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 1-3553
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
------------------------------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-0672570
(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 15,754,826 May 10, 2001
- ----------------------------------- ---------------- ----------------
Class Number of shares Date
2
TABLE OF CONTENTS
Item Page
Number Number
1 Financial Statements (Unaudited)
Southern Indiana Gas and Electric Company
Condensed Balance Sheets 3-4
Condensed Statements of Operations 5
Condensed Statements of Cash Flows 6
Notes to Condensed Unaudited Financial Statements 7-13
2 Management's Discussion and Analysis of Results
of Operations and Financial Condition 14-20
Signatures 21
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
(Unaudited - Thousands)
March 31,
----------------------- December 31,
ASSETS 2001 2000 2000
------ ---------- ---------- ----------
Utility Plant at original cost:
Electric $1,171,020 $1,142,496 $1,175,552
Gas 159,723 157,258 160,872
---------- ---------- ----------
1,330,743 1,299,754 1,336,424
Less: accumulated depreciation and amortization 661,008 626,545 650,499
---------- ---------- ----------
669,735 673,209 685,925
Construction work in progress 57,646 55,909 52,582
---------- ---------- ----------
Net utility plant 727,381 729,118 738,507
---------- ---------- ----------
Current Assets:
Cash and cash equivalents 3,687 2,147 1,613
Accounts receivable, less reserves of $2,409,
2,262 and $2,639, respectively 56,571 34,743 49,554
Accounts receivable from affiliated company 9,872 8,183 27,829
Accrued unbilled revenues 11,370 12,522 24,414
Inventories 27,399 31,657 31,055
Recoverable fuel and natural gas costs 35,996 6,210 28,703
Other current assets 14 2,239 312
---------- ---------- ----------
Total current assets 144,909 97,701 163,480
---------- ---------- ----------
Other Investments and Property:
Environmental improvement funds held by trustee 1,057 1,010 1,056
Nonutility property and other, net 2,924 2,924 1,960
---------- ---------- ----------
Total other investments and property 3,981 3,934 3,016
---------- ---------- ----------
Other Assets:
Regulatory assets 33,445 33,636 33,443
Deferred charges, net 27,815 14,012 12,868
---------- ---------- ----------
Total other assets 61,260 47,648 46,311
---------- ---------- ----------
TOTAL ASSETS $ 937,531 $ 878,401 $ 951,314
========== ========== ==========
The accompanying notes are an integral part of these
condensed financial statements.
4
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
(Unaudited - Thousands)
March 31,
------------------- December 31,
SHAREHOLDER'S EQUITY AND LIABILITIES 2001 2000 2000
------------------------------------ -------- -------- --------
Capitalization:
Common stock $ 78,258 $ 78,258 $ 78,258
Retained earnings 263,405 239,653 258,877
-------- -------- --------
Total common shareholder's equity 341,663 317,911 337,135
Cumulative nonredeemable preferred stock 8,852 11,090 8,890
Cumulative redeemable preferred stock 7,500 7,500 7,500
Cumulative special preferred stock 460 576 576
Long-term debt, net of current maturities 291,550 237,602 237,799
-------- -------- --------
Total capitalization, net of current maturities 650,025 574,679 591,900
-------- -------- --------
Commitments and Contingencies (Notes 6 and 7)
Current Liabilities:
Current maturities of adjustable rate bonds
subject to tender - 53,700 53,700
Short-term borrowings 14,828 10,318 40,154
Notes payable to affiliated company 25,000 - -
Accounts payable to affiliated company 6,266 6,468 11,486
Accounts payable 40,578 26,550 60,085
Dividends payable 142 103 144
Accrued taxes 23,246 18,757 9,956
Accrued interest 5,327 5,038 6,047
Refunds to customers 4,229 1,863 3,543
Deferred income taxes 10,271 1,483 11,295
Other accrued liabilities 5,225 19,201 14,278
-------- -------- --------
Total current liabilities 135,112 143,481 210,688
-------- -------- --------
Deferred Credits and Other Liabilities:
Deferred income taxes 112,145 119,421 112,122
Unamortized investment tax credits 15,606 17,015 15,944
Accrued postretirement benefits other
than pensions 14,554 12,889 14,054
Accrued pensions 6,668 8,862 6,310
Other 3,421 2,054 296
-------- -------- --------
Total deferred credits and other liabilities 152,394 160,241 148,726
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY AND LIABILITIES $937,531 $878,401 $951,314
======== ======== ========
The accompanying notes are an integral part of these
condensed financial statements.
