Vectren 2008 Annual Report Download - page 47

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45
that a maximum of $35 million of its total investment would be at risk (the Company’s proportionate share of the
investment would be $21 million). The Company believes that such a charge, should it occur, would not have a
material adverse effect on either the Company’s or ProLiance’s financial position, cash flows, or liquidity, but it
could be material to net income in any one accounting period. Further, it is not expected that the delay in Liberty’s
development will impact ProLiance’s ability to meet the needs of its customers.
Vectren Source
Vectren Retail, LLC (d/b/a Vectren Source), a wholly owned subsidiary, provides natural gas and other related
products and services to customers opting for choice among energy providers. Vectren Source earned
approximately $1.9 million in 2008, compared to $1.2 million in 2007 and a loss of $0.4 million in 2006. Results
in 2008 were impacted by a $0.5 million gain on the sale of its Georgia customer base. The earnings increase in
2007 compared to 2006 is primarily due to lower marketing costs in 2007 and mild weather in 2006. Vectren
Source’s customer count at December 31, 2008, was approximately 170,000 customers. This customer base
reflects nearly 40,000 equivalent customers in VEDO’s service territory as part of VEDO’s process of exiting the
merchant function and a loss of customers due to exiting the Georgia market. Vectren Source began providing
services to these Ohio customers on October 1, 2008. Customer count at the end of 2007 and 2006 was 161,000
and 150,000 respectively.
Coal Mining
Coal Mining mines and sells coal to the Company’s utility operations and to third parties through its wholly owned
subsidiary Vectren Fuels, Inc. (Fuels). Coal Mining, inclusive of holding company costs, operated at a loss of $4.6
million in 2008, compared to earnings of $2.0 million in 2007 and $5.0 million in 2006. The decrease in earnings
in 2008 compared to 2007 was primarily due to lower production and increased roofing structure costs as a result of
revised Mine Safety and Health Administration (MSHA) regulatory guidelines which necessitated changes to the
mining plan. As a result, the yield at the Prosperity mine decreased to 56 percent in 2008 down from 60 percent in
2007 and 2006. In addition, 2008 has been impacted by higher diesel fuel costs and unfavorable geologic
conditions at the Company’s surface mine, which has resulted in more costs to enhance the BTU content of mined
coal. The decline in earnings in 2007 compared to 2006 was primarily due to the effects of compliance with
revised MSHA seal guidelines and higher sulfur content from coal mined under a revised mining plan. These
decreases are offset somewhat by reduced operating costs from high wall mining at the Cypress Creek surface
mine.
In April 2006, Fuels announced plans to open two new underground mines near Vincennes, Indiana. Construction
continues at the new underground mines with the mine substation complete and the wash plant construction and
box cut excavation having commenced in June 2008. Production is expected to begin in mid 2009, with the second
mine opening in late 2010. Reserves at the two mines are estimated at 88 million tons of recoverable number-five
coal at 11,200 BTU (British thermal units) and less than 6-pound sulfur dioxide. The reserves at these new mines
bring total coal reserves to over 120 million tons. Once in production, the two new mines are expected to produce 5
million tons of coal per year. Of the total $170 million investment management estimates to access the reserves,
the Company has invested $68 million in the new mines through December 31, 2008.
The market for Illinois Basin coal reflects limited supply and increased demand, which has resulted in substantially
higher coal prices. Contracts reflecting these higher prices are in place on 70 percent of 2009 and 2010 planned
production. As a result, coal mining operations are expected to contribute substantial future earnings.