Vectren 2008 Annual Report Download - page 32

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30
While utility results increased in 2008 compared to 2007 primarily as a result of base rate increases, results reflect
decreased earnings from nonutility operations, primarily ProLiance and Coal Mining. Additionally, as more fully
described below, 2008 includes an approximate $0.08 per share impairment charge associated with legacy
nonutility commercial real estate investments.
The increase in 2007 earnings compared to 2006 is primarily attributable to higher gas and electric utility margins
and increased earnings from the sale of wholesale power. Results in 2007 also reflect increased earnings from the
Company’s nonutility operations, primarily Energy Marketing and Services, Energy Infrastructure Services, and
increased synfuel-related results.
Utility Group
In 2008, the Utility Group’s earnings were $111.1 million compared to $106.5 million in 2007. The 4 percent
increase in utility earnings is due primarily to a full year of base rate changes in the Indiana service territories and
increased earnings from wholesale power operations. Increases were offset somewhat by increased operating costs
associated with maintenance and reliability programs contemplated in the base rate cases and favorable weather in
2007.
In 2007 compared to 2006, the increase in Utility Group earnings primarily resulted from base rate increases in the
Vectren South service territory, the combined impact of residential and commercial usage and lost margin recovery,
favorable weather, and increased wholesale power margins. The increase was offset somewhat by increased
operating costs including depreciation expense in 2007 and a lower effective tax rate in 2006.
In the Company’s electric and Ohio natural gas service territories which are not protected by weather normalization
mechanisms, management estimates the margin impact of weather to be approximately $1.2 million favorable or
$0.01 per share compared to 30-year normal temperatures in 2008. In 2007 management estimates a $5.5 million
favorable impact on margin compared to normal or $0.04 per share, and in 2006 an $8.3 million unfavorable impact
on margin compared to normal or $0.07 per share.
Nonutility Group
The Nonutility Group’s earnings were $18.9 million in 2008, compared to earnings of $37.0 million in 2007 and
$18.1 million in 2006. The Company’s primary nonutility operations contributed $24.8 million, compared to $33.7
million in 2007 and $24.5 million in 2006. Primary nonutility operations are Energy Marketing and Services
companies, Coal Mining operations, and Energy Infrastructure Services companies.
In 2008 compared to 2007, primary nonutility group results decreased $8.9 million. Coal Mining operated at a loss
and results were approximately $6.6 million lower than the prior year due primarily to lower production and
increased operating costs. ProLiance’s earnings were $3.6 million lower than the prior year and reflect lower
operating results as well as a reserve for the FERC matter described herein. The results from the other primary
nonutility operations also reflect increased earnings from performance contracting and renewable energy
construction operations performed through Energy Systems Group and retail gas marketing operations performed
through Vectren Source. Miller Pipeline’s (Miller) results were generally flat compared to the prior year, which
was a record year in terms of earnings contribution.
Primary nonutility group results increased $9.2 million in 2007 compared to 2006. The increase was primarily
attributable to higher Miller earnings and the unfavorable impact of the ProLiance litigation settlement recorded in
the fourth quarter of 2006 totaling $6.6 million. The increased contribution from Miller of $3.8 million is due
largely to more large gas construction projects, pricing increases, and Vectren’s 100 percent ownership of Miller in
2007. Earnings from Energy Systems Group and Vectren Source were also favorable year over year. Operating
earnings from ProLiance were down year over year by $2.0 million as the favorable impact of their increased
storage capacity was more than offset by lower volatility in the wholesale natural gas markets. Coal Mining
earnings were $2.0 million in 2007 compared to $5.0 million in 2006 primarily due to compliance with new Mine
Safety and Health Administration (MSHA) seal and safety guidelines and the associated lost production and higher
sulfur content from coal mined under the revised mining plan.