SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-15467
VECTREN CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-2086905
-------- -----------
(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) 465-5300
(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 61,187,313 July 31, 2000
Class Number of shares Date
2
TABLE OF CONTENTS
Item Page
Number Number
Part I. Financial Information
1 Financial Statements (Unaudited)
Vectren Corporation and Subsidiary Companies
Consolidated Balance Sheets 3-4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-17
2 Management's Discussion and Analysis of Financial
Condition and 18-28
Results of Operations
3 Quantitative and Qualitative Disclosure About Market Risk 28-29
Part II. Other Information
1 Legal Proceedings 30
4 Submission of Matters to a Vote of Security Holders 30
6 Exhibits and Reports on Form 8-K 30-31
Signatures 32
3
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
June 30 December 31
---------------------- -----------
2000 1999 1999
----- ----- -----
ASSETS
Current Assets:
Cash and cash equivalents $ 18,727 $ 11,307 $ 17,351
Temporary investments 1,048 583 903
Accounts receivable, less
reserves of $2,024, $3,890
and $3,949, respectively 110,533 79,288 123,612
Accrued unbilled revenues 20,347 19,599 55,370
Inventories 34,118 46,367 58,863
Prepaid gas delivery service 20,969 11,645 20,937
Prepayments and other current
assets 25,758 25,737 28,676
--------- --------- ---------
Total current assets 231,500 194,526 305,712
--------- --------- ---------
Utility Plant:
Original cost 2,398,714 2,318,750 2,367,831
Less: accumulated depreciation
and amortization 1,059,500 1,007,135 1,031,498
--------- --------- ---------
Net utility plant 1,339,214 1,311,615 1,336,333
--------- --------- ---------
Other Investments:
Investments in leveraged leases 89,822 35,990 85,737
Investments in partnerships and
other corporations 76,819 76,273 74,644
Notes receivable 61,736 20,955 32,271
Other 1,019 4,384 996
--------- --------- ---------
Total other investments 229,396 137,602 193,648
--------- --------- ---------
Nonutility property, net of
accumulated depreciation 86,496 60,329 64,474
Other Assets:
Deferred charges 29,347 15,787 23,623
Unamortized debt costs 15,740 16,236 15,843
Demand side management programs 25,845 24,995 25,298
Other 6,950 10,324 15,536
--------- --------- ---------
Total other assets 77,882 67,342 80,300
--------- --------- ---------
TOTAL ASSETS $1,964,488 $1,771,414 $1,980,467
========== ========== ==========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
4
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
June 30 December 31
--------------------- ----------
2000 1999 1999
---------- --------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of adjustable
rate bonds subject to tender $ 53,700 $ 53,700 $ 53,700
Current maturities of long-term
debt and other obligations 258 10,814 776
Short-term borrowings 218,012 138,754 207,638
Accounts payable 100,351 63,243 95,827
Refunds to customers and
customer deposits 12,718 33,474 27,396
Accrued taxes 14,845 19,806 26,602
Accrued interest 11,404 8,609 12,097
Other current liabilities 47,581 50,580 49,467
---------- ---------- ----------
Total current liabilities 458,869 378,980 473,503
Deferred Credits and Other Liabilities:
Deferred income taxes 205,478 205,359 215,520
Accrued postretirement benefits
other than pensions 43,388 40,683 40,942
Unamortized investment tax credit 24,346 26,704 25,524
Other 18,414 7,467 8,297
---------- ---------- ----------
Total deferred credits and
other liabilities 291,626 280,213 290,283
Commitments and Contingencies
Minority interest in subsidiary 1,498 987 916
Capitalization:
Long-term debt and other
obligations, net of current
maturities 484,607 388,409 486,726
Preferred stock of subsidiary:
Redeemable 8,076 8,192 8,192
Nonredeemable 11,090 11,090 11,090
---------- ---------- ----------
Total preferred stock 19,166 19,282 19,282
Common stock (no par value) -
issued and outstanding 61,189,
61,288 and 61,305 respectively 213,742 215,018 215,917
Retained earnings 494,909 488,597 493,918
Accumulated other comprehensive
income 71 (72) (78)
---------- ----------- -----------
Total common shareholders'
equity 708,722 703,543 709,757
---------- ---------- ----------
Total capitalization 1,212,495 1,111,234 1,215,765
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,964,488 $1,771,414 $1,980,467
========== ========== ===========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
5
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands, except per share data)
Three Months Six Months
Ended June 30 Ended June 30
------------------ ------------------
2000 1999 2000 1999
OPERATING REVENUES:
Gas utility $100,485 $ 82,647 $301,330 $273,829
Electric utility 78,289 73,802 151,279 144,789
Energy services and other 84,703 50,593 170,312 109,457
-------- -------- -------- --------
Total operating revenues 263,477 207,042 622,921 528,075
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 55,898 38,617 174,425 142,116
Fuel for electric generation 15,543 15,730 32,116 31,358
Purchased electric energy 9,159 7,063 12,636 10,325
Cost of energy services and
other 80,240 48,464 161,962 104,634
Other operating 50,173 45,940 96,599 90,773
Merger costs 3,261 - 30,442 -
Depreciation and amortization 26,031 21,794 48,693 43,019
Taxes other than income taxes 7,456 6,494 16,056 14,777
-------- -------- -------- --------
Total operating expenses 247,761 184,102 572,929 437,002
-------- -------- -------- --------
OPERATING INCOME 15,716 22,940 49,992 91,073
OTHER INCOME
Equity in earnings of
unconsolidated investments 2,074 2,313 14,551 6,539
Other - net 7,801 1,146 10,219 3,006
-------- -------- -------- --------
Total other income 9,875 3,459 24,770 9,545
-------- -------- -------- --------
INTEREST EXPENSE 12,319 9,827 24,592 19,997
-------- -------- -------- --------
INCOME BEFORE PREFERRED DIVIDENDS
AND INCOME TAXES 13,272 16,572 50,170 80,621
PREFERRED DIVIDEND REQUIREMENT
OF SUBSIDIARY 266 269 535 539
