UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended March 31, 2001
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 1-15467
VECTREN CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1654378
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
20 N.W. Fourth Street, Evansville, Indiana 47741
(Address of principal executive offices and 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 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 67,716,725 May 10, 2001
---------------------------------- ---------------- -----------------
Class Number of shares Date
2
TABLE OF CONTENTS
Item Page
Number Number
1 Financial Statements (Unaudited)
Vectren Corporation and Subsidiary Companies
Condensed Consolidated Balance Sheets 3-4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-18
2 Management's Discussion and Analysis of Results of Operations 19-35
and Financial Condition
Signatures 36
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
March 31, December 31,
----------------------- ----------
ASSETS 2001 2000 2000
---------- ---------- ---------- ----------
Current Assets:
Cash and cash equivalents $ 23,115 $ 19,559 $ 15,170
Temporary investments - 1,058 -
Accounts receivable, less reserves of $6,883,
$4,863 and $5,716, respectively 359,463 125,414 295,351
Accrued unbilled revenues 63,134 32,651 143,365
Inventories 30,401 38,690 95,245
Prepaid gas delivery service 4,589 114 34,849
Recoverable fuel and natural gas costs 120,003 6,210 96,084
Prepayments and other current assets 10,978 23,253 20,998
---------- ---------- ----------
Total current assets 611,683 246,949 701,062
---------- ---------- ----------
Utility Plant:
Original cost 2,805,073 2,375,474 2,786,694
Less: accumulated depreciation and amortization 1,254,515 1,042,326 1,233,033
---------- ---------- ----------
Net utility plant 1,550,558 1,333,148 1,553,661
---------- ---------- ----------
Other Investments:
Investments in leveraged leases 93,551 86,978 93,145
Investments in partnerships and other corporations 114,328 76,338 109,766
Notes receivable 66,888 55,234 64,276
Other 1,057 1,010 1,057
---------- ---------- ----------
Total other investments 275,824 219,560 268,244
---------- ---------- ----------
Nonutility property, net of accumulated depreciation 125,334 85,338 104,456
Other Assets:
Deferred charges, net 47,444 25,671 31,541
Goodwill, net 196,806 - 197,977
Regulatory assets 52,552 44,983 52,246
---------- ---------- ----------
Total other assets 296,802 70,654 281,764
---------- ---------- ----------
TOTAL ASSETS $2,860,201 $1,955,649 $2,909,187
========== ========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
March 31, December 31,
-------------------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 2000
----------- ----------- -----------
Current Liabilities:
Current maturities of adjustable rate bonds
subject to tender $ - $ 53,700 $ 53,700
Current maturities of long-term debt and
other obligations - 190 249
Short-term borrowings 639,462 171,921 759,908
Accounts payable 150,249 49,104 201,481
Accounts payable to affiliated companies 40,196 39,476 102,540
Refunds to customers and customer deposits 18,544 23,495 22,922
Accrued taxes 55,660 30,904 9,571
Accrued interest 8,960 7,058 10,272
Deferred income taxes 23,221 1,483 16,531
Other current liabilities 66,326 72,779 70,750
----------- ----------- -----------
Total current liabilities 1,002,618 450,110 1,247,924
----------- ----------- -----------
Deferred Credits and Other Liabilities:
Deferred income taxes 200,570 206,983 204,365
Accrued postretirement benefits other than pensions 42,983 42,346 45,883
Unamortized investment tax credits 22,595 24,934 23,165
Other 14,007 8,038 5,826
----------- ----------- -----------
Total deferred credits and other liabilities 280,155 282,301 279,239
----------- ----------- -----------
Commitments and Contingencies (Notes 10, 11 and 12)
Minority Interest in Subsidiary
984 1,021 1,421
Capitalization:
Long-term debt and other obligations, net of
current maturities 678,881 485,770 631,954
Preferred stock of subsidiary:
Redeemable 5,759 8,076 5,875
Nonredeemable 11,053 11,090 11,090
----------- ----------- -----------
Total preferred stock 16,812 19,166 16,965
----------- ----------- -----------
Common stock (no par value) - issued and
outstanding 67,712, 61,299 and 61,419, respectively 347,140 215,917 217,720
Retained earnings 533,643 501,348 506,462
Accumulated other comprehensive income (32) 16 7,502
----------- ----------- -----------
Total common shareholders' equity 880,751 717,281 731,684
----------- ----------- -----------
Total capitalization 1,576,444 1,222,217 1,380,603
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,860,201 $ 1,955,649 $ 2,909,187
=========== =========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Thousands, except per share data)
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------------ -----------------------
OPERATING REVENUES: 2001 2000 2001 2000
---------- ---------- ---------- ----------
Gas utility $ 522,889 $ 200,845 $1,140,797 $ 509,236
Electric utility 88,209 72,990 351,628 309,572
Energy services and other 271,990 85,609 679,909 288,020
---------- ---------- ---------- ----------
Total operating revenues 883,088 359,444 2,172,334 1,106,828
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of gas sold 404,072 118,527 838,085 281,457
Fuel for electric generation 14,561 16,573 69,158 67,250
Purchased electric energy 13,153 3,477 46,070 21,006
Cost of energy services and other 265,204 81,722 656,740 273,142
Other operating 61,432 46,426 214,597 191,215
Merger and integration costs 962 27,181 14,926 27,181
Depreciation and amortization 31,471 22,662 114,470 88,435
Taxes other than income taxes 19,543 8,600 48,953 30,227
---------- ---------- ---------- ----------
Total operating expenses 810,398 325,168 2,002,999 979,913
---------- ---------- ---------- ----------
OPERATING INCOME 72,690 34,276 169,335 126,915
OTHER INCOME:
Equity in earnings of unconsolidated
investments 6,165 9,750 6,271 9,254
Other - net 3,368 5,145 22,872 20,099
---------- ---------- ---------- ----------
Total other income 9,533 14,895 29,143 29,353
---------- ---------- ---------- ----------
INTEREST EXPENSE 22,819 12,273 67,679 44,965
---------- ---------- ---------- ----------
INCOME BEFORE PREFERRED DIVIDENDS AND
INCOME TAXES 59,404 36,898 130,799 111,303
PREFERRED DIVIDEND REQUIREMENT OF
SUBSIDIARY 238 269 986 1,077
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 59,166 36,629 129,813 110,226
INCOME TAXES 18,775 14,362 38,645 37,433
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST 40,391 22,267 91,168 72,793
MINORITY INTEREST IN SUBSIDIARY (22) 142 840 643
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 40,413 22,125 90,328 72,150
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE-NET OF TAX (NOTE 8) 3,938 - 3,938 -
---------- ---------- ---------- ----------
NET INCOME $ 44,351 $ 22,125 $ 94,266 $ 72,150
========== ========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING 65,604 61,299 62,446 61,298
DILUTED COMMON SHARES OUTSTANDING 65,758 61,407 62,498 61,389
EARNINGS PER SHARE OF COMMON STOCK:
BASIC
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE $ 0.62 $ 0.36 $ 1.45 $ 1.18
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 0.06 - 0.06 -
---------- ---------- ---------- ----------
TOTAL EARNINGS PER SHARE OF COMMON STOCK $ 0.68 $ 0.36 $ 1.51 $ 1.18
========== ========== ========== ==========
DILUTED
INCOME BEFORE EFFECT OF ACCOUNTING CHANGE $ 0.61 $ 0.36 $ 1.45 $ 1.18
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 0.06 - 0.06 -
---------- ---------- ---------- ----------
TOTAL EARNINGS PER SHARE OF COMMON STOCK $ 0.67 $ 0.36 $ 1.51 $ 1.18
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Thousands)
Three Months Twelve Months
Ended March 31, Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES 2001 2000 2001 2000
--------- --------- --------- ---------
Net income $ 44,351 $ 22,125 $ 94,266 $ 72,150
--------- --------- --------- ---------
Adjustments to reconcile net income to cash provided
from operating activities -
Depreciation and amortization 31,471 22,662 114,470 88,435
Preferred dividend requirement of subsidiary 238 269 986 1,077
Deferred income taxes and investment tax credits 203 (5,491) 21,039 2,540
Allowance for funds used during construction (640) (128) (3,158) (3,980)
(Gain) loss on sale or retirement of assets - (8,961) - (8,961)
Undistributed earnings of unconsolidated
investments (8,083) (11,695) (13,942) (15,003)
Cumulative effect of accounting change (3,938) - (3,938) -
Unrealized gain on derivatives (5,498) - (5,498) -
Changes in assets and liabilities -
Receivables - net 16,119 23,213 (253,865) (8,831)
Inventories 64,844 20,173 62,488 11,537
Prepaid gas delivery service 30,260 20,823 (4,475) (114)
Recoverable fuel and natural gas costs (23,919) (625) (105,637) (4,461)
Prepayments and other current assets 10,020 (162) 17,735 (9,692)
Regulatory assets (306) 2,610 (7,569) 1,777
Accounts payable, refunds to customers, customer
deposits, other current liabilities (122,378) 12,164 82,580 21,761
Accrued taxes and interest 43,278 (2,890) 14,984 (5,123)
Accrued post-retirement benefits other
than pensions (2,900) 1,404 637 3,271
Other - net 3,378 9,073 (1,781) 2,764
--------- --------- --------- ---------
Total adjustments 32,149 82,439 (84,944) 76,997
--------- --------- --------- ---------
Net cash flows from operating activities 76,500 104,564 9,322 149,147
--------- --------- --------- ---------
CASH FLOWS (REQUIRED FOR) FROM FINANCING ACTIVITIES
Issuance of common stock 129,420 - 133,398 -
Retirement of common and preferred stock (153) (116) (2,354) (2,446)
Proceeds from long-term debt and other obligations - - 298,000 110,000
Retirement of long-term debt and other obligations (7,022) (1,542) (8,779) (67,682)
Net change in short-term borrowings (120,446) (35,717) 317,541 49,009
Dividends on common stock (17,219) (14,695) (62,500) (57,622)
Other (189) 1,231 1,043 161
--------- --------- --------- ---------
Net cash flows (required for) from
financing activities (15,609) (50,839) 676,349 31,420
--------- --------- --------- ---------
CASH FLOWS (REQUIRED FOR) FROM INVESTING ACTIVITIES
Capital expenditures (46,211) (40,855) (169,622) (122,486)
Investment in leveraged leases - 112 (328) (9,247)
Investments in partnerships and other corporations (4,419) 11,946 (35,254) (32,981)
Change in notes receivable (2,612) (22,963) (11,654) (55,234)
Cash distributions from unconsolidated investments - - 3,413 4,475
Acquisition of DPL natural gas distribution assets - - (463,301) -
Other 296 243 (5,369) 2,607
--------- --------- --------- ---------
Net cash flows (required for) investing activities (52,946) (51,517) (682,115) (212,866)
--------- --------- --------- ---------
Net increase (decrease) in cash 7,945 2,208 3,556 (32,299)
Cash and cash equivalents at beginning of period 15,170 17,351 19,559 51,858
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 23,115 $ 19,559 $ 23,115 $ 19,559
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Vectren Corporation (Vectren) is an Indiana corporation that was organized on
June 10, 1999, solely for the purpose of effecting the merger of Indiana Energy,
Inc. (Indiana Energy) and SIGCORP, Inc. (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.
