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Contributions: NU does not expect to make any contributions to the Pension
Plan in 2005 and expects to make $50.3 million in contributions to the
PBOP Plan in 2005.
Currently, NU’s policy is to annually fund an amount at least equal to
that which will satisfy the requirements of the Employee Retirement
Income Security Act and Internal Revenue Code.
Postretirement health plan assets for non-union employees are subject
to federal income taxes.
B. 401(k) Savings Plan
NU maintains a 401(k) Savings Plan for substantially all NU employees.
This savings plan provides for employee contributions up to specified
limits. NU matches employee contributions up to a maximum of three
percent of eligible compensation with one percent cash and two percent
NU shares. The 401(k) matching contributions of cash and NU shares
made by NU were $10.5 million in 2004, $9.9 million in 2003 and
$11.1 million in 2002.
C. Employee Stock Ownership Plan
NU maintains an Employee Stock Ownership Plan (ESOP) for purposes
of allocating shares to employees participating in the NU’s 401(k) Savings
Plan. Under this arrangement, NU issued unsecured notes during 1991
and 1992 totaling $250 million, the proceeds of which were loaned to
the ESOP trust (ESOP Notes) for the purchase of 10.8 million newly
issued NU common shares (ESOP shares). The ESOP trust is obligated
to make principal and interest payments to NU on the ESOP Notes at
the same rate that ESOP shares are allocated to employees. NU makes
annual contributions to the ESOP trust equal to the ESOP’s debt service,
less dividends received by the ESOP. NU’s contribution to the ESOP trust
totaled $12 million in 2004, $14.7 million in 2003 and $16.4 million in 2002.
Interest expense on the unsecured notes was $5.7 million, $7.6 million
and $9.5 million in 2004, 2003 and 2002, respectively. For the years ended
December 31, 2004, 2003 and 2002, NU recognized $7.3 million, $6.9 million
and $7.6 million, respectively, of expense related to the ESOP, excluding
the interest expense on the unsecured notes.
All dividends received by the ESOP on unallocated shares are used to
pay debt service and are not considered dividends for financial reporting
purposes. During the first and second quarters of 2003, NU paid a
$0.1375 per share quarterly dividend. During the third quarter of 2003
through the second quarter of 2004, NU paid a $0.15 per share quarterly
dividend. NU paid a $0.1625 per share dividend during the third and
fourth quarters of 2004.
In 2004 and 2003, the ESOP trust issued 567,907 and 607,020 of NU
common shares, respectively, to satisfy 401(k) Savings Plan obligations
to employees. At December 31, 2004 and 2003, total allocated ESOP
shares were 8,183,711 and 7,615,804, respectively, and total unallocated
ESOP shares were 2,616,474 and 3,184,381, respectively. The fair market
value of the unallocated ESOP shares at December 31, 2004 and 2003,
was $49.3 and $64.2 million, respectively.
D. Equity-Based Compensation
Impact of SFAS No. 123R: SFAS No. 123R will require NU to recognize
compensation expense in an amount equal to the fair value of share-
based payments granted to employees on or after July 1, 2005. NU is
currently evaluating the impact of SFAS No. 123R on the Employee Share
Purchase Plan (ESPP) and the Incentive Plan. Management believes that
the impact of the adoption of SFAS No. 123R will not be material. See
Note 1C, “New Accounting Standards,” for more information on SFAS
No. 123R.
Employee Share Purchase Plan: Since July 1998, NU has maintained an ESPP
for all eligible employees. Under the ESPP, NU common shares are
purchased at 6-month intervals at 85 percent of the lower of the price
on the first or last day of each 6-month period. Employees may purchase
shares having a value not exceeding 25 percent of their compensation
as of the beginning of the purchase period. During 2004 and 2003,
employees purchased 194,838 and 225,985 shares, respectively, at
discounted prices of $14.17 and $15.90 in 2004 and $12.20 in 2003. At
December 31, 2004 and 2003, 1,390,403 shares and 1,585,241 shares
remained registered for future issuance under the ESPP, respectively.
Incentive Plans: Under the Incentive Plan, NU is authorized to grant various
types of awards, including restricted stock, performance units, restricted
stock units, and stock options to eligible employees and board members.
The number of shares that may be utilized for grants and awards during
a given calendar year may not exceed the aggregate of one percent of the
total number of shares of NU common shares outstanding as of the first
day of that calendar year and the shares not utilized in previous years.
At December 31, 2004 and 2003, NU had 1,361,528 and 1,649,268 shares
of common stock, respectively, registered for issuance under the
Incentive Plan.
Restricted Stock and Restricted Stock Units: During 2004, NU granted 25,000
shares and 382,395 units of restricted stock and restricted stock units,
respectively, under the Incentive Plan. The restricted shares granted in
2004 had a fair value of $0.4 million and were recorded as an offset to
shareholders’ equity. The restricted stock units granted in 2004 had a fair
value of $7.4 million and were recorded as a liability in the accompanying
consolidated balance sheets. During 2003, NU granted 383,589 shares
of restricted stock under the Incentive Plan shares. Also during 2003,
75,000 restricted stock units were granted, all of which were forfeited
January 1, 2004. During 2004, 2003 and 2002, $3.8 million, $2 million and
$1 million, respectively, was expensed related to restricted stock and
restricted stock units.
Performance Units: Under the Incentive Plan, NU also granted 30,122, 35,303
and 38,847 performance units during 2004, 2003 and 2002, respectively.
The performance units vest ratably over three years and will be paid
in cash at the end of the vesting period. NU records a liability for the
performance units based on the achievement of the performance unit
goals. A liability of $3.2 million and $1.5 million was recorded at
December 31, 2004 and 2003, respectively, for these performance units.
During 2004, 2003 and 2002, $1.7 million, $0.2 million and $1.3 million,
respectively, was recorded as an expense related to these performance
units.
Stock Options: Prior to 2003, NU granted stock options to certain employees.
The exercise price of stock options, as set at the time of grant, was equal
to the fair market value per share at the date of grant, and therefore no
equity-based compensation cost was reflected in net income. No stock
options were granted during 2004 or 2003. A summary of stock option
transactions is as follows: