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Retirement Benefits
12 Months Ended
Dec. 31, 2012
RETIREMENT BENEFITS
RETIREMENT BENEFITS
Southern Company has a defined benefit, trusteed, pension plan covering substantially all employees. This qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In December 2012, certain of the traditional operating companies and other subsidiaries contributed $445 million to the qualified pension plan. No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2013. Southern Company also provides certain defined benefit pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, Southern Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The traditional operating companies fund related other postretirement trusts to the extent required by their respective regulatory commissions. For the year ending December 31, 2013, other postretirement trust contributions are expected to total approximately $28 million.
Actuarial Assumptions
The weighted average rates assumed in the actuarial calculations used to determine both the benefit obligations as of the measurement date and the net periodic costs for the pension and other postretirement benefit plans for the following year are presented below. Net periodic benefit costs were calculated in 2009 for the 2010 plan year using discount rates for the pension plans and the other postretirement benefit plans of 5.93% and 5.83%, respectively, and an annual salary increase of 4.18%.
 
 
2012
 
2011
 
2010
Discount rate:
 
 
 
 
 
Pension plans
4.26
%
 
4.98
%
 
5.52
%
Other postretirement benefit plans
4.05

 
4.88

 
5.40

Annual salary increase
3.59

 
3.84

 
3.84

Long-term return on plan assets:
 
 
 
 
 
Pension plans
8.20

 
8.45

 
8.45

Other postretirement benefit plans
7.29

 
7.39

 
7.40

 
 
 
 
 
 

The Company estimates the expected rate of return on pension plan and other postretirement benefit plan assets using a financial model to project the expected return on each current investment portfolio. The analysis projects an expected rate of return on each of seven different asset classes in order to arrive at the expected return on the entire portfolio relying on each trust's target asset allocation and reasonable capital market assumptions. The financial model is based on four key inputs: anticipated returns by asset class (based in part on historical returns), each trust's target asset allocation, an anticipated inflation rate, and the projected impact of a periodic rebalancing of each trust's portfolio.
An additional assumption used in measuring the accumulated other postretirement benefit obligations (APBO) is the weighted average medical care cost trend rate. The weighted average medical care cost trend rates used in measuring the APBO as of December 31, 2012 were as follows:
 
 
Initial Cost    
Trend Rate    
 
Ultimate       
Cost Trend       
Rate       
 
Year That  
Ultimate  
Rate Is  
Reached  
Pre-65
8.00%
 
5.00%
 
2020
Post-65 medical
6.00
 
5.00
 
2020
Post-65 prescription
6.00
 
5.00
 
2020

An annual increase or decrease in the assumed medical care cost trend rate of 1% would affect the APBO and the service and interest cost components at December 31, 2012 as follows:
 
 
1 Percent
Increase
 
1 Percent  
Decrease  
 
(in millions)
Benefit obligation
$
126

 
$
(106
)
Service and interest costs
7

 
(6
)


Pension Plans
The total accumulated benefit obligation for the pension plans was $8.5 billion at December 31, 2012 and $7.4 billion at December 31, 2011. Changes in the projected benefit obligations and the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
(in millions)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
8,079

 
$
7,223

Service cost
198

 
184

Interest cost
393

 
389

Benefits paid
(336
)
 
(324
)
Actuarial loss
968

 
607

Balance at end of year
9,302

 
8,079

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
6,800

 
6,834

Actual return (loss) on plan assets
1,010

 
256

Employer contributions
479

 
34

Benefits paid
(336
)
 
(324
)
Fair value of plan assets at end of year
7,953

 
6,800

Accrued liability
$
(1,349
)
 
$
(1,279
)


At December 31, 2012, the projected benefit obligations for the qualified and non-qualified pension plans were $8.7 billion and $582 million, respectively. All pension plan assets are related to the qualified pension plan.
Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's pension plans consist of the following:
 
 
2012
 
2011
 
(in millions)
Other regulatory assets, deferred
$
3,013

 
$
2,614

Other current liabilities
(37
)
 
(34
)
Employee benefit obligations
(1,312
)
 
(1,245
)
Accumulated OCI
125

 
109


Presented below are the amounts included in accumulated OCI and regulatory assets at December 31, 2012 and 2011 related to the defined benefit pension plans that had not yet been recognized in net periodic pension cost along with the estimated amortization of such amounts for 2013.
 
 
Prior Service Cost
 
Net (Gain) Loss  
 
(in millions)
Balance at December 31, 2012:
 
 
 
Accumulated OCI
$
7

 
$
118

Regulatory assets
100

 
2,913

Total
$
107

 
$
3,031

Balance at December 31, 2011:
 
 
 
Accumulated OCI
$
7

 
$
102

Regulatory assets
128

 
2,486

Total
$
135

 
$
2,588

Estimated amortization in net periodic pension cost in 2013:
 
 
 
Accumulated OCI
$
1

 
$
8

Regulatory assets
26

 
192

Total
$
27

 
$
200


 
The components of OCI and the changes in the balance of regulatory assets related to the defined benefit pension plans for the years ended December 31, 2012 and 2011 are presented in the following table:
 
Accumulated
OCI
 
Regulatory    
Assets    
 
(in millions)
Balance at December 31, 2010
$
68

 
$
1,749

Net (gain) loss
43

 
915

Change in prior service costs

 
1

Reclassification adjustments:
 
 
 
Amortization of prior service costs
(1
)
 
(31
)
Amortization of net gain (loss)
(1
)
 
(20
)
Total reclassification adjustments
(2
)
 
(51
)
Total change
41

 
865

Balance at December 31, 2011
$
109

 
$
2,614

Net (gain) loss
21

 
519

Change in prior service costs

 

Reclassification adjustments:
 
 
 
Amortization of prior service costs
(1
)
 
(29
)
Amortization of net gain (loss)
(4
)
 
(91
)
Total reclassification adjustments
(5
)
 
(120
)
Total change
16

 
399

Balance at December 31, 2012
$
125

 
$
3,013



Components of net periodic pension cost were as follows:
 
 
2012
 
2011
 
2010
 
(in millions)
Service cost
$
198

 
$
184

 
$
172

Interest cost
393

 
389

 
391

Expected return on plan assets
(581
)
 
(607
)
 
(552
)
Recognized net loss
95

 
21

 
10

Net amortization
30

 
32

 
33

Net periodic pension cost
$
135

 
$
19

 
$
54



Net periodic pension cost is the sum of service cost, interest cost, and other costs netted against the expected return on plan assets. The expected return on plan assets is determined by multiplying the expected rate of return on plan assets and the market-related value of plan assets. In determining the market-related value of plan assets, the Company has elected to amortize changes in the market value of all plan assets over five years rather than recognize the changes immediately. As a result, the accounting value of plan assets that is used to calculate the expected return on plan assets differs from the current fair value of the plan assets. Future benefit payments reflect expected future service and are estimated based on assumptions used to measure the projected benefit obligation for the pension plans. At December 31, 2012, estimated benefit payments were as follows:
 
 
Benefit Payments  
 
(in millions)  
2013
$
376

2014
397

2015
419

2016
440

2017
465

2018 to 2022
2,632


 
Other Postretirement Benefits
Changes in the APBO and in the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
(in millions)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
1,787

 
$
1,752

Service cost
21

 
21

Interest cost
85

 
92

Benefits paid
(99
)
 
(103
)
Actuarial loss
71

 
29

Plan amendments

 
(12
)
Retiree drug subsidy
7

 
8

Balance at end of year
1,872

 
1,787

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
765

 
802

Actual return on plan assets
93

 
4

Employer contributions
55

 
54

Benefits paid
(92
)
 
(95
)
Fair value of plan assets at end of year
821

 
765

Accrued liability
$
(1,051
)
 
$
(1,022
)


Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's other postretirement benefit plans consist of the following:
 
 
2012
 
2011
 
(in millions)
Other regulatory assets, deferred
$
360

 
$
345

Other current liabilities
(3
)
 
(4
)
Employee benefit obligations
(1,048
)
 
(1,018
)
Accumulated OCI
7

 
6



Presented below are the amounts included in accumulated OCI and regulatory assets at December 31, 2012 and 2011 related to the other postretirement benefit plans that had not yet been recognized in net periodic other postretirement benefit cost along with the estimated amortization of such amounts for 2013.
 
 
Prior Service
Cost
 
Net (Gain)
Loss
 
Transition
Obligation
 
 
 
(in millions)
 
 
Balance at December 31, 2012:
 
 
 
 
 
Accumulated OCI
$

 
$
7

 
$

Regulatory assets
13

 
342

 
5

Total
$
13

 
$
349

 
$
5

Balance at December 31, 2011:
 
 
 
 
 
Accumulated OCI
$

 
$
6

 
$

Regulatory assets
17

 
314

 
14

Total
$
17

 
$
320

 
$
14

Estimated amortization as net periodic postretirement benefit cost in 2013:
 
 
 
 
 
Accumulated OCI
$

 
$

 
$

Regulatory assets
4

 
12

 
5

Total
$
4

 
$
12

 
$
5


 
The components of OCI, along with the changes in the balance of regulatory assets, related to the other postretirement benefit plans for the plan years ended December 31, 2012 and 2011 are presented in the following table:
 
 
Accumulated
OCI
 
    Regulatory    
    Assets    
 
(in millions)
Balance at December 31, 2010
$
3

 
$
292

Net (gain) loss
3

 
84

Change in prior service costs/transition obligation

 
(12
)
Reclassification adjustments:
 
 
 
Amortization of transition obligation

 
(10
)
Amortization of prior service costs

 
(5
)
Amortization of net gain (loss)

 
(4
)
Total reclassification adjustments

 
(19
)
Total change
3

 
53

Balance at December 31, 2011
$
6

 
$
345

Net (gain) loss
1

 
35

Change in prior service costs/transition obligation

 

Reclassification adjustments:
 
 
 
Amortization of transition obligation

 
(10
)
Amortization of prior service costs

 
(4
)
Amortization of net gain (loss)

 
(6
)
Total reclassification adjustments

 
(20
)
Total change
1

 
15

Balance at December 31, 2012
$
7

 
$
360



Components of the other postretirement benefit plans' net periodic cost were as follows:
 
 
2012
 
2011
 
2010
 
(in millions)      
Service cost
$
21

 
$
21

 
$
25

Interest cost
85

 
92

 
100

Expected return on plan assets
(60
)
 
(64
)
 
(63
)
Net amortization
20

 
20

 
20

Net postretirement cost
$
66

 
$
69

 
$
82


Future benefit payments, including prescription drug benefits, reflect expected future service and are estimated based on assumptions used to measure the APBO for the other postretirement benefit plans. Estimated benefit payments are reduced by drug subsidy receipts expected as a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 as follows:
 
 
Benefit Payments
 
Subsidy Receipts
 
Total  
 
(in millions)
2013
$
110

 
$
(11
)
 
$
99

2014
116

 
(12
)
 
104

2015
122

 
(13
)
 
109

2016
127

 
(14
)
 
113

2017
130

 
(16
)
 
114

2018 to 2022
661

 
(88
)
 
573


 
Benefit Plan Assets
Pension plan and other postretirement benefit plan assets are managed and invested in accordance with all applicable requirements, including ERISA and the Internal Revenue Code of 1986, as amended (Internal Revenue Code). The Company's investment policies for both the pension plan and the other postretirement benefit plans cover a diversified mix of assets, including equity and fixed income securities, real estate, and private equity. Derivative instruments are used primarily to gain efficient exposure to the various asset classes and as hedging tools. The Company minimizes the risk of large losses primarily through diversification but also monitors and manages other aspects of risk.
The composition of the Company's pension plan and other postretirement benefit plan assets as of December 31, 2012 and 2011, along with the targeted mix of assets for each plan, is presented below:
 
