Vectren 2010 Annual Report Download - page 28

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and production costs and other risks in response to changes in demand. Other risks, which could adversely impact operating
results, include but are not limited to: market demand for coal; geologic, equipment, and operational risks; supplier and contract
miner performance; the availability of miners, key equipment and commodities; availability of transportation; and the ability to
access/replace coal reserves.
In addition, coal mining operations have exposure to coal commodity prices. If coal commodity prices change in a direction or
manner that is not anticipated, or if the forecasted sales transactions do not occur, losses may result. Although forecasted sales
are hedged with owned coal inventory and known reserves, all exposure to both short and long-term coal price volatility is not
hedged. Therefore, fluctuating coal prices are likely to cause the Company’s net income to be volatile.
The success of Vectren’s natural gas marketing strategies is affected by a number of factors.
ProLiance, and to a lesser extent the Company’s nonutility gas retail supply operations, rely on long-term firm transportation and
storage contracts with pipeline companies to deliver natural gas to its customer base. Those contracts are optimized by
balancing physical and financial markets and summer and winter time horizons. Therefore, recovery of the these contracts’
fixed costs is dependent on a number of factors, including the health of the economy, weather, and changes in the availability
and location of natural gas supply and related transmission assets, among others. A significant decline in optimization
opportunities or a deterioration of the customer base may result in the inability to fully recover these fixed price obligations.
Recent market conditions have compressed optimization opportunities, and ProLiance has operated at a loss. If current market
conditions continue, resulting in continued depressed asset optimization opportunities, it is expected that ProLiance will
experience a loss in 2011. Losses could continue in future years should ProLiance be unable to adjust to the current market
conditions or be unsuccessful in renegotiating its transportation and storage contracts over time.
In addition to physical and financial contracts executed for optimization opportunities, forward contracts and from time to time
option contracts are executed to meet forecasted customer demand that may or may not occur and to hedge commodity price
risk and basis risk. 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, losses may result. These contracts include 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. Therefore, fluctuating natural gas prices are likely to cause the Company’s net income to be volatile.
Vectren’s nonutility group competes with larger energy providers, which may limit its ability to grow its business.
Competitors for Vectren’s nonutility businesses include regional, national and global companies. Many of Vectren’s competitors
are well-established and have larger and more developed networks and systems, greater name recognition, longer operating
histories and significantly greater financial, technical and marketing resources. This competition, and the addition of any new
competitors, could negatively impact the financial performance of the nonutility group and the Company’s ability to grow its
nonutility businesses.
Increased derivative regulation could impact results.
The Company, as well as ProLiance, uses natural gas derivative instruments in conjunction with energy marketing and
procurement activities. The Company also uses interest rate derivative instruments to minimize the impact of interest rate
fluctuations associated with anticipated debt issuances.
In July 2010, legislation regulating the use of derivative instruments was signed into law. These new regulations include, but
are not limited to, a requirement that certain transactions be cleared on exchanges and a requirement to post cash collateral for
certain transactions. Depending on the regulations adopted by the Commodities Futures Trading Commission (CFTC) and
other agencies, the Company and ProLiance could be required to post additional collateral with dealer counterparties for
commitments and interest rate derivative transactions. Requirements to post collateral could limit cash for investment and for
other corporate purposes or could increase debt levels. In addition, a requirement for counterparties to post collateral could
result in additional costs associated with executing transactions, thereby decreasing profitability. An increased collateral
requirement could also reduce the Company’s and ProLiance’s ability to execute derivative transactions to reduce commodity
price and interest rate uncertainty and to protect cash flows.
The law provides for a potential exception from these clearing and cash collateral requirements for commercial end-users.
Significant rule-making by numerous governmental agencies, particularly the CFTC, must be adopted in the near term so that
the restrictions, limitations, and requirements contemplated by the new law can be implemented. The Company and ProLiance