Devon Energy (DVN)

respectively. We estimate that our pension expense will approximate $114 million in 2009. Should our actual 2009 contributions vary significantly from our current estimate of $173 million, our actual 2009 pension expense could vary from this estimate.

 

The calculation of pension expense and pension liability requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and actual experience can differ from the assumptions. We believe that the two most critical assumptions affecting pension expense and liabilities are the expected long-term rate of return on plan assets and the assumed discount rate.

 

We assumed that our plan assets would generate a long-term weighted average rate of return of 7.25% and 8.40% at December 31, 2008 and 2007, respectively. We developed these expected long-term rate of return assumptions by evaluating input from external consultants and economists as well as long-term inflation assumptions. The expected long-term rate of return on plan assets is based on a target allocation of investment types in such assets. At December 31, 2008, the target investment allocation for our plan assets is 30% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 40% debt securities. The target investment allocation for our plan assets at December 31, 2007, was 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 20% debt securities. We expect our long-term asset allocation on average to approximate the targeted allocation. We regularly review our actual asset allocation and periodically rebalance the investments to the targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan assets decreases. A decrease in our long-term rate of return assumption of 100 basis points (from 7.25% to 6.25%) would increase the expected 2009 pension expense by $5 million.

 

We discounted our future pension obligations using a weighted average rate of 6.00% and 6.22% at December 31, 2008 and 2007, respectively. The discount rate is determined at the end of each year based on the rate at which obligations could be effectively settled, considering the expected timing of future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk. We consider high quality corporate bond yield indices, such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 25 basis points (from 6.00% to 5.75%) would increase our pension liability at December 31, 2008, by $31 million, and increase estimated 2009 pension expense by $5 million.

 

At December 31, 2008, we had net actuarial losses of $440 million, which will be recognized as a component of pension expense in future years. These losses are primarily due to the large investment losses on plan assets in 2008, reductions in the discount rate since 2001 and increases in participant wages. We estimate that approximately $45 million and $41 million of the unrecognized actuarial losses will be included in pension expense in 2009 and 2010, respectively. The $45 million estimated to be recognized in 2009 is a component of the total estimated 2009 pension expense of $114 million referred to earlier in this section.

 

Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our defined benefit pension plans will impact future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

 

 

Funded Status.  As compared to the projected benefit obligation, our qualified and nonqualified defined benefit plans were underfunded by $501 million and $230 million at December 31, 2008 and 2007, respectively. A detailed reconciliation of the 2008 changes to our underfunded status is included in Note 8 to the accompanying consolidated financial statements. Of the $501 million underfunded status at the end of 2008, $211 million is attributable to various nonqualified defined benefit plans that have no plan assets. However, we have established certain trusts to fund the benefit obligations of such nonqualified plans. As of December 31, 2008, these trusts had investments with a fair value of $50 million. The value of these trusts is included in noncurrent other assets in our accompanying consolidated balance sheets.

 

As compared to the accumulated benefit obligation, our qualified defined benefit plans were underfunded by $209 million at December 31, 2008. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels.

 

Our funding policy regarding the qualified defined benefit plans is to contribute the amounts necessary for the plans’ assets to approximately equal the present value of benefits earned by the participants, as calculated in accordance with the provisions of the Pension Protection Act (“PPA”). During 2008, investment losses significantly reduced the value of our plans’ assets. This decrease was the primary contributor to the significant decrease in the funded status of our pension plans during 2008. The 2008 investment losses, combined with our target funding levels, will cause our 2009 contributions to be higher than those made in recent years. We estimate we will contribute up to approximately $173 million to our qualified pension plans during 2009. However, actual contributions may be less than this amount.

 

Pension Estimate Assumptions.  Our pension expense is recognized on an accrual basis over employees’ approximate service periods and is impacted by funding decisions or requirements. We recognized expense for our defined benefit pension plans of $61 million, $41 million and $31 million in 2008, 2007 and 2006,

respectively. We estimate that our pension expense will approximate $114 million in 2009. Should our actual 2009 contributions vary significantly from our current estimate of $173 million, our actual 2009 pension expense could vary from this estimate.

 

The calculation of pension expense and pension liability requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and actual experience can differ from the assumptions. We believe that the two most critical assumptions affecting pension expense and liabilities are the expected long-term rate of return on plan assets and the assumed discount rate.

 

We assumed that our plan assets would generate a long-term weighted average rate of return of 7.25% and 8.40% at December 31, 2008 and 2007, respectively. We developed these expected long-term rate of return assumptions by evaluating input from external consultants and economists as well as long-term inflation assumptions. The expected long-term rate of return on plan assets is based on a target allocation of investment types in such assets. At December 31, 2008, the target investment allocation for our plan assets is 30% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 40% debt securities. The target investment allocation for our plan assets at December 31, 2007, was 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 20% debt securities. We expect our long-term asset allocation on average to approximate the targeted allocation. We regularly review our actual asset allocation and periodically rebalance the investments to the targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan assets decreases. A decrease in our long-term rate of return assumption of 100 basis points (from 7.25% to 6.25%) would increase the expected 2009 pension expense by $5 million.

 

We discounted our future pension obligations using a weighted average rate of 6.00% and 6.22% at December 31, 2008 and 2007, respectively. The discount rate is determined at the end of each year based on the rate at which obligations could be effectively settled, considering the expected timing of future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk. We consider high quality corporate bond yield indices, such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 25 basis points (from 6.00% to 5.75%) would increase our pension liability at December 31, 2008, by $31 million, and increase estimated 2009 pension expense by $5 million.

 

At December 31, 2008, we had net actuarial losses of $440 million, which will be recognized as a component of pension expense in future years. These losses are primarily due to the large investment losses on plan assets in 2008, reductions in the discount rate since 2001 and increases in participant wages. We estimate that approximately $45 million and $41 million of the unrecognized actuarial losses will be included in pension expense in 2009 and 2010, respectively. The $45 million estimated to be recognized in 2009 is a component of the total estimated 2009 pension expense of $114 million referred to earlier in this section.

 

Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our defined benefit pension plans will impact future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

 

 

Funded Status.  As compared to the projected
benefit obligation, our qualified and nonqualified defined
benefit plans were underfunded by $501 million and
$230 million at December 31, 2008 and 2007,
respectively. A detailed reconciliation of the 2008 changes to
our underfunded status is included in Note 8 to the
accompanying consolidated financial statements. Of the
$501 million underfunded status at the end of 2008,
$211 million is attributable to various nonqualified
defined benefit plans that have no plan assets. However, we have
established certain trusts to fund the benefit obligations of
such nonqualified plans. As of December 31, 2008, these
trusts had investments with a fair value of $50 million.
The value of these trusts is included in noncurrent other assets
in our accompanying consolidated balance sheets.

 

As compared to the accumulated benefit obligation, our qualified
defined benefit plans were underfunded by $209 million at
December 31, 2008. The accumulated benefit obligation
differs from the projected benefit obligation in that the former
includes no assumption about future compensation levels.

 

Our funding policy regarding the qualified defined benefit plans
is to contribute the amounts necessary for the plans’
assets to approximately equal the present value of benefits
earned by the participants, as calculated in accordance with the
provisions of the Pension Protection Act (“PPA”).
During 2008, investment losses significantly reduced the value
of our plans’ assets. This decrease was the primary
contributor to the significant decrease in the funded status of
our pension plans during 2008. The 2008 investment losses,
combined with our target funding levels, will cause our 2009
contributions to be higher than those made in recent years. We
estimate we will contribute up to approximately
$173 million to our qualified pension plans during 2009.
However, actual contributions may be less than this amount.

 

Pension Estimate Assumptions.  Our pension
expense is recognized on an accrual basis over employees’
approximate service periods and is impacted by funding decisions
or requirements. We recognized expense for our defined benefit
pension plans of $61 million, $41 million and
$31 million in 2008, 2007 and 2006,

respectively. We estimate that our pension expense will
approximate $114 million in 2009. Should our actual 2009
contributions vary significantly from our current estimate of
$173 million, our actual 2009 pension expense could vary
from this estimate.

