Eversource 2004 Annual Report Download - page 63

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In 2002, NU Enterprises concluded a study of the depreciable lives of
certain generation assets. The impact of this study was to lengthen the
useful lives of those generation assets by 32 years to an average of 70
years. In addition, the useful lives of certain software was revised and
shortened to reflect a remaining life of 1.5 years. Depreciation expense
associated with these generation assets and software totaled $12.1 million
in 2004, $14.2 million in 2003 and $17.7 million in 2002.
L. Jointly Owned Electric Utility Plant
Regional Nuclear Companies: At December 31, 2004, CL&P, PSNH and
WMECO own common stock in three regional nuclear companies
(Yankee Companies). NU’s ownership interests in the Yankee Companies
at December 31, 2004, which are accounted for on the equity method
are 49 percent of the Connecticut Yankee Atomic Power Company
(CYAPC), 38.5 percent of the Yankee Atomic Electric Company (YAEC)
and 20 percent of the Maine Yankee Atomic Power Company (MYAPC). In
2003, CL&P, PSNH and WMECO sold their collective 17 percent owner-
ship interest in Vermont Yankee Nuclear Power Corporation (VYNPC).
NU’s total equity investment in the Yankee Companies at December 31,
2004 and 2003, was $28.6 million and $32.2 million, respectively.
Earnings related to these equity investments are included in other
income/(loss) on the accompanying consolidated statements of income.
For further information, see Note 1V, “Other Income/(Loss),” to the
consolidated financial statements. Each of the remaining Yankee
Companies owns a single nuclear generating plant which is being
decommissioned.
NU owns 49 percent of the common stock of CYAPC with a carrying
value of $21.4 million at December 31, 2004. CYAPC is involved in litigation
over the termination of the decommissioning contract with Bechtel
Power Corporation (Bechtel). Management believes that this litigation
has not impaired the value of its investment in CYAPC at December 31,
2004 but will continue to evaluate the impact of the litigation on NU’s
investment. For further information regarding the Bechtel litigation, see
Note 6E, “Commitments and Contingencies — Deferred Contractual
Obligations,” to the consolidated financial statements.
Hydro-Quebec: NU parent 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 $9.5 million
and $10.1 million at December 31, 2004 and 2003, respectively.
M. 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 as follows:
For the Years Ended December 31,
(Millions of Dollars, except percentages) 2004 2003 2002
Borrowed funds $4.5 $ 5.0 $ 7.5
Equity funds 3.8 6.5 5.8
Totals $8.3 $11.5 $13.3
Average AFUDC rate 3.9% 4.0% 4.9%
The average AFUDC rate is based on a FERC-prescribed formula that
develops an average rate using the cost of the company’s short-term
financings as well as the company’s capitalization (preferred stock,
long-term debt and common equity). The average rate is applied to
eligible construction work in progress amounts to calculate AFUDC.
N. Equity-Based Compensation
NU maintains an Employee Stock Purchase Plan and other long-term,
equity-based incentive plans under the Northeast Utilities Incentive
Plan (Incentive Plan). 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. 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) 2004 2003 2002
Net income as reported $116.6 $116.4 $152.1
Total equity-based employee
compensation expense
determined under the fair
value-based method for all
awards, net of related tax effects (1.1) (1.9) (3.2)
Pro forma net income $115.5 $114.5 $148.9
EPS:
Basic and diluted — as reported $ 0.91 $ 0.91 $ 1.18
Basic and diluted — pro forma $ 0.90 $ 0.90 $ 1.15
Net income as reported includes $3.8 million, $2 million and $1 million
of expense for restricted stock and restricted stock units for the years
ended December 31, 2004, 2003 and 2002, respectively. NU accounts for
restricted stock in accordance with APB No. 25 and amortizes the
intrinsic value of the award over the related 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.
During the year ended December 31, 2004, no stock options were awarded.
Under SFAS No. 123R, NU will be required to 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. Management believes that the
impact of the adoption of SFAS No. 123R will not be material.
O. Sale of Receivables
Utility Group: At December 31, 2004 and 2003, CL&P had sold an undivided
interest in its accounts receivable of $90 million and $80 million,
respectively, to a financial institution with limited recourse through
CL&P Receivables Corporation (CRC), a wholly owned subsidiary of
CL&P. CRC can sell up to $100 million of an undivided interest in its
accounts receivable and unbilled revenues. At December 31, 2004 and
2003, the reserve requirements calculated in accordance with the
Receivables Purchase and Sale Agreement were $18.8 million and