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 13,006 16,303 49,635 80,082
INCOME TAXES 4,390 4,538 18,656 27,514
-------- -------- -------- --------
NET INCOME BEFORE MINORITY
INTEREST 8,616 11,765 30,979 52,568
MINORITY INTEREST IN SUBSIDIARY 343 211 581 291
-------- -------- -------- --------
NET INCOME $ 8,273 $ 11,554 $ 30,398 $ 52,277
======== ======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 61,227 61,287 61,266 61,309
DILUTED COMMON SHARES OUTSTANDING 61,317 61,425 61,338 61,461
BASIC EARNINGS PER AVERAGE SHARE
OF COMMON STOCK $ 0.14 $ 0.19 $ 0.50 $ 0.85
======== ======== ======== ========
DILUTED EARNINGS PER AVERAGE SHARE
OF COMMON STOCK $ 0.13 $ 0.19 $ 0.50 $ 0.85
======== ======== ======== ========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
6
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands, except per share data)
Twelve Months
Ended June 30
-----------------------
2000 1999
OPERATING REVENUES:
Gas utility $ 527,074 $ 487,185
Electric utility 314,059 299,901
Energy services and other 322,130 222,543
---------- ----------
Total operating revenues 1,163,263 1,009,629
---------- ----------
OPERATING EXPENSES:
Cost of gas sold 298,738 258,717
Fuel for electric generation 67,063 64,110
Purchased electric energy 23,102 23,681
Cost of energy services and other 304,918 212,397
Other operating 195,448 182,750
Merger costs 30,442 -
Depreciation and amortization 92,672 84,133
Taxes other than income taxes 31,189 27,182
---------- ----------
Total operating expenses 1,043,572 852,970
---------- ----------
OPERATING INCOME 119,691 156,659
OTHER INCOME
Equity in earnings of unconsolidated
investments 19,654 9,882
Other - net 16,115 6,553
---------- ----------
Total other income 35,769 16,435
---------- ----------
INTEREST EXPENSE 47,457 40,076
---------- ----------
INCOME BEFORE PREFERRED DIVIDENDS AND
INCOME TAXES 108,003 133,018
PREFERRED DIVIDEND REQUIREMENT OF SUBSIDIARY 1,074 1,085
---------- ----------
INCOME BEFORE INCOME TAXES 106,929 131,933
INCOME TAXES 36,850 43,780
---------- ----------
NET INCOME BEFORE MINORITY INTEREST 70,079 88,153
MINORITY INTEREST IN SUBSIDIARY 1,210 562
---------- ----------
NET INCOME $ 68,869 $ 87,591
========== ==========
AVERAGE COMMON SHARES OUTSTANDING 61,281 61,424
DILUTED COMMON SHARES OUTSTANDING 61,362 61,598
BASIC EARNINGS PER AVERAGE SHARE OF
COMMON STOCK $ 1.12 $ 1.43
========== ==========
DILUTED EARNINGS PER AVERAGE SHARE OF
COMMON STOCK $ 1.12 $ 1.42
========== ==========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
7
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Thousands)
Six Months Twelve Months
Ended June 30 Ended June 30
----------------- -------------------
2000 1999 2000 1999
CASH FLOWS FROM OPERATING ACTIVITES
Net Income $ 30,398 $ 52,277 $ 68,869 $ 87,591
Adjustments to reconcile net
income to cash provided
from operating activities -
Depreciation and
amortization 48,693 43,019 92,672 84,133
Preferred dividend
requirement of subsidiary 535 539 1,074 1,085
Deferred income taxes and
Investment tax credits (11,220) (433) (2,239) 6,739
(Gain) loss on sale or
retirement of assets (8,961) 730 (8,961) 730
Undistributed earnings of
unconsolidated affiliates (7,551) (6,539) (12,654) (9,882)
-------- --------- --------- ---------
21,496 37,316 69,892 82,805
Changes in assets and liabilities -
Receivables - net 50,398 60,117 (29,697) 5,720
Inventories 24,745 20,319 12,249 213
Accounts payable,
refunds to customers,
customer deposits,
other current
liabilities (12,040) (21,288) 13,353 1,194
Accrued taxes and
interest (12,450) 3,301 (2,166) (2,682)
Prepayments and other
current assets 2,918 (4,520) (21) (7,837)
Prepaid gas delivery
service (32) (11,645) (9,324) (11,645)
Accrued post-retirement
benefits other than
pension 2,446 3,196 2,705 2,156
Other - net 2,694 875 (1,703) 7,296
-------- -------- --------- --------
Total adjustments 80,175 87,671 55,288 77,220
Net cash flows from
operating activities 110,573 139,948 124,157 164,811
CASH FLOWS (REQUIRED FOR) FROM
FINANCING ACTIVITIES
Retirement of common stock - (2,248) - (7,164)
Retirement of preferred
stock (116) (116) (116) (232)
Proceeds from long-term
debt - - 110,000 22,200
Retirement of long-term
debt and other obligations (2,637) (46,466) (24,358) (85,009)
Net change in short-term
borrowings 10,374 12,771 79,258 103,470
Dividends on common stock (29,533) (28,266) (58,798) (56,449)
Other - - - 330
-------- -------- -------- --------
Net cash flows (required
for) from financing activities (21,912) (64,325) 105,986 (22,854)
CASH FLOWS (REQUIRED FOR)
INVESTING ACTIVITIES
Capital expenditures (62,871) (63,381) (129,192) (130,135)
Investment in leveraged
leases (211) 13 (46,510) (275)
Investments in partnerships
and other corporations (8,737) (8,497) (10,956) (22,572)
Change in notes receivable (21,000) (583) (32,316) (3,530)
Change in nonutility
property (10,086) (796) (17,917) (4,544)
Cash distributions from
unconsolidated investments 3,261 3,113 4,898 4,436
Proceeds from sale of
assets - - - 4,113
Other 12,359 (1,576) 9,270 (6,499)
-------- -------- -------- --------
Net cash flows (required
for) investing activities (87,285) (71,707) (222,723) (159,006)
Net increase (decrease) in
cash 1,376 3,916 7,420 (17,049)
Cash and cash equivalents at
beginning of period 17,351 7,391 11,307 28,356
-------- -------- -------- --------
Cash and cash equivalents at
end of period $ 18,727 $ 11,307 $ 18,727 $ 11,307
======== ======== ======== ========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
8
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO 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. The common
shareholders of SIGCORP received one and one-third shares of
Vectren common stock for each SIGCORP common share and
Indiana Energy common shareholders received one share of
Vectren common stock for each Indiana Energy common share,
resulting in the issuance of 61.3 million shares of Vectren
common stock. The preferred stock and debt securities of
Indiana Energy's and SIGCORP's utility subsidiaries were not
affected by the merger.
