Eversource 2005 Annual Report Download - page 64

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CYAPC filed with the FERC to recover the increased estimate of
decommissioning and plant closure costs. The FERC proceeding is
ongoing. Management believes that the FERC proceeding has not
impaired the value of its investment in CYAPC totaling $22.7 million at
December 31, 2005 but will continue to evaluate the impacts that the
FERC proceeding has on NU’s investment. For further information,
see Note 9E, “Commitments and Contingencies – Deferred
Contractual Obligations,” to the consolidated financial statements.
Hydro-Quebec: NU parent has a 22.7 percent equity ownership interest in
two companies that transmit electricity imported from the Hydro-Quebec
system in Canada. NU’s investment, which is included in deferred debits
and other assets – other on the accompanying consolidated balance
sheets, totaled $8.5 million and $9.5 million at December 31, 2005
and 2004, 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 accompanying consolidated
statements of (loss)/income as follows:
For the Years Ended December 31,
(Millions of Dollars, except percentages) 2005 2004 2003
Borrowed funds $10.1 $3.9 $3.9
Equity funds 12.3 3.8 6.5
Totals $22.4 $7.7 $10.4
Average AFUDC rate 5.8% 3.9% 4.0%
The average Utility Group 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.
The increase in the average AFUDC rate during 2005 is primarily due
to increases in short-term and long-term debt interest rates.
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. Equity-based employee compensation cost for stock
options is not 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. During the years ended
December 31, 2005, 2004 and 2003, no stock options were awarded.
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) 2005 2004 2003
Net (loss)/income as reported $(253.5) $116.6 $116.4
Add: Equity-based employee
compensation expense included
in the reported net (loss)/income,
net of related tax effects 2.6 2.3 1.2
Net (loss)/income before equity-based
compensation (250.9) 118.9 117.6
Deduct: Total equity-based employee
compensation expense determined
under the fair value-based method
for all awards, net of related
tax effects (1.2) (2.7) (2.5)
Pro forma net (loss)/income $(252.1) $116.2 $115.1
EPS:
Basic and diluted – as reported $ (1.93) $ 0.91 $ 0.91
Basic and diluted – pro forma $ (1.92) $ 0.91 $ 0.90
In 2005, NU disclosed the final pro forma expense for stock options
granted in 2002 as all stock options were fully vested. The total equity-
based employee compensation expense of $1.2 million, $2.7 million,
and $2.5 million above includes offsetting amounts of $2.2 million,
$0.7 million, and $0.6 million, related to forfeitures of stock options
made for the years ended December 31, 2005, 2004, and 2003,
respectively.
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.
NU accounts for restricted stock and restricted stock units in accordance
with APB No. 25 and amortizes the intrinsic value of the stock at the
awarddate over the related service period.
For information regarding new accounting standards issued but not yet
adopted associated with equity-based compensation, see Note 1C,
“Summaryof Significant Accounting Policies – Accounting Standards
Issued But Not Yet Adopted,” to the consolidated financial statements.
O. Sale of Receivables
Utility Group: At December 31, 2005 and 2004, CL&P had sold an
undivided interest in its accounts receivable of $80 million and $90
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, 2005 and
2004, the reserve requirements calculated in accordance with the
Receivables Purchase and Sale Agreement were $21 million and $18.8
million, respectively. These reserve amounts are deducted from the
amount of receivables eligible for sale. At their present levels, these
reserve amounts do not limit CL&P’s ability to access the full amount
of the facility. Concentrations of credit risk to the purchaser under this
agreement with respect to the receivables are limited due to CL&P’s
diverse customer base.
At December 31, 2005 and 2004, amounts sold to CRC by CL&P but
not sold to the financial institution totaling $252.8 million and $139.4
million, respectively, are included as investments in securitizable
assets on the accompanying consolidated balance sheets. These