EAGAN, Minn. - Northwest Airlines Corp. is seeking a regulatory exemption that could make its three underfunded pension plans the majority owner of a subsidiary airline.
Northwest, based in Eagan, contributed $41 million in stock of the subsidiary, Pinnacle Airlines Inc., to its three underfunded pension plans even though it hadn't yet received a requested exemption to use assets of a unit it controls in lieu of cash.
Northwest informed the Department of Labor's Employee Benefits Security Administration (formerly the Pension and Welfare Benefits Administration) that the company plans to contribute another $182 million in Pinnacle stock later this year.
Both contributions are designed to fulfill Northwest's 2002 pension funding obligations. The $41 million was contributed Jan. 15, its due date, while the $182 million isn't due until September.
Related developments include:
* For 2003, Northwest is seeking a waiver from the Internal Revenue Service for $450 million in contributions it expects to be required to make. The company asks in its waiver to pay the 2003 contributions over five years, from 2004 through 2008, according to a corporate statement.
* Northwest officials said in a quarterly earnings teleconference that the company's pension expense for 2003 will be $400 million, up from about $300 million in 2002. The 2003 expense reflects new pension assumptions. Northwest officials lowered the long-term annual return assumption on pension assets to 9.5% from 10.5% and lowered the discount rate for pension liabilities to 6.75% from 7.5%.
10%-15% of total shares
The $41 million in Pinnacle stock is an appraised value, representing 10% to 15% of Pinnacle total shares, according to Northwest officials at the teleconference. Based on that figure, the other $182 million would represent between 44% and 66% of Pinnacle's stock. In all, the $233 million contribution of Pinnacle stock would represent between 54% and 81% of Pinnacle's stock.
Pinnacle, based in Memphis, is an indirect wholly owned subsidiary of Northwest.
By contributing the Pinnacle stock, Northwest takes a risk of having to pay an excise tax penalty if it does not receive an exemption requested from the EBSA, according to an agency official, who asked not to be named.
The proposal for the requested exemption to contribute the $223 million in Pinnacle stock was published in the Federal Register Jan. 17. The EBSA won't decide on the proposal until after the comment period ends in March.
"We have the authority to provide for a retroactive exemption" to Jan. 15, said the EBSA official, referring to the due date of Northwest's $41 million contribution and the date the company contributed the stock. "But if you do it (make a contribution in the stock) before you get the exemption, you do it at your own risk."
The official said applications for exemptions to contribute in-kind assets to the pension fund generally are approved, but there's no guarantee. If the exemption ultimately is rejected, Northwest will have to withdraw the stock and pay an excise tax penalty plus find another way to make the contribution it owes, said the official, who requested anonymity.
The EBSA official said Pinnacle stock was used instead of Northwest stock because Northwest executives believe Pinnacle is worth more. Northwest could have contributed its own stock without an exemption, the official noted.
IPO in offing
Northwest anticipates having an initial public offering for Pinnacle later this year or next year. Northwest expects the initial public offering will generate a premium price for shareholders, according to the Federal Register filing.
Northwest officials didn't return calls for comment.
Northwest hired Aon Fiduciary Counselors Inc. as independent fiduciary for the $41 million in Pinnacle stock. Aon will have "discretion to value, acquire, hold and dispose of the Pinnacle stock" in the interest of the plan participants, according the exemption proposal.
Northwest included a put option allowing Aon to sell back the Pinnacle stock to Northwest before the IPO at either the value of the stock at the time of the contribution or the fair market value determined by Aon and an independent appraiser.
Offering such a put option is not unusual for a stock without a public market, the EBSA official said. "We suggested for a non-publicly traded stock they (NWA) provide a put option to the extent the plan might need to realize (cash) on the asset it would have means to do so," the official said.
Northwest's three underfunded pension plans had total assets of $4.38 billion and unfunded liabilities of $1.06 billion as of Jan. 1, according to the filing.
Its so-called contract plan, which covers some 53,900 employees, including those represented by the International Association of Machinists and Aerospace Workers, was underfunded by $741 million, with assets with assets of $1.279 billion.
Its salaried plan, representing 10,500 employees, was underfunded by $67 million, with assets of $349 million. The pilots' plan currently prohibits investments in employer stock; however, Northwest expects to reach an agreement with the Air Line Pilots Association to permit the contribution.