 
Target  
 
2012
 
2011
Pension plan assets:
 
 
 
 
 
Domestic equity
26
%
 
28
%
 
29
%
International equity
25

 
24

 
25

Fixed income
23

 
27

 
23

Special situations
3

 
1

 

Real estate investments
14

 
13

 
14

Private equity
9

 
7

 
9

Total
100
%
 
100
%
 
100
%
Other postretirement benefit plan assets:
 
 
 
 
 
Domestic equity
40
%
 
38
%
 
39
%
International equity
21

 
24

 
18

Domestic fixed income
25

 
28

 
31

Global fixed income
4

 
3

 
4

Special situations
1

 

 

Real estate investments
6

 
5

 
5

Private equity
3

 
2

 
3

Total
100
%
 
100
%
 
100
%


The investment strategy for plan assets related to the Company's qualified pension plan is to be broadly diversified across major asset classes. The asset allocation is established after consideration of various factors that affect the assets and liabilities of the pension plan including, but not limited to, historical and expected returns, volatility, correlations of asset classes, the current level of assets and liabilities, and the assumed growth in assets and liabilities. Because a significant portion of the liability of the pension plan is long-term in nature, the assets are invested consistent with long-term investment expectations for return and risk. To manage the actual asset class exposures relative to the target asset allocation, the Company employs a formal rebalancing program. As additional risk management, external investment managers and service providers are subject to written guidelines to ensure appropriate and prudent investment practices.
Investment Strategies
Detailed below is a description of the investment strategies for each major asset category for the pension and other postretirement benefit plans disclosed above:
Domestic equity. A mix of large and small capitalization stocks with generally an equal distribution of value and growth attributes, managed both actively and through passive index approaches.
International equity. A mix of growth stocks and value stocks with both developed and emerging market exposure, managed both actively and through passive index approaches.
Fixed income. A mix of domestic and international bonds.
Trust-owned life insurance (TOLI). Investments of the Company's taxable trusts aimed at minimizing the impact of taxes on the portfolio.
Special situations. Investments in opportunistic strategies with the objective of diversifying and enhancing returns and exploiting short-term inefficiencies as well as investments in promising new strategies of a longer-term nature.
Real estate investments. Investments in traditional private market, equity-oriented investments in real properties (indirectly through pooled funds or partnerships) and in publicly traded real estate securities.
Private equity. Investments in private partnerships that invest in private or public securities typically through privately-negotiated and/or structured transactions, including leveraged buyouts, venture capital, and distressed debt.
Benefit Plan Asset Fair Values
Following are the fair value measurements for the pension plan and the other postretirement benefit plan assets as of December 31, 2012 and 2011. The fair values presented are prepared in accordance with GAAP. For purposes of determining the fair value of the pension plan and other postretirement benefit plan assets and the appropriate level designation, management relies on information provided by the plan's trustee. This information is reviewed and evaluated by management with changes made to the trustee information as appropriate.
Valuation methods of the primary fair value measurements disclosed in the following tables are as follows:
Investments in equity securities: Investments in equity securities such as common stocks, American depositary receipts, and real estate investment trusts that trade on a public exchange are classified as Level 1 investments and are valued at the closing price in the active market. Equity investments with unpublished prices (i.e. pooled funds) are valued as Level 2, when the underlying holdings used to value the investment are comprised of Level 1 or Level 2 equity securities.
Investments in fixed income securities: Investments in fixed income securities are generally classified as Level 2 investments and are valued based on prices reported in the market place. Additionally, the value of fixed income securities takes into consideration certain items such as broker quotes, spreads, yield curves, interest rates, and discount rates that apply to the term of a specific instrument.
Investments in TOLI: Investments in TOLI policies are classified as Level 2 investments and are valued based on the underlying investments held in the policy's separate account. The underlying assets are equity and fixed income pooled funds that are comprised of Level 1 and Level 2 securities.
Investments in private equity and real estate: Investments in private equity and real estate are generally classified as Level 3 as the underlying assets typically do not have observable inputs. The fund manager values the assets using various inputs and techniques depending on the nature of the underlying investments. In the case of private equity, techniques may include purchase multiples for comparable transactions, comparable public company trading multiples, and discounted cash flow analysis. Real estate managers generally use prevailing market capitalization rates, recent sales of comparable investments, and independent third-party appraisals to value underlying real estate investments. The fair value of partnerships is determined by aggregating the value of the underlying assets.

The fair values of pension plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
  Unobservable  
Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total 
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
1,163

 
$
670

 
$

 
$
1,833

International equity*
912

 
979

 

 
1,891

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
516

 

 
516

Mortgage- and asset-backed securities

 
127

 

 
127

Corporate bonds

 
876

 
3

 
879

Pooled funds

 
399

 

 
399

Cash equivalents and other
5

 
548

 

 
553

Real estate investments
258

 

 
841

 
1,099

Private equity

 

 
593

 
593

Total
$
2,338

 
$
4,115

 
$
1,437

 
$
7,890

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
  Unobservable  
Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total 
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
1,155

 
$
533

 
$

 
$
1,688

International equity*
1,187

 
340

 

 
1,527

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
433

 

 
433

Mortgage- and asset-backed securities

 
135

 

 
135

Corporate bonds

 
832

 
3

 
835

Pooled funds

 
380

 

 
380

Cash equivalents and other
1

 
139

 

 
140

Real estate investments
220

 

 
782

 
1,002

Private equity

 

 
582

 
582

Total
$
2,563

 
$
2,792

 
$
1,367

 
$
6,722


*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.
 
Changes in the fair value measurement of the Level 3 items in the pension plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
Real Estate Investments  
 
Private Equity 
 
Real Estate Investments  
 
Private Equity  
 
(in millions)
Beginning balance
$
782

 
$
582

 
$
674

 
$
638

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
56

 
1

 
72

 
(12
)
Related to investments sold during the year
3

 
41

 
20

 
47

Total return on investments
59

 
42

 
92

 
35

Purchases, sales, and settlements

 
(31
)
 
16

 
(91
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
841

 
$
593

 
$
782

 
$
582

The fair values of other postretirement benefit plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
  Unobservable  
Inputs
 
Total 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
140

 
$
43

 
$

 
$
183

International equity*
33

 
75

 

 
108

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
24

 

 
24

Mortgage- and asset-backed securities

 
4

 

 
4

Corporate bonds

 
31

 

 
31

Pooled funds

 
42

 

 
42

Cash equivalents and other

 
44

 

 
44

Trust-owned life insurance

 
320

 

 
320

Real estate investments
10

 

 
30

 
40

Private equity

 

 
21

 
21

Total
$
183

 
$
583

 
$
51

 
$
817

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
  Unobservable  
Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total 
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
156

 
$
38

 
$

 
$
194

International equity*
45

 
39

 

 
84

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
24

 

 
24

Mortgage- and asset-backed securities

 
5

 

 
5

Corporate bonds

 
32

 

 
32

Pooled funds

 
48

 

 
48

Cash equivalents and other

 
46

 

 
46

Trust-owned life insurance

 
291

 

 
291

Real estate investments
9

 

 
30

 
39

Private equity

 

 
23

 
23

Total
$
210

 
$
523

 
$
53

 
$
786


*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.
Changes in the fair value measurement of the Level 3 items in the other postretirement benefit plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
Real Estate Investments  
 
Private Equity 
 
Real Estate Investments  
 
Private Equity 
 
(in millions)
Beginning balance
$
30

 
$
23

 
$
26

 
$
23

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end

 

 
3

 

Related to investments sold during the year

 
1

 
1

 
2

Total return on investments

 
1

 
4

 
2

Purchases, sales, and settlements

 
(3
)
 

 
(2
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
30

 
$
21

 
$
30

 
$
23

Employee Savings Plan
Southern Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides an 85% matching contribution on up to 6% of an employee's base salary. Total matching contributions made to the plan for 2012, 2011, and 2010 were $82 million, $78 million, and $76 million, respectively.
Alabama Power [Member]
 
RETIREMENT BENEFITS
RETIREMENT BENEFITS
The Company has a defined benefit, trusteed, pension plan covering substantially all employees. This qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No contributions to the qualified pension plan were made for the year ended December 31, 2012. No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2013. The Company also provides certain defined benefit pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, the Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The Company funds its other postretirement trusts to the extent required by the Alabama PSC and the FERC. For the year ending December 31, 2013, other postretirement trust contributions are expected to total approximately $4 million.
Actuarial Assumptions
The weighted average rates assumed in the actuarial calculations used to determine both the benefit obligations as of the measurement date and the net periodic costs for the pension and other postretirement benefit plans for the following year are presented below. Net periodic benefit costs were calculated in 2009 for the 2010 plan year using discount rates for the pension plans and the other postretirement benefit plans of 5.93% and 5.84%, respectively, and an annual salary increase of 4.18%.
 
 
2012

 
2011

 
2010

Discount rate:
 
 
 
 
 
Pension plans
4.27
%
 
4.98
%
 
5.52
%
Other postretirement benefit plans
4.06

 
4.88

 
5.41

Annual salary increase
3.59

 
3.84

 
3.84

Long-term return on plan assets:
 
 
 
 
 
Pension plans
8.20

 
8.45

 
8.45

Other postretirement benefit plans
7.19

 
7.39

 
7.43


The Company estimates the expected rate of return on pension plan and other postretirement benefit plan assets using a financial model to project the expected return on each current investment portfolio. The analysis projects an expected rate of return on each of seven different asset classes in order to arrive at the expected return on the entire portfolio relying on each trust's target asset allocation and reasonable capital market assumptions. The financial model is based on four key inputs: anticipated returns by asset class (based in part on historical returns), each trust's target asset allocation, an anticipated inflation rate, and the projected impact of a periodic rebalancing of each trust's portfolio.
An additional assumption used in measuring the accumulated other postretirement benefit obligations (APBO) is the weighted average medical care cost trend rate. The weighted average medical care cost trend rates used in measuring the APBO as of December 31, 2012 were as follows:
 
 
Initial Cost Trend Rate
 
Ultimate
Cost Trend
Rate
 
   Year That   
Ultimate Rate
Is Reached
Pre-65
8.00%
 
5.00%
 
2020
Post-65 medical
6.00
 
5.00
 
2020
Post-65 prescription
6.00
 
5.00
 
2020

An annual increase or decrease in the assumed medical care cost trend rate of 1% would affect the APBO and the service and interest cost components at December 31, 2012 as follows:
 
 
1 Percent
Increase
 
    1 Percent    
Decrease
 
(in millions)
Benefit obligation
$
32

 
$
(27
)
Service and interest costs
2

 
(1
)

Pension Plans
The total accumulated benefit obligation for the pension plans was $2.0 billion at December 31, 2012 and $1.8 billion at December 31, 2011. Changes in the projected benefit obligations and the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
 
2012

 
2011

 
(in millions)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
1,932

 
$
1,779

Service cost
44

 
43

Interest cost
94

 
96

Benefits paid
(90
)
 
(88
)
Actuarial loss
238

 
102

Balance at end of year
2,218

 
1,932

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
1,885

 
1,933

Actual return on plan assets
274

 
32

Employer contributions
8

 
8

Benefits paid
(90
)
 
(88
)
Fair value of plan assets at end of year
2,077

 
1,885

Accrued liability
$
(141
)
 
$
(47
)

 
At December 31, 2012, the projected benefit obligations for the qualified and non-qualified pension plans were $2.1 billion and $121 million, respectively. All pension plan assets are related to the qualified pension plan.
Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's pension plans consist of the following:
 
2012

 
2011

 
(in millions)      
Prepaid pension costs
$

 
$
59

Other regulatory assets, deferred
822

 
727

Other current liabilities
(8
)
 
(7
)
Employee benefit obligations
(133
)
 
(99
)

Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the defined benefit pension plans that had not yet been recognized in net periodic pension cost along with the estimated amortization of such amounts for 2013.
 
