Eversource 2003 Annual Report Download - page 39

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Results: Pre-tax periodic pension income for the Pension Plan, excluding
settlements, curtailments and special termination benefits, totaled
$31.8 million, $73.4 million and $101 million for the years ended
December 31, 2003, 2002 and 2001, respectively. The pension income
amounts exclude one-time items recorded under SFAS No. 88,
“Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits,” associated with
early termination programs and the sale of the Millstone and Seabrook
nuclear units. Net SFAS No. 88 items totaled $22.2 million in income for
the year ended December 31, 2002. This amount was recorded as a liability
for refund to customers.
The pre-tax net PBOP Plan cost, excluding settlements, curtailments and
special termination benefits, totaled $35.1 million, $34.5 million and
$28.3 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The PBOP Plan cost excludes one-time items associated with
the sale of the Seabrook nuclear units. These items totaled $1.2 million
in income for the year ended December 31, 2002.
Long-Term Rate of Return Assumptions: In developing the expected
long-term rate of return assumptions, NU evaluated input from actuaries,
consultants and economists, as well as long-term inflation assumptions
and NU’s historical 20-year compounded return of approximately
11 percent. NU’s expected long-term rate of return on assets is based on
certain target asset allocation assumptions and expected long-term rates
of return. The Pension Plan’s and PBOP Plan’s target asset allocation
assumptions and expected long-term rates of return assumptions by
asset category are as follows:
At December 31,
Pension Benefits Postretirement Benefits
2003 2002 2003 2002
Target Assumed Target Assumed Target Assumed Target Assumed
Asset Rate of Asset Rate of Asset Rate of Asset Rate of
Allocation Return Allocation Return Allocation Return Allocation Return
Equity securities:
United States 45.00% 9.25% 45.00% 9.75% 55.00% 9.25% 55.00% 9.75%
Non-United States 14.00% 9.25% 14.00% 9.75% 11.00% 9.25% ——
Emerging markets 3.00% 10.25% 3.00% 10.75% 2.00% 10.25% ——
Private 8.00% 14.25% 8.00% 14.75% —— ——
Debt Securities:
Fixed income 20.00% 5.50% 20.00% 6.25% 27.00% 5.50% 45.00% 6.25%
High yield fixed income 5.00% 7.50% 5.00% 7.50% 5.00% 7.50% ——
Real Estate 5.00% 7.50% 5.00% 7.50% —— ——
The actual asset allocations at December 31, 2003 and 2002 approximated
these target asset allocations. NU regularly reviews the actual asset
allocations and periodically rebalances the investments to the targeted
asset allocations when appropriate. For information regarding actual
asset allocations, see Note 4A, “Employee Benefits — Pension Benefits
and Postretirement Benefits Other Than Pensions,” to the consolidated
financial statements.
NU reduced the long-term rate of return assumption 50 basis points
from 9.25 percent to 8.75 percent in 2003 for the Pension Plan and
PBOP Plan due to lower expected market returns. NU believes that 8.75
percent is a reasonable long-term rate of return on Pension Plan and
PBOP Plan assets for 2003, and NU expects to use 8.75 percent in 2004.
NU will continue to evaluate the actuarial assumptions, including the
expected rate of return, at least annually, and will adjust the appropriate
assumptions as necessary.
Actuarial Determination of Income and Expense: NU bases the actuarial
determination of Pension Plan and PBOP Plan income/expense on a market-
related valuation of assets, which reduces year-to-year volatility. This
market-related valuation calculation recognizes investment gains or losses
over a four-year period from the year in which they occur. Investment
gains or losses for this purpose are the difference between the expected
return calculated using the market-related value of assets and the actual
return based on the fair value of assets. Since the market-related valuation
calculation recognizes gains or losses over a four-year period, the future
value of the market-related assets will be impacted as previously deferred
gains or losses are recognized. There will be no impact on the fair value
of Pension Plan and PBOP Plan assets.
At December 31, 2003, the Pension Plan had cumulative unrecognized
investment losses of $106 million, which will increase pension expense
over the next four years by reducing the expected return on Pension Plan
assets. At December 31, 2003, the Pension Plan also had cumulative
unrecognized actuarial losses of $189 million, which will increase
pension expense over the expected future working lifetime of active
Pension Plan participants, or approximately 13 years. The combined total
of unrecognized investment and actuarial losses at December 31, 2003 is
approximately $295 million. These losses impact the determination of
pension expense and the actuarially determined prepaid pension amount
recorded on the consolidated balance sheets but have no impact on
expected Pension Plan funding.
At December 31, 2003, the PBOP Plan had cumulative unrecognized
investment losses of $11 million, which will increase PBOP Plan cost over
the next four years by reducing the expected return on plan assets. At
December 31, 2003, the PBOP Plan also had cumulative unrecognized
actuarial losses of $103 million, which will increase PBOP Plan expense
over the expected future working lifetime of active PBOP Plan participants,
or approximately 13 years. The combined total of unrecognized invest-
ment and actuarial losses at December 31, 2003 is approximately $114
million. These losses impact the determination of PBOP Plan cost and the
actuarially determined accrued PBOP Plan cost recorded on the
consolidated balance sheets.