5
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited - Thousands)
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
OPERATING REVENUES:
Electric revenues $ 88,209 $ 72,990 $351,628 $309,572
Gas revenues 51,950 29,227 132,007 67,741
-------- -------- -------- --------
Total operating revenues 140,159 102,217 483,635 377,313
-------- -------- -------- --------
COST OF OPERATING REVENUES:
Cost of fuel and purchased power 31,137 21,678 121,552 94,494
Cost of gas 41,458 19,634 100,727 39,741
-------- -------- -------- --------
Total cost of operating revenues 72,595 41,312 222,279 134,235
-------- -------- -------- --------
Total margin 67,564 60,905 261,356 243,078
OPERATING EXPENSES:
Operations and maintenance 23,441 21,238 105,256 94,667
Merger and integration costs 388 12,357 2,103 12,357
Depreciation and amortization 11,084 11,490 42,808 45,140
Income taxes 9,041 4,237 29,636 23,334
Taxes other than income taxes 3,626 3,233 13,651 12,951
-------- -------- -------- --------
Total operating expenses 47,580 52,555 193,454 188,449
-------- -------- -------- --------
OPERATING INCOME 19,984 8,350 67,902 54,629
OTHER INCOME-NET 859 699 4,834 3,416
-------- -------- -------- --------
INCOME BEFORE INTEREST AND
PREFERRED STOCK DIVIDEND 20,843 9,049 72,736 58,045
INTEREST EXPENSE 5,256 4,783 20,367 19,518
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 15,587 4,266 52,369 38,527
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE-NET OF TAX 3,938 - 3,938 -
-------- -------- -------- --------
NET INCOME 19,525 4,266 56,307 38,527
PREFERRED STOCK DIVIDEND 238 268 987 1,076
-------- -------- -------- --------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDER $ 19,287 $ 3,998 $ 55,320 $ 37,451
======== ======== ======== ========
The accompanying notes are an integral part of these
condensed financial statements.
6
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
CONDENSED 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 $ 19,525 $ 4,266 $ 56,307 $ 38,527
Adjustments to reconcile net income to cash
provided from operating activities -
Depreciation and amortization 11,084 11,490 42,808 45,140
Deferred income taxes and investment tax credits (519) (2,430) 1,924 1,123
Allowance for funds used during construction (329) - (2,380) (296)
Cumulative effect of accounting change (3,938) - (3,938) -
Unrealized gain on derivatives (5,498) - (5,498) -
Changes in assets and liabilities -
Receivables - net 23,984 (1,927) (21,252) (8,162)
Inventories 3,656 9,802 4,258 10,246
Recoverable fuel and natural gas costs (7,293) (625) (29,785) (1,741)
Regulatory assets (2) (843) 1,425 (222)
Accounts payable (24,727) (235) 18,520 7,292
Accrued taxes 8,849 9,961 436 3,306
Refunds to customers 686 (3,512) 2,366 (1,610)
Other assets and liabilities (4,488) 6,377 (10,204) 5,869
-------- -------- -------- --------
Total adjustments 1,465 28,058 (1,320) 60,945
-------- -------- -------- --------
Net cash flows from operating activities 20,990 32,324 54,987 99,472
-------- -------- -------- --------
CASH FLOWS (REQUIRED FOR) FINANCING ACTIVITIES
Retirement of preferred stock (153) (117) (2,352) (116)
Proceeds from long-term debt - - - 25,000
Net change in short-term borrowings and notes
payable to affiliated company (275) (6,412) 22,928 (72,483)
Dividends on common and preferred stock (8,842) (8,793) (29,705) (32,556)
Other - (72) 2,844 3,144
-------- -------- -------- --------
Net cash flows (required for) financing
activities (9,270) (15,394) (6,285) (77,011)
-------- -------- -------- --------
CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES
Capital expenditures (8,595) (14,944) (45,103) (61,681)
Other (1,051) (288) (2,059) (1,345)
-------- -------- -------- --------
Net cash flows (required for) investing
activities (9,646) (15,232) (47,162) (63,026)
-------- -------- -------- --------
Net increase (decrease) in cash 2,074 1,698 1,540 (40,565)
Cash and cash equivalents at beginning of period 1,613 449 2,147 42,712
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 3,687 $ 2,147 $ 3,687 $ 2,147
======== ======== ======== ========
The accompanying notes are an integral part of these
condensed financial statements.
