UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number: 1-16739
VECTREN UTILITY HOLDINGS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-2104850
- ---------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20 N.W. 4th Street, Evansville, Indiana, 47708
-------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
812-491-4000
-------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock- Without Par Value 10 October 31, 2003
------------------------------- ---------------- ----------------
Class Number of Shares Date
Table of Contents
Item Page
Number Number
PART I. FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Vectren Utility Holdings, Inc. and Subsidiary Companies
Consolidated Condensed Balance Sheets 1-2
Consolidated Condensed Statements of Income 3
Consolidated Condensed Statements of Cash Flows 4
Notes to Unaudited Consolidated Condensed Financial Statements 5-19
2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 20-31
3 Quantitative and Qualitative Disclosures About Market Risk 32
4 Controls and Procedures 32
PART II. OTHER INFORMATION
1 Legal Proceedings 33
6 Exhibits and Reports on Form 8-K 33-34
Signatures 35
Access to Information
Vectren Corporation makes available all SEC filings and recent annual reports
free of charge, including those of its wholly owned subsidiaries, through its
website at www.vectren.com, or by request, directed to Investor Relations at the
mailing address, phone number, or email address that follows:
Mailing Address: Phone Number: Investor Relations Contact:
P.O. Box 209 (812) 491-4000 Steven M. Schein
Evansville, Indiana Vice President, Investor Relations
47702-0209 [email protected]
Definitions
AFUDC: allowance for funds used MMBTU: millions of British thermal
during construction units
APB: Accounting Principles Board MW: megawatts
EITF: Emerging Issues Task Force MWh / GWh: megawatt hours / millions
of megawatt hours (gigawatt hours)
FASB: Financial Accounting Standards NOx: nitrogen oxide
Board
FERC: Federal Energy Regulatory OUCC: Indiana Office of the Utility
Commission Consumer Counselor
IDEM: Indiana Department of PUCO: Public Utilities Commission of
Environmental Management Ohio
IURC: Indiana Utility Regulatory SFAS: Statement of Financial
Commission Accounting Standards
MCF / BCF: millions / billions of USEPA: United States Environmental
cubic feet Protection Agency
MDth / MMDth: thousands / millions Throughput: combined gas sales and
of dekatherms gas transportation volumes
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
- -----------------------------------------------------------------------------
September 30, December 31,
2003 2002
- ----------------------------------------- ------------- ------------
ASSETS As Restated,
------ See Note 3
------------
Current Assets
Cash & cash equivalents $ 4.6 $ 10.5
Accounts receivable-less reserves of
$4.9 & $5.5, respectively 70.4 131.9
Receivables due from other Vectren
companies 4.6 56.3
Accrued unbilled revenues 37.6 112.7
Inventories 47.7 56.0
Recoverable fuel & natural gas costs 31.5 22.1
Prepayments & other current assets 160.8 86.5
- -----------------------------------------------------------------------------
Total current assets 357.2 476.0
- -----------------------------------------------------------------------------
Utility Plant
Original cost 3,178.5 3,037.2
Less: accumulated depreciation &
amortization 1,456.8 1,389.0
- -----------------------------------------------------------------------------
Net utility plant 1,721.7 1,648.2
- -----------------------------------------------------------------------------
Investments in Unconsolidated Affiliates 1.8 2.4
Other Investments 19.9 21.9
Non-Utility Property-Net 134.2 139.2
Goodwill-Net 202.2 202.2
Regulatory Assets 84.7 75.2
Other Assets 3.9 5.3
- -----------------------------------------------------------------------------
TOTAL ASSETS $ 2,525.6 $ 2,570.4
=============================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
- ------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- -------------------------------------------- -------------- ------------
LIABILITIES & SHAREHOLDER'S EQUITY As Restated,
---------------------------------- See Note 3
------------
Current Liabilities
Accounts payable $ 37.7 $ 74.8
Accounts payable to affiliated companies 48.2 85.6
Accounts payable due to other Vectren
companies 15.5 69.8
Accrued liabilities 90.4 83.2
Short-term borrowings 143.5 239.1
Short-term borrowings due to other
Vectren companies - 86.9
Current maturities of long-term debt - 39.8
Long-term debt subject to tender 10.0 26.6
- ------------------------------------------------------------------------------
Total current liabilities 345.3 705.8
- -------------------------------------------------------------------------------
Long-term Debt-Net of Current Maturities &
Debt Subject to Tender 978.8 841.2
Deferred Income Taxes & Other Liabilities
Deferred income taxes 189.2 172.3
Deferred credits & other liabilities 82.3 82.2
- ------------------------------------------------------------------------------
Total deferred credits & other
liabilities 271.5 254.5
- ------------------------------------------------------------------------------
Commitments & Contingencies (Notes 8, 9, & 10)
Cumulative, Redeemable Preferred Stock
of a Subsidiary 0.2 0.3
Common Shareholder's Equity
Common stock (no par value) 553.2 385.7
Retained earnings 376.6 382.4
Accumulated other comprehensive income - 0.5
- ------------------------------------------------------------------------------
Total common shareholder's equity 929.8 768.6
- ------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 2,525.6 $ 2,570.4
==============================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited - In millions)
- -----------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2003 2002 2003 2002
- --------------------------------------- ---------------------- ----------------------
As Restated, As Restated,
See Note 3 See Note 3
------------ -----------
OPERATING REVENUES
Gas utility $ 115.7 $ 88.5 $ 790.3 $ 586.7
Electric utility 134.0 189.6 343.6 475.3
Other 0.2 - 0.6 0.2
- -----------------------------------------------------------------------------------------
Total operating revenues 249.9 278.1 1,134.5 1,062.2
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 72.0 45.7 541.4 358.3
Fuel for electric generation 24.9 22.8 66.3 59.7
Purchased electric energy 42.6 93.0 101.8 239.5
Other operating 51.4 49.0 161.9 149.1
Depreciation & amortization 30.4 27.8 88.8 80.9
Taxes other than income taxes 9.2 9.5 41.8 37.6
- -----------------------------------------------------------------------------------------
Total operating expenses 230.5 247.8 1,002.0 925.1
- -----------------------------------------------------------------------------------------
OPERATING INCOME 19.4 30.3 132.5 137.1
OTHER INCOME (EXPENSE)-NET
Equity in earnings (losses) of
unconsolidated affiliates (0.1) (0.4) (0.5) (0.9)
Other-net 2.3 0.7 1.0 6.5
- -----------------------------------------------------------------------------------------
Total other income (expense)-net 2.2 0.3 0.5 5.6
- -----------------------------------------------------------------------------------------
Interest expense 17.1 16.9 49.5 51.8
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4.5 13.7 83.5 90.9
- -----------------------------------------------------------------------------------------
Income taxes 2.1 4.7 32.4 31.2
- -----------------------------------------------------------------------------------------
NET INCOME $ 2.4 $ 9.0 $ 51.1 $ 59.7
=========================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In millions)
- --------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2003 2002
- ---------------------------------------------------------------- --------------------
As Restated,
See Note 3
------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 51.1 $ 59.7
Adjustments to reconcile net income to cash
from operating activities:
Depreciation & amortization 88.8 80.9
Deferred income taxes & investment tax credits 17.4 (4.2)
Equity in losses of unconsolidated affiliates 0.5 0.9
Net unrealized (gain) loss on derivative instruments 0.4 3.2
Pension and postretirement expense 4.4 4.8
Other non-cash charges- net 13.8 5.5
Changes in working capital accounts:
Accounts receivable, including to Vectren
companies & accrued unbilled revenue 178.5 105.0
Inventories 8.3 2.6
Recoverable fuel & natural gas costs (9.4) 29.5
Prepayments & other current assets (80.7) (18.7)
Accounts payable, including to Vectren
companies & affiliated companies (128.8) (45.8)
Accrued liabilities 3.7 35.6
Changes in other noncurrent assets (3.3) 0.5
Changes in other noncurrent liabilities (3.4) (3.7)
- --------------------------------------------------------------------------------------
Net cash flows from operating activities 141.3 255.8
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Long-term debt issuance - net of issue costs
& hedging proceeds 202.9 -
Additional capital contribution 167.5 -
Requirements for:
Retirement of long-term debt, including
premiums paid (121.9) (6.4)
Dividends to parent (56.9) (51.8)
Redemption of preferred stock of subsidiary (0.1) (0.2)
Other financing activities (1.7) -
Net change in short-term borrowings, including
to other Vectren companies (182.5) (68.3)
- --------------------------------------------------------------------------------------
Net cash flows from financing activities 7.3 (126.7)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Unconsolidated affiliate distributions 0.1 -
Notes receivable, including notes from other
Vectren companies & other collections - 10.4
Requirements for:
Capital expenditures, excluding AFUDC-equity (153.5) (128.2)
Unconsolidated affiliate and other investments (1.1) (5.9)
- --------------------------------------------------------------------------------------
Net cash flows from investing activities (154.5) (123.7)
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash & cash equivalents (5.9) 5.4
Cash & cash equivalents at beginning of period 10.5 5.3
- --------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 4.6 $ 10.7
======================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Vectren Utility Holdings, Inc. (VUHI or the Company), an Indiana corporation,
was formed on March 31, 2000, to serve as the intermediate holding company for
Vectren Corporation's (Vectren) three operating public utilities, Indiana Gas
Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana
Energy, Inc. (Indiana Energy), Southern Indiana Gas and Electric Company
(SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc. (SIGCORP), and the
Ohio operations. VUHI also has other assets that provide information technology
and other services to the three utilities.
Indiana Gas provides natural gas distribution and transportation services to a
diversified customer base in 49 of Indiana's 92 counties. SIGECO provides
electric generation, transmission, and distribution services to 8 counties in
southwestern Indiana, including counties surrounding Evansville, and
participates in the wholesale power market. SIGECO also provides natural gas
distribution and transportation services to 10 counties in southwestern Indiana,
including counties surrounding Evansville. The Ohio operations, owned as a
tenancy in common by Vectren Energy Delivery of Ohio, Inc.(VEDO), a wholly owned
subsidiary, (53 % ownership) and Indiana Gas (47 % ownership), provide natural
gas distribution and transportation services to 17 counties in west central
Ohio, including counties surrounding Dayton.
Vectren is an energy and applied technology holding company headquartered in
Evansville, Indiana. The Company was organized on June 10, 1999, solely for the
purpose of effecting the merger of Indiana Energy and SIGCORP. On March 31,
2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated
with a tax-free exchange of shares and has been accounted for as a
pooling-of-interests in accordance with APB Opinion No. 16 "Business
Combinations" (APB 16).
Both Vectren and VUHI are exempt from registration pursuant to Section 3(a)(1)
and 3(c) of the Public Utility Holding Company Act of 1935.
2. Basis of Presentation
The interim consolidated condensed financial statements included in this report
have been prepared by the Company, without audit, as provided in the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted as provided in such rules and regulations. The Company
believes that the information in this report reflects all adjustments necessary
to fairly state the results of the interim periods reported. These consolidated
condensed financial statements and related notes should be read in conjunction
with the Company's audited annual consolidated financial statements for the year
ended December 31, 2002, filed on Form 10-K/A. Because of the seasonal nature of
the Company's utility operations, the results shown on a quarterly basis are not
necessarily indicative of annual results.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
3. Restatement of Previously Reported Information
Subsequent to the issuance of the Company's 2002 quarterly financial statements,
the Company's management determined that previously issued financial statements
should be restated. The restatement had the effect of decreasing net income for
the three and nine months ended September 30, 2002, by $0.4 million after tax
and $2.1 million after tax, respectively.
In the second quarter of 2002, the Company recorded $5.2 million ($3.2 million
after tax) of carrying costs for demand side management (DSM) programs pursuant
to existing IURC orders and based on an improved regulatory environment.
Subsequently, management determined that the accrual of such carrying costs was
more appropriate in periods prior to 2000 when DSM program expenditures were
made. Therefore, such carrying costs originally reflected in 2002 quarterly
results were reversed and reflected in common shareholders' equity as of January
1, 2000. The Company also identified other adjustments for various
reconciliation errors and other errors related primarily to the recording of
estimates. These adjustments were not significant, either individually or in the
aggregate, and increased previously reported pre-tax and after tax earnings for
the three months ended September 30, 2002, by approximately $0.7 million and
$0.4 million, respectively, and increased previously reported pre-tax and after
tax earnings for the nine months ended September 30, 2002, by approximately $1.8
million and $1.1 million, respectively.
