Vectren 2012 Annual Report Download - page 29

Download and view the complete annual report

Please find page 29 of the 2012 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 132

  • 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
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132

27
The success of Vectren’s nonutility natural gas marketing strategies is affected by a number of factors.
ProLiance relies 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, changes in the availability and location of natural gas supply and related transmission assets, the price of
natural gas, and the availability of credit. Optimization opportunities at current market prices 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, losses could continue in future years
should ProLiance be unable to adjust to the current market conditions or be unsuccessful in further 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.
ProLiance relies on short-term borrowings and trade credit to meet its cash flow needs. ProLiance has borrowing capacity
through a syndicated credit facility. The current facility expires in May 2014. Should ProLiance be unsuccessful in maintaining
short-term borrowing capacity and trade credit in the future, ProLiance's results of operations and financial condition could be
adversely impacted.
Other Corporate Operating Risks
The Company is exposed to physical and financial risks related to the uncertainty of climate change.
A changing climate creates uncertainty and could result in broad changes to the Company’s service territories. These impacts
could include, but are not limited to, population shifts; changes in the level of annual rainfall; changes in the weather; and
changes to the frequency and severity of weather events such as thunderstorms, wind, tornadoes, and ice storms that can
damage infrastructure. Such changes could impact the Company in a number of ways including the number and/or type of
customers in the Company’s service territories; the demand for energy resulting in the need for additional investment in
generation assets or the need to retire current infrastructure that is no longer required; an increase to the cost of providing
service; and an increase in the likelihood of capital expenditures to replace damaged infrastructure.
To the extent climate change impacts a region’s economic health, it may also impact the Company’s revenues, costs, and
capital structure and thus the need for changes to rates charged to regulated customers. Rate changes themselves can impact
the economic health of the communities served and may in turn adversely affect the Company’s operating results.
Increased derivative regulation could impact results.
The Company, as well as ProLiance, uses commodity derivative instruments in conjunction with energy marketing and
procurement activities. The Company may also periodically use interest rate derivative instruments to minimize the impact of
interest rate fluctuations associated with anticipated debt issuances.
Regulations related to the use of derivatives that became law in 2010 under the Dodd-Frank Wall Street Reform and Consumer
Protection Act continue to evolve and their ultimate application remains uncertain. Depending on the regulations adopted by the
Commodities Futures Trading Commission (CFTC) and other agencies, the Company and ProLiance may be required to post
additional collateral with dealer counterparties for commitments and interest rate, physical or financial commodity derivative
transactions and report or otherwise disclose such activity to dealer counterparties or other agencies. The law provides for an