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HomeMy WebLinkAboutRosborough Exhibit No. 13.pdf Actuarial Report PacifiCorp Retirement Plan As of January 1, 2004 Hewitt Associates LLC To protect the confidential and proprietary information included in this material, it may not be disclosed or rovided to an third arties without the a roval of Hewitt Associates LLC. Argentina Australia Austria Belgium Brazil Canada Channel Islands Chile China Czech Republic Dominican Republic France Germany Greece Hong Kong Hungary India Ireland Italy Japan Malaysia Mauritius Mexico Netherlands Philippines Poland Portugal Puerto Rico Singapore Slovenia South Africa South Korea Spain Sweden Switzerland Thailand United Kingdom United States Venezuela Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 Preparation of this Actuarial Valuation As of January 1, 2004 for PacifiCorp Retirement Plan This report has been prepared for PacifiCorp and summarizes the results of the funding valuation for the plan year and the accounting and reporting requirements for the 2005 fiscal year for pension benefits as set forth in FASB Statement of Financial Accounting Standard No. 87 as amended ("SFAS No. 87") and No. 88 as amended ("SFAS No. 88"). In addition, this material is intended to serve as a source document for information to meet certain accounting or government filing requirements. Determinations for purposes other than the funding valuation and financial accounting requirements may be significantly different from the results reported herein. Thus, the use of this report for purposes other than those expressed here may not be appropriate. In conducting the valuation, we have relied on personnel, plan design, and asset information supplied by PacifiCorp as of the valuation date. While we cannot verify the accuracy of all this information, the supplied information was reviewed for consistency and reasonableness. As a result of this review, we have no reason to doubt the substantial accuracy or completeness of the information and believe that it has produced appropriate results. This valuation has been conducted in accordance with generally accepted actuarial principles and practices, including the applicable Actuarial Standards of Practice as issued by the Actuarial Standards Board. In addition, the valuation results are based on our understanding of the applicable laws and regulations under IRC sections 404 and 412, and our understanding of the requirements of SFAS Nos. 87 and 88. The accounting information in this report is not intended to supersede or supplant the advice and interpretations of the Company's auditors. The actuarial assumptions and methods used in this valuation are described in the Actuarial Assumptions section of this report. • For the funding valuation, the interest rate and mortality table used to measure current liability are prescribed by IRC section 412. It is our belief that all other actuarial assumptions used for the funding valuation represent reasonable expectations of anticipated plan experience. • PacifiCorp selected the economic assumptions and prescribed them for use for purposes of compliance with SFAS No. 87 and SFAS No. 88. While the demographic assumptions were also prescribed by PacifiCorp, Hewitt Associates provided guidance with respect to these assumptions and it is our belief that they represent reasonable expectations of anticipated plan experience. The undersigned are familiar with the near-term and long-term aspects of pension valuations and meet the Qualification Standards of the American Academy of Actuaries necessary to render the actuarial opinions contained herein. All of the sections of this report are considered an integral part of the actuarial opinions. Hewitt Associates LLC Albert A. Kopec Jr., Enrolled Actuary Daniel S. Watts, Enrolled Actuary Fellow of the Society of Actuaries Member of the American Academy of Actuaries December 2004 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 Table of Contents Page Summary 1 Assets and Liabilities 3 Contributions 10 Experience 21 Accounting Requirements 23 Personnel Information 27 Plan Provisions 35 Actuarial Assumptions 42 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 1 Summary The following summary presents a comparison of liabilities, assets, and contributions from the 2003 actuarial valuation with the results of the January 1, 2004 valuation: January 1, 2003 Befor Amendment January 1, 200 After Amendments January 1, 2004 Funding Requirements Actuarial Accrued Liability Actives and Transfers $ 344,032,026 $ 378,388,669 $ 379,168,308 Vested Terminations 70,069,212 71,461,235 71,461,235 Retirees and Beneficiaries 594,872,666 551,651,223 551,651,223 Total $ 1,008,973,904 $ 1,001,501,127 $ 1,002,280,766 Valuation Assets $ 853,551,122 $ 889,398,489 $ 889,398,489 Unfunded Actuarial Liability $ 155,422,782 $ 112,102,638 $ 112,882,277 Annual Normal Cost $ 16,124,685 $ 17,131,150 $ 17,194,723 Actuarial Loss (Gain) $ N/A $ (11,613,476) N/A Contributions as of 12/31 Minimum Required $ 11,500,133 N/A $ 6,163,492 Maximum Deductible $ 174,277,373 N/A $ 145,915,674 Funding Policy $ 61,555,151 N/A $ 59,997,387 Interest Rate 8.0% 8.0% 8.0% Salary Scale 5.0% 5.0% 5.0% Mortality 83GAM 83GAM 83GAM Value of Accrued Benefits Value of All Accrued Benefits $ 887,587,739 $ 878,984,332 $ 879,005,493 Value of All Vested Accrued Benefits $ 871,865,711 $ 862,241,921 $ 862,260,640 Market Value of Assets $ 711,292,602 $ 800,645,958 $ 800,645,958 Interest Rate 8.0% 8.0% 8.0% Personnel Summary Number of: Actives 4,325 4,521 4,521 Vested Terminations 1,224 1,344 1,344 Retirees and Beneficiaries 4,407 4,254 4,254 Total 9,956 10,119 10,119 Characteristics of Active Participants Average Age 45.9 46.4 46.4 Average Service 15.5 15.7 15.7 Compensation Total $ 284,667,452 $ 314,691,126 $ 314,691,126 Average $ 65,819 $ 69,607 $ 69,607 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 2 Summary (continued) Disclosure Results as o March 31, 2003 Disclosure Results as o March 31, 2004 Accounting Requirements1 Disclosure for Fiscal Year 2003 2004 Accumulated Benefit Obligation $1,020,323,000 $ 1,047,900,000 Projected Benefit Obligation $ 1,107,611,000 $ 1,181,706,000 Market Value of Assets2 $ 681,241,000 $ 733,243,000 Funded Status $ (426,370,000) $ (448,463,000) Expense for Fiscal Year 2004 2005 Service Cost $ 19,300,000 $ 24,900,000 FAS 87 Expense $ 18,906,000 $ 35,775,000 Discount Rate Assumption 6.75% 6.25% Salary Increase Rate 4.00% 4.00% Expected Long-Term Rate of Return 8.75% 8.75% 1 The Accounting Requirements Section provides detailed information relative to the disclosure requirements under FASB Statement Nos. 87 and 132. 2 Excludes contributions accrued but not yet paid. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 3 Assets and Liabilities The results of the January 1, 2004 actuarial valuation are set forth below. For your reference, results of the January 1, 2003 actuarial valuation are also shown. January 1, 2004 January 1, 2003 Before Amendments After Amendments1 Funding Basis Actuarial Accrued Liability Actives and Transfers $ 344,032,026 $ 378,388,669 $ 379,168,308 Vested Terminations 70,069,212 71,461,235 71,461,235 Retirees and Beneficiaries 594,872,666 551,651,223 551,651,223 Total $ 1,008,973,904 $ 1,001,501,127 $ 1,002,280,766 Valuation Assets 853,551,122 889,398,489 889,398,489 Unfunded Actuarial Liability $ 155,422,782 $ 112,102,638 $ 112,882,277 Annual Normal Cost $ 16,124,685 $ 17,131,150 $ 17,194,723 As a Percent of Compensation 5.43% 5.35% 5.37% Interest Rate 8.00% 8.00% 8.00% Salary Scale 5.00% 5.00% 5.00% Mortality 83GAM 83GAM 83GAM Personnel Information Number of: Actives 4,325 4,521 4,521 Vested Terminations 1,224 1,344 1,344 Retirees and Beneficiaries 4,407 4,254 4,254 Total 9,956 10,119 10,119 Valuation Compensation $ 296,988,646 $ 320,041,673 $ 320,201,382 1 Liabilities for active participants increased because the IRC section 401(a)(17) pay limit increased from $200,000 to $205,000. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 4 Assets and Liabilities (continued) Determination of Valuation Assets, 1/1/2004 (1) Market Value, 1/1/2003 $ 711,292,602 (2) Contribution Made for 2003 Plan Year 61,555,151 (3) Benefit Payments During 2003 Plan Year (107,794,803) (4) Asset transfer to the PacifiCorp/IBEW Local Union 57 Retirement Trust Fund, 10/31/2003 (470,285) (5) Interest at 8.0% to 12/31/2003 on: (a) Market Value of Assets (Item 1) $ 56,903,408 (b) Company Contributions (Item 2) 0 (c) Benefit Payments (Item 3) (3,952,476) (d) Asset transfer (Item 4) (6,270) (e) Total, (a) + (b) + (c) + (d) $ 52,944,662 (6) Expected Market Value, 1/1/2004 $ 717,527,327 (1) + (2) + (3) + (4) + (5) (7) Actual Market Value With Accrued Contributions, 1/1/2004 800,645,958 (8) Asset Gain/(Loss), (7) – (6) $ 83,118,631 (9) Amount of Asset Gain/(Loss) Deferred (a) 20% of 2000 Gain/(Loss) of $(97,709,791) $ (19,541,958) (b) 40% of 2001 Gain/(Loss) of $(155,938,814) (62,375,526) (c) 60% of 2002 Gain/(Loss) of $(122,216,587) (73,329,952) (d) 80% of 2003 Gain/(Loss) of $83,118,631 66,494,905 (e) Total $ (88,752,531) (10) Actuarial Value of Assets Before Corridor Test, 1/1/2004, (7) – (9) $ 889,398,489 (11) Corridor Test (a) 80% of Market Value $ 640,516,766 (b) 120% of Market Value $ 960,775,150 (12) Actuarial Value of Assets After Corridor Test, 1/1/2004 $ 889,398,489 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 5 Assets and Liabilities (continued) Statement of Change in Fund Assets Market Value of Assets, 1/1/2003 $ 711,292,602 Contribution Made for 2003 Plan Year 61,555,151 Benefit Payments (107,794,803) Trustee and Administrative Expenses (3,206,560) Asset Transfer to Another Pension Plan (470,285) Net Investment Income 139,269,853 Market Value of Assets, 1/1/2004 $ 800,645,958 Components of Market Value of Assets January 1, 2003 January 1, 2004 Investment in Master Retirement Trust $ 677,844,021 $ 739,090,807 Accrued Contributions 33,448,581 61,555,151 Market Value of Assets $ 711,292,602 $ 800,645,958 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 6 Assets and Liabilities (continued) Current Liability Current liability equals the present value of all accrued benefits, measured using an interest rate that satisfies two requirements: • The interest rate lies within the permissible range, and • The interest rate reflects annuity purchase rates that would be used by insurance companies to satisfy the liabilities of the plan upon termination. The Internal Revenue Service has stated in IRS Notice 90-11 that the second requirement will be deemed to be satisfied (until the Service provides further guidance) if the interest rate lies within the permissible range. The Pension Funding Equity Act of 2004 changed the permissible range for 2004 and 2005 so it is now expressed in terms of a percentage of the four-year weighted average of corporate bond rates. The permissible range for RPA ’94 current liability calculations (the Retirement Protection Act of 1994) is shown below: RPA ’94 Applicable 4-Year Weighted Average Rate 6.55% Permissible Corridor 5.89% to 6.55% Percentages (90% to 100%) Interest Rate Used 6.55% (1) Current Liability, as of January 1, 2004 Actives and Transfers $ 298,049,429 Retirees and Beneficiaries 609,939,324 Vested Terminations 67,747,360 Total $ 975,736,113 (2) Current Year Accrual $ 25,958,902 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 7 Assets and Liabilities (continued) Accrued Benefit Values This section presents the results of a separate valuation of the plan’s obligations based only on benefits accrued as of the valuation date of January 1, 2004. The focus of this valuation differs from the calculation of ongoing funding requirements which anticipates benefits to be earned by future service and salary increases. This accrued benefit valuation assumes an ongoing plan and, therefore, differs from a calculation of PBGC termination liabilities which would be based on the benefits and assumptions appropriate for a terminating plan. The American Academy of Actuaries, in Appendix I of the Actuarial Standards of Practice Number 4, has provided recommended procedures for the calculation of the present value of vested accrued benefits (Illustration 1) and the present value of accrued benefits (Illustration 2). The results under both Illustrations include the sum of the present value of: • All benefits expected to be paid to former participants and their beneficiaries; and • Benefits expected to be paid at future dates to present active participants, based only on service and pay prior to the date of calculation. The present value of vested accrued benefits using Illustration 1 recognizes only the benefits in which an active participant retains a right, independent of continuation of employment beyond the calculation date. It does not include any additional benefits which might arise because of future death or disability that would not become payable if the participant had terminated employment before the occurrence of the death or disability. The present value of all accrued benefits using Illustration 2 recognizes all accrued benefits expected to become payable at future dates, including the accrued portion of disability and preretirement death benefits. Thus, the accrued benefit of a nonvested participant is included in this calculation to the extent it will become payable (i.e., vested) upon the occurrence of a future event such as termination, death, disability, or retirement. The accrued benefit used in these calculations is based on the personnel data supplied by the company. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 8 Assets and Liabilities (continued) Comparison of Vested Accrued and All Accrued Benefits With Assets January 1, 2003 January 1, 2004 January 1, 2004 Current Liability Assumed Interest Rate 8.0% 8.0% 6.55% Mortality Table 83 GAM 83 GAM 83 GAM Present Value of Vested Accrued Benefits Actives and Transfers $ 206,923,833 $ 239,148,182 $ 268,922,377 Vested Terminations 70,069,212 71,461,235 67,747,360 Retirees and Beneficiaries 594,872,666 551,651,223 609,939,324 Total $ 871,865,711 $ 862,260,640 $ 946,609,061 Present Value of All Accrued Benefits Actives and Transfers $ 222,645,861 $ 255,893,035 $ 298,049,429 Vested Terminations 70,069,212 71,461,235 67,747,360 Retirees and Beneficiaries 594,872,666 551,651,223 609,939,324 Total $ 887,587,739 $ 879,005,493 $ 975,736,113 Market Value of Assets1 $ 711,292,602 $ 800,645,958 $ 800,645,958 Funded Ratio (Market to All Accrued) 80.1% 91.1% 82.1% 1 Includes contributions accrued but not yet paid as of the calculation date. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 9 Assets and Liabilities (continued) Analysis of Change in Present Value of All Accrued Benefits Present Value of Accrued Benefits, 1/1/2003 $ 887,587,739 Change Due to Benefits Paid (107,794,803) Increase Due to Plan Experience, Including Population Changes 11,518,945 Increase Due to Additional Benefit Accrual 20,977,224 Increase Due to Interest 66,695,227 Increase Due to Assumption Changes1 0 Increase Due to Plan Amendments2 21,161 Present Value of Accrued Benefits, 1/1/2004 $ 879,005,493 1 There were no changes in assumptions since the previous valuation. 2 Liabilities for active participants increased because the IRC section 401(a)(17) pay limit increased from $200,000 to $205,000. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 10 Contributions Funding Standard Account The minimum contribution is determined under Section 412 of the Internal Revenue Code (IRC) by maintaining a Funding Standard Account (FSA). The minimum contribution required is the amount necessary to make the FSA credits for the plan year equal to the FSA charges for the plan year. Contributions in excess of the minimum create a credit balance, which serves to reduce the minimum contribution requirement for the subsequent plan year. The FSA charges for the plan year are the sum of: (1) Normal cost; (2) Amortization payments, representing amortization over 30-year periods for the initial unfunded actuarial liability, and for increases in the unfunded actuarial liability caused by plan amendments or the addition of new employee groups; over 10-year periods for the increases in the unfunded actuarial liability due to changes in actuarial assumptions; and over 5-year periods for increases in the unfunded actuarial liability resulting from actuarial losses; (3) Interest on the above items; and (4) An additional charge is applied for plans that are not sufficiently well-funded. The FSA credits for the plan year are the sum of: (5) Credit balance at the end of the prior plan year; (6) Contributions made; (7) Amortization payments, representing amortization over 10-year periods for decreases in the unfunded actuarial liability due to changes in actuarial assumptions and over 5-year periods for decreases in the unfunded actuarial liability resulting from actuarial gains; and (8) Interest on the above items. If the FSA credits are less than the FSA charges, a funding deficiency exists which is subject to an initial nondeductible tax of 10% with additional penalties if not corrected within a specified time frame. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 11 Contributions (continued) Funding Standard Account for Plan Year Ended December 31, 2003 Shown below is the calculation of the balance in the Funding Standard Account as of December 31, 2003: (1) Charges (a) Normal Cost, 1/1/2003 $ 16,124,685 (b) Amortization Payment (on $483,498,005) 76,198,253 (c) Interest as Applicable to End of Plan Year on (a) + (b) 7,385,835 (d) Additional Funding Charge 0 (e) Total $ 99,708,773 (2) Credits (a) Credit Balance on 12/31/2002 $ 45,002,030 (b) Amortization Payment (on $157,678,785) 36,672,637 (c) 2003 Plan Year Contribution Made on April 15, 2004 61,555,151 (d) Interest as Applicable to End of Plan Year on (a) + (b) + (c) 6,533,973 (e) Full Funding Limit Credit 0 (f) Total $ 149,763,791 (3) Credit Balance, 12/31/2003, 2(f) – 1(e) $ 50,055,018 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 12 Contributions (continued) Minimum Contribution (Funding Standard Account) for 2004 Plan Year The minimum contribution required for the plan year ending December 31, 2004 is developed below: (1) Charges (a) Normal Cost, 1/1/2004 $ 17,194,723 (b) Amortization Payment (on $440,663,372) 75,039,432 (c) Interest as Applicable to End of Plan Year on (a) + (b) 7,378,732 (d) Additional Funding Charge 0 (e) Total $ 99,612,887 (2) Credits (a) Credit Balance on 12/31/2003 $ 50,055,018 (b) Amortization Payment (on $142,300,116) 36,472,200 (c) Interest as Applicable to End of Plan Year on (a) + (b) 6,922,177 (d) Full Funding Limit Credit 0 (e) Total $ 93,449,395 (3) Contribution Needed to Avoid Funding Deficiency, $ 6,163,492 12/31/2004, (1)(e) – (2)(e), But Not Less Than Zero (4) 2004 Plan Year Contributions, $ 59,997,387 Expected to be Paid on April 15, 2005 (5) Expected Credit Balance, 12/31/2004, (2)(e) – (1)(e) + (4) $ 53,833,895 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 13 Contributions (continued) Additional Funding Requirement for 2004 Plan Year Beginning with the 1995 plan year, the Retirement Protection Act of 1994 modified the additional funding charge that was introduced by the Pension Protection Act of 1987. This additional funding charge applies only to underfunded plans. In general, this charge can vary from a 4 to a 12-year amortization of the unfunded current liability, reduced by certain charges and credits in the funding standard account. If applicable, the additional funding charge results in an increased minimum required contribution. The additional funding requirement eligibility test (Gateway Test) determines if the plan’s minimum contribution is subject to the additional charge for the plan year. For the 2004 plan year, the test compares current liability to the actuarial value of assets on January 1, 2004. The gateway current liability must be calculated using the 1983 Group Annuity Mortality table and the maximum permissible interest rate, which is 6.55% for 2004. If the gateway percentage (the ratio of assets to liabilities) is greater than 90%, then the plan is exempt from the additional funding charge. If the gateway percentage is greater than 80% but less than 90%, then the plan may qualify for the “volatility rule exemption.” To qualify, the plan must have gateway percentages greater than 90% in two consecutive years out of the immediately prior three years. For 2004, the gateway percentage is greater than 90%, and thus the plan is exempt from the additional funding charge. Additional Funding Requirement Eligibility Test (1) Gateway Current Liability, 1/1/2004 $ 975,736,113 Based on Interest Rate of 6.55% (2) Actuarial Value of Assets, 1/1/2004 $ 889,398,489 (3) Gateway Percentage, (2) ÷ (1) 91.2% Prior Gateway Percentages Gateway Percentage, January 1, 2003 88.4% Gateway Percentage, January 1, 2002 100.1% Gateway Percentage, January 1, 2001 90.2% Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 14 Contributions (continued) Amortization Schedule for Minimum Required Contribution Source, Date Began Amortization Initial Amount Remaining Balance on 1/1/2004 Date o Final Payment 2004 Payment Amount Charges Bases Combined, 1/1/1992 $122,190,098 $67,215,236 1/1/2010 $ 11,953,881 Plan Amendment, 1/1/1993 $49,391,031 42,446,506 1/1/2022 4,092,457 Plan Amendment, 1/1/1993 $1,041,966 895,464 1/1/2022 86,335 Plan Amendment, 1/1/1995 $4,303,956 3,847,299 1/1/2024 355,634 Assumption Change, 1/1/1995 $10,256,554 1,430,576 1/1/2004 1,430,576 Plan Amendment, 1/1/1996 $598,470 544,094 1/1/2025 49,387 Assumption Change, 1/1/1996 $11,120,033 2,977,909 1/1/2005 1,546,222 Change in Limits, 1/1/1997 $2,079,812 1,920,042 1/1/2026 171,421 Assumption Change, 1/1/1997 $37,583,735 14,503,025 1/1/2006 5,210,796 Plan Amendment, 1/1/1997 $1,384,224 1,277,888 1/1/2026 114,090 Change in Limits, 1/1/1998 $12,712 11,903 1/1/2027 1,047 Plan Amendment, 1/1/1998 $15,555,513 14,566,860 1/1/2027 1,281,047 Plan Amendment, 1/1/1998 $109,091,542 102,158,067 1/1/2027 8,984,042 Assumption Change, 1/1/1999 $63,616,718 37,890,215 1/1/2008 8,786,897 Plan Amendment, 1/1/2000 $2,702,426 2,596,201 1/1/2029 