Eversource 2015 Annual Report Download - page 54

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Health Care Cost: As of December 31, 2015, the health care cost trend rate assumption used to determine the PBOP Plan’s year end funded status
was 6.25 percent, subsequently decreasing to an ultimate rate of 4.5 percent in 2023. The effect of a hypothetical increase in the health care cost trend
rate by one percentage point would be an increase to the service and interest cost components of PBOP Plan expense by $8.5 million in 2015, and a
$115.3 million increase to the PBOP obligation.
Goodwill: We have recorded approximately $3.5 billion of goodwill associated with previous mergers and acquisitions. We have identified our
reporting units for purposes of allocating and testing goodwill as Electric Distribution, Electric Transmission and Natural Gas Distribution. These
reporting units are consistent with our operating segments underlying our reportable segments. Electric Distribution and Electric Transmission
reporting units include carrying values for the respective components of CL&P, NSTAR Electric, PSNH and WMECO. The Natural Gas
Distribution reporting unit includes the carrying values of NSTAR Gas and Yankee Gas. As of December 31, 2015, goodwill was allocated to the
reporting units as follows: $2.5 billion to Electric Distribution, $0.6 billion to Electric Transmission, and $0.4 billion to Natural Gas Distribution.
We are required to test goodwill balances for impairment at least annually by considering the fair values of the reporting units, which requires us to
use estimates and judgments. We have selected October 1
st
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 values of the reporting units’ assets and liabilities 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 test of goodwill as of October 1, 2015 for the Electric Distribution, Electric Transmission and Natural Gas Distribution
reporting units. This evaluation required the consideration of several factors that impact the fair value of the reporting units, including conditions and
assumptions that affect the future cash flows of the reporting units. Key considerations include discount rates, utility sector market performance and
merger transaction multiples, and internal estimates of future cash flows and net income.
The 2015 goodwill impairment test resulted in a conclusion that goodwill is not impaired and no reporting unit is at risk of a goodwill impairment.
Income Taxes: Income tax expense is estimated for each of the jurisdictions in which we operate and is recorded each quarter using an estimated
annualized effective tax rate. This process to record income tax expense 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 that directly impact income tax expense as a result of regulatory activity (flow-through items). The temporary differences and flow-
through items result in deferred tax assets and liabilities that are included in the balance sheets.
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. The determination of whether a tax position meets the
recognition threshold under applicable accounting 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 an adverse 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. If a most likely action plan cannot yet be determined, we estimate the liability based on the low end of a range of possible action
plans. A significant portion of our environmental sites and reserve amounts relate to former MGP sites that were operated several decades ago and
manufactured gas from coal and other processes, which resulted in certain by-products remaining in the environment that may pose a potential risk to
human health and the environment. As assessments on these sites are performed, we may receive new information to be considered in our estimates
related to the extent and nature of the contamination and the costs of required remediation.
Our estimates also 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.
Fair Value Measurements: We follow fair value measurement guidance that defines fair value as the price that would be received for the sale of an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We have applied this
guidance to our Company’s derivative contracts that are not elected or designated as “normal purchases or normal sales” (normal), to marketable
securities held in trusts, to our investments in our Pension and PBOP Plans, and to nonfinancial assets such as goodwill and AROs. This guidance
was also applied in estimating the fair value of preferred stock and long-term debt.
Changes in fair value of the Regulated company derivative contracts are recorded as Regulatory Assets or Liabilities, as we recover the costs of these
contracts in rates charged to customers. These valuations are sensitive to the prices of energy and energy-related products in future years for which
markets have not yet developed and assumptions are made.