Exhibit 99.1
SOUTHERN INDIANA GAS & ELECTRIC COMPANY
INTERIM REPORTING PACKAGE
For the quarterly period ended September 30, 2007
Contents
Page Number | ||
Financial Statements (Unaudited) | ||
Southern Indiana Gas & Electric Company | ||
Condensed Balance Sheets | 2-3 | |
Condensed Statements of Income | 4 | |
Condensed Statements of Cash Flows | 5 | |
Segment Information | 6 | |
Results of Operations | 7 | |
Basis of Presentation
The interim condensed financial statements of Southern Indiana Gas & Electric Company (SIGECO, Vectren South, or the Company) included in this report have been prepared without audit. The Company believes that the information in these interim condensed financial statements reflects all adjustments necessary to fairly state the results of the periods reported. These interim condensed financial statements should be read in conjunction with the Company’s audited annual financial statements for the year ended December 31, 2006, filed on Form 8-K on March 23, 2007, under Vectren Corporation (Vectren) and Vectren Utility Holdings, Inc. (Utility Holdings), the parent companies of SIGECO, as well as the interim condensed consolidated financial statements filed on Forms 10-Q for the quarter ended September 30, 2007 for Vectren and Utility Holdings, filed on November 2, 2007 and November 9, 2007, respectively. Vectren and Utility Holdings make available their Securities and Exchange Commission filings and recent annual reports free of charge through its website at www.vectren.com. Because of the seasonal nature of the Company’s utility operations, the results shown on a quarterly basis are not necessarily indicative of annual results.
Frequently Used Terms
AFUDC: allowance for funds used during construction | MMDth / MDth: millions/ thousands of dekatherms |
APB: Accounting Principles Board | MMBTU: millions of British thermal units |
EITF: Emerging Issues Task Force | MW: megawatts |
FASB: Financial Accounting Standards Board | MWh / GWh: megawatt hours / thousands of megawatt hours (gigawatt hours) |
FERC: Federal Energy Regulatory Commission | NOx: nitrogen oxide |
IDEM: Indiana Department of Environmental Management | OUCC: Indiana Office of the Utility Consumer Counselor |
IURC: Indiana Utility Regulatory Commission | SFAS: Statement of Financial Accounting Standards |
MCF / BCF: thousands / billions of cubic feet | USEPA: United States Environmental Protection Agency |
FINANCIAL STATEMENTS
SOUTHERN INDIANA GAS & ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
(Unaudited – In thousands)
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Utility Plant | ||||||||
Original cost | $ | 2,118,721 | $ | 2,025,108 | ||||
Less: accumulated depreciation & amortization | 852,661 | 817,959 | ||||||
Net utility plant | 1,266,060 | 1,207,149 | ||||||
Current Assets | ||||||||
Cash & cash equivalents | 1,953 | 1,063 | ||||||
Accounts receivable - less reserves of $1,587 & | ||||||||
$1,425, respectively | 45,814 | 41,380 | ||||||
Receivables due from other Vectren companies | 287 | 37 | ||||||
Accrued unbilled revenues | 23,911 | 24,441 | ||||||
Inventories | 64,265 | 60,990 | ||||||
Recoverable fuel & natural gas costs | - | 1,779 | ||||||
Prepayments & other current assets | 18,872 | 15,056 | ||||||
Total current assets | 155,102 | 144,746 | ||||||
Investment in unconsolidated affiliates | 150 | 150 | ||||||
Other investments | 7,234 | 6,969 | ||||||
Nonutility property - net | 3,846 | 3,514 | ||||||
Goodwill | 5,557 | 5,557 | ||||||
Regulatory assets | 81,883 | 67,634 | ||||||
Other assets | 4,849 | 5,159 | ||||||
TOTAL ASSETS | $ | 1,524,681 | $ | 1,440,878 |
SOUTHERN INDIANA GAS & ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
(Unaudited – In thousands)
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
LIABILITIES & SHAREHOLDER'S EQUITY | ||||||||
Common Shareholder's Equity | ||||||||
Common stock (no par value) | $ | 293,263 | $ | 293,263 | ||||
Retained earnings | 289,066 | 279,699 | ||||||