Vectren is a public utility holding company with two
operating public utilities, Indiana Gas Company, Inc.
(Indiana Gas), formerly a wholly owned subsidiary of Indiana
Energy, and Southern Indiana Gas and Electric Company
(SIGECO), formerly a wholly owned subsidiary of SIGCORP.
Vectren also has certain non-regulated operations and
investments. Indiana Gas and its subsidiaries provide
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 other
communities in ten counties in southwestern Indiana.
Vectren is involved in non-regulated activities through the
operations and investments of its three wholly-owned non-
regulated subsidiaries: Vectren Enterprises, Inc.
(Enterprises), Vectren Generation Services, Inc. (Generation
Services) and Vectren Resources, LLC (Resources).
Enterprises, the largest and most diverse of the non-
regulated subsidiaries, consists of five groups: Energy
Services, Communications, Utility Services, Financial Group
and Ventures. These five groups provide or invest in
entities that provide energy-related products and services,
telecommunications 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, and
venture capital projects. Generation Services owns and
operates coal mining properties and provides coal to SIGECO
and other customers. Resources owns information system and
technology assets utilized by Vectren and its subsidiaries.
2. Financial Statements
The interim consolidated financial statements included in
this report have been prepared, without audit, as provided
in the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles 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, that all such
adjustments are of a normal recurring nature, and the
disclosures are adequate to make the information presented
not misleading. The preparation of financial statements in
conformity with generally accepted accounting principles
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.
These interim financial statements should be read in
conjunction with the financial statements and the notes
thereto included in Vectren's annual financial statements
and notes thereto on Form 8-K, filed on July 11, 2000, which
reflect Vectren on a historical basis for the three years
ended December 31, 1999, as restated for the effects of the
pooling-of-interests transaction completed on March 31, 2000
between Indiana Energy and SIGCORP. As a result of the
merger, Vectren has consolidated the results of the
combining companies in the accompanying financial statements
for all periods presented.
9
Because of the seasonal nature of Vectren's utility
operations, the results shown on a quarterly basis are not
necessarily indicative of annual results.
3. Merger and Merger Related Costs
Merger costs incurred for the three and six months ended
June 30, 2000 totaled $3.3 million and $30.4 million,
respectively. These costs relate primarily to transaction
costs, severance and other merger integration activities.
Vectren expects to realize net merger savings of nearly $200
million over the next 10 years from the elimination of
duplicate corporate and administrative programs and greater
efficiencies in operations, business processes and
purchasing. The continued merger integration activities
will be substantially complete by 2001.
As a result of merger integration activities, management has
identified certain information systems which are expected to
be retired in 2001. Accordingly, the useful lives of these
assets have been shortened to reflect this decision,
resulting in an increase in depreciation expense of
approximately $3.3 million for the three, six and twelve
months ended June 30, 2000.
4. Indiana Energy and SIGCORP Results (Prior to the
Combination)
The results of the predecessor companies, Indiana Energy and
SIGCORP, for the three months ended March 31, 2000 and for
the three, six and twelve months ended June 30, 1999 are as
follows (in millions):
Three Three Six Twelve
months months months months
ended ended ended ended
March 31, June 30, June 30, June 30,
2000 1999 1999 1999
--------- -------- --------- ---------
Indiana Energy:
Operating Revenues $172.0 $72.5 $234.3 $421.6
Net Income $22.1 $3.4 $31.5 $41.8
SIGCORP:
Operating Revenues $187.4 $131.9 $282.1 $564.8
Net Income $19.3 $8.2 $20.8 $45.8
5. Acquisition of the Gas Distribution Assets of The Dayton
Power and Light Company
On December 15, 1999, Indiana Energy, now Vectren, announced
that the board of directors had approved a definitive
agreement under which the company will acquire the natural
gas distribution assets of The Dayton Power and Light
Company (DP&L), which will add 305,000 gas distribution
customers in 16 counties in west central Ohio. The
acquisition, with a purchase price of $425 million, is
expected to be funded with short-term debt, which will be
replaced over time with permanent financing. This
transaction is conditioned upon the approval of several
regulatory bodies. In June 2000, the Department of Justice
concluded that it had completed its review of its Hart Scott
Rodino notification filings and would take no further
action. In July 2000, the Public Utilities Commission of
Ohio granted approval for the transaction. Vectren is
awaiting approval from the SEC for the transaction under the
Public Utility Holding Company Act. Other remaining
approvals include the Federal Communications Commission's
authorization of the transfer of radio licenses held by
DP&L, and action by certain local authorities regarding the
transfer of operating rights. Management expects to
complete the transaction during the third quarter of 2000.
6. Gas in Underground Storage
Based on the average cost of gas purchased during June 2000,
the cost of replacing the current portion of gas in
underground storage exceeded LIFO cost at June 30, 2000 by
approximately $31.7 million.
