Notes to Consolidated Financial Statements
Note 3 Employee Benefit Plans
We sponsor two tax-qualified defined benefit retirement plans for our eligible employees, the AGL Resources Inc. Retirement Plan (AGL Retirement Plan) and the Employees' Retirement Plan of NUI Corporation (NUI Retirement Plan). A defined benefit plan specifies the amount of benefits an eligible participant eventually will receive using information about the participant.
We generally calculate the benefits under the AGL Retirement Plan based on age, years of service and pay. The benefit formula for the AGL Retirement Plan is a career average earnings formula, except for participants who were employees as of July 1, 2000, and who were at least 50 years of age as of that date. For those participants, we use a final average earnings benefit formula, and will continue to use this benefit formula for such participants until June 2010, at which time any of those participants who are still active will accrue future benefits under the career average earnings formula.
The NUI Retirement Plan covers substantially all of NUI's employees who were employed on or before December 31, 2005, except Florida City Gas union employees, who participate in a union-sponsored multiemployer plan. Pension benefits are based on years of credited service and final average compensation.
Effective with our acquisition of NUI in November 2004, we became sponsor of the NUI Retirement Plan. Throughout 2005, we maintained existing benefits for NUI employees, including participation in the NUI Retirement Plan. Beginning in 2006, eligible participants in the NUI Retirement Plan became eligible to participate in the AGL Retirement Plan and the benefits of those participants under the NUI Retirement Plan were frozen as of December 31, 2005, resulting in a $15 million reduction to the NUI Retirement Plan's projected benefit obligation as of December 31, 2005. Participants in the NUI Retirement Plan have the option of receiving a lump sum distribution upon retirement for all benefits earned through December 31, 2005. This resulted in settlement payments of $12 million and an immaterial settlement loss. This option is not permitted under the AGL Retirement Plan, except for accrued benefits valued at less than $10,000.
Our risk management activities are monitored by our Risk Management Committee (RMC). The RMC consists of members of senior management and is charged with reviewing and enforcing our risk management activities. Our risk management policies limit the use of derivative financial instruments and physical transactions within predefined risk tolerances associated with pre-existing or anticipated physical natural gas sales and purchases and system use and torage. We use the following derivative financial instruments and physical transactions to manage commodity price, interest rate, weather and foreign currency risks:
SFAS 158 In September 2006, the FASB issued SFAS 158, which we adopted prospectively on December 31, 2006. SFAS 158 requires that we recognize all obligations related to defined benefit pensions and other postretirement benefits. This statement requires that we quantify the plans' funding status as an asset or a liability on our consolidated balance sheets.
SFAS 158 further requires that we measure the plans' assets and obligations that determine our funded status as of the end of the fiscal year. We are also required to recognize as a component of OCI the changes in funded status that occurred during the year that are not recognized as part of net periodic benefit cost as explained in SFAS 87, or SFAS 106.
Based on the funded status of our defined benefit pension and postretirement benefit plans as of December 31, 2007, we reported a gain to our OCI of $24 million, a net decrease of $40 million to accrued pension and postretirement obligations and an increase of $16 million to accumulated deferred income taxes. Our adoption of SFAS 158 on December 31, 2006, had no impact on our earnings. The following tables present details about our pension plans.
The accumulated benefit obligation (ABO) and other information for the AGL Retirement Plan and the NUI Retirement Plan are set forth in the following table.
There were no other changes in plan assets and benefit obligations recognized for the AGL and NUI Retirement Plans for the year ended December 31, 2007.
The 2008 estimated OCI amortization and expected refunds for the AGL and NUI Retirement Plans are set forth in the following table.
The following table sets forth the assumed weighted average discount rates and rates of compensation increase used to determine benefit obligations at December 31.
We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets, and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors and generally base these rates on a 10-year horizon for various asset classes, our expected investments of plan assets and active asset management as opposed to investment in a passive index fund. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities, fixed income, real estate, private equity securities and alternative asset classes.
The following tables present the assumed weighted average discount rate, expected return on plan assets and rate of compensation increase used to determine net periodic benefit cost at the beginning of the period, which was January 1.
