2.2.0.25falsefalse0202 - Disclosure - Significant Accounting Policiestruefalsefalse1falsefalseUSDfalsefalse1/1/2010 - 12/31/2010
USD ($)
USD ($) / shares
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<b><font style="font-family: Arial, Helvetica">2.  </font></b>
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<b><font style="font-family: Arial, Helvetica">SIGNIFICANT
ACCOUNTING POLICIES</font></b>
</td>
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A summary of the major accounting policies followed in the
preparation of the accompanying consolidated financial
statements, which conform to accounting principles generally
accepted in the United States of America (“GAAP”), is
presented below:
</div>
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</div>
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<i>Principles of Consolidation</i> — ITC Holdings
consolidates its majority owned subsidiaries. We eliminate all
intercompany balances and transactions.
</div>
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</div>
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<i>Use of Estimates</i> — The preparation of the
consolidated financial statements in accordance with GAAP
requires us to use estimates and assumptions that impact the
reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities. Actual results may differ
from our estimates.
</div>
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<i>Regulation</i> — Our Regulated Operating
Subsidiaries are subject to the regulatory jurisdiction of the
FERC, which issues orders pertaining to rates, recovery of
certain costs, including the costs of transmission assets and
regulatory assets, conditions of service, accounting, financing
authorization and operating-related matters. The utility
operations of our Regulated Operating Subsidiaries meet the
accounting standards set forth by the Financial Accounting
Standards Board (“FASB”) for the accounting effects of
certain types of regulation. These accounting standards
recognize the cost-based rate setting process, which results in
differences in the application of GAAP between regulated and
non-regulated businesses. These standards require the recording
of regulatory assets and liabilities for transactions that would
have been recorded as revenue and expense in non-regulated
businesses. Regulatory assets represent costs that will be
included as a component of future tariff rates and regulatory
liabilities represent amounts provided in the current tariff
rates that are intended to recover costs expected to be incurred
in the future or amounts to be refunded to customers.
</div>
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<i>Cash and Cash Equivalents</i> — We consider all
unrestricted highly-liquid temporary investments with an
original maturity of three months or less at the date of
purchase to be cash equivalents.
</div>
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</div>
<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Consolidated Statements of Cash Flows</i> — The
following table presents certain supplementary cash flows
information for the years ended December 31, 2010, 2009 and
2008:
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</td>
<td>
 
</td>
<td colspan="11" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
<b>Year Ended December 31,</b>
</td>
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</td>
<td>
 
</td>
<td colspan="3" nowrap="nowrap" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
<b>2010</b>
</td>
<td>
 
</td>
<td colspan="3" nowrap="nowrap" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
<b>2009</b>
</td>
<td>
 
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<b>2008</b>
</td>
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<td colspan="13" align="left" valign="bottom">
<b>(In thousands)</b>
</td>
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Supplementary cash flows information:
</div>
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
</tr>
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<div style="text-indent: -10pt; margin-left: 20pt">
Interest paid (net of interest capitalized)
</div>
</td>
<td>
 
</td>
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$
</td>
<td nowrap="nowrap" align="right" valign="bottom">
135,771
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
$
</td>
<td nowrap="nowrap" align="right" valign="bottom">
125,254
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
$
</td>
<td nowrap="nowrap" align="right" valign="bottom">
102,149
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
</tr>
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<div style="text-indent: -10pt; margin-left: 20pt">
Income taxes paid
</div>
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
8,844
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
1,971
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
2,012
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
</tr>
<tr valign="bottom">
<td align="left" valign="bottom">
<div style="text-indent: -10pt; margin-left: 10pt">
Supplementary non-cash investing and financing activities:
</div>
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
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<td align="left" valign="bottom">
<div style="text-indent: -10pt; margin-left: 20pt">
Additions to property, plant and equipment(a)
</div>
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
44,496
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
23,169
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
54,689
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
</tr>
<tr valign="bottom">
<td align="left" valign="bottom">
<div style="text-indent: -10pt; margin-left: 20pt">
Allowance for equity funds used during construction
</div>
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
13,412
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
13,203
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
<td>
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
 
</td>
<td nowrap="nowrap" align="right" valign="bottom">
11,610
</td>
<td nowrap="nowrap" align="left" valign="bottom">
 
