Eversource 2008 Annual Report Download - page 41

renewable energy credits from a biomass energy plant
yet to be built. We determined that this contract was a
variable interest in a VIE. In 2008, CL&P and UI entered
into seven additional long-term agreements with proposed
renewable energy plants, of which four were determined
to be variable interests in VIEs and the other three were
concluded not to be variable interests because of their fixed
pricing elements. As directed by the DPUC, CL&P has an
agreement with UI under which it will share the costs and
benefits of these contracts with 80 percent to CL&P and
20 percent to UI (cost sharing agreement). We utilized
qualitative and quantitative analyses to evaluate whether
entering into the renewable energy contracts and cost
sharing agreement would require CL&P to consolidate the
projects and determined that consolidation would not be
required. The review of these contracts required significant
management judgment and incorporated quantitative
modeling of the projections of each plant under a variety
of possible scenarios in order to determine the allocation
of risk between variable interest holders including the
developers, equity investors, financing institutions and
CL&P. The primary variable factors considered in these
analyses were the plants’ operating performance and the
projected market prices of energy, capacity and renewable
energy credits.
In 2007, CL&P entered into two Capacity CfDs associated
with the capacity of two generating projects to be built
or modified, and UI entered into two capacity-related
CfDs, one with a generating project to be built and one
with a new demand response project. The contracts,
referred to as Capacity CfDs, obligate the utilities to
pay the dierence between a set capacity price and the
value that the projects receive in the ISO-NE capacity
markets for periods of up to 15 years beginning in 2009.
As directed by the DPUC, CL&P has a cost sharing
agreement with UI under which it will share the costs
and benefits of these four Capacity CfDs with 80 percent
to CL&P and 20 percent to UI. We determined that the
Capacity CfDs and the related cost sharing agreement
are derivatives and that the projects do not require
consolidation. Quantitative modeling was not required for
these contracts because we concluded that the derivative
contracts are not variable interests in the projects.
The Energy Eciency Act required electric distribution
companies, including CL&P, and allowed others to file
proposals with the DPUC to build cost-of-service peaking
generation facilities. In 2008, CL&P entered into three
CfDs with developers of peaking generation units approved
by the DPUC (Peaker CfDs). As directed by the DPUC,
CL&P and UI have entered into a cost sharing agreement,
whereby CL&P is responsible for 80 percent and UI for
20 percent of the net costs or benefits of these Peaker
CfDs. The Peaker CfDs pay the developer the dierence
between capacity, forward reserve and energy market
revenues and a cost-of-service payment stream for 30
years. The ultimate cost or benefit to CL&P under these
contracts will depend on the costs of plant construction
and operation and the prices that the projects receive
for capacity and other products in the ISO-NE markets.
Amounts paid or received under the Peaker CfDs will be
recoverable from or refunded to customers. We used both
qualitative and quantitative analyses to evaluate whether
these contracts are variable interests in VIEs that require
CL&P to consolidate the projects. CL&P determined that,
while the contracts represent variable interests in VIEs,
CL&P is not required to consolidate any of these projects
as of December31, 2008. For two of the projects, UI has
an obligation to absorb 20 percent of the net costs or
benefits of the projects through the cost sharing agreement
and also holds ownership in the projects jointly with
the developer. We concluded that UI is the party that is
most closely associated with the VIEs due to its related
party relationships with the projects and the cost sharing
agreement. We performed quantitative modeling for these
two projects and our qualitative analysis of UI’s interests
in the projects, which led us to conclude that CL&P is
not required to consolidate these projects. The third
peaker project is not currently held in a VIE. We utilized a
quantitative model to determine the variability that CL&P
would absorb if the project is transferred into a VIE and
the Peaker CfD thus becomes a variable interest in a VIE.
The primary variable factors considered in our quantitative
analyses of the peaker projects were their projected capital
costs, operating costs and operating performance as well as
projected market revenues in the capacity markets. Based
upon our quantitative analysis, we determined that the third
project will likely require consolidation if in a future period it
is transferred into a VIE. Consolidation of that project would
not impact CL&P’s net income, but could add approximately
$140 million of plant, $85 million of nonrecourse debt and
$55 million of equity (noncontrolling interest) to CL&P’s
balance sheet by the time the plant is placed in service
(scheduled for June 2012). Any demonstrated increases in
financing or other costs that might result from consolidation
of the project would be recoverable from CL&P’s customers.
The FASB is in the process of reinterpreting the consolidation
requirements of FIN 46(R) and expects to issue revised
guidance in the second quarter of 2009. If the proposed
guidance were finalized in its current form, it would likely
eliminate the requirement for consolidation when we do not
have the power to direct matters that significantly impact
the VIE’s activities. CL&P would not likely be required
to consolidate the peaker project if and when the new
guidance becomes eective. The FASB reinterpretation
of FIN 46(R), as drafted, would become eective on
January1, 2010. Changes in facts and circumstances and
changes in accounting guidance resulting in reevaluation
of the accounting treatment of these contracts could have
a significant impact on the accompanying consolidated
financial statements.
In December 2008, the FASB issued FASB Sta Position
(FSP) FIN 46(R)-8, “Disclosures by Public Entities about
Transfers of Financial Assets and Interests in Variable
Interest Entities,” requiring additional disclosures about
significant variable interests in variable interest entities
(VIEs) eective for December 31, 2008 financial reporting.
We do not have any significant variable interests in VIEs
that would be required to be disclosed because our
contracts do not materially impact our financial statements
due to the pass-through to our customers of contract costs
and benefits and because we are not currently the primary
beneficiary of any VIE.
Other Matters
Consolidated Edison, Inc. Merger Litigation: On March13,
2008, we entered into a settlement agreement with Con
Edison, which settled all claims in the civil lawsuit between
both parties relating to the proposed but unconsummated
merger. Under the terms of the settlement agreement,
we paid Con Edison $49.5 million on March 26, 2008, which
resulted in an after-tax charge of $29.8 million.
This amount is not recoverable from ratepayers.
Accounting Standards Issued But Not Yet Adopted:
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements,” which is eective January 1, 2009. SFAS
No. 160 requires ownership interests in subsidiaries held
by third parties (noncontrolling interests) to be presented
within equity and clearly identified and labeled. It sets forth
requirements for income statement presentation related to
the activities of noncontrolling interests and for accounting
for changes in ownership interests and provides guidance
for deconsolidation. Implementation of SFAS No. 160 is not
expected to have a material impact on our consolidated
financial statements.
In June 2008, the FASB issued FASB Sta Position (FSP)
EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions are Participating
Securities,” which is eective January 1, 2009 and is
required to be applied retrospectively. As a result of this
FSP, our restricted stock awards that were not vested
in 2007 and the first quarter of 2008 are considered
participating securities in calculating EPS for these
periods using the two-class method. Our restricted stock
awards were completely vested during the first quarter of
2008 and are no longer awarded. FSP EITF 03-6-1 is not
expected to impact our EPS for any period.
SFAS No. 157, which establishes a framework for identifying
and measuring fair value, was issued in 2006 and applied
in 2008 to the fair value measurements of financial assets
and liabilities of NU and its subsidiaries. The statement
defines fair value as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in
an orderly transaction between market participants at the
measurement date. SFAS No. 157 is required to be applied
40