CenterPoint Energy 2008 Annual Report Download - page 95

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73
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1 ―Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement),‖ which will change
the accounting treatment for convertible securities that the issuer may settle fully or partially in cash. The FSP is
effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, with retrospective application required. Under the final FSP, cash settled convertible
securities will be separated into their debt and equity components. The value assigned to the debt component will be
the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the
difference between the proceeds for the convertible debt and the amount reflected as a debt liability will be recorded
as additional paid-in capital. As a result, the debt will be recorded at a discount reflecting its below market coupon
interest rate. The debt will subsequently be accreted to its par value over its expected life, with the rate of interest
that reflects the market rate at issuance being reflected on the income statement. The Company currently has no
convertible debt that is within the scope of this FSP, but did during prior periods presented. Accordingly, the
implementation of the FSP will have a non-cash affect on net income for prior periods and the consolidated balance
sheets when the Company had contingently convertible debt outstanding. The effect on net income for the years
ended December 31, 2007 and 2008 will be a decrease in net income of $4 million and $1 million, respectively.
Upon adoption of this FSP, the effect on the balance sheet as of December 31, 2008 will be a credit to Additional
Paid-In-Capital of $23 million, with an offsetting debit to retained earnings of $23 million.
(p) Stock-Based Incentive Compensation Plans and Employee Benefit Plans
Stock-Based Incentive Compensation Plans
The Company has long-term incentive compensation plans (LICPs) that provide for the issuance of stock-based
incentives, including performance-based shares, performance-based units, restricted shares and stock options to
officers and key employees. A maximum of approximately 34 million shares of CenterPoint Energy common stock
is authorized to be issued under these plans.
Equity awards are granted to employees without cost to the participants. The performance shares are distributed
based upon the achievement of certain objectives over a three-year performance cycle. The stock awards granted in
2006, 2007 and 2008 are subject to the operational condition that total common dividends declared during the three-
year vesting period must be at least $1.80, $2.04 and $2.19 per share, respectively. The stock awards vest at the end
of a three-year period. Upon vesting, both the performance shares and the stock awards are issued to the participants
along with the value of dividend equivalents earned over the performance cycle or vesting period. The Company
issues new shares in order to satisfy share-based payments related to LICPs.
Option awards are generally granted with an exercise price equal to the average of the high and low sales price of
the Company’s stock at the date of grant. These option awards generally become exercisable in one-third increments
on each of the first through third anniversaries of the grant date and have 10-year contractual terms. No options were
granted during 2006, 2007 and 2008.
The Company recorded LICP compensation expense of $10 million in each of the years ended December 31,
2006, 2007 and 2008.
The total income tax benefit recognized related to such arrangements was $4 million in each of the years ended
December 31, 2006, 2007 and 2008. No compensation cost related to such arrangements was capitalized as a part of
inventory or fixed assets in 2006, 2007 or 2008.
Compensation costs for performance shares and stock awards granted under the LICPs are measured using fair
value and expected achievement levels on the grant date. Forfeitures are estimated on the date of grant and are
adjusted as required through the remaining vesting period.