Eversource 2003 Annual Report Download - page 38

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On June 25, 2003, the DIG cleared Issue No. C-20, which addressed the
meaning of “not clearly and closely related regarding contracts with a
price adjustment feature” as it relates to the election of the normal purchase
and sales exception to derivative accounting. The implementation of this
guidance was required for the fourth quarter of 2003 for NU. The
implementation of Issue No. C-20 resulted in CL&P recording the fair
value of two existing power purchase contracts as derivatives, one as a
derivative asset, and one as a derivative liability. An offsetting regulatory
liability and an offsetting regulatory asset were recorded, as these contracts
are part of stranded costs, and management believes that these costs
will continue to be recovered or refunded in rates. The fair values of
these long-term power purchase contracts include a derivative asset with
a fair value of $112.4 million and a derivative liability with a fair value of
$54.6 million at December 31, 2003.
At December 31, 2003, Select Energy recorded approximately $4.3 million
of TCCs at fair value. Market information for these TCCs is not available,
and management believes the amounts paid for these contracts are
equal to their fair value. Select Energy, as well as CL&P and PSNH, hold
FTR contracts to mitigate the risk associated with the congestion price
differences associated with LMP in New England. FTR contracts in New
England held by NU subsidiaries were recorded at a fair value of $6.2
million. FTR contracts held by Select Energy in the PJM region were
recorded at a fair value of $0.8 million. Management continues to
believe the amount to be paid for both the TCC and the FTR contracts
best represents their fair value. If new markets for these contracts develop,
then there may be an impact on NU’s consolidated financial statements
in future periods.
Regulatory Accounting: The accounting policies of NU’s regulated utility
companies historically reflect the effects of the rate-making process in
accordance with SFAS No. 71, “Accounting for the Effects of Certain
Types of Regulation.” The transmission and distribution businesses of
CL&P, PSNH and WMECO, along with PSNH’s generation business and
Yankee Gas’ distribution business, continue to be cost-of-service rate
regulated, and management believes the application of SFAS No. 71 to
that portion of those businesses continues to be appropriate.
Management must reaffirm this conclusion at each balance sheet date.
If, as a result of a change in circumstances, it is determined that any
portion of these companies no longer meets the criteria of regulatory
accounting under SFAS No. 71, that portion of the company will have to
discontinue regulatory accounting and write-off the respective regulatory
assets and liabilities. Such a write-off could have a material impact on NU’s
consolidated financial statements.
The application of SFAS No. 71 results in recording regulatory assets and
liabilities. Regulatory assets represent the deferral of incurred costs that
are probable of future recovery in customer rates. In some cases, NU
records regulatory assets before approval for recovery has been received
from the applicable regulatory commission. Management must use judg-
ment to conclude that costs deferred as regulatory assets are probable of
future recovery. Management bases its conclusion on certain factors,
including changes in the regulatory environment, recent rate orders
issued by the applicable regulatory agencies and the status of any
potential new legislation. Regulatory liabilities represent revenues
received from customers to fund expected costs that have not yet been
incurred or probable future refunds to customers.
Management uses its best judgment when recording regulatory assets
and liabilities; however, regulatory commissions can reach different
conclusions about the recovery of costs, and those conclusions could
have a material impact on NU’s consolidated financial statements.
Management believes it is probable that the Utility Group companies will
recover the regulatory assets that have been recorded.
Goodwill and Other Intangible Assets: SFAS No. 142, “Goodwill and
Other Intangible Assets,” requires that goodwill balances be reviewed for
impairment at least annually by applying a fair value-based test. NU
selected October 1 as the annual goodwill impairment testing date. The
goodwill impairment analysis impacts the Utility Group — Gas and NU
Enterprises segments. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value and if the
implied fair value of goodwill based on the estimated fair value of the
reporting unit is less than the carrying amount of the goodwill. If good-
will is deemed to be impaired it will be written off, which could have a
significant impact on NU’s consolidated financial statements.
NU has completed its impairment analyses as of October 1, 2003, for all
reporting units that maintain goodwill and has determined that no
impairments exist.
In performing the impairment evaluation required by SFAS No. 142,
NU estimates the fair value of each reporting unit and compares it to the
carrying amount of the reporting unit, including goodwill. NU estimates
the fair values of its reporting units using discounted cash flow method-
ologies and an analysis of comparable companies or transactions. The
discounted cash flow analysis requires the input of several critical
assumptions, including future growth rates, operating cost escalation
rates, allowed ROE, a risk-adjusted discount rate, and long-term earnings
multiples of comparable companies. These assumptions are critical to the
estimate and are susceptible to change from period to period.
Modifications to the aforementioned assumptions in future periods,
particularly changes in discount rates, could result in future impairments
of goodwill. Actual financial performance and market conditions in
upcoming periods could also impact future impairment analyses.
Pension and Postretirement Benefits Other Than Pensions (PBOP): NU’s
subsidiaries participate in a uniform noncontributory defined benefit
retirement plan (Pension Plan) covering substantially all regular NU
employees. NU also participates in a postretirement benefit plan (PBOP
Plan) to provide certain health care benefits, primarily medical and dental,
and life insurance benefits through a benefit plan to retired employees.
For each of these plans, the development of the benefit obligation, fair
value of plan assets, funded status and net periodic benefit credit or cost
is based on several significant assumptions. If these assumptions were
changed, the resulting change in benefit obligations, fair values of plan
assets, funded status and net periodic benefit credits or costs could have
a material impact on NU’s consolidated financial statements.