CenterPoint Energy 2008 Annual Report Download - page 78

56
In September 2006, the FASB issued SFAS No. 158, ―Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132(R)‖ (SFAS No. 158).
SFAS No. 158 requires us, as the sponsor of a plan, to (a) recognize on our balance sheet as an asset a plan’s over-
funded status or as a liability such plan’s under-funded status, (b) measure a plan’s assets and obligations as of the
end of our fiscal year and (c) recognize changes in the funded status of our plans in the year that changes occur
through adjustments to other comprehensive income.
As a result of the adoption of SFAS No. 158 as of December 31, 2006, we recorded a regulatory asset of
$466 million and a charge to accumulated comprehensive income of $79 million, net of tax.
At December 31, 2008, the projected benefit obligation exceeded the market value of plan assets of our pension
plans by $434 million. Changes in interest rates or the market values of the securities held by the plan during 2009
could materially, positively or negatively, change our funded status and affect the level of pension expense and
required contributions.
Pension expense was $46 million, $15 million and $1 million for 2006, 2007 and 2008, respectively.
The calculation of pension expense and related liabilities requires the use of assumptions. Changes in these
assumptions can result in different expense and liability amounts, and future actual experience can differ from the
assumptions. Two of the most critical assumptions are the expected long-term rate of return on plan assets and the
assumed discount rate.
As of December 31, 2008, our qualified pension plan had an expected long-term rate of return on plan assets of
8.00%, which was 0.50% lower than the rate assumed as of December 31, 2007. We believe that our actual asset
allocation, on average, will approximate the targeted allocation and the estimated return on net assets. We regularly
review our actual asset allocation and periodically rebalance plan assets as appropriate.
As of December 31, 2008, the projected benefit obligation was calculated assuming a discount rate of 6.90%,
which is a 0.50% increase from the 6.40% discount rate assumed in 2007. The discount rate was determined by
reviewing yields on high-quality bonds that receive one of the two highest ratings given by a recognized rating
agency and the expected duration of pension obligations specific to the characteristics of our plan.
Pension expense for 2009, including the benefit restoration plan, is estimated to be $112 million, of which we
expect $89 million to impact pre-tax earnings, based on an expected return on plan assets of 8.0% and a discount
rate of 6.90% as of December 31, 2008. If the expected return assumption were lowered by 0.5% (from 8.00% to
7.50%), 2009 pension expense would increase by approximately $6 million.
As of December 31, 2008, the pension plan projected benefit obligation exceeded plan assets (including the
unfunded benefit restoration plan) by $434 million. If the discount rate were lowered by 0.5% (from 6.90% to
6.40%), the assumption change would increase our projected benefit obligation and 2009 pension expense by
approximately $74 million and $5 million, respectively. In addition, the assumption change would impact our
Consolidated Balance Sheet by increasing the regulatory asset recorded as of December 31, 2008 by $59 million and
would result in a charge to comprehensive income in 2008 of $10 million, net of tax.
Future changes in plan asset returns, assumed discount rates and various other factors related to the pension plan
will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Impact of Changes in Interest Rates and Energy Commodity Prices
We are exposed to various market risks. These risks arise from transactions entered into in the normal course of
business and are inherent in our consolidated financial statements. Most of the revenues and income from our
business activities are impacted by market risks. Categories of market risk include exposure to commodity prices
through non-trading activities, interest rates and equity prices. A description of each market risk is set forth below: