Vectren 2012 Annual Report Download - page 42

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40
However, in 2012 regulatory orders allowing for deferral of depreciation on capital investments previously placed into service
were received that more than offset the impact of utility plant increases in 2012 and partially offset increases in 2011.
Taxes Other Than Income Taxes
Taxes other than income taxes decreased $0.6 million in 2012 compared to 2011 and decreased $5.6 million in 2011 compared
to 2010. The decrease in 2012 was primarily due to lower usage taxes associated with lower gas and fuel costs. The decrease
in 2011 is primarily attributable to lower Ohio excise and usage taxes associated with that territory’s process of exiting the
merchant function. These taxes are primarily revenue-related taxes and are offset dollar-for-dollar with lower gas utility
revenues.
Other Income-Net
Other income-net reflects income of $8.0 million in 2012, compared to $4.3 million in 2011 and $5.4 million in 2010. Results in
2012 include approximately $2.2 million of increased AFUDC compared to 2011. AFUDC in 2012 reflects the impact of recent
regulatory orders related to the infrastructure replacement investments. In addition, results in 2012 and in 2010 reflect
increased returns on assets that fund benefit plans compared to 2011.
Interest Expense
For year ended December 31, 2012, interest expense was $71.5 million, compared to $80.3 million in 2011 and $81.4 million in
2010. The decreases among the years are primarily due to fourth quarter 2011 refinancing activity in which $250 million of long-
term debt with a 6.625 percent interest rate matured and was replaced with $150 million of new long-term debt with an average
interest rate of 5.12 percent and $100 million of short-term borrowings. During the fourth quarter of 2011, the Company also
called $96.2 million of long-term debt at a rate of 5.95 percent and replaced that issuance in February 2012 with new debt at a
rate of 5.0 percent.
Income Taxes
In 2012, Utility Group federal and state income taxes were $85.3 million, compared to $82.9 million in 2011 and $77.1 million in
2010. Changes in income taxes are primarily driven by changes in pre-tax income. In addition, the effective income tax rate in
2011 was higher primarily due to the revaluation of Utility Group deferred income taxes from the fourth quarter sale of Vectren
Source which resulted in a $2.8 million charge, and a $1.4 million unfavorable tax adjustment recognized earlier in that year.
Rate & Regulatory Matters
Regulatory Treatment of Investments in Natural Gas Infrastructure Replacement
Vectren monitors and maintains its natural gas distribution system to ensure that natural gas is delivered in a safe and efficient
manner. Vectren's natural gas utilities are currently engaged in replacement programs in both Indiana and Ohio, the primary
purpose of which is preventive maintenance and continual renewal and operational improvement. In 2011, laws in both Indiana
and Ohio were passed that expand the ability of utilities to recover certain costs of federally mandated projects, and in Ohio
other capital investment projects, outside of a base rate proceeding. Utilization of these recovery mechanisms is discussed
below.
Ohio Recovery and Deferral Mechanisms
The PUCO order approving the Company's 2009 base rate case in the Ohio service territory authorized a distribution
replacement rider (DRR). The DRR's primary purpose is recovery of investments in utility plant and related operating expenses
associated with replacing bare steel and cast iron pipelines and certain other infrastructure. This rider is updated annually for
qualifying capital expenditures and allows for a return to be earned on those capital expenditures based upon the rate of return
approved in the 2009 base rate case. In addition, deferral of depreciation and the ability to accrue debt-related post in service
carrying costs is also allowed until the related capital expenditures are recovered through the DRR. To date, the Company has
made capital investments under this rider totaling $80 million. During 2012, 2011, and 2010 gas operating revenues associated
with the DRR were $6.5 million, $3.6 million, and $1.4 million, respectively. Other Income associated with the debt-related post
in service carrying costs totaled $1.8 million, $2.0 million, and $0.9 million for 2012, 2011, and 2010, respectively. Regulatory
assets associated with post in service carrying costs and depreciation deferrals were $6.5 million, $3.0 million, and $1.0 million
at December 31, 2012, 2011, and 2010, respectively.