2012
 
2011
 
Estimated    
Amortization    
in 2013    
 
 
 
(in millions)
 
 
Prior service cost
$
26

 
$
33

 
$
7

Net (gain) loss
796

 
694

 
52

Other regulatory assets, deferred
$
822

 
$
727

 
 

The changes in the balance of regulatory assets related to the defined benefit pension plans for the years ended December 31, 2012 and 2011 are presented in the following table:
 
Regulatory    
Assets    
 
(in millions)
Balance at December 31, 2010
$
497

Net (gain) loss
243

Change in prior service costs

Reclassification adjustments:
 
Amortization of prior service costs
(9
)
Amortization of net gain (loss)
(4
)
Total reclassification adjustments
(13
)
Total change
230

 
 
Balance at December 31, 2011
$
727

Net (gain) loss
125

Change in prior service costs

Reclassification adjustments:
 
Amortization of prior service costs
(7
)
Amortization of net gain (loss)
(23
)
Total reclassification adjustments
(30
)
Total change
95

Balance at December 31, 2012
$
822


 
Components of net periodic pension cost (income) were as follows:
 
 
2012
 
2011
 
2010
 
(in millions)
Service cost
$
44

 
$
43

 
$
41

Interest cost
94

 
96

 
97

Expected return on plan assets
(162
)
 
(173
)
 
(168
)
Recognized net (gain) loss
23

 
4

 
2

Net amortization
7

 
9

 
9

Net periodic pension cost (income)
$
6

 
$
(21
)
 
$
(19
)

Net periodic pension cost (income) is the sum of service cost, interest cost, and other costs netted against the expected return on plan assets. The expected return on plan assets is determined by multiplying the expected rate of return on plan assets and the market-related value of plan assets. In determining the market-related value of plan assets, the Company has elected to amortize changes in the market value of all plan assets over five years rather than recognize the changes immediately. As a result, the accounting value of plan assets that is used to calculate the expected return on plan assets differs from the current fair value of the plan assets.
Future benefit payments reflect expected future service and are estimated based on assumptions used to measure the projected benefit obligation for the pension plans. At December 31, 2012, estimated benefit payments were as follows:
 
 
Benefit Payments
 
(in millions)
2013
$
99

2014
104

2015
108

2016
112

2017
117

2018 to 2022
637


Other Postretirement Benefits
Changes in the APBO and in the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
(in millions)            
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
470

 
$
454

Service cost
5

 
5

Interest cost
22

 
24

Benefits paid
(24
)
 
(27
)
Actuarial loss
15

 
11

Plan amendments

 

Retiree drug subsidy
2

 
3

Balance at end of year
490

 
470

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
315

 
323

Actual return on plan assets
39

 
5

Employer contributions
11

 
11

Benefits paid
(22
)
 
(24
)
Fair value of plan assets at end of year
343

 
315

Accrued liability
$
(147
)
 
$
(155
)

 
Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's other postretirement benefit plans consist of the following:
 
 
2012
 
2011
 
(in millions)
Regulatory assets
$
89

 
$
96

Employee benefit obligations
(147
)
 
(155
)

Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the other postretirement benefit plans that had not yet been recognized in net periodic other postretirement benefit cost along with the estimated amortization of such amounts for 2013.
 
 
2012
 
2011
 
Estimated
Amortization
in 2013
 
(in millions)                
Prior service cost
$
22

 
$
26

 
$
4

Net (gain) loss
67

 
68

 
2

Transition obligation

 
2

 

Regulatory assets
$
89

 
$
96

 
 

The changes in the balance of regulatory assets related to the other postretirement benefit plans for the plan years ended December 31, 2012 and 2011 are presented in the following table:
 
 
Regulatory
Assets  
 
(in millions)
Balance at December 31, 2010
$
72

Net (gain) loss
31

Change in prior service costs/transition obligation

Reclassification adjustments:
 
Amortization of transition obligation
(3
)
Amortization of prior service costs
(4
)
Amortization of net gain (loss)

Total reclassification adjustments
(7
)
Total change
24

Balance at December 31, 2011
$
96

Net (gain) loss
(1
)
Change in prior service costs/transition obligation

Reclassification adjustments:
 
Amortization of transition obligation
(2
)
Amortization of prior service costs
(4
)
Amortization of net gain (loss)

Total reclassification adjustments
(6
)
Total change
(7
)
Balance at December 31, 2012
$
89


 
Components of the other postretirement benefit plans' net periodic cost were as follows:
 
 
2012
 
2011
 
2010
 
(in millions)
Service cost
$
5

 
$
5

 
$
6

Interest cost
22

 
24

 
26

Expected return on plan assets
(23
)
 
(25
)
 
(25
)
Net amortization
6

 
7

 
7

Net postretirement cost
$
10

 
$
11

 
$
14


Future benefit payments, including prescription drug benefits, reflect expected future service and are estimated based on assumptions used to measure the APBO for the other postretirement benefit plans. Estimated benefit payments are reduced by drug subsidy receipts expected as a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 as follows:
 
 
Benefit Payments
 
Subsidy Receipts
 
Total        
 
(in millions)
2013
$
30

 
$
(3
)
 
$
27

2014
32

 
(4
)
 
28

2015
33

 
(4
)
 
29

2016
34

 
(4
)
 
30

2017
35

 
(5
)
 
30

2018 to 2022
176

 
(26
)
 
150


Benefit Plan Assets
Pension plan and other postretirement benefit plan assets are managed and invested in accordance with all applicable requirements, including ERISA and the Internal Revenue Code of 1986, as amended (Internal Revenue Code). The Company's investment policies for both the pension plan and the other postretirement benefit plans cover a diversified mix of assets, including equity and fixed income securities, real estate, and private equity. Derivative instruments are used primarily to gain efficient exposure to the various asset classes and as hedging tools. The Company minimizes the risk of large losses primarily through diversification but also monitors and manages other aspects of risk.
The composition of the Company's pension plan and other postretirement benefit plan assets as of December 31, 2012 and 2011, along with the targeted mix of assets for each plan, is presented below:
 
 
Target
 
2012
 
2011
Pension plan assets:
 
 
 
 
 
Domestic equity
26
%
 
28
%
 
29
%
International equity
25

 
24

 
25

Fixed income
23

 
27

 
23

Special situations
3

 
1

 

Real estate investments
14

 
13

 
14

Private equity
9

 
7

 
9

Total
100
%
 
100
%
 
100
%
Other postretirement benefit plan assets:
 
 
 
 
 
Domestic equity
44
%
 
46
%
 
41
%
International equity
20

 
20

 
14

Domestic fixed income
24

 
28

 
38

Special situations
1

 

 

Real estate investments
8

 
4

 
4

Private equity
3

 
2

 
3

Total
100
%
 
100
%
 
100
%

 
The investment strategy for plan assets related to the Company's qualified pension plan is to be broadly diversified across major asset classes. The asset allocation is established after consideration of various factors that affect the assets and liabilities of the pension plan including, but not limited to, historical and expected returns, volatility, correlations of asset classes, the current level of assets and liabilities, and the assumed growth in assets and liabilities. Because a significant portion of the liability of the pension plan is long-term in nature, the assets are invested consistent with long-term investment expectations for return and risk. To manage the actual asset class exposures relative to the target asset allocation, the Company employs a formal rebalancing program. As additional risk management, external investment managers and service providers are subject to written guidelines to ensure appropriate and prudent investment practices.
Investment Strategies
Detailed below is a description of the investment strategies for each major asset category for the pension and other postretirement benefit plans disclosed above:
Domestic equity. A mix of large and small capitalization stocks with generally an equal distribution of value and growth attributes, managed both actively and through passive index approaches.
International equity. A mix of growth stocks and value stocks with both developed and emerging market exposure, managed both actively and through passive index approaches.
Fixed income. A mix of domestic and international bonds.
Trust-owned life insurance (TOLI). Investments of the Company's taxable trusts aimed at minimizing the impact of taxes on the portfolio.
Special situations. Investments in opportunistic strategies with the objective of diversifying and enhancing returns and exploiting short-term inefficiencies as well as investments in promising new strategies of a longer-term nature.
Real estate investments. Investments in traditional private market, equity-oriented investments in real properties (indirectly through pooled funds or partnerships) and in publicly traded real estate securities.
Private equity. Investments in private partnerships that invest in private or public securities typically through privately-negotiated and/or structured transactions, including leveraged buyouts, venture capital, and distressed debt.
Benefit Plan Asset Fair Values
Following are the fair value measurements for the pension plan and the other postretirement benefit plan assets as of December 31, 2012 and 2011. The fair values presented are prepared in accordance with GAAP. For purposes of determining the fair value of the pension plan and other postretirement benefit plan assets and the appropriate level designation, management relies on information provided by the plan's trustee. This information is reviewed and evaluated by management with changes made to the trustee information as appropriate.
Valuation methods of the primary fair value measurements disclosed in the following tables are as follows:
Investments in equity securities: Investments in equity securities such as common stocks, American depositary receipts, and real estate investment trusts that trade on a public exchange are classified as Level 1 investments and are valued at the closing price in the active market. Equity investments with unpublished prices (i.e. pooled funds) are valued as Level 2, when the underlying holdings used to value the investment are comprised of Level 1 or Level 2 equity securities.
Investments in fixed income securities: Investments in fixed income securities are generally classified as Level 2 investments and are valued based on prices reported in the market place. Additionally, the value of fixed income securities takes into consideration certain items such as broker quotes, spreads, yield curves, interest rates, and discount rates that apply to the term of a specific instrument.
Investments in TOLI: Investments in TOLI policies are classified as Level 2 investments and are valued based on the underlying investments held in the policy's separate account. The underlying assets are equity and fixed income pooled funds that are comprised of Level 1 and Level 2 securities.
Investments in private equity and real estate: Investments in private equity and real estate are generally classified as Level 3 as the underlying assets typically do not have observable inputs. The fund manager values the assets using various inputs and techniques depending on the nature of the underlying investments. In the case of private equity, techniques may include purchase multiples for comparable transactions, comparable public company trading multiples, and discounted cash flow analysis. Real estate managers generally use prevailing market capitalization rates, recent sales of comparable investments, and independent third-party appraisals to value underlying real estate investments. The fair value of partnerships is determined by aggregating the value of the underlying assets.
The fair values of pension plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
 (Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)    
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
304

 
$
175

 
$

 
$
479

International equity*
238

 
256

 

 
494

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
135

 

 
135

Mortgage- and asset-backed securities

 
33

 

 
33

Corporate bonds

 
230

 
1

 
231

Pooled funds

 
104

 

 
104

Cash equivalents and other
1

 
143

 

 
144

Real estate investments
67

 

 
220

 
287

Private equity

 

 
155

 
155

Total
$
610

 
$
1,076

 
$
376

 
$
2,062

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.


