Eversource 2003 Annual Report Download - page 37

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financial statements as adjustments to that estimate could significantly
impact operating revenues and earnings. Two potential methods for esti-
mating unbilled revenues are the requirements and the cycle method.
The Utility Group estimates unbilled revenues monthly using the require-
ments method. The requirements method utilizes the total monthly volume
of electricity or gas delivered to the system and applies a delivery effi-
ciency (DE) factor to reduce the total monthly volume by an estimate of
delivery losses in order to calculate total estimated monthly sales to
customers. The total estimated monthly sales amount less total monthly
billed sales amount results in a monthly estimate of unbilled sales.
Unbilled revenues are estimated by applying an average rate to the
estimate of unbilled sales.
Differences between the actual DE factor and the estimated DE factor
can have a significant impact on estimated unbilled revenue amounts.
In 2003, the unbilled sales estimates for all Utility Group companies were
tested using the cycle method. The cycle method uses the billed sales
from each meter reading cycle and an estimate of unbilled days in each
month based on the meter reading schedule. The cycle method is historically
more accurate than the requirements method when used in a mostly
weather-neutral month. The cycle method resulted in adjustments to the
estimate of unbilled revenues that had a net positive after-tax earnings
impact of approximately $4.6 million in 2003. The positive after-tax
impacts on CL&P, PSNH, and WMECO were $7.2 million, $3.3 million,
and $0.3 million, respectively. There was a negative after-tax impact on
Yankee Gas of $6.2 million, including certain gas cost adjustments.
The testing of the requirements method with the cycle method will be
done on at least an annual basis using a weather-neutral month.
Derivative Accounting: Effective January 1, 2001, NU adopted SFAS
No. 133, as amended.
Select Energy uses derivative instruments in its wholesale and retail
marketing activities, and many Utility Group contracts for the purchase
or sale of energy or energy-related products are derivatives. The application
of derivative accounting under SFAS No. 133, as amended, is complex
and requires management judgment in the following respects: identification
of derivatives and embedded derivatives, election and designation of the
normal purchases and sales exception, 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.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement
133 on Derivative Instruments and Hedging Activities,” which amended
existing derivative accounting guidance. This new statement incorporates
interpretations that were included in previous Derivative Implementation
Group (DIG) guidance, clarifies certain conditions, and amends other
existing pronouncements. It was effective for contracts entered into or
modified after June 30, 2003. Management has determined that the
adoption of SFAS No. 149 did not change NU’s accounting for wholesale
and retail marketing contracts or the ability of NU Enterprises to elect
the normal purchases and sales exception. The adoption of SFAS No.
149 resulted in fair value accounting for certain Utility Group contracts
that are subject to unplanned netting and do not meet the definition of
capacity contracts. These non-trading derivative contracts are recorded at
fair value at December 31, 2003 as derivative assets and liabilities with
offsetting amounts recorded as regulatory liabilities and assets because
the contracts are part of providing regulated electric or gas service. The
fair values of these Utility Group contracts at December 31, 2003 were
derivative assets of $1.6 million and derivative liabilities of $1.6 million.
Emerging Issues Task Force (EITF) Issue No. 03-11, “Reporting Realized
Gains and Losses on Derivative Instruments That Are Subject to FASB
Statement No. 133, and ‘Not Held for Trading Purposes’ as Defined in
EITF Issue No. 02-3,” was derived from EITF Issue No. 02-3, which
requires net reporting in the income statement of energy trading activities.
Issue No. 03-11 addresses income statement classification of revenues
related to derivatives that physically deliver and are not related to energy
trading activities. Prior to Issue No. 03-11, there was no specific account-
ing guidance that addressed the classification in the income statement
of Select Energy’s retail marketing and wholesale contracts or the Utility
Group’s power supply contracts, many of which are non-trading derivatives.
On July 31, 2003, the EITF reached a consensus in Issue No. 03-11 that
determining whether realized gains and losses on contracts that physically
deliver and are not held for trading purposes should be reported on a
net (sales and purchases both in expenses) or gross (sales in revenues
and purchases in expenses) basis is a matter of judgment that depends
on the relevant facts and circumstances. The EITF indicated that existing
accounting guidance should be considered and provided no new guidance
in Issue No. 03-11. In Issue No. 03-11, the EITF did not provide transition
guidance, which management could have interpreted as becoming
applicable on October 1, 2003 for revenues from that date forward.
However, management applied its conclusion on net or gross reporting
to all periods presented to enhance comparability.
Select Energy reports the settlement of long-term derivative contracts
that physically deliver and are not held for trading purposes on a gross
basis, generally with sales in revenues and purchases in expenses. Short-
term sales and purchases represent power that is purchased to serve full
requirements contracts but is ultimately not needed based on the actual
load of the full requirements customers. This excess power is sold to
the independent system operator or to other counterparties. As of
December 31, 2003, settlements of short-term derivative contracts that
are not held for trading purposes, though previously reported in revenues,
are reported on a net basis in expenses. Select Energy applied the new
classification to revenues for all years presented in order to enhance
comparability. Short-term and non-requirements sales and other
reclassifications that amounted to $595.7 million for the first nine
months of 2003 were reflected as revenues in quarterly reporting but
are now included in expenses.
Though previously reported on a gross basis, after reviewing the relevant
facts and circumstances, the Utility Group also reported the settlement
of all short-term sales contracts that are part of procurement activities
on a net basis in expenses. The Utility Group applied this new classification
to revenues for all years presented in order to enhance comparability.
These sales that amounted to $50.2 million for the first nine months of
2003 were reflected as revenues in quarterly reporting but are now
included in expenses.
The amounts reclassified from 2002 and 2001 revenues to operating
expenses are included in Note 1C, “Summary of Significant Accounting
Policies — New Accounting Standards,” to the consolidated financial
statements.