Eversource 2009 Annual Report Download - page 52

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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and, at times,
difficult, subjective or complex judgments. Changes in these estimates, assumptions and judgments, in and of themselves, could
materially impact our financial position, results of operations or cash flows. Our management communicates to and discusses with our
Audit Committee of the Board of Trustees critical accounting policies and estimates. The following are the accounting policies and
estimates that we believe are the most critical in nature. See Note 1, "Summary of Significant Accounting Policies," to our consolidated
financial statements for discussions of these policies and estimates as well as other accounting policies, estimates and assumptions
used in the preparation of our consolidated financial statements.
Regulatory Accounting: The accounting policies of the regulated companies conform to GAAP applicable to rate-regulated enterprises
and historically reflect the effects of the rate-making process.
The application of accounting guidance applicable to rate-regulated enterprises 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, we
record regulatory assets before approval for recovery has been received from the applicable regulatory commission. We must use
judgment to conclude that costs deferred as regulatory assets are probable of future recovery. We base our conclusion on certain
factors, including but not limited to 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.
We use our 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 our consolidated financial statements.
We believe it is probable that the regulated companies will recover the regulatory assets that have been recorded. If we determined
that we could no longer apply the accounting guidance applicable to rate-regulated enterprises to our operations, or if we could not
conclude that it is probable that costs would be recovered or reflected in future rates, the costs would be charged to earnings in the
period in which they were incurred. If we determine that a regulatory asset is no longer probable of recovery in rates, then we would
record the charge in earnings at that time.
For further information, see Note 1H, "Summary of Significant Accounting Policies - Regulatory Accounting," to the consolidated
financial statements.
Unbilled Revenues: The determination of retail energy sales to residential, commercial and industrial 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 majority 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 recorded.
Unbilled revenues represent an estimate of electricity or gas delivered to customers but not yet billed. Unbilled revenues are included in
Operating revenues on the statement of income and are assets on the balance sheet 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. There were no changes in estimating methodology in
2009.
The regulated companies estimate 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. The billed sales are subtracted from total
calendar month sales to estimate unbilled sales. Unbilled revenues are estimated by first allocating sales to the respective rate classes
and then applying an average rate to the estimate of unbilled sales.
The estimate of unbilled revenues is sensitive to numerous factors, such as energy demands, weather and changes in the composition
of customer classes that can significantly impact the amount of revenues recorded. Estimating the impact of these factors is complex
and requires our judgment. The estimate of unbilled revenues is important to our consolidated financial statements, as adjustments to
that estimate could significantly impact operating revenues and earnings.
Wholesale transmission revenues are based on formula rates that are approved by the FERC. These rates are based on forecasted
transmission formulas, primarily derived from historical financial results and estimates of forecasted plant in service, which are subject
to annual true-ups in the subsequent year. There can be differences in estimated versus actual transmission rates and revenues
depending upon a variety of factors, including transmission plant placed in service earlier or later than expected and FERC orders that
change the authorized ROEs.
For further information, see Note 1E, "Summary of Significant Accounting Policies - Revenues," to the consolidated financial
statements.
Pension and PBOP: Our subsidiaries participate in a uniform noncontributory defined benefit retirement plan (Pension Plan) covering
substantially all of our regular employees. In addition to the Pension Plan, we also participate in the PBOP Plan to provide certain
health care benefits, primarily medical and dental, and life insurance benefits 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