7
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Southern Indiana Gas and Electric Company (SIGECO) operates as a separate wholly
owned subsidiary of Vectren Corporation (Vectren) and 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.
Vectren was organized on June 10, 1999 solely for the purpose of effecting the
merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP),
SIGECO's former parent company. On March 31, 2000, the merger of Indiana Energy
with SIGCORP and into Vectren was consummated with a tax- free exchange of
shares that has been accounted for as a pooling-of-interests. The merger did not
affect SIGECO's preferred stock or debt securities.
2. Basis of Presentation
The interim condensed financial statements included in this report have been
prepared by SIGECO, 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. SIGECO 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 SIGECO's audited
annual financial statements for the year ended December 31, 2000 filed on Form
10-K. Because of the seasonal nature of SIGECO's operations, the results shown
on a quarterly basis are not necessarily indicative of annual results.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the statements
and the reported amounts of revenues and expenses during the reporting period.
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 $0.4 million and $2.1 million, respectively. Merger costs
are reflected in the financial statements of the subsidiaries in which merger
savings are expected to be realized. The continued merger integration activities
will be completed in 2001.
Since March 31, 2000, $14.5 has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$7.4 million. Of this amount, $0.7 million related to employee and executive
8
severance and $6.7 million related to transaction costs and filing fees. At
March 31, 2001, the accrual remaining for such costs totaled $0.4 million, all
related to severance costs. Of the $14.5 million expensed, the remaining $7.1
million was expensed through March 31, 2001 ($6.7 million in 2000 and $0.4 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, and
investor relations communications activities.
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.
4. 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,
2001, the interest rates were reset annually, and the bonds subject to tender
were presented in the 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 %.
5. 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. SIGECO 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, SIGECO 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 APB 20, "Accounting
Changes."
A limited number of SIGECO's contracts are defined as derivatives under SFAS
133. These derivatives are forward physical contracts for both the purchase and
sale of electricity.
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
9
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. This
cumulative impact is an earnings gain of approximately $6.3 million ($3.9
million after tax).
As of March 31, 2001, the fair value of power marketing derivative contracts
total $11.8 million and is included in deferred charges, net in the Condensed
Balance Sheets. The difference between the current market value and the market
value on the date of adoption of $5.5 million is reflected in cost of fuel and
purchased power in the Condensed Statements of Operations.
6. Contingencies
SIGECO is party to various legal proceedings arising in the normal course of
business. In the opinion of management, with the exception of the litigation
matter related to the Clean Air Act (See Note 7), there are no legal proceedings
pending against SIGECO that are likely to have a material adverse effect on its
financial position or results of operations.
7. Environmental Matters
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
10
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.
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
11
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.
8. Rate and Regulatory Matters
Commodity prices for natural gas purchases have increased significantly,
primarily due to a colder winter, increased demand and tighter supplies. SIGECO
is allowed full recovery of such changes in purchased gas and fuel costs for its
retail customers through commission-approved gas and fuel cost adjustment
mechanisms.
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 Indiana Office of Utility
Consumer Counselor (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.
9. Affiliate Transactions
Certain wholly owned subsidiaries of Vectren began providing support services to
SIGECO beginning April 1, 2000. As of March 31, 2000, certain assets owned by
SIGECO were contributed to a wholly owned subsidiary of Vectren (Vectren
Resources, LLC). The contribution of assets was reflected as a reduction of
common shareholder's equity and is omitted from the Condensed Statements of Cash
Flows.
