Eversource 2004 Annual Report Download - page 40

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working lifetime of active PBOP 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
approximately $166 million. These gains and losses impact the
determination of PBOP Plan cost and the actuarially determined
accrued PBOP Plan cost recorded on the consolidated balance sheets.
Discount Rate: The discount rate that is utilized in determining future
pension and PBOP obligations is based on a yield-curve approach
where each cash flow related to the Pension or PBOP 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, 2004. This process calculates the present values of
these cash flows and calculates the equivalent single discount rate that
produces the same present value for future cash flows. The discount
rates determined on this basis are 6.00 percent for the Pension Plan
and 5.50 percent for the PBOP Plan at December 31, 2004. Discount
rates used at December 31, 2003 were 6.25 percent for the Pension
Plan and the PBOP Plan.
Expected Contribution and Forecasted Expense: Due to the effect of the
unrecognized actuarial losses and based on an expected rate of
return on Pension Plan assets of 8.75 percent, a discount rate of
6.00 percent and an expected rate of return on PBOP assets of 6.85 percent
for health assets, net of tax and 8.75 percent for life assets and non-
taxable health assets, a discount rate of 5.50 percent and various
other assumptions, NU estimates that expected contributions to and
forecasted expense for the Pension Plan and PBOP Plan will be as
follows (in millions):
Pension Plan Postretirement Plan
Expected Forecasted Expected Forecasted
Year Contributions Expense Contributions Expense
2005 $ — $41.5 $50.3 $50.3
2006 $ — $50.6 $46.8 $46.8
2007 $ — $38.1 $39.4 $39.4
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.
Sensitivity Analysis: The following represents the increase/(decrease) to
the Pension Plan’s and 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 Postretirement Plan
Assumption Change 2004 2003 2004 2003
Lower long-term
rate of return $10.0 $10.7 $0.7 $0.9
Lower discount rate $13.4 $12.3 $1.0 $1.0
Lower compensation
increase $ (5.8) $ (5.9) N/A N/A
Plan Assets: The market-related value of the Pension Plan assets has
increased from $1.9 billion at December 31, 2003 to $2.1 billion at
December 31, 2004. The projected benefit obligation (PBO) for the
Pension Plan has increased from $1.9 billion at December 31, 2003 to
$2.1 billion at December 31, 2004. These changes have decreased the
funded status of the Pension Plan on a PBO basis from an overfunded
position of $3.8 million at December 31, 2003 to an underfunded position
of $57.7 million at December 31, 2004. The PBO includes expectations
of future employee compensation increases. The accumulated benefit
obligation (ABO) of the Pension Plan was approximately $225 million
less than Pension Plan assets at December 31, 2004 and approximately
$240 million less than Pension Plan assets at December 31, 2003. The
ABO is the obligation for employee service and compensation provided
through December 31, 2004. If the ABO exceeds Pension Plan assets at
a future plan measurement date, NU will record an additional minimum
liability. NU has not made employer contributions since 1991.
The value of PBOP Plan assets has increased from $178 million
at December 31, 2003 to $199.8 million at December 31, 2004. The
benefit obligation for the PBOP Plan has increased from $405 million
at December 31, 2003 to $468.3 million at December 31, 2004. These
changes have increased the underfunded status of the PBOP Plan on
an accumulated projected benefit obligation basis from $227 million
at December 31, 2003 to $268.5 million at December 31, 2004. NU
has made a contribution each year equal to the PBOP Plan’s
postretirement benefit cost, excluding curtailment, settlements
and special termination benefits.
Health Care Cost: The health care cost trend assumption used to project
increases in medical costs was 8 percent for 2004 and 9 percent for 2003,
decreasing one percentage point per year to an ultimate rate of
5 percent in 2007. The effect of increasing the health care cost trend
by one percentage point would have increased 2004 service and
interest cost components of the PBOP Plan cost by $1 million in 2004
and $0.8 million in 2003.
Income Taxes: Income tax expense is calculated each year in each of the
jurisdictions in which NU operates. This process involves estimating
NU’s actual current tax exposures as well as assessing 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, which
are included in NU’s consolidated balance sheets. The income tax
estimation process impacts all of NU’s segments. Adjustments made
to income taxes could significantly affect NU’s consolidated financial
statements. Management must also assess the likelihood that deferred
tax assets will be recovered from future taxable income, 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.