Eversource 2002 Annual Report Download - page 30

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The effect of lowering the expected long-term rate of return on Plan
assets by 0.5 percent would have reduced pension income for 2002 by
approximately $11 million. The effect of lowering the discount rate by
0.5 percent would have also reduced pension income for 2002 by
approximately $11 million.
The compensation increase assumption used for 2002 was based on the
expected increase in payroll for personnel covered by the Plan. The effect
of lowering the compensation increase assumption by 0.5 percent would
have increased pension income for 2002 by approximately $5 million.
The value of the Plan assets has decreased from $2 billion at December 31,
2001 to $1.6 billion at December 31, 2002. The investment performance
returns and declining discount rates have reduced the funded status of
the Plan on a projected benefit obligation (PBO) basis from an overfunded
position of $302.8 million at December 31, 2001 to an underfunded position
of $157.5 million at December 31, 2002. The PBO includes expectations of
future employee service and compensation increases.The significant
deterioration in the funded position of the Plan will likely result in Plan
contributions sooner than previously expected. NU has not made
contributions since 1991. This deterioration could also lead to the
requirement under defined benefit plan accounting to record an
additional minimum liability. The accumulated benefit obligation (ABO)
of the Plan was $78 million less than Plan assets at December 31, 2002.
The ABO is the obligation for employee service provided through
December 31, 2002. If the ABO exceeds Plan assets, NU will record
an additional minimum liability in 2003.
Income Taxes: Income tax expense is calculated in each of the jurisdictions
in which NU operates for each period for which a statement of income is
presented. This process involves estimating NU’s actual current tax
exposures as well as assessing temporary differences resulting from
differing treatment of items, such as timing of the deduction of expenses
for tax and book accounting purposes. These differences result in deferred
tax assets and liabilities, which are included in the consolidated balance
sheets. NU must also assess the likelihood that the deferred tax assets will
be recovered from future taxable income, and to the extent that recovery
is not likely, a valuation allowance must be established. Significant
management judgment is required in determining income tax expense,
deferred tax assets and liabilities and valuation allowances. 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.
This asset amounted to $331.9 million and $301.3 million at December 31,
2002 and 2001, respectively.
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.
Environmental Matters: At December 31, 2002, NU has recorded a reserve
for various environmental liabilities. NU’s environmental liabilities are
based on the best estimate of the amounts to be incurred for the
investigation, remediation and monitoring of the remediation sites. It is
possible that future cost estimates will either increase or decrease as
additional information becomes known. Changes in future cost estimates
will have a smaller impact on NU’s subsidiaries that have regulatory
mechanisms to recover environmental remediation costs. These
subsidiaries include PSNH and Yankee Gas.Yankee Gas recorded an
environmental liability for former manufactured gas plant sites of $19.4
million and $22.9 million at December 31, 2002 and 2001, respectively.
Special Purpose Entities and Off-Balance Sheet Financing: NU has a total of
seven special purpose entities (SPE), all of which are currently
consolidated in the financial statements. During 2001 and 2002, to
facilitate the issuance of rate reduction bonds and certificates intended to
finance 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 were created as
part of state sponsored securitization programs. The funding companies
are restricted 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 respective parent company’s bankruptcy estate if they
ever become involved in such bankruptcy proceedings.
The CL&P Receivables Corporation (CRC) is an SPE that was incorporated
on September 5, 1997, and is a wholly owned subsidiary of CL&P. The
CRC was established for the sole purpose of selling CL&P’s accounts
receivable and is included in the consolidation of NU’s financial statements.
On July 10, 2002 the CRC renewed its Receivables Purchase and Sale
Agreement with CL&P and a subsidiary of Citigroup, Inc. (Citigroup).
The agreement gives the CRC the right to sell and Citigroup the right to
purchase up to $100 million in receivables through July 9, 2003. At
December 31, 2002 there was $40 million outstanding under this facility.
Sales of receivables to Citigroup under this arrangement meet the
accounting criteria for derecognition from the consolidated balance
sheets. Accordingly, the $40 million outstanding under this facility is not
reflected as debt or included in the consolidated financial statements.
During 2001, SESI established an SPE, HEC/CJTS Energy Center LLC
(HEC/CJTS), to provide a bankruptcy-remote entity in connection with
an energy project constructed for the State of Connecticut (State). This
SPE was established for financing purposes with cooperation from the
State Treasurer. HEC/CJTS is limited in the transactions it may enter into
and may not initiate an event of bankruptcy without a vote of its sole
member and all directors, including independent directors. Pursuant to
an engineering, procurement, and construction agreement with the State,
SESI constructed a power plant to provide energy and heat to the
Connecticut Juvenile Training School (Project), in return for the State
entering into a 30-year lease. SESI assigned its interest in the lease with
the State to HEC/CJTS in exchange for payments totaling $17.7 million.
During 2001, HEC/CJTS transferred its interest in the lease with the State
to unaffiliated investors in exchange for the issuance of $19.2 million of
Certificates of Participation (Certificates). This transfer was accounted for
as a sale at the beginning of the lease term. HEC/CJTS is included in the
accompanying consolidated financial statements, however, upon transfer
of the interest in the lease, the debt of $19.2 million created upon
issuance of the Certificates was derecognized. No gain or loss was
recorded. Proceeds from the issuance of the Certificates, net of issuance
costs and net construction interest, were transferred to SESI as payment
for the Project construction.
During 1999, SESI established another SPE, HEC/Tobyhanna Energy
Project, LLC (HEC/Tobyhanna), to provide a bankruptcy-remote entity in
connection with a federal energy savings performance project located at
the United States Army Depot in Tobyhanna, Pennsylvania.
HEC/Tobyhanna sold $26.5 million of Certificates related to the
project and used the funds to repay SESI for the costs of the project.