In addition, on January 1, 2003, Vectren transferred certain information
technology systems and related assets and buildings from other entities within
its consolidated group to VUHI. These assets primarily support the operations of
VUHI's subsidiaries and VUHI's subsidiaries receive a charge for their use that
is included in their other operating expenses. The transfer required restatement
of VUHI's consolidated financial statements for all periods presented under
accounting rules governing combinations of entities under common control. The
reorganization increased previously reported earnings by $0.5 million after tax
for the three months ended September 30, 2002, and $3.2 million after tax for
the nine months ended September 30, 2002. Total assets, liabilities, and equity
transferred to VUHI on January 1, 2003, were $133.8 million, $93.5 million, and
$40.3 million, respectively.
Following is a summary of the effects of the reorganization due to the transfer
of assets and the restatement on previously reported results of operations for
the three months ended September 30, 2002.
In millions
- --------------------------------------------------------------------------------------------------
Adjustments for
---------------------------
OPERATING REVENUES As reported Reorganization Restatement As Restated
----------- -------------- ----------- -----------
Gas utility $ 88.1 $ - $ 0.4 $ 88.5
Electric utility 190.0 - (0.4) 189.6
Energy services & other - - - -
- --------------------------------------------------------------------------------------------------
Total operating revenues 278.1 - - 278.1
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 45.6 - 0.1 45.7
Fuel for electric generation 22.9 - (0.1) 22.8
Purchased electric energy 92.5 - 0.5 93.0
Other operating 53.3 (4.7) 0.4 49.0
Depreciation & amortization 24.2 3.6 - 27.8
Taxes other than income taxes 9.7 (0.3) 0.1 9.5
- --------------------------------------------------------------------------------------------------
Total operating expenses 248.2 (1.4) 1.0 247.8
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 29.9 1.4 (1.0) 30.3
OTHER INCOME (EXPENSE) - NET
Equity in losses of unconsolidated
affiliates (0.4) - - (0.4)
Other - net 0.6 0.1 - 0.7
- --------------------------------------------------------------------------------------------------
Total other income (expense) - net 0.2 0.1 - 0.3
- --------------------------------------------------------------------------------------------------
Interest expense 16.5 0.7 (0.3) 16.9
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13.6 0.8 (0.7) 13.7
- --------------------------------------------------------------------------------------------------
Income taxes 4.7 0.3 (0.3) 4.7
- --------------------------------------------------------------------------------------------------
NET INCOME $ 8.9 $ 0.5 $(0.4) $ 9.0
==================================================================================================
Following is a summary of the effects of the reorganization due to the transfer
of assets and the restatement on previously reported results of operations for
the nine months ended September 30, 2002.
In millions
- --------------------------------------------------------------------------------------------------
Adjustments for
---------------------------
OPERATING REVENUES As reported Reorganization Restatement As Restated
----------- -------------- ----------- -----------
Gas utility $ 585.0 $ - $ 1.7 $ 586.7
Electric utility 475.7 - (0.4) 475.3
Energy services & other 0.2 - 0.2
- --------------------------------------------------------------------------------------------------
Total operating revenues 1,060.7 0.2 1.3 1,062.2
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 358.2 - 0.1 358.3
Fuel for electric generation 59.7 - - 59.7
Purchased electric energy 239.3 - 0.2 239.5
Other operating 164.4 (15.8) 0.5 149.1
Depreciation & amortization 71.7 9.2 - 80.9
Taxes other than income taxes 37.8 (0.3) 0.1 37.6
- --------------------------------------------------------------------------------------------------
Total operating expenses 931.1 (6.9) 0.9 925.1
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 129.6 7.1 0.4 137.1
OTHER INCOME (EXPENSE) - NET
Equity in losses of unconsolidated
affiliates (1.4) - 0.5 (0.9)
Other - net 10.7 0.1 (4.3) 6.5
- --------------------------------------------------------------------------------------------------
Total other income (expense) - net 9.3 0.1 (3.8) 5.6
- --------------------------------------------------------------------------------------------------
Interest expense 49.7 2.1 - 51.8
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 89.2 5.1 (3.4) 90.9
- --------------------------------------------------------------------------------------------------
Income taxes 30.6 1.9 (1.3) 31.2
- --------------------------------------------------------------------------------------------------
NET INCOME $ 58.6 $ 3.2 $(2.1) $ 59.7
==================================================================================================
4. Transactions with ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides natural gas
and related services to Indiana Gas, the Ohio operations, Citizens Gas and
others. ProLiance also began providing service to SIGECO and Vectren Retail, LLC
(Vectren's retail gas marketer) in 2002. ProLiance's primary businesses include
gas marketing, gas portfolio optimization, and other portfolio and energy
management services.
Purchases from ProLiance for resale and for injections into storage for the
three months ended September 30, 2003 and 2002, totaled $148.3 million and $93.3
million, respectively, and for the nine months ended September 30, 2003 and
2002, totaled $575.8 million and $329.9 million, respectively. Amounts owed to
ProLiance at September 30, 2003, and December 31, 2002, for those purchases were
$47.7 million and $83.7 million, respectively, and are included in accounts
payable to affiliated companies. Amounts charged by ProLiance for gas supply
services are established by supply agreements with each utility.
5. Subsidiary Guarantor and Consolidating Information
The Company's three operating utility companies, SIGECO, Indiana Gas, and VEDO
are guarantors of VUHI's $346 million in short-term credit facilities, of which
$142.5 million is outstanding at September 30, 2003, and VUHI's $550.0 million
unsecured senior notes outstanding at September 30, 2003. As a result of the
reorganization described in Note 3, VUHI has operations other than those of the
subsidiary guarantors. Pursuant to Article 3-10 of Regulation S-X, disclosure of
the results of operations and balance sheets of the subsidiary guarantors
separate from the parent company's operations is required. Following are
consolidating financial statements including information on the combined
operations of the subsidiary guarantors separate from the other operations of
the parent company.
Consolidating Balance Sheet as of September 30, 2003 (in millions):
- ---------------------------------------------------------------------------------------------
ASSETS Subsidiary Parent
------ Guarantors Company Eliminations Consolidated
---------- ------- ------------ ------------
Current Assets
Cash & cash equivalents $ 6.0 $ (1.4) $ - $ 4.6
Accounts receivable-less reserves 70.2 0.2 - 70.4
Receivables due from other Vectren
companies 0.1 11.1 (6.6) 4.6
Accrued unbilled revenues 37.6 - - 37.6
Inventories 47.7 - - 47.7
Recoverable fuel & natural gas costs 31.5 - - 31.5
Prepayments & other current assets 156.5 4.3 - 160.8
- ---------------------------------------------------------------------------------------------
Total current assets 349.6 14.2 (6.6) 357.2
- ---------------------------------------------------------------------------------------------
Utility Plant
Original cost 3,178.5 - - 3,178.5
Less: accumulated depreciation
& amortization 1,456.8 - - 1,456.8
- ---------------------------------------------------------------------------------------------
Net utility plant 1,721.7 - - 1,721.7
- ---------------------------------------------------------------------------------------------
Investments in Consolidated Subsidiaries - 935.3 (935.3) -
Notes Receivable from Consolidated
Subsidiaries - 553.6 (553.6) -
Investments in Unconsolidated Affiliates 0.2 1.6 - 1.8
Other Investments 13.7 6.2 - 19.9
Non-Utility Property-Net 5.6 128.6 - 134.2
Goodwill-Net 202.2 - - 202.2
Regulatory Assets 84.8 (0.1) - 84.7
Other Assets 3.9 - - 3.9
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,381.7 $ 1,639.4 $(1,495.5) $ 2,525.6
=============================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY
- ----------------------------------
Current Liabilities
Accounts payable $ 36.0 $ 1.7 $ - $ 37.7
Accounts payable to affiliated
companies 48.2 - - 48.2
Accounts payable due to other Vectren
companies 22.1 - (6.6) 15.5
Accrued liabilities 83.1 9.9 (2.6) 90.4
Short-term borrowings 1.0 142.5 - 143.5
Short-term borrowings due from
other Vectren companies 107.9 - (107.9) -
Long-term debt subject to tender 10.0 - - 10.0
- ---------------------------------------------------------------------------------------------
Total current liabilities 308.3 154.1 (117.1) 345.3
- ---------------------------------------------------------------------------------------------
Long-Term Debt
Long-term debt-net of current
maturities & debt subject to tender 431.3 547.5 - 978.8
Long-term debt due to VUHI 443.1 - (443.1) -
- ---------------------------------------------------------------------------------------------
Total long-term debt-net 874.4 547.5 (443.1) 978.8
- ---------------------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 183.9 5.3 - 189.2
Deferred credits & other liabilities 79.6 2.7 - 82.3
- ---------------------------------------------------------------------------------------------
Total deferred credits & other
liabilities 263.5 8.0 - 271.5
- ---------------------------------------------------------------------------------------------
Cumulative, Redeemable Preferred Stock
of a Subsidiary 0.2 - - 0.2
Common Shareholder's Equity
Common stock (no par value) 601.3 553.2 (601.3) 553.2
Retained earnings 334.0 376.6 (334.0) 376.6
Accumulated other comprehensive income - - - -
- ---------------------------------------------------------------------------------------------
Total common shareholder's equity 935.3 929.8 (935.3) 929.8
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 2,381.7 $ 1,639.4 $(1,495.5) $ 2,525.6
=============================================================================================
Consolidating Balance Sheet as of December 31, 2002 (in millions):
- ----------------------------------------------------------------------------------------------------
ASSETS Subsidiary Parent
------ Guarantors Company Eliminations Consolidated
---------- ------- ------------ ------------
Current Assets
Cash & cash equivalents $ 10.2 $ 0.3 $ - $ 10.5
Accounts receivable-less reserves 130.8 1.1 - 131.9
Receivables due from other Vectren
companies 39.3 19.7 (2.7) 56.3
Accrued unbilled revenues 112.7 - - 112.7
Inventories 56.0 - - 56.0
Recoverable fuel & natural gas costs 22.1 - - 22.1
Prepayments & other current assets 86.2 0.3 - 86.5
- ----------------------------------------------------------------------------------------------------
Total current assets 457.3 21.4 (2.7) 476.0
- ----------------------------------------------------------------------------------------------------
Utility Plant
Original cost 3,037.2 - - 3,037.2
Less: accumulated depreciation &
amortization 1,389.0 - - 1,389.0
- ----------------------------------------------------------------------------------------------------
Net utility plant 1,648.2 - - 1,648.2
- ----------------------------------------------------------------------------------------------------
Investments in Consolidated Subsidiaries - 802.4 (802.4) -
Notes Receivable from Consolidated Subsidiaries 8.5 493.9 (502.4) -
Investments in Unconsolidated Affiliates 0.1 2.3 - 2.4
Other Investments 13.1 8.8 - 21.9
Non-Utility Property-Net 5.4 133.8 - 139.2
Goodwill-Net 202.2 - - 202.2
Regulatory Assets 70.3 4.9 - 75.2
Other Assets 4.9 0.4 - 5.3
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,410.0 $ 1,467.9 $(1,307.5) $ 2,570.4
====================================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY
- -----------------------------------
Current Liabilities
Accounts payable $ 71.3 $ 3.5 $ - $ 74.8
Accounts payable to affiliated companies 85.2 0.4 - 85.6
Accounts payable due to other Vectren
companies 61.3 11.2 (2.7) 69.8
Accrued liabilities 83.8 1.7 (2.3) 83.2
Short-term borrowings - 239.1 - 239.1
Short-term borrowings due from
other Vectren companies 147.6 95.4 (156.1) 86.9
Current maturities of long-term debt 39.8 - - 39.8
Long-term debt subject to tender 26.6 - - 26.6
- ----------------------------------------------------------------------------------------------------
Total current liabilities 515.6 351.3 (161.1) 705.8
- ----------------------------------------------------------------------------------------------------
Long-Term Debt
Long-term debt-net of current maturities &
debt subject to tender 492.8 348.4 - 841.2
Long-term debt due to VUHI 344.0 - (344.0) -
- ----------------------------------------------------------------------------------------------------
Total long-term debt-net 836.8 348.4 (344.0) 841.2
- ----------------------------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 174.6 (2.3) - 172.3
Deferred credits & other liabilities 80.3 1.9 - 82.2
- ----------------------------------------------------------------------------------------------------
Total deferred credits & other liabilities 254.9 (0.4) - 254.5
- ----------------------------------------------------------------------------------------------------
Cumulative, Redeemable Preferred Stock of
a Subsidiary 0.3 - - 0.3
Common Shareholder's Equity
Common stock (no par value) 461.3 385.7 (461.3) 385.7
