PG&E 2009 Annual Report Download - page 40

health care cost trend rate. PG&E Corporation and the
Utility review these assumptions on an annual basis and
adjust them as necessary. While PG&E Corporation and
the Utility believe that the assumptions used are
appropriate, significant differences in actual experience,
plan changes, or significant changes in assumptions may
materially affect the recorded pension and other
postretirement benefit obligations and future plan
expenses.
Changes in benefit obligations associated with these
assumptions may not be recognized as costs on the
statement of income. Differences between actuarial
assumptions and actual plan results are deferred in
Accumulated other comprehensive income (loss) and are
amortized into cost only when the accumulated differences
exceed 10% of the greater of the projected benefit
obligation or the market value of the related plan assets. If
necessary, the excess is amortized over the average
remaining service period of active employees. As such,
benefit costs recorded in any period may not reflect the
actual level of cash benefits provided to plan participants.
PG&E Corporation’s and the Utility’s recorded pension
expense totaled $458 million in 2009, $169 million in
2008, and $117 million in 2007. PG&E Corporation and
the Utility recorded expense for other postretirement
benefits totaled $94 million in 2009, $44 million in 2008,
and $44 million in 2007.
PG&E Corporation and the Utility recognize the funded
status of their respective plans on their respective
Consolidated Balance Sheet with an offsetting entry to
Accumulated other comprehensive income (loss), resulting
in no impact to their respective Consolidated Statements
of Income.
Since 1993, the CPUC has authorized the Utility to
recover the costs associated with its other postretirement
benefits based on the annual tax-deductible contributions
to the appropriate trusts. Regulatory adjustments have been
recorded in the Consolidated Statements of Income and
the Consolidated Balance Sheets of the Utility to reflect
the difference between Utility pension expense or income
for accounting purposes and Utility pension expense or
income for ratemaking, which is based on a funding
approach.
The differences between pension benefit costs recognized
in accordance with GAAP and amounts recognized for
ratemaking purposes are recorded as a regulatory asset or
liability as amounts are probable of recovery from
customers. (See Note 3 of the Notes to the Consolidated
Financial Statements.) Therefore, the difference is not
expected to impact net income in future periods.
PG&E Corporation’s and the Utility’s funding policy is
to contribute tax-deductible amounts, consistent with
applicable regulatory decisions and federal minimum
funding requirements. Based upon current assumptions
and available information, the Utility has not identified
any minimum funding requirements related to its pension
plans.
Pension and other postretirement benefit funds are held
in external trusts. Trust assets, including accumulated
earnings, must be used exclusively for pension and other
postretirement benefit payments. Consistent with the
trusts’ investment policies, assets are invested in U.S.
equities, non-U.S. equities, absolute return securities, and
fixed 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 postretirement benefit
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 benefit trusts, resulting in a weighted average rate
of return on plan assets. Fixed income returns were
projected based on real maturity and credit spreads added
to a long-term inflation rate. Equity returns were estimated
based on estimates of dividend yield and real earnings
growth added to a long-term rate of inflation. For the
Utility’s defined benefit pension plan, the assumed return
of 6.8% compares to a 10-year actual return of 4.7%.
The rate used to discount pension and other
postretirement benefit plan liabilities was based on a yield
curve developed from market data of approximately 300
Aa-grade non-callable bonds at December 31, 2009. This
yield curve has discount rates that vary based on the
duration of the obligations. The estimated future cash
flows for the pension and other postretirement obligations
were matched to the corresponding rates on the yield curve
to derive a weighted average discount rate.
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