Vectren 2012 Annual Report Download - page 79

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projected years of service. Annual service cost represents one year’s benefit accrual while the PBO represents benefits
allocated to previously accrued service. For other postretirement plans, service cost is calculated by dividing the present value
of a participant’s projected postretirement benefits into equal parts based upon the number of years between a participant’s hire
date and first eligible retirement date. Annual service cost represents one year’s benefit accrual while the APBO represents
benefit allocated to previously accrued service. To calculate the expected return on pension plan assets, the Company uses the
plan assets’ market-related value and an expected long-term rate of return. For the majority of the Company’s pension plans,
the fair market value of the assets at the balance sheet date is adjusted to a market-related value by recognizing the change in
fair value experienced in a given year ratably over a five-year period. Interest cost represents the annual accretion of the PBO
and APBO at the discount rate. Actuarial gains and losses outside of a corridor (equal to 10 percent of the greater of the benefit
obligation and the market-related value of assets) are amortized over the expected future working lifetime of active participants
(except for plans where almost all participants are inactive). Prior service costs related to plan changes are amortized over the
expected future working lifetime (or to full eligibility date for postretirement plan other than pensions) of the active participants at
the time of the amendment.
Asset Retirement Obligations
A portion of removal costs related to interim retirements of gas utility pipeline and utility poles, certain asbestos-related issues,
and reclamation activities meet the definition of an asset retirement obligation (ARO). The Company records the fair value of a
liability for a legal ARO in the period in which it is incurred. When the liability is initially recorded, the Company capitalizes a cost
by increasing the carrying amount of the related long-lived asset. The liability is accreted, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the liability, the Company settles the obligation for its
recorded amount or incurs a gain or loss. To the extent regulation is involved, regulatory assets and liabilities result when
accretion and amortization is adjusted to match rates established by regulators and any gain or loss is subject to deferral.
Product Warranties, Performance Guarantees & Other Guarantees
Liabilities and expenses associated with product warranties and performance guarantees are recognized based on historical
experience at the time the associated revenue is recognized. Adjustments are made as changes become reasonably
estimable. The Company does not recognize the fair value of an obligation at inception for these guarantees because they are
guarantees of the Company’s own performance and/or product installations.
While not significant at December 31, 2012 or 2011, the Company does recognize the fair value of an obligation at the inception
of a guarantee in certain circumstances. These circumstances would include executing certain indemnification agreements and
guaranteeing operating lease residual values, the performance of a third party, or the indebtedness of a third party.
Energy Contracts & Derivatives
The Company will periodically execute derivative contracts in the normal course of operations while buying and selling
commodities to be used in operations, optimizing its generation assets, and managing risk. A derivative is recognized on the
balance sheet as an asset or liability measured at its fair market value and the change in the derivative's fair market value is
recognized currently in earnings unless specific hedge criteria are met.
When an energy contract that is a derivative is designated and documented as a normal purchase or normal sale (NPNS), it is
exempted from mark-to-market accounting. Most energy contracts executed by the Company are subject to the NPNS
exclusion or are not considered derivatives. Such energy contracts include Real Time and Day Ahead purchase and sale
contracts with the MISO, natural gas purchases from ProLiance and others, and wind farm and other electric generating
contracts.
When the Company engages in energy contracts and financial contracts that are derivatives and are not subject to the NPNS or
other exclusions, such contracts are recorded at market value as current or noncurrent assets or liabilities depending on their
value and on when the contracts are expected to be settled. Contracts and any associated collateral with counter-parties
subject to master netting arrangements are presented net in the Consolidated Balance Sheets. The offset resulting from
carrying the derivative at fair value on the balance sheet is charged to earnings unless it qualifies as a hedge or is subject to
regulatory accounting treatment. When hedge accounting is appropriate, the Company assesses and documents hedging
relationships between the derivative contract and underlying risks as well as its risk management objectives and anticipated
effectiveness. When the hedging relationship is highly effective, derivatives are designated as hedges. The market value of the