Eversource 2004 Annual Report Download - page 62

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deliberating the comments received at the hearing. The ultimate results
of this contingency could have a positive impact on CL&P’s earnings.
I. Accounting for R.M. Services, Inc.
NU had an investment in R.M. Services, Inc. (RMS), a provider of consumer
collection services. In January 2003, the FASB issued FIN 46, which was
effective for NU on July 1, 2003. RMS is a VIE, as defined. FIN 46, as
revised, requires that the party to a VIE that absorbs the majority of the
VIE’s losses, defined as the “primary beneficiary,” consolidate the VIE.
Upon adoption of FIN 46 on July 1, 2003, management determined that
NU was the “primary beneficiary” of RMS under FIN 46 and that NU
was now required to consolidate RMS into its financial statements. To
consolidate RMS, NU eliminated the carrying value of its preferred stock
investment in RMS and recorded the assets and liabilities of RMS. This
adjustment resulted in a negative $4.7 million after-tax cumulative effect
of an accounting change in the third quarter of 2003, and is summarized
as follows (in millions of dollars):
Assets and Liabilities Recorded:
Current assets $0.6
Net property, plant and equipment 1.7
Other noncurrent assets 1.5
Current liabilities (0.6)
3.2
Elimination of investment at July 1, 2003 10.5
Pre-tax cumulative effect of accounting change 7.3
Income tax effect (2.6)
Cumulative effect of accounting change $4.7
Prior to the consolidation of RMS on July 1, 2003, NU recorded $1.4 million
of pre-tax investment write-downs in 2003. After RMS was consolidated
on July 1, 2003, $1.9 million of after-tax operating losses were included
in earnings.
On June 30, 2004, RMS sold virtually all of its assets and liabilities for
$3 million. NU recorded a gain totaling $0.8 million on the sale of RMS.
Prior to the sale, RMS was consolidated into NU’s financial statements
and had after-tax operating losses totaling $1 million in 2004. These
charges and gains are included in Note 1V, “Summary of Significant
Accounting Policies — Other Income/(Loss),” and in the other segment in
Note 15, “Segment Information,” to the consolidated financial statements.
NU has no other VIE’s for which it is defined as the “primary beneficiary.”
J. Other Investments
At December 31, 2004 and 2003, NU maintained certain cost method
and other investments. The cost method investments are comprised of
NEON, a provider of optical networking services and Acumentrics, a
developer of fuel cell and power quality equipment. Yankee Energy
System, Inc. maintains the other investment, a long-term note receivable
from BMC Energy LLC (BMC), an operator of renewable energy projects.
NEON: Under a 2002 common stock purchase agreement with NEON, NU
invested $2.1 million in 2004 in exchange for an additional 341,000
shares of NEON common stock.
On July 19, 2004, NEON and Globix Corporation (Globix) announced a
definitive merger agreement in which Globix, an unaffiliated publicly-
owned entity, would acquire NEON for shares of Globix common stock.
The merger closed on March 8, 2005, and NU received 1.2748 shares of
Globix common stock for each of the 2.1 million shares of NEON stock it
owned. Management calculated the estimated fair value of its investment
in NEON based on the Globix share price at December 31, 2004 and the
conversion factor. Results of the calculation indicated that the fair value
of NU’s investment in NEON was below the carrying value at December
31, 2004 and was impaired. As a result, NU recorded a pre-tax write-down
of $2.2 million.
In 2002, NU recorded an investment write-down of $14.6 million on a
pre-tax basis to reduce the carrying value of the investment in NEON to
its net realizable value at that time. NU’s investment in NEON had a
carrying value of $9.8 million and $9.9 million at December 31, 2004
and 2003, respectively.
Acumentrics: Based on new information that affected the fair value of NU’s
investment in Acumentrics, management determined that the value of
NU’s investment declined in 2004 and that these declines were other-
than-temporary in nature. Total investment write-downs of $9.1 million
on a pre-tax basis were recorded in 2004 to reduce the carrying value of
the investment. The balance of this investment at December 31, 2003
totaled $9.5 million including an investment in Acumentrics debt securities
of $2 million. During 2004, NU invested an additional $0.2 million in
Acumentrics debt securities. At December 31, 2004, after the investment
write-downs, NU’s remaining investment in Acumentrics totaled
$0.6 million in debt securities.
BMC: In late-March 2004, based on revised information that impacted
undiscounted cash flow projections and fair value estimates, management
determined that the fair value of the note receivable from BMC had
declined and that the note was impaired. As a result, management
recorded an investment write-down of $2.5 million on a pre-tax basis in
the first quarter of 2004. NU’s remaining note receivable from BMC,
which management expects to collect from BMC, totaled $1.3 million
and $4 million at December 31, 2004 and 2003, respectively.
The NEON, Acumentrics and BMC investment write-downs are included
in other income/(loss) on the accompanying consolidated statement of
income. For further information regarding other income/(loss), see Note
1V, “Other Income/(Loss)” to the consolidated financial statements.
K. Depreciation
The provision for depreciation on utility assets is calculated using the
straight-line method based on the estimated remaining useful lives of
depreciable plant-in-service, which range primarily from 3 years to 75
years, adjusted for salvage value and removal costs, as approved by the
appropriate regulatory agency where applicable. Depreciation rates are
applied to plant-in-service from the time it is placed in service. When
plant is retired from service, the original cost of the plant, including
costs of removal less salvage, is charged to the accumulated provision
for depreciation. Cost of removal is classified as a regulatory liability.
The depreciation rates for the several classes of electric utility plant-in-
service are equivalent to a composite rate of 3.3 percent in 2004, 3.4
percent in 2003 and 3.2 percent in 2002.
NU also maintains other non-utility plant which is being depreciated
using the straight-line method based on their estimated remaining
useful lives, which range primarily from 15 years to 120 years.