Eversource 2013 Annual Report Download - page 61

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Sensitivity Analysis: The following represents the hypothetical increase to the Pension Plans’ (excluding SERP) and PBOP Plans’
reported annual cost as a result of a change in the following assumptions by 50 basis points:
Pension Plan Cost
PBOP Plan Cost
(Millions of Dollars)
As of December 31,
Assumption Change
2013
2012
2013
2012
NU
Lower long-term rate of return
$
17.2
$
15.0
$
3.4
$
3.1
Lower discount rate
$
22.3
$
22.0
$
6.8
$
6.7
Higher compensation increase
$
12.4
$
10.4
N/A
N/A
NSTAR Plans
Lower long-term rate of return
$
5.6
$
4.8
$
1.8
$
1.7
Lower discount rate
$
5.4
$
6.8
$
3.4
$
4.1
Higher compensation increase
$
3.8
$
3.6
N/A
N/A
Changes in pension and PBOP costs would not impact net income for the NSTAR Plans as their expenses are fully recovered in rates,
which reconcile each year relative to the change in costs.
Health Care Cost: The health care cost trend rate assumption used to calculate the 2013 PBOP expense amounts was 7 percent for
the NUSCO PBOP Plan, subsequently decreasing by 50 basis points per year to an ultimate rate of 5 percent in 2017, and 7.10 percent
for the NSTAR PBOP Plan, subsequently decreasing to an ultimate rate of 4.5 percent in 2024. As of December 31, 2013, the health
care cost trend rate assumption used to determine the NUSCO and NSTAR PBOP Plans’ year end funded status is 7 percent,
subsequently decreasing to an ultimate rate of 4.5 percent in 2024. The effect of a hypothetical increase in the health care cost trend
rate by one percentage point would be an increase to the service and interest cost components of PBOP Plan expense by $7.1million in
2013, with a $85.8 million impact on the postretirement benefit obligation. See Note 10A, "Employee Benefits - Pension Benefits and
Postretirement Benefits Other Than Pensions," to the financial statements for more information.
Goodwill: We have recorded approximately $3.5 billion of goodwill associated with the previous mergers and acquisitions. NU has
identified its reporting units for purposes of allocating and testing goodwill as Electric Distribution, Electric Transmission and Natural
Gas Distribution. These reporting units are consistent with our operating segments underlying our reportable segments. Electric
Distribution and Electric Transmission reporting units include carrying values for the respective components of CL&P, NSTAR Electric,
PSNH and WMECO. The Natural Gas reporting unit includes the carrying values of NSTAR Gas and Yankee Gas. As of
December 31, 2013, goodwill was allocated to the reporting units as follows: $2.5 billion to Electric Distribution, $0.6 billion to Electric
Transmission, and $0.4 billion to Natural Gas Distribution.
We are required to test goodwill balances for impairment at least annually by considering the fair value of the reporting units, which
requires us to use estimates and judgments. We have selected October 1st of each year as the annual goodwill impairment testing
date. Goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value and if the implied
fair value of goodwill based on the estimated fair values of the reporting units’ assets and liabilities is less than the carrying amount of
the goodwill. If goodwill were deemed to be impaired, it would be written down in the current period to the extent of the impairment.
We performed an impairment test as of October 1, 2013 for the Electric Distribution, Electric Transmission and Natural Gas Distribution
reporting units. This evaluation required the test of several factors that impact the fair value of the reporting units, including conditions
and assumptions that affect the future cash flows of the reporting units.
The 2013 goodwill impairment test resulted in a conclusion that goodwill is not impaired and none of the reporting units is at risk of a
goodwill impairment.
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 for financial reporting and income tax return reporting purposes. Such differences are the result of timing of the
deduction for expenses, as well as any impact of permanent differences, non-tax deductible expenses, or 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 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.
A reconciliation of expected tax expense at the statutory federal income tax rate to actual tax expense recorded is included in Note 11,
"Income Taxes," to the 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 and circumstances 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