Eversource 2005 Annual Report Download - page 38

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NU has less than 50 percent ownership interests in CYAPC, YAEC,
MYAPC, and two companies that transmit electricity imported from the
Hydro-Quebec system. NU does not control these companies and
does not consolidate them in its financial statements. NU accounts for
the investments in these companies using the equity method. Under
the equity method, NU records its ownership share of the earnings or
losses at these companies. Determining whether or not NU should
apply the equity method of accounting for an investment requires
management judgment.
NU had a preferred stock investment in R.M. Services, Inc. (RMS).
Upon adoption of Financial Accounting Standards Board (FASB)
Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,”
management determined that NU was the primary beneficiary of RMS
and subsequently consolidated RMS into its financial statements. The
consolidation of RMS resulted in a negative $4.7 million after-tax
cumulative effect of an accounting change in the third quarter of 2003.
On June 30, 2004, the assets and liabilities of RMS were sold. For
more information on RMS, see Note 1I, “Summary of Significant
Accounting Policies – Accounting for R.M. Services, Inc.” to the
consolidated financial statements.
In December of 2003, the FASB issued a revised version of FIN 46
(FIN 46R). FIN 46R was effective for NU for the first quarter of 2004
and did not have an impact on NU’s consolidated financial statements.
Pension and Postretirement Benefits Other Than Pensions (PBOP): NU’s subsidiaries
participate in a uniform noncontributory defined benefit retirement plan
(Pension Plan) covering substantially all regular NU employees. NU also
participates in a postretirement benefit plan (PBOP Plan) to provide certain
health care benefits, primarily medical and dental, and life insurance
benefits through a benefit plan to retired employees. For each of these
plans, the development of the benefit obligation, fair value of plan
assets, funded status and net periodic benefit credit or cost is based
on several significant assumptions. If these assumptions were changed,
the resulting change in benefit obligations, fair values of plan assets,
funded status and net periodic benefit credits or costs could have a
material impact on NU’sconsolidated financial statements.
Pre-tax periodic pension expense/income for the Pension Plan totaled
an expense of $42.5 million, an expense of $5.9 million and income of
$31.8 million for the years ended December 31, 2005, 2004 and 2003,
respectively.The pension expense/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.”
The pre-tax net PBOP Plan cost, excluding curtailments and termination
benefits, totaled $49.8 million, $41.7 million and $35.1 million for the
years ended December 31, 2005, 2004 and 2003, respectively.
As a result of the decision to pursue a fundamentally different business
strategy,and align the structureof the company to support this business
strategy, NU recorded a $2.7 million pre-tax curtailment expense in
2005 for the Pension Plan. NU also accrued certain related termination
benefits and recorded a $2.8 million pre-tax charge in 2005 for the
Pension Plan. Additional termination benefits may be recorded in 2006.
On December 15, 2005, the NU Board of Trustees approved a benefit
for new non-union employees hired on and after January 1, 2006 to
receive retirement benefits under a new 401(k) benefit rather than
under the Pension Plan. Non-union employees actively employed on
December 31, 2005 will be given the choice in 2006 to elect to continue
participation in the Pension Plan or instead receive a new employer
contribution under the 401(k) Savings Plan effective January 1, 2007.
If the new benefit is elected, their accrued pension liability in the Pension
Plan will be frozen as of December 31, 2006. Non-union employees
will make this election in the second half of 2006. This decision resulted
in the recording of an estimated pre-tax curtailment expense of $6.2
million in 2005, as a certain number of employees are expected to
elect the new 401(k) benefit, resulting in a reduction in aggregate
estimated future years of service under the Pension Plan. Management
estimated the amount of the curtailment expense associated with this
change based upon actuarial calculations and certain assumptions,
including the expected level of transfers to the new 401(k) benefit.
Any adjustments to this estimate resulting from actual employee
elections will be recorded in 2006.
In April of 2004, as a result of litigation with nineteen former employees,
NU was ordered by the court to modify its Pension Plan to include
special retirement benefits for fifteen of these former employees
retroactive to the dates of their retirement and provide increased future
monthly benefit payments. NU recorded $2.1 million in termination
benefits related to this litigation in 2004 and made a lump sum benefit
payment totaling $1.5 million to these former employees.
For the PBOP Plan, NU recorded an estimated $3.7 million pre-tax
curtailment expense at December 31, 2005 relating to NU’s change in
business strategy. NU also accrued a $0.5 million pre-tax termination
benefit at December 31, 2005 relating to certain benefits provided
under the terms of the PBOP Plan. Additional termination benefits may
be recorded in 2006.
There were no curtailments or termination benefits recorded for the
Pension Plan or PBOP Plan in 2003.
Long-Term Rate of Return Assumptions: In developing the expected long-
term rate of return assumptions, NU evaluated input from actuaries
and consultants, as well as long-term inflation assumptions and NU’s
historical 20-year compounded return of approximately 11 percent.
NU’s expected long-term rates of return on assets is based on certain
target asset allocation assumptions and expected long-termrates of
return. NU believes that 8.75 percent is a reasonable long-term rate of
return on Pension Plan and PBOP Plan assets (life assets and non-tax-
able health assets) and 6.85 percent for PBOP health assets, net of tax
for 2005. NU will continue to evaluate these actuarial assumptions,
including the expected rate of return, at least annually, and will adjust
the appropriate assumptions as necessary.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
2005 and 2004 2005 and 2004
Target Assumed Target Assumed
Asset Rate of Asset Rate of
Allocation ReturnAllocation Return
Equity securities:
United States 45% 9.25% 55% 9.25%
Non-United States 14% 9.25% 11% 9.25%
Emerging markets 3% 10.25% 2% 10.25%
Private 8% 14.25% ——
Debt Securities:
Fixed income 20% 5.50% 27% 5.50%
High yield fixed income 5% 7.50% 5% 7.50%
Real estate 5% 7.50% — —