 

The calculation of pension expense and pension liability
requires the use of a number of assumptions. Changes in these
assumptions can result in different expense and liability
amounts, and actual experience can differ from the assumptions.
We believe that the two most critical assumptions affecting
pension expense and liabilities are the expected long-term rate
of return on plan assets and the assumed discount rate.

 

We assumed that our plan assets would generate a long-term
weighted average rate of return of 7.25% and 8.40% at
December 31, 2008 and 2007, respectively. We developed
these expected long-term rate of return assumptions by
evaluating input from external consultants and economists as
well as long-term inflation assumptions. The expected long-term
rate of return on plan assets is based on a target allocation of
investment types in such assets. At December 31, 2008, the
target investment allocation for our plan assets is 30%
U.S. large cap equity securities; 15% U.S. small cap
equity securities, equally allocated between growth and value;
15% international equity securities, equally allocated between
growth and value; and 40% debt securities. The target investment
allocation for our plan assets at December 31, 2007, was
50% U.S. large cap equity securities; 15% U.S. small
cap equity securities, equally allocated between growth and
value; 15% international equity securities, equally allocated
between growth and value; and 20% debt securities. We expect our
long-term asset allocation on average to approximate the
targeted allocation. We regularly review our actual asset
allocation and periodically rebalance the investments to the
targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan
assets decreases. A decrease in our long-term rate of return
assumption of 100 basis points (from 7.25% to 6.25%) would
increase the expected 2009 pension expense by $5 million.

 

We discounted our future pension obligations using a weighted
average rate of 6.00% and 6.22% at December 31, 2008 and
2007, respectively. The discount rate is determined at the end
of each year based on the rate at which obligations could be
effectively settled, considering the expected timing of future
cash flows related to the plans. This rate is based on
high-quality bond yields, after allowing for call and default
risk. We consider high quality corporate bond yield indices,
such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase
as the discount rate is reduced. Lowering the discount rate by
25 basis points (from 6.00% to 5.75%) would increase our
pension liability at December 31, 2008, by
$31 million, and increase estimated 2009 pension expense by
$5 million.

 

At December 31, 2008, we had net actuarial losses of
$440 million, which will be recognized as a component of
pension expense in future years. These losses are primarily due
to the large investment losses on plan assets in 2008,
reductions in the discount rate since 2001 and increases in
participant wages. We estimate that approximately
$45 million and $41 million of the unrecognized
actuarial losses will be included in pension expense in 2009 and
2010, respectively. The $45 million estimated to be
recognized in 2009 is a component of the total estimated 2009
pension expense of $114 million referred to earlier in this
section.

 

Future changes in plan asset returns, assumed discount rates and
various other factors related to the participants in our defined
benefit pension plans will impact future pension expense and
liabilities. We cannot predict with certainty what these factors
will be in the future.

 

 

Funded Status.  As compared to the projected
benefit obligation, our qualified and nonqualified defined
benefit plans were underfunded by $501 million and
$230 million at December 31, 2008 and 2007,
respectively. A detailed reconciliation of the 2008 changes to
our underfunded status is included in Note 8 to the
accompanying consolidated financial statements. Of the
$501 million underfunded status at the end of 2008,
$211 million is attributable to various nonqualified
defined benefit plans that have no plan assets. However, we have
established certain trusts to fund the benefit obligations of
such nonqualified plans. As of December 31, 2008, these
trusts had investments with a fair value of $50 million.
The value of these trusts is included in noncurrent other assets
in our accompanying consolidated balance sheets.

 

As compared to the accumulated benefit obligation, our qualified
defined benefit plans were underfunded by $209 million at
December 31, 2008. The accumulated benefit obligation
differs from the projected benefit obligation in that the former
includes no assumption about future compensation levels.