Retained earnings 341.1 382.4 (341.1) 382.4
Accumulated other comprehensive income - 0.5 - 0.5
- ----------------------------------------------------------------------------------------------------
Total common shareholder's equity 802.4 768.6 (802.4) 768.6
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 2,410.0 $ 1,467.9 $(1,307.5) $ 2,570.4
====================================================================================================
Consolidating Statement of Income for the three months ended September 30, 2003
(in millions):
- ---------------------------------------------------------------------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- ----------------------------------------- ---------- ------- ------------ ------------
OPERATING REVENUES
Gas utility $ 115.7 $ - $ - $ 115.7
Electric utility 134.0 - - 134.0
Other - 6.6 (6.4) 0.2
- ---------------------------------------------------------------------------------------------
Total operating revenues 249.7 6.6 (6.4) 249.9
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 72.0 - - 72.0
Fuel for electric generation 24.9 - - 24.9
Purchased electric energy 42.6 - - 42.6
Other operating 57.6 0.2 (6.4) 51.4
Depreciation & amortization 26.1 4.3 - 30.4
Taxes other than income taxes 9.0 0.2 - 9.2
- ---------------------------------------------------------------------------------------------
Total operating expenses 232.2 4.7 (6.4) 230.5
- ---------------------------------------------------------------------------------------------
OPERATING INCOME 17.5 1.9 - 19.4
OTHER INCOME (EXPENSE)-NET
Equity in earnings of consolidated
companies - 1.4 (1.4) -
Equity in losses of unconsolidated
affiliates - (0.1) - (0.1)
Other-net 1.8 7.4 (6.9) 2.3
- ---------------------------------------------------------------------------------------------
Total other income (expense)-net 1.8 8.7 (8.3) 2.2
- ---------------------------------------------------------------------------------------------
Interest expense 15.7 8.3 (6.9) 17.1
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3.6 2.3 (1.4) 4.5
- ---------------------------------------------------------------------------------------------
Income taxes 2.2 (0.1) - 2.1
- ---------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1.4 $ 2.4 $(1.4) $ 2.4
=============================================================================================
Consolidating Statement of Income for the three months ended September 30, 2002
(in millions):
- ---------------------------------------------------------------------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- ---------------------------------------- ---------- ------- ------------ ------------
OPERATING REVENUES
Gas utility $ 88.5 $ - $ - $ 88.5
Electric utility 189.6 - - 189.6
Other - 4.8 (4.8) -
- ----------------------------------------------------------------------------------------------
Total operating revenues 278.1 4.8 (4.8) 278.1
- ---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 45.7 - - 45.7
Fuel for electric generation 22.8 - - 22.8
Purchased electric energy 93.0 - - 93.0
Other operating 54.0 (0.2) (4.8) 49.0
Depreciation & amortization 24.2 3.6 - 27.8
Taxes other than income taxes 9.7 (0.2) - 9.5
- ---------------------------------------------------------------------------------------------
Total operating expenses 249.4 3.2 (4.8) 247.8
- ---------------------------------------------------------------------------------------------
OPERATING INCOME 28.7 1.6 - 30.3
OTHER INCOME (EXPENSE)-NET
Equity in earnings of consolidated
companies - 9.2 (9.2) -
Equity in losses of unconsolidated
affiliates - (0.4) - (0.4)
Other-net 0.8 6.1 (6.2) 0.7
- ---------------------------------------------------------------------------------------------
Total other income (expense)-net 0.8 14.9 (15.4) 0.3
- ---------------------------------------------------------------------------------------------
Interest expense 15.5 7.6 (6.2) 16.9
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14.0 8.9 (9.2) 13.7
- ---------------------------------------------------------------------------------------------
Income taxes 4.8 (0.1) - 4.7
- ---------------------------------------------------------------------------------------------
NET INCOME $ 9.2 $ 9.0 $ (9.2) $ 9.0
=============================================================================================
Consolidating Statement of Income for the nine months ended September 30, 2003
(in millions):
- ------------------------------------------------------------------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- ---------------------------------------- ---------- ------- ------------ ------------
OPERATING REVENUES
Gas utility $ 790.3 $ - $ - $ 790.3
Electric utility 343.6 - - 343.6
Other - 19.8 (19.2) 0.6
- ------------------------------------------------------------------------------------------
Total operating revenues 1,133.9 19.8 (19.2) 1,134.5
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 541.4 - - 541.4
Fuel for electric generation 66.3 - - 66.3
Purchased electric energy 101.8 - - 101.8
Other operating 180.1 1.0 (19.2) 161.9
Depreciation & amortization 76.9 11.9 - 88.8
Taxes other than income taxes 41.1 0.7 - 41.8
- ------------------------------------------------------------------------------------------
Total operating expenses 1,007.6 13.6 (19.2) 1,002.0
- ------------------------------------------------------------------------------------------
OPERATING INCOME 126.3 6.2 - 132.5
OTHER INCOME (EXPENSE)-NET
Equity in earnings of consolidated
companies - 49.8 (49.8) -
Equity in losses of unconsolidated
affiliates - (0.5) - (0.5)
Other-net 2.0 19.2 (20.2) 1.0
- ------------------------------------------------------------------------------------------
Total other income (expense)-net 2.0 68.5 (70.0) 0.5
- ------------------------------------------------------------------------------------------
Interest expense 46.6 23.1 (20.2) 49.5
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 81.7 51.6 (49.8) 83.5
- ------------------------------------------------------------------------------------------
Income taxes 31.9 0.5 - 32.4
- ------------------------------------------------------------------------------------------
NET INCOME $ 49.8 $ 51.1 $(49.8) $ 51.1
==========================================================================================
Consolidating Statement of Income for the nine months ended September 30, 2002
(in millions):
- ------------------------------------------------------------------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- -------------------------------------- ---------- ------- ------------ ------------
OPERATING REVENUES
Gas utility $ 586.7 $ - $ - $ 586.7
Electric utility 475.3 - - 475.3
Other - 16.0 (15.8) 0.2
- ------------------------------------------------------------------------------------------
Total operating revenues 1,062.0 16.0 (15.8) 1,062.2
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 358.3 - - 358.3
Fuel for electric generation 59.7 - - 59.7
Purchased electric energy 239.5 - - 239.5
Other operating 164.6 0.3 (15.8) 149.1
Depreciation & amortization 71.7 9.2 - 80.9
Taxes other than income taxes 37.9 (0.3) - 37.6
- ------------------------------------------------------------------------------------------
Total operating expenses 931.7 9.2 (15.8) 925.1
- ------------------------------------------------------------------------------------------
OPERATING INCOME 130.3 6.8 - 137.1
OTHER INCOME (EXPENSE)-NET
Equity in earnings of consolidated
companies - 57.8 (57.8) -
Equity in losses of unconsolidated
affiliates - (0.9) - (0.9)
Other-net 4.8 20.2 (18.5) 6.5
- ------------------------------------------------------------------------------------------
Total other income (expense)-net 4.8 77.1 (76.3) 5.6
- ------------------------------------------------------------------------------------------
Interest expense 47.2 23.1 (18.5) 51.8
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 87.9 60.8 (57.8) 90.9
- ------------------------------------------------------------------------------------------
Income taxes 30.1 1.1 - 31.2
- ------------------------------------------------------------------------------------------
NET INCOME $ 57.8 $ 59.7 $ (57.8) $ 59.7
==========================================================================================
Consolidating Statement of Cash Flows for the nine months ended September 30,
2003 (in millions):
- -----------------------------------------------------------------------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
---------- ------- ------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 114.2 $ 27.1 $ - $ 141.3
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Long-term debt issuance - net of
issue costs & hedging proceeds 99.0 202.9 (99.0) 202.9
Additional capital contribution 140.0 167.5 (140.0) 167.5
Requirements for:
Retirement of long-term debt,
includingpremiums paid (121.9) - - (121.9)
Dividends to parent (56.9) (56.9) 56.9 (56.9)
Redemption of preferred stock of
subsidiary (0.1) - - (0.1)
Other financing activities (1.7) - - (1.7)
Net change in short-term borrowings,
including to other Vectren companies (38.7) (192.0) 48.2 (182.5)
- -----------------------------------------------------------------------------------------------
Net cash flows from financing activities 19.7 121.5 (133.9) 7.3
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Consolidated subsidiary distributions - 56.9 (56.9) -
Unconsolidated affiliate distributions - 0.1 - 0.1
Requirements for:
Capital expenditures, excluding
AFUDC-equity (146.6) (6.9) - (153.5)
Consolidated subsidiary investments - (140.0) 140.0 -
Unconsolidated affiliate and other
investments - (1.1) - (1.1)
Net change in intercompany notes
receivable 8.5 (59.3) 50.8 -
- -----------------------------------------------------------------------------------------------
Net cash flows from investing activities (138.1) (150.3) 133.9 (154.5)
- -----------------------------------------------------------------------------------------------
Net decrease in cash & cash equivalents (4.2) (1.7) - (5.9)
Cash & cash equivalents at beginning of period 10.2 0.3 - 10.5
- -----------------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 6.0 $ (1.4) $ - $ 4.6
===============================================================================================
Consolidating Statement of Cash Flows for the nine months ended September 30,
2002 (in millions):
- -----------------------------------------------------------------------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- -----------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 249.9 $ 5.9 $ - $ 255.8
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Requirements for:
Retirement of long-term debt, including
premiums paid (6.4) - - (6.4)
Dividends to parent (55.8) (51.8) 55.8 (51.8)
Redemption of preferred stock of
subsidiary (0.2) - - (0.2)
Net change in short-term borrowings,
including to other Vectren companies (52.4) (31.8) 15.9 (68.3)
- -----------------------------------------------------------------------------------------------
Net cash flows from financing activities (114.8) (83.6) 71.7 (126.7)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Consolidated subsidiary distributions - 55.8 (55.8) -
Notes receivable & other collections 1.4 9.0 - 10.4
Requirements for:
Capital expenditures, excluding
AFUDC-equity (94.1) (34.1) - (128.2)
Unconsolidated affiliate & other
investments (3.8) (2.1) - (5.9)
Net change in intercompany notes receivable (38.7) 54.6 (15.9) -
- -----------------------------------------------------------------------------------------------
Net cash flows from investing activities (135.2) 83.2 (71.7) (123.7)
- -----------------------------------------------------------------------------------------------
Net (decrease) increase in cash & cash
equivalents (0.1) 5.5 - 5.4
Cash & cash equivalents at beginning of period 7.0 (1.7) - 5.3
- -----------------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 6.9 $ 3.8 $ - $ 10.7
===============================================================================================
6. Transactions with Other Vectren Companies
Support Services and Purchases
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, finance, tax, risk
management, human resources, which includes charges for restricted stock
compensation and for pension and other postretirement benefits not directly
charged to subsidiaries. These costs have been allocated using various
allocators, primarily number of employees, number of customers and/or revenues.
Allocations are based on cost. VUHI received corporate allocations totaling
$18.0 million and $15.1 million, respectively, for the three months ended
September 30, 2003 and 2002, and $52.6 million and $48.7 million, respectively,
for the nine months ended September 30, 2003 and 2002.
Vectren Fuels, Inc., a wholly owned subsidiary of Vectren, owns and operates
coal mines from which SIGECO purchases fuel used for electric generation.
Amounts paid for such purchases for the three months ended September 30, 2003
and 2002, totaled $20.5 million and $17.3 million, respectively, and $58.7
million and $45.6 million, respectively, for the nine months ended September 30,
2003 and 2002.
Stock-Based Incentive Plans
VUHI does not have stock-based compensation plans separate from Vectren. An
insignificant number of VUHI's employees participate in Vectren's stock-based
compensation plans.
7. Financing Transactions
VUHI Debt Issuance
In July 2003, VUHI issued senior unsecured notes with an aggregate principal
amount of $200 million in two $100 million tranches. The first tranche are
10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746%
to yield 5.28% to maturity (2013 Notes). The second tranche are 15-year notes
due August 2018, with an interest rate of 5.75% priced at 99.177% to yield 5.80%
to maturity (2018 Notes).
The notes are jointly and severally guaranteed by the Company's three public
utilities. In addition, they have no sinking fund requirements, and interest
payments are due semi-annually. The notes may be called by the Company, in whole
or in part, at any time for an amount equal to accrued and unpaid interest, plus
the greater of 100% of the principal amount or the sum of the present values of
the remaining scheduled payments of principal and interest, discounted to the
redemption date on a semi-annual basis at the Treasury Rate, as defined in the
indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the
2018 Notes.
Shortly before these issues, the Company entered into several treasury locks
with a total notional amount of $150.0 million. Upon issuance of the debt, the
treasury locks were settled resulting in the receipt of $5.7 million in cash.
The value received is being amortized as a reduction of interest expense over
the life of the issues.
The net proceeds from the sale of the senior notes and settlement of related
hedging arrangements approximated $203 million.
Additional Capital Contributions
In March 2003, Vectren filed a registration statement with the Securities and
Exchange Commission with respect to a public offering of 6.5 million shares of
new common stock. In August 2003, the registration became effective, and an
agreement was reached to sell approximately 7.4 million shares (the original 6.5
million shares, plus an over-allotment option of 941,400 shares) to a group of
underwriters. The net proceeds totaled $163.2 million and was contributed to
VUHI.
In addition, a portion of current year proceeds of $4.3 million generated from
the issuance of new shares of Vectren's common stock to fund its dividend
reinvestment plan was contributed to VUHI.
SIGECO and Indiana Gas Debt Call
During 2003, the Company called two first mortgage bonds outstanding at SIGECO
and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond
had a principal amount of $45.0 million, an interest rate of 7.60%, was
originally due in 2023, and was redeemed at 103.745% of its stated principal
amount. The second SIGECO bond had a principal amount of $20.0 million, an
interest rate of 7.625%, was originally due in 2025, and was redeemed at
103.763% of the stated principal amount.
The first Indiana Gas note had a remaining principal amount of $21.3 million, an
interest rate of 9.375%, was originally due in 2021, and was redeemed at
105.525% of the stated principal amount. The second Indiana Gas note had a
principal amount of $13.5 million, an interest rate of 6.75%, was originally due
in 2028, and was redeemed at the principal amount.
Pursuant to regulatory authority, the premiums paid to retire the net carrying
value of these notes totaling $3.6 million were deferred as a regulatory asset.
Other Financing Transactions
In January, 2003, other debt of Indiana Gas totaling $17.5 million and of SIGECO
totaling $1.0 million was retired.
8. Commitments & Contingencies
Legal Proceedings
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations. See Note 9 regarding
environmental matters.
United States Securities and Exchange Commission (SEC) Informal Inquiry
As more fully described in Note 3 to these consolidated condensed financial
statements and in Note 3 to the 2002 consolidated financial statements filed on
Form 10-K/A, the Company restated its consolidated financial statements for
2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC
in an informal inquiry with respect to this previously announced restatement,
has met with the staff of the SEC, and has provided information in response to
their requests.
9. Environmental Matters
NOx SIP Call Matter
The Clean Air Act (the Act) requires each state to adopt a State Implementation
Plan (SIP) to attain and maintain National Ambient Air Quality Standards (NAAQS)
for a number of pollutants, including ozone. If the USEPA finds a state's SIP
inadequate to achieve the NAAQS, the USEPA can call upon the state to revise its
SIP (a SIP Call).
In October 1998, the USEPA issued a final rule "Finding of Significant
Contribution and Rulemaking for Certain States in the Ozone Transport Assessment
Group Region for Purposes of Reducing Regional Transport of Ozone," (63 Fed.
Reg. 57355). This ruling found that the SIP's of certain states, including
Indiana, were substantially inadequate since they allowed for nitrogen oxide
(NOx) emissions in amounts that contributed to non-attainment with the ozone
NAAQS in downwind states. The USEPA required each state to revise its SIP to
provide for further NOx emission reductions. The NOx emissions budget, as
stipulated in the USEPA's final ruling, requires a 31% reduction in total NOx
emissions from Indiana.
In June 2001, the Indiana Air Pollution Control Board adopted final rules to
achieve the NOx emission reductions required by the NOx SIP Call. Indiana's SIP
requires the Company to lower its system-wide NOx emissions to .14 lbs./MMBTU by
May 31, 2004 (the compliance date). This is a 65% reduction from emission levels
existing in 1999 and 1998.
The Company has initiated steps toward compliance with the revised regulations.
These steps include installing Selective Catalytic Reduction (SCR) systems at
Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4,
and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx
emissions to atmospheric nitrogen and water using ammonia in a chemical
reaction. This technology is known to be the most effective method of reducing
NOx emissions where high removal efficiencies are required.
The IURC has issued orders that approve:
o the Company's project to achieve environmental compliance by investing in
clean coal technology;
o a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs incurred;
o a mechanism whereby, prior to an electric base rate case, the Company may
recover through a rider that is updated every six months an 8 percent
return on its capital costs for the project; and
o ongoing recovery of operating costs, including depreciation and purchased
emission allowances through a rider mechanism, related to the clean coal
technology once the facility is in service.
Based on the level of system-wide emissions reductions required and the control
technology utilized to achieve the reductions, the current estimated clean coal
technology construction cost is consistent with amounts approved in the IURC's
orders and is expected to be expended during the 2001-2006 period. Through
September 30, 2003, $117.1 million has been expended. After the equipment is
installed and operational, related annual operating expenses, including
depreciation expense, are estimated to be between $24 million and $27 million. A
portion of those expenses began in October 2003 when the Culley SCR became
operational. The 8 percent return on capital investment approximates the return
authorized in the Company's last electric rate case in 1995 and includes a
return on equity.
The Company expects to achieve timely compliance as a result of the project.
Construction of the first SCR at Culley was placed into service in October 2003,
and construction of the Warrick 4 and Brown SCR's is proceeding on schedule.
Installation of SCR technology as planned is expected to reduce the Company's
overall NOx emissions to levels compliant with Indiana's NOx emissions budget
allotted by the USEPA. Therefore, the Company has recorded no accrual for
potential penalties that may result from noncompliance.
Culley Generating Station Litigation
In the late 1990's, the USEPA initiated an investigation under Section 114 of
the Act of SIGECO's coal-fired electric generating units in commercial operation
by 1977 to determine compliance with environmental permitting requirements
related to repairs, maintenance, modifications, and operations changes. The
focus of the investigation was to determine whether new source review permitting
requirements were triggered by such plant modifications, and whether the best
available control technology was, or should have been used. Numerous electric
utilities were, and are currently, being investigated by the USEPA under an
industry-wide review for compliance. In July 1999, SIGECO received a letter from
the Office of Enforcement and Compliance Assurance of the USEPA discussing the
industry-wide investigation, vaguely referring to an investigation of SIGECO and
inviting SIGECO to participate in a discussion of the issues. No specifics were
noted; furthermore, the letter stated that the communication was not intended to
serve as a notice of violation. Subsequent meetings were conducted in September
and October 1999 with the USEPA and targeted utilities, including SIGECO,
regarding potential remedies to the USEPA's general allegations.
On November 3, 1999, the USEPA filed a lawsuit against seven utilities,
including SIGECO. SIGECO's suit was filed in the U.S. District Court for the
Southern District of Indiana. The USEPA alleged that, beginning in 1992, SIGECO
violated the Act by (1) making modifications to its Culley Generating Station in
Yankeetown, Indiana without obtaining required permits (2) making major
modifications to the Culley Generating Station without installing the best
available emission control technology and (3) failing to notify the USEPA of the
modifications. In addition, the lawsuit alleged that the modifications to the
Culley Generating Station required SIGECO to begin complying with federal new
source performance standards at its Culley Unit 3. The USEPA also issued an
administrative notice of violation to SIGECO making the same allegations, but
alleging that violations began in 1977.
On June 6, 2003, SIGECO, the Department of Justice (DOJ), and the USEPA
announced an agreement that would resolve the lawsuit. The agreement was
embodied in a consent decree filed in U.S. District Court for the Southern
District of Indiana. The mandatory public comment period has expired, and no
comments were received. The Court entered the consent decree on August 13, 2003.
Under the terms of the agreement, the DOJ and USEPA have agreed to drop all
challenges of past maintenance and repair activities at the Culley coal-fired
units. In reaching the agreement, SIGECO did not admit to any allegations
alleged in the government's complaint, and SIGECO continues to believe that it
acted in accordance with applicable regulations and conducted only routine
maintenance on the units. SIGECO has entered into this agreement to further its
continued commitment to improve air quality and avoid the cost and uncertainties
of litigation.
Under the agreement, SIGECO has committed to:
o either repower Culley Unit 1 (50 MW) with natural gas, which would
significantly reduce air emissions from this unit, and equip it with SCR
control technology for further reduction of nitrogen oxides, or cease
operation of the unit by December 2006;
o operate the existing SCR control technology recently installed on Culley
Unit 3 (287 MW) year round at a lower emission rate than that currently
required under the NOx SIP Call, resulting in further nitrogen oxide
reductions;
o enhance the efficiency of the existing scrubber at Culley Units 2 and 3 for
additional removal of sulphur dioxide emissions;
o install a baghouse for further particulate matter reductions at Culley Unit
3 by June 2007;
o conduct a Sulphuric Acid Reduction Demonstration Project as an
environmental mitigation project designed to demonstrate an advance in
pollution control technology for the reduction of sulfate emissions; and
o pay a $600,000 civil penalty.
The Company anticipates that the settlement would result in total capital
expenditures through 2007 in a range between $16 million and $28 million. Other
than the $600,000 civil penalty, which was accrued in the second quarter of
2003, the implementation of the settlement, including these capital expenditures
and related operating expenses, are expected to be recovered through rates.
Information Request
On January 23, 2001, SIGECO received an information request from the USEPA under
Section 114 of the Act for historical operational information on the Warrick and
A.B. Brown generating stations. SIGECO has provided all information requested,
and no further action has occurred.
Manufactured Gas Plants
In the past, Indiana Gas and others operated facilities for the manufacture of
gas. Given the availability of natural gas transported by pipelines, these
facilities have not been operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas and others may now be required
to take remedial action if certain byproducts are found above the regulatory
thresholds at these sites.
Indiana Gas has identified the existence, location, and certain general
characteristics of 26 gas manufacturing and storage sites for which it may have
some remedial responsibility. Indiana Gas has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites under an agreed
order between Indiana Gas and the IDEM, and a Record of Decision was issued by
the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at
additional sites, Indiana Gas has submitted several of the sites to the IDEM's
Voluntary Remediation Program and is currently conducting some level of remedial
activities including groundwater monitoring at certain sites where deemed
appropriate and will continue remedial activities at the sites as appropriate
and necessary.
In conjunction with data compiled by environmental consultants, Indiana Gas has
accrued the estimated costs for further investigation, remediation, groundwater
monitoring, and related costs for the sites. While the total costs that may be
incurred in connection with addressing these sites cannot be determined at this
time, Indiana Gas has recorded costs that it reasonably expects to incur
totaling approximately $24.4 million.
The estimated accrued costs are limited to Indiana Gas' proportionate share of
the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26
sites with other potentially responsible parties (PRP), which serve to limit
Indiana Gas' share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, Indiana Gas has received and recorded
settlements from all known insurance carriers in an aggregate amount
approximating $24.4 million.
Environmental matters related to manufactured gas plants have had no material
impact on earnings since costs recorded to date approximate PRP and insurance
settlement recoveries. While Indiana Gas has recorded all costs which it
presently expects to incur in connection with activities at these sites, it is
possible that future events may require some level of additional remedial
activities which are not presently foreseen.
In October 2002, the Company received a formal information request letter from
the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO
and not currently enrolled in the IDEM's Voluntary Remediation Program (VRP). In
response SIGECO submitted to the IDEM the results of preliminary site
investigations conducted in the mid-1990's. These site investigations confirmed
that based upon the conditions known at the time, the sites posed no risk to
human health or the environment. Follow up reviews have been initiated by the
Company to confirm that the sites continue to pose no such risk.
On October 6, 2003, SIGECO filed applications to enter four of the manufactured
gas plant sites in IDEM's VRP. The remaining site is currently being addressed
in the VRP by another Indiana utility. SIGECO is adding its four sites into the
renewal of the global Voluntary Remediation Agreement that Indiana Gas has in
place with IDEM for its manufactured gas plant sites. At this time the Company
is unable to predict any outcome that may result from these SIGECO manufactured
gas plant sites.