10
7. Refundable or Recoverable Gas and Fuel Costs
All metered gas rates contain a gas cost adjustment clause,
which allows for adjustment in charges for changes in the
cost of purchased gas. Metered electric rates typically
contain a fuel adjustment clause which allows for adjustment
in charges for electric energy to reflect changes in the
cost of fuel and the net energy cost of purchased power.
SIGECO also collects through a quarterly rate adjustment
mechanism the margin on electric sales lost due to the
implementation of demand side management programs.
Indiana Gas and SIGECO record any adjustment clause under-or-
overrecovery each month in revenues. A corresponding asset
or liability is recorded until such time as the under-or-
overrecovery is billed or refunded to utility customers. The
cost of gas sold is charged to operating expense as
delivered to customers and the cost of fuel for electric
generation is charged to operating expense when consumed.
On August 18, 1999, the Indiana Utility Regulatory
Commission (IURC) issued a generic order which established
new guidelines for the recovery of purchased power costs.
Those guidelines provided that SIGECO is able to recover
through rates the total cost incurred for purchased power if
over a period of seven days the average cost of purchased
power is below the highest cost of internal generation at
SIGECO or the higher costs can be justified in a fuel
adjustment clause filing. The generic order issued by the
IURC was appealed by the Indiana Office of Utility Consumer
Counselor (OUCC). On August 9, 2000, the IURC approved a
settlement between SIGECO and the OUCC which resolved all
issues between SIGECO and the OUCC regarding the IURC's
generic order and dismissed the OUCC's appeal. The
settlement pertains to the summer months of 2000 and the
parties have agreed to collaborate on a permanent agreement
covering future periods. The settlement provides a price
cap on the recovery from retail electric customers of
purchased power costs incurred by SIGECO during normal
economic dispatch conditions and provides for 85 percent
recoverability of purchased power costs incurred during
unplanned forced outages. SIGECO does not anticipate the
potential limitation of recoverability of its purchased
power costs to be material under this settlement.
8. Cash Flow Information
For purposes of the Consolidated Statements of Cash Flows,
Vectren considers cash investments with an original maturity
of three months or less to be cash equivalents. Cash paid
during the periods reported for interest and income taxes
were as follows:
Six Months Ended Twelve Months Ended
June 30 June 30
----------------- --------------------
2000 1999 2000 1999
Thousands
Interest (net of amount
capitalized) $23,748 $20,326 $38,247 $38,028
Income taxes $32,877 $25,141 $44,648 $43,952
9. Capitalization
On July 3, 2000, all of SIGECO's $9,975,000 Adjustable Rate
Pollution Control Revenue Bonds were remarketed and the
interest rate was reset to 4.75% from 4.55%. The new
interest rate will be effective from July 1, 2000 through
June 30, 2001.
On July 7, 2000, SIGECO repurchased 22,000 shares of its
4.75% nonredeemable $100 par value preferred stock at a
purchase price of $84.25 per share. The stock was
repurchased as treasury stock and is to be retired.
10. ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a 50 percent owned, non-
regulated, 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.
11
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 (the gas supply agreements) to be consistent with the
public interest. 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 and two
other pricing terms, 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. The IURC has not yet established a schedule
for conducting these additional proceedings.
The IURC's September 12, 1997, decision was appealed to the
Indiana Court of Appeals by certain Petitioners, including
the OUCC, the Citizens Action Coalition of Indiana, and a
small group of large-volume customers. On October 8, 1998,
the Indiana Court of Appeals issued a decision which
reversed and remanded the case to the IURC with instructions
that the gas supply agreements be disapproved. The basis for
the decision was that because the gas supply agreements
provide for index based pricing of gas commodity sold by
ProLiance to the utilities, the gas supply agreements should
have been the subject of an application for approval of an
alternative regulatory plan under Indiana statutory law.
On April 22, 1999, the Indiana Supreme Court granted a
petition for transfer of the case and will now consider the
appeal of the IURC's decision and issue its own decision on
the merits of the appeal at a later date. By granting
transfer, the Supreme Court has vacated the Court of
Appeals' decision.
If the Supreme Court reverses the IURC's decision, the case
will be remanded to the IURC for further proceedings
regarding the public interest in the gas supply agreements.
If the Supreme Court affirms the IURC's decision, as
described above, the reasonableness of certain of the gas
costs incurred by Indiana Gas under the gas supply
agreements will be further reviewed by the IURC in the
consolidated GCA proceeding. The existence of significant
benefits to the utilities and their customers resulting from
ProLiance's services has not been challenged on appeal.
Indiana Gas and Citizens Gas are continuing to utilize
ProLiance for their gas supplies.
On or about August 11, 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.
Pretax income of $1.5 million and $2.3 million was
recognized as ProLiance's contribution to earnings for the
three months ended June 30, 2000 and 1999, respectively.
Pretax income of $4.8 million and $7.2 million was
recognized as ProLiance's contribution to earnings for the
six months ended June 30, 2000 and 1999, respectively.
Pretax income of $4.2 million and $9.0 million was
recognized as ProLiance's contribution to earnings for the
twelve months ended June 30, 2000 and 1999, respectively.
Earnings recognized from ProLiance are included in Equity in
Earnings of Unconsolidated Investments on the Consolidated
Statements of Income.
At June 30, 2000, Vectren has reserved approximately $2.2
million of ProLiance earnings after tax. Total after-tax
ProLiance earnings recognized to date approximate $18.1
million. This amount includes earnings from all of
ProLiance's business activities, and therefore, is believed
to be a conservative estimate of the upper risk limit.
Resolution of the above proceedings may also impact future
operations and earnings contributions from ProLiance. Based
on the IURC's findings described above, management believes
the ProLiance issues may be resolved near the levels that
are already being reserved, and therefore, while these
proceedings are pending, management does not anticipate
changing the level at which it reserves ProLiance earnings.
However, no assurance of this outcome can be provided.
