Investment in ProLiance Holdings, LLC

12 Months Ended

Dec. 31, 2011

7.	Investment in ProLiance Holdings, LLC

ProLiance Holdings, LLC (ProLiance), a nonutility energy marketing affiliate of Vectren and Citizens Energy Group (Citizens), provides services to a broad range of municipalities, utilities, industrial operations, schools, and healthcare institutions located throughout the Midwest and Southeast United States. ProLiance's customers include Vectren's Indiana utilities and nonutility gas supply operations as well as Citizens' utilities. ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. Consistent with its ownership percentage, Vectren is allocated 61 percent of ProLiance's profits and losses; however, governance and voting rights remain at 50 percent for each member; and therefore, the Company accounts for its investment in ProLiance using the equity method of accounting. The Company, including its former retail gas supply operations, contracted for a substantial portion of its natural gas purchases through ProLiance in 2011, 2010, and 2009.

Summarized Financial Information


	Year Ended December 31,
(In millions)	2011			2010			2009
Summarized Statement of Income information:
Revenues	$	1,410.5		$	1,497.0		$	1,654.9
Operating income (loss)		(44.5	)		(3.1	)		35.2
Charge related to Investment in Liberty Gas Storage		-			-			(32.7	)
ProLiance's earnings (losses)		(47.3	)		(3.7	)		4.5


	As of December 31,
(In millions)	2011			2010
Summarized balance sheet information:
Current assets	$	381.9		$	441.4
Noncurrent assets		56.1			59.1
Current liabilities		298.5			298.1
Noncurrent liabilities		0.7			0.4
Members' equity		161.5			208.9
Accumulated other comprehensive income (loss)		(26.0	)		(10.8	)
Noncontrolling interest		3.3			3.9

Vectren records its 61 percent share of ProLiance's results in Equity in earnings (losses) of unconsolidated affiliates. Interest expense and income taxes associated with the investment are recorded separately within the statements of income in those line items. As of December 31, 2011 and 2010, the Company's investment balance is $85.4 million and $123.2 million, respectively. The amounts recorded to Equity in earnings (losses) of unconsolidated affiliates related to ProLiance's operations totaled a pre-tax loss of $28.6 million and $2.5 million for the twelve months ended December 31, 2011 and 2010, respectively, and pre-tax income of $3.6 million for the twelve months ended December 31, 2009. Lower natural gas prices, which have resulted in narrowed summer/winter spreads and locational margins, have negatively impacted ProLiance's results.

Investment in Liberty Gas Storage

Liberty Gas Storage, LLC (Liberty), a joint venture between a subsidiary of ProLiance and a subsidiary of Sempra Energy (SE), is a development project for salt-cavern natural gas storage facilities. ProLiance is the minority member with a 25 percent interest, which it accounts for using the equity method. The project was expected to include 17 Bcf of capacity in its North site, and an additional capacity of at least 17 Bcf at the South site. The South site also has the potential for further expansion. The Liberty pipeline system is currently connected with several interstate pipelines, including the Cameron Interstate Pipeline operated by Sempra Pipelines & Storage, and will connect area LNG regasification terminals to an interstate natural gas transmission system and storage facilities.

In late 2008, the project at the North site was halted due to subsurface and well-completion problems, resulting in Liberty recording a $132 million impairment charge related to the North site in 2009. ProLiance recorded its share of the charge in 2009 totaling $33 million; the Company recorded its share of the charge in 2009 totaling $11.9 million after tax. In the Consolidated Statement of Income for the year ended December 31, 2009, the charge is an approximate $19.9 million reduction to Equity in earnings of unconsolidated affiliates and an income tax benefit reflected in Income taxes of approximately $8.0 million. ProLiance's ability to meet the needs of its customers has not been, nor does it expect it to be, impacted. Approximately 12 Bcf of the storage at the South site, which comprises three of the four FERC certified caverns, is fully completed and tested. As a result of the issues encountered at the North site, Liberty requested and the FERC approved the separation of the North site from the South site. As of December 31, 2011 and December 31, 2010, ProLiance's investment in Liberty approximated $35.1 million and $36.7 million, respectively.

Liberty received a Demand for Arbitration from Williams Midstream Natural Gas Liquids, Inc. ("Williams") on February 8, 2011 related to a Sublease Agreement ("Sublease") between Liberty and Williams at the North site. Williams alleges that Liberty was negligent in its attempt to convert certain salt caverns to natural gas storage and thereby damaged the caverns. Williams alleges damages of $56.7 million. Liberty believes that it has complied with all of its obligations to Williams, including properly terminating the Sublease. Liberty intends to vigorously defend itself and has asserted counterclaims substantially in excess of the amounts asserted by Williams.

Firm Transportation and Storage Commitments

ProLiance has various firm transportation and storage agreements with only minimal support from Vectren or Citizens. (See Note 17 regarding corporate guarantees.) Under these agreements, ProLiance must make specified minimum payments which extend through 2029. At December 31, 2011, the estimated aggregated amounts of such required future payments were $55.5 million, $49.0 million, $46.6 million, $38.2 million, $33.9 million, and $247.9 million for 2012, 2013, 2014, 2015, 2016, and thereafter, respectively. During 2011, 2010, and 2009, fixed payments under these agreements were $73.0 million, $76.8 million, and $63.0 million, respectively. ProLiance also made variable payments under these agreements in 2011, 2010, and 2009. Variable payments include storage injection and withdrawal charges, and commodity transportation charges.

Transactions with ProLiance

Purchases from ProLiance for resale and for injections into storage for the years ended December 31, 2011, 2010, and 2009, totaled $378.7 million, $437.7 million, and $533.4 million, respectively. Amounts owed to ProLiance at December 31, 2011, and 2010, for those purchases were $36.8 million and $59.6 million, respectively, and are included in Accounts payable to affiliated companies in the Consolidated Balance Sheets. Vectren received regulatory approval on April 25, 2006, from the IURC for ProLiance to provide natural gas supply services to the Company's Indiana utilities through March 2011. On March 17, 2011, an order was received from the IURC providing for ProLiance's continued provision of gas supply services to the Company's Indiana utilities and Citizens Energy Group through March 2016. Amounts charged by ProLiance for gas supply services are established by supply agreements with each utility.

- Definition

The entire disclosure for equity investment, or group of investments, for which combined disclosure is appropriate, including: (a) the name of each investee and percentage of ownership of common stock, (b) accounting policies for investments in common stock, (c) difference between the amount at which the investment is carried and the amount of underlying equity in net assets and the accounting treatment of the difference, (d) the total fair value of each identified investment for which a market value is available, (e) summarized information as to assets, liabilities, and results of operations of the investees (for investments in unconsolidated subsidiaries, common stock of joint ventures, or other investments using the equity method), and (f) material effects of possible conversions, exercises, or contingent issuances of the investee. Other disclosures include (a) the names of any investee in which the investor owns 20 percent or more of the voting stock and investment is not accounted for using the equity method, and the reasons why not, and (b) the names of any investee in which the investor owns less than 20 percent of the voting stock and the investment is accounted for using the equity method, and the reasons why it is.

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