10. Rate and Regulatory Matters
The following is an update on two regulatory matters in Ohio. Each of the
discussed matters is currently pending before the PUCO.
The first matter relates to a pending application made to the PUCO by VEDO,
together with other regulated Ohio gas utilities, for authority to establish a
tariff mechanism to recover expenses related to uncollectible accounts. As
proposed the tariff mechanism would establish an automatic adjustment procedure
to track and recover these costs instead of providing the recovery of the
historical amount in base rates. If the application is approved before the end
of the year, 2003 uncollectible costs in excess of the amount in base rates
should be recovered. While the Company believes there is a sound basis for the
PUCO to grant the application to recover actual expenses relating to
uncollectible accounts, no assurance can be provided with respect to the
ultimate outcome of this proceeding.
The second matter related to the requirement that Ohio gas utilities undergo a
biannual audit of their gas acquisition practices in connection with the gas
cost recovery (GCR) mechanism. In the case of VEDO, the two-year period began in
November 2000, coincident with the Company's acquisition and commencement of
service in Ohio. The audit provides the initial review of the portfolio
administration arrangement between VEDO and ProLiance. The external auditor
retained by the PUCO staff recently submitted an audit report wherein it
recommended a disallowance of approximately $7 million of previously recovered
gas costs. The Company believes a large portion of the third party auditor
recommendations is without merit. There are two elements of the recommendations
relating to the treatment of a pipeline refund and a penalty for which a reserve
of $0.7 million has been established for the Company's estimated share of a
potential disallowance of these costs. For this PUCO audit period, a
disallowance relating to our ProLiance arrangement will be shared by the
Company's joint venture partner. Currently the matter is set for a hearing
before the PUCO in mid November. VEDO has and continues to engage in efforts
with the participants in the proceeding to resolve disputed issues outside of
administrative litigation. If the external auditor recommendations were adopted
by the PUCO, the Company believes that it would not likely have a material
effect on the Company's results or financial condition. However, the Company can
provide no assurance as to the ultimate outcome of this proceeding.
11. Impact of Recently Issued Accounting Guidance
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company adopted this statement on
January 1, 2003. The adoption was not material to the Company's results of
operations or financial condition.
In accordance with regulatory treatment, the Company collects an estimated net
cost of removal of its utility plant in rates through normal depreciation. As of
September 30, 2003, and December 31, 2002, such removal costs approximated $395
million and $385 million, respectively, of accumulated depreciation as presented
in the condensed consolidated balance sheets based upon the Company's latest
depreciation studies.
SFAS 149
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies the accounting guidance on (1) derivative instruments (including
certain derivative instruments embedded in other contracts) and (2) hedging
activities that fall within the scope of FASB Statement No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 149 amends
SFAS 133 to reflect decisions that were made (1) as part of the process
undertaken by the Derivatives Implementation Group (DIG), which necessitated
amending SFAS 133; (2) in connection with other projects dealing with financial
instruments; and (3) regarding implementation issues related to the application
of the definition of a derivative. SFAS 149 also amends certain other existing
pronouncements, which will result in more consistent reporting of contracts that
are derivatives in their entirety or that contain embedded derivatives that
warrant separate accounting. SFAS 149 is effective (1) for contracts entered
into or modified after June 30, 2003, with certain exceptions and (2) for
hedging relationships designated after June 30. The guidance is to be applied
prospectively. The adoption did not have a material effect on the Company's
financial statements.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150).
SFAS 150 requires issuers to classify as liabilities the following three types
of freestanding financial instruments: mandatorily redeemable financial
instruments; obligations to repurchase the issuer's equity shares by
transferring assets; and certain obligations to issue a variable number of
shares. SFAS 150 is effective immediately for all financial instruments entered
into or modified after May 31, 2003. For all other instruments, SFAS 150 applies
to the Company's third quarter of 2003. The Company has approximately $200,000
of outstanding preferred stock of a subsidiary that is redeemable on terms
outside the Company's control. However, the preferred stock is not redeemable on
a specified or determinable date or upon an event that is certain to occur.
Therefore, SFAS 150's adoption did not affect the Company's results of
operations or financial condition.
FASB Interpretation (FIN) 45
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken.
The initial recognition and measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Since that date, the adoption has not had a material effect on the Company's
results of operations or financial condition.
FIN 46
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIE) and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies related to VIE's and, thus
improves comparability between enterprises engaged in similar activities when
those activities are conducted through VIE's. FIN 46 currently applies to VIE's
created after January 31, 2003, and to VIE's in which an enterprise obtains an
interest after that date. For entities created prior to January 31, 2003, FIN 46
is to be adopted on December 31, 2003. Although management is still evaluating
the impact of FIN 46 on its financial position and results of operations, the
adoption is not expected to have a material effect.
EITF 03-11
The EITF has recently released guidance on when gross or net presentation on the
income statement for derivative instruments not held for trading purposes is
appropriate. The guidance is effective for the Company's fourth quarter, and the
Company is currently determining the impacts, if any, that will result from
implementing that guidance.
12. Segment Reporting
As discussed in Note 3, on January 1, 2003, Vectren transferred certain
information technology systems and related assets and buildings from other
entities within its consolidated group to VUHI. These assets primarily support
the operations of VUHI's subsidiaries. The operations of these assets comprise
the Corporate and Other operating segment. The Company separates its operations
into three operating segments: Gas Utility Services, Electric Utility Services,
and Corporate and Other. The Company uses operating income as the measure of
profitability for its segments.
Gas Utility Services provides natural gas distribution and transportation
services in nearly two-thirds of Indiana and west central Ohio. Electric Utility
Services provides electricity primarily to southwestern Indiana, and includes
the Company's power generating and marketing operations. Corporate and Other
Operations provide information technology and other support services to those
utility operations.
Following is information regarding the Company's segments' operating data.
- ------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
In millions 2003 2002 2003 2002
- ------------------------------ ------- ------- -------- ---------
Operating Revenues
Gas Utility Services $ 115.7 $ 88.5 $ 790.3 $ 586.7
Electric Utility Services 134.0 189.6 343.6 475.3
Corporate & Other 6.6 4.8 19.8 16.0
Intersegment Eliminations (6.4) (4.8) (19.2) (15.8)
- ------------------------------------------------------------------------------
Total operating revenues $ 249.9 $ 278.1 $1,134.5 $ 1,062.2
==============================================================================
Operating Income (Loss)
Gas Utility Services $ (14.9) $ (11.2) $ 54.6 $ 55.6
Electric Utility Services 32.4 39.8 71.6 74.6
Corporate & other 1.9 1.7 6.3 6.9
- ------------------------------------------------------------------------------
Total operating income $ 19.4 $ 30.3 $ 132.5 $ 137.1
==============================================================================
Following is the Company's segments' identifiable assets.
- ---------------------------------------------------------------------
September 30, December 31,
In millions 2003 2002
- ---------------------------------------------------------------------
Identifiable Assets
Gas Utility Services $ 1,486.9 $ 1,555.1
Electric Utility Services 896.5 860.9
Corporate & Other 148.9 171.6
Eliminations (6.7) (17.2)
- ---------------------------------------------------------------------
Total identifiable assets $ 2,525.6 $ 2,570.4
=====================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Description of the Business
Vectren Utility Holdings, Inc. (VUHI or the Company), an Indiana corporation,
was formed on March 31, 2000, to serve as the intermediate holding company for
Vectren Corporation's (Vectren) three operating public utilities, Indiana Gas
Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana
Energy, Inc. (Indiana Energy), Southern Indiana Gas and Electric Company
(SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc. (SIGCORP), and the
Ohio operations. VUHI also has other assets that provide information technology
and other services to the three utilities.
Indiana Gas provides natural gas distribution and transportation services to a
diversified customer base in 49 of Indiana's 92 counties. SIGECO provides
electric generation, transmission, and distribution services to 8 counties in
southwestern Indiana, including counties surrounding Evansville, and
participates in the wholesale power market. SIGECO also provides natural gas
distribution and transportation services to 10 counties in southwestern Indiana,
including counties surrounding Evansville. The Ohio operations, owned as a
tenancy in common by Vectren Energy Delivery of Ohio, Inc.(VEDO), a wholly owned
subsidiary, (53 % ownership) and Indiana Gas (47 % ownership), provide natural
gas distribution and transportation services to 17 counties in west central
Ohio, including counties surrounding Dayton.
Vectren is an energy and applied technology holding company headquartered in
Evansville, Indiana. The Company was organized on June 10, 1999, solely for the
purpose of effecting the merger of Indiana Energy and SIGCORP. On March 31,
2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated
with a tax-free exchange of shares and has been accounted for as a
pooling-of-interests in accordance with APB Opinion No. 16 "Business
Combinations" (APB 16).
Both Vectren and VUHI are exempt from registration pursuant to Section 3(a)(1)
and 3(c) of the Public Utility Holding Company Act of 1935.
Consolidated Results of Operations
The following discussion and analysis should be read in conjunction with the
unaudited consolidated condensed financial statements and notes thereto.
Subsequent to the issuance of the Company's 2002 quarterly financial statements,
the Company's management determined that previously issued financial statements
should be restated. The restatement had the effect of decreasing net income for
the three and nine months ended September 30, 2002, by $0.4 million after tax
and $2.1 million after tax, respectively.
In addition, on January 1, 2003, Vectren transferred certain information
technology systems and related assets and buildings from other entities within
its consolidated group to VUHI. These assets primarily support the operations of
VUHI's subsidiaries and VUHI's subsidiaries receive a charge for their use that
is included in their other operating expenses. The transfer required restatement
of VUHI's consolidated financial statements for all periods presented under
accounting rules governing combinations of entities under common control. The
reorganization increased previously reported earnings by $0.5 million after tax
for the three months ended September 30, 2002, and $3.2 million after tax for
the nine months ended September 30, 2002.
Note 3 to the consolidated condensed financial statements includes a summary of
the effects of the reorganization due to the transfer of assets and restatement
on previously reported results of operations. The results of operations give
effect to these restatements.
Net Income
For the three months ended September 30, 2003, net income was $2.4 million
compared to net income of $9.0 million for the same period last year. For the
nine months ended September 30, 2003, reported earnings were $51.1 million
compared to $59.7 million for the same period in 2002.
Quarter over quarter, earnings were primarily affected by a decrease in electric
margin of $7.3 million ($4.3 million after-tax). This was attributable to milder
cooling weather, which reduced margin an estimated $3.6 million pre-tax, the
effects of the slowly recovering economy, and slightly lower wholesale power
margins. The remaining decrease for the quarter was due to higher depreciation
and the timing of certain operating expenses. Year-to-date, the timing of
certain operating expenses and higher depreciation have been offset somewhat by
increased power marketing margins and favorable weather.
In addition, the year-to-date 2003 results include impairment charges related to
an investment in BABB International, Inc. (BABB), an entity that processes fly
ash into building materials. Charges affecting year-to-date results were $3.9
million ($2.3 million after tax).
Utility Margin
Gas Utility Margin
Gas utility margin by customer type and separated between volumes sold and
transported follows:
- -----------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ -------------------
In millions 2003 2002 2003 2002
- --------------------------------------- ---------------------------- ------
Residential $ 26.7 $ 26.8 $ 159.2 $ 146.6
Commercial 7.2 7.6 50.3 47.5
Contract 9.7 7.8 33.6 32.2
Other 0.1 0.5 5.8 2.1
- -----------------------------------------------------------------------------
Total gas utility margin $ 43.7 $ 42.7 $ 248.9 $ 228.4
=============================================================================
Volumes in MMDth
- --------------------------------
Sold 7.3 7.2 85.8 74.9
Transported 17.8 19.3 63.6 65.4
- -----------------------------------------------------------------------------
Total throughput 25.1 26.5 149.4 140.3
=============================================================================
Gas margins for the third quarter, a non-heating, base load usage quarter, were
$43.7 million, an increase of 2% compared to the prior year period. While margin
was generally flat and reflects a $0.7 million charge associated with a PUCO GCR
audit proceeding in 2003, residential and commercial usage increased slightly,
offset by declining industrial usage due to the slow economic conditions.
Gas margins year-to-date were $248.9 million, an increase of $20.5 million over
the nine months ended September 30, 2002. It is estimated that weather, 19%
colder than the prior year and 8% colder than normal, contributed $12.6 million
to the increased margin. The remaining $7.9 million increase is primarily
attributable to higher utility receipts and excise taxes on higher gas costs and
volumes sold and recovery of Ohio customer choice implementation costs,
partially offset by the negative effect of high gas prices on customer usage.