222,377 Plan Amendment, 1/1/2000 $481,417 462,494 1/1/2029 39,615 Actuarial Loss, 1/1/2000 $7,777,840 1,806,743 1/1/2004 1,806,743 Plan Amendment, 1/1/2001 $ 33,858,303 32,903,982 1/1/2030 2,786,117 Plan Amendment, 1/1/2002 $ 4,964,860 4,873,700 1/1/2031 408,348 Plan Amendment, 1/1/2002 $ 15,792,646 15,502,675 1/1/2031 1,298,908 Actuarial Loss, 1/1/2002 $ 5,064,838 3,269,103 1/1/2006 1,174,557 Plan Amendment, 1/1/2003 $ 5,574,458 5,525,250 1/1/2032 458,486 Actuarial Loss, 1/1/2003 $ 97,955,679 81,258,501 1/1/2007 22,716,326 Plan Amendment, 1/1/2004 $ 779,639 779,639 1/1/2033 64,123 Total $440,663,372 $ 75,039,432 Credits Plan Amendment, 1/1/1994 $2,413,393 $2,117,404 1/1/2023 $ 199,687 Asset Method Change, 1/1/1997 $66,556,163 25,683,070 1/1/2006 9,227,678 De Minimus Merger of PFS, 1/1/1998 $1,964,832 972,567 1/1/2007 271,888 Method Change, 1/1/1999 $141,826,250 84,471,931 1/1/2008 19,589,390 Plan Amendment, 1/1/2000 $10,961,683 10,530,811 1/1/2029 902,014 Actuarial Gain, 1/1/2001 $15,451,891 6,910,857 1/1/2005 3,588,330 Actuarial Gain, 1/1/2004 $11,613,476 11,613,476 1/1/2008 2,693,213 Total $142,300,116 $ 36,472,200 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 15 Contributions (continued) Amortization Schedule for Minimum Required Contribution (continued) Equation of Balance, 1/1/2004 (1) Net Remaining Balance $ 298,363,256 (2) Credit Balance 50,055,018 (3) Reconciliation Account (Due to Prior Deficit Reduction Contribution) 135,425,961 (4) Unfunded Actuarial Liability, (1) – (2) – (3), but not less than $0 $ 112,882,277 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 16 Contributions (continued) Maximum Deductible Contribution The determination of the maximum deductible contribution for the tax year ending March 31, 2004, is based upon the plan year beginning January 1, 2004, as shown below: (1) Normal Cost $ 17,194,723 (2) Net Amortization Payment (on $146,330,858) 20,192,234 (3) Interest to 3/31/2004 747,739 (4) Ten-year Maximum for 12 Months $ 38,134,696 (5) Full Funding Limit $ 269,784,474 (6) Lesser of (4) or (5) $ 38,134,696 (7) Minimum Required Contribution as of 12/31/2004 $ 6,163,492 (8) Greater of (6) and (7) $ 38,134,696 (9) Projected Unfunded Current Liability, 3/31/2004, for Maximum Purposes $ 145,915,674 (10) Maximum Deductible Contribution, Greater of (8) and (9) $ 145,915,674 It is our understanding that all contributions reported on the Form 5500 for years prior to 2003 have been fully deducted. This calculation does not reflect the 25% of covered compensation limitation on deduction for contributions to overlapping plans. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 17 Contributions (continued) Funding Policy Contribution Effective January 1, 2001, the company adopted a new funding policy. The policy defines the contribution as of January 1, 2001 to be the normal cost plus a five year amortization of the unfunded actuarial liability. In subsequent years, the difference between the actual unfunded actuarial liability and the expected unfunded liability is amortized over five years. In addition, increases or decreases in the unfunded actuarial liability as a result of changes in plan benefits, population coverages, assumptions, or actuarial methods are amortized over five years. Finally, the funding policy contribution will be no less than the minimum required contribution nor greater than the maximum deductible contribution. The calculation of the Funding Policy Contribution for the 2004 plan year is as follows: (1) Normal Cost, 1/1/2004 $ 17,194,723 (2) Amortization Payment (on $112,882,275) 38,358,413 (3) Interest on (1) + (2) to 12/31/2004 4,444,251 (4) Five-Year Contribution, (1) + (2) + (3) $ 59,997,387 (5) Minimum Contribution $ 6,163,492 (6) Maximum Deductible Contribution $ 145,915,674 (7) Funding Policy Contribution, greater of (4) and (5), but not to exceed (6) $ 59,997,387 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 18 Contributions (continued) Amortization Schedule for Funding Policy Contribution Source, Date Began Amortization Initial Amount Remainin Balance on 1/1/2004 Date o Final Payment Annual Pa ment Amount Initial Unfunded Actuarial Liability, 1/1/2001 $ 34,398,502 $ 15,363,410 1/1/2005 $ 7,977,154 Spinoff, 1/31/2001 $ 12,489,202 5,802,900 1/1/2006 2,896,297 Actuarial Loss, 1/1/2002 $ 5,064,838 3,269,102 1/1/2006 1,174,557 Plan Amendments, 1/1/2002 $ 20,757,506 13,397,944 1/1/2006 4,813,751 Actuarial Loss, 1/1/2003 $ 97,955,679 81,258,501 1/1/2007 22,716,326 Plan Amendments, 1/1/2003 $ 5,574,458 4,624,255 1/1/2007 1,292,740 Actuarial Gain, 1/1/2004 $ (11,613,476) (11,613,476) 1/1/2008 (2,693,213) Plan Amendments, 1/1/2004 $ 779,639 779,639 1/1/2008 180,801 $ 112,882,275 $ 38,358,413 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 19 Contributions (continued) Full Funding Limitation The Full Funding Limitation (FFL) is defined in IRC Section 412(c)(7) as the ERISA full funding limitation with a minimum equal to the RPA ’94 full funding limitation. The ERISA FFL is the excess, if any, of the actuarial accrued liability (projected to the end of the year) over the lesser of the fair market value of assets and the actuarial value of assets. RPA ’94 requires the full funding limitation to be no smaller than the excess, if any, of 90% of the RPA ’94 current liability over the actuarial value of assets. For determining the ERISA full funding limitation for the minimum required contribution, an adjustment is made to reflect the Funding Standard Account Credit Balance, with interest to the end of the year at the funding interest rate. ERISA FFL RPA ’94 Override Projected Liability, 12/31/2004 $ 1,001,193,528 $ 974,358,538 Applicable Percentage 100% 90% Adjusted Liability $ 1,001,193,528 $ 876,922,684 Projected Assets for Maximum Purposes Lesser of Market Value and Actuarial Value 731,409,054 N/A Actuarial Value N/A 827,261,787 For Determining Maximum Deductible Contribution $ 269,784,474 $ 49,660,897 Carryover Contributions for Maximum (33,448,581) (33,448,581) Credit Balance, 12/31/2004 54,059,419 N/A For Determining Minimum Required Contribution $ 290,395,312 $ 16,212,316 For Maximum Deductible Contribution For Minimum Required Contribution Full Funding Limitation, 12/31/2004 $ 269,784,474 $ 290,395,312 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 20 Contributions (continued) Full Funding Limitation This page develops the end of year liabilities and assets for the determination of the full funding limitation. Liabilities Actuarial Liability (ERISA) Current Liability (RPA ’94) Interest Rate 8.0% 6.55% Liability, 1/1/2004 $ 1,002,280,766 $ 975,736,113 Expected Benefit Accrual for 2004 17,194,723 25,958,902 Expected Benefit Payments (96,000,000 ) (90,000,000 ) Interest to 12/31/2004 77,718,039 62,663,523 Projected Liability, 12/31/2004 $ 1,001,193,528 $ 876,922,684 Assets Market Value Actuarial Value Interest Rate 8.0% 8.0% Assets, 1/1/2004 $ 800,645,958 $ 889,398,489 Expected Benefit Payments for 2004 (96,000,000 ) (96,000,000 ) Interest to 12/31/2004 60,211,677 67,311,879 Projected Assets, 12/31/2004 $ 764,857,635 $ 860,710,368 Carryover Contributions (33,448,581 ) (33,448,581 ) Projected Assets for Maximum, 12/31/2004 $ 731,409,054 $ 827,261,787 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 21 Experience Determination of the Actuarial Loss (Gain) for Funding Purposes If the experience of the plan had corresponded