12
11. Vectren Advanced Communications
In May 1998, Vectren Advanced Communications, Inc. (formerly
SIGCORP Advanced Communications, Inc.), a wholly owned
subsidiary of Enterprises, was formed to hold Vectren's
investment in SIGECOM, LLC (SIGECOM) and Utilicom Networks,
Inc. (Utilicom). Also, on May 7, 1998, a joint venture
between Vectren Advanced Communications and Utilicom was
formed to provide enhanced communication services over a
high capacity fiber optic based network in the greater
Evansville, Indiana area. Vectren Advanced Communications'
investment was in the form of a preferred interest in
SIGECOM, which had a 100 percent liquidation preference. In
addition, SIGCORP contributed its wholly-owned subsidiary,
ComSource, Inc., to SIGECOM on July 1, 1998.
On January 28, 2000, affiliates of Blackstone Capital
Partners III, a private equity fund of The Blackstone Group,
invested in class B equity units of Utilicom Holdings LLC,
the newly formed holding company for Utilicom. The
investment was the first part of a commitment by Blackstone
to invest up to $100 million to fund future growth
opportunities in the fiber optic networks. At the same
time, Vectren Advanced Communications exchanged 35 percent
of its 49 percent equity interest in SIGECOM for $16.5
million of convertible debt of Utilicom Networks LLC. The
debt is convertible into class A equity units at a future
date or in the event of a public offering of stock by
Utilicom. Vectren Advanced Communications' remaining 14
percent preferred equity interest in SIGECOM was converted
to a 14 percent indirect common equity interest in SIGECOM.
The investment restructuring resulted in a pre-tax gain of
$8.0 million which is classified in Other Income in the
accompanying Consolidated Statements of Income. In June
2000, Vectren Advanced Communications recognized a $1.0
million loss associated with the final phase in the
restructuring of its investment in SIGECOM, eliminating its
common equity investment. As of June 30, 2000, Vectren
Advanced Communications' investment in SIGECOM was $8.2
million.
12. Environmental Matters
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 threshold
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 (ROD) was issued by 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 (VRP) 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.
Indiana Gas has accrued the estimated costs for further
investigation, remediation, groundwater monitoring and
related costs for the sites. While the total costs which
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.
Indiana Gas has recovered these estimated accrued costs from
insurance carriers and other potentially responsible parties
(PRPs). Indiana Gas has PRP agreements in place for 19 of
the 26 sites, which serve to limit Indiana Gas' share of
response costs at these 19 sites to between 20 and 50
percent. For these sites, Indiana Gas has accrued only its
proportionate share of the estimated response costs.
13
With respect to insurance coverage, as of June 30, 2000,
Indiana Gas has recorded settlements from all known
insurance carriers in an aggregate amount of approximately
$20.1 million.
These environmental matters 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.
Clean Air Act
In October 1997, the United States Environmental Protection
Agency (USEPA) proposed a rulemaking that could require
uniform NOx emissions reductions of 85 percent 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, which requires 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.
Midwestern states (the alliance) have been working together
to determine the most appropriate compliance strategy as an
alternative to the USEPA proposal. The alliance submitted
its proposal, which calls for a smaller, phased in reduction
of NOx levels, to the USEPA and the Indiana Department of
Environmental Management in June 1998.
In July 1998, Indiana submitted its proposed plan to the
USEPA in response to the USEPA's proposed new NOx rule and
the emissions budget proposed for Indiana. The Indiana
plan, which calls for a reduction of NOx emissions to a rate
of 0.25 lb/mmBtu by 2003, is less stringent than the USEPA
proposal but more stringent than the alliance proposal.
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.
During the second quarter of 1999, the USEPA lost two
federal court challenges to key air-pollution control
requirements. In the first ruling by the U.S. Circuit Court
of Appeals for the District of Columbia on May 14, 1999, the
Court struck down the USEPA's attempt to tighten the one-
hour ozone standard to an eight-hour standard and the
attempt to tighten the standard for particulate emissions,
finding the actions unconstitutional. In the second ruling
by the same Court on May 25, 1999, the Court placed an
indefinite stay on the USEPA's attempts to reduce the
allowed NOx emissions rate from levels required by the Clean
Air Act Amendments of 1990. The USEPA appealed both court
rulings. On October 29, 1999, the Court refused to
reconsider its May 14, 1999 ruling.
On March 3, 2000, the D.C. Circuit 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
by no later than September 30, 1999. Numerous petitioners,
including several states, have filed petitions for rehearing
with the U.S. Court of Appeals for the District of Columbia
in Michigan v. the USEPA. On June 22, 2000, the D.C. Circuit
Court of Appeals denied petition for rehearing en banc and
lifted its May 25, 1999 stay.
14
The proposed NOx emissions budget for Indiana stipulated in
the USEPA's final ruling requires a 36 percent reduction in
total NOx emissions from Indiana. The ruling could require
SIGECO to lower its system-wide emissions by approximately
70 percent. 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 $100
million, and related additional operation and maintenance
expenses could be an estimated $8 million to $10 million,
annually. Under the USEPA implementation schedule, the
emissions reductions and required control equipment must be
implemented and in place by May 15, 2003.
The USEPA initiated an investigation under Section 114 of
the Clean Air Act (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 Clean Air 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 complying 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 Clean Air 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 $100 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
Clean Air Act. Consequently, SIGECO anticipates at this
time that the plant will continue to operate while the
matter is being decided.
15
13. Commitments and Contingencies
Vectren is party to various legal proceedings arising in the
normal course of business. In the opinion of management,
there are no legal proceedings pending against Vectren that
are likely to have a material adverse effect on the
financial position or results of operations. Refer to Note
10 for litigation matters related to ProLiance and Note 12
for litigation matters concerning the Clean Air Act.