Vectren is a public utility holding company, whose wholly owned subsidiary,
Vectren Utility Holdings, Inc. (VUHI), is the intermediate holding company for
Vectren's three operating public utilities, Indiana Gas Company, Inc. (Indiana
Gas), formerly a wholly owned subsidiary of Indiana Energy, Southern Indiana Gas
and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP,
and the Ohio operations. VUHI's regulated subsidiaries serve approximately one
million customers. Indiana Gas provides natural gas and transportation services
to a diversified base of customers in 311 communities in 49 of Indiana's 92
counties. SIGECO provides generation, transmission, distribution and the sale of
electric power to Evansville, Indiana, and 74 other communities, and the
distribution and sale of natural gas to Evansville, Indiana, and 64 communities
in ten counties in southwestern Indiana. The Ohio operations, owned as a tenancy
in common by Vectren Energy Delivery of Ohio, Inc., a wholly owned subsidiary,
(53 % ownership) and Indiana Gas (47 % ownership), provide natural gas
distribution and transportation services to Dayton, Ohio and 16 counties in west
central Ohio. The Ohio operations were acquired from the Dayton Power & Light
Company on October 31, 2000.
Vectren is involved in non-regulated activities through three primary business
groups: Energy Services, Utility Services, and Communications. Energy Services
trades and markets natural gas and provides energy performance contracting
services. Utility Services provides utility products and services, such as
underground construction and facilities locating, meter reading and materials
management, and the mining and sale of coal. Communications provides integrated
broadband communications services, including local and long distance telephone,
Internet access and cable television. In addition, other businesses invest in
other energy-related opportunities and corporate technology.
2. Basis of Presentation
The interim condensed financial statements included in this report have been
prepared by Vectren, without audit, as provided in the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
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. Vectren believes that the
information in this report reflects all adjustments necessary to fairly state
the results of the interim periods reported. These condensed financial
statements and related notes should be read in conjunction with Vectren's
audited annual consolidated financial statements for the year ended December 31,
2000 filed on Form 10-K. Because of the seasonal nature of Vectren'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
8
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Certain reclassifications have been made to prior period financial statements to
conform with the current year classification. These reclassifications have no
impact on previously reported net income.
3. Merger and Integration Costs
Merger and integration costs incurred for the three and twelve months ended
March 31, 2001 were $1.0 million and $14.9 million, respectively. The continued
merger integration activities will be substantially completed in 2001. Merger
costs are reflected in the financial statements of the operating subsidiaries in
which merger savings are expected to be realized.
Since March 31, 2000, $42.1 has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$20.7 million. Of this amount, $5.5 million related to employee and executive
severance cots, $13.1 million related to transaction costs and regulatory filing
fees incurred prior to the closing of the merger, and the remaining $2.1 related
to employee relocations that occurred prior to or coincident with the merger
closing. At March 31, 2001, the accrual remaining for such costs totaled $1.6
million, all related to severance costs. Of the $42.1 million expensed, the
remaining $21.4 million was expensed through March 31, 2001 ($20.4 million in
2000 and $1.0 in 2001) for accounting fees resulting from merger related filing
requirements, consulting fees related to integration activities such as
organization structure, employee travel between company locations as part of
integration activities, internal labor of employees assigned to integration
teams, investor relations communications activities, and certain benefit costs.
The integration activities experienced by the company included such things as
information system consolidation, process review and definition, organization
design and consolidation, and knowledge sharing.
As a result of merger integration activities, management has identified certain
information systems that are expected to be retired in 2001. Accordingly, the
useful lives of these assets have been shortened to reflect this decision,
resulting in additional depreciation expense of approximately $3.2 million ($2.0
million after tax) and $14.6 million ($9.1 million after tax), respectively, for
the three and twelve months ended March 31, 2001.
4. Short - Term Borrowings
At March 31, 2001, Indiana Gas was not in compliance with the total indebtedness
to capitalization ratio contained in its back up credit facility for its
commercial paper program. The non-compliance resulted from the indebtedness
incurred to purchase its ownership interest in the Ohio operations and working
capital requirements associated with higher gas costs. A waiver on the Indiana
Gas facility has been obtained to waive the non-compliance through and including
March 31, 2001 which effectively waives the noncompliance up to June 30, 2001,
the date of the next quarterly test of the financial covenants. Vectren
anticipates making an equity investment in Indiana Gas to bring Indiana Gas back
into compliance. No amount is outstanding under the back up facility.
5. Long - Term Debt
SIGECO has $53.7 million of adjustable rate pollution control series first
mortgage bonds which could, at the election of the bondholder, be tendered to
SIGECO when the interest rates are reset. Prior to the latest reset on March 1,
9
2001, the interest rates were reset annually, and the bonds subject to tender
were presented in the Condensed Consolidated Balance Sheets as current
liabilities. Effective March 1, 2001, the bonds were reset for a five-year
period and have been classified as long-term debt. Resulting from the reset, the
interest rate on the $31.5 million Series A bonds increased from 4.30 % to 4.75
%, and the interest rate on the $22.2 million Series C bonds increased from 4.45
% to 5.00 %.
6. Common Stock Offering
On January 19, 2001, Vectren filed a registration statement with the Securities
and Exchange Commission with respect to a public offering of 5.5 million shares
of new common stock. On February 8, 2001, the registration became effective and
agreement was reached to sell 5.5 million shares to a group of underwriters. On
February 14, the shares were sold, at which time, the underwriters exercised
their over-allotment option to sell an additional 825,000 shares for a total of
about 6.3 million shares. The net proceeds of $129.4 million were used to repay
outstanding commercial paper utilized for recent acquisitions.
7. Earnings Per Share
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share assumes the conversion of stock options into
common shares using the treasury stock method to the extent the effect of the
conversion would be dilutive.
The following table details the number of shares of common stock added to the
average common shares outstanding to show the effects of the assumed exercise of
stock options for the purpose of calculating diluted earnings per share.
Three Months Ended March 31,
---------------------------------------------------------
2001 2000
--------------------------- ----------------------------
In thousands, except per Per Per
share amounts Share Share
Income Shares Amount Income Shares Amount
------- ------- ------ ------- ------- --------
Basic EPS $44,351 65,604 $ 0.68 $22,125 61,299 $ 0.36
Effect of dilutive stock options - 154 - 108
------- ------- ------ ------- ------- --------
Diluted EPS $44,351 65,758 $ 0.67 $22,125 61,407 $ 0.36
======= ======= ====== ======= ======= ========
Twelve Months Ended March 31,
---------------------------------------------------------
2001 2000
-------------------------- ----------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------- ------- ------ ------- ------- ------
Basic EPS $94,266 62,446 $ 1.51 $72,150 61,298 $ 1.18
Effect of dilutive stock options - 52 - 91
------- ------- ------ ------- ------- -------
Diluted EPS $94,266 62,498 $ 1.51 $72,150 61,389 $ 1.18
======= ======= ====== ======= ======= =======
For the three months ended March 31, 2001 and 2000, options to purchase an
additional 95,400 and 615,847 common shares of the company's common stock were
outstanding, but were not included in the computation of diluted earnings per
share because their effect would be antidilutive. Exercise prices for options
excluded from the computation equaled $24.05 in 2001 and ranged from $17.44 to
$24.05 in 2000.
10
For the twelve months ended March 31, 2001 and 2000, options to purchase an
additional 95,400 and 558,506 common shares of the company's common stock were
outstanding, but were not included in the computation of diluted earnings per
share because their effect would be antidilutive. Exercise prices for options
excluded from the computation equaled $24.05 in 2001 and ranged from $19.83 to
$24.05 in 2000.
8. New Accounting Principle
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
requires that every derivative instrument be recorded on the balance sheet as an
asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
SFAS 133, as amended, is effective for fiscal years beginning after June 15,
2000 and must be applied to derivative instruments and certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1998. Vectren has completed the
process of identifying all derivative instruments, determining fair market
values of these derivatives, designating and documenting hedge relationships,
and evaluating the effectiveness of those hedge relationships. As a result of
the successful completion of this process, Vectren adopted SFAS 133 as of
January 1, 2001.
SFAS 133 requires that as of the date of initial adoption, the difference
between the fair market value of derivative instruments recorded on the balance
sheet and the previous carrying amount of those derivatives be reported in net
income or other comprehensive income, as appropriate, as the cumulative effect
of a change in accounting principle in accordance with Accounting Principles
Board Opinion No. 20, "Accounting Changes."
A limited number of Vectren's contracts are defined as derivatives under SFAS
133. These derivatives are forward physical contracts for both the purchase and
sale of natural gas and electricity by its wholly owned gas marketing
subsidiary, SIGCORP Energy Services, Inc. (SES) and SIGECO, respectively, and an
interest rate swap.
SES's primary business is the buying and re-selling of physical natural gas to
the industrial market segment. SES manages its pricing risk by entering into
corresponding gas commodity contracts that ensure a reasonable matching of the
associated risk. In addition, SES takes physical delivery of gas in storage
facilities to ensure operational as well as price risk management of its forward
positions. Open positions in terms of price, volume and specified delivery
locations do occur and are managed by SES using the above instruments and
through management reporting. These commodity contracts and gas storage
facilities involve the normal purchase and sale of natural gas and therefore do
not require fair value accounting under SFAS 133. SES also utilizes price swap
agreements that are accounted for under SFAS 133 to mitigate price risk related
to certain forward physical contracts. These derivatives have not been
designated as hedges; accordingly, the changes in market value will be recorded
currently in earnings. The mark to market impact of these derivatives has been
reflected as part of the transition adjustment recorded to earnings on January
1, 2001.
