Vectren 2008 Annual Report Download - page 84

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obligation exceeds amounts previously recognized, the Company records a Regulatory asset for that portion related
to its cost-based and rate regulated utilities. To the extent that excess liability does not relate to a cost-based rate-
regulated utility, the offset is recorded as a reduction to equity in Accumulated other comprehensive income.
SFAS 158 requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet
and requires disclosure in the notes to financial statements certain additional information related to net periodic
benefit cost for the next fiscal year. These measurement date provisions were adopted on January 1, 2008. Prior to
the adoption of SFAS 158, Vectren had a September 30 measurement date. The effects of adopting SFAS 158 were
calculated using a measurement of plan assets and benefit obligations as of September 30, 2007 and a 15-month
projection of periodic cost to December 31, 2008. The Company recorded three months of that cost totaling $2.7
million, or $1.6 million after tax, to retained earnings on January 1, 2008. Related adjustments to Accumulated
other comprehensive income and Regulatory assets were not material.
Net Periodic Benefit Costs
A summary of the components of net periodic benefit cost for the three years ended December 31, 2008, follows:
(In millions) 2008 2007 2006 2008 2007 2006
Service cost 6.1$ 5.6$ 6.0$ 0.5$ 0.5$ 0.6$
Interest cost 15.1 14.9 14.1 4.2 4.0 3.9
Expected return on plan assets (16.6) (14.3) (13.5) (0.5) (0.5) (0.6)
Amortization of prior service cost 1.7 1.7 1.8 (0.8) (0.8) (0.8)
Amortization of actuarial loss (gain) 0.1 1.5 2.4 - (0.1) -
Amortization of transitional obligation - - - 1.1 1.1 1.1
Net periodic benefit cost 6.4$ 9.4$ 10.8$ 4.5$ 4.2$ 4.2$
Pension Benefits Other Benefits
A portion of benefit costs are capitalized as Utility plant. Costs capitalized in 2008, 2007, and 2006 approximated
$3.0 million, $3.9 million, and $4.3 million, respectively.
To calculate the expected return on plan assets, the Company uses the plan assets’ market-related value and an
expected long-term rate of return. For the majority of the Company’s pension plans, the fair market value of the
assets at the measurement date is adjusted to a market-related value by recognizing the change in fair value
experienced in a given year ratably over a five-year period.
Based on a targeted 60 percent equity, 35 percent debt, and 5 percent alternative investments allocation for the
pension plans, the Company has used a long-term expected rate of return of 8.25 percent to calculate 2008 periodic
benefit cost. For fiscal 2009, the expected long-term rate of return will also be 8.25 percent.
The Company has increased the discount rate used to measure its benefit obligations and periodic cost due to
increases in benchmark interest rates that approximate the expected duration of the Company’s benefit obligations.
For fiscal 2009, the discount rate will be consistent with 2008 at 6.25 percent.
The weighted averages of significant assumptions used to determine net periodic benefit costs follow:
(In millions) 2008 2007 2006 2008 2007 2006
Discount rate 6.25% 5.85% 5.50% 6.25% 5.85% 5.50%
Rate of compensation increase 3.75% 3.75% 3.25% N/A N/A N/A
Expected return on plan assets 8.25% 8.25% 8.25% 8.25% 8.25% 8.25%
Expected increase in Consumer Price Index N/A N/A N/A 3.50% 3.50% 3.50%
Pension Benefits Other Benefits
Health care cost trend rate assumptions do not have a material effect on the service and interest cost components of
benefit costs. The Company’s benefit plans limit its exposure to increases in health care costs to annual changes in