Eversource 2006 Annual Report Download - page 79

NU 2006 ANNUAL REPORT 77
The components of net periodic expense are as follows:
For the Years Ended December 31,
Pension Benefits SERP Benefits Postretirement Benefits
(Millions of Dollars) 2006 2005 2004 2006 2005 2004 2006 2005 2004
Service cost $49.4 $48.7 $ 40.7 $1.1 $1.0 $0.9 $8.3 $8.0 $ 6.0
Interest cost 129.7 125.6 118.9 1.9 1.9 1.9 27.3 25.2 25.3
Expected return on plan assets (174.0) (172.0) (175.1) ———(14.0) (12.3) (12.5)
Net transition (asset)/obligation cost (0.1) (0.3) (1.5) —— — 11.6 11.8 11.9
Prior service cost 6.6 7.1 7.2 0.2 0.2 0.3 (0.3) (0.4) (0.4)
Actuarial loss 41.1 33.4 15.7 0.9 0.6 0.9 17.8 17.5 11.4
Net periodic expense – before
curtailments and termination benefits 52.7 42.5 5.9 4.1 3.7 4.0 50.7 49.8 41.7
Curtailment (benefit)/expense (4.8) 8.9 — ———(2.2) 3.7 —
Termination benefits expense 2.3 2.8 2.1 ———0.3 0.5 —
Total curtailments and
termination benefits (2.5) 11.7 2.1 ———(1.9) 4.2 —
Total – net periodic expense $ 50.2 $54.2 $ 8.0 $4.1 $3.7 $4.0 $48.8 $54.0 $41.7
The following assumptions were used to calculate pension and postretirement benefit expense and income amounts:
For the Years Ended December 31,
Pension Benefits and SERP Postretirement Benefits
Statements of Income 2006 2005 2004 2006 2005 2004
Discount rate 5.80% 6.00% 6.25% 5.65% 5.50% 6.25%
Expected long-term rate of return 8.75% 8.75% 8.75% N/A N/A N/A
Compensation/progression rate 4.00% 4.00% 3.75% N/A N/A N/A
Expected long-term rate of return –
Health assets, net of tax N/A N/A N/A 6.85% 6.85% 6.85%
Life assets and non-taxable health assets N/A N/A N/A 8.75% 8.75% 8.75%
The following table represents the PBOP assumed health care cost
trend rate for the next year and the assumed ultimate trend rate:
Year Following December 31,
2006 2005
Health care cost trend rate
assumed for next year 9.00% 10.00%
Rate to which health care
cost trend rate is assumed
to decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2011 2011
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.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of changing the
assumed health care cost trend rate by one percentage point in each
year would have the following effects:
One PercentageOne Percentage
(Millions of Dollars) Point Increase Point Decrease
Effect on total service and
interest cost components $ 1.2 $ (1.0)
Effect on postretirement
benefit obligation $ 16.9 $ (14.6)
NU’sinvestment strategy for its Pension Plan and PBOP Plan is to
maximize the long-term rateof return on those plans’ assets within an
acceptable level of risk. The investment strategy establishes target
allocations, which are routinely reviewed and periodically rebalanced.
NU’s expected long-term rates of return on Pension Plan assets and
PBOP Plan assets arebased on these target asset allocation assumptions
and related expected long-term rates of return. In developing its
expected long-term rateof 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’sand PBOP Plan’s target asset allocation assumptions
and expected long-term rate of return assumptions by asset category
areas follows:
At December 31,
Pension Benefits Postretirement Benefits
2006 and 2005 2006 and 2005
Target Assumed Target Assumed
Asset RateAsset 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% — —