Vectren 2008 Annual Report Download - page 52

Download and view the complete annual report

Please find page 52 of the 2008 Vectren annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

50
Critical Accounting Policies
Management is required to make judgments, assumptions, and estimates that affect the amounts reported in the
consolidated financial statements and the related disclosures that conform to accounting principles generally
accepted in the United States. The consolidated financial statement footnotes describe the significant accounting
policies and methods used in the preparation of the consolidated financial statements. Certain estimates used in the
financial statements are subjective and use variables that require judgment. These include the estimates to perform
goodwill and other asset impairments tests and to determine pension and postretirement benefit obligations. The
Company makes other estimates, in the course of accounting for unbilled revenue and the effects of regulation that
are critical to the Company’s financial results but that are less likely to be impacted by near term changes. Other
estimates that significantly affect the Company’s results, but are not necessarily critical to operations, include
depreciating utility and nonutility plant, valuing reclamation liabilities, valuing derivative contracts, and estimating
uncollectible accounts and coal reserves, among others. Actual results could differ from these estimates.
Impairment Review of Investments
The Company has both debt and equity investments in unconsolidated entities. When events occur that may cause
one of these investments to be impaired, the Company performs both a qualitative and quantitative review of that
investment and when necessary performs an impairment analysis. An impairment analysis of notes receivable
usually involves the comparison of the investment’s estimated free cash flows to the stated terms of the note, or for
notes that are collateral dependent, a comparison of the collateral’s fair value, if readily available, to the carrying
amount of the note. An impairment analysis of equity investments involves comparison of the investment’s
estimated fair value to its carrying amount. Fair value is estimated using market comparisons, appraisals, and/or
discounted cash flow analyses. Calculating free cash flows and fair value using the above methods is subjective
and requires judgment concerning growth assumptions, longevity of cash flows, and discount rates (for fair value
calculations).
The current economic recession has impacted the value of commercial real estate investments within the Other
Businesses nonutility portfolio, and the prospect for recovery of that value has diminished. The Company assessed
its commercial real estate investments for impairment and identified the need to reduce their carrying values. The
impairment charge recorded in 2008 totaled $10.0 million. The assessment was conducted using SFAS No. 114
“Accounting by Creditors for Impairment of a Loan”, APB 18 “The Equity Method of Accounting for Investments
in Common Stock”, and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, and
their related amendments and interpretations. An impairment analysis of notes receivable per SFAS 114 involves
the comparison of the investment’s estimated free cash flows to the stated terms of the note. An impairment
analysis of equity method investments per APB 18 is a comparison of the investment’s estimated fair value to its
carrying amount and an assessment of whether any decline in fair value is “other than temporary”. Fair value was
estimated primarily using discounted future cash flows. Calculating free cash flows and the resulting fair value is
subjective and requires judgment concerning growth assumptions, longevity of cash flows, and discount rates.
Significant assumptions impacting these analyses were holding periods, net operating income and capitalization
rates, which have increased in the current economic and credit constrained environment. Related to capitalization
rates, the Company used a 9.75 cap rate to value a suburban Chicago commercial real estate holding owned by the
Company that is currently vacant and a 9.25 cap rate to value leased commercial real estate located in Charlotte,
NC and Birmingham, AL that serve as collateral for a note receivable. A 50 basis point increase in those cap rates
would have increased the impairment charge by $2.5 million. Actual realized values could differ from these
estimates.
In 2008 and 2007, the Company examined the recoverability of a note receivable from the City of Alameda,
California and determined the carrying value of that investment is not impaired. This was primarily a qualitative
assessment of collecting amounts due pursuant to the note agreement’s contract provisions. Based on that review,
the Company believes collection is probable. However, actual amounts realized could differ from recorded
amounts.