Accumulated other comprehensive income | 455 | 851 | ||||||
Total common shareholder's equity | 582,784 | 573,813 | ||||||
Long-term debt payable to third parties - net of current | ||||||||
maturities & debt subject to tender | 226,193 | 226,271 | ||||||
Long-term debt payable to Utility Holdings | 223,182 | 223,182 | ||||||
Total long-term debt, net | 449,375 | 449,453 | ||||||
Current Liabilities | ||||||||
Accounts payable | 30,731 | 47,741 | ||||||
Accounts payable to affiliated companies | 4,967 | 11,806 | ||||||
Payables to other Vectren companies | 13,372 | 14,205 | ||||||
Refundable fuel & natural gas costs | 4,083 | - | ||||||
Accrued liabilities | 40,831 | 30,481 | ||||||
Short-term borrowings payable to Utility Holdings | 138,694 | 51,303 | ||||||
Total current liabilities | 232,678 | 155,536 | ||||||
Deferred Income Taxes & Other Liabilities | ||||||||
Deferred income taxes | 130,665 | 143,285 | ||||||
Regulatory liabilities | 63,077 | 59,117 | ||||||
Deferred credits & other liabilities | 66,102 | 59,674 | ||||||
Total deferred credits & other liabilities | 259,844 | 262,076 | ||||||
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY | $ | 1,524,681 | $ | 1,440,878 | ||||
SOUTHERN INDIANA GAS & ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited – In thousands)
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
OPERATING REVENUES | ||||||||||||||||
Electric utility | $ | 143,519 | $ | 123,212 | $ | 361,584 | $ | 324,381 | ||||||||
Gas utility | 13,756 | 15,353 | 91,108 | 92,921 | ||||||||||||
Total operating revenues | 157,275 | 138,565 | 452,692 | 417,302 | ||||||||||||
COST OF OPERATING REVENUES | ||||||||||||||||
Cost of fuel & purchased power | 50,548 | 46,773 | 129,511 | 115,823 | ||||||||||||
Cost of gas sold | 3,896 | 5,141 | 61,098 | 62,981 | ||||||||||||
Total cost of operating revenues | 54,444 | 51,914 | 190,609 | 178,804 | ||||||||||||
TOTAL OPERATING MARGIN | 102,831 | 86,651 | 262,083 | 238,498 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Other operating | 38,111 | 34,043 | 103,259 | 95,420 | ||||||||||||
Depreciation & amortization | 18,265 | 16,914 | 53,544 | 50,219 | ||||||||||||
Taxes other than income taxes | 4,377 | 3,809 | 12,619 | 11,443 | ||||||||||||
Total operating expenses | 60,753 | 54,766 | 169,422 | 157,082 | ||||||||||||
OPERATING INCOME | 42,078 | 31,885 | 92,661 | 81,416 | ||||||||||||
Other income-net | 30 | 986 | 2,756 | 2,429 | ||||||||||||
Interest expense | 8,699 | 7,185 | 24,456 | 21,148 | ||||||||||||
INCOME BEFORE INCOME TAXES | 33,409 | 25,686 | 70,961 | 62,697 | ||||||||||||
Income taxes | 13,735 | 9,539 | 28,287 | 24,423 | ||||||||||||
NET INCOME | $ | 19,674 | $ | 16,147 | $ | 42,674 | $ | 38,274 |
SOUTHERN INDIANA GAS & ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited – In thousands)
Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | $ | 56,722 | $ | 86,245 | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from: | ||||||||
Long-term debt | - | 75,000 | ||||||
Additional capital contribution | - | 20,000 | ||||||
Requirements for: | ||||||||
Dividends to parent | (33,306 | ) | (30,093 | ) | ||||
Retirement of long-term debt | (199 | ) | (26 | ) | ||||
Net change in short-term borrowings | 87,391 | (49,898 | ) | |||||
Net cash flows from financing activities | 53,886 | 14,983 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from other investing activities | 13 | - | ||||||
Requirements for capital expenditures, | ||||||||
excluding AFUDC equity | (109,731 | ) | (101,776 | ) | ||||
Net cash flows from investing activities | (109,718 | ) | (101,776 | ) | ||||
Net change in cash & cash equivalents | 890 | (548 | ) | |||||
Cash & cash equivalents at beginning of period | 1,063 | 1,123 | ||||||
Cash & cash equivalents at end of period | $ | 1,953 | $ | 575 |
SEGMENT INFORMATION
Information related to the Company’s business segments is summarized below:
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Revenues | ||||||||||||||||
Electric Utility Services | $ | 143,519 | $ | 123,212 | $ | 361,584 | $ | 324,381 | ||||||||
