Workshop for BC Utilities Commission Pacific Northern Gas (PNG) - - PowerPoint PPT Presentation

Pacific Northern Gas (PNG)

Pension & Non-Pension Benefits Application Workshop for BC Utilities Commission

February 4, 2013

B-2-1 PNG-PNG (NE) 2012 PENSION & NON-PENSION BENEFITS EXHIBIT

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Agenda

• Accounting vs. Funding Valuations
• Plan Obligation and Assets

(for accounting purposes)

• Overview of Financial Disclosure for

Employee Future Benefit Plans

• Non-Pension Post-Retirement Benefits

(NPPRB) Unrecovered Historical Liability

ACCOUNTING VS. FUNDING VALUATIONS

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Actuarial Valuations of Employee Future Benefits

• Accounting valuation: used to determine amounts to

be recognized on company’s financial statement

• Funding valuation: used to determine contribution

requirements

• Both attempt to answer the same question: what is

the value / cost of benefits?

• Both are just estimates based on assumptions

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Why is Accounting Different than Funding?

• Accounting standards value benefits as corporate debt
• Creates difference in assumptions
• Funding considered financing procedure to systematically

accumulate assets so they are sufficient to pay benefits as they fall due

• Accounting places greater emphasis on allocating costs to

when benefits are earned, rather than when contributions are made

• Both ultimately recognize same cost, but allocation to each

year differs

PLAN OBLIGATION AND ASSETS (for accounting purposes)

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Accrued Benefit Obligation

• Represents value of future benefits earned by

employees prior to a particular date

• Calculated as present value of future benefit

payments

• Determined based on actuarial valuation for

accounting purposes

• Discount rate based on current market yields on

high quality corporate bonds

• Other assumptions are management’s best estimates

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Changes in the Accrued Benefit Obligation

Cdn GAAP Pension Plans NPPRB $000’s 2011 2011 Accrued benefit obligation at beginning of year 29,275 6,531 Current service cost 1,104 224 Employees’ contributions 23  Interest cost 1,554 346 Benefits paid (1,029) (214) Actuarial losses (gains) 889 (68) Accrued benefit obligation at measurement date 31,816 6,819

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Actuarial Gains and Losses

• Actuarial gains and losses arise due to:
• Actual experience differing from assumptions

(backward looking)

• Changes in assumptions (forward looking)

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Plan Assets

• Funds held in trust to provide benefits for

plan beneficiaries Trust Fund

Employer contributions Employee contributions Net investment return Benefit payments

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Changes in Plan Assets

Cdn GAAP Pension Plans NPPRB $000’s 2011 2011 Fair value of assets at beginning of year 21,879 1,122 Actual return on plan assets (486) (22) Employer contributions 2,260 420 Employees’ contributions 23  Benefits paid (1,029) (214) Fair value of assets at measurement date 22,647 1,306

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Ultimate Employer Cost of Benefits

 Employer cost of benefits reduced by employee contributions and net investment return

Employer contributions Employee contributions Net investment return Benefit payments Employer contributions Employee contributions Net investment return Benefit payments

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Contributions

• Registered Pension Plan contributions prescribed by

legislation

• No legislated contribution requirements for

Supplemental Pension Plan or NPPRB

• If benefits are not pre-funded, then funding is on “pay as

you go” basis (i.e. contributions = benefit payments)

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Registered Pension Plan Contributions

• Minimum and maximum funding rules prescribed by

legislation

• Contributions must be determined by actuary
• PNG policy is to contribute the minimum required amount
• Minimum required contributions:
• Current service contributions

› in respect of benefits earned by employees in current year

• Special contributions to amortize any deficits

› in respect of benefits earned in prior years

• Accrued Benefit Asset (Liability)
• Expense
• Canadian GAAP vs. US GAAP

OVERVIEW OF FINANCIAL DISCLOSURE FOR EMPLOYEE FUTURE BENEFIT PLANS

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Accrued Benefit Asset (Liability)

• Net asset or liability recognized on balance sheet
• Deferred recognition of certain amounts permitted
• Fiscal year-end date vs. measurement date

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Accrued Benefit Asset (Liability)

