Eversource 2009 Annual Report Download - page 53

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significant assumptions. If these assumptions were changed, the resulting changes in benefit obligations, fair values of plan assets,
funded status and net periodic expense could have a material impact on our financial position, results of operations or cash flows.
Pre-tax periodic pension expense for the Pension Plan was $39.7 million, $2.4 million and $17.4 million for the years ended
December 31, 2009, 2008 and 2007, respectively, excluding a one-time termination benefit of $0.3 million in 2007. The pre-tax net
PBOP Plan expense was $37.2 million, $36.2 million and $38.4 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Long-Term Rate of Return Assumptions and Plan Assets: In developing our expected long-term rate of return assumptions for the
Pension Plan and the PBOP Plan, we evaluated input from actuaries and consultants, as well as long-term inflation assumptions and
historical returns. Our expected long-term rates of return on assets are based on certain target asset allocation assumptions and
corresponding assumed rates of returns. We used 8.75 percent for 2009 for the aggregate long-term rate of return on Pension Plan
and PBOP Plan life and non-taxable health assets and 6.85 percent for PBOP taxable health assets. We will continue to evaluate these
actuarial assumptions at least annually and will adjust them as necessary. We routinely review the actual asset allocations and
periodically rebalance the investments to the targeted asset allocations when appropriate. For information regarding actual asset
values, see Note 5A, "Employee Benefits - Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated
financial statements.
Investment securities are exposed to various risks, including interest rate, credit and market price volatility. As a result of these risks,
the market values of investment securities could increase or decrease in the near term, resulting in a material impact on the value of our
plan assets. Increases or decreases in market values could materially affect the future level of pension and other postretirement benefit
expense.
Actuarial Determination of Expense: Pension and PBOP expense consists of the service cost and prior service cost determined by our
actuaries, the interest cost based on the discounting of the obligations and the amortization of the net transition obligation, offset by the
expected return on plan assets. Pension and PBOP expense also includes amortization of actuarial gains and losses, which represent
differences between assumptions and actual or updated information.
We calculate the expected return on plan assets by applying our assumed rate of return to a four-year rolling average of plan asset fair
values, which reduces year-to-year volatility. This calculation recognizes in plan assets investment gains or losses over a four-year
period from the year in which they occur. Investment gains or losses for this purpose are the difference between the calculated
expected return and the actual return based on the change in the fair value of assets during the year. As of December 31, 2009, total
investment losses to be reflected in the four-year rolling average of plan assets over the next four years were $350.4 million and $30.9
million for the Pension Plan and the PBOP Plan, respectively. As these asset losses are reflected in the average plan asset fair values,
they will be subject to amortization with other unrecognized gains or losses. The Plans currently amortize unrecognized gains or losses
as a component of pension and PBOP expense over the average future employee service period of approximately 12 years.
As of December 31, 2009, the net actuarial losses on the Pension and PBOP Plan liabilities, also subject to amortization over the next
12 years, were $570 million and $154 million, respectively.
Discount Rate: Cash flows related to the Pension Plan or PBOP Plan liability stream are discounted at interest rates applicable to the
timing of the cash flow. The discount rate that is utilized in determining future pension and PBOP obligations is based on a yield-curve
approach. The yield curve is developed from the top quartile of "AA-rated" Moody’s and S&P’s bonds without callable features
outstanding as of December 31, 2009. This process calculates the present values of these cash flows and calculates the equivalent
single discount rate that produces the same present value for future cash flows. The discount rates determined on this basis are 5.98
percent for the Pension Plan and 5.73 percent for the PBOP Plan as of December 31, 2009. Discount rates used as of December 31,
2008 were 6.89 percent for the Pension Plan and 6.90 percent for the PBOP Plan.
Forecasted Expenses and Expected Contributions: Due to the effect of the unrecognized actuarial gains or losses and based on the
long-term rate of return assumptions, discount rates and other assumptions, we estimate that forecasted expense for the Pension Plan
and PBOP Plan will be $79.5 million and $41.2 million, respectively, in 2010, which is included in our earnings guidance. Future actual
Pension and PBOP expense will depend on future investment performance, changes in future discount rates and various other factors
related to the populations participating in the plans and amounts capitalized. We expect to continue our policy to contribute to the
PBOP Plan at the amount of PBOP expense, excluding curtailments and special benefit amounts and adding contributions for the
amounts received from the federal Medicare subsidy.
We have not been required to make a contribution to the Pension Plan since 1991. As of January 1, 2010 and 2009, the fair value of
our Pension Plan assets decreased from prior years due primarily to negative financial market conditions. On October 7, 2009, the
Internal Revenue Service issued final regulations on the PPA funding rules, which allows us to maximize our funding flexibility by using
the October 2008 yield curve rate for the January 1, 2009 valuation of Pension Plan liabilities. Using the October 2008 yield curve rate,
our Pension Plan funded ratio (the value of plan assets divided by the funding target in accordance with the requirement of the PPA)
was 100 percent as of January 1, 2009. We currently estimate that a contribution of approximately $45 million will be made in the third
quarter of 2010 for the purpose of satisfying benefit obligations accrued during 2009, and that contributions totaling approximately $200
million could potentially be made in 2011 (using 24 month segment rates to determine the funding target beginning in 2010). The actual
amounts of contributions in 2011 and in future plan years will depend on many factors, including the performance of existing plan
assets, valuation of plan liabilities, and long-term discount rates.