 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
 (Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)    
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
320

 
$
148

 
$

 
$
468

International equity*
329

 
94

 

 
423

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
120

 

 
120

Mortgage- and asset-backed securities

 
37

 

 
37

Corporate bonds

 
232

 
1

 
233

Pooled funds

 
105

 

 
105

Cash equivalents and other

 
39

 

 
39

Real estate investments
61

 

 
217

 
278

Private equity

 

 
161

 
161

Total
$
710

 
$
775

 
$
379

 
$
1,864

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Changes in the fair value measurement of the Level 3 items in the pension plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
Real Estate Investments
 
Private Equity
 
Real Estate Investments
 
Private Equity    
 
(in millions)
Beginning balance
$
217

 
$
161

 
$
191

 
$
180

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
2

 

 
16

 
(3
)
Related to investments sold during the year
1

 
2

 
6

 
9

Total return on investments
3

 
2

 
22

 
6

Purchases, sales, and settlements

 
(8
)
 
4

 
(25
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
220

 
$
155

 
$
217

 
$
161


The fair values of other postretirement benefit plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
62

 
$
9

 
$

 
$
71

International equity*
12

 
13

 

 
25

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
7

 

 
7

Mortgage- and asset-backed securities

 
2

 

 
2

Corporate bonds

 
11

 

 
11

Pooled funds

 
5

 

 
5

Cash equivalents and other

 
19

 

 
19

Trust-owned life insurance

 
178

 

 
178

Real estate investments
4

 

 
11

 
15

Private equity

 

 
8

 
8

Total
$
78

 
$
244

 
$
19

 
$
341

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Fair Value Measurements Using

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)    
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
57

 
$
8

 
$

 
$
65

International equity*
17

 
5

 

 
22

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
9

 

 
9

Mortgage- and asset-backed securities

 
2

 

 
2

Corporate bonds

 
12

 

 
12

Pooled funds

 
5

 

 
5

Cash equivalents and other

 
19

 

 
19

Trust-owned life insurance

 
160

 

 
160

Real estate investments
4

 

 
11

 
15

Private equity

 

 
8

 
8

Total
$
78

 
$
220

 
$
19

 
$
317

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

Changes in the fair value measurement of the Level 3 items in the other postretirement benefit plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
Real Estate Investments
 
Private Equity
 
Real Estate Investments
 
Private Equity
 
(in millions)
Beginning balance
$
11

 
$
8

 
$
10

 
$
9

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end

 

 
1

 

Related to investments sold during the year

 

 

 

Total return on investments

 

 
1

 

Purchases, sales, and settlements

 

 

 
(1
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
11

 
$
8

 
$
11

 
$
8


Employee Savings Plan
The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides an 85% matching contribution on up to 6% of an employee's base salary. Total matching contributions made to the plan for 2012, 2011, and 2010 were $19 million, $18 million, and $18 million, respectively.
Georgia Power [Member]
 
RETIREMENT BENEFITS
RETIREMENT BENEFITS
The Company has a defined benefit, trusteed, pension plan covering substantially all employees. This qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). No contributions to the qualified pension plan were made for the year ended December 31, 2012. No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2013. The Company also provides certain defined benefit pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, the Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The Company funds its other postretirement trusts to the extent required by the Georgia PSC and the FERC. For the year ending December 31, 2013, other postretirement trust contributions are expected to total approximately $24 million.
Actuarial Assumptions
The weighted average rates assumed in the actuarial calculations used to determine both the benefit obligations as of the measurement date and the net periodic costs for the pension and other postretirement benefit plans for the following year are presented below. Net periodic benefit costs were calculated in 2009 for the 2010 plan year using discount rates for the pension plans and the other postretirement benefit plans of 5.93% and 5.83%, respectively, and an annual salary increase of 4.18%.
 
 
2012

 
2011

 
2010

Discount rate:
 
 
 
 
 
Pension plans
4.27
%
 
4.98
%
 
5.52
%
Other postretirement benefit plans
4.04

 
4.87

 
5.40

Annual salary increase
3.59

 
3.84

 
3.84

Long-term return on plan assets:
 
 
 
 
 
Pension plans
8.20

 
8.45

 
8.45

Other postretirement benefit plans
7.24

 
7.25

 
7.24

The Company estimates the expected rate of return on pension plan and other postretirement benefit plan assets using a financial model to project the expected return on each current investment portfolio. The analysis projects an expected rate of return on each of seven different asset classes in order to arrive at the expected return on the entire portfolio relying on each trust's target asset allocation and reasonable capital market assumptions. The financial model is based on four key inputs: anticipated returns by asset class (based in part on historical returns), each trust's target asset allocation, an anticipated inflation rate, and the projected impact of a periodic rebalancing of each trust's portfolio.
An additional assumption used in measuring the accumulated other postretirement benefit obligations (APBO) is the weighted average medical care cost trend rate. The weighted average medical care cost trend rates used in measuring the APBO as of December 31, 2012 were as follows:
 
 
  Initial Cost  
  Trend Rate  
 
  Ultimate  
  Cost Trend  
  Rate  
 
  Year That  
  Ultimate  
  Rate Is  
  Reached  
Pre-65
8.00%
 
5.00%
 
2020
Post-65 medical
6.00
 
5.00
 
2020
Post-65 prescription
6.00
 
5.00
 
2020

An annual increase or decrease in the assumed medical care cost trend rate of 1% would affect the APBO and the service and interest cost components at December 31, 2012 as follows:
 
 
1 Percent
Increase
 
1 Percent    
Decrease    
 
(in millions)
Benefit obligation
$
61

 
$
(52
)
Service and interest costs
3

 
(3
)

Pension Plans
The total accumulated benefit obligation for the pension plans was $3.1 billion at December 31, 2012 and $2.7 billion at December 31, 2011. Changes in the projected benefit obligations and the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
 
2012

 
2011

 
(in millions)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
2,909

 
$
2,674

Service cost
60

 
57

Interest cost
141

 
144

Benefits paid
(136
)
 
(132
)
Actuarial loss
338

 
166

Balance at end of year
3,312

 
2,909

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
2,575

 
2,621

Actual return on plan assets
377

 
76

Employer contributions
11

 
10

Benefits paid
(136
)
 
(132
)
Fair value of plan assets at end of year
2,827

 
2,575

Accrued liability
$
(485
)
 
$
(334
)

At December 31, 2012, the projected benefit obligations for the qualified and non-qualified pension plans were $3.1 billion and $165 million, respectively. All pension plan assets are related to the qualified pension plan.
Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's pension plans consist of the following:
 
 
2012

 
2011

 
(in millions)
Other regulatory assets, deferred
$
1,132

 
$
995

Current liabilities, other
(11
)
 
(10
)
Employee benefit obligations
(474
)
 
(324
)

Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the defined benefit pension plans that had not yet been recognized in net periodic pension cost along with the estimated amortization of such amounts for 2013.
 
 
2012
 
2011
 
Estimated
Amortization
in 2013
 
(in millions)
Prior service cost
$
37

 
$
48

 
$
10

Net (gain) loss
1,095

 
947

 
74

Other regulatory assets, deferred
$
1,132

 
$
995

 
 

The changes in the balance of regulatory assets related to the defined benefit pension plans for the years ended December 31, 2012 and 2011 are presented in the following table:
 
 
Regulatory  
Assets  
 
(in millions)  
Balance at December 31, 2010
$
689

Net (gain) loss
324

Change in prior service costs

Reclassification adjustments:
 
Amortization of prior service costs
(12
)
Amortization of net gain (loss)
(6
)
Total reclassification adjustments
(18
)
Total change
306

Balance at December 31, 2011
$
995

Net (gain) loss
182

Change in prior service costs

Reclassification adjustments:
 
Amortization of prior service costs
(12
)
Amortization of net gain (loss)
(33
)
Total reclassification adjustments
(45
)
Total change
137

Balance at December 31, 2012
$
1,132


Components of net periodic pension cost (income) were as follows:
 
 
2012

 
2011

 
2010

 
(in millions)
Service cost
$
60

 
$
57

 
$
54

Interest cost
141

 
144

 
145

Expected return on plan assets
(221
)
 
(234
)
 
(220
)
Recognized net loss
33

 
6

 
2

Net amortization
12

 
12

 
13

Net periodic pension cost (income)
$
25

 
$
(15
)
 
$
(6
)

 
Net periodic pension cost (income) is the sum of service cost, interest cost, and other costs netted against the expected return on plan assets. The expected return on plan assets is determined by multiplying the expected rate of return on plan assets and the market-related value of plan assets. In determining the market-related value of plan assets, the Company has elected to amortize changes in the market value of all plan assets over five years rather than recognize the changes immediately. As a result, the accounting value of plan assets that is used to calculate the expected return on plan assets differs from the current fair value of the plan assets.
Future benefit payments reflect expected future service and are estimated based on assumptions used to measure the projected benefit obligation for the pension plans. At December 31, 2012, estimated benefit payments were as follows:
 
 
Benefit Payments  
 
(in millions)  
2013
$
148

2014
154

2015
160

2016
166

2017
173

2018 to 2022
952


Other Postretirement Benefits
Changes in the APBO and in the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
 
2012

 
2011

 
(in millions)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
774

 
$
786

Service cost
7

 
7

Interest cost
37

 
41

Benefits paid
(46
)
 
(48
)
Actuarial (gain) loss
25

 
(4
)
Plan amendments

 
(12
)
Retiree drug subsidy
3

 
4

Balance at end of year
800

 
774

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
365

 
393

Actual return (loss) on plan assets
43

 
(4
)
Employer contributions
17

 
20

Benefits paid
(43
)
 
(44
)
Fair value of plan assets at end of year
382

 
365

Accrued liability
$
(418
)
 
$
(409
)

Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's other postretirement benefit plans consist of the following:
 
 
2012

 
2011

 
(in millions)
Regulatory assets
$
187

 
$
186

Employee benefit obligations
(418
)
 
(409
)

 
Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the other postretirement benefit plans that had not yet been recognized in net periodic other postretirement benefit cost along with the estimated amortization of such amounts for 2013.
 
 
2012
 
2011
 
Estimated    
Amortization    
in 2013    
 
(in millions)
Prior service cost
$
(4
)
 
$
(4
)
 
$

Net (gain) loss
186

 
179

 
7

Transition obligation
5

 
11

 
4

Regulatory assets
$
187

 
$
186

 
 

The changes in the balance of regulatory assets related to the other postretirement benefit plans for the plan years ended December 31, 2012 and 2011 are presented in the following table:
 
 
Regulatory  
Assets  
 
(in millions)  
Balance at December 31, 2010
$
179

Net (gain) loss
29

Change in prior service costs/transition obligation
(12
)
Reclassification adjustments:
 
Amortization of transition obligation
(6
)
Amortization of prior service costs
(1
)
Amortization of net gain (loss)
(3
)
Total reclassification adjustments
(10
)
Total change
7

Balance at December 31, 2011
$
186

Net (gain) loss
11

Change in prior service costs/transition obligation

Reclassification adjustments:
 
Amortization of transition obligation
(6
)
Amortization of prior service costs

Amortization of net gain (loss)
(4
)
Total reclassification adjustments
(10
)
Total change
1

Balance at December 31, 2012
$
187


Components of the other postretirement benefit plans' net periodic cost were as follows:
 
 
2012

 
2011

 
2010

 
(in millions)
Service cost
$
7

 
$
7

 
$
9

Interest cost
37

 
41

 
44

Expected return on plan assets
(29
)
 
(30
)
 
(30
)
Net amortization
10

 
11

 
10

Net postretirement cost
$
25

 
$
29

 
$
33


 
Future benefit payments, including prescription drug benefits, reflect expected future service and are estimated based on assumptions used to measure the APBO for the other postretirement benefit plans. Estimated benefit payments are reduced by drug subsidy receipts expected as a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 as follows:
 
 
Benefit Payments
 
Subsidy Receipts
 
Total     
 
(in millions)                
2013
$
49

 
$
(5
)
 
$
44

2014
51

 
(5
)
 
46

2015
53

 
(5
)
 
