Eversource 2010 Annual Report Download - page 60

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Actuarial Determination of Expense: Pension and PBOP expense are determined by our actuaries and consist 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, 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 by applying our assumed rate of return to a calculation of plan assets that recognizes
investment gains or losses over a four-year period after the year in which they occur, which reduces year-to-year volatility. Investment
gains or losses for this purpose are the difference between the calculated expected return using our long-term rate of return assumption
and the actual return or loss based on the change in the fair value of assets during the year. As of December 31, 2010, investment
losses that remain to be reflected in the calculation of plan assets over the next four years were $238.9 million and $1.8 million for the
Pension Plan and PBOP Plan, respectively. These asset losses will be subject to amortization with other unrecognized actuarial gains
or losses as they are reflected in the calculation of plan assets. The plans currently amortize unrecognized actuarial gains or losses as
a component of pension and PBOP expense over the average future employee service period of approximately 10 and 9 years,
respectively. As of December 31, 2010, the net unrecognized actuarial losses on the Pension and PBOP Plan liabilities, subject to
amortization, were $676.7 million and $171.3 million, respectively.
Forecasted Expenses and Expected Contributions: Based upon the assumptions and methodologies discussed above, we estimate
that forecasted expense for the Pension Plan and PBOP Plan will be $124.9 million and $42.8 million, respectively, in 2011, which is
included in our earnings guidance. 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 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. NU's policy is to annually fund
the Pension Plan in an amount at least equal to what will satisfy the requirements of ERISA and the Internal Revenue Code. NU's
Pension Plan has historically been well funded, and a contribution was not required to be made from 1991 until the third quarter of
2010, when PSNH made a contribution to the plan of $45 million. Using the segment rate approach as allowed under PPA guidelines,
our Pension Plan funded ratio (the value of plan assets divided by the funding target in accordance with the requirement of the PPA)
was 92 percent as of January 1, 2010. We currently estimate that quarterly contributions aggregating to a total of approximately $145
million will be made in 2011.
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 2010 2009 2010 2009
Lower long-term rate of return $ 10.7 $ 11.1 $ 1.2 $ 1.7
Lower discount rate $ 13.4 $ 12.0 $ 2.2 $ 1.5
Higher compensation increase $ 6.1 $ 6.0 N/A N/A
Health Care Cost: The health care cost trend assumption used to project increases in medical costs was 7.5 percent for determining
2010 PBOP Plan expense. For 2011 through 2013, the rate is 7 percent, subsequently decreasing one half percentage point per year
to an ultimate rate of 5 percent in 2017. 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 $1.2 million in 2010, with a $14.5 million impact on the
postretirement benefit obligation.
See Note 10A, "Employee Benefits - Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial
statements for more information.
Goodwill and Intangible Assets: We are required to test goodwill balances for impairment at least annually by applying a fair value-
based test that requires us to use estimates and judgment. We have selected October 1st of each year as the annual goodwill
impairment testing date. 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 down in the current period to the extent of the impairment.
We performed an impairment analysis as of October 1, 2010 for the Yankee Gas goodwill balance of $287.6 million. We determined
that no triggering events occurred in 2010 that would have required testing before or after October 1st. We determined that the fair
value of Yankee Gas substantially exceeds its carrying value and no impairment exists. In performing the 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 a discounted cash flow methodology and two market approaches that analyze
comparable companies or transactions. This evaluation 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, long-term earnings and merger
multiples of comparable companies.