</td>
</tr>
</table>
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<td> (a) 
</td>
<td align="left">
Amounts consist of current liabilities for construction labor
and materials that have not been included in investing
activities. These amounts have not been paid for as of
December 31, 2010, 2009 or 2008, respectively, but have
been or will be included as a cash outflow from investing
activities for expenditures for property, plant and equipment
when paid.
</td>
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<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Accounts Receivable</i> — We recognize losses for
uncollectible accounts based on specific identification of any
such items. As of December 31, 2010 and 2009, we did not
have an accounts receivable reserve.
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<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Inventories</i> — Materials and supplies
inventories are valued at average cost. Additionally, the costs
of warehousing activities are recorded here and included in the
cost of materials when requisitioned.
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<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Property, Plant and Equipment</i> — Depreciation
and amortization expense on property, plant and equipment was
$77.8 million, $76.8 million and $85.6 million
for 2010, 2009 and 2008, respectively.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
Property, plant and equipment in service at our Regulated
Operating Subsidiaries is stated at its original cost when first
devoted to utility service. The gross book value of assets
retired less salvage proceeds is charged to accumulated
depreciation. The provision for depreciation of transmission
assets is a significant component of our Regulated Operating
Subsidiaries’ cost of service under
FERC-approved rates. Depreciation is computed over the estimated
useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income
tax reporting purposes. The composite depreciation rate for our
Regulated Operating Subsidiaries included in our consolidated
statements of operations was 2.4%, 2.6% and 3.0% for 2010, 2009
and 2008, respectively. Both ITCTransmission and METC
implemented new depreciation rates effective for the year ended
December 31, 2009 and ITC Midwest implemented new
depreciation rates effective for the year ended
December 31, 2010. Refer to Note 4 for additional
discussion of these depreciation rate changes. The composite
depreciation rates include depreciation primarily on
transmission station equipment, towers, poles and overhead and
underground lines that have a useful life ranging from 48 to
60 years. The portion of depreciation expense related to
asset removal costs is added to regulatory liabilities and
removal costs incurred are deducted from regulatory liabilities.
Our Regulated Operating Subsidiaries capitalize to property,
plant and equipment an allowance for the cost of equity and
borrowings used during construction (“AFUDC”) in
accordance with FERC regulations. AFUDC represents the composite
cost incurred to fund the construction of assets, including
interest expense and a return on equity capital devoted to
construction of assets. The AFUDC debt of $3.9 million,
$3.9 million and $3.5 million for 2010, 2009 and 2008,
respectively, was a reduction to interest expense. The AFUDC
equity was $13.4 million, $13.2 million and
$11.6 million for 2010, 2009 and 2008, respectively.
Certain projects at ITC Great Plains have been granted an
incentive to include construction work in progress balances in
rate base, and we do not accrue AFUDC on those projects.
</div>
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<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
For acquisitions of property, plant and equipment greater than
the net book value (other than asset acquisitions accounted for
under the purchase method of accounting that result in
goodwill), the acquisition premium is recorded to property,
plant and equipment and amortized over the estimated remaining
useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income
tax reporting purposes.
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<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
Property, plant and equipment includes capital equipment
inventory stated at original cost consisting of items that are
expected to be used exclusively for capital projects.
</div>
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<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
We capitalize the costs associated with computer software we
develop or obtain for use in our business, which is included in
property, plant and equipment. We amortize computer software
costs on a straight-line basis over the expected period of
benefit once the installed software is ready for its intended
use.
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<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
Property, plant and equipment at ITC Holdings and non-regulated
subsidiaries is stated at its acquired cost. Proceeds from
salvage less the net book value of assets disposed of is
recognized as a gain or loss on disposal. Depreciation is
computed based on the acquired cost less expected residual value
and is recognized over the estimated useful lives of the assets
on a straight-line method for financial reporting purposes and
accelerated methods for income tax reporting purposes.
</div>
<div style="margin-top: 6pt; font-size: 1pt"> 
</div>
<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Impairment of Long-Lived Assets</i> — Other than
goodwill, our long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. If the
carrying amount of the asset exceeds the expected undiscounted
future cash flows generated by the asset, an impairment loss is
recognized resulting in the asset being written down to its
estimated fair value.
</div>
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</div>
<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Goodwill and Intangible Assets</i> — We comply with