The colder weather is the primary reason for the 6% increase in throughput.
Higher gas costs and a slowly recovering economy have impacted customer usage.
The average cost per dekatherm of gas purchased for the three months ended
September 30, 2003, was $6.22 compared to $3.95 in 2002. Year-to-date the cost
of gas purchased in 2003 was $6.44 compared to $4.39 in the prior year.
Electric Utility Margin
Electric utility margin by customer type and non-firm wholesale margin separated
between realized margin and mark-to-market gains and losses follows:
- ------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
In millions 2003 2002 2003 2002
- --------------------------------- ------------------ ------------------
Retail & firm wholesale $ 63.7 $ 70.0 $ 160.5 $ 169.2
Non-firm wholesale 2.8 3.8 15.0 6.9
- ------------------------------------------------------------------------------
Total electric utility margin $ 66.5 $ 73.8 $ 175.5 $ 176.1
==============================================================================
Non-firm wholesale margin:
Realized margin $ 3.3 $ 4.0 $ 14.6 $ 10.0
Mark-to-market gains (losses) (0.5) (0.2) 0.4 (3.1)
Electric margins were $66.5 million, a decrease of $7.3 million compared to the
third quarter of 2002. The decrease in electric margin was due primarily to the
effect of milder cooling weather which was 7% cooler than normal and 26% cooler
than last year. The estimated quarter over quarter decrease as a result of the
milder weather was approximately $3.6 million. Impacts of the slowly recovering
economy on industrial sales and slightly lower non-firm wholesale power margins
further decreased non-weather related electric margin compared to the prior
year. As a result primarily of mild weather, volumes sold to retail and firm
wholesale customers decreased 8% from 1.87 GWh in 2002 to 1.72 GWh in 2003.
Electric margins were $175.5 million, a decrease of $0.6 million over the nine
months ended September 30, 2002. The decrease was primarily due to lower retail
sales due to milder cooling weather and the current quarter decrease in
industrial sales. As a result primarily of the mild weather which was 18% cooler
than normal and 33% cooler than last year, volumes sold to retail and firm
wholesale customers decreased 5% from 4.76 GWh in 2002 to 4.53 GWh in 2003 with
an estimated margin decrease of $6.5 million. The decrease was partially offset
by increased non-firm wholesale power margins resulting from price volatility.
Periodically, generation capacity is in excess of that needed to serve retail
and firm wholesale customers. The Company markets this unutilized capacity to
optimize the return on its owned generation assets. The contracts entered into
are primarily short-term purchase and sale transactions that expose the Company
to limited market risk. For the three months ended September 30, 2003, volumes
sold into the wholesale market were 1.01 GWh compared to 2.66 GWh in 2002 while
volumes purchased were 1.01 GWh in 2003 compared to 2.65 GWh in 2002. For the
nine months ended September 30, 2003, volumes sold into the wholesale market
were 3.04 GWh compared to 8.30 GWh in 2002 while volumes purchased were 3.49 GWh
in 2003 compared to 8.14 GWh in 2002. A portion of volumes purchased in the
wholesale market is used to serve retail and firm wholesale customers, and in
2003, greater amounts of purchased power have been required for native load due
to scheduled outages, which has reduced capacity available for optimization.
Additionally, both sold and purchased power were lower in 2003 due to a shorter
term focus in hedging and optimization strategies combined with a more selective
approach to counter-party relationships. While volumes both sold and purchased
in the wholesale market have decreased during 2003, which has resulted in
decreased electric revenues and purchased power, margins year-to-date have
increased primarily from price volatility. In the third quarter, margins
decreased because less capacity was available for optimization due to outages
for NOx control equipment installation and the wholesale power market was less
volatile.
Utility Group Operating Expenses
Other Operating
For the three and nine months ended September 30, 2003, other operating expenses
increased $2.4 million and $12.8 million, respectively, compared to the same
periods in the prior year. The increased expenses were principally due to the
timing of routine expenditures between the periods and increased employee
benefit costs. Year-to-date, the timing of maintenance expenditures, Ohio
customer choice program implementation costs that are recovered through margins,
and increased uncollectible accounts expense have also contributed to the
increase. Year-to-date uncollectible accounts expense has increased $1.7 million
compared to the prior year due principally to higher gas costs.
Depreciation & Amortization
For the three and nine months ended September 30, 2003, depreciation and
amortization increased $2.6 million and $7.9 million, respectively, due to
additions to utility plant. Increased depreciation expense reflects a full nine
months of depreciation on the addition of over $100 million of utility plant
placed into service including a new gas-fired peaker unit, expenditures for
implementing a choice program for Ohio gas customers, customer system upgrades,
and other upgrades to existing transmission and distribution facilities.
Taxes Other Than Income Taxes
For the nine months ended September 30, 2003, taxes other than income taxes
increased $4.2 million compared to the prior year. The increase results from
higher utility receipts and excise taxes as a result of higher gas prices and
more volumes sold. The higher utility receipts and excise taxes on gas volumes
sold are recovered dollar-for-dollar through customer billings.
Utility Group Other Income (Expense)-Net
For the three and nine months ended September 30, 2003, other income
(expense)-net increased $1.9 million and decreased $5.1 million, respectively,
compared to the prior year. The year-to-date decrease is primarily the result of
the write-off of the BABB investment totaling $3.9 million. The remaining
decrease results principally from sales of emission allowances and other assets
in the second quarter of 2002 totaling $1.8 million and current year
contributions of $1.2 million made to low income heating assistance programs
pursuant to a settlement previously approved by the IURC regarding transactions
with ProLiance Energy LLC. These decreases were offset somewhat by the current
quarter increase in other income (expense)-net which was principally the result
of fluctuations in investments used to fund deferred compensation plans.
Utility Group Interest Expense
For the three and nine months ended September 30, 2003, interest expense
increased $0.2 million and decreased $2.3 million, respectively, when compared
to the same periods last year. The changes reflect the impact of the permanent
financing completed in the third quarter of 2003 and lower short-term borrowing
rates.
Utility Group Income Tax
For the three months ended September 30, 2003, federal and state income taxes
decreased $2.6 million primarily due to fluctuations in pre-tax income. For the
nine months ended September 30, 2003, income taxes increased $1.2 million when
compared to 2002. The year-to-date change is primarily due to an increased
effective tax rate, offset by less pre-tax income. Year to date, the effective
tax rate increased from 34.3% in 2002 to 38.8% in 2003 principally due to an
increase in the Indiana state income tax rate from 4.5 % to 8.5% that was
effective January 1, 2003.
Environmental Matters
Clean Air Act
NOx SIP Call Matter
The Clean Air Act (the Act) requires each state to adopt a State Implementation
Plan (SIP) to attain and maintain National Ambient Air Quality Standards (NAAQS)
for a number of pollutants, including ozone. If the USEPA finds a state's SIP
inadequate to achieve the NAAQS, the USEPA can call upon the state to revise its
SIP (a SIP Call).
In October 1998, the USEPA issued a final rule "Finding of Significant
Contribution and Rulemaking for Certain States in the Ozone Transport Assessment
Group Region for Purposes of Reducing Regional Transport of Ozone," (63 Fed.
Reg. 57355). This ruling found that the SIP's of certain states, including
Indiana, were substantially inadequate since they allowed for nitrogen oxide
(NOx) emissions in amounts that contributed to non-attainment with the ozone
NAAQS in downwind states. The USEPA required each state to revise its SIP to
provide for further NOx emission reductions. The NOx emissions budget, as
stipulated in the USEPA's final ruling, requires a 31% reduction in total NOx
emissions from Indiana.
In June 2001, the Indiana Air Pollution Control Board adopted final rules to
achieve the NOx emission reductions required by the NOx SIP Call. Indiana's SIP
requires the Company to lower its system-wide NOx emissions to .14 lbs./MMBTU by
May 31, 2004 (the compliance date). This is a 65% reduction from emission levels
existing in 1999 and 1998.
The Company has initiated steps toward compliance with the revised regulations.
These steps include installing Selective Catalytic Reduction (SCR) systems at
Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4,
and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx
emissions to atmospheric nitrogen and water using ammonia in a chemical
reaction. This technology is known to be the most effective method of reducing
NOx emissions where high removal efficiencies are required.
The IURC has issued orders that approve:
o the Company's project to achieve environmental compliance by investing in
clean coal technology;
o a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs incurred;
o a mechanism whereby, prior to an electric base rate case, the Company may
recover through a rider that is updated every six months an 8 percent
return on its capital costs for the project; and
o ongoing recovery of operating costs, including depreciation and purchased
emission allowances through a rider mechanism, related to the clean coal
technology once the facility is placed into service.
Based on the level of system-wide emissions reductions required and the control
technology utilized to achieve the reductions, the current estimated clean coal
technology construction cost is consistent with amounts approved in the IURC's
orders and is expected to be expended during the 2001-2006 period. Through
September 30, 2003, $117.1 million has been expended. After the equipment is
installed and operational, related annual operating expenses, including
depreciation expense, are estimated to be between $24 million and $27 million. A
portion of those expenses began in October 2003 when the Culley SCR became
operational. The 8 percent return on capital investment approximates the return
authorized in the Company's last electric rate case in 1995 and includes a
return on equity.
The Company expects to achieve timely compliance as a result of the project.
Construction of the first SCR at Culley was placed into service in October 2003,
and construction of the Warrick 4 and Brown SCR's is proceeding on schedule.
Installation of SCR technology as planned is expected to reduce the Company's
overall NOx emissions to levels compliant with Indiana's NOx emissions budget
allotted by the USEPA. Therefore, the Company has recorded no accrual for
potential penalties that may result from noncompliance.
Culley Generating Station Litigation
In the late 1990's, the USEPA initiated an investigation under Section 114 of
the Act of SIGECO's coal-fired electric generating units in commercial operation
by 1977 to determine compliance with environmental permitting requirements
related to repairs, maintenance, modifications, and operations changes. The
focus of the investigation was to determine whether new source review permitting
requirements were triggered by such plant modifications, and whether the best
available control technology was, or should have been used. Numerous electric
utilities were, and are currently, being investigated by the USEPA under an
industry-wide review for compliance. In July 1999, SIGECO received a letter from
the Office of Enforcement and Compliance Assurance of the USEPA discussing the
industry-wide investigation, vaguely referring to an investigation of SIGECO and
inviting SIGECO to participate in a discussion of the issues. No specifics were
noted; furthermore, the letter stated that the communication was not intended to
serve as a notice of violation. Subsequent meetings were conducted in September
and October 1999 with the USEPA and targeted utilities, including SIGECO,
regarding potential remedies to the USEPA's general allegations.
On November 3, 1999, the USEPA filed a lawsuit against seven utilities,
including SIGECO. SIGECO's suit was filed in the U.S. District Court for the
Southern District of Indiana. The USEPA alleged that, beginning in 1992, SIGECO
violated the Act by (1) making modifications to its Culley Generating Station in
Yankeetown, Indiana without obtaining required permits (2) making major
modifications to the Culley Generating Station without installing the best
available emission control technology and (3) failing to notify the USEPA of the
modifications. In addition, the lawsuit alleged that the modifications to the
Culley Generating Station required SIGECO to begin complying with federal new
source performance standards at its Culley Unit 3. The USEPA also issued an
administrative notice of violation to SIGECO making the same allegations, but
alleging that violations began in 1977.
On June 6, 2003, SIGECO, the Department of Justice (DOJ), and the USEPA
announced an agreement that would resolve the lawsuit. The agreement was
embodied in a consent decree filed in U.S. District Court for the Southern
District of Indiana. The mandatory public comment period has expired, and no
comments were received. The Court entered the consent decree on August 13, 2003.
Under the terms of the agreement, the DOJ and USEPA have agreed to drop all
challenges of past maintenance and repair activities at the Culley coal-fired
units. In reaching the agreement, SIGECO did not admit to any allegations
alleged in the government's complaint, and SIGECO continues to believe that it
acted in accordance with applicable regulations and conducted only routine
maintenance on the units. SIGECO has entered into this agreement to further its
continued commitment to improve air quality and avoid the cost and uncertainties
of litigation.
Under the agreement, SIGECO has committed to:
o either repower Culley Unit 1 (50 MW) with natural gas, which would
significantly reduce air emissions from this unit, and equip it with SCR
control technology for further reduction of nitrogen oxides, or cease
operation of the unit by December of 2006;
o operate the existing SCR control technology recently installed on Culley
Unit 3 (287 MW) year round at a lower emission rate than that currently
required under the NOx SIP Call, resulting in further nitrogen oxide
reductions;
o enhance the efficiency of the existing scrubber at Culley Units 2 and 3 for
additional removal of sulphur dioxide emissions;
o install a baghouse for further particulate matter reductions at Culley Unit
3 by June of 2007;
o conduct a Sulphuric Acid Reduction Demonstration Project as an
environmental mitigation project designed to demonstrate an advance in
pollution control technology for the reduction of sulfate emissions; and
o pay a $600,000 civil penalty.
The Company anticipates that the settlement would result in total capital
expenditures through 2007 in a range between $16 million and $28 million. Other
than the $600,000 civil penalty, which was accrued in the second quarter of
2003, the implementation of the settlement, including these capital expenditures
and related operating expenses, are expected to be recovered through rates.
Information Request
On January 23, 2001, SIGECO received an information request from the USEPA under
Section 114 of the Act for historical operational information on the Warrick and
A.B. Brown generating stations. SIGECO has provided all information requested,
and no further action has occurred.
Manufactured Gas Plants
In the past, Indiana Gas and others operated facilities for the manufacture of
gas. Given the availability of natural gas transported by pipelines, these
facilities have not been operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas and others may now be required
to take remedial action if certain byproducts are found above the regulatory
thresholds at these sites.
Indiana Gas has identified the existence, location, and certain general
characteristics of 26 gas manufacturing and storage sites for which it may have
some remedial responsibility. Indiana Gas has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites under an agreed
order between Indiana Gas and the IDEM, and a Record of Decision was issued by
the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at
additional sites, Indiana Gas has submitted several of the sites to the IDEM's
Voluntary Remediation Program and is currently conducting some level of remedial
activities including groundwater monitoring at certain sites where deemed
appropriate and will continue remedial activities at the sites as appropriate
and necessary.
In conjunction with data compiled by environmental consultants, Indiana Gas has
accrued the estimated costs for further investigation, remediation, groundwater
monitoring, and related costs for the sites. While the total costs that may be
incurred in connection with addressing these sites cannot be determined at this
time, Indiana Gas has recorded costs that it reasonably expects to incur
totaling approximately $20.4 million.
The estimated accrued costs are limited to Indiana Gas' proportionate share of
the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26
sites with other potentially responsible parties (PRP), which serve to limit
Indiana Gas' share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, Indiana Gas has received and recorded
settlements from all known insurance carriers in an aggregate amount
approximating $20.4 million.
Environmental matters related to manufactured gas plants have had no material
impact on earnings since costs recorded to date approximate PRP and insurance
settlement recoveries. While Indiana Gas has recorded all costs which it
presently expects to incur in connection with activities at these sites, it is
possible that future events may require some level of additional remedial
activities which are not presently foreseen.
In October 2002, the Company received a formal information request letter from
the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO
and not currently enrolled in the IDEM's Voluntary Remediation Program (VRP). In
response SIGECO submitted to the IDEM the results of preliminary site
investigations conducted in the mid-1990's. These site investigations confirmed
that based upon the conditions known at the time, the sites posed no risk to
human health or the environment. Follow up reviews have been initiated by the
Company to confirm that the sites continue to pose no such risk.
On October 6, 2003, SIGECO filed applications to enter four of the manufactured
gas plant sites in IDEM's VRP. The remaining site is currently being addressed
in the VRP by another Indiana utility. SIGECO is adding its four sites into the
renewal of the global Voluntary Remediation Agreement that Indiana Gas has in
place with IDEM for its manufactured gas plant sites. At this time the Company
is unable to predict any outcome that may result from these SIGECO manufactured
gas plant sites.
Rate and Regulatory Matters
The following is an update on two regulatory matters in Ohio. Each of the
discussed matters is currently pending before the PUCO.
The first matter relates to a pending application made to the PUCO by VEDO,
together with other regulated Ohio gas utilities, for authority to establish a
tariff mechanism to recover expenses related to uncollectible accounts. As
proposed the tariff mechanism would establish an automatic adjustment procedure
to track and recover these costs instead of providing the recovery of the
historical amount in base rates. If the application is approved before the end
of the year, 2003 uncollectible costs in excess of the amount in base rates
should be recovered. While the Company believes there is a sound basis for the
PUCO to grant the application to recover actual expenses relating to
uncollectible accounts, no assurance can be provided with respect to the
ultimate outcome of this proceeding.
The second matter related to the requirement that Ohio gas utilities undergo a
biannual audit of their gas acquisition practices in connection with the gas
cost recovery (GCR) mechanism. In the case of VEDO, the two-year period began in
November 2000, coincident with the Company's acquisition and commencement of
service in Ohio. The audit provides the initial review of the portfolio
administration arrangement between VEDO and ProLiance. The external auditor
retained by the PUCO staff recently submitted an audit report wherein it
recommended a disallowance of approximately $7 million of previously recovered
gas costs. The Company believes a large portion of the third party auditor
recommendations is without merit. There are two elements of the recommendations
relating to the treatment of a pipeline refund and a penalty for which a reserve
of $0.7 million has been established for the Company's estimated share of a
potential disallowance of these costs. For this PUCO audit period, a
disallowance relating to our ProLiance arrangement will be shared by the
Company's joint venture partner. Currently the matter is set for a hearing
before the PUCO in mid November. Throughout this process VEDO has and continues
to engage in efforts with the participants in the proceeding to resolve disputed
issues outside of administrative litigation. If the external auditor
recommendations were adopted by the PUCO, the Company believes that it would not
likely have a material effect on the Company's results or financial condition.
However, the Company can provide no assurance as to the ultimate outcome of this
proceeding.
United States Securities and Exchange Commission (SEC) Informal Inquiry
As more fully described in Note 3 to these consolidated condensed financial
statements and in Note 3 to the 2002 consolidated financial statements filed on
Form 10-K/A, the Company restated its consolidated financial statements for
2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC
in an informal inquiry with respect to this previously announced restatement,
has met with the staff of the SEC, and has provided information in response to
their requests.
Impact of Recently Issued Accounting Guidance
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company adopted this statement on
January 1, 2003. The adoption was not material to the Company's results of
operations or financial condition.
SFAS 149
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and
clarifies the accounting guidance on (1) derivative instruments (including
certain derivative instruments embedded in other contracts) and (2) hedging
activities that fall within the scope of FASB Statement No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities. SFAS 149 amends
SFAS 133 to reflect decisions that were made (1) as part of the process
undertaken by the Derivatives Implementation Group (DIG), which necessitated
amending SFAS 133; (2) in connection with other projects dealing with financial
instruments; and (3) regarding implementation issues related to the application
of the definition of a derivative. SFAS 149 also amends certain other existing
pronouncements, which will result in more consistent reporting of contracts that
are derivatives in their entirety or that contain embedded derivatives that
warrant separate accounting. SFAS 149 is effective (1) for contracts entered
into or modified after June 30, 2003, with certain exceptions and (2) for
hedging relationships designated after June 30. The guidance is to be applied
prospectively. The adoption did not have a material effect on the Company's
financial statements.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150).
SFAS 150 requires issuers to classify as liabilities the following three types
of freestanding financial instruments: mandatorily redeemable financial
instruments; obligations to repurchase the issuer's equity shares by
transferring assets; and certain obligations to issue a variable number of
shares. SFAS 150 is effective immediately for all financial instruments entered
into or modified after May 31, 2003. For all other instruments, SFAS 150 applies
to the Company's third quarter of 2003. The Company has approximately $200,000
of outstanding preferred stock of a subsidiary that is redeemable on terms
outside the Company's control. However, the preferred stock is not redeemable on
a specified or determinable date or upon an event that is certain to occur.
Therefore, SFAS 150's adoption did not affect the Company's results of
operations or financial condition.
FASB Interpretation (FIN) 45
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken.
The initial recognition and measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Since that date, the adoption has not had a material effect on the Company's
results of operations or financial condition.
FIN 46
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIE) and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies related to VIE's and, thus
improves comparability between enterprises engaged in similar activities when
those activities are conducted through VIE's. FIN 46 currently applies to VIE's
created after January 31, 2003, and to VIE's in which an enterprise obtains an
interest after that date. For entities created prior to January 31, 2003, FIN 46
is to be adopted on December 31, 2003. Although management is still evaluating
the impact of FIN 46 on its financial position and results of operations, the
adoption is not expected to have a material effect.
EITF 03-11
The EITF has recently released guidance on when gross or net presentation on the
income statement for derivative instruments not held for trading purposes is
appropriate. The guidance is effective for the Company's fourth quarter, and the
Company is currently determining the impacts, if any, that will result from
implementing that guidance.
Financial Condition
Within Vectren's consolidated group, VUHI funds short-term and long-term
financing needs of the utility group operations. Vectren does not guarantee
VUHI's debt. VUHI's currently outstanding long-term and short-term borrowing
arrangements are jointly and severally guaranteed by Indiana Gas, SIGECO, and
VEDO. The guarantees are full and unconditional and joint and several, and VUHI
has no subsidiaries other than the subsidiary guarantors. Information about the
subsidiary guarantors as a group is included in Note 5 to the condensed
consolidated financial statements. VUHI's long-term and short-term obligations
outstanding at September 30, 2003, totaled $550.0 million and $142.5 million,
respectively. Additionally, prior to VUHI's formation, Indiana Gas and SIGECO
funded their operations separately, and therefore, have long-term debt
outstanding funded solely by their operations. VUHI's operations have
historically funded almost all of Vectren's common stock dividends.
VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at
September 30, 2003, are A-/Baa1 as rated by Standard and Poor's Ratings Services
(Standard and Poor's) and Moody's Investors Service (Moody's), respectively.
SIGECO's credit ratings on outstanding senior unsecured debt are BBB+/Baa1.
SIGECO's credit ratings on outstanding secured debt are A-/A3. VUHI's commercial
paper has a credit rating of A-2/P-2. Moody's current outlook is stable while
Standard and Poor's current outlook is negative. The ratings of Moody's and
Standard and Poor's are categorized as investment grade and are unchanged from
December 31, 2002. In July 2003, Standard and Poor's reaffirmed its ratings, and
Moody's reaffirmed its ratings on VUHI's senior unsecured debt. A security
rating is not a recommendation to buy, sell, or hold securities. The rating is
subject to revision or withdrawal at any time, and each rating should be
evaluated independently of any other rating. Standard and Poor's and Moody's
lowest level investment grade rating is BBB- and Baa3, respectively.
The Company's consolidated equity capitalization objective is 45-55% of total
capitalization. This objective may have varied, and will vary, depending on
particular business opportunities, capital spending requirements, and seasonal
factors that affect the Company's operation. The Company's equity component was
48% and 46% of total capitalization, including current maturities of long-term
debt and long-term debt subject to tender, at September 30, 2003, and December
31, 2002, respectively.
The Company expects the majority of its capital expenditures, investments, and
debt security redemptions to be provided by internally generated funds. However,
due to significant capital expenditures for NOx compliance equipment at SIGECO
and to further strengthen the Company's capital structure and the capital
structures of the Company's utility subsidiaries, the Company has completed
certain financing transactions as more fully described below.
Sources & Uses of Liquidity
Operating Cash Flow
The Company's primary and historical source of liquidity to fund working capital
requirements has been cash generated from operations, which for the nine months
ended September 30, 2003 and 2002, was $141.3 million and $255.8 million,
respectively. The decrease of $114.5 million is primarily the result of more
favorable changes in working capital accounts occurring in 2002 due to a return
to lower gas prices in that year and higher gas prices in the current year,
offset by increased earnings before non-cash charges in 2003.
Financing Cash Flow
Although working capital requirements are generally funded by cash flow from
operations, the Company uses short-term borrowings to supplement working capital
needs when accounts receivable balances are at their highest and gas storage is
refilled. Additionally, short-term borrowings are required for capital projects
and investments until they are permanently financed.
Cash flow required for financing activities of $7.3 million for the nine months
ended September 30, 2003, includes the effects of the permanent financing
executed during the third quarter in which approximately $370 million in capital
contributions from Vectren and third party debt proceeds were received and used
to retire higher coupon long-term debt and other short term borrowings. In 2002,
higher operating cash flow was used to repay short-term borrowings. Common stock
dividends have increased in 2003 compared to 2002.