SIGECO uses derivative and non-derivative forward contracts in its power
marketing operations to effectively manage the utilization of its generation
capacity. Certain forward sales contracts are used to sell the excess generation
capacity of SIGECO when demand conditions warrant this activity. These contracts
involve the normal sale of electricity and therefore do not require fair value
accounting under SFAS 133. Certain forward purchase and sale contracts entered
into as part of "buy-sell" transactions with other utilities and power marketers
are derivatives but do not qualify for hedge accounting. The mark to market
11
impact of these derivatives upon adoption of SFAS 133 is reflected as part of
the transition adjustment recorded to earnings on January 1, 2001.
The interest rate swap is used to hedge the exposure to interest rate risk
associated with VUHI's $150 million floating rate notes. The swap was entered
into concurrently with the issuance of the floating rate debt. Vectren has
formally documented the hedging relationship between the swap and floating rate
debt as well as its risk management objectives and strategies for undertaking
the hedging transaction. The swap has been designated as a cash flow hedge and
the mark to market impact has been reflected as part of the transition
adjustment recorded to other comprehensive income on January 1, 2001.
The cumulative impact of the adoption of SFAS 133 on January 1, 2001 is an
earnings gain of approximately $6.3 million ($3.9 million after tax) due to the
derivatives used in power marketing operations. The impact of the derivatives
used by SES and the interest rate swap was immaterial.
As of March 31, 2001, the fair value of power marketing derivative contracts
totals $11.8 million and is included in deferred charges, net in the Condensed
Consolidated Balance Sheets. The difference between the current market value and
the market value on the date of adoption of $5.5 million is included in
purchased electric energy in the Condensed Consolidated Statements of
Operations. The fair value of the interest rate swap is $1.4 million and is
included in other current liabilities on the Condensed Consolidated Balance
Sheets. The difference between the current market value and the market value on
the date of adoption of $1.4 million ($0.9 million after tax) is included in
accumulated other comprehensive income on the Condensed Consolidated Balance
Sheets and will be reclassified to interest expense by December 31, 2001 as the
swap expires in 2001. Derivatives used by SES remain immaterial.
In addition to these wholly owned subsidiaries, ProLiance Energy, LLC
(ProLiance), a 50 % owned equity method investment, adopted SFAS 133 on August
31, 2000. The impact of adoption on ProLiance is reflected in accumulated other
comprehensive income due to the nature of the derivatives used.
9. Comprehensive Income
Vectren's components of comprehensive income (loss) include its portion of
ProLiance's comprehensive income and market value fluctuation of an interest
rate swap designated as a cash flow hedge. ProLiance's component of
comprehensive income is the result of its adoption of SFAS 133.
Comprehensive income consists of the following:
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
In thousands 2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 44,351 $ 22,125 $ 94,266 $ 72,150
Comprehensive income (loss) of
unconsolidated investments, net of tax (6,628) - 874 -
Interest rate swap and other, net of tax (906) 62 (922) (22)
-------- -------- -------- --------
Total comprehensive income $ 36,817 $ 22,187 $ 94,218 $ 72,128
======== ======== ======== ========
12
10. Contingencies
Vectren is party to various legal proceedings arising in the normal course of
business. In the opinion of management, with the exception of litigation matters
related to ProLiance (See Note 11) and the Clean Air Act (See Note 12), there
are no legal proceedings pending against Vectren that are likely to have a
material adverse effect on its financial position or results of operations.
11. ProLiance Energy, LLC
ProLiance, a 50 % owned, non-regulated, energy marketing affiliate of Vectren,
began providing natural gas and related services to Indiana Gas, Citizens Gas
and Coke Utility (Citizens Gas) and others effective April 1, 1996. The sale of
gas and provision of other services to Indiana Gas by ProLiance is subject to
regulatory review through the quarterly gas cost adjustment (GCA) process
administered by the Indiana Utility Regulatory Commission (IURC).
On September 12, 1997, the IURC issued a decision finding the gas supply and
portfolio administration agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas to be consistent with the public interest and that
ProLiance is not subject to regulation by the IURC as a public utility. The
IURC's decision reflected the significant gas cost savings to customers obtained
through ProLiance's services and suggested that all material provisions of the
agreements between ProLiance and the utilities are reasonable. Nevertheless,
with respect to the pricing of gas commodity purchased from ProLiance, the
pricing of fees paid by ProLiance to the utilities for the prospect of using
pipeline entitlements if and when they are not required to serve the utilities'
firm customers, and the pricing of fees paid by the utilities to ProLiance for
portfolio administration services, the IURC concluded that additional review in
the GCA process would be appropriate and directed that these matters be
considered further in the pending, consolidated GCA proceeding involving Indiana
Gas and Citizens Gas. Through a series of appeals, the order was finally
considered by the Indiana Supreme Court.
On September 22, 2000, the Indiana Supreme Court issued a decision affirming the
IURC's decision on ProLiance in all respects. The IURC has recently commenced
the processing of these further proceedings by conducting a prehearing
conference. Discovery is ongoing in the further proceeding at the current time.
Until the three pricing issues reserved by the IURC are resolved, Vectren will
continue to reserve a portion of its share of ProLiance earnings.
In August 1998, Indiana Gas, Citizens Gas and ProLiance each received a Civil
Investigative Demand (CID) from the United States Department of Justice
requesting information relating to Indiana Gas' and Citizens Gas' relationship
with and the activities of ProLiance. The Department of Justice issued the CID
to gather information regarding ProLiance's formation and operations, and to
determine if trade or commerce has been restrained. Indiana Gas has provided all
information requested and management continues to believe that there are no
significant issues in this matter.
Indiana Gas continues to record gas costs in accordance with the terms of the
ProLiance contract and Vectren continues to record its proportional share of
ProLiance's earnings. Pre-tax income of $5.6 million and $3.4 million was
recognized as ProLiance's contribution to earnings for the three months ended
March 31, 2001 and 2000, respectively. Pre-tax income of $7.9 million and $5.1
million was recognized as ProLiance's contribution to earnings for the twelve
months ended March 31, 2001 and 2000, respectively. Earnings recognized from
ProLiance are included in equity in earnings of unconsolidated investments on
the Condensed Consolidated Statements of Operations. At March 31, 2001, March
31, 2000 and December 31, 2000, Vectren has reserved approximately $2.7 million,
13
$2.2 million and $2.4 million, respectively, of ProLiance's earnings after tax
pending resolution of the remaining issues. The reserve represents 10% of
ProLiance's pretax earnings and serves as management's best estimate of
potential exposure arising from the three pricing issues.
12. Environmental Matters
Clean Air Act
NOx SIP Call Matter. In October 1997, the United States Environmental Protection
Agency (USEPA) proposed a rulemaking that could require uniform nitrogen oxide
(NOx) emissions reductions of 85 % by utilities and other large sources in a
22-state region spanning areas in the Northeast, Midwest, Great Lakes,
Mid-Atlantic and South. This rule is referred to as the "NOx SIP call." The
USEPA provided each state a proposed budget of allowed NOx emissions, a key
ingredient of ozone, requiring a significant reduction of such emissions. Under
that budget, utilities may be required to reduce NOx emissions to a rate of 0.15
lb/mmBtu below levels already imposed by Phase I and Phase II of the Clean Air
Act Amendments of 1990 (the Act).
On October 27, 1998, 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). The final rule requires that 23 states and jurisdictions must file
revised state implementation plans (SIPs) with the USEPA by no later than
September 30, 1999, which was essentially unchanged from its October 1997,
proposed rule. The USEPA has encouraged states to target utility coal-fired
boilers for the majority of the reductions required, especially NOx emissions.
Northeastern states have claimed that ozone transport from midwestern states
(including Indiana) is the primary reason for their ozone concentration
problems. Although this premise is challenged by others based on various air
quality modeling studies, including studies commissioned by the USEPA, the USEPA
intends to incorporate a regional control strategy to reduce ozone transport.
The USEPA's final ruling is being litigated in the federal courts by
approximately ten midwestern states, including Indiana.
On March 3, 2000, the United States Circuit Court of Appeals for the District of
Columbia (D.C. Court of Appeals) upheld the USEPA's October 27, 1998 final rule
requiring 23 states and the District of Columbia to file revised SIPs with the
USEPA. Numerous petitioners, including several states, filed petitions for
rehearing with the D.C. Court of Appeals. On June 22, 2000, the D.C. Court of
Appeals denied petition for rehearing en banc. Following this decision, on
August 30, 2000, the D.C. Court of Appeals issued an extension of the SIP Call
implementation deadline to May 31, 2004. On September 20, 2000, petitioners
filed a Petition of Writ of Certiori with the United States Supreme Court
requesting review of the D.C. Court of Appeals March 3, 2000 Order, which was
denied. Therefore, SIGECO's compliance date remains May 31, 2004.
The proposed NOx emissions budget for Indiana stipulated in the USEPA's final
ruling requires a 36 % reduction in total NOx emissions from Indiana. The
ruling, pending finalization of state rule making, could require SIGECO to lower
its system-wide emissions by approximately 70 %. Depending on the level of
system-wide emissions reductions ultimately required, and the control technology
utilized to achieve the reductions, the estimated construction costs of the
control equipment could reach $160 million, which are expected to be expended
during the 2001-2004 period, and related additional operation and maintenance
expenses could be an estimated $8 million to $10 million, annually. No accrual
has been recorded by the company related to the NOx SIP Call matter. The rules
governing NOx emissions, once finalized, are to be applied prospectively.
14
Culley Generating Station Investigation Matter. 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 performance standards should be applied to the
modifications and whether the best available control technology was, or should
have been, used. Numerous other electric utilities were, and are currently,
being investigated by the USEPA under an industry-wide review for similar
compliance. SIGECO responded to all of the USEPA's data requests during the
investigation. 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 the 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 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. The USEPA alleges that, beginning in 1992, SIGECO violated the
Act by: (i) making modifications to its Culley Generating Station in Yankeetown,
Indiana without obtaining required permits; (ii) making major modifications to
the Culley Generating Station without installing the best available emission
control technology; and (iii) failing to notify the USEPA of the modifications.
In addition, the lawsuit alleges that the modifications to the Culley Generating
Station required SIGECO to begin to comply with federal new source performance
standards.
SIGECO believes it performed only maintenance, repair and replacement activities
at the Culley Generating Station, as allowed under the Act. Because proper
maintenance does not require permits, application of the best available emission
control technology, notice to the USEPA, or compliance with new source
performance standards, SIGECO believes that the lawsuit is without merit, and
intends to vigorously defend the lawsuit.
