Eversource 2004 Annual Report Download - page 57

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Application to Certain Investments.” EITF Issue No. 03-1 provides
guidance on how to evaluate and recognize an impairment loss that is
other-than-temporary and could impact NU’s investments in Acumentrics
Corporation (Acumentrics) and NEON Communications, Inc. (NEON)
upon its effective date. Certain accounting guidance included in EITF
Issue No. 03-1 is not effective until the FASB concludes on this issue.
EITF Issue No. 03-1 also requires certain annual disclosures, which are
included in this annual report.
For information regarding these disclosures see Note 1J, “Summary of
Significant Accounting Policies – Other Investments” and Note 8,
“Marketable Securities,” to the consolidated financial statements.
Share-Based Payments: On December 16, 2004, the FASB issued Statement
of Financial Accounting Standards (SFAS) No. 123 (Revised 2004),
“Share-Based Payments,” (SFAS No. 123R), which amended SFAS No.
123, “Accounting for Stock-Based Compensation.” SFAS No. 123R
requires all companies to recognize compensation expense in an
amount equal to the fair value of share-based payments granted to
employees. NU has elected to apply SFAS No. 123R on a modified
prospective method. Under this method, NU will recognize compensation
expense for the unvested portion of previously granted awards that
remain outstanding on July 1, 2005, the effective date of SFAS No. 123R,
and any new awards after that date. NU is currently evaluating the impact
of SFAS No. 123R, but management believes that the adoption of SFAS
No. 123R will not have a material impact on NU’s consolidated financial
statements.
For further information regarding equity-based compensation, see
Note 1N, “Equity-Based Compensation,” to the consolidated financial
statements.
Accounting for the Effect of Medicare Changes on Postretirement Benefits Other Than Pension
(PBOP): On December 8, 2003, the President of the United States signed
into law a bill that expands Medicare, primarily by adding a prescription
drug benefit and by adding a federal subsidy to qualifying plan sponsors
of retiree health care benefit plans. NU chose to reflect the impact on
December 31, 2003 reported amounts with no impact on 2003 expenses,
assets, or liabilities.
On May 19, 2004, the FASB issued Staff Position (FSP) No. FAS 106-2,
“Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003,” to
provide guidance on accounting for the effects of the aforementioned
Medicare expansion. This FSP concludes that the effects of the federal
subsidy should be considered an actuarial gain and treated like similar
gains and losses and requires certain disclosures for employers that
sponsor postretirement health care plans that provide prescription drug
benefits which are included in this annual report. The accounting treatment
under FSP No. FAS 106-2 is consistent with NU’s accounting treatment
at December 31, 2003 and reduced the projected benefit obligation by
$7.5 million and $19.5 million in 2004 and 2003, respectively.
Consolidation of Variable Interest Entities: In December 2003, the FASB issued
a revised version of FASB Interpretation No. (FIN) 46, “Consolidation of
Variable Interest Entities,” (FIN 46R). FIN 46R resulted in fewer NU
investments meeting the definition of a variable interest entity (VIE).
FIN 46R was effective for NU for the first quarter of 2004 and did not
have an impact on NU’s consolidated financial statements.
D. Guarantees
NU provides credit assurance in the form of guarantees and letters of
credit in the normal course of business, primarily for the financial
performance obligations of NU Enterprises. NU would be required to
perform under these guarantees in the event of non-performance by
NU Enterprises, primarily Select Energy. At December 31, 2004, the
maximum level of exposure in accordance with FIN 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others,” under guarantees by
NU, primarily on behalf of NU Enterprises, totaled $1.1 billion. A majority
of these guarantees do not have established expiration dates. For the
guarantees with expiration dates, most are due to expire by December
31, 2005. Additionally, NU had $48.9 million of letters of credit issued, of
which $33.9 million were issued for the benefit of NU Enterprises at
December 31, 2004.
At December 31, 2004, NU had outstanding guarantees on behalf of
the Utility Group of $12.7 million. This amount is included in the total
outstanding NU guarantee exposure amount of $1.1 billion.
Several underlying contracts that NU guarantees and certain surety
bonds contain credit ratings triggers that would require NU to post
collateral in the event that NU’s credit ratings are downgraded below
investment grade.
NU currently has authorization from the SEC to provide up to $750 million
of guarantees for NU Enterprises through June 30, 2007. The $12.7 million
in guarantees to the Utility Group are subject to a separate $50 million
SEC limitation apart from the current $750 million guarantee limit. The
amount of guarantees outstanding for compliance with the SEC limit for
NU Enterprises at December 31, 2004 is $358.6 million, which is calculated
using different, more probabilistic and fair-value based criteria than the
maximum level of exposure required to be disclosed under FIN 45. FIN 45
includes all exposures even though they are not reasonably likely to
result in exposure to NU.
On October 19, 2004, the SEC authorized NU to issue guarantees of up
to an aggregate $100 million through June 30, 2007 of the debt or other
obligations of two of its subsidiaries, NUSCO and Rocky River Realty
Company. These companies provide certain specialized support and real
estate services and occasionally enter into transactions that require
financial backing from NU parent. The amount of guarantees outstanding
for compliance with the SEC limit under this category at December 31,
2004 is $0.2 million.
E. Revenues
Utility Group: Utility Group retail revenues are based on rates approved by
the state regulatory commissions. These regulated rates are applied to
customers’ use of energy to calculate a bill. In general, rates can only be
changed through formal proceedings with the state regulatory commissions.
Certain Utility Group companies utilize regulatory commission-approved
tracking mechanisms to track the recovery of certain incurred costs.
The tracking mechanisms allow for rates to be changed periodically,
with overcollections refunded to customers or undercollections collected
from customers in future periods.