to that expected under the actuarial assumptions, the plan would have had no actuarial loss (gain). However, for the plan year just ended, the actual experience did vary from the assumptions used for the plan and the resulting actuarial loss (gain) is determined as follows: (1) Unfunded Actuarial Liability, 1/1/2003 $ 155,422,782 (2) Normal Cost, 1/1/2003 16,124,685 (3) 2003 Plan Year Contributions 61,555,151 (4) Interest at 8.00% on: (a) Unfunded Actuarial Liability $ 12,433,823 (b) Normal Cost 1,289,975 (c) Contributions 0 (d) Total, (a) + (b) – (c) $ 13,723,798 (5) Expected Unfunded Actuarial Liability, $ 123,716,114 (1) + (2) – (3) + (4)(d) (6) Actual Unfunded Actuarial Liability $ 112,102,638 Before Changes, 1/1/2004 (7) Actuarial Loss (Gain), (6) – (5) $ (11,613,476) Analysis of Experience There are two main sources of actuarial gain or loss during any year: liability experience and investment experience. During 2003, the experience from all sources created a net actuarial gain of $11,613,476. This gain was the result of an investment gain of $17,755,407 offset by a liability loss of $6,141,931. The return during the 2003 plan year on the actuarial value of assets was 10.3%. The return during the 2003 plan year on the market value of assets was 21.2%. The history of return on market value of assets is shown on the following page. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 22 Experience (continued) Asset Return The table below shows the actual and assumed rates of return on the market value of assets over the past several years. The rates of return have been developed by assuming benefits and expenses are paid uniformly throughout the year and contributions made after the plan year are paid at the end of the year. The rate should be used in analyzing trends in actuarial experience, but is not appropriate for comparisons external to the actuarial report. The rates of return prior to 1996 are taken from the January 1, 1996 valuation report by the previous actuary. Actual Year Annual Cumulative Average Assumed Return 2003 21.2% 10.2% 8.00% 2002 –7.5% 9.6% 8.00% 2001 –7.9% 10.8% 8.00% 2000 –0.4% 12.1% 8.00% 1999 28.4% 13.1% 8.00% 1998 17.3% 12.0% 8.50% 1997 15.9%1 11.5% 8.50% 1996 16.7% 11.1% 8.75% 1995 21.8% 10.6% 8.75% 1994 –0.6% 9.5% 8.75% 1993 14.4% 10.8% 8.75% 1992 6.0% 10.3% 9.00% 1991 19.6% 11.0% 9.00% 1990 –1.6% 9.3% 9.00% 1989 21.0% 12.2% 9.00% 1988 14.7% 9.5% 8.3% 1987 3.2% 7.0% 8.3% 1986 10.9% 10.9% 8.3% 1 The method for determining the annual rate of return changed effective January 1, 1997, and the return under the new method is shown for all subsequent years. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 23 Accounting Requirements Accounting Information Under SFAS No. 87 The Financial Accounting Standards Board issued Statement No. 87 (Employers’ Accounting for Pensions) and Statement No. 88 (Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits) in December 1985. The expense and disclosure portions of Statement No. 87 are effective for fiscal years beginning after December 15, 1986. The balance sheet and non-U.S. plans portion of Statement No. 87 are effective for fiscal years beginning after December 15, 1988. Statement No. 88 is effective upon adoption of Statement No. 87. Statement of Financial Accounting Standards No. 132 (Employers’ Disclosures about Pensions and Other Postretirement Benefits) was published in February 1998. Statement No. 132 amended the disclosure requirements of FAS Statements No. 87 and 88. The disclosure requirements under Statement No. 132 first became effective for fiscal years beginning after December 15, 1997. Statement No. 132 was subsequently revised in December 2003. All but one of the new disclosure requirements under Statement No. 132 (revised 2003) are effective for fiscal years ending after December 15, 2003. Disclosure of estimated future benefit payments is effective for fiscal years ending after June 15, 2004. PacifiCorp adopted the expense and disclosure portions of Statement No. 87 in 1987 based on a December 31 measurement date. The next several pages contain the results determined under Statement No. 87, as amended by Statement No. 132, for footnote disclosure in the 2004 financial statements and net periodic pension cost determination for fiscal year 2005. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 Accounting Requirements (continued) Financial Position During 2004 Under SFAS No. 87 Disclosed March 31, 2004 Projected Benefit Obligation $ (1,181,706,000) Plan Assets at Fair Value 733,243,000 Funded Status $ (448,463,000) Unrecognized Net (Gain) Loss 369,209,000 Unrecognized Prior Service Cost 8,815,000 Unrecognized Net Transition (Asset) Obligation 24,361,000 Prepaid (Accrued) Pension Cost $ (46,078,000) Net Periodic Pension Cost 4/1/2004 3/31/2005 Service Cost Component $ 24,900,000 Interest Cost Component 70,857,000 Expected Return on Assets (77,670,000) Amortization of: Unrecognized Net (Gain) Loss 8,384,000 Unrecognized Prior Service Cost 897,000 Unrecognized Net (Asset) Obligation 8,407,000 Net Periodic Pension Cost (Income) $ 35,775,000 Expected Employer Contributions $ 61,555,000 Expected Benefit Payments $ 96,000,000 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 25 Accounting Requirements (continued) Determination of Market Related Value of Assets Market Related Value of Assets have been determined as the market value of assets adjusted to spread asset gains and losses after January 1, 2000 over five measurement periods. This method of determining assets is an acceptable method under current FAS 87 and is designed to reflect a relatively stable, long-term growth of assets. January 1, 2004 (1) Market value of assets, January 1, 2004 $ 733,243,461 (2) Amount of Asset Gain/(Loss) Deferred (a) 20% of Gain/(Loss) from April 1, 2000 to December 31, 2000 of $(30,862,971) $ (6,172,594) (b) 40% of Gain/(Loss) from January 1, 2001 to December 31, 2001 of $(247,483,829) (98,993,532) (c) 60% of Gain/(Loss) from January 1, 2002 to December 31, 2002 of $(152,823,874) (91,694,324) (d) 80% of Gain/(Loss) from January 1, 2003 to December 31, 2003 of $47,559,993 38,047,994 (e) Total $ (158,812,456) (3) Market related value of assets, January 1, 2004 (1) – (2) (e) $ 892,055,917 (Gain)/Loss Subject to Amortization for 4/1/2004 – 3/31/2005 Corridor Test (a) Total (Gain)/Loss $ 369,209,000 (b) Nonamortizable Portion of Asset (Gain)/Loss 158,812,456 (c) (Gain)/Loss Subject to Corridor, (a) – (b) $ 210,396,544 Corridor Limit (d) 10% of the Greater of Projected Benefit Obligation and Market- Related Value of Assets $ 118,170,600 (e) (Gain)/Loss Subject to Amortization, Excess of (c) Over (d) $ 92,225,944 (f) Average Remaining Service (Years) 11 (g) Amortization Payment (e) ÷ (f) $ 8,384,177 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 26 Accounting Requirements (continued) Alternative Amortization Method As permitted under Paragraph 26 of Statement No. 87, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the Plan. Initial Date Balance 4/1/2004 Remainin Period Annual Net Amortization Payment Transition Obligation/Assets UP&L Transition 1/1/1987 $ 12,622,108 4.83 $ 2,611,470 DCP Transition 1/1/1987 11,738,806 2.02 5,795,397 $ 24,360,914 $ 8,406,867 Prior Service Costs Plan Change Local 57 4/1/2000 $ (5,912,751) 8.00 $ (739,094) COLA 4/1/2002 14,727,272 9.00 1,636,364 $ 8,814,521 $ 897,270 (Gain)/Loss 2004 