Eversource 2003 Annual Report Download - page 60

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Hydro-Quebec: NU has a 22.66 percent equity ownership interest in two
companies that transmit electricity imported from the Hydro-Quebec
system in Canada. NU’s investment and exposure to loss is $10.1 million
and $12 million at December 31, 2003 and 2002, respectively.
Other Investments: At December 31, 2003 and 2002, NU maintains certain
cost method and other investments. The cost method investments are
comprised of NEON Communications, Inc. (NEON), a provider of
high-bandwidth fiber optic telecommunications services and Acumentrics
Corporation (Acumentrics), a privately owned producer of advanced
power generation and power protection technologies applicable to
homes, telecommunications, commercial businesses, industrial facilities,
and the automobile industry. These cost method investments have a
combined total carrying value of $17.4 million and $12.5 million at
December 31, 2003 and 2002, respectively.
Other investments also include a long-term note receivable from BMC
Energy LLC, (BMC), an operator of renewable energy projects. NU’s
remaining note receivable from BMC totaled $4 million and $4.7 million
at December 31, 2003 and 2002, respectively.
During 2002, after-tax impairment write-offs totaling $10.3 million were
recorded to reduce the carrying values of NEON and Acumentrics to their
net realizable values. Excluding BMC, these investments are VIEs under
FIN 46 for which NU is not the primary beneficiary, and NU’s exposure to
loss as a result of these investments totaled $17.4 million and $12.5 million
at December 31, 2003 and 2002, respectively.
L. 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 consolidated statements of income:
For the Years Ended December 31,
(Millions of Dollars, except percentages) 2003 2002 2001
Borrowed funds $ 5.0 $ 7.5 $ 6.6
Equity funds 6.5 5.8 3.8
Totals $11.5 $13.3 $10.4
Average AFUDC rates 4.0% 4.9% 7.2%
M. Equity-Based Compensation
In December 2002, the FASB issued SFAS No. 148, “Accounting for
Stock-Based Compensation —Transition and Disclosure.” This statement
amended SFAS No. 123, “Accounting for Stock-Based Compensation,”
to provide alternative methods of transition for a voluntary change to
the fair value-based method of accounting for equity-based employee
compensation. This statement also requires prominent disclosures in both
annual and interim financial statements about the method of accounting
for equity-based employee compensation and the effect of the method
used on reported results. At this time, NU has not elected to transition
to the fair value-based method of accounting for equity-based
employee compensation.
At December 31, 2003, NU maintains an Employee Share Purchase Plan
(ESPP) and other long-term incentive plans, which are described in Note 4D,
“Employee Benefits — Equity-Based Compensation,” to the consolidated
financial statements. NU accounts for these plans under the recognition
and measurement principles of Accounting Principles Board Opinion (APB)
No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. No equity-based employee compensation cost for stock
options is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. No stock options were granted during
2003. The following table illustrates the effect on net income and earnings
per share (EPS) if NU had applied the fair value recognition provisions of
SFAS No. 123 to equity-based employee compensation.
For the Years Ended December 31,
(Millions of Dollars, except per share amounts) 2003 2002 2001
Net income as reported $116.4 $152.1 $243.5
Total equity-based employee
compensation expense
determined under the fair
value-based method for
all awards, net of related
tax effects (1.9) (3.2) (2.6)
Pro forma net income $114.5 $148.9 $240.9
Earnings per share:
Basic — as reported $ 0.91 $ 1.18 $ 1.80
Basic — pro forma $ 0.90 $ 1.15 $ 1.78
Diluted — as reported $ 0.91 $ 1.18 $ 1.79
Diluted — pro forma $ 0.90 $ 1.15 $ 1.77
Net income as reported includes $2 million, $1 million and $1.2 million
expensed for restricted stock in 2003, 2002 and 2001, respectively. NU
accounts for restricted stock in accordance with APB No. 25 and amortizes
the intrinsic value of the award over the service period.
NU assumes an income tax rate of 40 percent to estimate the tax effect
on total equity-based employee compensation expense determined
under the fair value-based method for all awards.
N. Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset
Retirement Obligations.” This statement requires that legal obligations
associated with the retirement of property, plant and equipment be
recognized as a liability at fair value when incurred and when a reason-
able estimate of the fair value of the liability can be made. SFAS No. 143
was effective on January 1, 2003 for NU. Management completed its
review process for potential asset retirement obligations (ARO) and has
not identified any material AROs that have been incurred. However,
management has identified certain removal obligations that arise in the
ordinary course of business or have a low probability of occurring. These
types of obligations primarily relate to transmission and distribution lines
and poles, telecommunication towers, transmission cables, and certain
FERC or state regulatory agency re-licensing issues. These obligations are
AROs that have not been incurred or are not material in nature.
A portion of NU’s regulated utilities’ rates is intended to recover the cost
of removal of certain utility assets. The amounts recovered do not
represent AROs. At December 31, 2003 and 2002, cost of removal was
approximately $334 million and $321 million, respectively.