 

Our funding policy regarding the qualified defined benefit plans
is to contribute the amounts necessary for the plans’
assets to approximately equal the present value of benefits
earned by the participants, as calculated in accordance with the
provisions of the Pension Protection Act (“PPA”).
During 2008, investment losses significantly reduced the value
of our plans’ assets. This decrease was the primary
contributor to the significant decrease in the funded status of
our pension plans during 2008. The 2008 investment losses,
combined with our target funding levels, will cause our 2009
contributions to be higher than those made in recent years. We
estimate we will contribute up to approximately
$173 million to our qualified pension plans during 2009.
However, actual contributions may be less than this amount.

 

Pension Estimate Assumptions.  Our pension
expense is recognized on an accrual basis over employees’
approximate service periods and is impacted by funding decisions
or requirements. We recognized expense for our defined benefit
pension plans of $61 million, $41 million and
$31 million in 2008, 2007 and 2006,

respectively. We estimate that our pension expense will
approximate $114 million in 2009. Should our actual 2009
contributions vary significantly from our current estimate of
$173 million, our actual 2009 pension expense could vary
from this estimate.

 

The calculation of pension expense and pension liability
requires the use of a number of assumptions. Changes in these
assumptions can result in different expense and liability
amounts, and actual experience can differ from the assumptions.
We believe that the two most critical assumptions affecting
pension expense and liabilities are the expected long-term rate
of return on plan assets and the assumed discount rate.

 

We assumed that our plan assets would generate a long-term
weighted average rate of return of 7.25% and 8.40% at
December 31, 2008 and 2007, respectively. We developed
these expected long-term rate of return assumptions by
evaluating input from external consultants and economists as
well as long-term inflation assumptions. The expected long-term
rate of return on plan assets is based on a target allocation of
investment types in such assets. At December 31, 2008, the
target investment allocation for our plan assets is 30%
U.S. large cap equity securities; 15% U.S. small cap
equity securities, equally allocated between growth and value;
15% international equity securities, equally allocated between
growth and value; and 40% debt securities. The target investment
allocation for our plan assets at December 31, 2007, was
50% U.S. large cap equity securities; 15% U.S. small
cap equity securities, equally allocated between growth and
value; 15% international equity securities, equally allocated
between growth and value; and 20% debt securities. We expect our
long-term asset allocation on average to approximate the
targeted allocation. We regularly review our actual asset
allocation and periodically rebalance the investments to the
targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan
assets decreases. A decrease in our long-term rate of return
assumption of 100 basis points (from 7.25% to 6.25%) would
increase the expected 2009 pension expense by $5 million.

 

We discounted our future pension obligations using a weighted
average rate of 6.00% and 6.22% at December 31, 2008 and
2007, respectively. The discount rate is determined at the end
of each year based on the rate at which obligations could be
effectively settled, considering the expected timing of future
cash flows related to the plans. This rate is based on
high-quality bond yields, after allowing for call and default
risk. We consider high quality corporate bond yield indices,
such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase
as the discount rate is reduced. Lowering the discount rate by
25 basis points (from 6.00% to 5.75%) would increase our
pension liability at December 31, 2008, by
$31 million, and increase estimated 2009 pension expense by
$5 million.

 

At December 31, 2008, we had net actuarial losses of
$440 million, which will be recognized as a component of
pension expense in future years. These losses are primarily due
to the large investment losses on plan assets in 2008,
reductions in the discount rate since 2001 and increases in
participant wages. We estimate that approximately
$45 million and $41 million of the unrecognized
actuarial losses will be included in pension expense in 2009 and
2010, respectively. The $45 million estimated to be
recognized in 2009 is a component of the total estimated 2009
pension expense of $114 million referred to earlier in this
section.

 

Future changes in plan asset returns, assumed discount rates and
various other factors related to the participants in our defined
benefit pension plans will impact future pension expense and
liabilities. We cannot predict with certainty what these factors
will be in the future.

