Eversource 2006 Annual Report Download - page 67

NU 2006 ANNUAL REPORT 65
K. Allowance for Funds Used During Construction
The allowance for funds used during construction (AFUDC) is a non-
cash item that is included in the cost of Utility Group utility plant and
represents the cost of borrowed and equity funds used to finance
construction. The portion of AFUDC attributable to borrowed funds is
recorded as a reduction of other interest expense, and the cost of
equity funds is recorded as other income on the accompanying
consolidated statements of income/(loss), as follows:
For the Years Ended December 31,
(Millions of Dollars, except percentages) 2006 2005 2004
Borrowed funds $13.5 $10.1 $3.9
Equity funds 13.6 12.3 3.8
Totals $27.1 $22.4 $7.7
Average AFUDC rates 7.5% 7.2% 4.1%
The average Utility Group AFUDC rate is based on a FERC-prescribed
formula that develops an average rate using the cost of a company’s
short-term financings as well as a company’s capitalization (preferred
stock, long-term debt and common equity). The average rate is applied
to eligible construction work in progress (CWIP) amounts to calculate
AFUDC. Fifty percent of CL&P’s AFUDC is recorded in CWIP for its
major transmission projects in southwest Connecticut with the other
50 percent in rate base. Once completed, the portion in CWIP is
recovered in rates along with an appropriate ROE. The increase in
AFUDC from borrowed and equity funds in 2006 as compared to 2005
and 2004 results from higher levels of CWIP due to CL&P’s transmission
projects, PSNH’s Northern Wood Power Project and Yankee Gas’ liquefied
natural gas (LNG) project. The increase in the average AFUDC rate
in 2006 is primarily due to the increased CWIP being financed by
permanent capital and higher short-term debt rates.
L. Sale of Receivables
At December 31, 2005, CL&P had sold an undivided interest in its
accounts receivable and unbilled revenue of $80 million to a financial
institution with limited recourse through CL&P Receivables Corporation
(CRC). At December 31, 2006, there wereno such sales. CRC can sell
up to$100 million of an undivided interest in its accounts receivable
and unbilled revenues. At December 31, 2005, the reserve requirements
calculated in accordance with the Receivables Purchase and Sale
Agreement was $21 million. This reserve amount was deducted from
the amount of receivables eligible for sale. Concentrations of credit risk
tothe purchaser under this agreement with respect to the receivables
are limited due to CL&P’s diverse customer base.
At December 31, 2006 and 2005, amounts sold to CRC by CL&P but
not sold to the financial institution totaling $375.7 million and
$252.8 million, respectively, areincluded as investments in securitizable
assets on the accompanying consolidated balance sheets. These
amounts would be excluded from CL&P’s assets in the event of CL&P’s
bankruptcy.On July 5, 2006, CRC renewed the bank commitment for
the Receivables Purchase and Sale Agreement with CL&P and the
financial institution through July 3, 2007 to coincide with the date this
agreement terminates, unless otherwise extended. CL&P’s continuing
involvement with the receivables that are sold to CRC and the financial
institution is limited to the servicing of those receivables.
The transfer of receivables to the financial institution under this
arrangement qualifies for sale treatment under SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities – A Replacement of SFAS No. 125.”
Beginning in the first quarter of 2007, NU will apply SFAS No. 156
related to the accounting for servicing of financial assets. See Note 1C,
“Summary of Significant Accounting Policies – Accounting Standards
Issued But Not Yet Adopted,” for further information.
M. Asset Retirement Obligations
NU implemented FIN 47 on December 31, 2005. FIN 47 requires an
entity to recognize a liability for the fair value of an asset retirement
obligation (ARO) even if it is conditional on a future event and the
liability’s fair value can be reasonably estimated. FIN 47 provides that
settlement dates and future costs should be reasonably estimated
when sufficient information becomes available and provides guidance
on the definition and timing of sufficient information in determining
expected cash flows and fair values. Management has identified various
categories of AROs, primarily certain assets containing asbestos and
hazardous contamination. A fair value calculation, reflecting expected
probabilities for settlement scenarios, has been performed.
For the year ended December 31, 2005, the earnings impact of this
implementation was recorded as a cumulative effect of accounting
change of $1 million, net of tax benefit, related to NU Enterprises.
Because the Utility Group companies are cost-of-service rate regulated
entities, these companies utilized regulatory accounting in accordance
with SFAS No. 71, and the Utility Group companies’ AROs are included
in other regulatory assets at December 31, 2006 and 2005. The fair
value of the AROs is included in property, plant and equipment and
related accretion is recorded as a regulatory asset, with corresponding
credits reflecting the ARO liabilities in deferred credits and other
liabilities – other, on the accompanying consolidated balance sheets
at December 31, 2006 and 2005. Depreciation of the ARO asset is also
included as a regulatory asset with an offsetting amount in accumulated
depreciation.
The following tables present the fair value of the ARO, the related
accumulated depreciation, the regulatory asset, and the ARO liabilities
at December 31, 2006 and 2005:
At December 31, 2006
Fair Value Accumulated
of ARODepreciation Regulatory ARO
(Millions of Dollars) Asset of ARO Asset Asset Liabilities
Asbestos $3.8 $(2.1) $20.1 $(22.1)
Hazardous contamination 6.5 (1.6) 15.9 (20.7)
Other AROs 11.8 (5.5) 10.4 (16.9)
Total Utility Group AROs $22.1 $(9.2) $46.4 $(59.7)
AtDecember 31, 2005
Fair Value Accumulated
of ARO Depreciation Regulatory ARO
(Millions of Dollars) Asset of ARO Asset Asset Liabilities
Asbestos $ 3.9 $(2.1) $21.0 $(22.8)
Hazardous contamination 7.1 (1.7) 17.4 (22.8)
Other AROs 9.6 (3.9) 8.9 (14.6)
Total Utility Group AROs $20.6 $(7.7) $47.3 $(60.2)