Loss 4/1/2004 $ 92,225,944 11.00 $ 8,384,177 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 27 Personnel Information This section contains data on personnel submitted for the actuarial valuation. The information is organized to be useful for a variety of purposes: • Counts of plan participants and averages of age and service provide quick comparisons of the differences from year to year in the employee group. • The detailed information on personnel by age and service isolates the number of participants eligible for specific employee benefits. For example, if participants with 15 or more years of service are to receive additional vacation, this distribution indicates the number of participants currently eligible for additional vacation and the number potentially becoming eligible for additional vacation in each of the next several years. The actuarial valuation was based on personnel information from company records. The following table shows the number of participants by category and the number of vested active participants: Personnel Summary January 1, 2003 January 1, 2004 Active Participants Vested 3,429 3,593 Nonvested 896 928 Subtotal 4,325 4,521 Vested Terminations 1,224 1,344 Retirees and Beneficiaries 4,407 4,254 Total Number of Participants 9,956 10,119 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 28 Personnel Information (continued) Personnel Characteristics of Active Participants The following characteristics of active participants, both male and female, are presented: number of employees, average age, and average service. January 1, 2003 January 1, 2004 Number of Active Participants Males 3,249 3,403 Females 1,076 1,118 Total 4,325 4,521 Average Present Age Males 46.9 47.3 Females 42.9 43.4 Total 45.9 46.4 Average Years of Service Males 17.0 17.2 Females 10.9 11.1 Total 15.5 15.7 Compensation Total $ 284,667,452 $ 314,691,126 Average $ 65,819 $ 69,607 Valuation Compensation Total $ 296,988,646 $ 320,201,382 Average $ 68,668 $ 70,825 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 29 Personnel Information (continued) Personnel Characteristics of Inactive Participants January 1, 2003 January 1, 2004 Terminated Vested Participants Number 1,224 1,344 Average Age 50.1 50.9 Average Monthly Benefit $ 1,067 $ 942 Retirees and Beneficiaries Number 4,407 4,254 Average Age 70.5 71.4 Average Monthly Benefit1 $ 1,294 $ 1,292 1 Includes DCP Benefit. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 35 Plan Provisions Effective Date Amended and restated effective January 1, 1994; most recently amended effective December 31, 2002. Participation Any employee, other than a casual or leased employee, of a participating company shall become a participant on the first of the month following the completion of one-year of service and attainment of age 21. Eligibility for Benefits Normal Attainment of age 65. Early • Attainment of age 55 and the completion of 5 years of service; or • At least 75 points (age plus years of service). Deferred Completion of 5 years of service. Disability Completion of 10 years of service, and disabled. Preretirement Death Completion of 5 years of service. Postponed Retirement after attainment of age 65. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 36 Plan Provisions (continued) Retirement Benefits Normal Monthly benefit equal to the greatest of (1), (2), (3), (4), and (5); plus the DCP benefit. (1) The Basic Benefit plus the Excess Benefit, plus the Additional Service Benefit; Basic Benefit = 1.3% of Final Average Pay times Benefit Years up to a maximum of 30. Excess Benefit = 0.65% of Final Average Pay in excess of Social Security Covered Compensation, times Benefit Years up to a maximum of 30. Additional 0.25% of Final Average Pay times Service Benefit = Benefit Years in excess of 30. (2) Monthly benefit under the Utah Power and Light Company Retirement Income Plan on the New Formula Date, as follows: • 12/31/90 for union employees; or • 12/31/89 for non-union employees; or • the date of transfer from union to non-union status for employees making this transfer during 1990. (3) Short service factor (SSF) x Benefit Years up to 20, plus the long service factor (LSF) x Benefit Years in excess of 20, where: Annual Salary Rate on New Formula Date SSF LSF Under $25,000 $35 $15 From $25,000 to $35,000 $50 $20 Over $35,000 $60 $25 (4) Monthly benefit earned under other groups that were merged with the Plan. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 37 Plan Provisions (continued) Retirement Benefits (continued) (5) For members of the IBEW Local 57 who are age 50 or older and in active status on July 1, 1999: 1.67% of Final Average Pay times Benefit Years up to a maximum of 30 plus 0.50% of Final Average Pay times Benefit Years in excess of 30. The DCP benefit is the monthly benefit payable to former participants of the Utah Power and Light Deferred Compensation Plan. Early A benefit computed in the same manner as a normal retirement benefit based on compensation and benefit years at the time of termination. This benefit is paid without reduction if deferred to age 65 or reduced if payments commence before age 65. The applicable early retirement factors vary depending upon which benefit formula predominates. For Formula (1), the Basic Benefit is reduced under the Higher Percentage table if the participant terminates with 75 or more points, otherwise the Lower Percentage table is used; the Excess Benefit is reduced under the Lower Percentage Table and the Additional Service Benefit is reduced under the Higher Percentage table. Age at Benefit Starting Date Higher Percentage Lower Percentage 64 100.00% 92.00% 63 100.00% 84.00% 62 100.00% 76.00% 61 96.00% 72.00% 60 92.00% 68.00% 59 88.00% 64.00% 58 84.00% 60.00% 57 80.00% 56.00% 56 76.00% 52.00% 55 72.00% 48.00% 54 64.63% 43.09% 53 58.09% 38.73% 52 52.29% 34.86% 51 47.12% 31.42% 50 42.52% 28.35% Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 38 Plan Provisions (continued) Retirement Benefits (continued) For Formulas (2) and (5), the reduction factor is 4% per year below age 65 if the participant has less than 30 years of service; otherwise, the reduction is 4% per year below age 64. For retirement between ages 50 and 55, the reduction factors are the same as the terminated vested factors. For Formula (3), the reduction factors are based on the factors in the Higher Percentage table listed above. For Formula (4), the reduction is based upon the applicable early retirement factor for the frozen benefit that was merged with the Plan. The DCP benefit is also reduced for early commencement under a schedule that approximates actuarial reductions from age 65. Deferred Vested A benefit computed in the same manner as a normal retirement benefit based on final average compensation and benefit years at the time of termination. This benefit is paid without reduction at age 65 or actuarially reduced for early commencement. Disability A benefit computed in the same manner as a normal retirement benefit based on final average pay and benefit years at the time of disability. This benefit is paid without reduction if deferred to age 65 or reduced in accordance with the early retirement table if receipt is commenced earlier. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 39 Plan Provisions (continued) Retirement Benefits (continued) Preretirement Death If death occurs before age 55, the vested participant’s spouse will be eligible to begin receiving a life annuity or lump sum immediately or may defer payment until the time the participant would have become age 55. If deferred to age 55, the benefit amount will be equal to the amount the spouse would have received if the participant had separated from service on the date of death or on the actual date of termination, if earlier, survived until age 55, and then died with a 50% joint and survivor benefit in effect. The spouse of a participant who dies while employed after age 55 or after completing 30 years of service shall receive a life annuity equal to the benefit which would have been paid if the participant had retired on the day before his death with a 50% joint and survivor benefit in effect. In the case of death of a participant with 30 years of service before age 55, the participant is assumed to be age 55 in determining the applicable early retirement reduction factors. Preretirement death benefits of terminated vested participants are the same as those for active participants except that the benefit is reduced for the cost of death protection after the date of termination of employment. Participants may elect out of this coverage at the time of termination with spousal consent. Postponed Retirement A benefit computed in the same manner as a normal retirement benefit. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 40 Plan Provisions (continued) Definitions Year of Service 12-month period during which an employee is in continuous employment with the company or an affiliate. Benefit Year Years of service while a participant. Any participants who complete less than a full year of service receive fractional credit. Compensation Compensation includes all nondeferred compensation reportable on Form W-2 except the amounts shown below, plus salary reduction amounts elected by the participant under a qualified cash or deferred arrangement or a cafeteria plan. Excluded items are: • Bonuses in excess of 10 percent of base salary, determined before reductions in base salary for nonqualified deferred compensation; • Overtime, premium pay, shift and location differentials; • Imputed income from expense reimbursement or fringe benefits; • Commissions that are in lieu of participation in a bonus program or that do not accompany a discounted salary rate; • Other items such as prizes and awards, severance payments, long-term incentive pay. As of January 1, 2004, compensation for purposes of calculating qualified plan benefits is limited to $205,000 in accordance with IRC section 401(a)(17). Final Average Pay Average monthly compensation in the 60 highest consecutive calendar months of the last 120 calendar months of employment. Social Security Covered Compensation The covered compensation amount for a person with the participant’s Social Security retirement age. Plan Year January 1 to December 31. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 41 Plan Provisions (continued) Contributions The plan is paid for by the company. No participant contributions are allowed other than amounts previously transferred from plans that merged with the Plan. Normal Form of Benefits An unmarried member receives benefits payable as a single life annuity. A married participant retiring from active or disabled status receives a 50% joint and survivor benefit which is the actuarial equivalent of a life annuity payment. All other benefits are provided on an actuarial equivalent basis to a life annuity. Optional Annuity Forms of Benefit Level income option, 100% or 50% joint and survivor options, 10-year certain and life option. All optional forms are actuarially equivalent to the single life annuity based upon: Interest: 9.00% Mortality: 1984 Unisex Pension Mortality Table. Lump Sum Benefit The actuarially equivalent lump sum benefit is paid: • automatically if the amount is not over $5,000; or • upon request. The lump sum is based upon: Interest: 30-year Treasury Rate for the September preceding the year in which the lump sum is paid. Mortality: 1994 Group Annuity Reserving Table per Revenue Ruling 2001-62. Cost of Living Adjustment The amount payable to each participant with no service after December 31, 1987 is increased each January 1 by the lesser of: (1) 2%; or (2) The percentage increase in the U.S. Consumer Price Index (all items) during the 12 months ending with the September index preceding the adjustment date. Effective May 1, 2002, an ad hoc COLA was granted to certain pre-1996 retirees. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 42 Actuarial Assumptions Factor Assumption Mortality 1983 Group Annuity Mortality Table. Withdrawal Before Retirement Table A. Retirement Table B. Disability Table C. Investment Return Cash Contribution: 8.00% per year (net of investment expenses and net of 0.25% for administrative expenses) FAS 87 Expense for fiscal year ending March 31, 2005: Discount Rate: 6.25% Long-term Rate of return: 8.75% (net of investment expenses and net of 0.25% for administrative expenses) Salary Scale Cash Contribution: 5.0% per year. Expense: 4.0% per year. Social Security Taxable Wage Base Increase Cash Contribution: 4.5% per year. Expense: 4.0% per year. Maximum Benefit Limitations Cash Contribution: Limit at Social Security Normal Retirement Age for 2004 is $165,000; no increase permitted under IRC section 412. Expense: The 2004 IRC section 415 annual benefit limit of $165,000 is assumed to increase at 4% per year thereafter (preretirement and postemployment increases reflected). Lump Sum Interest Rate Cash Contribution: 150 basis points less than the Investment Return assumption. Expense: 100 basis points less than the Discount Rate. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 43 Actuarial Assumptions (continued) Factor Assumption Lump Sum Mortality 1994 GAR as modified for use in Revenue Ruling 2001-62. Percent Electing Lump Sum 50% of normal and early retirement eligible active employees are assumed to elect a lump sum when they retire. All pre-retirement, post-decrement benefits are assumed to be paid as a lump sum. Compensation Limitations Cash Contribution: Limit for 2004 is $205,000; no increase permitted under IRC section 412. Expense: The 2004 IRC section 401(a)(17) annual compensation limitation of $205,000 is increased 4% per year thereafter. Death Benefits 80% of participants are assumed to be married. Males are assumed to be 3 years older than their spouses. Valuation of Assets The market value is written up at the expected return on asset assumption (8% for Cash Contribution, 8.75% for Expense) and 20% of each of the preceding five years’ asset gains or losses are captured. For Cash Contribution, the asset value determined under the method will be adjusted to be no greater than 120% and no less than 80% of the fair market value. Actuarial Method Projected unit credit cost method. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 44 Actuarial Assumptions (continued) Table A Rates of Withdrawal Male and Female Age Factor Age Factor 20 0.13250 40 0.05250 21 0.12800 41 0.04900 22 0.12350 42 0.04550 23 0.11900 43 0.04200 24 0.11450 44 0.03850 25 0.11000 45 0.03500 26 0.10550 46 0.03150 27 0.10100 47 0.02800 28 0.09650 48 0.02450 29 0.09200 49 0.02100 30 0.08750 50 0.01750 31 0.08400 51 0.01400 32 0.08050 52 0.01050 33 0.07700 53 0.00700 34 0.07350 54 0.00350 35 0.07000 55 0.00000 36 0.06650 56+ 0.00000 37 0.06300 38 0.05950 39 0.05600 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 45 Actuarial Assumptions (continued) Table B Rates of Retirement Male and Female Age Factor 55 25% 56 5% 57 5% 58 5% 59 5% 60 5% 61 5% 62 35% 63 10% 64 10% 65 and over 100% Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 46 Actuarial Assumptions (continued) Table C Rates of Disability Male and Female Age Factor Age Factor 20 0.00060 40 0.00220 21 0.00065 41 0.00259 22 0.00070 42 0.00298 23 0.00075 43 0.00337 24 0.00080 44 0.00376 25 0.00085 45 0.00415 26 0.00090 46 0.00454 27 0.00095 47 0.00493 28 0.00100 48 0.00532 29 0.00105 49 0.00571 30 0.00110 50 0.00610 31 0.00121 51 0.00712 32 0.00132 52 0.00814 33 0.00143 53 0.00916 34 0.00154 54 0.01018 35 0.00165 55 0.01120 36 0.00176 56 0.01222 37 0.00187 57 0.01324 38 0.00198 58 0.01426 39 0.00209 59 0.01528 60 0.01630 61+ 0.00000 Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 47 Actuarial Assumptions (continued) Discussion of Actuarial Assumptions and Methods Ultimate Cost The ultimate cost of a pension plan can be measured only when the obligation to all participants has been fully discharged. The cost will then be: The benefits paid from the plan plus administrative expenses less investment gains plus investment losses. The actuarial process assigns pension costs to the current year by estimating, based on both current and future service, the benefits to be paid to current plan participants. These estimates are determined through an actuarial valuation which uses three basic elements to project payments from the plan: • Benefit provisions of the plan. • Data on the present work force, terminated vested, and retired employees. • Certain predictions (actuarial assumptions) about the future as it applies to this work force. Actuarial Assumptions The first step in the actuarial process is to determine the magnitude of the pension liability by determining the benefits expected to be paid. To determine how many employees will become eligible for benefits, what benefits will be paid, and how long benefits will be paid, it is necessary to make some economic and demographic predictions (usually called actuarial assumptions) such as: • An assumed retirement age predicting when employees will begin to receive retirement benefits. • A mortality rate predicting the number of employees who will die before retirement and the duration of benefit payments after retirement. • A withdrawal rate predicting the number of employees who will leave the work force before retirement. (Sometimes certain kinds of withdrawal such as disabilities are predicted separately.) • If the benefits are based on compensation, an assumed rate of pay increases predicting employees’ compensation in future years. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 48 Actuarial Assumptions (continued) These assumptions are applied to the data for each employee to predict the amount of benefits expected to be paid each year in the future. The total future benefit payments in each year are then discounted at a selected interest rate to determine the current amount which with future investment return, will be sufficient to pay the expected benefits as they become payable. The discounted payments are usually called the present value of future benefits. Total Future Benefit Payments Future Investment Return Present Value of Future Benefits Actuarial Method The actuarial method is the mathematical process which determines the contributions required to pay for the present value of future benefits, by allocating costs to the years of an employee’s career. Some costs are allocated to future years in an employee’s career (future service liability) and other costs are allocated to past years (past service liability). Total Future Benefit Payments Future Investment Return Present Value of Future Benefits Future Service Liability Past Service Liability There is a fair amount of flexibility in this allocation of costs between future and past. Some methods assign relatively little cost to past years in an employee’s career, others assign a more significant portion to the past. All methods produce allocations of contributions which will accumulate to an amount sufficient to provide the benefits at retirement. However, the various methods produce widely different allocation of contributions to past and future employment. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 49 Actuarial Assumptions (continued) Many actuarial methods are acceptable under the Employee Retirement Income Security Act of 1974 (ERISA) for calculating cash contributions. However, once an actuarial method has been selected and filed for minimum funding purposes, a change in method may be made only if approved by the Secretary of the Treasury or his delegate. The Secretary has granted automatic approval for some changes in actuarial method. Usual terminology refers to the future allocation as the present value of future normal costs and the past allocation as the accrued liability. The portion of the accrued liability which is not covered by the assets of the plan is called the unfunded accrued liability. The value of the assets used in the actuarial process under ERISA must take into account fair market value, but this may be done in a way which eliminates much of the short-term fluctuation of market value from one valuation to the next. Total Future Benefit Payments Future Investment Return Present Value of Future Benefits Future Service Liability Past Service Liability Present Value of Future Normal Costs Unfunded Accrued Liability Assets For the current year, the method produces a normal cost. Payment of the normal cost each year would eventually discharge all future service liability. Hewitt Associates 2004_PRPVAL.DOCXP/03A 12/2004 50 Actuarial Assumptions (continued) The unfunded accrued liability must also be discharged, and this is done by an amortization payment. The amortization payment is flexible, and may be increased or decreased within certain allowable bounds. The sum of both the normal cost and the amortization payment is the current year’s pension cost. Total Future Benefit Payments Future Investment Return Present Value of Future Benefits Future Service Liability Past Service Liability Present Value of Future Normal Costs Unfunded Accrued Liability Assets Normal Cost Amortization Payment Current Year’s Contribution Valuations to determine contributions to the ongoing plan use the Projected Unit Credit Cost Method. Under this actuarial method, the cost attributed to past service (past service liability or accrued liability) is determined on the valuation date as the present value of the benefits actually earned (accrued) as of that date. The unfunded accrued liability is the amount by which the accrued liability exceeds the valuation assets. The current year’s normal cost, determined on the valuation date, is the amount required to fund the benefit expected to be earned in the current year. Because the value of the future service liability is not used in the calculation of normal cost, it is often omitted from the actuarial report which may show only an accrued liability. The calculations for any disability, termination or death benefits take into consideration that the entitlement to benefits may begin at various future times. Each age prior to retirement has associated with it appropriate probabilities of disability, termination and death.