Vectren 2008 Annual Report Download - page 53

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51
In 2006, the Company fully impaired its investment in Pace Carbon. The Company took this action because of the
effect high oil prices had on Pace Carbon’s future operations. The write off of the investment and expensing of
future funding requirements totaled $9.5 million, or $5.7 million after tax in 2006.
Goodwill and Intangible Assets
The Company performs an annual impairment analysis of its goodwill, most of which resides in the Gas Utility
Services operating segment, at the beginning of each year, and more frequently if events or circumstances indicate
that an impairment loss may have been incurred. Impairment tests are performed at the reporting unit level. The
Company has determined its Gas Utility Services operating segment as identified in Note 18 to the consolidated
financial statements to be the reporting unit. Nonutility Group reporting units are generally defined as the operating
companies that aggregate that operating segment. An impairment test requires that a reporting unit’s fair value be
estimated. The Company used a discounted cash flow model to estimate the fair value of its Gas Utility Services
operating segment, and that estimated fair value was compared to its carrying amount, including goodwill. The
estimated fair value was in excess of the carrying amount in 2008, 2007, and 2006 and therefore resulted in no
impairment. Goodwill related to the Nonutility Group is also tested using market comparable data, if readily
available, or a discounted cash flow model.
Estimating fair value using a discounted cash flow model is subjective and requires significant judgment in
applying a discount rate, growth assumptions, company expense allocations, and longevity of cash flows. A 100
basis point increase in the discount rate utilized to calculate the Gas Utility Services segment’s fair value also
would have resulted in no impairment charge.
The Company also annually tests non-amortizing intangible assets for impairment and amortizing intangible assets
are tested on an event and circumstance basis. During 2008, 2007, and 2006, these tests yielded no impairment
charges.
Pension and Other Postretirement Obligations
The Company estimates the expected return on plan assets, discount rate, rate of compensation increase, and future
health care costs, among other inputs, and relies on actuarial estimates to assess the future potential liability and
funding requirements of the Company's pension and postretirement plans. The Company has historically measured
its obligations annually on September 30. However, in 2008, the Company measured these obligations on
December 31 in accordance with SFAS 158. The Company used the following weighted average assumptions to
develop 2008 periodic benefit cost: a discount rate of 6.25 percent, an expected return on plan assets of 8.25
percent, a rate of compensation increase of 3.75 percent, and an inflation assumption of 3.5 percent. In 2008, the
Company increased the discount rate from 5.85 percent, which was used to measure 2007 periodic cost due to an
increase in benchmark interest rates. Due to the recent and significant decline in asset values, retirement plan costs
are expected to be higher in 2009 and in subsequent years. Management currently estimates a pension and
postretirement cost of approximately $14 to $16 million in 2009 depending on funding levels, compared to
approximately $11 million in 2008. Future changes in health care costs, work force demographics, interest rates,
asset values or plan changes could significantly affect the estimated cost of these future benefits.
Management estimates that a 50 basis point decrease in the discount rate used to estimate 2009 projected costs
would generally increase periodic benefit cost by approximately $1.7 million.
Unbilled Revenues
To more closely match revenues and expenses, the Company records revenues for all gas and electricity delivered
to customers but not billed at the end of the accounting period. The Company uses actual units billed during the
month to allocate unbilled units by customer class. Those allocated units are multiplied by rates in effect during the
month to calculate unbilled revenue at balance sheet dates.
Regulation
At each reporting date, the Company reviews current regulatory trends in the markets in which it operates. This
review involves judgment and is critical in assessing the recoverability of regulatory assets as well as the ability to