Eversource 2010 Annual Report Download - page 59

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judgment to conclude that costs deferred as regulatory assets are probable of future recovery. We base our conclusion on certain
factors, including, but not limited to, regulatory precedent. Regulatory liabilities represent revenues received from customers to fund
expected costs that have not yet been incurred or probable future refunds to customers.
We use our best judgment when recording regulatory assets and liabilities; however, regulatory commissions can reach different
conclusions about the recovery of costs, and those conclusions could have a material impact on our consolidated financial statements.
We believe it is probable that the Regulated companies will recover the regulatory assets that have been recorded. If we determined
that we could no longer apply the accounting guidance applicable to rate-regulated enterprises to our operations, or if we could not
conclude that it is probable that costs would be recovered or reflected in future rates, the costs would be charged to earnings in the
period in which they were incurred. If we determine that a regulatory asset is no longer probable of recovery in rates, then we would
record the charge in earnings at that time.
For further information, see Note 2, "Regulatory Accounting," to the consolidated financial statements.
Unbilled Revenues: The determination of retail energy sales to residential, commercial and industrial customers is based on the
reading of meters, which occurs on a systematic basis throughout the month. Billed revenues are based on these meter readings and
the majority of recorded revenues is based on actual billings. At the end of each month, amounts of energy delivered to customers
since the date of the last meter reading are estimated, and an estimated amount of unbilled revenues is recorded.
Unbilled revenues represent an estimate of electricity or natural gas delivered to customers but not yet billed. Unbilled revenues are
included in Operating Revenues on the statement of income and are assets on the balance sheet that are reclassified to Accounts
Receivable in the following month as customers are billed. Such estimates are subject to adjustment when actual meter readings
become available, when changes in estimating methodology occur and under other circumstances. There were no changes in
estimating methodology in 2010.
The Regulated companies estimate unbilled revenues monthly using the daily load cycle (DLC) method. The DLC method allocates
billed sales to the current calendar month based on the daily load for each billing cycle. The billed sales are subtracted from total
calendar month sales to estimate unbilled sales. Unbilled revenues are estimated by first allocating sales to the respective rate classes
and then applying an average rate to the estimate of unbilled sales. The estimate of unbilled revenues is sensitive to numerous factors,
such as energy demands, weather and changes in the composition of customer classes, that can significantly impact the amount of
revenues recorded.
For further information, see Note 1M, "Summary of Significant Accounting Policies - Revenues," to the consolidated financial
statements.
Pension and PBOP: Our subsidiaries participate in a Pension Plan covering certain of our regular employees and in a PBOP Plan to
provide certain health care benefits, primarily medical and dental, and life insurance benefits to retired employees. For each of these
plans, the development of the benefit obligation, fair value of plan assets, funded status and net periodic benefit cost is based on
several significant assumptions. We evaluate these assumptions at least annually and adjust them as necessary. Changes in these
assumptions could have a material impact on our financial position, results of operations or cash flows.
Pre-tax net periodic pension expense for the Pension Plan was $80.4 million, $39.7 million and $2.4 million for the years ended
December 31, 2010, 2009 and 2008, respectively. The pre-tax net PBOP Plan expense was $41.6 million, $37.2 million and $36.2
million for the years ended December 31, 2010, 2009 and 2008, respectively.
We develop key assumptions for purposes of measuring the plans’ liabilities as of December 31 and expenses for the subsequent year.
These assumptions include the long-term rate of return on plan assets, discount rate, compensation/progression rate, and health care
cost trend rates and are discussed below.
Long-Term Rate of Return on Plan Assets: In developing this assumption, we consider historical and expected returns and input from
our actuaries and 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. We used aggregate expected long-term rate
of return assumptions of 8.25 percent and 8.75 percent on Pension Plan assets and PBOP Plan life and non-taxable health assets and
a 6.45 percent and 6.85 percent for PBOP taxable health assets as of December 31, 2010 and 2009, respectively.
Discount Rate: Payment obligations related to the Pension Plan and PBOP Plan are discounted at interest rates applicable to the
timing of the plans’ cash flows. The discount rate that is utilized in determining the 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, 2010. The discount rates determined on this basis are 5.57 percent for the Pension Plan and 5.28
percent for the PBOP Plan as of December 31, 2010 and 5.98 percent and 5.73 percent for the respective plans as of December 31,
2009.
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. We used a compensation/progression rate of 3.5 percent and 4.0 percent
as of December 31, 2010 and 2009, respectively. The 3.5 percent rate reflects our current expectation of future salary increases and
promotions, including consideration of the levels of increases built into union contracts.