Eversource 2006 Annual Report Download - page 43

NU 2006 ANNUAL REPORT 41
toelect the new 401(k) benefit as permitted, 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. Because the predicted level of elections of the
new benefit did not occur, NU recorded a pre-capitalization, pre-
tax reduction in the curtailment expense of $3.6 million and a pre-
capitalization, pre-tax increase in pension expense of $5.4 million in
2006. The increase in pension expense reflects interest on the increased
PBO and amortization of increased actuarial gains and losses resulting
from the inclusion of additional employees in Pension Plan calculations.
In addition, as a result of its corporate reorganization, NU estimated
and recorded a combined pre-capitalization, pre-tax curtailment
expense and related termination benefits for the Pension Plan totaling
$5.5 million in 2005. Refinements to this estimate resulted in a combined
pre-capitalization, pre-tax increase in the curtailment expense and
termination benefits expense of $1.1 million in 2006.
In 2004, as a result of litigation with nineteen former employees, NU
was ordered by the court tomodify its Pension Plan to include special
retirement benefits for fifteen of these former employees retroactive
tothe dates of their retirement and provide increased futuremonthly
benefit payments. NU recorded $2.1 million in termination benefits
expense related to this litigation in 2004 and made a lump sum benefit
payment totaling $1.5 million tothese former employees.
For the PBOP Plan, NU recorded an estimated $3.7 million pre-tax
curtailment expense at December 31, 2005 relating to its corporate
reorganization. NU also accrued a $0.5 million pre-tax termination
benefit expense at December 31, 2005 relating to certain benefits
provided under the terms of the PBOP Plan. Based on refinements
to its estimates, NU recorded an adjustment to the curtailment and
related termination benefits in 2006. This adjustment resulted in a
combined pre-capitalization, pre-tax reduction in the curtailment
expense and termination benefits expense of $1.9 million in 2006.
There were no curtailments or termination benefits in 2004.
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 are based on certain
target asset allocation assumptions and expected long-term rates of
return. NU believes that 8.75 percent is an appropriate aggregate long-
term rate of return on Pension Plan and PBOP Plan assets (life assets
and non-taxable health assets) and 6.85 percent for PBOP health assets,
net of tax, for 2006. 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
2006 and 2005 2006 and 2005
Target Assumed Target Assumed
Asset Rate of Asset Rate of
Allocation Return Allocation 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, 2006 and 2005 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 6A, “Employee Benefits – Pension Benefits
and Postretirement Benefits Other Than Pensions,” to the consolidated
financial statements.
Actuarial Determination of Expense: NU bases the actuarial
determination of Pension Plan and PBOP Plan 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
trustfunds of these plans.
DiscountRate: The discount rate that is utilized in determining future
pension and PBOP obligations is based on a yield-curve approach
whereeach cash flow related to the Pension Plan, SERP 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, 2006. This process calculates
the present values of these cash flows and calculates the equivalent
singlediscount rate that produces the same present value for future
cash flows. The discount rates determined on this basis are 5.90 percent
for the Pension Plan and SERP and 5.80 percent for the PBOP Plan at
December 31, 2006. Discount rates used at December 31, 2005 were
5.80 percent for the Pension Plan and SERP and 5.65 percent for the
PBOP Plan.