We consider a variety of factors in determining and selecting our assumptions for the discount rate at December 31. We consider certain market indices, including Moody's Corporate AA long-term bond rate, the Citigroup Pension Liability rate our actuaries model and our own payment stream based on these indices to develop our rate. Consequently, we selected a discount rate of 6.4% as of December 31, 2007, following our review of these various factors.
Our actual retirement plans' weighted average asset allocations at December 31, 2007 and 2006 and our target asset allocation ranges are as follows:
The Retirement Plan Investment Committee (the Committee) appointed by our Board of Directors is responsible for overseeing the investments of the retirement plans. Further, we have an Investment Policy (the Policy) for the retirement plans that aims to preserve the retirement plans' capital and maximize investment earnings in excess of inflation within acceptable levels of capital market volatility. To accomplish this goal, the retirement plans' assets are actively managed to optimize long-term return while maintaining a high standard of portfolio quality and proper diversification.
The Policy's risk management strategy establishes a maximum tolerance for risk in terms of volatility to be measured at 75% of the volatility experienced by the S&P 500. We will continue to diversify retirement plan investments to minimize the risk of large losses in a single asset class. The Policy's permissible investments include domestic and international equities (including convertible securities and mutual funds), domestic and international fixed income (corporate and U.S. government obligations), cash and cash equivalents and other suitable investments. The asset mix of these permissible investments is maintained within the Policy's target allocations as included in the preceding tables, but the Committee can vary allocations between various classes or investment managers in order to improve investment results.
Equity market performance and corporate bond rates have a significant effect on our reported unfunded ABO, as the primary factors that drive the value of our unfunded ABO are the assumed discount rate and the actual return on plan assets. Additionally, equity market performance has a significant effect on our market-related value of plan assets (MRVPA), which is a calculated value and differs from the actual market value of plan assets. The MRVPA recognizes the difference between the actual market value and expected market value of our plan assets and is determined by our actuaries using a five-year moving weighted average methodology. Gains and losses on plan assets are spread through the MRVPA based on the five-year moving weighted average methodology, which affects the expected return on plan assets component of pension expense.
Our employees do not contribute to the retirement plans. We fund the plans by contributing at least the minimum amount required by applicable regulations and as recommended by our actuary. However, we may also contribute in excess of the minimum required amount. We calculate the minimum amount of funding using the projected unit credit cost method. The Pension Protection Act (the Act) of 2006 contains new funding requirements for single employer defined benefit pension plans. The Act establishes a 100% funding target for plan years beginning after December 31, 2007. However, a delayed effective date of 2011 may apply if the pension plan meets the following targets: 92% funded in 2008;
94% funded in 2009; and 96% funded in 2010. In October 2006 we made a voluntary contribution of $5 million to the AGL Resources Inc. Retirement Plan. No contribution was required for the qualified plans in 2007, and we did not make a contribution. Further, no contribution is required for the qualified plans in 2008.
Until January 1, 2006, we sponsored two defined benefit postretirement health care plans for our eligible employees, the AGL Resources Inc. Postretirement Health Care Plan (AGL Postretirement Plan) and the NUI Corporation Postretirement Health Care Plan (NUI Postretirement Plan), which we acquired upon our acquisition of NUI. Eligibility for these benefits is based on age and years of service.
The NUI Postretirement Plan provided certain medical and dental health care benefits to retirees, other than retirees of Florida City Gas, depending on their age, years of service and start date. The NUI Postretirement Plan was contributory, and NUI funded a portion of these future benefits through a Voluntary Employees' Beneficiary Association. Effective July 2000, NUI no longer offered postretirement benefits other than pension for any new hires. In addition, NUI capped its share of costs at $500 per participant per month for retirees under age 65, and at $150 per participant per month for retirees over age 65. At the beginning of 2006, eligible participants in the NUI Postretirement Plan became eligible to participate in the AGL Postretirement Plan and all participation in this plan ceased, effective January 1, 2006.
