Eversource 2004 Annual Report Download - page 39

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Modifications to the aforementioned assumptions in future periods,
particularly changes in discount rates, could result in future impairments
of goodwill. Actual financial performance and market conditions in
upcoming periods could also impact future impairment analyses.
Pension and Postretirement Benefits Other Than Pensions (PBOP): NU’s subsidiaries
participate in a uniform noncontributory defined benefit retirement
plan (Pension Plan) covering substantially all regular NU employees.
NU also participates in a postretirement benefit plan (PBOP Plan) to
provide certain health care benefits, primarily medical and dental, and
life insurance benefits through a benefit plan to retired employees.
For each of these plans, the development of the benefit obligation,
fair value of plan assets, funded status and net periodic benefit credit
or cost is based on several significant assumptions. If these assumptions
were changed, the resulting change in benefit obligations, fair values
of plan assets, funded status and net periodic benefit credits or costs
could have a material impact on NU’s consolidated financial statements.
Results: Pre-tax periodic pension expense/income for the Pension Plan,
excluding settlements, curtailments, and special termination benefits,
totaled expense of $5.9 million, income of $31.8 million and income of
$73.4 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The pension expense/income amounts exclude one-time
items recorded under SFAS No. 88, “Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits.”
As a result of litigation with nineteen former employees, in April 2004,
NU was ordered by the court to modify its retirement plan to include
special retirement benefits for fifteen of these former employees
retroactive to the dates of their retirement and provide increased future
monthly benefit payments. In the third quarter of 2004, NU withdrew its
appeal of the court’s ruling. As a result, NU recorded $2.1 million in
special termination benefits related to this litigation in 2004.
There were no settlements, curtailments or special termination benefits
recorded in 2003.
Net SFAS No. 88 items associated with early termination programs and
the sale of the Millstone and Seabrook nuclear units totaled $22.2 million
in income for the year ended December 31, 2002. This amount was
recorded as a regulatory liability for refund to customers.
The pre-tax net PBOP Plan cost, excluding settlements, curtailments
and special termination benefits, totaled $41.7 million, $35.1 million
and $34.5 million for the years ended December 31, 2004, 2003 and
2002, respectively. The 2002 PBOP Plan cost excludes one-time items
associated with the sale of the Seabrook nuclear units. These items
totaled $1.2 million in income for the year ended December 31, 2002.
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 is based on certain
target asset allocation assumptions and expected long-term rates of
return. NU believes that 8.75 percent is a reasonable long-term rate
of return on Pension Plan and PBOP Plan assets for 2004. NU will
continue to evaluate the 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
2004 and 2003 2004 and 2003
Target Assumed Target Assumed
Asset Rate of Asset Rate of
Asset Category 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, 2004 and 2003 approximated
these target asset allocations. NU regularly 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 4A, “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.
At December 31, 2004, the Pension Plan had cumulative unrecognized
investment gains of $59 million, which will decrease pension expense
over the next four years. At December 31, 2004, the Pension Plan had
cumulative unrecognized actuarial losses of $413 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, 2004 is a net unrecognized loss of $354 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, 2004, the PBOP Plan had cumulative unrecognized
investment gains of $53 million, which will decrease PBOP Plan
expense over the next four years. At December 31, 2004, the PBOP
Plan also had cumulative unrecognized actuarial losses of $219 million,
which will increase PBOP Plan expense over the expected future