the standards set forth by the FASB for goodwill and other
intangible assets. Under these standards, goodwill and other
intangibles with indefinite lives are not subject to
amortization. However, goodwill and other intangibles are
subject to fair value-based rules for measuring impairment, and
resulting write-downs, if any, are to be reflected in operating
expense. In order to perform these impairment tests, we
determined fair value using
valuation techniques based on discounted future cash flows under
various scenarios and we also considered estimates of
market-based valuation multiples for companies within the peer
group of the reporting unit that has goodwill recorded. These
accounting standards require that goodwill be reviewed at least
annually for impairment and whenever facts or circumstances
indicate that the carrying amounts may not be recoverable. We
have goodwill recorded relating to the acquisitions of each our
MISO Regulated Operating Subsidiaries. We completed our annual
goodwill impairment test for each of our MISO Regulated
Operating Subsidiaries as of October 1, 2010 and determined
that no impairment exists, nor do we believe there is material
risk of being impaired in the near term. There were no events
subsequent to October 1, 2010 that indicated impairment of
our goodwill. Our intangible assets have finite lives and are
amortized over their useful lives, refer to Note 6.
</div>
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</div>
<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Deferred Financing Fees and Discount or Premium on
Debt</i> — The costs related to the issuance of
long-term debt are recorded to deferred financing fees and are
deferred and amortized over the life of the debt issue. The debt
discount or premium related to the issuance of long-term debt is
recorded to long-term debt and amortized over the life of the
debt issue. We recorded to interest expense the amortization of
deferred financing fees and the amortization of our debt
discounts for 2010, 2009 and 2008 of $3.1 million,
$3.3 million and $3.2 million, respectively.
</div>
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</div>
<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Asset Retirement Obligations</i> — We comply with
the standards set forth by the FASB for asset retirement
obligations. As defined in the standards, a conditional asset
retirement obligation refers to a legal obligation to perform an
asset retirement activity in which the timing
<font style="white-space: nowrap">and/or</font>
method of settlement are conditional on a future event that may
or may not be within our control. We have identified conditional
asset retirement obligations primarily associated with the
removal of equipment containing polychlorinated biphenyls
(“PCBs”) and asbestos. We record a liability at fair
value for a legal asset retirement obligation in the period in
which it is incurred. When a new legal obligation is recorded,
we capitalize the costs of the liability by increasing the
carrying amount of the related long-lived asset. We accrete the
liability to its present value each period and depreciate the
capitalized cost over the useful life of the related asset. At
the end of the asset’s useful life, we settle the
obligation for its recorded amount or incur a gain or loss. The
standards for asset retirement obligation applied to our
Regulated Operating Subsidiaries require us to recognize
regulatory assets or liabilities for the timing differences
between when we recover legal asset retirement obligations in
rates and when we would recognize these costs under the
standards. Our asset retirement obligations as of
December 31, 2010 and 2009 of $3.3 million and
$3.5 million, respectively, are included in other
liabilities.
</div>
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</div>
<div align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: transparent">
<i>Financial Instruments</i> — We comply with the
standards set forth by the FASB for derivatives and hedging in
accounting for financial instruments. For derivative instruments
that have been designated and qualify as hedges of the exposure
to variability in expected future cash flows, the gain or loss
on the derivative is initially reported as a component of other
comprehensive income (loss) and reclassified to the consolidated
statement of operations when the underlying hedged transaction
affects net income. Any hedge ineffectiveness is recognized in
net income during the period of change.
</div>
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<i>Contingent Obligations</i> — We are subject to a
number of federal and state laws and regulations, as well as
other factors and conditions that potentially subject us to
environmental, litigation and other risks. We periodically
evaluate our exposure to such risks and record reserves for
those matters where a loss is considered probable and reasonably
estimable in accordance with GAAP. The adequacy of reserves can
be significantly affected by external events or conditions that
can be unpredictable; thus, the ultimate outcome of such matters
could materially affect our consolidated financial statements.
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<i>Generator Interconnection Projects</i> — Certain
capital investment at our MISO Regulated Operating Subsidiaries
relates to investments we make under generator interconnection
agreements. The generator interconnection agreements typically
consist of both transmission network upgrades, which
have been deemed by FERC to benefit the transmission system as a
whole, as well as direct connection facilities, which are needed
to interconnect the generating facility to the transmission
system and primarily benefit the generating facility. Our
investment in transmission network upgrade facilities are
recorded to property, plant and equipment. For direct connection
facilities, we collect a contribution in aid of construction