The AGL Postretirement Plan covers all eligible AGL Resources employees who were employed as of June 30, 2002, if they reach retirement age while working for us. The state regulatory commissions have approved phase-ins that defer a portion of other postretirement benefits expense for future recovery. We recorded a regulatory asset for these future recoveries of $12 million as of December 31, 2007 and $13 million as of December 31, 2006. In addition, we recorded a regulatory liability of $4 million as of December 31, 2007 and $4 million as of December 31, 2006 for our expected expenses under the AGL Postretirement Plan. We expect to pay $7 million of insurance claims for the postretirement plan in 2008, but we do not anticipate making any additional contributions.
Effective December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law. This act provides for a prescription drug benefit under Medicare (Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.
On July 1, 2004, the AGL Postretirement Plan was amended to remove prescription drug coverage for Medicare-eligible retirees effective January 1, 2006. Certain grandfathered NUI retirees participating in the NUI Postretirement Plan will continue receiving a prescription drug benefit through some period of time. Medicare-eligible participants receive prescription drug benefits through a Medicare Part D plan offered by a third party and to which AGL subsidizes participant premiums. Medicare-eligible retirees who opt out of the AGL Postretirement Plan are eligible to receive a cash subsidy which may be used towards eligible prescription drug expenses. The following tables present details about our postretirement benefits.
The following table presents details on the components of our net periodic benefit cost for the AGL Postretirement Plan at the balance sheet dates.
There were no other changes in plan assets and benefit obligations recognized for the AGL Postretirement Plan for the year ended December 31, 2007. The 2008 estimated OCI amortization and refunds expected for the AGL Postretirement Plan are set forth in the following table.
The following table sets forth the assumed weighted average discount rates and rates of compensation increase used to determine benefit obligations for the AGL postretirement plans at December 31.
The following table presents our weighted average assumed rates used to determine benefit obligations at the beginning of the period, January 1 for the AGL Postretirement Plan and December 1 for the NUI Postretirement Plan, and our weighted average assumed rates used to determine net periodic benefit cost at the beginning of this same period.
For information on the discount rate assumptions used for our postretirement plans, see the discussion contained in this Note 3 under the caption "Pension Benefits."
We consider the same factors in determining and selecting our assumptions for the overall expected long-term rate of return on plan assets as those considered in determining and selecting the overall expected long-term rate of return on plan assets for our retirement plans. For purposes of measuring our accumulated postretirement benefit obligation, the assumed pre-Medicare and post-Medicare health care inflation rates are as follows:
Effective January 2006, our health care trend rates for the AGL Postretirement Plan was capped at 2.5%. This cap limits the increase in our contributions to the annual change in the consumer price index (CPI). An annual CPI rate of 2.5% was assumed for future years.
Assumed health care cost trend rates impact the amounts reported for our health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects for the AGL Postretirement Plan and the NUI Postretirement Plan.
Our investment policies and strategies for our postretirement plans, including target allocation ranges, are similar to those for our retirement plans. We fund the plans annually; retirees contribute 20% of medical premiums, 50% of the medical premium for spousal coverage and 100% of the dental premium. Our postretirement plans weighted average asset allocations for 2007 and 2006 and our target asset allocation ranges are as follows.
The following table presents expected benefit payments covering the periods 2008 through 2017 for our retirement plans and postretirement health care plans. There will be benefit payments under these plans beyond 2017.
The following table presents the amounts not yet reflected in net periodic benefit cost and included in accumulated OCI as of December 31, 2007.
There were no other changes in plan assets and benefit obligations recognized in the AGL and NUI Retirement Plans or the AGL Postretirement Plan for the year ended December 31, 2007.
Employee Savings Plan Benefits
We sponsor the Retirement Savings Plus Plan (RSP), a defined contribution benefit plan that allows eligible participants to make contributions to their accounts up to specified limits. Under the RSP, we made matching contributions to participant accounts in the following amounts:
- $6 million in 2007
- $6 million in 2006
- $5 million in 2005
We also sponsor the Nonqualified Savings Plan (NSP), an unfunded, nonqualified plan similar to the RSP. The NSP provides an opportunity for eligible employees who could reach the maximum contribution amount in the RSP to contribute additional amounts for retirement savings. Our contributions to the NSP have not been significant in any year.