48

2016
55

 
(6
)
 
49

2017
56

 
(7
)
 
49

2018 to 2022
282

 
(36
)
 
246


Benefit Plan Assets
Pension plan and other postretirement benefit plan assets are managed and invested in accordance with all applicable requirements, including ERISA and the Internal Revenue Code of 1986, as amended (Internal Revenue Code). The Company's investment policies for both the pension plan and the other postretirement benefit plans cover a diversified mix of assets, including equity and fixed income securities, real estate, and private equity. Derivative instruments are used primarily to gain efficient exposure to the various asset classes and as hedging tools. The Company minimizes the risk of large losses primarily through diversification but also monitors and manages other aspects of risk.
The composition of the Company's pension plan and other postretirement benefit plan assets as of December 31, 2012 and 2011, along with the targeted mix of assets for each plan, is presented below:
 
 
Target
 
2012
 
2011
Pension plan assets:
 
 
 
 
 
Domestic equity
26
%
 
28
%
 
29
%
International equity
25

 
24

 
25

Fixed income
23

 
27

 
23

Special situations
3

 
1

 

Real estate investments
14

 
13

 
14

Private equity
9

 
7

 
9

Total
100
%
 
100
%
 
100
%
Other postretirement benefit plan assets:
 
 
 
 
 
Domestic equity
41
%
 
34
%
 
39
%
International equity
21

 
27

 
22

Domestic fixed income
24

 
27

 
26

Global fixed income
8

 
7

 
8

Special situations
1

 

 

Real estate investments
3

 
3

 
3

Private equity
2

 
2

 
2

Total
100
%
 
100
%
 
100
%

The investment strategy for plan assets related to the Company's qualified pension plan is to be broadly diversified across major asset classes. The asset allocation is established after consideration of various factors that affect the assets and liabilities of the pension plan including, but not limited to, historical and expected returns, volatility, correlations of asset classes, the current level of assets and liabilities, and the assumed growth in assets and liabilities. Because a significant portion of the liability of the pension plan is long-term in nature, the assets are invested consistent with long-term investment expectations for return and risk. To manage the actual asset class exposures relative to the target asset allocation, the Company employs a formal rebalancing program. As additional risk management, external investment managers and service providers are subject to written guidelines to ensure appropriate and prudent investment practices.
Investment Strategies
Detailed below is a description of the investment strategies for each major asset category for the pension and other postretirement benefit plans disclosed above:
Domestic equity. A mix of large and small capitalization stocks with generally an equal distribution of value and growth attributes, managed both actively and through passive index approaches.
International equity. A mix of growth stocks and value stocks with both developed and emerging market exposure, managed both actively and through passive index approaches.
Fixed income. A mix of domestic and international bonds.
Trust-owned life insurance (TOLI). Investments of the Company's taxable trusts aimed at minimizing the impact of taxes on the portfolio.
Special situations. Investments in opportunistic strategies with the objective of diversifying and enhancing returns and exploiting short-term inefficiencies as well as investments in promising new strategies of a longer-term nature.
Real estate investments. Investments in traditional private market, equity-oriented investments in real properties (indirectly through pooled funds or partnerships) and in publicly traded real estate securities.
Private equity. Investments in private partnerships that invest in private or public securities typically through privately-negotiated and/or structured transactions, including leveraged buyouts, venture capital, and distressed debt.
Benefit Plan Asset Fair Values
Following are the fair value measurements for the pension plan and the other postretirement benefit plan assets as of December 31, 2012 and 2011. The fair values presented are prepared in accordance with GAAP. For purposes of determining the fair value of the pension plan and other postretirement benefit plan assets and the appropriate level designation, management relies on information provided by the plan's trustee. This information is reviewed and evaluated by management with changes made to the trustee information as appropriate.
Valuation methods of the primary fair value measurements disclosed in the following tables are as follows:
Investments in equity securities: Investments in equity securities such as common stocks, American depositary receipts, and real estate investment trusts that trade on a public exchange are classified as Level 1 investments and are valued at the closing price in the active market. Equity investments with unpublished prices (i.e. pooled funds) are valued as Level 2, when the underlying holdings used to value the investment are comprised of Level 1 or Level 2 equity securities.
Investments in fixed income securities: Investments in fixed income securities are generally classified as Level 2 investments and are valued based on prices reported in the market place. Additionally, the value of fixed income securities takes into consideration certain items such as broker quotes, spreads, yield curves, interest rates, and discount rates that apply to the term of a specific instrument.
Investments in TOLI: Investments in TOLI policies are classified as Level 2 investments and are valued based on the underlying investments held in the policy's separate account. The underlying assets are equity and fixed income pooled funds that are comprised of Level 1 and Level 2 securities.
Investments in private equity and real estate: Investments in private equity and real estate are generally classified as Level 3 as the underlying assets typically do not have observable inputs. The fund manager values the assets using various inputs and techniques depending on the nature of the underlying investments. In the case of private equity, techniques may include purchase multiples for comparable transactions, comparable public company trading multiples, and discounted cash flow analysis. Real estate managers generally use prevailing market capitalization rates, recent sales of comparable investments, and independent third-party appraisals to value underlying real estate investments. The fair value of partnerships is determined by aggregating the value of the underlying assets.
The fair values of pension plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
413

 
$
238

 
$

 
$
651

International equity*
324

 
348

 

 
672

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
183

 

 
183

Mortgage- and asset-backed securities

 
45

 

 
45

Corporate bonds

 
312

 
1

 
313

Pooled funds

 
142

 

 
142

Cash equivalents and other
2

 
195

 

 
197

Real estate investments
92

 

 
299

 
391

Private equity

 

 
211

 
211

Total
$
831

 
$
1,463

 
$
511

 
$
2,805

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
437

 
$
202

 
$

 
$
639

International equity*
449

 
129

 

 
578

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
164

 

 
164

Mortgage- and asset-backed securities

 
51

 

 
51

Corporate bonds

 
316

 
1

 
317

Pooled funds

 
144

 

 
144

Cash equivalents and other

 
53

 

 
53

Real estate investments
83

 

 
296

 
379

Private equity

 

 
220

 
220

Total
$
969

 
$
1,059

 
$
517

 
$
2,545

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Changes in the fair value measurement of the Level 3 items in the pension plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
 
Real Estate Investments    
 
Private Equity
 
Real Estate Investments    
 
Private Equity
 
(in millions)
Beginning balance
$
296

 
$
220

 
$
258

 
$
245

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
2

 

 
24

 
(5
)
Related to investments sold during the year
1

 
2

 
8

 
14

Total return on investments
3

 
2

 
32

 
9

Purchases, sales, and settlements

 
(11
)
 
6

 
(34
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
299

 
$
211

 
$
296

 
$
220


The fair values of other postretirement benefit plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
65

 
$
27

 
$

 
$
92

International equity*
10

 
51

 

 
61

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
6

 

 
6

Mortgage- and asset-backed securities

 
1

 

 
1

Corporate bonds

 
10

 

 
10

Pooled funds

 
32

 

 
32

Cash equivalents and other

 
18

 

 
18

Trust-owned life insurance

 
142

 

 
142

Real estate investments
3

 

 
10

 
13

Private equity

 

 
7

 
7

Total
$
78

 
$
287

 
$
17

 
$
382

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
85

 
$
24

 
$

 
$
109

International equity*
15

 
31

 

 
46

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
5

 

 
5

Mortgage- and asset-backed securities

 
1

 

 
1

Corporate bonds

 
10

 

 
10

Pooled funds

 
38

 

 
38

Cash equivalents and other

 
26

 

 
26

Trust-owned life insurance

 
131

 

 
131

Real estate investments
3

 

 
9

 
12

Private equity

 

 
7

 
7

Total
$
103

 
$
266

 
$
16

 
$
385

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

Changes in the fair value measurement of the Level 3 items in the other postretirement benefit plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
  
Real Estate Investments
 
Private Equity
 
Real Estate Investments
 
Private Equity
 
(in millions)
Beginning balance
$
9

 
$
7

 
$
8

 
$
8

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
1

 

 
1

 

Related to investments sold during the year

 

 

 

Total return on investments
1

 

 
1

 

Purchases, sales, and settlements

 

 

 
(1
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
10

 
$
7

 
$
9

 
$
7


Employee Savings Plan
The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides an 85% matching contribution on up to 6% of an employee's base salary. Total matching contributions made to the plan for 2012, 2011, and 2010 were $24 million, $24 million, and $23 million, respectively.
Gulf Power [Member]
 
RETIREMENT BENEFITS
RETIREMENT BENEFITS
The Company has a defined benefit, trusteed, pension plan covering substantially all employees. This qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In December 2012, the Company contributed $13.4 million to the qualified pension plan. No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2013. The Company also provides certain defined benefit pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, the Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The Company funds its other postretirement trusts to the extent required by the FERC. For the year ending December 31, 2013, no other postretirement trust contributions are expected.
Actuarial Assumptions
The weighted average rates assumed in the actuarial calculations used to determine both the benefit obligations as of the measurement date and the net periodic costs for the pension and other postretirement benefit plans for the following year are presented below. Net periodic benefit costs were calculated in 2009 for the 2010 plan year using discount rates for the pension plans and the other postretirement benefit plans of 5.93% and 5.84%, respectively, and an annual salary increase of 4.18%.
 
2012

 
2011

 
2010

Discount rate:
 
 
 
 
 
Pension plans
4.27
%
 
4.98
%
 
5.53
%
Other postretirement benefit plans
4.06

 
4.88

 
5.41

Annual salary increase
3.59

 
3.84

 
3.84

Long-term return on plan assets:
 
 
 
 
 
Pension plans
8.20

 
8.45

 
8.45

Other postretirement benefit plans
8.02

 
8.11

 
8.18


The Company estimates the expected rate of return on pension plan and other postretirement benefit plan assets using a financial model to project the expected return on each current investment portfolio. The analysis projects an expected rate of return on each of seven different asset classes in order to arrive at the expected return on the entire portfolio relying on each trust's target asset allocation and reasonable capital market assumptions. The financial model is based on four key inputs: anticipated returns by asset class (based in part on historical returns), each trust's target asset allocation, an anticipated inflation rate, and the projected impact of a periodic rebalancing of each trust's portfolio.
An additional assumption used in measuring the accumulated other postretirement benefit obligations (APBO) is the weighted average medical care cost trend rate. The weighted average medical care cost trend rates used in measuring the APBO as of December 31, 2012 were as follows:
 
 
Initial Cost
Trend Rate
 
Ultimate Cost Trend Rate
 
Year That Ultimate Rate Is Reached
Pre-65
8.00
%
 
5.00
%
 
2020
Post-65 medical
6.00

 
5.00

 
2020
Post-65 prescription
6.00

 
5.00

 
2020

An annual increase or decrease in the assumed medical care cost trend rate of 1% would affect the APBO and the service and interest cost components at December 31, 2012 as follows:
 
 
1 Percent
Increase
 
1 Percent  
Decrease  
 
(in thousands)
Benefit obligation
$
3,399

 
$
(2,897
)
Service and interest costs
198

 
(169
)

Pension Plans
The total accumulated benefit obligation for the pension plans was $371 million at December 31, 2012 and $321 million at December 31, 2011. Changes in the projected benefit obligations and the fair value of plan assets during the plan years ended December 31, 2012 and 2011were as follows:
 
2012
 
2011
 
(in thousands)  
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
352,834

 
$
316,286

Service cost
9,101

 
8,431

Interest cost
17,199

 
17,074

Benefits paid
(14,046
)
 
(13,807
)
Plan amendments
426

 

Actuarial loss
47,987

 
24,850

Balance at end of year
413,501

 
352,834

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
304,324

 
307,828

Actual return on plan assets
45,762

 
9,552

Employer contributions
14,220

 
751

Benefits paid
(14,046
)
 
(13,807
)
Fair value of plan assets at end of year
350,260

 
304,324

Accrued liability
$
(63,241
)
 
$
(48,510
)

At December 31, 2012, the projected benefit obligations for the qualified and non-qualified pension plans were $393 million and $20 million, respectively. All pension plan assets are related to the qualified pension plan.
 
Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's pension plans consist of the following:
 
2012
 
2011
 
(in thousands)
Other regulatory assets
$
139,261

 
$
115,853

Current liabilities, other
(855
)
 
(794
)
Employee benefit obligations
(62,386
)
 
(47,716
)

Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the defined benefit pension plans that had not yet been recognized in net periodic pension cost along with the estimated amortization of such amounts for 2013.
 
2012
 
2011
 
Estimated Amortization in 2013    
 
(in thousands)
Prior service cost
$
5,565

 
$
6,402

 
$
1,164

Net (gain) loss
133,696

 
109,451

 
8,385

Other regulatory assets
$
139,261

 
$
115,853

 
 

The changes in the balance of regulatory assets related to the defined benefit pension plans for the years ended December 31, 2012 and 2011 are presented in the following table:
  
Regulatory    
Assets    
 
(in thousands)    
Balance at December 31, 2010
$
75,096

Net (gain) loss
42,531

Change in prior service costs

Reclassification adjustments:
 
Amortization of prior service costs
(1,262
)
Amortization of net gain (loss)
(512
)
Total reclassification adjustments
(1,774
)
Total change
40,757

Balance at December 31, 2011
$
115,853

Net (gain) loss
28,157

Change in prior service costs
426

Reclassification adjustments:
 
Amortization of prior service costs
(1,262
)
Amortization of net gain (loss)
(3,913
)
Total reclassification adjustments
(5,175
)
Total change
23,408

Balance at December 31, 2012
$
139,261


 
Components of net periodic pension cost were as follows:
 
2012
 
2011
 
2010
 
(in thousands)
Service cost
$
9,101

 
$
8,431

 
$
7,853

Interest cost
17,199

 
17,074

 
17,305

Expected return on plan assets
(25,932
)
 
(27,232
)
 
(24,695
)
Recognized net (gain) loss
3,913

 
512

 
398

Net amortization
1,262

 
1,262

 
1,302

Net periodic pension cost
$
5,543

 
$
47

 
$
2,163


Net periodic pension cost is the sum of service cost, interest cost, and other costs netted against the expected return on plan assets. The expected return on plan assets is determined by multiplying the expected rate of return on plan assets and the market-related value of plan assets. In determining the market-related value of plan assets, the Company has elected to amortize changes in the market value of all plan assets over five years rather than recognize the changes immediately. As a result, the accounting value of plan assets that is used to calculate the expected return on plan assets differs from the current fair value of the plan assets.
Future benefit payments reflect expected future service and are estimated based on assumptions used to measure the projected benefit obligation for the pension plans. At December 31, 2012, estimated benefit payments were as follows:
  
Benefit Payments    
 
(in thousands)    
2013
$
15,767

2014
16,606

2015
17,427

2016
18,272

2017
19,383

2018 to 2022
113,108


Other Postretirement Benefits
Changes in the APBO and in the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
 
(in thousands)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
70,923

 
$
69,617

Service cost
1,167

 
1,132

Interest cost
3,367

 
3,658

Benefits paid
(3,854
)
 
(4,189
)
Actuarial loss
3,468

 
292

Plan amendments

 

Retiree drug subsidy
324

 
413

Balance at end of year
75,395

 
70,923

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
14,978

 
15,697

Actual return on plan assets
2,131

 
514

Employer contributions
2,648

 
2,543

Benefits paid
(3,530
)
 
(3,776
)
Fair value of plan assets at end of year
16,227

 
14,978

Accrued liability
$
(59,168
)
 
$
(55,945
)

 
Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's other postretirement benefit plans consist of the following:
 
2012
 
2011
 
(in thousands)  
Regulatory assets
$
2,169

 
$
239

Current liabilities, other
(661
)
 
(624
)
Employee benefit obligations
(58,507
)
 
(55,321
)

Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the other postretirement benefit plans that had not yet been recognized in net periodic other postretirement benefit cost along with the estimated amortization of such amounts for 2013.
 
2012
 
2011
 
Estimated Amortization in 2013    
 
(in thousands)      
Prior service cost
$
324

 
$
510

 
$
186

Net (gain) loss
1,845

 
(464
)
 

Transition obligation

 
193

 

Regulatory assets (liabilities)
$
2,169

 
$
239

 
 

The changes in the balance of regulatory assets and regulatory liabilities related to the other postretirement benefit plans for the plan years ended December 31, 2012 and 2011 are presented in the following table:
 
Regulatory
Assets
 
Regulatory  
Liabilities  
 
(in thousands)
Balance at December 31, 2010
$

 
$
(166
)
Net (gain) loss
635

 
166

Change in prior service costs/transition obligation

 

Reclassification adjustments:
 
 
 
Amortization of transition obligation
(257
)
 

Amortization of prior service costs
(186
)
 

Amortization of net gain (loss)
47

 

Total reclassification adjustments
(396
)
 

Total change
239

 
166

Balance at December 31, 2011
$
239

 
$

Net (gain) loss
2,309

 

Change in prior service costs/transition obligation

 

Reclassification adjustments:
 
 
 
Amortization of transition obligation
(193
)
 

Amortization of prior service costs
(186
)
 

Amortization of net gain (loss)

 

Total reclassification adjustments
(379
)
 

Total change
1,930

 

Balance at December 31, 2012
$
2,169

 
$


 
Components of the other postretirement benefit plans' net periodic cost were as follows:
 
2012
 
2011
 
2010
 
(in thousands)
Service cost
$
1,167

 
$
1,132

 
$
1,304

Interest cost
3,367

 
3,658

 
4,121

Expected return on plan assets
(1,311
)
 
(1,445
)
 
(1,481
)
Net amortization
379

 
396

 
406

Net postretirement cost
$
3,602

 
$
3,741

 
$
4,350


Future benefit payments, including prescription drug benefits, reflect expected future service and are estimated based on assumptions used to measure the APBO for the other postretirement benefit plans. Estimated benefit payments are reduced by drug subsidy receipts expected as a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 as follows:
 
Benefit
Payments
 
Subsidy
Receipts
 
Total
 
(in thousands)
2013
$
4,473

 
$
(488
)
 
$
3,985

2014
4,707

 
(537
)
 
4,170

2015
4,903

 
(589
)
 
4,314

2016
5,117

 
(643
)
 
4,474

2017
5,211

 
(705
)
 
4,506

2018 to 2022
26,913

 
(3,804
)
 
23,109


Benefit Plan Assets
Pension plan and other postretirement benefit plan assets are managed and invested in accordance with all applicable requirements, including ERISA and the Internal Revenue Code of 1986, as amended (Internal Revenue Code). The Company's investment policies for both the pension plan and the other postretirement benefit plans cover a diversified mix of assets, including equity and fixed income securities, real estate, and private equity. Derivative instruments are used primarily to gain efficient exposure to the various asset classes and as hedging tools. The Company minimizes the risk of large losses primarily through diversification but also monitors and manages other aspects of risk.
The composition of the Company's pension plan and other postretirement benefit plan assets as of December 31, 2012 and 2011, along with the targeted mix of assets for each plan, is presented below:
 
Target    

 
2012

 
2011

Pension plan assets:
 
 
 
 
 
Domestic equity
26
%
 
28
%
 
29
%
International equity
25

 
24

 
25

Fixed income
23

 
27

 
23

Special situations
3

 
1

 

Real estate investments
14

 
13

 
14

Private equity
9

 
7

 
9

Total
100
%
 
100
%
 
100
%
Other postretirement benefit plan assets:
 
 
 
 
 
Domestic equity
25
%
 
27
%
 
28
%
International equity
24

 
23

 
24

Domestic fixed income
25

 
29

 
26

Special situations
3

 
1

 

Real estate investments
14

 
13

 
13

Private equity
9

 
7

 
9

Total
100
%
 
100
%
 
100
%

 
The investment strategy for plan assets related to the Company's qualified pension plan is to be broadly diversified across major asset classes. The asset allocation is established after consideration of various factors that affect the assets and liabilities of the pension plan including, but not limited to, historical and expected returns, volatility, correlations of asset classes, the current level of assets and liabilities, and the assumed growth in assets and liabilities. Because a significant portion of the liability of the pension plan is long-term in nature, the assets are invested consistent with long-term investment expectations for return and risk. To manage the actual asset class exposures relative to the target asset allocation, the Company employs a formal rebalancing program. As additional risk management, external investment managers and service providers are subject to written guidelines to ensure appropriate and prudent investment practices.
Investment Strategies
Detailed below is a description of the investment strategies for each major asset category for the pension and other postretirement benefit plans disclosed above:
Domestic equity. A mix of large and small capitalization stocks with generally an equal distribution of value and growth attributes, managed both actively and through passive index approaches.
International equity. A mix of growth stocks and value stocks with both developed and emerging market exposure, managed both actively and through passive index approaches.
Fixed income. A mix of domestic and international bonds.
Special situations. Investments in opportunistic strategies with the objective of diversifying and enhancing returns and exploiting short-term inefficiencies as well as investments in promising new strategies of a longer-term nature.
Real estate investments. Investments in traditional private market, equity-oriented investments in real properties (indirectly through pooled funds or partnerships) and in publicly traded real estate securities.
Private equity. Investments in private partnerships that invest in private or public securities typically through privately-negotiated and/or structured transactions, including leveraged buyouts, venture capital, and distressed debt.
Benefit Plan Asset Fair Values
Following are the fair value measurements for the pension plan and the other postretirement benefit plan assets as of December 31, 2012 and 2011. The fair values presented are prepared in accordance with GAAP. For purposes of determining the fair value of the pension plan and other postretirement benefit plan assets and the appropriate level designation, management relies on information provided by the plan's trustee. This information is reviewed and evaluated by management with changes made to the trustee information as appropriate.
Valuation methods of the primary fair value measurements disclosed in the following tables are as follows:
Investments in equity securities: Investments in equity securities such as common stocks, American depositary receipts, and real estate investment trusts that trade on a public exchange are classified as Level 1 investments and are valued at the closing price in the active market. Equity investments with unpublished prices (i.e. pooled funds) are valued as Level 2, when the underlying holdings used to value the investment are comprised of Level 1 or Level 2 equity securities.
Investments in fixed income securities: Investments in fixed income securities are generally classified as Level 2 investments and are valued based on prices reported in the market place. Additionally, the value of fixed income securities takes into consideration certain items such as broker quotes, spreads, yield curves, interest rates, and discount rates that apply to the term of a specific instrument.
Investments in private equity and real estate: Investments in private equity and real estate are generally classified as Level 3 as the underlying assets typically do not have observable inputs. The fund manager values the assets using various inputs and techniques depending on the nature of the underlying investments. In the case of private equity, techniques may include purchase multiples for comparable transactions, comparable public company trading multiples, and discounted cash flow analysis. Real estate managers generally use prevailing market capitalization rates, recent sales of comparable investments, and independent third-party appraisals to value underlying real estate investments. The fair value of partnerships is determined by aggregating the value of the underlying assets. 
The fair values of pension plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
51,215

 
$
29,499

 
$

 
$
80,714

International equity*
40,166

 
43,120

 

 
83,286

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
22,724

 