Gas Utility Services | 13,756 | 15,353 | 91,108 | 92,921 | ||||||||||||
Total Revenues | $ | 157,275 | $ | 138,565 | $ | 452,692 | $ | 417,302 | ||||||||
Profitability Measure | ||||||||||||||||
Net Income | ||||||||||||||||
Electric Utility Services | $ | 18,609 | $ | 14,185 | $ | 39,596 | $ | 33,601 | ||||||||
Gas Utility Services | 1,065 | 1,962 | 3,078 | 4,673 | ||||||||||||
Net Income | $ | 19,674 | $ | 16,147 | $ | 42,674 | $ | 38,274 |
RESULTS OF OPERATIONS
Executive Summary of Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and notes thereto and the quarterly reports of Vectren and Utility Holdings filed with the SEC on Forms 10-Q on November 2, 2007 and November 9, 2007, respectively.
SIGECO’s earnings for the quarter ended September 30, 2007, were $19.7 million in 2007 compared to $16.1 million in 2006 and $42.7 million for the nine months ended September 30, 2007 compared to $38.3 million in 2006. The increases in earnings resulted from gas and electric base rate increases implemented in August 2007 and favorable weather. The increase was offset somewhat by increased operating costs including depreciation expense.
In the Company’s electric service territory which is not protected by a weather normalization mechanism, management estimates the margin impact of weather experienced during the third quarter of 2007 to be $5.2 million favorable compared to normal and $5.9 million favorable compared to the prior year. Year to date, management estimates the margin impact of weather experienced during 2007 to be $6.6 million favorable compared to normal and $10.1 million favorable compared to the prior year.
The Company generates revenue primarily from the delivery of natural gas and electric service to its customers. The primary source of cash flow results from the collection of customer bills and the payment for goods and services procured for the delivery of gas and electric services. The results are impacted by weather patterns in its electric service territory and general economic conditions both in its service territory as well as nationally.
Vectren has in place a disclosure committee that consists of senior management as well as financial management. The committee is actively involved in the preparation and review of SIGECO’s parent companies’ SEC filings.
Significant Fluctuations
Margin
Throughout this discussion, the terms Gas Utility margin and Electric Utility margin are used. Gas Utility margin is calculated as Gas utility revenues less the Cost of gas. Electric Utility margin is calculated as Electric utility revenues less Cost of fuel & purchased power. These measures exclude Other operating expenses, Depreciation and amortization, and Taxes other than income taxes, which are included in the calculation of operating income. The Company believes Gas Utility and Electric Utility margins are better indicators of relative contribution than revenues since gas prices and fuel costs can be volatile and are generally collected on a dollar-for-dollar basis from customers.
Sales of natural gas and electricity to residential and commercial customers are seasonal and are impacted by weather. Trends in average use among natural gas residential and commercial customers have tended to decline in recent years as more efficient appliances and furnaces are installed and the price of natural gas has increased. Normal temperature adjustment (NTA) and lost margin recovery mechanisms largely mitigate the effect on Gas Utility margin that would otherwise be caused by variations in volumes sold due to weather and changing consumption patterns. SIGECO’s natural gas territory has had an NTA since 2005, and lost margin recovery began when new base rates went into effect on August 1, 2007. Electric use among residential and commercial classes has remained relatively stable. SIGECO’s electric service territory does not have weather normalization and its tariffs generally do not provide for lost margin recovery.
