Vectren 2013 Annual Report Download - page 26

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In addition, coal mining operations have exposure to coal commodity prices. If coal commodity prices change in a direction or
manner that is not anticipated, or if the forecasted sales transactions do not occur, losses may result. Although forecasted sales
are hedged with owned coal inventory and known reserves, all exposure to both short and long-term coal price volatility is not
hedged. Therefore, fluctuating coal prices are likely to cause the Company’s net income to be volatile.
The Company could be negatively impacted by declines in the market demand for coal.
With respect to its Coal Mining operations, the Company competes with coal producers in the Illinois Basin and in other coal
producing regions of the United States. The domestic demand for, and prices for, the Company's coal primarily depend on the
coal consumption patterns of the domestic electric utility industry. Consumption by the domestic electric utility industry is
affected by the demand for electricity, environmental and other governmental regulations, technological developments, and the
price of competing coal and alternative fuel sources, such as natural gas, nuclear, hydroelectric power, and other renewable
energy sources. The domestic electric utility industry currently accounts for approximately 90 percent of domestic coal
consumption. Moreover, in 2012 the Energy Information Administration estimated that coal consumption in the electric power
sector totaled 829 million tons, the lowest amount since 1992 primarily due to historically low natural gas prices paid by the
electric generators that led to a significant increase in the share of natural gas-fired power generation. The economic stability of
these markets has a significant effect on the demand for coal and the level of competition in supplying these markets.
Consequently, a decrease in coal consumption by the domestic electric utility industry could adversely affect the price of coal,
which could negatively impact the Company's results of operations and liquidity. Additionally, during the last several years the
U.S. coal industry has experienced increased consolidation, which has contributed to the industry becoming more competitive.
Increased competition by coal producers or producers of alternate fuels could decrease the demand for or pricing of the
Company's coal, which could adversely impact the Company's results of operations.
Mining in the Illinois Basin is more complex and involves more regulatory constraints than mining in other areas of the
United States, which could affect our mining operations and cost structures in these areas.
The geological characteristics of the Illinois Basin coal reserves, such as elevated sulfur content, depth of overburden, and coal
seam thickness, among other factors, makes such reserves complex and costly to mine. As mines become depleted,
replacement reserves may not be available when required or, if available may not be capable of being mined at costs
comparable to those of the depleting mines. In addition, the composition of the Illinois Basin coal reserves compared to
reserves from other regions of the United States or international sources may make such Illinois Basin coal less desirable as a
fuel source. These factors could have a material adverse effect on the mining operations, cost structures, and the results of the
operations of the Company's Coal Mining group.
Other Corporate Operating Risks
The Company is exposed to physical and financial risks related to the uncertainty of climate change.
A changing climate creates uncertainty and could result in broad changes to the Company’s service territories. These impacts
could include, but are not limited to, population shifts; changes in the level of annual rainfall; changes in the weather; and
changes to the frequency and severity of weather events such as thunderstorms, wind, tornadoes, and ice storms that can
damage infrastructure. Such changes could impact the Company in a number of ways including the number and/or type of
customers in the Company’s service territories; the demand for energy resulting in the need for additional investment in
generation assets or the need to retire current infrastructure that is no longer required; an increase to the cost of providing
service; and an increase in the likelihood of capital expenditures to replace damaged infrastructure.
To the extent climate change impacts a region’s economic health, it may also impact the Company’s revenues, costs, and
capital structure and thus the need for changes to rates charged to regulated customers. Rate changes themselves can impact
the economic health of the communities served and may in turn adversely affect the Company’s operating results.