Vectren 2010 Annual Report Download - page 27

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The impact of MISO participation is uncertain.
Since February 2002 and with the IURC’s approval, the Company has been a member of the MISO. The MISO serves the
electrical transmission needs of much of the Midwest and maintains operational control over SIGECO’s electric transmission
facilities as well as that of other Midwest utilities.
As a result of MISO’s operational control over much of the Midwestern electric transmission grid, including SIGECO’s
transmission facilities, SIGECO’s continued ability to import power, when necessary, and export power to the wholesale market
has been, and may continue to be, impacted.
The need to expend capital for improvements to the regional transmission system, both to SIGECO’s facilities as well as to
those facilities of adjacent utilities, over the next several years is expected to be significant. The Company timely recovers its
investment in certain new electric transmission projects that benefit the MISO infrastructure at a FERC approved rate of return.
Wholesale power marketing activities may add volatility to earnings.
Vectren’s regulated electric utility engages in wholesale power marketing activities that primarily involve the offering of utility-
owned or contracted generation into the MISO hourly and real time markets. As part of these strategies, the Company may also
execute energy contracts that are integrated with portfolio requirements around power supply and delivery. Presently, margin
earned from these activities above or below $10.5 million is shared evenly with customers. These earnings from wholesale
marketing activities may vary based on fluctuating prices for electricity and the amount of electric generating capacity or
purchased power available beyond that needed to meet firm service requirements. In addition, this earnings sharing approach
may be modified in future regulatory proceedings.
Increases in the wholesale price of natural gas, coal, and electricity could reduce earnings and working capital.
The Company’s regulated operations have limited exposure to commodity price risk for transactions involving purchases and
sales of natural gas, coal, and purchased power for the benefit of retail customers due to current state regulations, which
subject to compliance with those regulations, allow for recovery of the cost of such purchases through natural gas and fuel cost
adjustment mechanisms. However, significant increases in the price of natural gas, coal, or purchased power may cause
existing customers to conserve or motivate them to switch to alternate sources of energy as well as cause new home
developers, builders, and new customers to select alternative sources of energy. Decreases in volumes sold could reduce
earnings. The decrease would be more significant in the absence of constructive regulatory orders, such as those authorizing
revenue decoupling, lost margin recovery, and other innovative rate designs. A decline in new customers could impede growth
in future earnings. In addition, during periods when commodity prices are higher than historical levels, working capital costs
could increase due to higher carrying costs of inventories and cost recovery mechanisms, and customers may have trouble
paying higher bills leading to bad debt expenses.
The performance of Vectren’s nonutility businesses is subject to certain risks.
Execution of the Company’s nonutility business strategies and the success of efforts to invest in and develop new opportunities
in the nonutility business area is subject to a number of risks. These risks include, but are not limited to, the effects of weather;
failure of installed performance contracting products to operate as planned; failure to properly estimate the cost to construct
projects; failure to develop or obtain gas storage field and mining property; potential legislation that may limit CO2 and other
greenhouse gases emissions; creditworthiness of customers and joint venture partners; changes in federal, state or local legal
requirements, such as changes in tax laws or rates; and changing market conditions.
Vectren’s nonutility businesses support its regulated utilities pursuant to service contracts by providing natural gas supply
services, coal, and infrastructure services. In most instances, Vectren’s ability to maintain these service contracts depends
upon regulatory discretion and negotiation with interveners, and there can be no assurance that it will be able to obtain future
service contracts, or that existing arrangements will not be revisited.
Coal mining operations could be adversely affected by a number of factors.
The success of coal mining operations is predicated on the ability to fully access coal at company-owned mines; to operate
owned mines in accordance with MSHA guidelines and regulations, recent interpretations of those guidelines and regulations,
and any new guidelines or regulations that could result from the recent mining incidents at coal mines of other companies and to
respond to more frequent and broader inspections; to negotiate and execute new sales contracts; and to manage production