Vectren 2010 Annual Report Download - page 64

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62
occur. Related to Vectren Source and coal mining operations, most contracts are expected to be settled by physical receipt or
delivery of the commodity. A small portion of contracts that are derivatives are hedges of forecasted transactions. ProLiance
more frequently uses financial instruments that are derivatives to hedge its market exposures that arise from gas in storage,
imbalances, and fixed-price forward purchase and sale contracts.
Interest Rate Risk
The Company is exposed to interest rate risk associated with its borrowing arrangements. Its risk management program seeks
to reduce the potentially adverse effects that market volatility may have on interest expense. The Company limits this risk by
allowing only an annual average of 15 percent to 25 percent of its total debt to be exposed to variable rate volatility. However,
this targeted range may not always be attained during the seasonal increases in short-term borrowings. To manage this
exposure, the Company may use derivative financial instruments.
Market risk is estimated as the potential impact resulting from fluctuations in interest rates on adjustable rate borrowing
arrangements exposed to short-term interest rate volatility. During 2010 and 2009, the weighted average combined borrowings
under these arrangements approximated $198 million and $211 million, respectively. At December 31, 2010 and 2009,
combined borrowings under these arrangements were $160 million and $255 million, respectively. Based upon average
borrowing rates under these facilities during the years ended December 31, 2010 and 2009, an increase of 100 basis points
(one percentage point) in the rates would have increased interest expense by approximately $2 million in each year.
Other Risks
By using financial instruments to manage risk, the Company, as well as ProLiance, creates exposure to counter-party credit risk
and market risk. The Company manages exposure to counter-party credit risk by entering into contracts with companies that
can be reasonably expected to fully perform under the terms of the contract. Counter-party credit risk is monitored regularly and
positions are adjusted appropriately to manage risk. Further, tools such as netting arrangements and requests for collateral are
also used to manage credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a
change in commodity prices or interest rates. The Company attempts to manage exposure to market risk associated with
commodity contracts and interest rates by establishing parameters and monitoring those parameters that limit the types and
degree of market risk that may be undertaken.
The Company’s customer receivables from gas and electric sales and gas transportation services are primarily derived from
residential, commercial, and industrial customers located in Indiana and west central Ohio. The Company manages credit risk
associated with its receivables by continually reviewing creditworthiness and requests cash deposits or refunds cash deposits
based on that review. Credit risk associated with certain investments is also managed by a review of creditworthiness and
receipt of collateral. In addition, credit risk is mitigated by regulatory orders that allow recovery of all uncollectible accounts
expense in Ohio and the gas cost portion of uncollectible accounts expense in Indiana based on historical experience.