The lawsuit seeks fines against SIGECO in the amount of $27,500 per day per
violation. The lawsuit does not specify the number of days or violations the
USEPA believes occurred. The lawsuit also seeks a court order requiring SIGECO
to install the best available emissions technology at the Culley Generating
Station. If the USEPA is successful in obtaining an order, SIGECO estimates that
it would incur capital costs of approximately $40 million to $50 million
complying with the order. In the event that SIGECO is required to install
system-wide NOx emission control equipment, as a result of the NOx SIP call
issue, the majority of the $40 million to $50 million for best available
emissions technology at Culley Generating Station would be included in the $160
million expenditure previously discussed.
The USEPA has also issued an administrative notice of violation to SIGECO making
the same allegations, but alleging that violations began in 1977.
While it is possible that SIGECO could be subjected to criminal penalties if the
Culley Generating Station continues to operate without complying with the new
source performance standards and the allegations are determined by a court to be
valid, SIGECO believes such penalties are unlikely as the USEPA and the electric
utility industry have a bonafide dispute over the proper interpretation of the
Act. Accordingly, no accrual has been recorded by the company, and SIGECO
anticipates at this time that the plant will continue to operate while the
matter is being decided.
Information Request. On January 23, 2001, SIGECO received an information request
from the USEPA under Section 114(a) of the Act for historical operational
information on the Warrick and A.B. Brown generating stations. SIGECO has
15
provided all information requested, and management believes that no significant
issues will arise from this request.
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 Indiana Department of Environmental Management
(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 expert 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 accrued costs that it reasonably expects to incur totaling
approximately $20.3 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, which serve to limit Indiana
Gas' share of response costs at these 19 sites to between 20 and 50 percent.
With respect to insurance coverage, as of March 31, 2001, Indiana Gas has
received and recorded settlements from all known insurance carriers in an
aggregate amount approximating its $20.3 million accrual.
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.
13. Rate and Regulatory Matters
Gas Costs Proceedings
Commodity prices for natural gas purchases have increased significantly,
primarily due to a colder winter, increased demand and tighter supplies.
Vectren's utility subsidiaries are allowed full recovery of such changes in
purchased gas costs for their retail customers through commission-approved gas
cost adjustment mechanisms.
On October 11, 2000, Indiana Gas filed for approval of its regular quarterly
GCA. In early December, the IURC issued an interim order approving the request
by Indiana Gas for a GCA factor for December 2000. On January 4, 2001, the IURC
approved the January and February 2001 GCA as filed. The order also addressed
16
the claim by the Indiana Office of Utility Consumer Counselor (OUCC) that a
portion of the requested GCA be disallowed because Indiana Gas should have
entered into additional commitments for this winter's gas supply in late 1999
and early 2000. In procuring gas supply for this winter, Indiana Gas followed
the gas procurement practices that it had employed over the last several years.
In response to the claim by the OUCC, the IURC found that there should be a $3.8
million disallowance related to gas procurement for the winter season. As a
result, Indiana Gas recognized a pre-tax charge of $3.8 million in December
2000. Both Indiana Gas and the OUCC appealed the ruling. The Citizens Action
Coalition of Indiana, Inc.(CAC), a not for profit consumer advocate, also filed
with the IURC a petition to intervene and a notice of appeal of the order.
In March 2001, Vectren, Indiana Gas and SIGECO reached agreement with the OUCC
and CAC regarding the IURC Order. As part of the agreement, among other things,
the companies agreed to contribute an additional $1.9 million to the state of
Indiana's Low Income Heating Assistance Program in 2001 and to credit $3.3
million of the $3.8 million disallowed amount to Indiana Gas customers' April
2001 utility bills in exchange for both the OUCC and the CAC dropping their
appeals of the IURC Order. In April 2001, the IURC issued an order approving the
settlement. The contribution to Indiana's Low Income Heating Assistance Program
totaling $1.9 million were made in 2001 and were charged to other operating
expense. There was no impact to 2000 operations as a result of this
contribution.
Purchased Power Costs
As a result of the ongoing appeal of a generic order issued by the IURC in
August 1999 regarding guidelines for the recovery of purchased power costs,
SIGECO entered into a settlement agreement with the OUCC that provides certain
terms with respect to the recoverability of such costs. The settlement,
originally approved by the IURC on August 9, 2000, has been extended by
agreement through March 2002. Under the settlement, SIGECO can recover the
entire cost of purchased power up to an established benchmark, and during forced
outages, SIGECO will bear a limited share of its purchased power costs
regardless of the market costs at that time. Based on this agreement, SIGECO
believes it has limited its exposure to unrecoverable purchased power costs.
14. Affiliate Transactions
ProLiance provides natural gas supply and related services to certain wholly
owned subsidiaries of Vectren. Purchases from ProLiance for resale and for
injections into storage for the three months ended March 31, 2001 and 2000
totaled $268.5 million and $66.1 million, respectively; and for the twelve
months ended March 31, 2001 and 2000 totaled $681.3 million and $240.4 million,
respectively.
ProLiance has a standby letter of credit facility with a bank for letters up to
$45 million, $30 million and $45 million at March 31, 2001, March 31, 2000 and
December 31, 2000. This facility is collaterialized in part by a support
agreement from Vectren. Letters of credit outstanding at March 31, 2001, March
31, 2000 and December 31, 2000 totaled $14.8 million, $12.8 million and $22.0
million, respectively.
CIGMA, LLC (CIGMA), owned jointly and equally by a wholly owned subsidiary of
Vectren and a third party, provides materials acquisition and related services
that are used by certain wholly owned subsidiaries of Vectren. Purchases of
these services during the three months ended March 31, 2001 and 2000 totaled
$3.7 million and $4.1 million, respectively; and for the twelve months ended
March 31 2001 and 2000 totaled $17.2 million and $16.9 million, respectively.
Vectren is a two-thirds guarantor of certain surety bonds and other obligations
of Energy Systems Group, LLC, a two-thirds owned consolidated subsidiary.
Vectren's share of the guarantee of such obligations totaled $56.4 million,
17
$43.8 million and $50.6 million at March 31, 2001, March 31, 2000 and December
31, 2000, respectively.
Amounts owed to unconsolidated affiliates totaled $40.2 million, $39.5
million and $102.5 million at March 31, 2001, March 31, 2000 and December 31,
2000, respectively, and are included in accounts payable to affiliated companies
on the Condensed Consolidated Balance Sheets. Amounts due from unconsolidated
affiliates totaled $24.8 million, $17.0 million and $17.6 million at March 31,
2001, March 31, 2000 and December 31, 2000 respectively, and are included in
accounts receivable on the Condensed Consolidated Balance Sheets.
15. Segment Reporting
Operating segments are defined as components of an enterprise for which separate
financial information is available and evaluated regularly by the chief
operating decision makers in deciding how to allocate resources and in the
assessment of performance.
There were three operating segments of Vectren during the reported periods: (1)
Gas Utility Services, (2) Electric Utility Services, and (3) Non-regulated
Operations. The Gas Utility Services segment distributes, transports and sells
natural gas in southwest and central Indiana and west central Ohio and is
comprised of the operations of Indiana Gas, the Ohio operations and SIGECO's
natural gas business. The Electric Utility Services segment generates,
transmits, distributes and sells electricity within primarily southwestern
Indiana and in periods of under utilized capacity, sells excess electricity to
other wholesale customers. This segment is comprised of SIGECO's electric
business. The Non-regulated Operations segment is made up of various businesses
providing energy-related products and services; telecommunication products and
services; materials management, debt collection and meter reading services;
underground utility asset location and construction services; structured finance
and investment transactions including leveraged leases of real estate and
equipment; venture capital projects; coal mining and sales; and other
energy-related services. Revenues for each segment are principally attributable
to customers in the United States.
Effective January 1, 2001, the utility operations announced the reorganization
of those operations into two primary business units: Energy Delivery and Power
Supply. During 2001, organizational alignment will occur along with the
development of management reporting processes. As a result, Vectren will report
utility segment information as Gas Utility Services and Electric Utility
Services.
The following tables provide information about business segments. Vectren makes
decisions on finance and dividends at the corporate level; these topics are
addressed on a consolidated basis. In addition, adjustments have been made to
the segment information to arrive at information included in the consolidated
results of operations and financial position. These adjustments include
unallocated corporate assets, revenues and expenses and the elimination of
intercompany transactions.
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------------- --------------------------
In thousands 2001 2000 2001 2000
----------- ----------- ----------- -----------
Operating Revenues:
Gas Utility Services $ 522,889 $ 200,845 $ 1,140,797 $ 509,236
Electric Utility Services 88,209 72,990 351,628 309,572
Non-regulated Operations 292,465 101,456 743,847 344,987
Intersegment Eliminations (20,475) (15,847) (63,938) (56,967)
----------- ----------- ----------- -----------
Total operating revenues $ 883,088 $ 359,444 $ 2,172,334 $ 1,106,828
=========== =========== =========== ===========
18
Net Income:
Gas Utility Services $ 18,804 $ 10,222 $ 24,172 $ 17,009
Electric Utility Services 16,869 2,607 51,072 35,017
Non-regulated Operations 8,678 9,296 19,181 20,124
Intersegment Eliminations - - (159) -
----------- ----------- ----------- -----------
Net income $ 44,351 $ 22,125 $ 94,266 $ 72,150
=========== =========== =========== ===========
March 31, March 31, December 31,
2001 2000 2000
----------- ----------- -----------
Identifiable Assets:
Gas Utility Services $ 1,511,901 $ 828,785 $ 1,658,778
Electric Utility Services 788,056 755,884 799,104
Non-regulated Operations 842,762 526,983 749,237
Intersegment Eliminations (282,518) (156,003) (297,932)
----------- ----------- -----------
Total identifiable assets $ 2,860,201 $ 1,955,649 $ 2,909,187
=========== =========== ===========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
Description of the Business
Vectren Corporation (Vectren) is an Indiana corporation that was organized on
June 10, 1999, solely for the purpose of effecting the merger of Indiana Energy,
Inc. (Indiana Energy) and SIGCORP, Inc. (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.
