Vectren 2010 Annual Report Download - page 51

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December 31, 2010 ProLiance continued to maintain significant sources of liquidity beyond its credit facility, which is up for
renewal in June 2011, and its balance sheet has $209 million of members’ equity, no long-term debt, and $49 million of working
capital debt outstanding, which has now been repaid. Various profit improvement initiatives are underway, including lowering
the cost of pipeline demand costs through ongoing pipeline renegotiations. Should market conditions improve from the current
depressed levels, ProLiance’s return to profitability would be accelerated.
During 2009, ProLiance’s earnings contribution decreased $18.8 million compared to 2008. The decrease reflects the 2009
Liberty Charge and also reflects lower cash to NYMEX spreads compared to the prior year, particularly spreads existing in the
third quarter of 2008 that had unprecedented price volatility and resulted in record quarterly earnings from ProLiance.
ProLiance’s storage capacity was 46 Bcf at December 31, 2010 and 2009 compared to 42 Bcf at December 31, 2008.
For the years ended December 31, 2010, 2009, and 2008, the amounts recorded to Equity in earnings of unconsolidated
affiliates related to ProLiance’s operations totaled a pre-tax loss of $2.5 million, earnings of $3.6 million, and earnings of $39.5
million, respectively. The earnings in 2009 include the Liberty Charge described below.
Investment in Liberty Gas Storage
Liberty Gas Storage, LLC (Liberty), a joint venture between a subsidiary of ProLiance and a subsidiary of Sempra Energy (SE),
is a development project for salt-cavern natural gas storage facilities. ProLiance is the minority member with a 25 percent
interest, which it accounts for using the equity method. The project was expected to include 17 Bcf of capacity in its north
facility, and an additional 17 Bcf of capacity in its south facility. The Liberty pipeline system is currently connected with several
interstate pipelines, including the Cameron Interstate Pipeline operated by Sempra Pipelines & Storage, and will connect area
LNG regasification terminals to an interstate natural gas transmission system and storage facilities. ProLiance’s investment in
Liberty is $36.7 million at December 31, 2010, after reflecting the charge discussed below.
In late 2008, SE advised ProLiance that the completion of the phase of Liberty’s development at the north site had been delayed
by subsurface and well-completion problems. Based on testing performed in the second quarter of 2009, SE determined that
attempts at corrective measures had been unsuccessful in development of certain caverns. At June 30, 2009, Liberty recorded
a charge of approximately $132 million to write off the north caverns and certain related assets. As an equity investor in Liberty,
ProLiance recorded its share of the charge, totaling $33 million at June 30, 2009. The Company’s share is $11.9 million after
tax, or $0.15 per share. In the Consolidated Statement of Income for the year ended December 31, 2009, the charge is an
approximate $19.9 million reduction to Equity in earnings of unconsolidated affiliates and an income tax benefit reflected in
Income taxes of approximately $8.0 million. ProLiance has not experienced, and does not expect, any impact to its liquidity or
access to capital as a result of the impairment charge, nor is it expected that this situation will impact ProLiance’s ability to meet
the needs of its customers.
Liberty received a Demand for Arbitration from Williams Midstream Natural Gas Liquids, Inc. (“Williams”) on February 8, 2011
related to a Sublease Agreement (“Sublease”) between Liberty and Williams. Williams alleges that Liberty was negligent in its
attempt to convert certain salt caverns to natural gas storage and thereby damaged the caverns. Williams alleges damages of
$56.7 million. Liberty believes that the claims are without merit and believes that it has complied with all of its obligations to
Williams and has properly terminated the Sublease. Liberty intends to vigorously defend itself and believes it has counterclaims
against Williams which it will assert in the arbitration proceeding. Liberty has made no accrual for this matter as of December
31, 2010.
Vectren Source
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 $3.7 million in 2010, compared to $6.4 million in
2009 and $1.5 million in 2008. Results in 2010 were lower than the prior year, as expected, due to higher margins on variable
priced contracts in the first quarter of 2009. During 2009’s first quarter, revenues on variable priced sales contracts fell more
slowly than gas costs. Results in 2008 were impacted by a $0.5 million gain on the sale of its Georgia customer base. Vectren
Source’s customer count at December 31, 2010 was approximately 227,000 equivalent customers, compared to 189,000 at
December 31, 2009 and 170,000 at December 31, 2008. The 2010 customer count reflects nearly 100,000 customers in
VEDO’s service territory that have either voluntarily opted to choose their natural gas supplier or are supplied natural gas by
Vectren Source but remain customers of the regulated utility as part of VEDO’s exit the merchant function process. As a result
of a supplier choice auction held on January 18, 2011 in VEDO’s service territory, Vectren Source will increase its customer
base by 28,000 to over 255,000.