Cdn GAAP Pension Plans NPPRB $000’s 2011 2011 Plan assets at measurement date 22,647 1,306 Accrued benefit obligation at measurement date (31,816) (6,819) Surplus (deficit) (9,169) (5,513) Unamortized net actuarial losses (gains) 12,052 1,791 Unamortized transitional obligation (asset) (38) 863 Accrued benefit asset (liability) at measurement date 2,845 (2,859) Employer contributions betw. measurement date and EOY 574 357 Accrued benefit asset (liability) at EOY 3,419 (2,502)

* Unamortized past service costs n/a for PNG

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Unamortized Net Actuarial Losses (Gains)

Cdn GAAP Pension Plans NPPRB $000’s 2011 2011 Unamortized net actuarial losses (gains) at BOY 9,355 1,889 Loss (gain) on obligation during year 889 (68) Loss (gain) on assets during year 2,174 65 Amortization of net actuarial losses (366) (95) Unamortized net actuarial losses (gains) at measurement date 12,052 1,791

• Sum of cumulative losses (gains) not yet recognized
• Deferred recognition permitted based on assumption that

losses and gains expected to balance out over time

• Amortized prospectively using a “corridor approach”

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Unamortized Transitional Obligation (Asset)

• When new Canadian accounting standards (CICA 3461) took

effect in 2000 (2002 for NPPRB), many plan sponsors had not been accounting (properly) for their plans

• Instead of reflecting the “full balance sheet impact” of

switching to CICA 3461 immediately, plan sponsors were given the option to recognize this change over time

• Will eventually disappear once amortization period expires

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Unamortized Transitional Obligation (Asset)

• NPPRB transitional obligation in 2002: $2,093K
• Amortized over 17 years (2002 – 2018)
• Amount recognized each year: $2,093 ÷ 17 yrs = $123K

Cdn GAAP Pension Plans NPPRB $000’s 2011 2011 Unamortized transitional obligation (asset) at BOY (38) 986 Amortization of transitional (obligation) asset * (123) Unamortized transitional obligation (asset) at measurement date (38) 863

* Registered Pension Plan = (9); Supplemental Pension Plan = 9; Pension Plans Total = 0

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Expense

• Cost of benefits recognized for the year on the

income statement (based on accounting rules)

• Different than actual contributions remitted to

the plan (based on funding rules)

• Both recognize same ultimate cost, but there is

a difference in timing

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Expense Components

• Current service cost
• Value of benefits earned by employees in current year (net of

employee contributions)

• Interest cost
• Interest on accrued benefit obligation
• Expected return on plan assets
• Reduces the expense
• May be determined using “market-related” value of assets instead of

fair value of assets

• Amortization of past service costs
• Value of new benefits granted in respect of prior years (n/a for PNG)

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Expense Components (cont’d)

• Amortization of transitional obligation (asset)
• Amortization of net actuarial losses (gains)
• Amortization period = expected average remaining service lifetime of

active employees (i.e. average period to retirement)

• Amount subject to amortization based on “corridor approach”
• Corridor = 10% of max [ Assets, Accrued Benefit Obligation ]
• Net actuarial losses (gains) that fall outside the corridor are amortized
• Amount subject to amortization also adjusted if market-related value
• f assets is used

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Expense Components

Cdn GAAP Pension Plans NPPRB $000’s 2011 2011 Current service cost 1,104 224 Interest cost 1,554 346 Expected return on plan assets (1,688) (43) Amortization of transitional obligation (asset)  123 Amortization of net actuarial losses (gains) 366 95 Expense 1,336 745

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Accrued Benefit Asset (Liability) Reconciliation

Cdn GAAP Pension Plans NPPRB $000’s 2011 2011 Accrued benefit asset (liability) at prior measurement date 1,921 (2,534) Expense (1,336) (745) Employer contributions 2,260 420 Accrued benefit asset (liability) at current measurement date 2,845 (2,859)

• Accrued benefit asset (liability) is related to expense and

contributions as follows:  Accrued benefit asset (liability) also represents the cumulative difference between expense and contributions

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Expense to Balance Sheet Map