 

The calculation of pension expense and pension liability requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from the assumptions. We believe that the two most critical assumptions affecting pension expense and liabilities are the expected long-term rate of return on plan assets and the assumed discount rate.

 

We assumed that our plan assets would generate a long-term weighted average rate of return of 8.40% at both December 31, 2007 and 2006. We developed these expected long-term rate of return assumptions by evaluating input from external consultants and economists as well as long-term inflation assumptions. The expected long-term rate of return on plan assets is based on a target allocation of investment types in such assets. The target investment allocation for our plan assets is 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 20% debt securities. We expect our long-term asset allocation on average to approximate the targeted allocation. We regularly review our actual asset allocation and periodically rebalance the investments to the targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan assets decreases. A decrease in our long-term rate of return assumption of 100 basis points (from 8.40% to 7.40%) would increase the expected 2008 pension expense by $6 million.

 

We discounted our future pension obligations using a weighted average rate of 6.22% and 5.72% at December 31, 2007 and 2006, respectively. The discount rate is determined at the end of each year based on the rate at which obligations could be effectively settled, considering the expected timing of future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk. We consider high quality corporate bond yield indices, such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 25 basis points (from 6.22% to 5.97%) would increase our pension liability at December 31, 2007, by $28 million, and increase estimated 2008 pension expense by $4 million.

 

At December 31, 2007, we had actuarial losses of $208 million, which will be recognized as a component of pension expense in future years. These losses are primarily due to reductions in the discount rate since 2001 and increases in participant wages. We estimate that approximately $14 million and $12 million of the unrecognized actuarial losses will be included in pension expense in 2008 and 2009, respectively. The $14 million estimated to be recognized in 2008 is a component of the total estimated 2008 pension expense of $61 million referred to earlier in this section.

 

Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our defined benefit pension plans will impact future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

 

On August 17, 2006, the Pension Protection Act was signed into law. Beginning in 2008, this act will cause extensive changes in the determination of both the minimum required contribution and the maximum tax deductible limit. Because the new required contribution will approximate our current policy of fully funding the accumulated benefit obligation, the changes are not expected to have a significant impact on future cash flows.

 

 

Funded Status.  As compared to the
“projected benefit obligation,” our qualified and
nonqualified defined benefit plans were underfunded by
$230 million and $178 million at December 31,
2007 and 2006, respectively. A detailed reconciliation of the
2007 changes to our underfunded status is included in
Note 6 to the accompanying consolidated financial
statements. Of the $230 million underfunded status at the
end of 2007, $198 million is attributable to various
nonqualified defined benefit plans that have no plan assets.
However, we have established certain trusts to fund the benefit
obligations of such nonqualified plans. As of December 31,
2007, these trusts had investments with a fair value of
$59 million. The value of these trusts is included in
noncurrent other assets in our accompanying consolidated balance
sheets.

 

As compared to the “accumulated benefit obligation,”
our qualified defined benefit plans were overfunded by
$62 million at December 31, 2007. The accumulated
benefit obligation differs from the projected benefit obligation
in that the former includes no assumption about future
compensation levels. Our current intentions are to provide
sufficient funding in future years to ensure the accumulated
benefit obligation remains fully funded. The actual amount of
contributions required during this period will depend on
investment returns from the plan assets and payments made to
participants. Required contributions also depend upon changes in
actuarial assumptions made during the same period, particularly
the discount rate used to calculate the present value of the
accumulated benefit obligation. For 2008, we anticipate the
accumulated benefit obligation will remain fully funded without
contributing to our qualified defined benefit plans. Therefore,
we don’t expect to contribute to the plans during 2008.

 

Pension Estimate Assumptions.  Our pension
expense is recognized on an accrual basis over employees’
approximate service periods and is generally calculated
independent of funding decisions or requirements. We recognized
expense for our defined benefit pension plans of
$41 million, $31 million and $26 million in 2007,
2006 and 2005, respectively. We estimate that our pension
expense will approximate $61 million in 2008.

