Eversource 2006 Annual Report Download - page 45

NU 2006 ANNUAL REPORT 43
Truing up income tax amounts between the consolidated financial
statements and the income tax returns is a customary, annual process.
For information regarding the adoption of Financial Accounting
Standards Board (FASB) Interpretation No. (FIN) 48, “Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement
No. 109,” see Note 1C, “Summary of Significant Accounting Policies –
Accounting Standards Issued But Not Yet Adopted,” to the consolidated
financial statements.
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 reserves
could have a significant effect on earnings. The probabilistic model
approach estimates the liability based on the most likely action plan
from 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
presentlyenacted state and federal environmental laws and regulations
and several cost estimates from third-party engineering and remediation
contractors. These amounts also takeintoconsideration prior
experiencein remediating contaminated sites and data released by the
United States Environmental Protection Agency and other organizations.
These estimates aresubjectivein naturepartlybecause there are usually
several different remediation options from which to choose when
working on a specific site. These estimates are subject to revisions in
futureperiods based on actual costs or newinformation concerning
either the level of contamination at the site or newly enacted laws and
regulations. The amounts recorded as environmental liabilities on the
consolidated balancesheets 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.
PSNH and Yankee Gas have rate recovery mechanisms in place for
environmental costs. As a result, regulatory assets have been recorded
for certain of PSNH’s and Yankee Gas’ environmental liabilities. As of
December 31, 2006 and 2005, $32.6 million and $30.3 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 separate regulatory mechanism to recover
environmental costs from its customers, and changes in WMECO’s
environmental reserves impact WMECO’s earnings.
Initial remediation activities have been conducted at a coal tar
contaminated river site in Massachusetts that is the responsibility
of HWP. The cost to clean up that contamination may be more
significant than currently estimated, but the level and extent of
contamination is not yet known. Any and all exposure related to
this site are not subject to ratepayer recovery. An increase to the
environmental reserve for this site would be recorded in earnings in
futureperiods and may be material.
For further information, see Note 8B, “Commitments and Contingencies
–Environmental Matters,” to the consolidated financial statements.
Asset Retirement Obligations: In March of 2005, the FASB issued
FIN 47, “Accounting for Conditional Asset Retirement Obligations –
an Interpretation of FASB Statement No. 143.” FIN 47 requires an entity
to recognize a liability for the fair value of an ARO that is conditional on
afuture event if the liability’s fair value can be reasonably estimated.
NU adopted FIN 47 on December 31, 2005 and recorded a cumulative
effect of an accounting change reflecting a $1 million after-tax loss
related to NU Enterprises on the accompanying consolidated statements
of income/(loss).
For further information regarding the adoption of FIN 47, see Note 1M,
“Summary of Significant Accounting Policies – Asset Retirement
Obligations,” to the consolidated financial statements.
Regulated utilities, including NU’s Utility Group companies, currently
recover amounts in rates for future costs of removal of plant assets. At
December 31, 2006 and 2005, these amounts totaling $290.8 million
and $305.5 million, respectively, are classified as regulatory liabilities
on the accompanying consolidated balance sheets.
Special Purpose Entities: In addition to special purpose entities
(SPEs) that aredescribed in the “Off-BalanceSheet Arrangements”
section of this management’sdiscussion and analysis, during 2001 and
2002, to facilitate the issuance of rate reduction bonds and certificates
intended tofinance certain stranded costs, NU established four SPEs:
CL&P Funding LLC, PSNH Funding LLC, PSNH Funding LLC 2, and
WMECO Funding LLC (the funding companies). The funding companies
werecreated as part of state-sponsored securitization programs.
The funding companies arerestricted from engaging in non-related
activities and are required to operate in a manner intended to reduce
the likelihood that they would be included in their respectiveparent
company’s bankruptcy estate if they ever become involved in a
bankruptcy proceeding. The funding companies and the securitization
amounts are consolidated in the accompanying consolidated financial
statements.
Other Matters
Consolidated Edison, Inc. Merger Litigation: Certain gain and loss
contingencies exist with regard to the merger agreement between NU
and Consolidated Edison, Inc. (Con Edison) and related litigation.
In 2001, Con Edison advised NU that it was unwilling to close its merger
with NU on the terms set forth in the parties’ merger agreement
(Merger Agreement). In March of 2001, NU filed suit against Con Edison
seeking damages in excess of $1 billion.
In a 2005 opinion, a panel of three judges at the Second Circuit held
that the shareholders of NU had no right to sue Con Edison for its
alleged breach of the parties’ Merger Agreement. NU’s request for a
rehearing was denied in 2006. This ruling left intact the remaining
claims between NU and Con Edison for breach of contract, which
include NU’s claim for recovery of costs and expenses of approximately
$32 million and Con Edison’s claim for damages. NU opted not to seek
review of this ruling by the United States Supreme Court. In April of
2006, NU filed its motion for partial summary judgment on Con Edison’s
damage claim. NU’s motion asserts that NU is entitled to a judgment
in its favor with respect to this claim based on the undisputed material