Vectren 2013 Annual Report Download - page 53

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Acquisition of Minnesota Limited
On March 31, 2011, the Company purchased Minnesota Limited, excluding certain assets. Minnesota Limited is a specialty
contractor focusing on natural gas and oil transmission pipeline construction and maintenance; pump station, compressor
station, terminal and refinery construction; and hydrostatic testing. Minnesota Limited is headquartered in Big Lake, Minnesota
and the majority of its customers are generally located in the northern Midwest region. The purchase price was approximately
$83.4 million and included $14.8 million of net working capital, $34.4 million of property plant and equipment and $39.4 million of
intangible assets, including goodwill.
Energy Services
Energy Services provides energy performance contracting and sustainable infrastructure projects through its wholly owned
subsidiary, Energy Systems Group, LLC (ESG). Inclusive of holding company costs, Energy Services’ operations contributed
earnings of $1.0 million in 2013, compared to $5.7 million in 2012 and $6.7 million in 2011.
Results in 2013 reflect continued lower revenues from slow demand for performance contracting projects due primarily to
budgetary constraints for state, municipal, and school customers. The unfavorable earnings impact due to continued slow
demand in 2013 was partially offset by tax deductions associated with energy efficiency projects. Total deductions in 2013 were
$19.3 million compared to $17.8 million in 2012 and $6.2 million in 2011. The impact of these tax deductions on earnings in
2013 was $7.8 million, compared to $7.2 million in 2012, and $2.5 million in 2011. Under current tax legislation, these
deductions expired on December 31, 2013. Results in 2012 reflect decreased earnings compared to 2011 associated with an
increase in the sales force.
As of December 31, 2013, the performance contracting backlog was $72 million, compared to $77 million at December 31, 2012
and $82 million at December 31, 2011. ESG continues to develop strategies to position it for growth as the national focus on
energy conservation and sustainable infrastructure continues for the long-term given the increase in power prices across the
country.
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
losses of $16.0 million in 2013 and $3.5 million in 2012, compared to earnings of $16.6 million in 2011.
Coal Mining revenues were $293 million in 2013 compared to $236 million in 2012, and $286 million in 2011. While coal sales
and related revenues were higher in 2013 compared to 2012 due to additional volumes sold of 1.8 million tons, results in 2013
were lower due to higher production costs associated with a thin coal seam and other unfavorable mining conditions at
Prosperity mine. In the second half of the year, substantial progress was made in the execution of a revised mining plan at
Prosperity mine, resulting in lower production costs. While the revised mining plan has resulted in lower costs of production at
Prosperity, and with continued focus on safety, further cost reductions are necessary and remain a priority for 2014. Lower 2013
results were also driven by reduced pricing for customers associated with contracts that had price reopener clauses during 2012
and the overall softness in the coal market. Coal sales increased in 2013 to 6.2 million tons, compared to 4.5 million tons in
2012. 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 coal.
Vectren Fuels' expects production of 7.3 million tons and sales of 7.6 million tons in 2014. Expected production increases in
2014 primarily relate to having a full year of operation at the second mine at the Company's Oaktown mining complex, which
opened during the second quarter of 2013. The increased sales in 2014 include 0.3 million tons under contract carried over
from 2013 that were not sold due to weather related delivery issues. These tons were held in inventory at December 31, 2013.
Approximately 90 percent of the expected 2014 sales are committed and priced. 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.