The calculation of pension expense and pension liability
requires the use of a number of assumptions. Changes in these
assumptions can result in different expense and liability
amounts, and future actual experience can differ from the
assumptions. We believe that the two most critical assumptions
affecting pension expense and liabilities are the expected
long-term rate of return on plan assets and the assumed discount
rate.

 

We assumed that our plan assets would generate a long-term
weighted average rate of return of 8.40% at both
December 31, 2007 and 2006. We developed these expected
long-term rate of return assumptions by evaluating input from
external consultants and economists as well as long-term
inflation assumptions. The expected long-term rate of return on
plan assets is based on a target allocation of investment types
in such assets. The target investment allocation for our plan
assets is 50% U.S. large cap equity securities; 15%
U.S. small cap equity securities, equally allocated between
growth and value; 15% international equity securities, equally
allocated between growth and value; and 20% debt securities. We
expect our long-term asset allocation on average to approximate
the targeted allocation. We regularly review our actual asset
allocation and periodically rebalance the investments to the
targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan
assets decreases. A decrease in our long-term rate of return
assumption of 100 basis points (from 8.40% to 7.40%) would
increase the expected 2008 pension expense by $6 million.

 

We discounted our future pension obligations using a weighted
average rate of 6.22% and 5.72% at December 31, 2007 and
2006, respectively. The discount rate is determined at the end
of each year based on the rate at which obligations could be
effectively settled, considering the expected timing of future
cash flows related to the plans. This rate is based on
high-quality bond yields, after allowing for call and default
risk. We consider high quality corporate bond yield indices,
such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase
as the discount rate is reduced. Lowering the discount rate by
25 basis points (from 6.22% to 5.97%) would increase our
pension liability at December 31, 2007, by
$28 million, and increase estimated 2008 pension expense by
$4 million.

 

At December 31, 2007, we had actuarial losses of
$208 million, which will be recognized as a component of
pension expense in future years. These losses are primarily due
to reductions in the discount rate since 2001 and increases in
participant wages. We estimate that approximately
$14 million and $12 million of the unrecognized
actuarial losses will be included in pension expense in 2008 and
2009, respectively. The $14 million estimated to be
recognized in 2008 is a component of the total estimated 2008
pension expense of $61 million referred to earlier in this
section.

 

Future changes in plan asset returns, assumed discount rates and
various other factors related to the participants in our defined
benefit pension plans will impact future pension expense and
liabilities. We cannot predict with certainty what these factors
will be in the future.

 

On August 17, 2006, the Pension Protection Act was signed
into law. Beginning in 2008, this act will cause extensive
changes in the determination of both the minimum required
contribution and the maximum tax deductible limit. Because the
new required contribution will approximate our current policy of
fully funding the accumulated benefit obligation, the changes
are not expected to have a significant impact on future cash
flows.

 

The calculation of pension expense and pension liability requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from the assumptions. We believe that the two most critical assumptions affecting pension expense and liabilities are the expected long-term rate of return on plan assets and the assumed discount rate.

 

We assumed that our plan assets would generate a long-term weighted average rate of return of 8.40% at both December 31, 2007 and 2006. We developed these expected long-term rate of return assumptions by evaluating input from external consultants and economists as well as long-term inflation assumptions. The expected long-term rate of return on plan assets is based on a target allocation of investment types in such assets. The target investment allocation for our plan assets is 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 20% debt securities. We expect our long-term asset allocation on average to approximate the targeted allocation. We regularly review our actual asset allocation and periodically rebalance the investments to the targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan assets decreases. A decrease in our long-term rate of return assumption of 100 basis points (from 8.40% to 7.40%) would increase the expected 2008 pension expense by $6 million.

 

We discounted our future pension obligations using a weighted average rate of 6.22% and 5.72% at December 31, 2007 and 2006, respectively. The discount rate is determined at the end of each year based on the rate at which obligations could be effectively settled, considering the expected timing of future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk. We consider high quality corporate bond yield indices, such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 25 basis points (from 6.22% to 5.97%) would increase our pension liability at December 31, 2007, by $28 million, and increase estimated 2008 pension expense by $4 million.

