Eversource 2006 Annual Report Download - page 76

74 NU 2006 ANNUAL REPORT
Market-Related Value of Pension Plan Assets: NU bases the
actuarial determination of pension plan expense or income 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.
SERP: NU has maintained a SERP since 1987. The SERP provides its
eligible participants, who are officers of NU, with benefits that would
have been provided to them under NU’s retirement plan if certain
Internal Revenue Code and other limitations were not imposed.
For information regarding SERP investments that are used to fund
the SERP liability, see Note 10, “Marketable Securities,” to the
consolidated financial statements.
Postretirement Benefits Other Than Pensions: NU’ssubsidiaries
provide certain health care benefits, primarily medical and dental,
and life insurance benefits through a PBOP Plan. These benefits are
availablefor employees retiring from NU who have met specified
service requirements. For current employees and certain retirees,
the total benefit is limited to two times the 1993 per retiree health care
cost. These costs are charged to expense over the estimated work life
of the employee. NU uses a December 31st measurement date for the
PBOP Plan.
NU annuallyfunds postretirement costs through external trusts with
amounts that have been and will continue to be recovered in rates and
that are tax deductible. Currently, there are no pending regulatory
actions regarding postretirement benefit costs.
Impact of MedicareChanges 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
leastactuariallyequivalent tothe 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 total 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
approximately13 years. For the years ended 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 cost and service cost based 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
tobenefit payments made in 2006. This amount is expected tobe funded
into the PBOP Plan.
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 they will 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.
PBOP Curtailments and Termination Benefits: NU recorded an
estimated $3.7 million pre-tax curtailment expense at December 31,
2005 relating to its corporate reorganization. NU also accrued a
$0.5 million pre-tax termination benefit at December 31, 2005 relating
to certain benefits provided under the terms of the PBOP Plan. Based
on refinements to its estimates, NU recorded an adjustment to the
curtailment and related termination benefits in 2006. This adjustment
resulted in a combined pre-capitalization, pre-tax reduction in the
curtailment expense and termination benefits of $1.9 million in 2006.
There were no curtailments or termination benefits in 2004.