Eversource 2012 Annual Report Download - page 64

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Goodwill: We recorded approximately $3.2 billion of goodwill associated with the merger with NSTAR on April 10, 2012. NU had
existing goodwill of $0.3 billion related to Yankee Gas. NU has identified its reporting units for purposes of allocating goodwill as
Electric Distribution, Electric Transmission and Natural Gas Distribution. Our reporting units for purposes of allocating and testing
goodwill are consistent with our operating segments underlying our reportable segments. Electric Distribution and Electric
Transmission reporting units include 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.
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 carrying 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 were
deemed to be impaired, it would be written down in the current period to the extent of the impairment.
We performed an impairment analysis as of October 1, 2012 for the Electric Distribution, Electric Transmission and Natural Gas
Distribution reporting units. We determined that the fair value of the reporting units substantially exceeded the carrying values and no
impairment exists. In performing the evaluation, we estimated the fair values of the reporting units and compared them to the carrying
values of the reporting units, including goodwill. We estimated the fair values of the reporting units using a discounted cash flow
approach and a market approach that analyzed company information and market transactions. This evaluation requires the input of
several critical assumptions, including cash flow projections, operating cost escalation rates, rates of return, future growth rates, a risk-
adjusted discount rate, long-term earnings and merger multiples of comparable companies.
We determine the discount rate using the capital asset pricing model methodology. This methodology uses a weighted average cost of
capital in which the ROE is developed using risk-free rates, equity premiums and a beta representing the reporting unit’s volatility
relative to the overall market. The resulting discount rate is intended to be comparable to a rate that would be applied by a market
participant. The discount rate may change from year to year as it is based on external market conditions.
The 2012 goodwill impairment analysis resulted in a significant excess of fair value of our reporting units over the carrying value. The
estimated fair value of our reporting units is sensitive to changes in assumptions, such as discount rates, peer company financial
results, recent market transactions and forecasted cash flows.
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 consolidated 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 consolidated 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
(including information gained from those examinations), developments in case law, settlements of tax positions, changes in tax law and
regulations, rulings by taxing authorities and statute of limitation expirations. Such information or events may have a significant impact
on our financial position, results of operations and cash flows.
Accounting for Environmental Reserves: Environmental reserves are accrued when assessments indicate it is probable that a liability
has been incurred and an amount can be reasonably estimated. Adjustments made to estimates of environmental liabilities could have
a significant impact on earnings. We estimate these liabilities based on findings through various phases of the assessment,
considering the most likely action plan from a variety of available remediation options (ranging from no action required to full site
remediation and long-term monitoring), current site information from our site assessments, remediation estimates from third party
engineering and remediation contractors, and our prior experience in remediating contaminated sites. Our estimates incorporate
currently enacted state and federal environmental laws and regulations and data released by the EPA and other organizations. The
estimates associated with each possible action plan are judgmental in nature partly because there are usually several different
remediation options from which to choose. Our estimates are subject to revision in future periods based on actual costs or new
information from other sources, including the level of contamination at the site, the extent of our responsibility or the extent of
remediation required, recently enacted laws and regulations or a change in cost estimates due to certain economic factors.