Vectren 2012 Annual Report Download - page 53

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States. ProLiance’s customers include Vectren’s Indiana utilities and Citizens’ utilities. ProLiance’s primary businesses include
gas marketing, gas portfolio optimization, and other portfolio and energy management services. Consistent with its ownership
percentage, Vectren is allocated 61 percent of ProLiance’s profits and losses; however, governance and voting rights remain at
50 percent for each member. The Company accounts for its investment in ProLiance using the equity method of
accounting. On March 17, 2011, an order was received from the IURC providing for ProLiance’s continued provision of gas
supply services to the Company’s Indiana utilities and Citizens Energy Group through March 2016.
Vectren Energy Marketing and Services, Inc (EMS), a wholly owned subsidiary, holds the Company’s investment in
ProLiance. EMS is responsible for certain financing costs associated with ProLiance and is also responsible for income taxes
and allocated corporate expenses related to the Company’s portion of ProLiance’s results. During the year ended December
31, 2012, EMS’ results related to the Company’s share of ProLiance’s losses, which include financing costs, income taxes, and
other holding company costs, were a loss of $17.6 million, compared to a loss of $22.9 million in 2011 and a loss of $7.9 million
in 2010. The smaller loss in 2012 primarily reflects the reduction in fixed demand costs for both storage and transportation
contracts and lower general and administrative expenses. The $15.0 million increased loss in 2011 compared to 2010 reflects
new natural gas sources from shale and greater transmission capacity, as well as lower industrial demand for natural gas in the
Midwest compared to prior years. These conditions have resulted in plentiful natural gas supply and lower and less volatile
natural gas prices. Historical basis differences between physical and financial markets and summer and winter prices narrowed
in 2011. As a result, there were, and continue to be, reduced opportunities to optimize ProLiance’s firm transportation and
storage capacity.
Efforts to lower the cost of pipeline and storage demand costs continue. Through negotiations and by dropping some
uneconomical contracts as they expire, ProLiance has lowered its pipeline transportation and storage costs to approximately
$55 million for 2012, compared to $73 million in 2011 and $77 million in 2010. The projected annual demand costs in 2013 are
expected to be approximately $42 million, or approximately $13 million lower than 2012. In addition to these reductions,
opportunities exist to renegotiate or drop contracts with annual demand costs of approximately $9 million by the end of 2015.
Changes in market conditions or other circumstances could cause actual demand costs to be materially different from this
expectation. At December 31, 2012, ProLiance had approximately $124 million of members' equity on its balance sheet, no
long-term debt outstanding, and borrowings to support working capital of $77 million on its $120 million credit facility, which
became effective in May 2012 for a two year period.
For the year ended December 31, 2012, the amounts recorded to Equity in (losses) of unconsolidated affiliates related to
ProLiance’s operations totaled a pre-tax loss of $22.7 million, compared to a loss of $28.6 million in 2011 and a loss of $2.5
million in 2010.
At the time of the sale of Vectren Source, the Company stated that its future emphasis in the Nonutility Group would be on
growing its infrastructure and energy services businesses rather than its commodities businesses. The Company continues to
evaluate and assess strategic alternatives related to the investment in its energy marketing affiliate, ProLiance Holdings. The
Company believes the carrying value of its investment in ProLiance Holdings at December 31, 2012 is appropriate, based upon
projections and other valuation data received from ProLiance. If the Company, however, proceeds with one of the strategic
alternatives being evaluated, which could include a disposition of its investment in ProLiance Holdings or a disposition by
ProLiance Holdings of one or more of its operating subsidiaries or their assets, the amount realized could be materially below
the carrying value of the Company's investment of $73.9 million. In such event, the Company would record such loss as Equity
in (losses) of unconsolidated affiliates.
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 site,
and an additional capacity of at least 17 Bcf at the South site. The South site also has the potential for further expansion. 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.