Vectren is a public utility holding company, whose wholly owned subsidiary,
Vectren Utility Holdings, Inc. (VUHI), is the intermediate holding company for
Vectren's three operating public utilities, Indiana Gas Company, Inc. (Indiana
Gas), formerly a wholly owned subsidiary of Indiana Energy, Southern Indiana Gas
and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP,
and the Ohio operations. VUHI's regulated subsidiaries serve approximately one
million customers. Indiana Gas provides natural gas and transportation services
to a diversified base of customers in 311 communities in 49 of Indiana's 92
counties. SIGECO provides generation, transmission, distribution and the sale of
electric power to Evansville, Indiana, and 74 other communities, and the
distribution and sale of natural gas to Evansville, Indiana, and 64 communities
in ten counties in southwestern Indiana. The Ohio operations, owned as a tenancy
in common by Vectren Energy Delivery of Ohio, Inc., a wholly owned subsidiary,
(53 % ownership) and Indiana Gas (47 % ownership), provide natural gas
distribution and transportation services to Dayton, Ohio and 16 counties in west
central Ohio. The Ohio operations were acquired from the Dayton Power & Light
Company on October 31, 2000.
Vectren is involved in non-regulated activities through three primary business
groups: Energy Services, Utility Services, and Communications. Energy Services
trades and markets natural gas and provides energy performance contracting
services. Utility Services provides utility products and services, such as
underground construction and facilities locating, meter reading and materials
management, and the mining and sale of coal. Communications provides integrated
broadband communications services, including local and long distance telephone,
Internet access and cable television. In addition, other businesses invest in
other energy-related opportunities and corporate technology.
20
Overview
Vectren's consolidated earnings result from the operations of its utility
subsidiaries, Indiana Gas, SIGECO and the Ohio operations, and from the
non-utility operations and investments of Vectren's non-regulated businesses.
Three Months Twelve Months
In millions, except per share amounts Ended March 31, Ended March 31,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income, as reported $ 44.4 $ 22.1 $ 94.3 $ 72.2
Merger and integration costs, net of tax 2.5 19.3 20.1 19.3
Cumulative effect of accounting change (3.9) - (3.9) -
Gain on restructuring of a non-regulated
investment, net of tax - (4.9) - (4.9)
---------- ---------- ---------- ----------
Net income before merger and integration costs,
cumulative effect of accounting change and gain
on restructuring of a non-regulated investment $ 43.0 $ 36.5 $ 110.5 $ 86.6
========== ========== ========== ==========
Attributed to:
Regulated $ 34.4 $ 31.3 $ 87.1 $ 70.5
Non-regulated $ 8.6 $ 5.2 $ 23.4 $ 16.1
Basic earnings per share, as reported $ 0.68 $ 0.36 $ 1.51 $ 1.18
Merger and integration costs, net of tax 0.04 0.32 0.32 0.32
Cumulative effect of accounting change (0.06) - (0.06) -
Gain on restructuring of a non-regulated
investment, net of tax - (0.08) - (0.08)
---------- ---------- ---------- ----------
Basic earnings per share before merger and
integration costs, cumulative effect of
accounting change and gain on restructuring
of a non-regulated investment $ 0.66 $ 0.60 $ 1.77 $ 1.42
========== ========== ========== ==========
Attributed to:
Regulated $ 0.52 $ 0.52 $ 1.39 $ 1.16
Non-regulated $ 0.14 $ 0.08 $ 0.38 $ 0.26
Net Income
For the three months ended March 31, 2001, consolidated net income was $44.4
million, or $0.68 per share on a basic earnings per share basis. Consolidated
net income before merger and integration costs of $4.2 million, including $3.2
million of additional depreciation expense (see merger and integration costs
below), and the cumulative effect of the accounting change (adoption of FAS 133)
was $43.0 million, or $0.66 per share, compared to net income and basic earnings
per share before merger and integration costs and the one time gain from the
restructuring of a non-regulated investment for the first quarter of 2000 of
$36.5 million, or $0.60 per share, respectively.
For the twelve months ended March 31, 2001, consolidated net income was $94.3
million, or $1.51 per share on a basic earnings per share basis. Consolidated
net income before merger and integration costs of $29.5 million, including $14.6
million of additional depreciation expense (see merger and integration costs
below), and the cumulative effect of the accounting change was $110.5 million,
or $1.77 per share, compared to net income and basic earnings per share before
merger and integration costs and the one time gain from the restructuring of a
non-regulated investment for the twelve months ended March 31, 2000 of $86.6
million, or $1.42 per share, respectively. Vectren's results for the twelve
months ended March 31, 2001 reflect the results of the Ohio operations for five
months.
21
Dividends
On January 24, 2001, the board of directors declared a dividend of $0.255 per
share, payable on March 1, 2001, to common shareholders of record on February
15, 2001. Total dividends paid were $1.00 per share for the twelve months ended
March 31, 2001, compared to $0.95 per share for the twelve months ended March
31, 2000.
Results of Regulated Operations
Regulated utility operations contributed net income before merger and
integration costs (as described below) and the cumulative effect of the
accounting change (adoption of SFAS 133) of $34.4 million, or $0.52 per share,
for the three months ended March 31, 2001, compared to $31.3 million, or $0.52
for the same period in 2000.
For the twelve months ended March 31, 2001, regulated operations contributed net
income before merger and integration costs (as described below) and the
cumulative effect of the accounting change (adoption of SFAS 133) of $87.1
million, or $1.39 per share, compared to $86.6 million, or $1.16 for the same
period in 2000.
The results for regulated operations were primarily driven by colder weather,
the inclusion of the Ohio operations, the impact marking certain whole contracts
to market as required by SFAS 133, and additional wholesale marketing sales.
These increases were offset somewhat by reduced consumption and additional
operating expenses, both primarily attributable to the significant increase in
natural gas costs.
Utility Margin (Operating Revenues Less Cost of Gas Sold, Fuel for Electric
Generation, Purchased Electric Energy)
Gas Utility Margin
Gas Utility margin for the three months ended March 31, 2001 of $118.8 million
increased $36.5 million, or 44 %, compared to 2000. The Ohio operations
represent $35.5 million of the increase. The remaining increase of $1.0 million
related to Indiana Gas and SIGECO is due to a 2 % increase in throughput
resulting primarily from temperatures being 15 % colder than the previous year.
These favorable impacts were partially offset by reduced consumption and the
cost of unaccounted for gas due to much higher gas costs (see below).
Total cost of gas sold was $404.1 million for the three months ended March 31,
2001 and $118.5 million in 2000. Excluding $147.4 million related to the Ohio
operations, total cost of gas sold increased $138.2 million, or 116 %, during
2001 compared to 2000, primarily due to significantly higher per unit purchased
gas costs. The total average cost per dekatherm of gas purchased by Indiana Gas
and SIGECO for the three months ended March 31, 2001 was $7.40 compared to $3.84
for the same period in 2000.
Gas Utility margin for the twelve months ended March 31, 2001 of $302.7 million
increased $74.9 million, or 33 %, compared to 2000. The Ohio operations
represent $63.7 million of the increase. The remaining increase of $11.2 million
related to Indiana Gas and SIGECO is due to a 11 % increase in throughput
resulting primarily from temperatures being 26 % colder than the previous year
and a 2 % increase in their combined residential customer base. These favorable
impacts on gas margin were partially offset by a $3.8 million disallowance of
gas costs by the Indiana Utility Regulatory Commission (IURC) and the cost of
unaccounted for gas due to higher gas costs.
22
Total cost of gas sold was $838.1 million for the twelve months ended March 31,
2001 and $281.5 million in 2000. Excluding $230.6 million related to the Ohio
operations, total cost of gas sold increased $326.0 million, or 116 %, during
2001 compared to 2000, and is primarily due to significantly higher per unit
purchased gas costs.
The price changes in the cost of gas purchased are due primarily to changing
commodity costs in the marketplace. Vectren's utility subsidiaries are allowed
full recovery of such changes in purchased gas costs from their retail customers
through commission-approved gas cost adjustment mechanisms. For further
information on matters affecting gas utility margin, see Rate and Regulatory
Matters.
Electric Utility Margin
Electric Utility margin for the three months ended March 31, 2001 of $60.5
million, increased $7.6 million, or 14 %, over 2000 primarily due to a $5.5
million gain recorded to reflect certain wholesale power marketing purchase and
sale contracts at current market values as required by Statement of Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) (see below). The remaining $2.1 million resulted
primarily from a 8 % increase in sales to residential and commercial customers
for the quarter due to the impact of colder weather on retail electric heating
sales and an increasing customer base.
Electric Utility margin for the twelve months ended March 31, 2001 of $236.4
million, increased $15.1 million, or 7 %, over 2000 primarily due to the current
quarter $5.5 million gain recorded to reflect certain wholesale power marketing
purchase and sale contracts at current market values as required by SFAS 133
(see below). The remaining $9.6 million increase results from increased margin
from sales to wholesale energy markets with volumes increasing 69 % over 2000,
and a 5 % increase in sales to retail customers for the period due to the impact
of colder weather on retail electric heating sales and an increasing customer
base.
Purchased electric energy increased $9.7 million, or 278 %, and $25.1 million,
or 119 %, for the three and twelve month periods ended March 31, 2001, compared
to the same periods in the prior year due primarily to increased purchased power
related to the greater sales to other utilities and power marketers.
Utility Operating Expenses (excluding Cost of Gas Sold, Fuel for Electric
Generation and Purchased Electric Energy)
Utility Other Operating
Excluding $11.8 million in expenses related to the Ohio operations, utility
other operating expenses increased $3.2 million for the three months ended March
31, 2001 compared to the prior year, and excluding $18.9 million in expenses
related to the Ohio operations, utility other operating expenses increased $4.5
million for the twelve months ended March 31, 2001. The increases reflect
additional Low Income Heating Assistance Program contributions and bad debts
provisions due to the increased gas costs which resulted in higher customer
billings.
Utility Depreciation and Amortization
Utility depreciation and amortization increased $8.8 million and $26.0 million,
respectively, for the three and twelve months ended March 31, 2001 compared to
the prior year due primarily to additional depreciation related to merger and
integration activities (see below) and the inclusion of the Ohio operations.
Utility depreciation and amortization related to the Ohio operations was $3.9
million and $6.4 million for the three and twelve months ended March 31, 2001,
respectively. The remaining increases are attributable to depreciation of
additions to utility plant.
23
Utility Taxes Other Than Income Taxes
Utility taxes other than income taxes increased $10.9 million and $18.7 million,
respectively, for the three and twelve month periods ended March 31, 2001. The
three and twelve month periods include $9.7 million and $16.8 million,
respectively, of primarily Ohio state excise tax related to the Ohio operations.
The remaining increases result from increases in gross receipts and property
taxes.