 
22,724

Mortgage- and asset-backed securities

 
5,594

 

 
5,594

Corporate bonds

 
38,534

 
139

 
38,673

Pooled funds

 
17,581

 

 
17,581

Cash equivalents and other
208

 
24,148

 

 
24,356

Real estate investments
11,362

 

 
37,039

 
48,401

Private equity

 

 
26,129

 
26,129

Total
$
102,951

 
$
181,200

 
$
63,307

 
$
347,458

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
51,686

 
$
23,857

 
$

 
$
75,543

International equity*
53,130

 
15,223

 

 
68,353

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
19,375

 

 
19,375

Mortgage- and asset-backed securities

 
6,047

 

 
6,047

Corporate bonds

 
37,274

 
120

 
37,394

Pooled funds

 
16,998

 

 
16,998

Cash equivalents and other
30

 
6,228

 

 
6,258

Real estate investments
9,838

 

 
34,989

 
44,827

Private equity

 

 
26,053

 
26,053

Total
$
114,684

 
$
125,002

 
$
61,162

 
$
300,848

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Changes in the fair value measurement of the Level 3 items in the pension plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
  
Real Estate Investments
 
Private Equity
 
Real Estate Investments
 
Private Equity
 
(in thousands)
Beginning balance
$
34,989

 
$
26,053

 
$
30,355

 
$
28,727

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
1,918

 
44

 
3,021

 
(538
)
Related to investments sold during the year
132

 
1,396

 
896

 
1,941

Total return on investments
2,050

 
1,440

 
3,917

 
1,403

Purchases, sales, and settlements

 
(1,364
)
 
717

 
(4,077
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
37,039

 
$
26,129

 
$
34,989

 
$
26,053


The fair values of other postretirement benefit plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
2,290

 
$
1,319

 
$

 
$
3,609

International equity*
1,795

 
1,928

 

 
3,723

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
1,016

 

 
1,016

Mortgage- and asset-backed securities

 
250

 

 
250

Corporate bonds

 
1,722

 
6

 
1,728

Pooled funds

 
1,298

 

 
1,298

Cash equivalents and other
9

 
1,078

 

 
1,087

Real estate investments
508

 

 
1,667

 
2,175

Private equity

 
15

 
1,155

 
1,170

Total
$
4,602

 
$
8,626

 
$
2,828

 
$
16,056

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
2,445

 
$
1,128

 
$

 
$
3,573

International equity*
2,511

 
719

 

 
3,230

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
918

 

 
918

Mortgage- and asset-backed securities

 
286

 

 
286

Corporate bonds

 
1,761

 

 
1,761

Pooled funds

 
1,328

 

 
1,328

Cash equivalents and other
1

 
295

 

 
296

Real estate investments
466

 

 
1,657

 
2,123

Private equity

 

 
1,232

 
1,232

Total
$
5,423

 
$
6,435

 
$
2,889

 
$
14,747

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

Changes in the fair value measurement of the Level 3 items in the other postretirement benefit plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
  
Real Estate
Investments
 
Private
Equity
 
Real Estate
Investments
 
Private
Equity
 
(in thousands)
Beginning balance
$
1,657

 
$
1,232

 
$
1,452

 
$
1,375

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
107

 
(1
)
 
129

 
(26
)
Related to investments sold during the year
6

 
80

 
42

 
77

Total return on investments
113

 
79

 
171

 
51

Purchases, sales, and settlements
(103
)
 
(156
)
 
34

 
(194
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
1,667

 
$
1,155

 
$
1,657

 
$
1,232


Employee Savings Plan
The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides an 85% matching contribution on up to 6% of an employee's base salary. Total matching contributions made to the plan for 2012, 2011, and 2010 were $4.0 million, $3.7 million, and $3.6 million, respectively.
Mississippi Power [Member]
 
RETIREMENT BENEFITS
RETIREMENT BENEFITS
The Company has a defined benefit, trusteed, pension plan covering substantially all employees. This qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In December 2012, the Company contributed $43.0 million to the qualified pension plan. No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2013. The Company also provides certain defined benefit pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, the Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The Company funds its other postretirement trusts to the extent required by the FERC. For the year ending December 31, 2013, other postretirement trust contributions are expected to be less than $1 million.
Actuarial Assumptions
The weighted average rates assumed in the actuarial calculations used to determine both the benefit obligations as of the measurement date and the net periodic costs for the pension and other postretirement benefit plans for the following year are presented below. Net periodic benefit costs were calculated in 2009 for the 2010 plan year using discount rates for the pension plans and the other postretirement benefit plans of 5.92% and 5.83%, respectively, and an annual salary increase of 4.18%.
 
 
2012
 
2011
 
2010
Discount rate:
 
 
 
 
 
Pension plans
4.26
%
 
4.98
%
 
5.51
%
Other postretirement benefit plans
4.04

 
4.87

 
5.39

Annual salary increase
3.59

 
3.84

 
3.84

Long-term return on plan assets:
 
 
 
 
 
Pension plans
8.20

 
8.45

 
8.45

Other postretirement benefit plans
6.96

 
7.53

 
7.65

The Company estimates the expected rate of return on pension plan and other postretirement benefit plan assets using a financial model to project the expected return on each current investment portfolio. The analysis projects an expected rate of return on each of seven different asset classes in order to arrive at the expected return on the entire portfolio relying on each trust's target asset allocation and reasonable capital market assumptions. The financial model is based on four key inputs: anticipated returns by asset class (based in part on historical returns), each trust's target asset allocation, an anticipated inflation rate, and the projected impact of a periodic rebalancing of each trust's portfolio.
An additional assumption used in measuring the accumulated other postretirement benefit obligations (APBO) is the weighted average medical care cost trend rate. The weighted average medical care cost trend rates used in measuring the APBO as of December 31, 2012 were as follows:
 
 
Initial Cost
Trend Rate
 
Ultimate Cost Trend Rate
 
Year That Ultimate Rate Is Reached  
Pre-65
8.00%
 
5.00%
 
2020
Post-65 medical
6.00
 
5.00
 
2020
Post-65 prescription
6.00
 
5.00
 
2020

An annual increase or decrease in the assumed medical care cost trend rate of 1% would affect the APBO and the service and interest cost components at December 31, 2012 as follows:
 
 
1 Percent
Increase
 
1 Percent   
Decrease   
 
(in thousands)
Benefit obligation
$
6,000

 
$
(5,099
)
Service and interest costs
316

 
(268
)

Pension Plans
The total accumulated benefit obligation for the pension plans was $392 million at December 31, 2012 and $339 million at December 31, 2011. Changes in the projected benefit obligations and the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
 
(in thousands)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
369,680

 
$
330,315

Service cost
9,416

 
8,838

Interest cost
18,019

 
17,827

Benefits paid
(14,949
)
 
(14,587
)
Plan amendments

 

Actuarial loss
50,387

 
27,287

Balance at end of year
432,553

 
369,680

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
282,100

 
283,698

Actual return on plan assets
39,668

 
10,805

Employer contributions
44,930

 
2,184

Benefits paid
(14,949
)
 
(14,587
)
Fair value of plan assets at end of year
351,749

 
282,100

Accrued liability
$
(80,804
)
 
$
(87,580
)

At December 31, 2012, the projected benefit obligations for the qualified and non-qualified pension plans were $400 million and $32 million, respectively. All pension plan assets are related to the qualified pension plan.
 
Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's pension plans consist of the following:
 
2012
 
2011
 
(in thousands)
Other regulatory assets, deferred
$
146,838

 
$
117,354

Other current liabilities
(2,087
)
 
(1,652
)
Employee benefit obligations
(78,717
)
 
(85,928
)

Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the defined benefit pension plans that had not yet been recognized in net periodic pension cost along with the estimated amortization of such amounts for 2013.
 
2012
 
2011
 
Estimated Amortization in 2013
 
(in thousands)
Prior service cost
$
5,261

 
$
6,570

 
$
1,143

Net (gain) loss
141,577

 
110,784

 
9,461

Other regulatory assets, deferred
$
146,838

 
$
117,354

 
 

The changes in the balance of regulatory assets related to the defined benefit pension plans for the years ended December 31, 2012 and 2011 are presented in the following table:
  
Regulatory    
Assets    
 
(in thousands)    
Balance at December 31, 2010
$
78,130

Net (gain) loss
41,647

Change in prior service costs

Reclassification adjustments:
 
Amortization of prior service costs
(1,309
)
Amortization of net gain (loss)
(1,114
)
Total reclassification adjustments
(2,423
)
Total change
39,224

Balance at December 31, 2011
$
117,354

Net (gain) loss
34,893

Change in prior service costs

Reclassification adjustments:
 
Amortization of prior service costs
(1,309
)
Amortization of net gain (loss)
(4,100
)
Total reclassification adjustments
(5,409
)
Total change
29,484

Balance at December 31, 2012
$
146,838


Components of net periodic pension cost were as follows:
 
2012
 
2011
 
2010
 
(in thousands)
Service cost
$
9,416

 
$
8,838

 
$
8,300

Interest cost
18,019

 
17,827

 
17,916

Expected return on plan assets
(24,121
)
 
(25,166
)
 
(21,451
)
Recognized net (gain) loss
4,100

 
1,114

 
634

Net amortization
1,309

 
1,309

 
1,391

Net periodic pension cost
$
8,723

 
$
3,922

 
$
6,790


 
Net periodic pension cost is the sum of service cost, interest cost, and other costs netted against the expected return on plan assets. The expected return on plan assets is determined by multiplying the expected rate of return on plan assets and the market-related value of plan assets. In determining the market-related value of plan assets, the Company has elected to amortize changes in the market value of all plan assets over five years rather than recognize the changes immediately. As a result, the accounting value of plan assets that is used to calculate the expected return on plan assets differs from the current fair value of the plan assets.
Future benefit payments reflect expected future service and are estimated based on assumptions used to measure the projected benefit obligation for the pension plans. At December 31, 2012, estimated benefit payments were as follows:
  
Benefit    
Payments    
 
(in thousands)    
2013
$
16,282

2014
17,121

2015
17,947

2016
18,886

2017
20,001

2018 to 2022
117,471


Other Postretirement Benefits
Changes in the APBO and in the fair value of plan assets during the plan years ended December 31, 2012 and 2011 were as follows:
 
2012
 
2011
 
(in thousands)
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
87,447

 
$
81,688

Service cost
1,038

 
1,012

Interest cost
4,155

 
4,292

Benefits paid
(4,432
)
 
(4,094
)
Actuarial loss
3,166

 
4,073

Plan amendments

 

Retiree drug subsidy
409

 
476

Balance at end of year
91,783

 
87,447

Change in plan assets
 
 
 
Fair value of plan assets at beginning of year
20,534

 
20,955

Actual return on plan assets
2,427

 
720

Employer contributions
3,052

 
2,477

Benefits paid
(4,023
)
 
(3,618
)
Fair value of plan assets at end of year
21,990

 
20,534

Accrued liability
$
(69,793
)
 
$
(66,913
)

Amounts recognized in the balance sheets at December 31, 2012 and 2011 related to the Company's other postretirement benefit plans consist of the following:
 
2012
 
2011
 
(in thousands)
Other regulatory assets, deferred
$
15,454

 
$
13,324

Employee benefit obligations
(69,793
)
 
(66,913
)

 
Presented below are the amounts included in regulatory assets at December 31, 2012 and 2011 related to the other postretirement benefit plans that had not yet been recognized in net periodic other postretirement benefit cost along with the estimated amortization of such amounts for 2013.
 
