Vectren Corp.’s second quarter net income dropped 68% to $4.3 million, or $0.06 per share, compared to $13.4 million, or $0.18 per share, reflecting the company’s decision to exit the synthetic fuels production business and the continuing challenge of declining gas demand due to high gas prices.

Excluding the cost of exiting its synthetic fuel production investments, Vectren second quarter earnings still fell about 7% to $9.3 million, or $0.12 per share, compared to $10 million, or $0.13 per share in 2005. Excluding synfuels, Vectren’s year-to-date earnings rose $3.2 million, or 4 cents per share, to $66.2 million, or $0.87 per share. Net income for the six-month period was $61.9 million, or $0.82 per share, compared to $69.5 million, or $0.92 per share, in the same period in 2005. About 7 cents/share of the decline was a result of lower gas customer demand and lower wholesale power earnings as a result of mark-to-market gains in 2005, the company said.

“Exclusive of the impact of synfuels, our year to date earnings reflect growth in net income despite the challenges of reduced average usage per customer and warmer than normal heating weather,” said CEO Niel C. Ellerbrook. “Our focus remains on building on our core businesses and improving our long-term results.”

The company is waiting approval of conservation programs and conservation adjustment riders in its Indiana and Ohio service territories. The petitions allow Vectren to recover the costs of promoting the conservation of natural gas through conservation trackers that work in tandem with a lost margin recovery mechanism. This mechanism is designed to allow the company to recover the distribution portion of its rates from residential and commercial customers based on the level of customer usage established in each utility’s last general rate case.

“Supply and demand pressures on natural gas continue driving unpredictable commodity prices and we must continue to move toward innovative regulation that aligns the customers’ interests with those of the company,” said Ellerbrook. A hearing before the Indiana Commission occurred on July 18 and a decision is anticipated early in the fourth quarter. All hearings before the Ohio Commission have been conducted and the settlement is now awaiting a final order.

The major factor weighing down Vectren’s financial results during the quarter was its decision to exit the synthetic fuels business due to the high price of oil and the uncertainty of federal legislation that would favorably impact the reference price of oil governing the phase out of synfuel tax credits. Based on the lack of legislative action during the current congressional session, a significant phase out of tax credits in 2006 is likely, the company said.

Accordingly, it has estimated a 65% phase out of its credits generated to date in 2006 based on current oil prices and other factors, including insurance proceeds, and has recorded a reserve of $4.4 million against those credits generated year to date in 2006, of which $2.1 million was recorded during the second quarter. In addition, Vectren estimates that its remaining funding obligation and an impairment charge in its investment in Pace Carbon will be about $9.5 million, or $5.7 million after tax, which was recorded in the second quarter.

The company also announced that it had signed an agreement to purchase Duke Energy’s share of Miller Pipeline Corp. Prior to the agreement, Miller was 100% owned by Reliant Services LLC, a 50% strategic alliance formed in 1998 between Vectren and Cinergy Corp. (now Duke Energy).

“Miller has successfully supported our core utility business and is strategically positioned as an important player in the replacement of the region’s aging utility infrastructure,” said Ellerbrook. Miller Pipeline was established in 1953 and has grown to become one of the country’s largest gas distribution contractors. In addition, Vectren and Duke have announced that Reliant is exiting the meter reading business and the remainder of the Reliant operations are under evaluation.

Vectren’s energy delivery subsidiaries provide gas and/or electricity to more than one million customers in adjoining service territories that cover nearly two-thirds of Indiana and west central Ohio.

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