Eversource 2005 Annual Report Download - page 39

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The actual asset allocations at December 31, 2005 and 2004
approximated these target asset allocations. NU routinely 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 7, “Employee Benefits –
Pension Benefits and Postretirement Benefits Other Than Pensions,”
to the consolidated financial statements.
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 in the
trust funds of these plans.
At December 31, 2005, the Pension Plan had cumulative unrecognized
investment gains of $77.6 million, which will decrease pension expense
over the next four years. At December 31, 2005, the Pension Plan had
cumulative unrecognized actuarial losses of $498.7 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 gains and actuarial losses
at December 31, 2005 is a net unrecognized loss of $421.1 million.
These gains and 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, 2005, the PBOP Plan had cumulative unrecognized
investment gains of $47.5 million, which will decrease PBOP Plan
expense over the next four years. At December 31, 2005, the PBOP
Plan also had cumulative unrecognized actuarial losses of $227.4 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 investment gains and actuarial
losses at December 31, 2005 is a net unrecognized loss of $179.9 million.
These gains and losses impact the determination of PBOP Plan cost
and the actuarially determined accrued PBOP Plan cost recorded on
the consolidated balance sheets.
Discount Rate: The discount rate that is utilized in determining future
pension and PBOP obligations is based on a yield-curve approach where
each cash flow related to the Pension Plan or PBOP Plan liability
stream is discounted at an interest rate specifically applicable to the
timing of the cash flow.The yield curve is developed from the top
quartile of AA rated Moody’s and S&P’s bonds without callable features
outstanding at December 31, 2005. This process calculates the present
values of these cash flows and calculates the equivalent single discount
rate that produces the same present value for future cash flows. The
discount rates determined on this basis are 5.80 percent for the Pension
Plan and 5.65 percent for the PBOP Plan at December 31, 2005.
Discount rates used at December 31, 2004 were 6.00 percent for the
Pension Plan and 5.50 percent for the PBOP Plan.
Expected Contributions and Forecasted Expense: Due to the effect of the
unrecognized actuarial losses and based on an expected rate of return
on Pension Plan assets of 8.75 percent, a discount rate of 6.00 percent
and an expected rate of return on PBOP assets of 6.85 percent for health
assets, net of tax and 8.75 percent for life assets and nontaxable health
assets, a discount rate of 5.50 percent and various other assumptions,
NU estimates that expected contributions to and forecasted expense for
the Pension Plan and PBOP Plan will be as follows (in millions):
Pension Plan Postretirement Plan
Year Expected Forecasted Expected Forecasted
Contributions Expense Contributions Expense
2006 $0 $51.6 $49.5 $49.5
2007 $0 $32.5 $41.7 $41.7
2008 $0 $28.1 $39.6 $39.6
Future actual pension and postretirement expense will depend on
future investment performance, changes in future discount rates and
various other factors related to the populations participating in the
plans and amounts capitalized.
Sensitivity Analysis: The following represents the increase/(decrease) to
the Pension Plan’s and PBOP Plan’s reported cost as a result of a
change in the following assumptions by 50 basis points (in millions):
At December 31,
Pension Plan Postretirement Plan
Assumption Change 2005 2004 2005 2004
Lower long-term
rate of return $10.0 $10.0 $0.9 $0.7
Lower discount rate $15.6 $13.4 $1.1 $1.0
Lower compensation
increase $(7.3) $(5.8) N/A N/A
Plan Assets: The market-related value of the Pension Plan assets has
increased by $47.1 million to $2.1 billion at December 31, 2005. The
projected benefit obligation (PBO) for the Pension Plan has also
increased by $153 million to $2.3 billion at December 31, 2005. These
changes have increased the underfunded status of the Pension Plan
on a PBO basis from an underfunded position of $57.7 million at
December 31, 2004 to an underfunded position of $163.6 million at
December 31, 2005. The PBO includes expectations of future employee
compensation increases. The accumulated benefit obligation (ABO) of
the Pension Plan was approximately $62 million less than Pension Plan
assets at December 31, 2005 and approximately $225 million less than
Pension Plan assets at December 31, 2004. The ABO is the obligation
for employee service and compensation provided through December 31,
2005. Under current accounting rules, if the ABO exceeds Pension
Plan assets at a future plan measurement date, NU will record an
additional minimum liability. NU has not made employer contributions
to the Pension Plan since 1991.
The value of PBOP Plan assets has increased from $199.8 million at
December 31, 2004 to $222.9 million at December 31, 2005. The benefit
obligation for the PBOP Plan has also increased from $468.3 million at
December 31, 2004 to $493.8 million at December 31, 2005. These
changes have increased the underfunded status of the PBOP Plan on
an accumulated projected benefit obligation basis from $268.5 million
at December 31, 2004 to $270.9 million at December 31, 2005. NU
has made a contribution each year equal to the PBOP Plan’s postretirement
benefit cost, excluding curtailment and termination benefits.