2012
 
2011
 
Estimated Amortization in 2013
 
(in thousands)        
Prior service cost
$
(2,498
)
 
$
(2,686
)
 
$
(188
)
Net (gain) loss
17,952

 
15,839

 
659

Transition obligation

 
171

 

Other regulatory assets, deferred
$
15,454

 
$
13,324

 
 

The changes in the balance of regulatory assets related to the other postretirement benefit plans for the plan years ended December 31, 2012 and 2011 are presented in the following table:
  
Regulatory    
Assets    
 
(in thousands)    
Balance at December 31, 2010
$
8,618

Net (gain) loss
4,980

Change in prior service costs/transition obligation

Reclassification adjustments:
 
Amortization of transition obligation
(228
)
Amortization of prior service costs
188

Amortization of net gain (loss)
(234
)
Total reclassification adjustments
(274
)
Total change
4,706

Balance at December 31, 2011
$
13,324

Net (gain) loss
2,600

Change in prior service costs/transition obligation

Reclassification adjustments:
 
Amortization of transition obligation
(171
)
Amortization of prior service costs
188

Amortization of net gain (loss)
(487
)
Total reclassification adjustments
(470
)
Total change
2,130

Balance at December 31, 2012
$
15,454


Components of the other postretirement benefit plans' net periodic cost were as follows:
 
2012
 
2011
 
2010
 
(in thousands)
Service cost
$
1,038

 
$
1,012

 
$
1,305

Interest cost
4,155

 
4,292

 
4,763

Expected return on plan assets
(1,552
)
 
(1,763
)
 
(1,826
)
Net amortization
470

 
274

 
574

Net postretirement cost
$
4,111

 
$
3,815

 
$
4,816


 
Future benefit payments, including prescription drug benefits, reflect expected future service and are estimated based on assumptions used to measure the APBO for the other postretirement benefit plans. Estimated benefit payments are reduced by drug subsidy receipts expected as a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 as follows:
 
Benefit Payments
 
Subsidy Receipts
 
Total
 
(in thousands)
2013
$
5,174

 
$
(601
)
 
$
4,573

2014
5,442

 
(663
)
 
4,779

2015
5,754

 
(720
)
 
5,034

2016
5,995

 
(782
)
 
5,213

2017
6,280

 
(845
)
 
5,435

2018 to 2022
33,822

 
(4,414
)
 
29,408


Benefit Plan Assets
Pension plan and other postretirement benefit plan assets are managed and invested in accordance with all applicable requirements, including ERISA and the Internal Revenue Code of 1986, as amended (Internal Revenue Code). The Company's investment policies for both the pension plan and the other postretirement benefit plans cover a diversified mix of assets, including equity and fixed income securities, real estate, and private equity. Derivative instruments are used primarily to gain efficient exposure to the various asset classes and as hedging tools. The Company minimizes the risk of large losses primarily through diversification but also monitors and manages other aspects of risk.
The composition of the Company's pension plan and other postretirement benefit plan assets as of December 31, 2012 and 2011, along with the targeted mix of assets for each plan, is presented below:
 
Target
 
2012
 
2011
Pension plan assets:
 
 
 
 
 
Domestic equity
26
%
 
28
%
 
29
%
International equity
25

 
24

 
25

Fixed income
23

 
27

 
23

Special situations
3

 
1

 

Real estate investments
14

 
13

 
14

Private equity
9

 
7

 
9

Total
100
%
 
100
%
 
100
%
Other postretirement benefit plan assets:
 
 
 
 
 
Domestic equity
21
%
 
22
%
 
22
%
International equity
20

 
19

 
20

Fixed income
39

 
42

 
40

Special situations
2

 
1

 

Real estate investments
11

 
10

 
11

Private equity
7

 
6

 
7

Total
100
%
 
100
%
 
100
%

The investment strategy for plan assets related to the Company's qualified pension plan is to be broadly diversified across major asset classes. The asset allocation is established after consideration of various factors that affect the assets and liabilities of the pension plan including, but not limited to, historical and expected returns, volatility, correlations of asset classes, the current level of assets and liabilities, and the assumed growth in assets and liabilities. Because a significant portion of the liability of the pension plan is long-term in nature, the assets are invested consistent with long-term investment expectations for return and risk. To manage the actual asset class exposures relative to the target asset allocation, the Company employs a formal rebalancing program. As additional risk management, external investment managers and service providers are subject to written guidelines to ensure appropriate and prudent investment practices.
Investment Strategies
Detailed below is a description of the investment strategies for each major asset category for the pension and other postretirement benefit plans disclosed above:
Domestic equity. A mix of large and small capitalization stocks with generally an equal distribution of value and growth attributes, managed both actively and through passive index approaches.
International equity. A mix of growth stocks and value stocks with both developed and emerging market exposure, managed both actively and through passive index approaches.
Fixed income. A mix of domestic and international bonds.
Special situations. Investments in opportunistic strategies with the objective of diversifying and enhancing returns and exploiting short-term inefficiencies as well as investments in promising new strategies of a longer-term nature.
Real estate investments. Investments in traditional private market, equity-oriented investments in real properties (indirectly through pooled funds or partnerships) and in publicly traded real estate securities.
Private equity. Investments in private partnerships that invest in private or public securities typically through privately-negotiated and/or structured transactions, including leveraged buyouts, venture capital, and distressed debt.
Benefit Plan Asset Fair Values
Following are the fair value measurements for the pension plan and the other postretirement benefit plan assets as of December 31, 2012 and 2011. The fair values presented are prepared in accordance with GAAP. For purposes of determining the fair value of the pension plan and other postretirement benefit plan assets and the appropriate level designation, management relies on information provided by the plan's trustee. This information is reviewed and evaluated by management with changes made to the trustee information as appropriate.
Valuation methods of the primary fair value measurements disclosed in the following tables are as follows:
Investments in equity securities: Investments in equity securities such as common stocks, American depositary receipts, and real estate investment trusts that trade on a public exchange are classified as Level 1 investments and are valued at the closing price in the active market. Equity investments with unpublished prices (i.e. pooled funds) are valued as Level 2, when the underlying holdings used to value the investment are comprised of Level 1 or Level 2 equity securities.
Investments in fixed income securities: Investments in fixed income securities are generally classified as Level 2 investments and are valued based on prices reported in the market place. Additionally, the value of fixed income securities takes into consideration certain items such as broker quotes, spreads, yield curves, interest rates, and discount rates that apply to the term of a specific instrument.
Investments in private equity and real estate: Investments in private equity and real estate are generally classified as Level 3 as the underlying assets typically do not have observable inputs. The fund manager values the assets using various inputs and techniques depending on the nature of the underlying investments. In the case of private equity, techniques may include purchase multiples for comparable transactions, comparable public company trading multiples, and discounted cash flow analysis. Real estate managers generally use prevailing market capitalization rates, recent sales of comparable investments, and independent third-party appraisals to value underlying real estate investments. The fair value of partnerships is determined by aggregating the value of the underlying assets.
The fair values of pension plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
51,433

 
$
29,624

 
$

 
$
81,057

International equity*
40,337

 
43,303

 

 
83,640

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
22,820

 

 
22,820

Mortgage- and asset-backed securities

 
5,618

 

 
5,618

Corporate bonds

 
38,696

 
140

 
38,836

Pooled funds

 
17,656

 

 
17,656

Cash equivalents and other
209

 
24,251

 

 
24,460

Real estate investments
11,410

 

 
37,196

 
48,606

Private equity

 

 
26,240

 
26,240

Total
$
103,389

 
$
181,968

 
$
63,576

 
$
348,933

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)         
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
47,911

 
$
22,115

 
$

 
$
70,026

International equity*
49,250

 
14,111

 

 
63,361

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
17,960

 

 
17,960

Mortgage- and asset-backed securities

 
5,605

 

 
5,605

Corporate bonds

 
34,552

 
112

 
34,664

Pooled funds

 
15,757

 

 
15,757

Cash equivalents and other
28

 
5,773

 

 
5,801

Real estate investments
9,119

 

 
32,434

 
41,553

Private equity

 

 
24,151

 
24,151

Total
$
106,308

 
$
115,873

 
$
56,697

 
$
278,878

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

Changes in the fair value measurement of the Level 3 items in the pension plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
  
2012
 
2011
  
Real Estate
Investments
 
Private Equity
 
Real Estate
Investments
 
Private Equity
 
(in thousands)
Beginning balance
$
32,434

 
$
24,151

 
$
27,976

 
$
26,475

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
4,629

 
44

 
2,964

 
(498
)
Related to investments sold during the year
133

 
3,415

 
830

 
1,951

Total return on investments
4,762

 
3,459

 
3,794

 
1,453

Purchases, sales, and settlements

 
(1,370
)
 
664

 
(3,777
)
Transfers into/out of Level 3

 

 

 

Ending balance
$
37,196

 
$
26,240

 
$
32,434

 
$
24,151


 
The fair values of other postretirement benefit plan assets as of December 31, 2012 and 2011 are presented below. These fair value measurements exclude cash, receivables related to investment income, pending investments sales, and payables related to pending investment purchases. Assets that are considered special situations investments, primarily real estate investments and private equities, are presented in the tables below based on the nature of the investment.
 
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2012:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)                
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
2,561

 
$
1,475

 
$

 
$
4,036

International equity*
2,008

 
2,156

 

 
4,164

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
5,187

 

 
5,187

Mortgage- and asset-backed securities

 
280

 

 
280

Corporate bonds

 
1,925

 
7

 
1,932

Pooled funds

 
879

 

 
879

Cash equivalents and other
11

 
1,612

 

 
1,623

Real estate investments
569

 

 
1,865

 
2,434

Private equity

 
14

 
1,293

 
1,307

Total
$
5,149

 
$
13,528

 
$
3,165

 
$
21,842

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
 
Fair Value Measurements Using
 
 

Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
As of December 31, 2011:
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Domestic equity*
$
2,733

 
$
1,260

 
$

 
$
3,993

International equity*
2,807

 
804

 

 
3,611

Fixed income:
 
 
 
 
 
 
 
U.S. Treasury, government, and agency bonds

 
4,796

 

 
4,796

Mortgage- and asset-backed securities

 
320

 

 
320

Corporate bonds

 
1,968

 

 
1,968

Pooled funds

 
898

 

 
898

Cash equivalents and other
1

 
987

 

 
988

Real estate investments
520

 

 
1,851

 
2,371

Private equity

 

 
1,377

 
1,377

Total
$
6,061

 
$
11,033

 
$
3,228

 
$
20,322

*
Level 1 securities consist of actively traded stocks while Level 2 securities consist of pooled funds. Management believes that the portfolio is well-diversified with no significant concentrations of risk.

 
Changes in the fair value measurement of the Level 3 items in the other postretirement benefit plan assets valued using significant unobservable inputs for the years ended December 31, 2012 and 2011 were as follows:
 
 
2012
 
2011
  
Real Estate Investments
 
Private Equity
 
Real Estate Investments
 
Private Equity
 
(in thousands)
Beginning balance
$
1,851

 
$
1,377

 
$
1,625

 
$
1,538

Actual return on investments:
 
 
 
 
 
 
 
Related to investments held at year end
119

 
(1
)
 
141

 
(29
)
Related to investments sold during the year
7

 
90

 
47

 
85

Total return on investments
126

 
89

 
188

 
56

Purchases, sales, and settlements
(112
)
 
(173
)
 
38

 
(217
)
Ending balance
$
1,865

 
$
1,293

 
$
1,851

 
$
1,377


Employee Savings Plan
The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides an 85% matching contribution on up to 6% of an employee's base salary. Total matching contributions made to the plan for 2012, 2011, and 2010 were $3.9 million, $3.8 million, and $3.8 million, respectively.