Financing Transactions
VUHI Debt Issuance
In July 2003, VUHI issued senior unsecured notes with an aggregate principal
amount of $200 million in two $100 million tranches. The first tranche are
10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746%
to yield 5.28% to maturity (2013 Notes). The second tranche are 15-year notes
due August 2018, with an interest rate of 5.75% priced at 99.177% to yield 5.80%
to maturity (2018 Notes).
The notes are jointly and severally guaranteed by the Company's three public
utilities. In addition, they have no sinking fund requirements, and interest
payments are due semi-annually. The notes may be called by the Company, in whole
or in part, at any time for an amount equal to accrued and unpaid interest, plus
the greater of 100% of the principal amount or the sum of the present values of
the remaining scheduled payments of principal and interest, discounted to the
redemption date on a semi-annual basis at the Treasury Rate, as defined in the
indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the
2018 Notes.
Shortly before these issues, the Company entered into several treasury locks
with a total notional amount of $150.0 million. Upon issuance of the debt, the
treasury locks were settled resulting in the receipt of $5.7 million in cash.
The value received is being amortized as a reduction of interest expense over
the life of the issues.
The net proceeds from the sale of the senior notes and settlement of related
hedging arrangements approximated $203 million and was used to repay short-term
borrowing and to retire long-term debt with higher interest rates.
Additional Capital Contributions
In March 2003, Vectren filed a registration statement with the Securities and
Exchange Commission with respect to a public offering of authorized but
previously unissued shares of common stock. In August 2003, the registration
became effective, and an agreement was reached to sell approximately 7.4 million
shares to a group of underwriters. The net proceeds totaled $163.2 million and
was contributed to VUHI.
In addition, a portion of current year proceeds generated from Vectren's stock
plans totaling $4.3 million was contributed to VUHI.
SIGECO and Indiana Gas Debt Call
During 2003, the Company called two first mortgage bonds outstanding at SIGECO
and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond
had a principal amount of $45.0 million, an interest rate of 7.60%, was
originally due in 2023, and was redeemed at 103.745% of its stated principal
amount. The second SIGECO bond had a principal amount of $20.0 million, an
interest rate of 7.625%, was originally due in 2025, and was redeemed at
103.763% of the stated principal amount.
The first Indiana Gas note had a remaining principal amount of $21.3 million, an
interest rate of 9.375%, was originally due in 2021, and was redeemed at
105.525% of the stated principal amount. The second Indiana Gas note had a
principal amount of $13.5 million, an interest rate of 6.75%, was originally due
in 2028, and was redeemed at the principal amount.
Pursuant to regulatory authority, the premiums paid to retire these notes
totaling $3.6 million were deferred as a regulatory asset.
Other Financing Transactions
In January, 2003, other debt of Indiana Gas totaling $17.5 million and of SIGECO
totaling $1.0 million was retired.
At December 31, 2002, the Company had $26.6 million of adjustable rate senior
unsecured bonds which could, at the election of the bondholder, be tendered to
the Company when interest rates are reset. Such bonds were classified as
long-term debt subject to tender. During the second quarter, the Company
re-marketed those bonds on a long-term basis and has therefore reclassified them
as long-term debt at September 30, 2003.
Investing Cash Flow
Cash required for investing activities of $154.5 million for the nine months
ended September 30, 2003, includes $153.5 million of requirements for capital
expenditures. Investing activities for 2002 were $123.7 million. The increase
occurring in 2003 is principally the result of additional capital expenditures,
principally for the NOx project and implementation of choice programs in Ohio,
and payments to other Vectren subsidiaries for the transfer of assets. In
addition, in 2002 proceeds were received from the sale of assets and from the
collection of notes receivable from other Vectren companies.
Available Sources of Liquidity
At September 30, 2003, the Company has $351 million of short-term borrowing
capacity, of which approximately $208 million is available.
Planned Capital Expenditures & Investments
Capital expenditures for the remainder of 2003 and for the year ended December
31, 2004, are estimated to be approximately $75 million and $250 million,
respectively.
Forward-Looking Information
A "safe harbor" for forward-looking statements is provided by the Private
Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of
1995 was adopted to encourage such forward-looking statements without the threat
of litigation, provided those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statement. Certain matters described in Management's Discussion
and Analysis of Results of Operations and Financial Condition are
forward-looking statements. Such statements are based on management's beliefs,
as well as assumptions made by and information currently available to
management. When used in this filing, the words "believe," "anticipate,"
"endeavor," "estimate," "expect," "objective," "projection," "forecast," "goal,"
and similar expressions are intended to identify forward-looking statements. In
addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, factors that could cause the
Company's actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following:
o Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; unusual maintenance or repairs;
unanticipated changes to fossil fuel costs; unanticipated changes to gas
supply costs, or availability due to higher demand, shortages,
transportation problems or other developments; environmental or pipeline
incidents; transmission or distribution incidents; unanticipated changes to
electric energy supply costs, or availability due to demand, shortages,
transmission problems or other developments; or electric transmission or
gas pipeline system constraints.
o Increased competition in the energy environment including effects of
industry restructuring and unbundling.
o Regulatory factors such as unanticipated changes in rate-setting policies
or procedures, recovery of investments and costs made under traditional
regulation, and the frequency and timing of rate increases.
o Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board; the Securities and Exchange
Commission; the Federal Energy Regulatory Commission; state public utility
commissions; state entities which regulate electric and natural gas
transmission and distribution, natural gas gathering and processing,
electric power supply; and similar entities with regulatory oversight.
o Economic conditions including the effects of an economic downturn,
inflation rates, and monetary fluctuations.
o Changing market conditions and a variety of other factors associated with
physical energy and financial trading activities including, but not limited
to, price, basis, credit, liquidity, volatility, capacity, interest rate,
and warranty risks.
o Direct or indirect effects on our business, financial condition or
liquidity resulting from a change in credit ratings, changes in interest
rates, and/or changes in market perceptions of the utility industry and
other energy-related industries.
o Employee or contractor workforce factors including changes in key
executives, collective bargaining agreements with union employees, or work
stoppages.
o Legal and regulatory delays and other obstacles associated with mergers,
acquisitions, and investments in joint ventures.
o Costs and other effects of legal and administrative proceedings,
settlements, investigations, claims, and other matters, including, but not
limited to, those described in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
o Changes in federal, state or local legislature requirements, such as
changes in tax laws or rates, environmental laws and regulations.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of changes in actual results,
changes in assumptions, or other factors affecting such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various business risks associated with commodity
prices, interest rates, and counter-party credit. These financial exposures are
monitored and managed by the Company as an integral part of its overall risk
management program. The Company's risk management program includes, among other
things, the use of derivatives to mitigate risk.
The Company also executes derivative contracts in the normal course of
operations while buying and selling commodities and other fungible goods to be
used in operations and while optimizing generation assets. The Company does not
execute derivative contracts it designates as trading.
These risks are not significantly different from the information set forth in
Item 7A Quantitative and Qualitative Disclosures About Market Risk included in
the VUHI 2002 Form 10-K/A and is therefore not presented herein.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2003, the Company carried out an evaluation under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer of the effectiveness and the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective at providing
reasonable assurance that material information relating to the Company required
to be disclosed by the Company in its filings under the Securities Exchange Act
of 1934 (Exchange Act) is brought to their attention on a timely basis.
Disclosure controls and procedures, as defined by the Exchange Act in Rules
13a-15(e) and 15d-15(e), are controls and other procedures of the Company that
are designed to ensure that information required to be disclosed by the Company
in the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms. "Disclosure controls and procedures" include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in its Exchange Act reports is accumulated and
communicated to the Company's management, including its principal executive and
financial officers, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2003, there have been no significant
changes to the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Internal control over financial reporting is defined by the SEC in Final Rule:
Management's Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports. The final rule
defines internal control over financial reporting as a process designed by, or
under the supervision of, the registrant's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
registrant's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that: (1) Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the registrant; (2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the registrant are being made only in accordance with
authorizations of management and directors of the registrant; and (3) Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the registrant's assets that could have a
material effect on the financial statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations. See Note 9 of its unaudited
consolidated condensed financial statements included in Part 1 Item 1 Financial
Statements regarding the Clean Air Act and related legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Certifications
31.1 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002-
Chief Executive Officer
31.2 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002-
Chief Financial Officer
32 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
Other Exhibits
None
(b) Reports On Form 8-K During The Last Calendar Quarter
On July 11, 2003, the Company filed a Current Report on Form 8-K with respect to
Vectren Corporation's adjustment of 2003 earnings guidance and to address recent
announcements related to the production of synthetic fuel. Portions of this
information were furnished to the SEC
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
99.1 - Press Release - Vectren Corporation adjusts 2003 earnings
guidance and addresses recent announcements related to the
production of synthetic fuel
99.2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
Item 9. Regulation FD Disclosure and Item 12. Results of Operations
and Financial Condition
On July 23, 2003, the Company filed a Current Report on Form 8-K with respect to
the release of the Company's and Vectren Corporation's financial information to
the investment community regarding the Company's results of operations, for the
three, six, and twelve month periods ended June 30, 2003. The financial
information was released to the public through this filing.
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
99.1 - Vectren Corporation Consolidated Statement of Income for
the three and six months ended June 30, 2003 and 2002
99.2 - Vectren Utility Holdings, Inc. Consolidated Statement of
Income for the three and six months ended June 30, 2003
and 2002
99.3 - Vectren Corporation Operating Highlights
99.4 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
On July 23, 2003, the Company furnished information to the SEC on a Current
Report on Form 8-K with respect to the release of the Company's and Vectren
Corporation's financial information to the investment community regarding the
Company's results of operations, for the three, six, and twelve month periods
ended June 30, 2003. The financial information was released to the public
through this filing.
Item 7. Exhibits
99.1 - Press Release - Vectren Corporation Reports 2nd Quarter
2003 Results
99.2 - Press Release - Vectren Corporation Declares Regular
Quarterly Dividend
99.3 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
Item 9. Regulation FD Disclosure and Item 12. Results of Operations
and Financial Condition
On July 25, 2003, the Company furnished information to the SEC on a Current
Report on Form 8-K to announce the pricing of $200 million in senior unsecured
notes in two tranches of $100 million each.
Item 7. Exhibits
99.1 - Press Release- Vectren Corporation Sells $200 Million in
Debt
99.2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
Item 9. Regulation FD Disclosure and Item 12. Results of Operations
and Financial Condition
On July 29, 2003, the Company filed a Current Report on Form 8-K to disclose the
underwriting agreement and terms agreement associated with a debt issuance.
Item 5. Other Events
Item 7. Financial Statements and Exhibits
Exhibit 1.1 - Underwriting Agreement, dated July 24, 2003, among
Vectren Utility Holdings, Inc., Indiana Gas
Company, Inc., Southern Indiana Gas and Electric
Company and Vectren Energy Delivery of Ohio, Inc.,
and ABN AMRO Incorporated and Banc One Capital
Markets, Inc., in their respective capacities of
the underwriters named therein.
Exhibit 1.2 - Terms Agreement, dated July 24, 2003, among Vectren
Utility Holdings, Inc., Indiana Gas Company, Inc.,
Southern Indiana Gas and Electric Company and
Vectren Energy Delivery of Ohio, Inc., and ABN AMRO
Incorporated and Banc One Capital Markets, Inc.,
in their respective capacities of the underwriters
named therein.
Exhibit 4.1 - Form of Third Supplemental Indenture, among Vectren
Utility Holdings, Inc., Indiana Gas Company, Inc.,
Southern Indiana Gas and Electric Company, Vectren
Energy Delivery of Ohio, Inc. and U.S. Bank
National Association.
Exhibit 5.1 - Opinion of Barnes & Thornburg
Exhibit 5.2 - Opinion of Kegler, Brown, Hill & Ritter
On August 4, 2003, the Company filed a Current Report on Form 8-K with respect
to updates on various matters incident to Vectren Corporation's equity offering.
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
99.1 - Selected Financial Data
99.2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
On August 18, 2003, the Company filed a Current Report on Form 8-K with respect
to updates on various regulatory matters in Ohio.
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
99.1 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VECTREN UTILITY HOLDINGS, INC.
------------------------------
Registrant
November 12, 2003 /s/Jerome A. Benkert, Jr.
-------------------------
Jerome A. Benkert, Jr.
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/M. Susan Hardwick
---------------------------
M. Susan Hardwick
Vice President & Controller
(Principal Accounting Officer)