A wholly-owned subsidiary of Vectren holds one limited
partnership unit (which equates to an 8.3 percent ownership
interest) in Pace Carbon Synfuels Investors, L.P. (Pace
Carbon), a Delaware limited partnership formed to develop,
own and operate four projects to produce and sell coal-based
synthetic fuel. The subsidiary has agreed to advance up to
$1.8 million, of which, $0.4 million was advanced through
June 30, 2000, against future cash flows of the partnership
for capital improvements and financing capital needs. In
addition to its initial investment of $7.5 million, Vectren
has a continuing obligation to invest approximately $40
million in Pace Carbon, with any such additional investments
to be funded solely from a portion of the federal tax
credits that are earned from the production and sale of
briquettes by the projects.
On October 9, 1998, a wholly owned subsidiary of Vectren
committed to invest $10 million in Haddington Energy
Partners, L.P. (Haddington). Haddington, a Delaware limited
partnership, raised $77 million to invest in projects that
represent a portfolio of development opportunities,
including high deliverability gas storage, compressed air
energy storage, thermally-balanced cogeneration, fuel cells,
hydrogen generators, and gathering and processing in the
Powder River Basin and the Gulf Coast. Haddington's
investment opportunities primarily focus on acquiring and
completing energy projects under development rather than
start-up ventures. Through June 30, 2000, Vectren, through
its subsidiary, had invested approximately $9.7 million of
its commitment to Haddington, with the remainder to be paid
in calendar 2000. On July 28, 2000, Vectren announced its
commitment to fund an additional $20 million in Haddington
Energy Partners II, L.P., which is expected to raise an
additional $150 million. This second fund will provide
additional capital for the initial fund portfolio companies
as well as make investments in new areas, such as
distributed generation, power backup and quality devices,
and emerging technologies such as fuel cells, microturbines
and photovoltaics. This additional investment is expected
to be made through 2001.
14. Affiliate Transactions
The obligations of a wholly owned subsidiary of Vectren,
Vectren Capital Corp., which provides financing for
Vectren's non-utility subsidiaries, are subject to a support
agreement between Vectren and the subsidiary, under which
Vectren has agreed to make payments of interest and
principal on the subsidiary's securities in the event of
default. At June 30, 2000, the subsidiary had $149.3 million
in notes payable. Under the terms of the support agreement,
in addition to the cash flow of dividends paid to Vectren by
any of its consolidated subsidiaries, the non-utility assets
of Vectren are available as recourse to holders of the
subsidiary's securities. The carrying value of such non-
utility assets that are contained in the consolidated
financial statements of Vectren is approximately $589
million as of June 30, 2000.
ProLiance provides natural gas supply and related services
to Indiana Gas. Indiana Gas' purchases from ProLiance for
resale and for injections into storage for the three, six
and twelve months ended June 30, 2000, totaled $70.3
million, $136.3 million and $242.6 million, respectively.
Indiana Gas' purchases from ProLiance for the three, six and
twelve months ended June 30, 1999, totaled $48.2 million,
$114.1 million and $226.6 million, respectively.
ProLiance has a standby letter of credit facility with a
bank for letters up to $30 million. This facility is secured
in part by a support agreement from Vectren. Letters of
credit outstanding at June 30, 2000 totaled $13 million.
CIGMA, LLC, 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 Indiana
Gas and others. Indiana Gas' purchases of these services
during the three, six and twelve months ended June 30, 2000,
totaled $4.1 million, $8.1 million and $16.6 million,
respectively. Indiana Gas' purchases of these services
during the three, six and twelve months ended June 30, 1999,
totaled $4.4 million, $8.9 million and $18.5 million,
respectively.
16
Reliant Services, LLC (Reliant), owned jointly and equally
by a wholly owned subsidiary of Vectren and a third party,
provides utility locating, meter reading and construction
services to Indiana Gas and others. Amounts paid by Indiana
Gas to Reliant for such services totaled $1.0 million, $2.0
million and $4.1 million, respectively, for the three, six
and twelve months ended June 30, 2000. Amounts paid by
Indiana Gas to Reliant totaled $0.7 million, $1.4 million
and $1.5 million, respectively, for the three, six and
twelve months ended June 30, 1999.
Vectren is a two-thirds guarantor of certain surety bond and
other obligations of Energy Systems Group, LLC, a two-thirds
owned subsidiary. Vectren's share of the guarantee of such
obligations totaled $47.2 million at June 30, 2000.
Amounts owed to unconsolidated affiliates totaled
$28.8 million, $21.9 million and $28.8 million at June 30,
2000 and 1999 and December 31, 1999, respectively, and are
included in Accounts Payable on the Consolidated Balance
Sheets. Amounts due from unconsolidated affiliates totaled
$17.1 million, $6.6 million and $6.6 million at June 30,
2000 and 1999 and December 31, 1999, respectively, and are
included in Accounts Receivable on the Consolidated Balance
Sheets.
15. Segment Reporting
Statement of Financial Accounting Standards (SFAS) No. 131
"Disclosure about Segments of an Enterprise and Related
Information" establishes standards for the reporting of
information about operating segments in financial statements
and disclosures about products, services and geographical
areas. 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.
The operating segments of Vectren are defined as (1) Gas
Utility Services, (2) Electric Utility Services, and (3) Non-
regulated Operations.
