Vectren 2010 Annual Report Download - page 49

47
The national focus on a comprehensive energy strategy and a continued focus on renewable energy, energy conservation, and
sustainability measures by ESG’s customers are expected to create favorable conditions for ESG’s future growth. As a recent
example, on February 8, 2011, ESG was selected to design, construct, and operate a landfill gas-to-recycled natural gas
processing facility for DeKalb County, Georgia’s Seminole Road Landfill. The recycled natural gas will be used to fuel
compressed natural gas (CNG) vehicles at the Seminole Road Landfill, and the project will result in millions of dollars in savings
in fuel costs to operate the Dekalb County sanitation fleet.
Coal Mining
Coal Mining owns mines that produce and sell coal to the Company’s utility operations and to third parties through its wholly
owned subsidiary Vectren Fuels, Inc. (Vectren Fuels). Coal Mining, inclusive of holding company costs, earned approximately
$11.9 million in 2010, compared to $13.4 million in 2009 and a loss of $4.6 million in 2008.
In 2010, Coal Mining revenues were $210 million, a $17 million increase compared to 2009 and a $46 million increase
compared to 2008. In 2010, expected higher depreciation and other mining costs as well as higher interest costs associated
with the ramp up of mining at the Oaktown mine complex more than offset the increase in sales. In 2009 compared to 2008,
Coal Mining earnings increased based on new contract pricing effective January 1, 2009. The impact of higher revenues in
2009 was somewhat offset by increased costs per ton mined and the recession. The anticipated cost increase was reflective of
efforts of the contract miner to reconfigure the mining operation at Prosperity mine in order to improve future productivity and
meet Mine Safety and Health Administration (MSHA) requirements. During the second half of 2009, these improvements began
to favorably impact production and operating costs.
The recent recession resulted in a decrease in the demand for, and market price of, Illinois Basin coal and has resulted in lower
than anticipated earnings from Coal Mining operations. The lowered demand caused some build up of coal inventory at most
customer locations as well as at the mines owned by Vectren Fuels. As a result of contracts with minimum delivery provisions,
certain customers scaled back their deliveries within specified limits. This resulted in less 2010 and 2009 mine production as
production was aligned with customer’s needs. In the current market conditions, the coal mines sold 3.7 million tons in 2010,
3.5 million tons in 2009, and 4.2 million tons in 2008. During 2010, there has been some improvement in the demand and
supply imbalance for Illinois Basin coal that began in 2009. Demand is returning as evidenced by successful negotiations with a
number of new term supply contracts, as well as continued spot sales. The anticipated 2011 coal production is approximately
5.1 million tons with total sales in 2011 of 5.4 million tons expected and over 90% of those sales have been contracted and
priced.
Oaktown Mines
The first of two new underground mine investments, located near Vincennes, Indiana, began full operations in 2010. The
second mine is currently expected to open in 2012. However, Vectren Fuels may continue to adjust this timing as it evaluates
the impacts of market conditions. Reserves at the two mines are estimated at about 105 million tons of recoverable coal at
11,200 BTU and less than 6-pound sulfur dioxide. The reserves at these new mines bring total coal reserves to approximately
137 million tons at December 31, 2010. Once in production, the two new mines are capable of producing about 5 million tons of
coal per year. Management expects to incur approximately $200 million to access the coal reserves. At December 31, 2010,
Vectren Fuels has invested approximately $186 million in the new mines toward initial construction.
Mine Safety Information
The Company, through its wholly owned subsidiary Vectren Fuels, Inc., owns coal mines and related assets located in Indiana.
The Company has retained independent third party contract mining companies to operate its coal mines. Five Star Mining LLC
("Five Star") is the contract mining company at the Prosperity underground mine and Black Panther Mining LLC ("Black
Panther") is the contract mining company at the Oaktown underground mines. While in operation, Vigo-Cypress Creek, LLC
was the contract mining company at Cypress Creek surface mine. The contract mining companies are the mine “operator”, as
that term is used in both the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) and the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010. All employees at the coal mines are hired, supervised, and paid by the contract
mining companies. As the mine operator, the contract mining companies make all regulatory filings required by the MSHA. In
most circumstances, however, the cost of fines and penalties assessed by MSHA are contractually passed through from the
contract mining company to Vectren Fuels. The process of settling such claims can take years in certain circumstances. During