Merger and Integration Costs
Merger and integration costs incurred for the three and twelve months ended
March 31, 2001 were $1.0 million and $14.9 million, respectively and for both
the three and twelve months ended March 31, 2000, totaled $27.2 million Vectren
expects to realize net merger savings of nearly $200 million over the next ten
years from the elimination of duplicate corporate and administrative programs
and greater efficiencies in operations, business processes and purchasing. The
continued merger integration activities, which will contribute to the merger
savings, will be substantially completed in 2001. Merger costs are primarily
reflected in the operations of the utility operating subsidiaries where merger
savings are expected to be realized.
Since March 31, 2000, $42.1 million has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$20.7 million. Of this amount, $5.5 million related to employee and executive
severance costs, $13.1 related to transaction costs and regulatory filing fees
incurred prior to the closing of the merger, and the remaining $2.1 million
related to employee relocations that occurred prior to or coincident with the
merger closing. At March 31, 2001, the accrual remaining for such costs totaled
$1.6 million, all related to severance costs. Of the $42.1 million expensed, the
remaining $21.4 million was expensed through March 31, 2001 ($20.4 million in
2000 and $1.0 in 2001) for accounting fees resulting from merger related filing
requirements, consulting fees related to integration activities such as
organization structure, employee travel between company locations as part of
integration activities, internal labor of employees assigned to integration
teams, investor relations communications activities, and certain benefit costs.
The integration activities experienced by the company included such things as
information system consolidation, process review and definition, organization
design and consolidation, and knowledge sharing.
As a result of the merger and integration activities, management has identified
certain information systems that are expected to be retired in 2001.
Accordingly, the useful lives of these assets have been shortened to reflect
this decision, resulting in additional depreciation expense of approximately
$3.2 million ($2.0 million after tax) and $14.6 million ($9.1 million after tax)
for the three and twelve months ended March 31, 2001.
In total, for the three months ended March 31, 2001, merger and integration
costs totaled $4.2 million ($2.5 million after tax), or $0.04 on a basic
earnings per share basis compared to $27.2 million ($19.3 million after tax), or
$0.32 on a basic earnings per share basis for the same period in 2000.
In total, for the twelve months ended March 31, 2001, merger and integration
costs totaled $29.5 million ($20.1 million after tax), or $0.32 on a basic
earnings per share basis compared to $27.2 million ($19.3 million after tax), or
$0.32 on a basic earnings per share basis for the same period in 2000.
Utility Other Income, Net
Utility other income, net decreased $1.3 million for the three months ended
March 31, 2001 compared to the prior year due to increased charitable
contributions including the 2001 funding of Vectren Foundation, a not for profit
24
organization formed in 2000. Utility other income, net for the twelve months
ended March 31, 2001 was comparable to 2000 results.
Utility Interest Expense
Utility interest expense increased $9.6 million and $18.2 million, respectively,
for the three and twelve months ended March 31, 2001, when compared to the prior
year. The increases were due primarily to interest related to the financing of
the acquisition of the Ohio operations, increased working capital requirements
resulting from extremely high natural gas prices, and higher average interest
rates on utility debt and short-term borrowings.
Utility Income Tax Expense
Federal and state income taxes related to utility operations increased $7.0
million and $9.6 million for the three and twelve months ended March 31, 2001,
respectively, compared to the prior year due primarily to higher pre-tax
earnings, partially offset by normal effective tax rates in 2001. The effective
tax rate in 2000 was higher as a result of the non-deductibility of certain
merger and integration costs.
Results of Non-regulated Operations
Before merger and integration costs (as described below) and the one time gain
on the restructuring of a non-regulated investment, non-regulated operations
contributed net income of $8.6 million, or $0.14 per share, for the three months
ended March 31, 2001, compared to $5.2 million, or $0.08 per share, for the same
period in 2000.
Before merger and integration costs (as described below) and the one time gain
on the restructuring of a non-regulated investment, non-regulated operations
contributed net income of $23.4 million, or $0.38 per share, for the twelve
months ended March 31, 2001, compared to $16.1 million, or $0.26 for the same
period in 2000.
The increases of $0.06 and $0.12 per share for the three and twelve months ended
March 31, 2001, respectively, is primarily driven by continued growth of the gas
marketing operations and the gain on sale of an investment.
Energy Services and Other Revenues
Revenues from Vectren's non-utility operations (primarily the operating
companies of its Energy Services, Utility Services and Communications groups)
for the three and twelve months ended March 31, 2001 were $272.0 million and
$679.9 million, respectively, compared to $85.6 million and $288.0 million in
2000. The significant increases over prior year amounts are primarily from
Energy Services' natural gas marketing operations resulting from higher prices
for natural gas reflected in sales to its customers during the periods and
increased volume.
Costs of Energy Services and Other Revenues
Cost of energy services and other, which is primarily the cost of natural gas
purchased for resale by Energy Services and project contract costs at Energy
Services and Communications, increased $183.5 million and $383.6 million for the
three and twelve months ended March 31, 2001, respectively, over 2000. The
increase is primarily due to higher per unit purchased gas costs and growth in
gas sales at Energy Services.
25
Non-regulated Margin
Margins for the three months and twelve months ended March 31, 2001 from
non-regulated operations increased $2.9 million, or 75 %, to $6.8 million for
the three month period and increased $8.3 million, or 56 %, to $23.2 million for
the twelve month period. Growth in margin for both the three and twelve month
periods principally results from continued growth of the company's natural gas
marketing operations, performance contracting and energy efficiency project
operations, and expanded coal mining operations.
Non-regulated Operating Expenses (excluding Costs of Energy Services and Other
Revenues)
Non-regulated operating expenses consist of other operating expenses,
depreciation and amortization, and taxes other than income taxes. For the three
and twelve months ended March 31, 2001, non-regulated operating expenses were
comparable to the prior year periods.
Non-regulated Other Income
Equity in Earnings of Unconsolidated Investments
Earnings from unconsolidated investments decreased $3.6 million and $3.0
million, respectively, for the three and twelve months ended March 31, 2001,
compared to the prior year. The decreases for both periods reflect an $8.0
million gain recognized in 2000 related to restructuring Communication's
investment in SIGECOM, partially offset by the current quarter gain on the sale
of one of Haddington Energy Partners, LP's (Haddington) investments.
In March 2001, Haddington, a non-regulated investment accounted for on the
equity method, sold its investment in Bear Paw Investments, LLC (Bear Paw) in
exchange for a combination of cash and securities. The cost of Haddington's Bear
Paw investment approximated $5.1 million, and the net proceeds received
approximated $18.1 million, resulting in a pre tax gain of $13.0 million.
Vectren recognized its portion of the pre-tax gain, allocated per the terms of
the partnership agreement, through equity earnings in unconsolidated
investments. The amount of the pre-tax gain recognized by Vectren approximates
$3.9 million.
Non-regulated Other Income, Net
Non-regulated other income, net decreased $0.4 million for the three months
ended March 31, 2001 and increased $2.8 million for the twelve months ended
March 31, 2001 when compared to the prior year primarily due to fluctuations in
interest income and leveraged lease income.
Non-regulated Interest Expense
Non-regulated interest expense increased by $0.9 million and $4.5 million,
respectively, for the three and twelve months ended March 31, 2001, when
compared to the prior year. The increases were due primarily to increased debt
to fund additional investments in non-regulated businesses.
Non-regulated Income Tax Expense
Federal and state income taxes related to non-regulated operations have
decreased $2.6 million and $8.4 million, respectively, for the three and twelve
months ended March 31, 2001, compared to the prior year. The decrease results
from lower pretax earnings and additional utilization of tax credits.
26
Other Operating Matters
New Accounting Principle and Cumulative Effect of Change in Accounting Principle
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
requires that every derivative instrument be recorded on the balance sheet as an
asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
SFAS 133, as amended, is effective for fiscal years beginning after June 15,
2000 and must be applied to derivative instruments and certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1998. Vectren has completed the
process of identifying all derivative instruments, determining fair market
values of these derivatives, designating and documenting hedge relationships,
and evaluating the effectiveness of those hedge relationships. As a result of
the successful completion of this process, Vectren adopted SFAS 133 as of
January 1, 2001.
SFAS 133 requires that as of the date of initial adoption, the difference
between the fair market value of derivative instruments recorded on the balance
sheet and the previous carrying amount of those derivatives be reported in net
income or other comprehensive income, as appropriate, as the cumulative effect
of a change in accounting principle in accordance with Accounting Principles
Board Opinion No. 20, "Accounting Changes."
A limited number of Vectren's contracts are defined as derivatives under SFAS
133. These derivatives are forward physical contracts for both the purchase and
sale of natural gas and electricity by its wholly owned gas marketing
subsidiary, SIGCORP Energy Services, Inc. (SES) and SIGECO, respectively, and an
interest rate swap.
SES's primary business is the buying and re-selling of physical natural gas to
the industrial market segment. SES manages its pricing risk by entering into
corresponding gas commodity contracts that ensure a reasonable matching of the
associated risk. In addition, SES takes physical delivery of gas in storage
facilities to ensure operational as well as price risk management of its forward
positions. Open positions in terms of price, volume and specified delivery
locations do occur and are managed by SES using the above instruments and
through management reporting. These commodity contracts and gas storage
facilities involve the normal purchase and sale of natural gas and therefore do
not require fair value accounting under SFAS 133. SES also utilizes price swap
agreements that are accounted for under SFAS 133 to mitigate price risk related
to certain forward physical contracts. These derivatives have not been
designated as hedges; accordingly, the changes in market value will be recorded
currently in earnings. The mark to market impact of these derivatives has been
reflected as part of the transition adjustment recorded to earnings on January
1, 2001.
SIGECO uses derivative and non-derivative forward contracts in its power
marketing operations to effectively manage the utilization of its generation
capacity. Certain forward sales contracts are used to sell the excess generation
capacity of SIGECO when demand conditions warrant this activity. These contracts
involve the normal sale of electricity and therefore do not require fair value
accounting under SFAS 133. Certain forward purchase and sale contracts entered
into as part of "buy-sell" transactions with other utilities and power marketers
are derivatives but do not qualify for hedge accounting. The mark to market
impact of these derivatives upon adoption of SFAS 133 is reflected as part of
the transition adjustment recorded to earnings on January 1, 2001.
27
The interest rate swap is used to hedge the exposure to interest rate risk
associated with VUHI's $150 million floating rate notes. The swap was entered
into concurrently with the issuance of the floating rate debt. Vectren has
formally documented the hedging relationship between the swap and floating rate
debt as well as its risk management objectives and strategies for undertaking
the hedging transaction. The swap has been designated as a cash flow hedge and
the mark to market impact has been reflected as part of the transition
adjustment recorded to other comprehensive income on January 1, 2001.
