Eversource 2008 Annual Report Download - page 37

the classes of securities we own. We continue to monitor the liquidity of our securities
and review our valuations to ensure proper classification within the fair value hierarchy.
We consider unrealized losses on investment securities in the trusts to be other than
temporary by nature and recognize them as realized losses because investment decisions
are made by our trustee and we do not have the ability to hold securities until unrealized
losses are recovered. Therefore, unrealized losses incurred on our supplemental benefit
trust are recorded as realized losses in our consolidated statements of income. In 2008,
we recorded $9.2 million of after-tax unrealized losses incurred on our supplemental
benefit trust in other income, net on the consolidated statement of income. These
amounts were partially oset by $0.4 million of after-tax net realized gains on sales of
investment securities. Losses related to the WMECO spent nuclear fuel trust are recorded
as an oset to the spent nuclear fuel obligation and do not impact earnings.
We believe that current market conditions were the key driver of losses recognized on
our investment securities. As of December31, 2008, our supplemental benefit trust
invested in equity securities and investment grade fixed income securities (BBB- and
above or equivalent). Our spent nuclear fuel trust invested in short-term investments
and investment grade fixed income securities. We have $0.3 million of mortgage-
backed and asset-backed securities collateralized by sub-prime debt or Alt-B debt
held in the supplemental benefit trust and $0.2 million of mortgage-backed securities
collateralized by Alt-A debt in the spent nuclear fuel trust. A significant portion of
our mortgage-backed securities are U.S. Agency notes collateralized by residential
mortgages. The underlying collateral of our corporate-asset backed securities includes
residential home equity loans, auto and equipment loans, commercial mortgage-backed
securities and credit card receivables.
For further information on derivative contracts and marketable securities, see Note
1E, “Summary of Significant Accounting Policies - Derivative Instruments,” Note 3,
“Derivative Instruments,” and Note 9, “Marketable Securities,” to the consolidated financial
statements.
Pension and PBOP: Our subsidiaries participate in a uniform noncontributory defined
benefit retirement plan (Pension Plan) covering substantially all our regular employees.
In addition to the Pension Plan, we also participate in the PBOP 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 our financial position or results of operations.
Pre-tax periodic pension expense for the Pension Plan was $2.4 million, $17.4 million and
$52.7 million for the years ended December31, 2008, 2007 and 2006, 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, was $36.2 million, $38.4 million and $50.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Long-Term Rate of Return Assumptions: In developing our expected long-term rate of
return assumptions for the Pension Plan and the PBOP Plan, we evaluated input from
actuaries and consultants, as well as long-term inflation assumptions and our historical
25-year compounded return of 11 percent. Our expected long-term rates of return on
assets are based on certain target asset allocation assumptions. We believe that 8.75
percent is an appropriate aggregate long-term rate of return on Pension Plan and PBOP
Plan assets (life assets and non-taxable health assets) and 6.85 percent for PBOP health
assets, net of tax, for 2008. We will continue to evaluate these 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
2008 and 2007 2008 and 2007
Target Assumed Target Assumed
Asset Rate of Asset Rate of
Allocation Return Allocation Return
Equity Securities:
United States 40% 9.25% 55% 9.25%
Non-United States 17% 9.25% 11% 9.25%
Emerging markets 5% 10.25% 2% 10.25%
Private 8% 14.25% - ----
Debt Securities:
Fixed income 25% 5.50% 27% 5.50%
High yield fixed income - - 5% 7.50%
Real Estate 5% 7.50% - ----
The actual asset allocations at December 31, 2008 and 2007 approximated these target
asset allocations. We routinely review the actual asset allocations and periodically
rebalance the investments to the targeted asset allocations when appropriate. For
information regarding actual asset allocations, see Note 5A, “Employee Benefits - Pension
Benefits and Postretirement Benefits Other Than Pensions,” to the consolidated financial
statements.
Pension and other postretirement benefit funds are held in external trusts. Trust assets,
including accumulated earnings, must be used exclusively for pension and postretirement
benefit payments. Investment securities are exposed to various risks, including interest
rate, credit and overall market volatility. As a result of these risks, it is reasonably
probable that the market values of investment securities could increase or decrease in
the near term, resulting in a material impact on the value of our pension assets. Increases
or decreases in the market values could materially aect the current value of the trusts
and the future level of pension and other postretirement benefit expense. The current
conditions in the credit market could negatively impact the assets in our trusts, but at this
time we still believe that the 8.75 percent rate and the 6.85 percent rate for respective
Pension and PBOP Plan assets are appropriate long-term rate of return assumptions.
Actuarial Determination of Expense: Pension and PBOP expense consists of the service
cost and prior service cost determined by our actuaries, the interest cost based on the
discounting of the obligations and the amortization of the net transition obligation,
oset by the expected return on plan assets. Pension and PBOP expense also includes
amortization of actuarial gains and losses, which represent dierences between
assumptions and actual or updated information.
We calculate the expected return on plan assets by applying our assumed rate of return
to a four-year rolling average of plan asset fair values, which reduces year-to-year
volatility. This 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
dierence between the calculated expected return and the actual return based on the
change in the fair value of assets during the year. At December 31, 2008, total investment
losses to be reflected in the four-year rolling average of plan assets over the next four
years were $672.3 million and $73.9 million, for the Pension Plan and the PBOP Plan,
respectively. As these asset losses are reflected in the average plan asset fair values, they
will be subject to amortization with other unrecognized gains/losses. The Plans currently
amortize unrecognized gains/losses as a component of pension and PBOP expense over
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