Eversource 2005 Annual Report Download - page 75

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NU’s expected long-term rates of return on Pension Plan assets and
PBOP Plan assets are based on these target asset allocation assumptions
and related expected long-term rates of return. In developing its
expected long-term rate of return assumptions for the Pension Plan
and the PBOP Plan, NU also 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.
The Pension Plan’s and PBOP Plan’s target asset allocation
assumptions and expected long-term rate 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 Asset Rate
Asset Category Allocation of Return Allocation of 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% ——
The actual asset allocations at December 31, 2005 and 2004
approximated these target asset allocations. The plans’ actual
weighted-average asset allocations by asset categoryareas follows:
At December 31,
Pension Benefits Postretirement Benefits
Asset Category2005 2004 2005 2004
Equity securities:
United States 46% 47% 54% 55%
Non-United States 16% 17% 14% 14%
Emerging markets 4% 3% 1% 1%
Private 5% 4% ——
Debt Securities:
Fixed income 19% 19% 29% 28%
High yield fixed income 5% 5% 2% 2%
Real estate 5% 5% ——
Totals 100% 100% 100% 100%
Estimated FutureBenefit Payments: The following benefitpayments, which
reflect expected future service, are expected to be paid for the
Pension and PBOP Plans:
(Millions of Dollars)
Pension Postretirement Government
Year Benefits Benefits Subsidy
2006 $111.1 $ 44.1 $ 4.3
2007 114.2 45.0 4.6
2008 117.3 44.7 4.9
2009 120.6 44.4 5.2
2010 124.3 44.2 5.5
2011-2015 690.4 217.0 33.1
Government subsidy represents amounts expected to be received
from the federal government for the new Medicare prescription drug
benefitunder the PBOP Plan.
Contributions: NU does not expect to make any contributions to the
Pension Plan in 2006 and expects to make $49.5 million in
contributions to the PBOP Plan in 2006.
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 common shares. The 401(k) matching contributions of cash and
NU common shares made by NU were $10.7 million in 2005,
$10.5 million in 2004 and $9.9 million in 2003.
C. Employee Stock Ownership Plan
NU maintains an Employee Stock Ownership Plan (ESOP) for purposes
of allocating shares to employees participating in 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 areallocated 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 contributions
to the ESOP trust totaled $11.2 million in 2005, $12 million in 2004
and $14.7 million in 2003. Interest expense on the unsecured notes
was $3.3 million, $5.7 million and $7.6 million in 2005, 2004 and 2003,
respectively.For the years ended December 31, 2005, 2004 and 2003,
NU recognized $7.7 million, $7.3 million and $6.9 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 2004, NU paid a $0.15
per sharequarterly dividend. During the third quarter of 2004 through
the second quarter of 2005, NU paid a $0.1625 per share quarterly
dividend. NU paid a $0.175 per share dividend during the third and
fourth quarters of 2005.
In 2005 and 2004, the ESOP trust issued 590,173 and 567,907 of NU
common shares, respectively,to satisfy 401(k) Savings Plan obligations
to employees. At December 31, 2005 and 2004, total allocated ESOP
shares were8,773,884 and 8,183,711, respectively, and total unallocated
ESOP shares were2,026,301 and 2,616,474, respectively.The fair
market value of the unallocated ESOP shares at December 31, 2005
and 2004, was $39.9 and $49.3 million, respectively.
D. Equity-Based Compensation
Impact of SFAS No. 123R: See Note 1C, “Summaryof Significant Accounting
Policies – Accounting Standards Issued But Not Yet Adopted,” for
information on the implementation of SFAS No. 123R.
Employee SharePurchase Plan (ESPP): NU maintains an ESPP for all eligible
employees. Under the ESPP,NU common shares werepurchased at
six-month intervals at 85 percent of the lower of the price on the first