The cumulative impact of the adoption of SFAS 133 on January 1, 2001 is an
earnings gain of approximately $6.3 million, ($3.9 million after tax) due to the
derivatives used in SIGECO's power marketing operations. The impact of
derivatives used by SES and the interest rate swap was immaterial.
As of March 31, 2001, the fair value of power marketing derivative contracts
totals $11.8 million and is included in deferred charges, net on the Condensed
Consolidated Balance Sheets. The difference between the current market value and
the market value on the date of adoption of $5.5 million is included in
purchased electric energy in the Condensed Consolidated Statements of
Operations. The fair value of the interest rate swap is $1.4 million and is
included in other current liabilities on the Condensed Consolidated Balance
Sheets. The difference between the current market value and the market value on
the date of adoption of $1.4 million ($0.9 million after tax) is included in
accumulated other comprehensive income on the Condensed Consolidated Balance
Sheets and will be reclassified to interest expense by December 31, 2001.
Derivatives used by SES remain immaterial.
In addition to these wholly owned subsidiaries, ProLiance Energy, LLC, a 50 %
owned equity method investment, adopted SFAS 133 on August 31, 2000. The impact
of adoption on ProLiance is reflected in accumulated other comprehensive income
due to the nature of the derivatives used.
Realignment
Effective January 1, 2001, the utility operations announced the reorganization
of those operations into two primary business units: Energy Delivery and Power
Supply. During 2001, organizational alignment will occur along with the
development of management reporting processes. As a result, Vectren will report
utility segment information as Gas Utility Services and Electric Utility
Services.
Financial Condition
ProLiance Energy, LLC
ProLiance, a 50 % owned, non-regulated, energy marketing affiliate of Vectren,
began providing natural gas and related services to Indiana Gas, Citizens Gas
and Coke Utility (Citizens Gas) and others effective April 1, 1996. The sale of
gas and provision of other services to Indiana Gas by ProLiance is subject to
regulatory review through the quarterly gas cost adjustment (GCA) process
administered by the IURC.
On September 12, 1997, the IURC issued a decision finding the gas supply and
portfolio administration agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas to be consistent with the public interest and that
ProLiance is not subject to regulation by the IURC as a public utility. The
IURC's decision reflected the significant gas cost savings to customers obtained
through ProLiance's services and suggested that all material provisions of the
agreements between ProLiance and the utilities are reasonable. Nevertheless,
28
with respect to the pricing of gas commodity purchased from ProLiance, the
pricing of fees paid by ProLiance to the utilities for the prospect of using
pipeline entitlements if and when they are not required to serve the utilities'
firm customers, and the pricing of fees paid by the utilities to ProLiance for
portfolio administration services, the IURC concluded that additional review in
the GCA process would be appropriate and directed that these matters be
considered further in the pending, consolidated GCA proceeding involving Indiana
Gas and Citizens Gas. Through a series of appeals, the order was finally
considered by the Indiana Supreme Court.
On September 22, 2000, the Indiana Supreme Court issued a decision affirming the
IURC's decision on ProLiance in all respects. The IURC has recently commenced
the processing of these further proceedings by conducting a prehearing
conference. Discovery is ongoing in the further proceeding at the current time.
Until the three pricing issues reserved by the IURC are resolved, Vectren will
continue to reserve a portion of its share of ProLiance earnings.
In August 1998, Indiana Gas, Citizens Gas and ProLiance each received a Civil
Investigative Demand (CID) from the United States Department of Justice
requesting information relating to Indiana Gas' and Citizens Gas' relationship
with and the activities of ProLiance. The Department of Justice issued the CID
to gather information regarding ProLiance's formation and operations, and to
determine if trade or commerce has been restrained. Indiana Gas has provided all
information requested and management continues to believe that there are no
significant issues in this matter.
Indiana Gas continues to record gas costs in accordance with the terms of the
ProLiance contract and Vectren continues to record its proportional share of
ProLiance's earnings. Pre-tax income of $5.6 million and $3.4 million was
recognized as ProLiance's contribution to earnings for the three months ended
March 31, 2001 and 2000, respectively. Pre-tax income of $7.9 million and $5.8
million was recognized as ProLiance's contribution to earnings for the twelve
months ended March 31, 2001 and 2000, respectively. Earnings recognized from
ProLiance are included in equity in earnings of unconsolidated investments on
the Condensed Consolidated Statements of Operations. At March 31, 2001, March
31, 2000 and December 31, 2000, Vectren has reserved approximately $2.7 million,
$2.2 million and $2.4 million, respectively, of ProLiance's earnings after tax
pending resolution of the remaining issues. The reserve represents 10% of
ProLiance's pretax earnings and serves as management's best estimate of
potential exposure arising from the three pricing issues.
Environmental Matters
Clean Air Act
NOx SIP Call Matter. In October 1997, the United States Environmental Protection
Agency (USEPA) proposed a rulemaking that could require uniform nitrogen oxide
(NOx) emissions reductions of 85 % by utilities and other large sources in a
22-state region spanning areas in the Northeast, Midwest, Great Lakes,
Mid-Atlantic and South. This rule is referred to as the "NOx SIP call." The
USEPA provided each state a proposed budget of allowed NOx emissions, a key
ingredient of ozone, requiring a significant reduction of such emissions. Under
that budget, utilities may be required to reduce NOx emissions to a rate of 0.15
lb/mmBtu below levels already imposed by Phase I and Phase II of the Clean Air
Act Amendments of 1990 (the Act).
On October 27, 1998, 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). The final rule requires that 23 states and jurisdictions must file
revised state implementation plans (SIPs) with the USEPA by no later than
29
September 30, 1999, which was essentially unchanged from its October 1997,
proposed rule. The USEPA has encouraged states to target utility coal-fired
boilers for the majority of the reductions required, especially NOx emissions.
Northeastern states have claimed that ozone transport from midwestern states
(including Indiana) is the primary reason for their ozone concentration
problems. Although this premise is challenged by others based on various air
quality modeling studies, including studies commissioned by the USEPA, the USEPA
intends to incorporate a regional control strategy to reduce ozone transport.
The USEPA's final ruling is being litigated in the federal courts by
approximately ten midwestern states, including Indiana.
On March 3, 2000, the United States Circuit Court of Appeals for the District of
Columbia (D.C. Court of Appeals) upheld the USEPA's October 27, 1998 final rule
requiring 23 states and the District of Columbia to file revised SIPs with the
USEPA. Numerous petitioners, including several states, filed petitions for
rehearing with the D.C. Court of Appeals. On June 22, 2000, the D.C. Court of
Appeals denied petition for rehearing en banc. Following this decision, on
August 30, 2000, the D.C. Court of Appeals issued an extension of the SIP Call
implementation deadline to May 31, 2004. On September 20, 2000, petitioners
filed a Petition of Writ of Certiori with the United States Supreme Court
requesting review of the D.C. Court of Appeals March 3, 2000 Order, which was
denied. Therefore, SIGECO's compliance date remains May 31, 2004.
The proposed NOx emissions budget for Indiana stipulated in the USEPA's final
ruling requires a 36 % reduction in total NOx emissions from Indiana. The
ruling, pending finalization of state rule making, could require SIGECO to lower
its system-wide emissions by approximately 70 %. Depending on the level of
system-wide emissions reductions ultimately required, and the control technology
utilized to achieve the reductions, the estimated construction costs of the
control equipment could reach $160 million, which are expected to be expended
during the 2001-2004 period, and related additional operation and maintenance
expenses could be an estimated $8 million to $10 million, annually. No accrual
has been recorded by the company related to the NOx SIP Call matter. The rules
governing NOx emissions, once finalized, are to be applied prospectively.
Culley Generating Station Investigation Matter. 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 performance standards should be applied to the
modifications and whether the best available control technology was, or should
have been, used. Numerous other electric utilities were, and are currently,
being investigated by the USEPA under an industry-wide review for similar
compliance. SIGECO responded to all of the USEPA's data requests during the
investigation. 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 the 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 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. The USEPA alleges that, beginning in 1992, SIGECO violated the
Act by: (i) making modifications to its Culley Generating Station in Yankeetown,
Indiana without obtaining required permits; (ii) making major modifications to
the Culley Generating Station without installing the best available emission
control technology; and (iii) failing to notify the USEPA of the modifications.
In addition, the lawsuit alleges that the modifications to the Culley Generating
Station required SIGECO to begin to comply with federal new source performance
standards.
30
SIGECO believes it performed only maintenance, repair and replacement activities
at the Culley Generating Station, as allowed under the Act. Because proper
maintenance does not require permits, application of the best available emission
control technology, notice to the USEPA, or compliance with new source
performance standards, SIGECO believes that the lawsuit is without merit, and
intends to vigorously defend the lawsuit.
The lawsuit seeks fines against SIGECO in the amount of $27,500 per day per
violation. The lawsuit does not specify the number of days or violations the
USEPA believes occurred. The lawsuit also seeks a court order requiring SIGECO
to install the best available emissions technology at the Culley Generating
Station. If the USEPA is successful in obtaining an order, SIGECO estimates that
it would incur capital costs of approximately $40 million to $50 million
complying with the order. In the event that SIGECO is required to install
system-wide NOx emission control equipment, as a result of the NOx SIP call
issue, the majority of the $40 million to $50 million for best available
emissions technology at Culley Generating Station would be included in the $160
million expenditure previously discussed.
The USEPA has also issued an administrative notice of violation to SIGECO making
the same allegations, but alleging that violations began in 1977.
While it is possible that SIGECO could be subjected to criminal penalties if the
Culley Generating Station continues to operate without complying with the new
source performance standards and the allegations are determined by a court to be
valid, SIGECO believes such penalties are unlikely as the USEPA and the electric
utility industry have a bonafide dispute over the proper interpretation of the
Act. Accordingly, no accrual has been recorded by the company, and SIGECO
anticipates at this time that the plant will continue to operate while the
matter is being decided.
Information Request. On January 23, 2001, SIGECO received an information request
from the USEPA under Section 114(a) of the Act for historical operational
information on the Warrick and A.B. Brown generating stations. SIGECO has
provided all information requested, and management believes that no significant
issues will arise from this request.
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 the 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 Indiana Department of Environmental Management
(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 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 expert 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
31
time, Indiana Gas has accrued costs that it reasonably expects to incur totaling
approximately $20.3 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, which serve to limit Indiana
Gas' share of response costs at these 19 sites to between 20 and 50 percent.
