Retirement Plans & Other Postretirement Benefits

12 Months Ended

Dec. 31, 2011

Retirement Plans and Other Postretirement Benefits [Abstract]

Retirement Plans and Other Postretirement Benefits

11.   Retirement Plans & Other Postretirement Benefits

At December 31, 2011, the Company maintains three qualified defined benefit pension plans, a nonqualified supplemental executive retirement plan (SERP), and three other postretirement benefit plans.  The defined benefit pension and other postretirement benefit plans, which cover eligible full-time regular employees, are primarily noncontributory.  The postretirement health care and life insurance plans are a combination of self-insured and fully insured plans.  The qualified pension plans and the SERP are aggregated under the heading "Pension Benefits."  Other postretirement benefit plans are aggregated under the heading "Other Benefits."

Net Periodic Benefit Costs

A summary of the components of net periodic benefit cost for the three years ended December 31, 2011 follows:

	Pension Benefits									Other Benefits
(In millions)	2011			2010			2009			2011			2010			2009
Service cost	$	6.9		$	6.3		$	6.3		$	0.5		$	0.5		$	0.5
Interest cost		15.9			15.9			15.8			4.3			4.6			4.4
Expected return on plan assets		(21.2	)		(18.4	)		(16.4	)		-			(0.4	)		(0.3	)
Amortization of prior service cost (benefit)		1.7			1.6			1.7			(0.8	)		(0.8	)		(0.8	)
Amortization of actuarial loss (gain)		3.8			3.2			2.2			0.6			0.5			0.4
Amortization of transitional obligation					-			-			1.1			1.2			1.1
Net periodic benefit cost	$	7.1		$	8.6		$	9.6		$	5.7		$	5.6		$	5.3

A portion of benefit costs are capitalized as Utility plant.  Costs capitalized in 2011, 2010, and 2009 are estimated at $3.9 million, $4.3 million, and $4.5 million, respectively.

The Company lowered the discount rate used to measure periodic cost from 6.0 percent in 2010 to 5.50 percent in 2011 due to lower benchmark interest rates that approximate the expected duration of the Company's benefit obligations.  For fiscal year 2012, the weighted average discount rate will be 4.82 percent for the defined benefit pension plans.  Over the periods presented other assumptions have also declined reflecting the lower interest rate environment.

The weighted averages of significant assumptions used to determine net periodic benefit costs follow:

	Pension Benefits									Other Benefits
	2011			2010			2009			2011			2010			2009
Discount rate		5.50	%		6.00	%		6.25	%		5.50	%		6.00	%		6.25	%
Rate of compensation increase		3.50	%		3.50	%		3.75	%		N/A			N/A			N/A
Expected return on plan assets		8.00	%		8.00	%		8.25	%		8.00	%		8.00	%		8.25	%
Expected increase in Consumer Price Index		N/A			N/A			N/A			3.00	%		3.00	%		3.50	%

Health care cost trend rate assumptions do not have a material effect on the service and interest cost components of benefit costs.  The Company's plans limit its exposure to increases in health care costs to annual changes in the Consumer Price Index (CPI).  Any increase in health care costs in excess of the CPI increase is the responsibility of the plan participants.

Benefit Obligations

A reconciliation of the Company's benefit obligations at December 31, 2011 and 2010 follows:

	Pension Benefits						Other Benefits
(In millions)	2011			2010			2011			2010
Benefit obligation, beginning of period	$	297.3		$	271.5		$	80.7		$	79.6
Service cost - benefits earned during the period		6.9			6.3			0.5			0.5
Interest cost on projected benefit obligation		15.9			15.9			4.3			4.6
Plan participants' contributions		-			-			1.9			1.7
Plan amendments		-			0.8			-			-
Actuarial loss (gain)		23.1			21.3			(0.5	)		1.2
Medicare subsidy receipts		-			-			1.0			0.5
Benefit payments		(14.0	)		(18.5	)		(8.2	)		(7.4	)
Benefit obligation, end of period	$	329.2		$	297.3		$	79.7		$	80.7

The accumulated benefit obligation for all defined benefit pension plans was $310.9 and $280.5 million at December 31, 2011 and 2010, respectively.

The benefit obligation as of December 31, 2011 and 2010 was calculated using the following weighted average assumptions:

	Pension Benefits						Other Benefits
	2011			2010			2011			2010
Discount rate		4.82	%		5.50	%		4.78	%		5.50	%
Rate of compensation increase		3.50	%		3.50	%		N/A			N/A
Expected increase in Consumer Price Index		N/A			N/A			2.75	%		3.00	%

To calculate the 2011 ending postretirement benefit obligation, medical claims costs in 2012 were assumed to be 8 percent higher than those incurred in 2011.  That trend was assumed to reach its ultimate trending increase of 5 percent by 2018 and remain level thereafter.  A one-percentage point change in assumed health care cost trend rates would have changed the benefit obligation by approximately $2.5 million.