 

At December 31, 2007, we had actuarial losses of $208 million, which will be recognized as a component of pension expense in future years. These losses are primarily due to reductions in the discount rate since 2001 and increases in participant wages. We estimate that approximately $14 million and $12 million of the unrecognized actuarial losses will be included in pension expense in 2008 and 2009, respectively. The $14 million estimated to be recognized in 2008 is a component of the total estimated 2008 pension expense of $61 million referred to earlier in this section.

 

Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our defined benefit pension plans will impact future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

 

On August 17, 2006, the Pension Protection Act was signed into law. Beginning in 2008, this act will cause extensive changes in the determination of both the minimum required contribution and the maximum tax deductible limit. Because the new required contribution will approximate our current policy of fully funding the accumulated benefit obligation, the changes are not expected to have a significant impact on future cash flows.

 

 

Funded Status.  As compared to the
“projected benefit obligation,” our qualified and
nonqualified defined benefit plans were underfunded by
$230 million and $178 million at December 31,
2007 and 2006, respectively. A detailed reconciliation of the
2007 changes to our underfunded status is included in
Note 6 to the accompanying consolidated financial
statements. Of the $230 million underfunded status at the
end of 2007, $198 million is attributable to various
nonqualified defined benefit plans that have no plan assets.
However, we have established certain trusts to fund the benefit
obligations of such nonqualified plans. As of December 31,
2007, these trusts had investments with a fair value of
$59 million. The value of these trusts is included in
noncurrent other assets in our accompanying consolidated balance
sheets.

 

As compared to the “accumulated benefit obligation,”
our qualified defined benefit plans were overfunded by
$62 million at December 31, 2007. The accumulated
benefit obligation differs from the projected benefit obligation
in that the former includes no assumption about future
compensation levels. Our current intentions are to provide
sufficient funding in future years to ensure the accumulated
benefit obligation remains fully funded. The actual amount of
contributions required during this period will depend on
investment returns from the plan assets and payments made to
participants. Required contributions also depend upon changes in
actuarial assumptions made during the same period, particularly
the discount rate used to calculate the present value of the
accumulated benefit obligation. For 2008, we anticipate the
accumulated benefit obligation will remain fully funded without
contributing to our qualified defined benefit plans. Therefore,
we don’t expect to contribute to the plans during 2008.

 

Pension Estimate Assumptions.  Our pension
expense is recognized on an accrual basis over employees’
approximate service periods and is generally calculated
independent of funding decisions or requirements. We recognized
expense for our defined benefit pension plans of
$41 million, $31 million and $26 million in 2007,
2006 and 2005, respectively. We estimate that our pension
expense will approximate $61 million in 2008.

The calculation of pension expense and pension liability
requires the use of a number of assumptions. Changes in these
assumptions can result in different expense and liability
amounts, and future actual experience can differ from the
assumptions. We believe that the two most critical assumptions
affecting pension expense and liabilities are the expected
long-term rate of return on plan assets and the assumed discount
rate.

 

We assumed that our plan assets would generate a long-term
weighted average rate of return of 8.40% at both
December 31, 2007 and 2006. We developed these expected
long-term rate of return assumptions by evaluating input from
external consultants and economists as well as long-term
inflation assumptions. The expected long-term rate of return on
plan assets is based on a target allocation of investment types
in such assets. The target investment allocation for our plan
assets is 50% U.S. large cap equity securities; 15%
U.S. small cap equity securities, equally allocated between
growth and value; 15% international equity securities, equally
allocated between growth and value; and 20% debt securities. We
expect our long-term asset allocation on average to approximate
the targeted allocation. We regularly review our actual asset
allocation and periodically rebalance the investments to the
targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan
assets decreases. A decrease in our long-term rate of return
assumption of 100 basis points (from 8.40% to 7.40%) would
increase the expected 2008 pension expense by $6 million.