With respect to insurance coverage, as of March 31, 2001, Indiana Gas has
received and recorded settlements from all known insurance carriers in an
aggregate amount approximating its $20.3 million accrual.
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.
Rate and Regulatory Matters
Gas Cost Proceedings
Commodity prices for natural gas purchases have increased significantly,
primarily due to a colder winter, increased demand and tighter supplies.
Vectren's utility subsidiaries are allowed full recovery of such changes in
purchased gas costs from their retail customers through commission-approved gas
cost adjustment mechanisms, and margin on gas sales should not be impacted.
However, in 2001, Vectren 's utility subsidiaries have experienced and may
continue to experience higher working capital requirements, increased expenses
including unrecoverable interest costs, uncollectibles and unaccounted for gas,
and some level of price sensitive reduction in volumes sold.
On October 11, 2000, Indiana Gas filed for approval of its regular quarterly
GCA. In early December, the IURC issued an interim order approving the request
by Indiana Gas for a GCA factor for December 2000. On January 4, 2001, the IURC
approved the January and February 2001 GCA as filed. The order also addressed
the claim by the Indiana Office of Utility Consumer Counselor (OUCC) that a
portion of the requested GCA be disallowed because Indiana Gas should have
entered into additional commitments for this winter's gas supply in late 1999
and early 2000. In procuring gas supply for this winter, Indiana Gas followed
the gas procurement practices that it had employed over the last several years.
In response to the claim by the OUCC the IURC found that there should be a $3.8
million disallowance related to gas procurement for the winter season. As a
result, Indiana Gas recognized a pre-tax charge of $3.8 million in December
2000. Both Indiana Gas and the OUCC appealed the ruling. The Citizens Action
Coalition of Indiana, Inc.(CAC), a not for profit consumer advocate, also filed
with the IURC a petition to intervene and a notice of appeal of the order.
In March 2001, Vectren, Indiana Gas and SIGECO reached agreement with the OUCC
and CAC regarding the IURC Order. As part of the agreement, among other things,
the companies agreed to contribute an additional $1.9 million to the state of
Indiana's Low Income Heating Assistance Program in 2001 and to credit $3.3
million of the $3.8 million disallowed amount to Indiana Gas customers' April
2001 utility bills in exchange for both the OUCC and the CAC dropping their
appeals of the IURC Order. In April 2001, the IURC issued an order approving the
settlement. The contribution to Indiana's Low Income Heating Assistance Program
totaling $1.9 million were made in 2001 and were charged to operations and
maintenance expense. There was no impact to 2000 operations as a result of this
contribution.
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Purchased Power Costs
As a result of the ongoing appeal of a generic order issued by the IURC in
August 1999 regarding guidelines for the recovery of purchased power costs,
SIGECO entered into a settlement agreement with the OUCC that provides certain
terms with respect to the recoverability of such costs. The settlement,
originally approved by the IURC on August 9, 2000, has been extended by
agreement through March 2002. Under the settlement, SIGECO can recover the
entire cost of purchased power up to an established benchmark, and during forced
outages, SIGECO will bear a limited share of its purchased power costs
regardless of the market costs at that time. Based on this agreement, SIGECO
believes it has limited its exposure to unrecoverable purchased power costs.
Liquidity and Capital Resources
Vectren's capitalization objective is 40-50 % permanent capitalization. This
objective may have varied, and will vary, from time to time, depending on
particular business opportunities and seasonal factors that affect the company's
operation. Vectren's permanent component was 56 %, 56 % and 51 % of total
capitalization, including current maturities of long-term debt, at March 31,
2001, March 31, 2000 and December 31, 2000, respectively. The common equity
component of 56 % at March 31, 2001 is expected to be reduced in 2001 upon the
refinancing of a substantial amount of short-term debt to long-term debt.
Short-term cash working capital is required primarily to finance customer
accounts receivable, unbilled utility revenues resulting from cycle billing, gas
in underground storage, prepaid gas delivery services, capital expenditures and
investments until permanently financed. Short-term borrowings tend to be
greatest during the summer when accounts receivable and unbilled utility
revenues related to electricity are highest and gas storage facilities are being
refilled. However, working capital requirements have been significantly higher
during the fourth quarter of 2000 and the first quarter of 2001 due to the
higher natural gas costs and the acquisition of the Ohio operations.
Cash Flow from Operations
Vectren's primary source of liquidity to fund working capital requirements has
been cash generated from operations, which totaled approximately $76.5 million
and $104.6 million for the three months ended March 31, 2001 and 2000,
respectively, and $9.3 million and $149.1 million for the twelve months ended
March 31, 2001 and 2000, respectively.
Cash flow from operations decreased during the three and twelve months ended
March 31, 2001 compared to 2000 by $28.1 million and $139.8, respectively, due
primarily to increased working capital requirements due to higher gas costs,
offset by additional net income.
Vectren expects the majority of its capital expenditures and debt security
redemptions to be provided by internally generated funds.
Financing Activities
Cash flow required for financing activities of $15.6 million for the three
months ended March 31, 2001 includes $127.5 million of reductions in net
borrowings and $17.2 million common stock dividends, offset by the issuance of
$129.4 million of common stock. This is a decrease in cash required for
financing activities when compared to the three months ended March 31, 2000 of
$35.2 million. The decrease in cash requirements is primarily due to decreased
payments on short-term borrowings using internally generated funds in 2001.
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Cash flow from financing activities of $676.3 million for the twelve months
ended March 31, 2001 includes $606.8 million of additional net borrowings and
the issuance of common stock of $133.4 million offset by $62.5 million of common
stock dividends. This is an increase of $644.9 million over the same period in
the prior year due primarily to financing acquisitions with commercial paper and
increased working capital requirements.
SIGECO has $53.7 million of adjustable rate pollution control series first
mortgage bonds which could, at the election of the bondholder, be tendered to
SIGECO when the interest rates are reset. Prior to the latest reset on March 1,
2001, the interest rates were reset annually, and the bonds subject to tender
were presented in the Condensed Consolidated Balance Sheets as current
liabilities. Effective March 1, 2001, the bonds were reset for a five-year
period and have been classified as long-term debt. Resulting from the reset, the
interest rate on the $31.5 million Series A bonds increased from 4.30 % to 4.75
%, and the interest rate on the $22.2 million Series C bonds increased from 4.45
% to 5.00 %.
On January 19, 2001, Vectren filed a registration statement with the Securities
and Exchange Commission with respect to a public offering of 5.5 million shares
of new common stock. On February 8, 2001, the registration became effective and
agreement was reached to sell 5.5 million shares to a group of underwriters. On
February 14, the shares were sold, at which time, the underwriters exercised
their over-allotment option to sell an additional 825,000 shares for a total of
about 6.3 million shares. The net proceeds of $129.4 million were used to repay
outstanding commercial paper utilized for recent acquisitions.
At March 31, 2001, Vectren has approximately $995 million of short-term
borrowing capacity, including $814 million for its regulated operations and $181
million for its non-regulated operations, of which approximately $285 million is
available for regulated operations and $71 million is available for
non-regulated operations. On October 31, 2000, the acquisition of the Ohio
operations was completed for a purchase price of approximately $465 million.
Commercial paper was issued to fund the purchase and will be replaced over time
with permanent financing.
At March 31, 2001, Indiana Gas was not in compliance with the total indebtedness
to capitalization ratio contained in its back up credit facility for its
commercial paper program. The non-compliance resulted from the indebtedness
incurred to purchase its ownership interest in the Ohio operations and working
capital requirements associated with higher gas costs. A waiver on the Indiana
Gas facility has been obtained to waive the non-compliance through and including
March 31, 2001 which effectively waives the noncompliance up to June 30, 2001,
the date of the next quarterly test of financial covenants. Vectren anticipates
making an equity investment in Indiana Gas to bring Indiana Gas back into
compliance. No amount is outstanding under the back up facility.
Indiana Gas' and SIGECO's credit ratings on outstanding debt at March 31, 2001
were A/A2 and A/A1, respectively. VUHI's commercial paper related to the October
2000 Ohio operations acquisition has a credit rating of A-1/P-2. Indiana Gas'
commercial paper retains an A-1/P-1 rating.
Capital Expenditures and Other Investment Activities
Cash required for investing activities of $52.9 million for the three months
ended March 31, 2001 includes $46.2 million of capital expenditures. Investing
activities for the three months ended March 31, 2000 were $51.5 million. The
increase from the prior period results from additional capital expenditures,
offset by changes in investment activity in partnerships and notes receivable.
Cash required for investing activities of $682.1 million for the twelve months
ended March 31, 2001 includes $463.3 million required for the Ohio operations
acquisition, $169.6 million of capital expenditures and $46.9 million of
investments in partnerships, other corporations and notes receivable. This is an
34
increase of $469.2 million over the same period in the prior year due primarily
to the Ohio operations acquisition.
New construction, normal system maintenance and improvements, and information
technology investments needed to provide service to a growing customer base will
continue to require substantial expenditures. Capital expenditures and
non-regulated investments for the remainder of 2001 are estimated at $249
million.
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, including, but
not limited to Vectren's realization of net merger savings and ProLiance, 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
Vectren and its subsidiaries' actual results to differ materially from those
contemplated in any forward-looking statements included, among others, the
following:
|X| 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.
|X| Increased competition in the energy environment including effects of
industry restructuring and unbundling.
|X| 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.
|X| 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 natural gas
transmission, gathering and processing, and similar entities with
regulatory oversight.
|X| Economic conditions including inflation rates and monetary
fluctuations.
35
|X| 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.
|X| Availability or cost of capital, resulting from changes in Vectren
Corporation and its subsidiaries, interest rates, and securities
ratings or market perceptions of the utility industry and
energy-related industries.
|X| Employee workforce factors including changes in key executives,
collective bargaining agreements with union employees, or work
stoppages.
|X| Legal and regulatory delays and other obstacles associated with
mergers, acquisitions, and investments in joint ventures.
|X| 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.
|X| Changes in federal, state or local legislature requirements, such as
changes in tax laws or rates, environmental laws and regulations.
Vectren and its subsidiaries undertake 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.
36
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 CORPORATION
Registrant
August 27, 2001 /s/Jerome A. Benkert, Jr.
-------------------------
Jerome A. Benkert, Jr.
Executive Vice President and
Chief Financial Officer
/s/M. Susan Hardwick
-------------------------
M. Susan Hardwick
Vice President and Controller