12
Vectren and certain subsidiaries of Vectren have provided certain corporate
general and administrative services to the company including legal, finance,
tax, risk management and human resources. The costs have been allocated to
SIGECO using various allocators, primarily number of employees, number of
customers and/or revenues. Allocations are based on cost. Management believes
that the allocation methodology is reasonable and approximates the costs that
would have been incurred had SIGECO secured those services on a stand alone
basis. SIGECO received corporate allocations totaling $11.1 million and $41.1
million for the three and twelve months ended March 31, 2001, respectively.
Prior to April 1, 2000, these costs were incurred by SIGECO directly.
Vectren Fuels, Inc., a wholly owned subsidiary of Vectren, owns and operates
coal mines from which SIGECO purchases fuel used for electric generation.
Amounts paid for such purchases for the three months ended March 31, 2001 and
2000 were $10.4 million and $6.6 million respectively. Amounts paid for such
purchases for the twelve months ended March 31, 2001 and 2000 were $28.6 million
and $22.2 million, respectively. Amounts charged by Vectren Fuels, Inc. are
market based.
SIGECO also participates in a centralized cash management program with its
parent, affiliated companies and banks which permits funding of checks as they
are presented.
Amounts owed to wholly owned subsidiaries of Vectren as of March 31, 2001, March
31, 2000 and December 31, 2000 totaled $31.3 million, $6.5 million and $11.5
million, respectively, and are included in accounts payable to affiliated
company. Amounts due from wholly owned subsidiaries of Vectren as of March 31,
2001, March 31, 2000 and December 31, 2000 totaled $9.9 million, $8.2 million,
and $27.8 million, respectively, and are included in accounts receivable from
affiliated company.
10. 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 two operating segments of SIGECO during the reported periods: (1)
Electric Utility Services and (2) Gas Utility Services. The Electric Utility
Services segment generates, transmits, distributes and sells electricity
primarily within southwestern Indiana and in periods of under utilized capacity,
sells excess electricity to other wholesale customers. The Gas Utility Services
segment distributes, transports and sells natural gas to Evansville, Indiana and
64 communities in ten counties in southwestern Indiana. Revenues for each
segment are attributable to customers in the United States. Effective January 1,
2001, SIGECO announced the reorganization of its utility 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, SIGECO will report segment information as Gas
Utility Services and Electric Utility Services.
13
Certain information relating to SIGECO's business segments is presented below.
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------- -------------------
In thousands 2001 2000 2001 2000
-------- -------- -------- --------
Operating Revenues:
Electric Utility Services $ 88,209 $ 72,990 $351,628 $309,572
Gas Utility Services 51,950 29,227 132,007 67,741
-------- -------- -------- --------
Total operating revenues $140,159 $102,217 $483,635 $377,313
======== ======== ======== ========
Net Income Applicable to
Common Shareholder:
Electric Utility Services $ 16,869 $ 2,607 $ 51,072 $ 35,017
Gas Utility Services 2,418 1,391 4,248 2,434
-------- -------- -------- --------
Net income applicable to
common shareholder $ 19,287 $ 3,998 $ 55,320 $ 37,451
======== ======== ======== ========
March 31, March 31, December 31,
2001 2000 2000
-------- -------- --------
Identifiable Assets:
Electric Utility Services $788,506 $755,884 $799,104
Gas Utility Services 149,025 122,517 152,210
-------- -------- --------
Total identifiable assets $937,531 $878,401 $951,314
======== ======== ========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
Description of the Business
Southern Indiana Gas and Electric Company (SIGECO) operates as a separate wholly
owned subsidiary of Vectren Corporation (Vectren) and 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.
Vectren was organized on June 10, 1999 solely for the purpose of effecting the
merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP),
SIGECO's former parent company. On March 31, 2000, the merger of Indiana Energy
with SIGCORP and into Vectren was consummated with a tax- free exchange of
shares that has been accounted for as a pooling-of-interests. The merger did not
affect SIGECO's preferred stock or debt securities.