 

We discounted our future pension obligations using a weighted
average rate of 6.22% and 5.72% at December 31, 2007 and
2006, respectively. The discount rate is determined at the end
of each year based on the rate at which obligations could be
effectively settled, considering the expected timing of future
cash flows related to the plans. This rate is based on
high-quality bond yields, after allowing for call and default
risk. We consider high quality corporate bond yield indices,
such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase
as the discount rate is reduced. Lowering the discount rate by
25 basis points (from 6.22% to 5.97%) would increase our
pension liability at December 31, 2007, by
$28 million, and increase estimated 2008 pension expense by
$4 million.

 

At December 31, 2007, we had actuarial losses of
$208 million, which will be recognized as a component of
pension expense in future years. These losses are primarily due
to reductions in the discount rate since 2001 and increases in
participant wages. We estimate that approximately
$14 million and $12 million of the unrecognized
actuarial losses will be included in pension expense in 2008 and
2009, respectively. The $14 million estimated to be
recognized in 2008 is a component of the total estimated 2008
pension expense of $61 million referred to earlier in this
section.

 

Future changes in plan asset returns, assumed discount rates and
various other factors related to the participants in our defined
benefit pension plans will impact future pension expense and
liabilities. We cannot predict with certainty what these factors
will be in the future.

 

On August 17, 2006, the Pension Protection Act was signed
into law. Beginning in 2008, this act will cause extensive
changes in the determination of both the minimum required
contribution and the maximum tax deductible limit. Because the
new required contribution will approximate our current policy of
fully funding the accumulated benefit obligation, the changes
are not expected to have a significant impact on future cash
flows.

 

evaluating input from external consultants and economists as well as long-term inflation assumptions. The expected long-term rate of return on plan assets is based on a target allocation of investment types in such assets. The target investment allocation for our plan assets is 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 20% debt securities. We expect our long-term asset allocation on average to approximate the targeted allocation. We regularly review our actual asset allocation and periodically rebalance the investments to the targeted allocation when considered appropriate.

 

Pension expense increases as the expected rate of return on plan assets decreases. A decrease in our long-term rate of return assumption of 100 basis points (from 8.40% to 7.40%) would increase the expected 2007 pension expense by $6 million.

 

We discounted our future pension obligations using a weighted average rate of 5.72% at both December 31, 2006 and 2005. The discount rate is determined at the end of each year based on the rate at which obligations could be effectively settled. This rate is based on high-quality bond yields, after allowing for call and default risk. We consider high quality corporate bond yield indices, such as Moody’s Aa, when selecting the discount rate.

 

The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 25 basis points (from 5.72% to 5.47%) would increase our pension liability at December 31, 2006, by $25 million, and increase estimated 2007 pension expense by $3 million.

 

At December 31, 2006, we had actuarial losses of $214 million which will be recognized as a component of pension expense in future years. These losses are primarily due to reductions in the discount rate since 2001 and increases in participant wages. We estimate that approximately $15 million and $13 million of the unrecognized actuarial losses will be included in pension expense in 2007 and 2008, respectively. The $15 million estimated to be recognized in 2007 is a component of the total estimated 2007 pension expense of $43 million referred to earlier in this section.

 

Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our defined benefit pension plans will impact future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.

 

On August 17, 2006, the Pension Protection Act was signed into law. Beginning in 2008, this act will cause extensive changes in the determination of both the minimum required contribution and the maximum tax deductible limit. Because the new required contribution will approximate our current policy of fully funding the accumulated benefit obligation, the changes are not expected to have a significant impact on future cash flows.

 

Beginning with our December 31, 2006 balance sheet, Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R), requires us to recognize on our consolidated balance sheet the funded status of our defined benefit plans. The funded status is measured as the difference between the projected benefit obligation and the fair value of plan assets. As a result, we recognized as liabilities the actuarial losses and other costs that were previously unrecognized under prior accounting rules, and the net effect was also recorded as a reduction to stockholders’ equity on December 31, 2006. This reduction was $140 million, or less than 1% of our stockholders’ equity.