolidated financial statements.
Revenue Recognition: Utility Group retail revenues are based on rates
approved by the state regulatory commissions. These regulated rates are
applied to customers’ use of energy to calculate a bill. In general, rates
can only be changed through formal proceedings with the state
regulatory commissions.
Certain Utility Group companies utilize regulatory commission-approved
tracking mechanisms to track the recovery of certain incurred costs.
The tracking mechanisms allow for rates to be changed periodically, with
overcollections refunded to customers or undercollections collected
from customers in future periods.
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.
Wholesale transmission revenues are based on rates and formulas that are
approved by the FERC. Most of NU’s wholesale transmission revenues are
collected through a combination of the New England Regional Network
Service (RNS) tariff and NU’s Local Network Service (LNS) 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
on October 22, 2003, 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.
NU Enterprises recognizes revenues at different times for its different business
lines. Wholesale and retail marketing revenues are recognized when energy
is delivered to customers. Trading revenues are recognized as the fair value
of trading contracts changes. 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 trans-
actions settle. The settlement of wholesale non-trading derivative contracts
for the sale of energy or gas by both the Utility Group and NU Enterprises
that are not related to customers’ needs are recorded in operating expenses.
Derivative contracts that hedge an underlying transaction and that qualify
for hedge accounting affect earnings when the forecasted transaction
being hedged occurs, when hedge ineffectiveness is measured and recorded,
when the forecasted transaction being hedged is no longer probable of
occurring, or when there is an accumulated other comprehensive loss and
when the hedge and the forecasted transaction being hedged are in a loss
position on a combined basis. The settlement of hedge derivative contracts
is recorded in the same revenue or expense line as the transaction being
hedged. For further information regarding the accounting for these
contracts, see Note 1G, “Summary of Significant Accounting Policies —
Accounting for Energy Contracts,” to the consolidated financial statements.
Utility Group Unbilled Revenues: Unbilled revenues represent an estimate
of electricity or gas delivered to customers that has not been billed.
Unbilled revenues represent assets on the balance sheet that become
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