Plan Assets

A reconciliation of the Company's plan assets at December 31, 2011 and 2010 follows:

	Pension Benefits						Other Benefits
(In millions)	2011			2010			2011			2010
Plan assets at fair value, beginning of period	$	237.2		$	211.1		$	3.1		$	4.0
Actual return on plan assets		2.1			26.8			0.1			0.3
Employer contributions		35.7			17.8			3.1			4.5
Plan participants' contributions		-			-			1.9			1.7
Benefit payments		(14.0	)		(18.5	)		(8.2	)		(7.4	)
Fair value of plan assets, end of period	$	261.0		$	237.2		$	-		$	3.1

The Company's overall investment strategy for its retirement plan trusts is to maintain investments in a diversified portfolio, comprised of primarily equity and fixed income investments, which are further diversified among various asset classes.  The diversification is designed to minimize the risk of large losses while maximizing total return within reasonable and prudent levels of risk.  The investment objectives specify a targeted investment allocation for the pension plans of 60 percent equities, 35 percent debt, and 5 percent for other investments, including real estate.  Both the equity and debt securities have a blend of domestic and international exposures.  Objectives do not target a specific return by asset class.  The portfolios' return is monitored in total.  Following is a description of the valuation methodologies used for trust assets measured at fair value.

Mutual Funds

The fair values of mutual funds are derived from quoted market prices or net asset values as these instruments have active markets (Level 1 inputs). 

Common Collective Trust Funds (CTF's)

The Company's plans have investments in trust funds similar to mutual funds in that they are created by pooling of funds from investors into a common trust and such funds are managed by a third party investment manager.  These trust funds typically give investors a wider range of investment options through this pooling of funds than that generally available to investors on an individual basis.  However, unlike mutual funds, these trusts are not publicly traded in an active market.  The fair values of these trusts are derived from Level 2 market inputs based on a daily calculated unit value as determined by the issuer.  This daily calculated value is based on the fair market value of the underlying investments.  These funds are primarily comprised of investments in equity and fixed income securities which represent approximately 52 percent and 40 percent, respectively, of their fair value as of December 31, 2011 and approximately 55 percent and 37 percent, respectively, as of December 31, 2010.  Equity securities within these funds are primarily valued using quoted market prices as these instruments have active markets.  From time to time, less liquid equity securities are valued using Level 2 inputs, such as bid prices or a closing price, as determined in good faith by the investment manager.  Fixed income securities are valued at the last available bid prices quoted by an independent pricing service.  When valuations are not readily available, fixed income securities are valued using primarily other Level 2 inputs as determined in good faith by the investment manager.

The fair value of these funds totals $128.2 million at December 31, 2011 and $110.4 million at December 31, 2010.  In relation to these investments, there are no unfunded commitments.  Also, the Plan can exchange shares with minimal restrictions.  However, in certain events, a restriction of up to 31 days may exist.

Guaranteed Annuity Contract

One of the Company's pension plans is party to a group annuity contract with John Hancock Life Insurance Company.  At December 31, 2011 and 2010, the estimate of undiscounted funds necessary to satisfy John Hancock's remaining obligation was $3.4 million and $3.1 million, respectively.  If funds retained by John Hancock are not sufficient to satisfy retirement payments due these retirees, the shortfall must be funded by the Company. The composite investment return, net of manager fees and other charges for the years ended December 31, 2011 and 2010 was 5.26 percent and 5.37 percent, respectively.  The Company values this illiquid investment using long-term interest rate and mortality assumptions, among others, and is therefore considered a Level 3 investment.  There is no unfunded commitment related to this investment.

The fair values of the Company's pension and other retirement plan assets at December 31, 2011 and December 31, 2010 by asset category and by fair value hierarchy are as follows:

	As of December 31, 2011
(In millions)	Level 1		Level 2		Level 3		Total
Domestic equities & equity funds	$	54.7	$	66.5	$	-	$	121.2
International equities & equity funds		28.6		-		-		28.6
Domestic bonds & bond funds		38.2		39.1		-		77.3
Inflation protected security fund		-		11.8		-		11.8
Real estate, commodities & other		7.5		10.8		3.8		22.1
Total Plan Investments	$	129.0	$	128.2	$	3.8	$	261.0

	As of December 31, 2010
(In millions)	Level 1		Level 2		Level 3		Total
Domestic equities & equity funds	$	54.6	$	60.8	$	-	$	115.4
International equities & equity funds		29.7		-		-		29.7
Domestic bonds & bond funds		35.3		31.3		-		66.6
Inflation protected security fund		-		9.2		-		9.2
Real estate, commodities & other		6.6		9.1		3.7		19.4
Total Plan Investments	$	126.2	$	110.4	$	3.7	$	240.3

A roll forward of the fair value of the guaranteed annuity contract calculated using Level 3 valuation assumptions follows:

(In millions)	2011			2010
Fair value, beginning of year	$	3.7		$	3.6
Unrealized gains related to    investments still held at reporting date		0.2			0.2
Purchases, sales and settlements, net		(0.1	)		(0.1	)
Fair value, end of year	$	3.8		$	3.7

Funded Status

The funded status of the plans as of December 31, 2011 and 2010 follows:

	Pension Benefits						Other Benefits
(In millions)	2011			2010			2011			2010
Qualified Plans
Benefit obligation, end of period	$	(314.7	)	$	(285.5	)	$	(79.7	)	$	(80.7	)
Fair value of plan assets, end of period		261.0			237.2			-			3.1
Funded Status of Qualified Plans, end of period		(53.7	)		(48.3	)		(79.7	)		(77.6	)
Benefit obligation of SERP Plan, end of period		(14.5	)		(11.8	)		-			-
Total funded status, end of period	$	(68.2	)	$	(60.1	)	$	(79.7	)	$	(77.6	)
Accrued liabilities	$	0.7		$	0.7		$	5.1		$	4.6
Deferred credits & other liabilities	$	67.5		$	59.4		$	74.6		$	73.0

Expected Cash Flows

In 2012, the Company expects to make contributions of approximately $15 million to its pension plan trusts.  In addition, the Company expects to make payments totaling approximately $0.7 million directly to SERP participants and approximately $5.1 million directly to those participating in other postretirement plans.

Estimated retiree pension benefit payments, including the SERP, projected to be required during the years following 2011 (in millions) are approximately $16.4 in 2012, $17.3 in 2013 $17.9 in 2014, $18.7 in 2015, $19.8 in 2016 and $125.2 in years 2017-2021.  Expected benefit payments projected to be required for postretirement benefits during the years following 2011 (in millions) are approximately $7.5 in 2012, $8.1 in 2013, $8.7 in 2014, $9.2 in 2015, and $9.8 in 2016 and $58.1 in years 2017-2021.

Prior Service Cost, Actuarial Gains and Losses, and Transition Obligation Effects

Following is a roll forward of prior service cost, actuarial gains and losses, and transition obligations.

(In millions)	Pensions						Other Benefits
	Prior Service Cost			Net Gain or Loss			Prior Service Cost			Net Gain or Loss			Transition Obligation
Balance January 1, 2009	$	9.5		$	90.9		$	(3.7	)	$	3.5		$	6.2
Amounts arising during the period		0.1			(20.2	)		0.1			6.6			(0.1	)
Reclassification to benefit costs		(1.7	)		(2.2	)		0.8			(0.4	)		(1.1	)
Balance December 31, 2009	$	7.9		$	68.5		$	(2.8	)	$	9.7		$	5.0
Amounts arising during the period		0.8			12.9			-			1.1			-
Reclassification to benefit costs		(1.6	)		(3.2	)		0.8			(0.5	)		(1.2	)
Balance December 31, 2010	$	7.1		$	78.2		$	(2.0	)	$	10.3		$	3.8
Amounts arising during the period		-			42.2			-			(0.6	)		-
Reclassification to benefit costs		(1.7	)		(3.8	)		0.8			(0.6	)		(1.1	)
Balance December 31, 2011	$	5.4		$	116.6		$	(1.2	)	$	9.1		$	2.7

Following is a reconciliation of the amounts in Accumulated other comprehensive income (AOCI) and Regulatory assets related to retirement plan obligations at December 31, 2011 and 2010:

(In millions)	2011						2010
	Pensions			Other Benefits			Pensions			Other Benefits
Prior service cost	$	5.4		$	(1.2	)	$	7.1		$	(2.0	)
Unamortized actuarial gain/(loss)		116.6			9.1			78.2			10.3
Transition obligation		-			2.7			-			3.8
		122.0			10.6			85.3			12.1
Less: Regulatory asset deferral		(115.9	)		(10.1	)		(81.0	)		(11.5	)
AOCI before taxes	$	6.1		$	0.5		$	4.3		$	0.6

Related to pension plans, $1.6 million of prior service cost and $6.8 million of actuarial gain/loss is expected to be amortized to cost in 2012.  Related to other benefits, $1.1 million of the transition obligation and $0.5 million of actuarial gain/loss is expected to be amortized to periodic cost in 2012, and $0.8 million of prior service cost is expected to reduce cost in 2012.

Multiemployer Benefit Plan

The Company, through its Infrastructure Services operating segment, participates in several industry wide multiemployer pension plans for its union employees which provide for monthly benefits based on length of service. Expense is recognized as payments are accrued for work performed or when withdrawal liabilities are probable and estimable.  Expense associated with multiemployer plans was $18.3 million for the year ended December 31, 2011 and includes results from Minnesota Limited and a small withdrawal liability from one plan.  Expense in 2010 and 2009 was $10.0 million and $8.8 million, respectively.  During 2011, the Company made contributions on behalf of employees that participate in over 260 unions.  The average contribution to each union was less than $0.1 million, and the largest contribution was $1.1 million.  Multiple unions can contribute to a single multiemployer plan.  The Company identified contributions to at least 17 plans in 2011 and total contributions to each plan were not significant.

Defined Contribution Plan

The Company also has defined contribution retirement savings plans that are qualified under sections 401(a) and 401(k) of the Internal Revenue Code and include an option to invest in Vectren common stock, among other alternatives.  During 2011, 2010 and 2009, the Company made contributions to these plans of $6.2 million, $6.6 million, and $4.6 million, respectively.