Results of Operations
Net Income Applicable to Common Shareholder
For the three months ended March 31, 2001, net income applicable to common
shareholder was $19.3 million. Net income applicable to common shareholder
before merger and integration costs and the cumulative effect of the accounting
change (adoption of FAS 133) was $15.6 million, compared to net income
applicable to common shareholder before merger and integration costs for the
first quarter of 2000 of $13.0 million. (See discussion of merger and
integration costs and cumulative effect of change in accounting principle
below.)
For the twelve months ended March 31, 2001, net income applicable to common
shareholder was $55.3 million. Net income applicable to common shareholder
before merger and integration costs and the cumulative effect of the accounting
change (adoption of FAS 133) was $53.2 million, compared to net income
applicable to common shareholder before merger and integration costs for the
twelve months ended March 31, 2000 of $46.5 million.
Utility Margin (Operating Revenues Less Cost of Fuel, Purchased Power and Cost
of Gas)
Electric Utility Margin
Electric Utility margin for the three months ended March 31, 2001 of $57.1
million, increased $5.8 million, or 11 %, 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).
Electric Utility margin for the twelve months ended March 31, 2001 of $230.1
million, increased $15.0 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.
The remaining $9.5 million increase results from increased margin from sales to
wholesale energy markets with volumes increasing 69 % over 2000, and a 5 %
15
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.
Total cost of fuel for electric generation and purchased power increased $9.5
million, or 44 %, and $27.1 million, or 29 %, 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.
Gas Utility Margin
Gas Utility margin for the three months ended March 31, 2001 of $10.5 million
increased $0.9 million, or 9 %, compared to 2000. The increase is due to an 8 %
increase in throughput resulting primarily from temperatures being 16 % 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 $41.5 million for the three months ended March 31,
2001 compared to $19.6 million in 2000. This increase of $21.8 million, or 111 %
is primarily due to significantly higher average per unit purchased gas costs.
The total average cost per dekatherm of gas purchased by SIGECO for the three
months ended March 31, 2001 was $6.74 compared to $3.86 for the same period in
2000.
Gas Utility margin for the twelve months ended March 31, 2001 of $31.3 million
increased $3.3 million, or 12 %, compared to 2000. The increase is due to a 15 %
increase in throughput resulting primarily from temperatures being 27 % colder
than the previous year and a 2 % increase in the residential customer base.
These favorable impacts on gas margin were partially offset by the cost of
unaccounted for gas due to higher gas costs.
Total cost of gas sold was $100.7 million for the twelve months ended March 31,
2001 and $39.7 million in 2000. This increase of $61.0 million, or 153 %,
compared to 2000 is primarily due to significantly higher per unit purchased gas
costs.
Commodity prices for natural gas purchases have increased significantly,
primarily due to a colder winter, increased demand and tighter supplies. Subject
to compliance with applicable state laws, SIGECO is allowed full recovery of
such charges 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, SIGECO has 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.
Operating Expenses
Operations and Maintenance
Operations and maintenance expenses increased $2.2 million, or 10 %, for the
three months ended March 31, 2001 compared to the prior year, and operations and
maintenance expenses increased $10.6 million, or 11 % for the twelve months
ended March 31, 2001. The increases reflect primarily higher general and
administrative costs and plant and system maintenance.
16
Depreciation and Amortization
Depreciation and amortization decreased $0.4 million and $2.3 million for the
three and twelve months ended March 31, 2001, respectively, compared to the
prior year due to the contribution of certain information systems and equipment
to a wholly owned subsidiary of Vectren.
Income Taxes
Federal and state income taxes increased $4.8 million and $6.3 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 for the three month period
in 2000 was higher as a result of the non-deductibility of certain merger and
integration costs.
Taxes Other Than Income Taxes
Taxes other than income taxes increased $0.4 million and $0.7 million for the
three and twelve month periods ended March 31, 2001, respectively. The 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, totaled $0.4 million ($0.2 million after tax) and $2.1 million
($1.8 million after tax) respectively, and for both the three and twelve months
ended March 31, 2000 totaled $12.4 million ($9.0 million after tax). 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 completed in 2001. Merger costs are reflected in the financial
statements of Vectren's operating subsidiaries in which merger savings are
expected to be realized.