Three Months Six Months
Ended June 30 Ended June 30
------------------- ------------------
2000 <F1> 1999 2000 <F1> 1999
Operating Revenues:
Gas Utility Services $100,485 $ 82,647 $301,330 $273,829
Electric Utility Services 78,289 73,802 151,279 144,789
Non-regulated Operations 98,129 64,111 199,609 135,971
Intersegment Eliminations (13,426) (13,518) (29,297) (26,514)
-------- -------- -------- --------
Total operating revenues $263,477 $207,042 $622,921 $528,075
-------- -------- -------- --------
Interest Expense:
Gas Utility Services $ 5,377 $ 4,191 $ 10,855 $ 8,781
Electric Utility Services 4,428 4,236 8,781 8,534
Non-regulated Operations 5,303 2,670 10,139 5,168
Intersegment Eliminations (2,789) (1,270) (5,183) (2,486)
--------- -------- -------- --------
Total interest expense $ 12,319 $ 9,827 $ 24,592 $ 19,997
-------- -------- -------- --------
Income Taxes:
Gas Utility Services $ (815) $ 90 $ 6,760 $ 16,057
Electric Utility Services 4,265 4,499 7,526 10,216
Non-regulated Operations 940 (51) 4,370 1,241
-------- -------- -------- --------
Total income taxes $ 4,390 $ 4,538 $ 18,656 $ 27,514
-------- -------- -------- --------
Depreciation and amortization:
Gas Utility Services $ 10,261 $ 9,708 $ 20,524 $ 19,306
Electric Utility Services 9,583 10,058 19,828 20,118
Non-regulated Operations 6,187 2,028 8,341 3,595
-------- -------- -------- --------
Total depreciation and
amortization $ 26,031 $ 21,794 $ 48,693 $ 43,019
-------- -------- -------- --------
Net (loss) income:
Gas Utility Services $ (2,913) $ 826 $ 7,308 $ 27,652
Electric Utility Services 5,875 7,430 8,483 16,840
Non-regulated Operations 5,311 3,298 14,607 7,785
-------- -------- -------- --------
Net income $ 8,273 $ 11,554 $ 30,398 $ 52,277
-------- -------- -------- --------
Capital Expenditures:
Gas Utility Services $ 15,284 $ 17,419 $ 33,422 $ 32,421
Electric Utility Services 9,545 14,407 21,034 26,197
Non-regulated Operations 7,201 1,808 8,415 4,763
-------- -------- -------- --------
Total capital expenditures $ 32,030 $ 33,634 $ 62,871 $ 63,381
-------- -------- -------- --------
Twelve Months
Ended June 30
-----------------
2000 <F1> 1999
Operating Revenues:
Gas Utility Services $ 527,074 $ 487,185
Electric Utility Services 314,059 299,901
Non-regulated Operations 378,508 272,016
Intersegment Eliminations (56,378) (49,473)
---------- ----------
Total operating revenues $1,163,263 $1,009,629
---------- ----------
Interest Expense:
Gas Utility Services $ 20,800 $ 17,725
Electric Utility Services 17,730 18,383
Non-regulated Operations 18,032 8,621
Intersegment Eliminations (9,105) (4,653)
---------- ----------
Total interest expense $ 47,457 $ 40,076
---------- ----------
Income Taxes:
Gas Utility Services $ 9,421 $ 19,784
Electric Utility Services 21,753 22,177
Non-regulated Operations 5,676 1,819
---------- ----------
Total income taxes $ 36,850 $ 43,780
---------- ----------
Depreciation and amortization:
Gas Utility Services $ 40,432 $ 37,979
Electric Utility Services 39,948 39,093
Non-regulated Operations 12,292 7,061
---------- ----------
Total depreciation and amortization $ 92,672 $ 84,133
---------- ----------
Net (loss) income:
Gas Utility Services $ 13,269 $ 36,430
Electric Utility Services 33,463 37,407
Non-regulated Operations 22,137 13,754
---------- ----------
Net income $ 68,869 $ 87,591
---------- ----------
Capital Expenditures:
Gas Utility Services $ 74,643 $ 68,185
Electric Utility Services 45,522 51,363
Non-regulated Operations 9,027 10,587
---------- ----------
Total capital expenditures $ 129,192 $ 130,135
---------- ----------
As of
As of June 30 December 31
------------------------ -----------
2000 1999 1999
Total Assets:
Gas Utility Services $ 838,842 $ 788,466 $ 882,948
Electric Utility Services 737,833 734,341 751,159
Non-regulated Operations 589,489 361,931 509,572
Intersegment Eliminations (201,676) (113,324) (163,212)
----------- ----------- -----------
Total assets $1,964,488 $1,771,414 $1,980,467
----------- ----------- -----------
<FN>
<F1> The 2000 amounts include merger and merger related
costs (see Note 3).
</FN>
16. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement, as
amended by SFAS No. 138, establishes accounting and
reporting standards requiring that every derivative
instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair
value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in
the income statement, and requires that a company must
formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Vectren is
required to adopt SFAS No. 133 no later than January 1,
2001. In certain of its operations, Vectren utilizes
derivative instruments to manage pricing decisions, minimize
the risk of price volatility, and minimize price risk
exposure in the energy markets. Vectren has not quantified
the impact of adopting this statement on its financial
position or results of operations.
17. Reclassifications
Certain reclassifications have been made to the prior
periods' financial statements to conform to the current year
presentation. These reclassifications have no impact on net
income previously reported.
18
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Merger Transaction
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. The common
shareholders of SIGCORP received one and one-third shares of
Vectren common stock for each SIGCORP common share and
Indiana Energy common shareholders received one share of
Vectren common stock for each Indiana Energy common share,
resulting in the issuance of 61.3 million shares of Vectren
common stock. The preferred stock and debt securities of
Indiana Energy's and SIGCORP's utility subsidiaries were not
affected by the merger.
Vectren is a public utility holding company with two
operating public utilities, Indiana Gas Company, Inc.
(Indiana Gas), formerly a wholly owned subsidiary of Indiana
Energy, and Southern Indiana Gas and Electric Company
(SIGECO), formerly a wholly owned subsidiary of SIGCORP.
Vectren also has certain non-regulated operations and
investments. Indiana Gas and its subsidiaries provide
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.
Vectren is involved in non-regulated activities through the
operations and investments of its three wholly-owned non-
regulated subsidiaries: Vectren Enterprises, Inc.
(Enterprises), Vectren Generation Services, Inc. (Generation
Services) and Vectren Resources, LLC (Resources).
Enterprises, the largest and most diverse of the non-
regulated subsidiaries, consists of five groups: Energy
Services, Communications, Utility Services, Financial Group
and Ventures. These five groups provide or invest in
entities that provide energy-related products and services,
telecommunications 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, and
venture capital projects. Generation Services owns and
operates coal mining properties and provides coal to SIGECO
and other customers. Resources owns information system and
technology assets utilized by Vectren and its subsidiaries.
