Eversource 2014 Annual Report Download - page 54

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 We sponsor Pension and PBOP Plans to provide retirement benefits to our employees. Effective January 1, 2015, the two
Pension Plans were merged into one Pension Plan, sponsored by NUSCO, and the PBOP Plans were merged into one PBOP Plan, sponsored by
NUSCO. For each of these plans, several significant assumptions are used to determine the projected benefit obligation, funded status and net
periodic benefit cost. These assumptions include the expected long-term rate of return on plan assets, discount rate, compensation/progression rate,
mortality assumptions, and health care cost trend rates. 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 $118.4 million, $236.3 million and $234.9 million for the years
ended December 31, 2014, 2013 and 2012, respectively. The pre-tax net periodic benefit expense for the PBOP Plans was $8.1 million, $32.6
million and $72.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. NSTAR Pension and PBOP expense was included in
NU beginning April 10, 2012.
Expected Long-Term Rate of Return on Plan Assets: In developing this assumption, we consider historical and expected returns and input from our
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, 2014, our aggregate expected long-term rate of return assumption of 8.25 percent
was used to determine our Pension and PBOP expense. For the forecasted 2015 Pension and PBOP expense, our expected long-term rate of return of
8.25 percent for all plans was used reflecting our target asset allocations.
Discount Rate: Payment obligations related to the Pension 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. As of December 31, 2014, the discount rates used to determine the funded status were 4.2 percent for
the Pension Plans and 4.22 percent for the PBOP Plans. As of December 31, 2013, the discount rates used were 5.03 percent for the NUSCO Pension
Plan, 4.85 percent for the NSTAR Pension Plan, 4.78 percent for the NUSCO PBOP Plans and 5.10 percent for the NSTAR PBOP Plan. As of
December 31, 2014, the decreases in the discount rates resulted in an increase on NU’s funded status liability of approximately $530 million and
$110 million for the Pension and PBOP Plans, respectively.
Compensation/Progression Rate: This assumption reflects the expected long-term salary growth rate, including consideration of the levels of
increases built into collective bargaining agreements, and impacts the estimated benefits that Pension Plan participants receive in the future. As of
December 31, 2014, the compensation/progression rate used to determine the funded status was 3.5 percent.
Mortality Assumptions: Assumptions as to mortality of the participants in our Pension and PBOP Plans are a key estimate in measuring the expected
payments a participant may receive over their lifetime and the plan liability we need to record. During 2014, the Society of Actuaries released a
series of updated mortality tables resulting from recent studies that measured mortality rates for various groups of individuals. The updated mortality
tables released in 2014 reflect increased life expectancy of plan participants by 3 to 5 years and have the effect of increasing the estimate of benefits
to be provided to plan participants. As of December 31, 2014, the impact of this adoption on NU’s funded status was an increase in the liability of
approximately $340 million and $82 million for the Pension and PBOP Plans, respectively.
Actuarial Determination of Expense: Pension and PBOP expense is determined by our actuaries and consists 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
(which was fully amortized in 2013), offset by the expected return on plan assets. Actuarial gains and losses represent differences between
assumptions and actual information or updated assumptions.
Effective January 1, 2015, as a result of the merger of the NUSCO Pension and PBOP plans into the respective NSTAR plans, the NSTAR
accounting policies became effective for the NUSCO plans. For the NSTAR Pension and PBOP plans, we apply a corridor approach to determine
the potential actuarial gain or loss to be amortized in the Pension and PBOP net periodic benefit expense. This amortization approach is applied if
the unrecognized actuarial gains or losses exceed 10 percent of the greater of the fair value of plan assets or the projected benefit obligation. This
excess is amortized over the average remaining service period of active plan participants. In addition, for the NSTAR plans, the expected return on
plan assets is determined by applying the assumed long-term rate of return to the Pension and PBOP Plan asset balances. This calculated expected
return is compared to the actual return or loss on plan assets at the end of each year to determine the investment gains or losses to be immediately
reflected in actuarial gains and losses. For the years ended December 31, 2014, 2013 and 2012, the NUSCO Pension and PBOP plans did not utilize
the corridor approach, and the expected return on plan assets was determined by applying our assumed long-term rate of return to a four-year rolling
average of plan asset fair values. This calculation recognized investment gains or losses over a four-year period from the years in which they
occurred.
Forecasted Expenses and Expected Contributions: We estimate that the expense for the Pension and PBOP Plans will be approximately $130 million
and $4 million, respectively, in 2015. 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.
Our policy is to annually fund the Pension Plans in an amount at least equal to the amount that will satisfy federal requirements. We contributed
$171.6 million to the Pension Plans in 2014, of which $101 million was contributed by NSTAR Electric. We currently estimate approximately $155
million of contributions to the Pension Plan in 2015.
For the PBOP Plans, it is our policy to annually fund the PBOP Plans up to the maximum tax-deductible level permitted. We contributed $40 million
to the PBOP Plans in 2014. We currently estimate approximately $27 million in contributions to the PBOP Plan in 2015.