from the generator for the cost of the facilities and offset the
contribution against the plant investment recorded to property,
plant and equipment.
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We receive deposits or letters of credit from the generator for
the network upgrade facilities in advance of construction. When
the generator meets certain criteria of Attachment FF of the
MISO tariff, such as having a long-term sales agreement at the
commercial operation date for the generating capacity of the
facility, we refund the cash deposits or release letter of
credit that was provided. If the generator does not meet these
criteria, the deposit is retained or other security drawn upon,
and is recorded as an offset against the plant investment
recorded to property, plant and equipment. When the cash or
other security received is not refunded under the criteria of
Attachment FF, the receipt of cash becomes taxable income for us
for which we bill the generator a tax
<font style="white-space: nowrap">gross-up.</font>
The tax
<font style="white-space: nowrap">gross-up</font>
represents the difference between taxable income associated with
the contribution compared to the present value of tax
depreciation of the property constructed using the taxable
contribution in aid of construction. The deferred revenues
associated with the tax
<font style="white-space: nowrap">gross-up</font> are
recorded to other long-term liabilities when collected, and
amortized over the tax depreciation life of the asset to other
operating income and
<font style="white-space: nowrap">expense-net.</font>
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<i>Revenues</i> — Revenues from the transmission of
electricity are recognized as services are provided based on
FERC-approved cost-based formula rate templates. We record a
reserve for revenue subject to refund when such refund is
probable and can be reasonably estimated. The reserve is
recorded as a reduction to operating revenues.
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The cost-based formula rate templates at our Regulated Operating
Subsidiaries include a
<font style="white-space: nowrap">true-up</font>
mechanism, whereby they compare their actual revenue
requirements to their billed revenues for each year to determine
any over- or under-collection of revenue requirements and record
a revenue accrual or deferral for the difference. Refer to
Note 4 under “Cost-Based Formula Rates with
<font style="white-space: nowrap">True-Up</font>
Mechanism” for a discussion of our revenue accounting under
our cost-based formula rate templates.
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<i>Share-Based Payment</i> — We have an Amended and
Restated 2003 Stock Purchase and Option Plan for Key Employees
of ITC Holdings Corp. and its subsidiaries (the “2003 Stock
Purchase and Option Plan”) and an Amended and Restated 2006
Long-Term Incentive Plan (the “LTIP”) pursuant to
which we grant various share-based awards, including options and
restricted stock and deferred stock units. Compensation expense
for employees and directors is recorded for stock options,
restricted stock awards and deferred stock units that are
expected to vest based on their fair value at grant date, and is
amortized over the expected vesting period. We recognize expense
for our stock options, which have graded vesting schedules, on a
straight-line basis over the entire vesting period and not for
each separately vesting portion of the award. The grant date is
the date at which our commitment to issue share based awards to
the employee or a director arises, which is generally the later
of the board approval date, the date of hire of the employee or
the date of the employee’s compensation agreement which
contains the commitment to issue the award.
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We also have an Employee Stock Purchase Plan (“ESPP”)
which is a compensatory plan. Compensation expense is recorded
based on the fair value of the purchase options at the grant
date,
which corresponds to the first day of each purchase period, and
is amortized over the purchase period.
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<i>Comprehensive Income (Loss)</i> — Comprehensive
income (loss) is the change in common stockholders’ equity
during a period arising from transactions and events from
non-owner sources, including net income and any gain or loss
recognized for the effective portion of our interest rate swap.
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<i>Income Taxes</i> — Deferred income taxes are
recognized for the expected future tax consequences of events
that have been recognized in the financial statements or tax
returns. Deferred tax assets and liabilities are determined
based on the differences between the financial statements and
tax bases of various assets and liabilities using the tax rates
expected to be in effect for the year in which the differences
are expected to reverse.
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The accounting standards for uncertainty in income taxes
prescribe a recognition threshold and a measurement attribute
for tax positions taken, or expected to be taken, in a tax
return that may not be sustainable.
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We file income tax returns with the Internal Revenue Service and
with various state and city jurisdictions. We are no longer
subject to U.S. federal tax examinations for tax years 2006
and earlier. The Internal Revenue Service completed its
examination of our 2006 federal tax returns in January 2010.
State and city jurisdictions that remain subject to examination
range from tax years 2006 to 2009. The Internal Revenue Service
examination did not result in any material adjustments to our
consolidated financial statements. In the event we are assessed
interest or penalties by any income tax jurisdictions, interest
would be recorded as interest expense and penalties would be
recorded as other expense.
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