Eversource 2008 Annual Report Download - page 38

approximately 12 years, which were the average future service period of the employees at
December 31, 2008.
At December 31, 2008, the net actuarial loss subject to amortization over the next 12 years
was $237.2 million and $104.9 million for the Pension Plan and PBOP Plan, respectively,
which excludes the $672.3 million and $73.9 million of previous investment losses not
currently reflected in the calculation of the fair value of Pension Plan and PBOP Plan
assets, respectively.
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 Plan or PBOP Plan 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, 2008. 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 6.89 percent for the
Pension Plan and 6.90 percent for the PBOP Plan at December 31, 2008. Discount rates
used at December 31, 2007 were 6.60 percent for the Pension Plan and 6.35 percent for
the PBOP Plan.
Forecasted Expenses and Expected Contributions: Due to the eect of the unrecognized
actuarial gains/losses and based on the long-term rate of return assumptions and discount
rates as noted above as well as various other assumptions, we estimate that expected
forecasted expense for the Pension Plan and PBOP Plan will be $40.3 million and $37.3
million, respectively, in 2009, which is included in our guidance.
Future actual Pension and PBOP 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. We expect to continue with our policy
to contribute to the PBOP Plan at the amount of PBOP expense, excluding curtailments
and special benefit amounts. Beginning in 2007, we made additional contributions to the
PBOP Plan for the amounts received from the federal Medicare subsidy. This amounted to
$3.7 million in 2008 and is estimated to be $3.4 million in 2009.
We have not contributed to the Pension Plan since 1991. However, as discussed below, the
fair value of Pension Plan assets declined significantly during 2008. This decline, and the
resulting asset level compared to the Pension Plan obligation, resulted in a required pre-tax
contribution for the 2008 Pension Plan year that we currently estimate to be $150 million
(assuming there is no change in current funding requirements). This contribution would be
made just prior to the filing of the 2009 federal income tax return, which will likely be filed in
the third quarter of 2010.
For the 2009 pension plan year, it is likely that we will also be required to make a
contribution unless there is a change in current funding requirements or a very significant
recovery in the financial markets. Also assuming that the pension plan assets earn the
long-term rate of return of 8.75 percent and discount rates remain constant, we could
be required to make an additional pre-tax contribution for the 2009 plan year in 2010 of
between $150 million and $200 million. Contributions for the 2009 plan year would be
made quarterly starting in the second quarter of 2010.
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,
Postretirement
Pension Plan Cost Plan Cost
Assumption Change 2008 2007 2008 2007
Lower long-term rate of return $ 11.8 $ 11.1 $ 1.3 $ 1.1
Lower discount rate $ 11.6 $ 12.9 $ 1.4 $ 1.4
Lower compensation increase $ (6.2 ) $ (6.9 ) N/A N/A
Plan Assets: The fair value of the Pension Plan assets decreased by $902.6 million to $1.56
billion at December31, 2008. This decrease includes benefit payments of $127.6 million
in 2008. The Projected Benefit Obligation (PBO) for the Pension Plan increased by $40.8
million to $2.3 billion at December31, 2008. These changes have changed the funded
status of the Pension Plan on a PBO basis from an overfunded position of $202.5 million
at December 31, 2007 to an underfunded position of $740.9 million at December31, 2008.
The PBO includes expectations of future employee compensation increases.
The accumulated benefit obligation (ABO) of the Pension Plan was approximately $490
million greater than Pension Plan assets at December31, 2008 and approximately $454
million less than Pension Plan assets at December 31, 2007. The ABO is the obligation for
employee service and compensation provided through December 31, 2008.
The value of PBOP Plan assets has decreased by $82.5 million to $195.6 million at
December 31, 2008. The benefit obligation for the PBOP Plan has decreased by $23.6
million to $436 million at December 31, 2008. These changes have increased the
underfunded status of the PBOP Plan on an accumulated projected benefit obligation
basis from $181.5 million at December 31, 2007 to $240.4 million at December 31, 2008.
We have made a contribution each year equal to the PBOP Plan’s postretirement benefit
cost, excluding curtailment and termination benefits.
The Pension Plan assets include certain investments that are not regularly priced in an
active market. These investments include private equity interests and real estate fund
assets, comprising approximately 15 percent of total plan assets as of December 31, 2008.
In determining the fair value of Pension Plan assets as of December 31, 2008, we obtained
the most recent financial statements and requested updated values as of December 31st
from the fund managers in order to obtain the best possible estimate of fair values. For
the private equity and many real estate funds, the fund managers were able to provide
year-end estimates of value. After discussion with various fund managers, we obtained
information about conditions in the real estate markets and concluded on appropriate
real estate fund values where manager estimates had not been given. The valuation of
these investments requires significant judgment. These values reflect management’s best
estimate as of December 31, 2008.
Health Care Cost: The health care cost trend assumption used to project increases in
medical costs was 8.5 percent for 2008, decreasing one half percentage point per year to
an ultimate rate of 5 percent in 2015. The eect of increasing the health care cost trend
by one percentage point would have increased service and interest cost components of
the PBOP Plan cost by $1 million in 2008 and $1 million in 2007. Changes in the long-term
health care cost trend assumption could have a material impact on our financial position or
results of operations.
Goodwill and Intangible Assets: SFAS No. 142, “Goodwill and Other Intangible Assets,”
requires that goodwill balances be reviewed for impairment at least annually by applying a
fair value-based test. The testing of goodwill for impairment requires us to use estimates
and judgment. We have selected October 1st of each year as the annual goodwill
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