Since March 31, 2000, $14.5 million has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$7.4 million. Of this amount, $0.7 million related to employee and executive
severance costs and $6.7 related to transaction costs and regulatory filing fees
incurred prior to the closing of the merger. At March 31, 2001, the accrual
remaining for such costs totaled $0.4 million, all related to severance costs.
Of the $14.5 million expensed, the remaining $7.1 million was expensed through
March 31, 2001 ($6.7 million in 2000 and $0.4 million 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.
Other Income, Net
Other income, net increased $0.2 million and $1.4 million for the three and
twelve months ended March 31, 2001 compared to the prior year due to increased
allowance for funds used during construction (AFUDC) resulting from increased
utility plant construction in progress.
17
Interest Expense
Interest expense increased by $0.5 million and $0.8 million, respectively, for
the three and twelve months ended March 31, 2001, respectively, when compared to
the prior year. The increases were due primarily to increased working capital
requirements resulting from higher natural gas prices.
Other Operating Matters
New Accounting Principle and Cumulative Effect of Change in Accounting Principle
See Note 5 in the condensed financial statements regarding the adoption of SFAS
133, as amended.
Realignment
Effective January 1, 2001, SIGECO announced the reorganization of its utility
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, SIGECO will report segment
information as Gas Utility Services and Electric Utility Services.
Financial Condition
Environmental and Regulatory Matters
See Notes 7 and 8 in SIGECO's condensed financial statements included in Part I,
Item 1 regarding matters affecting operations including Clean Air Act compliance
(Note 7) and purchased power costs recovery (Note 8).
Liquidity and Capital Resources
SIGECO's capitalization objective is 40-55 % 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. SIGECO's common equity component was 53 %, 51 % and 52 % of total
capitalization, including current maturities of long-term debt, at March 31,
2001, March 31, 2000 and December 31, 2000, respectively.
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 other periods due to the higher natural gas costs.
Cash Flow from Operations
SIGECO's primary source of liquidity to fund working capital requirements has
been cash generated from operations, which totaled approximately $21.0 million
and $32.3 million for the three months ended March 31, 2001 and 2000,
18
respectively, and $55.0 million and $99.5 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 $11.3 million and $44.5 million,
respectively, due to increased working capital requirements due to higher gas
costs offset by decreased merger and integration costs.
SIGECO 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 $34.3 million for the three
months ended March 31, 2001 includes $25.3 million of reductions in net
borrowings and preferred stock and $8.8 million common and preferred stock
dividends. This is an increase in cash required for financing activities when
compared to the three months ended March 31, 2000 of $18.9 million. The increase
is primarily due to increased payments on short-term borrowings from internally
generated funds in 2001.
Cash flow required for financing activities of $31.3 million for the twelve
months ended March 31, 2001 includes $4.4 million of reductions in net
borrowings and preferred stock and $29.7 million of common and preferred stock
dividends. This is a decrease in cash requirements for financing activities of
$45.7 million over the same period in the prior year due primarily to a decrease
in short-term borrowings being paid down in 2001.
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 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 %.
At March 31, 2001, SIGECO has approximately $74 million of short-term borrowing
capacity for use in its operations, of which approximately $59 million is
available.
SIGECO's credit rating on outstanding debt at March 31, 2001 was A/A1.
19
Capital Expenditures and Other Investment Activities
Cash required for investing activities of $9.6 million and $47.2 for the three
and twelve months ended March 31, 2001 is comprised mainly of capital
expenditures. Cash requirements for investing activities have decreased from
prior year requirements primarily due a decrease in capital expenditures for
utility plant.
New construction, normal system maintenance and improvements, and technology
investments needed to provide service to a growing customer base will continue
to require substantial expenditures. Capital expenditures for the remainder of
2001 are estimated at $88 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, 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.
20
|X| Economic conditions including inflation rates and monetary
fluctuations.
|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 SIGECO,
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.
SIGECO undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of changes in actual results, changes in
assumptions, or other factors affecting such statements.
21
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.
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
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