Vectren 2012 Annual Report Download - page 52

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50
Results in 2012 reflect reduced revenues, which indicate a slowing in demand for performance contracting projects due primarily
to current budgetary constraints on municipal and school customers, and increased operating expenses associated with an
increase in the sales force incurred throughout 2012 and 2011. The impact of energy efficiency building tax deductions from
qualifying projects on 2012 earnings offset the reduced revenues and higher operating expenses, and resulted in earnings
comparable to 2011. The increase in earnings in 2011 compared to 2010 reflects increased revenues. ESG continues to add to
its employee base and footprint to position it for long-term growth in this sector as the national focus on energy conservation,
renewable energy, and sustainability is expected to continue longer term, given the expected rise in power prices across the
country as utilities increase rates to recover expected increased environmental expenditures and other federally mandated
costs.
As of December 31, 2012, performance contracting backlog was $77 million, compared to $82 million at December 31, 2011 and
$118 million at December 31, 2010. ESG placed three “build and own” anaerobic digester projects into service in 2012.
Coal Mining
Coal Mining owns mines that produce and sell coal to the Company’s utility operations and to third parties through its wholly
owned subsidiary Vectren Fuels, Inc. (Vectren Fuels). Results from Coal Mining, inclusive of holding company costs, were a
loss of $3.5 million in 2012, compared to earnings of $16.6 million in 2011 and $11.9 million in 2010.
Results were lower in 2012 due to lower tons sold and reduced pricing for customers associated with contracts that had price
reopener clauses. Tons sold in 2012 were unfavorably impacted by the low cost of natural gas and mild winter weather. These
factors significantly reduced the demand for Illinois Basin coal and led to a more than 10 percent reduction in volumes sold
compared to 2011. Coal sales in 2012 were 4.5 million tons, compared to 5.2 million tons in 2011 and 3.7 million tons in 2010.
During 2012, the Company reduced production in order to better match the lower demand. Production at these lower than
optimal levels significantly increased the cost per ton mined at both the Oaktown and Prosperity mining complexes. At normal
production levels, the Oaktown cost environment remains favorable; however, at Prosperity a thin coal seam and other
unfavorable mining conditions continue to have a negative impact on production costs. Coal Mining revenues were $236 million
in 2012, $286 million in 2011, and $210 million in 2010. The increase in revenues in 2011 reflects increased sales to third
parties as a result of opening Oaktown 1 in 2010. Revenues from Oaktown 1 more than offset lost revenues from the Cypress
Creek surface mine which closed in 2010 with only limited production.
Vectren Fuels' expected production is approximately 5.5 million tons in 2013. Coal sales in 2013 are estimated at 5.6 million
tons. The impact of continued reduced demand for coal generally, and its impact on price, is expected to result in a greater loss
from Coal Mining operations in 2013 compared to 2012. The development of the second mine at the Company's Oaktown
mining complex was substantially completed in 2012 but is not expected to begin production until demand for its coal increases.
Longer term, the Company continues to believe that reduced coal volumes available from Central Appalachia due to increased
regulation and the large number of scrubbers to be installed throughout the United States, including the Midwest, coupled with
moderate increases in natural gas prices from the very low levels experienced in 2012, should drive stronger demand for Illinois
Basin coal. Changes in market conditions or other circumstances could cause actual results to be materially different from these
expectations.
Coal Reserves
As of December 31, 2012, management estimates the Company’s total Illinois Basin coal reserves to be approximately 127
million tons. Of this amount, approximately 39 million tons are attributable to the second mine at the Company's Oaktown
mining complex. Once this mine is in production, Vectren Fuels' three underground mines are capable of producing about 7.5
million tons of coal per year.
Energy Marketing
ProLiance
ProLiance, a nonutility energy marketing affiliate of Vectren and Citizens, provides services to a broad range of municipalities,
utilities, industrial operations, schools, and healthcare institutions located throughout the Midwest and Southeast United