Gas and electric margin generated from sales to large customers (generally industrial and other contract customers) is primarily impacted by overall economic conditions. Margin is also impacted by the collection of state mandated taxes, which fluctuate with gas and fuel costs, as well as other tracked expenses. Certain operating costs associated with operating environmental compliance equipment were also tracked prior to their recovery in base rates that went into effect on August 15, 2007. The August SIGECO rate orders also provide for the tracking of MISO revenues and costs, as well as the gas cost component of bad debt expense and unaccounted for gas. Electric generating asset optimization activities are primarily affected by market conditions, the level of excess generating capacity, and electric transmission availability. Following is a discussion and analysis of margin generated from regulated utility operations.
Electric Utility Margin (Electric utility revenues less Cost of fuel and purchased power)
Electric Utility margin by revenue type follows:
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Electric utility revenues | $ | 143,519 | $ | 123,212 | $ | 361,584 | $ | 324,381 | ||||||||
Cost of fuel & purchased power | 50,548 | 46,773 | 129,511 | 115,823 | ||||||||||||
Total electric utility margin | $ | 92,971 | $ | 76,439 | $ | 232,073 | $ | 208,558 | ||||||||
Margin attributed to: | ||||||||||||||||
Residential & commercial | $ | 64,400 | $ | 49,364 | $ | 147,878 | $ | 125,582 | ||||||||
Industrial | 21,688 | 18,924 | 56,463 | 53,390 | ||||||||||||
Municipalities & other | 4,365 | 6,619 | 14,632 | 18,920 | ||||||||||||
Subtotal retail & firm wholesale | $ | 90,453 | $ | 74,907 | $ | 218,973 | $ | 197,892 | ||||||||
Asset optimization | $ | 2,518 | $ | 1,532 | $ | 13,100 | $ | 10,666 | ||||||||
Electric volumes sold in MWh attributed to: | ||||||||||||||||
Residential & commercial customers | 954,385 | 847,068 | 2,357,648 | 2,152,463 | ||||||||||||
Industrial customers | 638,760 | 674,649 | 1,942,461 | 1,983,877 | ||||||||||||
Municipalities & other | 192,045 | 182,880 | 483,468 | 494,642 | ||||||||||||
Total retail & firm wholesale volumes sold | 1,785,190 | 1,704,597 | 4,783,577 | 4,630,982 |
Retail & Firm Wholesale Margin
Electric retail and firm wholesale utility margins were $90.5 million and $219.0 million for the three and nine months ended September 30, 2007. These represent increases over the prior year periods of $15.6 million and $21.1 million, respectively. Management estimates the period over period increases in usage by residential and commercial customers due to weather to be $5.9 million in the quarter and $10.1 million year to date. The base rate increase that went into effect on August 15, 2007, produced incremental margin of $6.4 million, and recovery of pollution control investments and expenses increased margin $1.3 million in the quarter and $3.2 million year over year. Impacts of weather on volumes sold were offset in the quarter by a large industrial customer’s planned outage.
Margin from Asset Optimization Activities
Periodically, generation capacity is in excess of that needed to serve native load and firm wholesale customers. The Company markets and sells this unutilized generating and transmission capacity to optimize the return on its owned assets. On an annual basis, a majority of the margin generated from these activities is associated with wholesale off-system sales, and substantially all off-system sales occur into the MISO day-ahead market. Following is a reconciliation of asset optimization activity:
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(In millions) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Off-system sales | $ | 1,005 | $ | 1,106 | $ | 9,880 | $ | 11,855 | ||||||||
Transmission system sales | 1,513 | 1,021 | 3,220 | 2,521 | ||||||||||||
Other | - | (595 | ) | - | (3,710 | ) | ||||||||||
Total asset optimization | $ | 2,518 | $ | 1,532 | $ | 13,100 | $ | 10,666 |
For the three and nine months ended September 30, 2007, net asset optimization margins were $2.5 million and $13.1 million, which represents increases of $1.0 million and $2.4 million, compared to 2006. The increases are primarily due to losses on financial contracts experienced in 2006 offset partially by lower availability of generating units for off system sales in 2007, due largely to the retirement of 50 MW of owned generation on December 31, 2006. Year to date off-system sales totaled 571.7 GWh in 2007, compared to 755.0 GWh in 2006.