∑ (Expense) + ∑ Contributions + 0 = Asset/(Liability) Expense Employer Funding Employees’ Share Balance Sheet (Current Service Cost) (Interest Cost) (ABO) Return on Assets Employer Employee Contributions Contributions FV Assets Surplus(Deficit) (TO Amort) TO/(A) (PSC Amort) PSC Gain/(Loss) Amort (Gain)/Loss

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Canadian GAAP (CICA 3461) vs. US GAAP (ASC 715)

• No early measurement date under US GAAP
• Expense essentially the same
• Balance sheet reconciliation differs under US GAAP
• Actual surplus (deficit) recognized as net asset (liability)
• Unamortized amounts recognized in Accumulated Other

Comprehensive Income (AOCI)

• Transitional obligation (asset) amortized starting in

1989 for pension plans / 1995 for NPPRB

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Balance Sheet under Cdn GAAP vs. US GAAP

2011 Pension Plans Pension Plans $000’s Cdn GAAP US GAAP Plan assets at measurement date / EOY 22,647 23,762 Accrued benefit obligation at measurement date / EOY (31,816) (32,276) Surplus (deficit) (9,169) (8,514) Unamortized net actuarial losses (gains) 12,052 n/a Unamortized transitional obligation (asset) (38) n/a Accrued benefit asset (liability) at measurement date 2,845 (8,514) Employer contributions betw. measurement date and EOY 574 n/a Accrued benefit asset (liability) at EOY 3,419 (8,514) Accumulated other comprehensive income at EOY n/a 12,048

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Balance Sheet under Cdn GAAP vs. US GAAP

2011 NPPRB NPPRB $000’s Cdn GAAP US GAAP Plan assets at measurement date / EOY 1,306 1,716 Accrued benefit obligation at measurement date / EOY (6,819) (6,821) Surplus (deficit) (5,513) (5,105) Unamortized net actuarial losses (gains) 1,791 n/a Unamortized transitional obligation (asset) 863 n/a Accrued benefit asset (liability) at measurement date (2,859) (5,105) Employer contributions betw. measurement date and EOY 357 n/a Accrued benefit asset (liability) at EOY (2,502) (5,105) Accumulated other comprehensive income at EOY n/a 1,706

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Accrued Benefit Asset (Liability)

US GAAP Pension Plans NPPRB $000’s 2011 2011 Accrued benefit asset (liability) at BOY (6,114) (5,260) Expense (1,250) (730) Contributions 2,282 734 Net change in AOCI (3,432) 151 Accrued benefit asset (liability) at EOY (8,514) (5,105)

• The accrued liability asset (liability) is related to the expense,

contributions and AOCI as follows:

NPPRB UNRECOVERED HISTORICAL LIABILITY

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NPPRB Accounting for PNG

• Accounting standards provide rate regulated

entities with an exemption from certain accounting rules

• PNG historical expense recognition:
• Pay as you go method through 2003
• Partial accrual method from 2004 – 2010
• Full accrual method effective 2011

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NPPRB Expense Components

Pay as you go Partial accrual method Full accrual method Benefit payments Current service cost Current service cost Benefit payments Interest cost Expected return on assets Amortization of past service costs* Amortization of transitional

• bligation (asset)

Amortization of net actuarial losses (gains)

* n/a for NPPRB

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Comparison of Expense Recognized by PNG

• vs. Full Accrual Expense

Cdn GAAP ($000’s) Year 2002 2003 2004 . . . 2009 2010 Total BENEFIT EXPENSE – FULL ACCRUAL METHOD Current service cost 71 160 180 156 150 Interest cost 154 273 284 315 317 Expected return on assets    (30) (36) Amortization of transitional

• bligation (asset)

123 123 123 123 123 Amortization of net actuarial loss (gain)  94 100 15 1 Total 348 650 687 . . . 579 555 5,296 BENEFIT EXPENSE – PARTIAL ACCRUAL METHOD Current service cost 71 160 180 156 150 Benefit payments 72 101 192 233 243 Total 143 261 372 389 393 EXPENSE COMPARISON Method for PNG expense Pay as you go Pay as you go Partial accrual Partial accrual Partial accrual Expense recognized by PNG 72 101 372 . . . 389 393 2,797 Difference vs. full accrual expense 276 549 315 . . . 190 162 2,499

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QUESTIONS?

Thank You

Satinder Sidhu ssidhu@morneaushepell.com