Eversource 2012 Annual Report Download - page 62

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record regulatory assets before approval for recovery has been received from the applicable regulatory commission. We must use
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 that 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 the determination is made.
For further information, see Note 3, "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 regularly throughout the month. Billed revenues are based on these meter readings and the majority of
recorded annual revenues is based on actual billings. Because customers are billed throughout the month based on pre-determined
cycles rather than on a calendar month basis, an estimate of electricity or natural gas delivered to customers for which the customers
have not yet been billed is calculated as of the balance sheet date.
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 there is a change in estimates and under other circumstances.
The Regulated companies estimate unbilled sales monthly using the daily load cycle method. The daily load cycle 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
month load, net of delivery losses, to estimate unbilled sales. Unbilled revenues are estimated by first allocating unbilled sales to the
respective customer classes, then applying an estimated rate by customer class to those 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 1K, "Summary of Significant Accounting Policies - Revenues," to the consolidated financial
statements.
Pension and PBOP: NUSCO and NSTAR Electric sponsor pension plans covering certain of our employees. In addition, NUSCO and
NSTAR Electric & Gas sponsor PBOP plans 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, 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 benefit expense (excluding SERP) for the Pension Plans was $234.9 million, $127.7 million and $80.4 million for
the years ended December 31, 2012, 2011 and 2010, respectively. The pre-tax net periodic benefit expense for the PBOP Plans was
$72.3 million, $43.6 million and $41.6 million for the years ended December 31, 2012, 2011 and 2010, respectively. NSTAR pension
and PBOP expense is included in NU consolidated amounts from the date of the merger, April 10, 2012, through December 31, 2012.
We develop key assumptions for purposes of measuring liabilities as of December 31st 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. For the year ended December 31, 2012, our
aggregate expected long-term rate of return assumptions of 8.25 percent on the NUSCO Pension and PBOP Plans and 7.30 percent
for the NSTAR Pension and PBOP Plans were used to determine our Pension and PBOP expense. For the forecasted 2013 pension
and PBOP expense, our expected long-term rate of return of 8.25 percent for all plans was used, which reflects a change in 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
are 4.24 percent for the NUSCO Pension Plan, 4.13 percent for the NSTAR Pension Plan, 4.04 percent for the NUSCO PBOP Plans
and 4.35 percent for the NSTAR PBOP Plan as of December 31, 2012.