Vectren 2008 Annual Report Download - page 26

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24
The need to expend capital for improvements to the regional transmission system, both to SIGECO’s facilities as
well as to those facilities of adjacent utilities, over the next several years is expected to be significant. The
Company timely recovers its investment in certain new electric transmission projects that benefit the MISO
infrastructure at a FERC approved rate of return.
Wholesale power marketing activities may add volatility to earnings.
Vectren’s regulated electric utility engages in wholesale power marketing activities that primarily involve the
offering of utility-owned or contracted generation into the MISO hourly and real time markets. As part of these
strategies, the Company may also execute energy contracts that are integrated with portfolio requirements around
power supply and delivery. Margin earned from these activities above or below $10.5 million is shared evenly with
customers. These earnings from wholesale marketing activities may vary based on fluctuating prices for electricity
and the amount of electric generating capacity or purchased power available, beyond that needed to meet firm
service requirements.
If Vectren does not accurately forecast future commodities prices or if its hedging procedures do not operate
as planned in certain nonutility businesses, the Company’s net income could be reduced or the Company
may experience losses.
The operations of ProLiance, as well as the Company’s nonutility gas retail supply and coal mining businesses,
execute forward contracts and from time to time option contracts that commit them to purchase and sell natural gas
and coal in the future, including forward contracts to purchase commodities to fulfill forecasted sales transactions
that may or may not occur. If the value of these contracts changes in a direction or manner that is not anticipated,
or if the forecasted sales transactions do not occur, Vectren may experience losses.
To lower the financial exposure related to commodity price fluctuations, these nonutility businesses may execute
contracts that hedge the value of commodity price risk and basis risks. As part of this strategy, Vectren may utilize
fixed-price forward physical purchase and sales contracts, and/or financial forwards, futures, swaps and option
contracts traded in the over-the-counter markets or on exchanges. However, although almost all natural gas and
coal positions are hedged, either with these contracts or with Vectren’s owned coal inventory and known reserves,
Vectren does not hedge its entire exposure or its positions to market price volatility. To the extent Vectren’s
forecasts of future commodities prices are inaccurate, its hedging procedures do not work as planned, its coal
reserves cannot be accessed or it has unhedged positions, fluctuating commodity prices are likely to cause the
Company’s net income to be volatile and may lower its net income.
The performance of Vectren’s nonutility businesses is also subject to certain risks.
Execution of gas marketing strategies by ProLiance and the Company’s nonutility gas retail supply operations as
well as the execution of the Company’s coal mining and energy infrastructure services strategies, and the success of
efforts to invest in and develop new opportunities in the nonutility business area is subject to a number of risks.
These risks include, but are not limited to, the effects of weather; failure of installed performance contracting
products to operate as planned; failure to properly estimate the cost to construct projects; storage field and mining
property development; increased coal mining industry regulation; potential legislation that may limit CO2 and other
greenhouse gases emissions; creditworthiness of customers and joint venture partners; factors associated with
physical energy trading activities, including price, basis, credit, liquidity, volatility, capacity, and interest rate risks;
changes in federal, state or local legal requirements, such as changes in tax laws or rates; and changing market
conditions.
Vectren’s nonutility businesses support its regulated utilities pursuant to service contracts by providing natural gas
supply services, coal, and energy infrastructure services. In most instances, Vectren’s ability to maintain these
service contracts depends upon regulatory discretion and negotiation with interveners, and there can be no
assurance that it will be able to obtain future service contracts, or that existing arrangements will not be revisited.