Vectren 2008 Annual Report Download - page 49

Download and view the complete annual report

Please find page 49 of the 2008 Vectren annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

47
Commercial Real Estate Charge
The current economic recession has impacted the value of commercial real estate investments within this portfolio,
and the prospect for recovery of that value has diminished. During 2008, the Company assessed its commercial
real estate investments for impairment and identified the need to reduce their carrying values. The impairment
charge totaled $10.0 million, $5.9 million after tax, or $0.08 per basic earnings per share. Of the $10.0 million
charge, $5.2 million is included in Other-net and $4.8 million is included in Other operating expenses.
Sale of Interest in SIGECOM
SIGECOM provided broadband services, such as cable television, high-speed internet, and advanced local and long
distance phone services, to the greater Evansville, Indiana area. In August 2006, SIGECOM’s majority owner and
the Company sold their interests in SIGECOM to WideOpenWest, LLC. Resulting from the sale, the Company
recorded an after tax loss of $1.3 million in 2006. Proceeds to the Company, which includes the settlement of notes
receivable, approximated $45 million and were received in 2007.
Synfuel-Related Activity
Pace Carbon Synfuels, LP (Pace Carbon) is a Delaware limited partnership formed to develop, own, and operate
four projects to produce and sell coal-based synthetic fuel (synfuel) utilizing Covol technology. The Company has
an 8.3 percent interest in Pace Carbon which is accounted for using the equity method of accounting. The Internal
Revenue Code provided for manufacturers, such as Pace Carbon, to receive a tax credit for every ton of synthetic
fuel sold. In addition, Vectren Fuels, Inc., a wholly owned subsidiary involved in coal mining, received processing
fees from synfuel producers unrelated to Pace Carbon for a portion of its coal production. The tax law authorizing
synfuel related credits and fees expired on December 31, 2007. Partnership operations since that date have been
insignificant.
The Internal Revenue Service issued private letter rulings, which concluded the synthetic fuel produced at the Pace
Carbon facilities should qualify for tax credits. The IRS has completed tax audits of Pace Carbon for the years
1998 through 2001 without challenging tax credit calculations. Generally, the statute of limitations for the IRS to
audit a tax return is three years from filing. Therefore tax credits utilized in 2005 – 2007 are still subject to IRS
examination. However, avenues remain where the IRS could challenge tax credits for the years prior to 2005. As
a partner of Pace Carbon, Vectren has reflected cumulative synfuel tax credits of approximately $101 million in its
consolidated results, of which approximately $45 million were generated since 2004. To date, Vectren has been in
a position to utilize all of the credits generated
Synfuel tax credits were only available when the price of oil was less than a base price specified by the Internal
Revenue Code, as adjusted for inflation. Because of high oil prices in 2007, only $6.0 million of the approximate
$23.1 million in tax credits generated were reflected as a reduction to the Company’s income tax expense. In 2006
high oil prices also phased out synfuel tax credits. Of the $21.5 million tax credits generated in 2006, only $14.0
million are reflected as a reduction to the Company’s income tax expense.
The Company executed several financial contracts to hedge oil price risk. Income statement activity associated
with these contracts was gain of $13.4 million in 2007 and a loss of $4.7 million in 2006. This activity is reflected
in Other-net. Impairment charges related to the investment in Pace Carbon approximating $9.5 million were also
recorded in Other-net in 2006.
The investment in Pace Carbon resulted in losses reflected in Equity in earnings of unconsolidated affiliates
totaling $20.0 million in 2007 and $17.8 million in 2006. Synfuel-related results, inclusive of equity method losses
and their related tax benefits as well as the tax credits and other related activity, were earnings of $6.8 million in
2007 and a loss of $5.3 million in 2006. Of those earnings, which do not continue beyond 2007, $3.8 million ($5.8
million pre tax) was contributed to the Vectren Foundation in 2007. Net of that contribution, synfuel-related results
were $3.0 million in 2007.