CenterPoint Energy 2008 Annual Report Download - page 76

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54
balance sheet as regulatory assets or liabilities and are recognized in income as the related amounts are included in
service rates and recovered from or refunded to customers. Regulatory assets and liabilities are recorded when it is
probable, as defined in SFAS No. 5, ―Accounting for Contingencies‖ (SFAS No. 5), that these items will be
recovered or reflected in future rates. Determining probability requires significant judgment on the part of
management and includes, but is not limited to, consideration of testimony presented in regulatory hearings,
proposed regulatory decisions, final regulatory orders and the strength or status of applications for rehearing or state
court appeals. If events were to occur that would make the recovery of these assets and liabilities no longer
probable, we would be required to write off or write down these regulatory assets and liabilities. At December 31,
2008, we had recorded regulatory assets of $3.7 billion and regulatory liabilities of $821 million.
Impairment of Long-Lived Assets and Intangibles
We review the carrying value of our long-lived assets, including goodwill and identifiable intangibles, whenever
events or changes in circumstances indicate that such carrying values may not be recoverable, and at least annually
for goodwill as required by SFAS No. 142, ―Goodwill and Other Intangible Assets.‖ No impairment of goodwill
was indicated based on our annual analysis as of July 1, 2008. Unforeseen events and changes in circumstances and
market conditions and material differences in the value of long-lived assets and intangibles due to changes in
estimates of future cash flows, interest rates, regulatory matters and operating costs could negatively affect the fair
value of our assets and result in an impairment charge.
Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties
and may be estimated using a number of techniques, including quoted market prices or valuations by third parties,
present value techniques based on estimates of cash flows, or multiples of earnings or revenue performance
measures. The fair value of the asset could be different using different estimates and assumptions in these valuation
techniques.
Asset Retirement Obligations
We account for our long-lived assets under SFAS No. 143, ―Accounting for Asset Retirement Obligations‖
(SFAS No. 143), and Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 47, ―Accounting for
Conditional Asset Retirement Obligations — An Interpretation of SFAS No. 143‖ (FIN 47). SFAS No. 143 and
FIN 47 require that an asset retirement obligation be recorded at fair value in the period in which it is incurred if a
reasonable estimate of fair value can be made. In the same period, the associated asset retirement costs are
capitalized as part of the carrying amount of the related long-lived asset. Rate-regulated entities may recognize
regulatory assets or liabilities as a result of timing differences between the recognition of costs as recorded in
accordance with SFAS No. 143 and FIN 47, and costs recovered through the ratemaking process.
We estimate the fair value of asset retirement obligations by calculating the discounted cash flows that are
dependent upon the following components:
• Inflation adjustment — The estimated cash flows are adjusted for inflation estimates for labor, equipment,
materials, and other disposal costs;
• Discount rate — The estimated cash flows include contingency factors that were used as a proxy for the
market risk premium; and
• Third-party markup adjustments — Internal labor costs included in the cash flow calculation were adjusted
for costs that a third party would incur in performing the tasks necessary to retire the asset.
Changes in these factors could materially affect the obligation recorded to reflect the ultimate cost associated with
retiring the assets under SFAS No. 143 and FIN 47. For example, if the inflation adjustment increased 25 basis
points, this would increase the balance for asset retirement obligations by approximately 3.0%. Similarly, an
increase in the discount rate by 25 basis points would decrease asset retirement obligations by approximately the
same percentage. At December 31, 2008, our estimated cost of retiring these assets is approximately $63 million.