Eversource 2004 Annual Report Download - page 41

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NU accounts for deferred taxes under SFAS No. 109, “Accounting for
Income Taxes.” For temporary differences recorded as deferred tax
liabilities that will be recovered in rates in the future, NU has established
a regulatory asset. The regulatory asset amounted to $316.3 million
and $253.8 million at December 31, 2004 and 2003, respectively.
Regulatory agencies in certain jurisdictions in which NU’s Utility Group
companies operate require the tax effect of specific temporary differences
to be “flowed through” to utility customers. Flow through treatment
means that deferred tax expense is not recorded on the consolidated
statements of income. Instead, the tax effect of the temporary
difference impacts both amounts for income tax expense currently
included in customers’ rates and the company’s net income. Flow
through treatment can result in effective income tax rates that are
significantly different than expected income tax rates. Recording
deferred taxes on flow through items is required by SFAS No. 109,
and the offset to the deferred tax amounts is the regulatory asset
referred to above.
A reconciliation from expected tax expense at the statutory federal
income tax rate to actual tax expense recorded is included in the
accompanying footnotes to the consolidated financial statements.
See Note 1H, “Summary of Significant Accounting Policies — Income
Taxes,” to the consolidated financial statements for further information.
The estimates that are made by management in order to record
income tax expense, accrued taxes and deferred taxes are compared
each year to the actual tax amounts filed on NU’s income tax returns.
The income tax returns were filed in the fall of 2004 for the 2003 tax
year, and NU recorded differences between income tax expense,
accrued taxes and deferred taxes on its consolidated financial statements
and the amounts that were on its income tax returns.
Depreciation: Depreciation expense is calculated based on an asset’s
useful life, and judgment is involved when estimating the useful lives
of certain assets. A change in the estimated useful lives of these
assets could have a material impact on NU’s consolidated financial
statements absent timely rate relief for Utility Group assets.
Accounting for Environmental Reserves: Environmental reserves are accrued
using a probabilistic model approach when assessments indicate that
it is probable that a liability has been incurred and an amount can be
reasonably estimated. Adjustments made to environmental liabilities
could have a significant effect on earnings. The probabilistic model
approach estimates the liability based on the most likely action plan
from of a variety of available remediation options, ranging from no
action to remedies ranging from establishing institutional controls to
full site remediation and long-term monitoring. The probabilistic model
approach estimates the liabilities associated with each possible action
plan based on findings through various phases of site assessments.
These estimates are based on currently available information from
presently enacted state and federal environmental laws and regulations
and several cost estimates from outside engineering and remediation
contractors. These amounts also take into consideration prior experience
in remediating contaminated sites and data released by the United
States Environmental Protection Agency and other organizations.
These estimates are subjective in nature partly because there are
usually several different remediation options from which to choose
when working on a specific site. These estimates are subject to
revisions in future periods based on actual costs or new information
concerning either the level of contamination at the site or newly enacted
laws and regulations. The amounts recorded as environmental liabilities
on the consolidated balance sheets represent management’s best
estimate of the liability for environmental costs based on current site
information from site assessments and remediation estimates.
These liabilities are estimated on an undiscounted basis.
Under current rate-making policy, PSNH and Yankee Gas have regulatory
recovery mechanisms in place for environmental costs. Accordingly,
regulatory assets have been recorded for certain of PSNH’s and Yankee
Gas’ environmental liabilities. As of December 31, 2004 and 2003,
$28 million and $26.3 million, respectively, have been recorded as
regulatory assets on the accompanying consolidated balance sheets.
CL&P recovers a certain level of environmental costs currently in rates
but does not have an environmental cost recovery tracking mechanism.
Accordingly, changes in CL&P’s environmental reserves impact CL&P’s
earnings. WMECO does not have a regulatory mechanism to recover
environmental costs from its customers, and changes in WMECO’s
environmental reserves impact WMECO’s earnings.
Capital expenditures related to environmental matters are expected to
total approximately $104 million in aggregate for the years 2005 through
2009. Of the $104 million, approximately $55 million relates to the
conversion of a 50 megawatt oil and coal burning unit at Schiller Station
to a wood burning unit to, among other things, provide a reduction in air
emissions at the plant and approximately $14 million relates to installing
equipment to meet emission requirements at HWP’s Mt. Tom coal-fired
generating station. The remainder primarily relates to other environmental
remediation programs associated with NU’s hydroelectric generation assets.
Asset Retirement Obligations: NU adopted SFAS No. 143, “Accounting for
Asset Retirement Obligations,” on January 1, 2003. SFAS No. 143
requires that legal obligations associated with the retirement of
property, plant and equipment be recorded as a liability on the balance
sheet at fair value when incurred and when a reasonable estimate of
the fair value can be made. SFAS No. 143 defines an asset retirement
obligation (ARO) as a legal obligation that is required to be settled due
to an existing or enacted law, statute, ordinance, or a written or oral
promise to remove an asset. AROs may stem from environmental laws,
state laws and regulations, easement agreements, building codes,
contracts, franchise grants and agreements, oral promises made upon
which third parties have relied, or the dismantlement, restoration,
or reclamation of properties.
Upon adoption of SFAS No. 143, certain removal obligations were
identified that management believes are AROs but either have not been
incurred or are not material. These removal obligations arise in the
ordinary course of business or have a low probability of occurring.
The types of obligations primarily relate to transmission and distribution
lines and poles, telecommunication towers, transmission cables and
certain FERC or state regulatory agency re-licensing issues. There was