Eversource 2006 Annual Report Download - page 44

42 NU 2006 ANNUAL REPORT
Expected Contributions and Forecasted Expense: Due to the effect
of the unrecognized actuarial losses and based on the long-term rate
of return assumptions and discount rates as noted above as well as
various other assumptions, NU estimates that expected contributions
to and forecasted expense for the Pension Plan, SERP and PBOP Plan
will be as follows (in millions):
Pension Plan SERP Postretirement Plan
Expected Forecasted Expected Forecasted Expected Forecasted
Year Contributions Expense Contributions Expense Contributions Expense
2007 $ — $26.2 N/A $3.6 $39.8 $39.8
2008 $ — $18.8 N/A $3.7 $36.7 $36.7
2009 $ — $ 8.9 N/A $3.8 $33.9 $33.9
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. Beginning in 2007, NU will make an
additional contribution to the PBOP Plan for the amounts received
from the federal Medicare subsidy. This amount is estimated at
$3.2 million for 2007.
Sensitivity Analysis: The following represents the increase/(decrease)
tothe Pension Plan’s, SERP’sand 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 Cost SERP Cost Postretirement Plan Cost
Assumption Change 2006 2005 2006 2005 2006 2005
Lower long-term
rate of return $10.2 $10.0 N/A N/A $0.9 $0.9
Lower discount rate $15.0 $15.6 $ 0.4 $ 0.4 $1.4 $1.1
Lower compensation
increase $(7.3) $(7.3) $(0.1) $(0.1) N/A N/A
Plan Assets: The market-related value of the Pension Plan assets has
increased by $233.6 million to$2.4 billion at December 31, 2006. The
PBO for the Pension Plan has also increased by $48.4 million to $2.3
billion at December 31, 2006. These changes have changed the funded
status of the Pension Plan on a PBO basis from an underfunded position
of $163.6 million at December 31, 2005 to an overfunded position of
$21.6 million at December 31, 2006. The PBO includes expectations of
future employee compensation increases. SFAS No. 158 requires NU
to record the funded status of the Pension Plan based on the PBO on
the consolidated balance sheet at December 31, 2006. NU has not
made an employer contribution to the Pension Plan since 1991.
The accumulated benefit obligation (ABO) of the Pension Plan was
approximately $260 million less than Pension Plan assets at December
31, 2006 and approximately $62 million less than Pension Plan assets
at December 31, 2005. The ABO is the obligation for employee service
and compensation provided through December 31st.
The value of PBOP Plan assets has increased by $43.7 million to
$266.6 million at December 31, 2006. The benefit obligation for the
PBOP Plan has decreased by $23.9 million to $469.9 million at
December 31, 2006. These changes have changed the underfunded
status of the PBOP Plan on an accumulated projected benefit obligation
basis from $270.9 million at December 31, 2005 to $203.3 million at
December 31, 2006. SFAS No. 158 requires NU to record the funded
status of the PBOP Plan based on the PBO on the consolidated balance
sheet at December 31, 2006. NU has made a contribution each year equal
to the PBOP Plan’s postretirement benefit cost, excluding curtailment
and termination benefits.
Health Care Cost: The health care cost trend assumption used
toproject increases in medical costs was 7 percent for 2005. At
December 31, 2005, the health care cost trend assumption was reset
for 2006 at 10 percent, decreasing one percentage point per year to an
ultimate rate of 5 percent in 2011. The effect of increasing the health
care cost trend by one percentage point would have increased service
and interest cost components of the PBOP Plan cost by $1.2 million in
2006 and $0.9 million in 2005.
Income Taxes: Income tax expense is calculated in each reporting
period in each of the jurisdictions in which NU operates. This process
involves estimating actual current tax expense or benefit as well as the
income tax impact of temporary differences resulting from differing
treatment of items, such as timing of the deduction and expenses for
tax and book accounting purposes. These differences result in deferred
tax assets and liabilities that are recorded on the consolidated balance
sheets. The income tax estimation process impacts all of NU’s segments.
Adjustments made toincome tax estimates can significantly affect
NU’s consolidated financial statements. Management must also assess
the likelihood that deferred tax assets will be recovered from future
taxableincome, and to the extent that recovery is not likely, a valuation
allowance must be established. Significant management judgment is
required in determining income tax expense, deferred tax assets and
liabilities and valuation allowances.
NU accounts for deferred taxes under SFAS No. 109, “Accounting for
Income Taxes.” For temporary differences recorded as deferred tax
liabilities that will be recovered in rates in the future, NU has established
a regulatory asset. The regulatory asset amounted to $308 million and
$332.5 million at December 31, 2006 and 2005, respectively. Regulatory
agencies in certain jurisdictions in which NU’sUtility Group companies
operate require the tax effect of specific temporary differences to be
“flowed through” to utility customers. Flow through treatment means
that deferred tax expense is not recorded on the consolidated statements
of income/(loss). Instead, the tax effect of the temporary difference
impacts both amounts for income tax expense currently included in
customers’ rates and the company’s net income. Flow through treatment
can result in effective income tax rates that are significantly different
than expected income tax rates. Recording deferred taxes on flow
through items is required by SFAS No. 109, and the offset to the
deferred tax amounts is the regulatory asset referred to above.
Areconciliation from expected tax expense at the statutory federal
income tax rate to actual tax expense recorded is included in Note 1G,
“Summary of Significant Accounting Policies – Income Taxes,” to the
consolidated financial statements.
The estimates that are made by management in order to record income
tax expense are compared each year to the actual tax amounts included
on NU’s income tax returns as filed. The income tax returns were filed
in the fall of 2006 for the 2005 tax year, and NU recorded differences
between income tax expense, accrued taxes and deferred taxes on its
consolidated financial statements and the amounts that were on its
income tax returns. Recording these tax reserve adjustments did not
have a material impact on NU’s consolidated earnings in 2006 and 2005.