Gas Utility Margin (Gas utility revenues less Cost of gas sold)
Gas Utility margin and throughput by customer type follows:
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(In thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Gas utility revenues | $ | 13,756 | $ | 15,353 | $ | 91,108 | $ | 92,921 | ||||||||
Cost of gas sold | 3,896 | 5,141 | 61,098 | 62,981 | ||||||||||||
Total gas utility margin | $ | 9,860 | $ | 10,212 | $ | 30,010 | $ | 29,940 | ||||||||
Margin attributed to: | ||||||||||||||||
Residential & commercial customers | $ | 5,428 | $ | 5,495 | $ | 22,260 | $ | 21,508 | ||||||||
Industrial customers | 1,175 | 1,311 | 3,815 | 3,766 | ||||||||||||
Other | 3,257 | 3,406 | 3,935 | 4,666 | ||||||||||||
Sold & transported volumes in MDth attributed to: | ||||||||||||||||
Residential & commercial customers | 1,091 | 1,088 | 7,566 | 6,662 | ||||||||||||
Industrial customers | 3,716 | 4,326 | 13,264 | 13,384 | ||||||||||||
Total sold & transported volumes | 4,807 | 5,414 | 20,830 | 20,046 |
For the three and nine months ended September 30, 2007, Gas Utility margins were $9.9 million and $30.0 million, respectively, and are relatively flat compared to the prior year periods. Variations in unaccounted for gas offset increases in base rates and increased usage. The average cost per dekatherm of gas purchased for the nine months ended September 30, 2007, was $8.58 compared to $9.55 in 2006.
Operating Expenses
Other Operating Expenses
For the three and nine months ended September 30, 2007, Other operating expenses were $38.1 million and $103.3 million, which represent increases of $4.1 million and $7.8 million, compared to 2006. Pass-through costs, including costs funding new Indiana energy efficiency programs that are recovered in utility margin, increased $0.1 million in the quarter and $0.5 million year over year. Third quarter planned outage costs associated with a jointly owned turbine resulted in $2.5 million of increased costs. The remaining increases are primarily due to increased wage and benefit costs, other operating cost increases, and timing of expenses.
Depreciation & Amortization
For the three and nine months ended September 30, 2007, Depreciation and amortization expenses were $18.3 million and $53.5 million, which represents increases of $1.4 million and $3.3 million compared to 2006. The increases were primarily due to increased utility plant and also include $0.5 million of amortization associated with electric demand side management costs permitted to be recovered pursuant to the August 15th electric base rate order.
Taxes Other Than Income Taxes
For the three and nine months ended September 30, 2007, Taxes other than income taxes were $4.4 million and $12.6 million, which represent increases of $0.6 million and $1.2 million compared to 2006. The year to date increase results primarily from increased property taxes and higher revenues subject to taxes.
Other Income-Net
Other-net quarter over quarter reflects a decrease of $0.9 million while the year to date period increased approximately $0.3 million compared to the prior year, primarily due to the capitalization of funds used during construction.
Interest Expense
For the three and nine months ended September 30, 2007, Interest expense was $8.7 million and $24.5 million, which represents increases of $1.5 million and $3.3 million compared to 2006. The increases reflect higher interest rates associated with short-term borrowings and greater levels of short-term debt outstanding.
Income Taxes
Federal and state income taxes were $13.7 million for the quarter and $28.3 million year to date, an increase of $4.2 million in the quarter and $3.9 million year to date, compared to the prior year periods. The increases are primarily due to higher pretax income.