Eversource 2006 Annual Report Download - page 39

NU 2006 ANNUAL REPORT 37
The wholesale marketing business was not presented as discontinued
operations as it is not held for sale. The retail marketing business, which
was held for sale until it was sold on June 1, 2006, was not presented
as discontinued operations because separate financial information was
not available for this business for the periods prior to the first quarter of
2006. The remaining energy services businesses (NGS, Woods Electrical
–Other, Boulos and SECI-CT) are not presented as discontinued
operations as these business do not meet the criteria that SFAS No.
144 sets forth for this presentation.
For further information regarding these companies, see Note 3, “Assets
Held for Sale and Discontinued Operations,” to the consolidated financial
statements. Management will continue to evaluate discontinued operations
presentation for NU Enterprises’ businesses that are being exited.
Goodwill and 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. The
testing of goodwill for impairment requires management to use estimates
and judgment. Upon adoption in 2002, NU selected October 1st of each
year as the annual goodwill impairment testing date. Goodwill impairment
is deemed to existif 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 lessthan the carrying
amount of the goodwill. If goodwill is deemed tobe impaired, it is written
off to the extent it is impaired. In 2006, the impact of this goodwill
impairment reviewwas limited to Yankee Gas’ goodwill balance totaling
$287.6 million because in 2005 the total goodwill and intangible asset
balances previously recorded by NU Enterprises totaling $50.7 million
werewritten off.
NU completed its impairment analysis as of October 1, 2006 for Yankee
Gas and has determined that no impairment exists. In performing the
required impairment evaluation, NU estimated the fair value of the
Yankee Gas reporting unit and compared it to the carrying amount of
the reporting unit, including goodwill. NU estimated the fair value of
Yankee Gas using discounted cash flow methodologies and an analysis
of comparable companies or transactions. This analysis requires the
input of several critical assumptions, including future growth rates,
cash flow projections, operating cost escalation rates, rates of return,
arisk-adjusted discount rate, and long-term earnings multiples of
comparable companies. These assumptions are critical to the estimate
and can change from period to period.
Updates to these 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.
For further information, see Note 7, “Goodwill and Other Intangible
Assets,” to the consolidated financial statements.
Revenue Recognition: Utility Group retail revenues are based on rates
approved by the state regulatory commissions. These rates are applied
to customers’ use of energy to calculate their bills. In general, rates
can only be changed through formal proceedings before the state
regulatory commissions.
The determination of 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 and the
bulk of recorded revenues is based on actual billings. 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 also recorded.
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.
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 ISO-NE FERC Electric
Tariff No. 3, Open Access Transmission Tariff (RNS), and Schedule 21 –
NU (LNS) to that tariff. The RNS tariff is administered by ISO-NE and is
billed to all New England transmission users. RNS recovers the revenue
requirements associated with facilities that are deemed to provide a
regional benefit, or PTF. The RNS rate is reset on June 1st of each year.
NU’s LNS rate is reset on January 1st and June 1st of each year
and provides for a true-up toactual costs, which ensures that NU’s
transmission business recovers its total transmission revenue
requirements, including the allowed ROE.
Asignificant portion of the NU transmission business revenue comes
from ISO-NE charges tothe distribution businesses of CL&P, PSNH
and WMECO. The distribution businesses recover these costs through
the retail rates that arecharged totheir retail customers. In 2005,
CL&P began tracking its retail transmission revenues and expenses
for recovery. WMECO implemented a retail transmission tracker and
rateadjustment mechanism in January of 2002 as part of its 2002 rate
change filing. PSNH does not currentlyhave a retail transmission rate
tracking mechanism, but the company requested such a mechanism in
its 2006 energy delivery rate case. Such a mechanism was also included
in the rate case settlement agreement that PSNH reached with the
NHPUC staff and the OCA that was filed with the NHPUC.
Revenues and expenses for derivative contracts that were entered into
for trading purposes were recorded on a net basis in revenues when
these transactions settled. The settlement of wholesale non-trading
derivative contracts for the sale of energy or gas by the Utility Group
that are related to customers’ needs are recorded net in operating
expenses. For further information regarding the accounting for these
contracts, see Note 1E, “Summary of Significant Accounting Policies -
Derivative Accounting,” to the consolidated financial statements.
Utility Group Unbilled Revenues: Unbilled revenues represent an
estimate of electricity or gas delivered to customers that has not
yet been billed. Unbilled revenues are included in revenue on the
accompanying consolidated statements of income/(loss) and are assets
on the accompanying consolidated balance sheets that are reclassified
to accounts receivable in the following month as customers are billed.
Such estimates are subject to adjustment when actual meter readings
become available, when changes in estimating methodology occur and
under other circumstances.
The Utility Group estimates unbilled revenues monthly using the daily
load cycle(DLC) method. The DLC method allocates billed sales to the
current calendar month based on the daily load for each billing cycle.