Vectren 2012 Annual Report Download - page 41

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39
Margin from Wholesale Electric Activities
The Company earns a return on electric transmission projects constructed by the Company in its service territory that meet the
criteria of MISO’s regional transmission expansion plans and also markets and sells its generating and transmission capacity to
optimize the return on its owned assets. Substantially all off-system sales are generated in the MISO Day Ahead and Real Time
markets when sales into the MISO in a given hour are greater than amounts purchased for native load. Further detail of MISO
off-system margin and transmission system margin follows:
Year Ended December 31,
(In millions) 2012 2011 2010
Transmission system margin $ 26.4 $ 23.5 $ 18.8
Off-system margin 5.7 6.1 7.4
Total wholesale margin $ 32.1 $ 29.6 $ 26.2
Transmission system margin associated with qualifying projects, including the reconciliation of recovery mechanisms, and other
transmission system operations, totaled $26.4 million during 2012, compared to $23.5 million in 2011 and $18.8 million in
2010. Increases are primarily due to increased investment in qualifying projects. To date, the Company has invested $155
million in qualifying projects. These projects include an interstate 345 Kv transmission line that connects Vectren’s A.B. Brown
Generating Station to a generating station in Indiana owned by Duke Energy to the north and to a generating station in Kentucky
owned by Big Rivers Electric Corporation to the south; a substation; and another transmission line. Once placed into service,
these projects earn a FERC approved equity rate of return of 12.38 percent on the net plant balance, and operating expenses
are also recovered. The 345 Kv project is the largest of these qualifying projects, with a cost of $107 million that earned the
FERC approved equity rate of return while under construction. The last segment of that project was placed into service in
December 2012.
For the year ended December 31, 2012, margin from off-system sales was $5.7 million, compared to $6.1 million in 2011 and
$7.4 million in 2010. The base rate changes implemented in May 2011 require that wholesale margin from off-system sales
earned above or below $7.5 million per year be shared equally with customers. This compares to a $10.5 million sharing
threshold established in 2007. Results for the periods presented reflect the impact of that sharing. Off-system sales totaled
336.7 GWh in 2012, compared to 586.7 GWh in 2011, and 587.6 GWh in 2010. The lower volumes sold in 2012 from Vectren
South's primarily coal-fired generation result from increased sales of power in MISO from gas-fired electric generation due to low
natural gas prices and more wind generation.
Utility Group Operating Expenses
Other Operating
For the year ended December 31, 2012, Other operating expenses were $310.1 million, and compared to 2011, decreased $3.0
million. Excluding pass through costs, expenses were essentially flat. Continuous improvement initiatives throughout the Utility
Group are being implemented to limit growth in operating expenses over the coming years. The Company estimates that in
2012 these initiatives have resulted in sustainable savings of more than $7 million. Examples of the initiatives implemented in
2012 include improved processes that have allowed the Company to become more efficient in completing work and thereby
reduce labor costs and recent amendments to postretirement medical plans that provide better access to benefits for retirees at
lower costs to the Company. These sustainable savings have aided in offsetting planned increases in energy delivery related
operating expenses.
For the year ended December 31, 2011, Other operating expenses increased $13.9 million compared to 2010. The increase is
primarily attributable to higher electric power supply operating expenses. Such expenses increased $10.8 million year over year
with $6.9 million attributed to planned outage maintenance and $3.1 million attributed to variable production costs. The
remaining variance is primarily attributable to higher expected energy delivery costs.
Depreciation & Amortization
For the year ended December 31, 2012, depreciation and amortization expense was $190.0 million, compared to $192.3 million
in 2011 and $188.2 million in 2010. The periods presented reflect increased utility plant investments placed into service.