Eversource 2006 Annual Report Download - page 42

40 NU 2006 ANNUAL REPORT
expected purchase price. On November 1, 2006, NU sold the competitive
generation business and realized a gain on the sale of approximately
$314 million.
At December 31, 2006, the assets and liabilities of the wholesale
marketing business, NGS, Woods Electrical – Other, Boulos and SECI-CT
are being accounted for as assets to be held and used. A change in
classification from assets to be held and used to assets held for sale,
were it to occur, may result in additional asset impairments and write-offs.
For further information regarding impairment charges, see Note 2,
“Restructuring and Impairment Charges,” and for information regarding
assets held for sale Note 3, “Assets Held for Sale and Discontinued
Operations,” to the consolidated financial statements.
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. In addition to the Pension Plan, NU also participates in
aPBOP Plan to provide certain health care benefits, primarily medical
and dental, and life insurance benefits 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 changes in benefit obligations, fair values of
plan assets, funded status and net periodic expense could have a
material impact on NU’s consolidated financial statements.
On December 31, 2006, NU implemented SFAS 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans,” which amends SFAS No. 87, “Employers’Accounting for
Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits,” SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions,” and SFAS No. 132(R), “Employers’
Disclosures about Pensions and Other Postretirement Benefits.” SFAS
No. 158 applies tothe Pension Plan, NU’ssupplemental executive
retirement plan (SERP), and PBOP Plan and requires NU to record the
funded status of these plans based on the projected benefit obligation
for the Pension Plan and accumulated postretirement benefit obligation
(APBO) for the PBOP Plan on the consolidated balance sheet at
December 31, 2006. Previously, the prepaid or accrued benefit obligation
was recorded in accordance with SFAS No. 87 and SFAS No. 106, which
allowed for the deferral of certain items and reconciliation to the funded
status was provided in the footnotes to financial statements. These
deferred items included the transition obligation, prior service costs,
and net actuarial loss.
SFAS No. 158 requires the additional liability to be recorded with an
offset to accumulated other comprehensive income in shareholders’
equity. NU recorded an after-tax charge totaling $4.4 million to
accumulated other comprehensive income related to the impact of
SFAS No. 158 on NU’s unregulated subsidiaries. However, because
the Utility Group companies are cost-of-service rate regulated entities
under SFAS No. 71, regulatory assets were recorded in the amount
of $407.4 million, as these amounts in pension expense have been and
continue tobe recoverable in cost-of-service, regulated rates. Regulatory
accounting was also applied to the portions of the Northeast Utilities
Service Company (NUSCO) costs that support the Utility Group, as
these amounts arealso recoverable.
Pre-tax periodic pension expense for the Pension Plan totaled $52.7
million, $42.5 million and $5.9 million for the years ended December 31,
2006, 2005 and 2004, respectively. The pension expense amounts exclude
one-time items such as Pension Plan curtailments and termination
benefits.
The pre-tax net PBOP Plan cost, excluding curtailments and termination
benefits, totaled $50.7 million, $49.8 million and $41.7 million for the
years ended December 31, 2006, 2005 and 2004, respectively.
On August 17, 2006, the Pension Protection Act of 2006 (Act) was enacted,
with provisions becoming effective in 2008. The most significant impact
on NU relates to changes in the IRS minimum funding requirements
for the Pension and PBOP Plans. Management will continue to assess
the impact of the Act on the company, but the Act is not expected to
have any impact on NU’s earnings or financial position.
Impact of Medicare Changes on PBOP: On December 8, 2003, the
President signed into law a bill that expanded Medicare, primarily by
adding a prescription drug benefit starting in 2006 for Medicare-eligible
retirees as well as a federal subsidy to plan sponsors of retiree health
care benefit plans who provide a prescription drug benefit at least
actuarially equivalent to the new Medicare benefit.
Based on the current PBOP Plan provisions, NU qualifies for this
federal subsidy because the actuarial value of NU’s PBOP Plan
exceeds the threshold required for the subsidy. The Medicare changes
decreased the PBOP benefit obligation by $27 million as of December
31, 2006 and 2005. The total $27 million decrease is currently being
amortized as a reduction to PBOP expense over approximately 13
years. For the yearsended December 31, 2006, 2005 and 2004, this
reduction in PBOP expense totaled approximately $3.6 million, including
amortization of actuarial gains of $2 million and a reduction in interest
costand service costbased on a lower PBOP benefit obligation of
$1.6 million. At December 31, 2006, NU had a receivable for the federal
subsidy in the amount of $3.2 million related to benefit payments
made in 2006. The amount is expected tobe funded intothe PBOP
Plan when received in 2007.
Based upon guidance from the federal government released in 2005,
NU also qualifies for the federal subsidy relating to employees whose
PBOP Plan obligation is “capped” under NU’s PBOP Plan. These
subsidy amounts do not reduce NU’s PBOP Plan benefit obligation as
theywill be used to offset retiree contributions. NU realizes a tax
benefit because the federal subsidy is tax exempt when it is collected
and tax deductible as the amounts are contributed to the PBOP Plan.
These additional subsidy benefits are also being amortized over
approximately 13 years beginning in 2005. For the years ended
December 31, 2006 and 2005, the additional subsidy amounts were
approximately $12.6 million. For the years ended December 31, 2006,
2005 and 2004, the subsidy amounts reduced expected tax expense
by $5.5 million, $6 million and $1 million, respectively.
Pension and PBOP Plan Curtailments and Termination Benefits:
In December of 2005, a new program was approved providing a benefit
for certain employees hired on and after January 1, 2006 providing for
these employees to receive retirement benefits under a new 401(k)
benefit (K-Vantage Plan) rather than under the Pension Plan. The
approval of the new plan resulted in the recording of an estimated pre-
capitalization, pre-tax curtailment expense of $6.2 million in 2005, as
acertain number of employees hired before that date were expected