Eversource 2009 Annual Report Download - page 54

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Sensitivity Analysis: The following represents the increase to the Pension Plan’s and PBOP Plan’s reported cost as a result of a change
in the following assumptions by 50 basis points (in millions):
As of December 31,
Pension Plan Cost Postretirement Plan Cost
Assumption Change 2009 2008 2009 2008
Lower long-term rate of return $ 11.1 $ 11.8 $1.7 $ 1.3
Lower discount rate $ 12.0 $ 11.6 $1.5 $1.4
Higher compensation increase $ 6.0 $ 6.2 N/A N/A
Health Care Cost: The health care cost trend assumption used to project increases in medical costs was 8 percent for 2009,
decreasing one half percentage point per year to an ultimate rate of 5 percent in 2015. The effect of increasing the health care cost
trend by one percentage point would have increased service and interest cost components of PBOP Plan expense by $0.9 million in
2009. The effect of increasing the health care cost trend rate by one percentage point would have been a $12.9 million impact on the
postretirement benefit obligation in 2009.
Goodwill and Intangible Assets: We are required to test goodwill balances for impairment at least annually by applying a fair value-
based test. The testing of goodwill for impairment requires us to use estimates and judgment. We have selected October 1st of each
year as the annual goodwill impairment testing date. Management has determined that no triggering events occurred in 2009 that
would have required interim testing before or after October 1st. Goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value and if the implied fair value of goodwill based on the estimated fair value of the reporting
unit is less than the carrying amount of the goodwill. If goodwill is deemed to be impaired, it is written off in the current period to the
extent it is impaired.
We completed our impairment analysis as of October 1, 2009 for the Yankee Gas goodwill balance of $287.6 million. We determined
that the fair value of Yankee Gas substantially exceeds its carrying value and no impairment exists. In performing the required
impairment evaluation, we estimated the fair value of the Yankee Gas reporting unit and compared it to the carrying amount of the
reporting unit, including goodwill. We estimated the fair value of Yankee Gas using discounted cash flow methodologies and an
analysis of comparable companies or transactions. This analysis requires the input of several critical assumptions, including future
growth rates, cash flow projections, operating cost escalation rates, rates of return, a risk-adjusted discount rate, and long-term earnings
and merger multiples of comparable companies.
We determined the discount rate using the capital asset pricing model methodology. This methodology uses a weighted average cost
of capital in which the ROE is calculated using risk-free rates, stock premiums and a beta representing Yankee Gas' volatility relative to
the overall market. The resulting discount rate is intended to be comparable to a rate that would be applied by a market participant.
The discount rate fluctuates from year to year as it is based on external market conditions. In 2009, the discount rate increased
because the beta was higher in 2009 than 2008.
Income Taxes: Income tax expense is estimated annually for each of the jurisdictions in which we operate. This process involves
estimating current and deferred income tax expense or benefit and the impact of temporary differences resulting from differing treatment
of items. Such differences are the result of timing of the deduction for expenses, as well as any impact of permanent differences
resulting from tax credits, non-tax deductible expenses, in addition to various other items, including items that directly impact our tax
return as a result of a regulatory activity (flow-through items). The temporary differences and flow-through items result in deferred tax
assets and liabilities that are included in the consolidated balance sheets. The income tax estimation process impacts all of our
segments. We record income tax expense quarterly using an estimated annualized effective tax rate. Adjustments to these estimates
can significantly impact our consolidated financial statements.
A reconciliation of expected tax expense at the statutory federal income tax rate to actual tax expense recorded is included in Note 1I,
"Summary of Significant Accounting Policies - Income Taxes," to the consolidated financial statements.
We also account for uncertainty in income taxes, which applies to all income tax positions previously filed in a tax return and income tax
positions expected to be taken in a future tax return that have been reflected on our balance sheets. We follow generally accepted
accounting principles to address the methodology to be used in recognizing, measuring and classifying the amounts associated with tax
positions that are deemed to be uncertain, including related interest and penalties. The determination of whether a tax position meets
the recognition threshold under this guidance is based on facts, circumstances and information available to us. Once a tax position
meets the recognition threshold, the tax benefit is measured using a cumulative probability assessment. Assigning probabilities in
measuring a recognized tax position and evaluating new information or events in subsequent periods requires significant judgment and
could change previous conclusions used to measure the tax position estimate. New information or events may include tax examinations
or appeals, developments in case law, settlements of tax positions, changes in tax law and regulations, rulings by taxing authorities and
statute of limitation expirations. Such information or events may have a significant impact on our net income, financial position and
cash flows.
Accounting for Environmental Reserves: Environmental reserves are accrued when assessments indicate that it is probable that a
liability has been incurred and an amount can be reasonably estimated. Adjustments made to environmental reserves could have a
significant impact on earnings. Our approach estimates these liabilities based on the most likely action plan from a variety of available
options, ranging from no action to establishing institutional controls, full site remediation and long-term monitoring. The estimates
associated with each possible action plan are based on findings through various phases of site assessments.