Eversource 2013 Annual Report Download - page 60

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Pre-tax net periodic benefit expense (excluding SERP) for the Pension Plans was $236.3 million, $234.9 million and $127.7 million for
the years ended December 31, 2013, 2012 and 2011, respectively. The pre-tax net periodic benefit expense for the PBOP Plans was
$32.6 million, $72.3 million and $43.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. NSTAR pension
and PBOP expense was included in NU beginning April 10, 2012.
We develop key assumptions for purposes of measuring liabilities as of December 31st and expenses for the subsequent year. These
assumptions include the expected long-term rate of return on plan assets, discount rate, compensation/progression rate, and health
care cost trend rates and are discussed below.
Expected Long-Term Rate of Return on Plan Assets: In developing this assumption, we consider historical and expected returns and
input from our consultants. Our expected long-term rate of return on assets is based on assumptions regarding target asset allocations
and corresponding expected rates of return for each asset class. We routinely review the actual asset allocations and periodically
rebalance the investments to the targeted asset allocations when appropriate. For the year ended December 31, 2013, our aggregate
expected long-term rate of return assumption of 8.25 percent was used to determine our pension and PBOP expense. For the
forecasted 2014 pension and PBOP expense, our expected long-term rate of return of 8.25 percent for all plans was used reflecting our
target asset allocations within both the NUSCO and NSTAR Pension and PBOP Plans.
Discount Rate: Payment obligations related to the Pension Plans and PBOP Plans are discounted at interest rates applicable to the
expected timing of each plan’s cash flows. The discount rate that is utilized in determining the pension and PBOP obligations is based
on a yield-curve approach. This approach is based on a population of bonds with an average rating of AA based on bond ratings by
Moody’s, S&P and Fitch, and uses bonds with above median yields within that population. The discount rates determined on this basis
were 5.03 percent for the NUSCO Pension Plan, 4.85 percent for the NSTAR Pension Plan, 4.78 percent for the NUSCO PBOP Plans
and 5.10 percent for the NSTAR PBOP Plan as of December 31, 2013.
Compensation/Progression Rate: This assumption reflects the expected long-term salary growth rate, which impacts the estimated
benefits that pension plan participants receive in the future. As of December 31, 2013 and 2012, we used a compensation/progression
rate of 3.5 percent for the NUSCO Pension Plan and 4 percent for the NSTAR Pension Plan, which reflects our current expectation of
future salary increases, including consideration of the levels of increases built into collective bargaining agreements.
Actuarial Determination of Expense: Pension and PBOP expense is determined by our actuaries and consists of service cost and prior
service cost, interest cost based on the discounting of the obligations, amortization of actuarial gains and losses and amortization of the
net transition obligation (which was fully amortized in 2013), offset by the expected return on plan assets. Actuarial gains and losses
represent differences between assumptions and actual information or updated assumptions.
We determine the expected return on plan assets for the NUSCO Pension and PBOP Plans 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 investment gains or
losses over a four-year period from the years in which they occur. Investment gains or losses for this purpose are the difference
between the calculated expected return and the actual return or loss based on the change in the fair value of assets during the year.
As of December 31, 2013, investment gains and losses that remain to be reflected in the calculation of plan assets over the next four
years were losses of $41.8 million and gains of $27.6 million for the NUSCO Pension Plan and PBOP Plans, respectively. As
investment gains and losses are reflected in the average plan asset fair values, they are subject to amortization with other
unrecognized actuarial gains or losses. The plans currently amortize unrecognized actuarial gains or losses as a component of
pension and PBOP expense over the average future employee service period. As of December 31, 2013, the net unrecognized
actuarial losses on the NUSCO Pension and PBOP Plan liabilities were $628.8 million and $111 million, respectively. For the NSTAR
Pension and PBOP Plans, the entire difference between the actual and expected return on plan assets as of December 31, 2013 is
immediately reflected as a component of unrecognized actuarial gains or losses to be amortized over the estimated average future
service period of the employees. As of December 31, 2013, the net unrecognized actuarial losses on the NSTAR Pension and PBOP
Plan liabilities were approximately $498 million and $12.1 million, respectively.
Forecasted Expenses and Expected Contributions: Based upon the assumptions and methodologies discussed above, we estimate
that the combined expense for the Pension and PBOP Plans will be $132 million and $9.1 million, respectively, in 2014. Pension and
PBOP expense for subsequent years will depend on future investment performance, changes in future discount rates and other
assumptions, and various other factors related to the populations participating in the plans. Pension and PBOP expense charged to
earnings is net of the amounts capitalized.
We expect to continue our policy to contribute to the NUSCO PBOP Plans at the amount of PBOP expense excluding any curtailments
and the NSTAR PBOP Plan at an amount that approximates benefit payments. We contributed $57.6 million to the PBOP Plans in
2013 and expect to contribute $39.7 million in 2014. NU's policy is to fund the Pension Plans annually in an amount at least equal to an
amount that will satisfy the federal requirements. NU made contributions to the NUSCO Pension Plan totaling $202.7 million in 2013, of
which $108.3 million was contributed by PSNH. NSTAR Electric contributed $82 million to the NSTAR Pension Plan in 2013. Our
Pension Plan funded ratio (the value of plan assets divided by the funding target in accordance with the requirements and guidelines of
the PPA) was 94.6 percent and 96 percent as of January 1, 2013 for the NUSCO Pension Plan and NSTAR Pension Plan, respectively.
We currently estimate that aggregate contributions of $71.6 million to the Pension Plans will be made in 2014. Fluctuations in the
average discount rate used to calculate expected contributions to the Pension Plans can have a significant impact on the amounts.