PG&E 2007 Annual Report Download - page 69

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In July 2006, the CPUC approved the Utility’s 2006
Pension Contribution Application to resume rate recovery
for the Utility’s contributions to the qualifi ed defi ned benefi t
pension plan for the years 2006 through 2009, with the goal
of fully-funded status by 2010. In March 2007, the CPUC
extended the terms of the decision for one additional year,
through 2010. PG&E Corporation and the Utility made
total pension contributions of approximately $139 million
in 2007 and expect to make total contributions of approxi-
mately $176 million annually for the years 2008, 2009, and
2010. PG&E Corporation and the Utility made total con-
tributions of approximately $38 million in 2007 related to
their other postretirement benefi t plans and expect to make
contributions of approximately $58 million annually for the
years 2008, 2009, and 2010.
Pension and other postretirement benefi t funds are
held in external trusts. Trust assets, including accumulated
earnings, must be used exclusively for pension and other
postretirement benefi t payments. Consistent with the trusts’
investment policies, assets are invested in U.S. equities, non-
U.S. equities, absolute return securities, and fi xed income
securities. Investment securities are exposed to various risks,
including interest rate risk, credit risk, and overall market
volatility. As a result of these risks, it is reasonably possible
that the market values of investment securities could increase
or decrease in the near term. Increases or decreases in market
values could materially affect the current value of the trusts
and, as a result, the future level of pension and other post-
retirement benefi t expense.
Expected rates of return on plan assets were developed
by determining projected stock and bond returns and then
applying these returns to the target asset allocations of the
employee benefi t trusts, resulting in a weighted average rate
of return on plan assets.
Fixed income returns were projected based on real matu-
rity and credit spreads added to a long-term infl ation rate.
Equity returns were estimated based on estimates of dividend
yield and real earnings growth added to a long-term rate
of infl ation. For the Utility’s Retirement Plan, the assumed
return of 7.4% compares to a ten-year actual return of 7.9%.
The rate used to discount pension and other post-
retirement benefi t plan liabilities was based on a yield
curve developed from market data of over 500 Aa-grade
non-callable bonds at December 31, 2007. This yield curve
has discount rates that vary based on the duration of the
obligations. The estimated future cash fl ows for the pension
and other postretirement obligations were matched to the
corresponding rates on the yield curve to derive a weighted
average discount rate.
The following refl ects the sensitivity of pension costs and
projected benefi t obligation to changes in certain actuarial
assumptions:
Increase in
Projected
Increase Benefi t
Increase in 2007 Obligation at
(decrease) in Pension December 31,
(in millions) Assumption Costs 2007
Discount rate (0.5)% $22 $612
Rate of return on
plan assets (0.5)% 44 —
Rate of increase in
compensation 0.5% 18 129
The following refl ects the sensitivity of other post-
retirement benefi t costs and accumulated benefi t obligation
to changes in certain actuarial assumptions:
Increase Increase in
in 2007 Accumulated
Other Benefi t
Increase Post- Obligation at
(decrease) in retirement December 31,
(in millions) Assumption Benefi t Costs 2007
Health care cost trend rate 0.5% $6 $32
Discount rate (0.5)% 7 76