Vectren 2013 Annual Report Download - page 58

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56
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), among others.
Over the year’s presented, the Company has recorded charges associated with legacy commercial real estate and other
investments using the methods described above.
Goodwill & 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 to be the level at which impairment is tested as its components are similar. Nonutility Group
impairment testing for its Infrastructure Services and Energy Services segments are also performed at the operating segment
level. An impairment test requires fair value to be estimated. The Company used a discounted cash flow model and other
market based information 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. Goodwill related to the Nonutility Group is also tested using market
comparable data, if readily available, or a discounted cash flow model. The estimated fair value has been substantially in
excess of the carrying amount in each of the last three years and therefore resulted in no impairment.
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 the last three years, these tests yielded no impairment charges.
Pension & 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 obtains actuarial estimates to assess the future potential liability and funding requirements
of the Company's pension and postretirement plans. The Company used the following weighted average assumptions to
develop 2013 periodic benefit cost: a discount rate of approximately 4.00 percent, an expected return on plan assets of 7.75
percent, a rate of compensation increase of 3.50 percent, and an inflation assumption of 2.75 percent. Due to low interest rates,
the discount rate is 80 basis points lower from the assumption used in 2012. The rate of return and inflation rates remained the
same from 2012 to 2013. To estimate 2014 costs, the discount rate, expected return on plan assets, rate of compensation
increase, and inflation assumption were approximately 4.74 percent, 7.75 percent, 3.50 percent, and 2.75 percent respectively,
reflecting an increase in interest rates. Management currently estimates a pension and postretirement cost of approximately $6
million in 2014. 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 increase in the discount rate used to estimate retirement costs generally decreases
periodic benefit cost by approximately $2.0 million.
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 continue to account for its
activities based on the criteria set forth in FASB guidance related to accounting for the effects of certain types of
regulation. Based on the Company’s current review, it believes its regulatory assets are probable of recovery. If all or part of the
Company's operations cease to meet the criteria, a write-off of related regulatory assets and liabilities could be required. In
addition, the Company would be required to determine any impairment to the carrying value of its utility plant and other
regulated assets and liabilities. In the unlikely event of a change in the current regulatory environment, such write-offs and
impairment charges could be significant.