Results of Operations
Vectren's consolidated earnings are from the operations of
its gas distribution and electric subsidiaries, Indiana Gas
and SIGECO, and from the non-utility operations and
investments of Vectren's non-regulated subsidiaries.
Net Income
Consolidated net income was $8.3 million, or $0.14 on a
basic earnings per share basis (EPS), for the three months
ended June 30, 2000. Consolidated net income before merger
and merger related charges of $6.5 million, including $3.3
million of accelerated depreciation included in depreciation
and amortization (see merger and merger related costs
below), was $14.2 million ($0.23 per share) for the three
months ended June 30, 2000, as compared to net income of
$11.6 million ($0.19 per share) for the same period in 1999.
Consolidated net income was $30.4 million ($0.50 per share)
for the six months ended June 30, 2000. Consolidated net
income before merger and merger related charges of $33.7
million (including $3.3 million of accelerated depreciation)
was $55.6 million ($0.91 per share) for the six months ended
June 30, 2000, as compared to net income of $52.3 million
($0.85 per share) for the same period in 1999.
19
Consolidated net income was $68.9 million ($1.12 per share)
for the twelve months ended June 30, 2000. Consolidated net
income before merger and merger related charges of $33.7
million (including $3.3 million of accelerated depreciation)
was $94.1 million ($1.53 per share) for the twelve months
ended June 30, 2000, as compared to net income of $87.6
million ($1.43 EPS) for the same period in 1999.
Utility Margin (Operating Revenues Less Cost of Gas, Cost of
Fuel for Electric Generation and
Purchased Electric Energy)
Gas utility margin for the quarter ended June 30, 2000 was
$44.6 million compared to $44.0 million for the same period
last year reflecting an increase in gas sales due to
slightly more favorable weather conditions and customer
growth.
Gas margin for the six months ended June 30, 2000 was $126.9
million compared to $131.7 million for the same period in
1999. Gas margin was lower for the six months ended June
30, 2000 due to weather being 4 percent warmer than the
prior year period and 16 percent warmer than normal, causing
a 3 percent decline from the prior year period in total
residential and commercial gas sales. The decrease in gas
margin was partially offset by additional residential and
commercial customer growth.
Gas utility margin for the twelve months ended June 30, 2000
was $228.3 million compared to $228.5 million for the same
period last year due to similar weather during the
comparative periods.
Vectren's rates for gas transportation generally provide for
the same margins as are earned on the sale of gas under its
applicable sales tariffs. Approximately one-half of total
gas system throughput represents gas used for space heating
and is affected by weather.
Electric utility margin for the quarter ended June 30, 2000
was $53.6 million as compared to $51.0 million for the same
period last year. During the current quarter, a $2.6 million
increase in margin from nonfirm wholesale sales to other
utilities and power marketers was the primary reason for the
increase in total electric margin. Sales to these customers
were up 20 percent and average unit sales margins were
greater compared to the year ago period.
Electric utility margin for the six months ended June 30,
2000 was $106.5 million as compared to $103.1 million for
the same period in 1999. For the six month period ending
June 30, 2000, a 38 percent increase in sales to other
utilities and power marketers and higher average unit
margins from these sales contributed an additional $4.0
million to electric margin, more than offsetting the impact
of 6 percent fewer residential electric sales.
Electric utility margin for the twelve months ended June 30,
2000, was $223.9 million compared to $212.1 million for the
same period last year. The $11.8 million increase in margin
reflected a $7.5 million increase in margin from sales to
other utilities and power marketers and a 4 percent increase
in retail and firm wholesale electric sales primarily due to
stronger industrial and commercial sales.
Non-Utility Margin (Energy Services and Other Revenues Less
Cost of Energy Services and Other)
Margin from Vectren's non-utility operations (primarily the
operating companies of its Generation Services and Energy
Services and Communications groups) for the quarter ended
June 30, 2000 was $4.5 million compared to $2.1 million for
the same period in 1999. The $2.4 million increase in the
current quarter's non-utility margin was primarily due to a
$2.3 million increase in margin from the Energy Services
group reflecting continued growth in its performance
contracting and energy efficiency project operations,
including several large federal government contracts in
progress, and the continued growth of its natural gas
marketing and fuel supply management services operations.
20
Non-utility margin for the six months ended June 30, 2000
was $8.4 million compared to $4.8 million for the same
period last year. During the current six month period, the
Energy Services group and the Communications group
contributed an additional $2.0 million and $1.2 million,
respectively, to non-utility margin. Additional municipal
fiber optic systems projects revenue and improved project
margins were the primary reasons for the Communications
group's increased margin.
Non-utility margin for the twelve months ended June 30,
2000, was $17.2 million compared to $10.1 million for the
year ago period. Operating margin for the Energy Services
group increased $6.2 million during the twelve months ended
June 30, 2000, for the same reasons as described above.
Operating Expenses (excluding Cost of Gas, Cost of Fuel for
Electric Generation, Purchased Electric Energy and Cost of
Energy Services and Other)
Other operating expenses increased $4.2 million, or 9.2
percent, for the three months ended June 30, 2000, when
compared to the same period a year ago. The increase is
primarily attributed to $1.7 million higher operating
expenses related to expanded operations and staffing at
certain non-regulated subsidiaries and a rise in utility
operating expenses due to additional scheduled maintenance
expenditures of $1.2 million at SIGECO's generation
facilities.
Other operating expenses increased $5.8 million, or 6.4
percent, for the six months ended June 30, 2000, when
compared to the same period a year ago. The six month
increase is also primarily attributed to $1.9 million higher
operating expenses related to continued growth in operations
and staffing at certain non-regulated subsidiaries and a
rise in utility operating expenses due to $1.6 million of
additional scheduled maintenance projects at SIGECO's
generation facilities. Additionally, utility operating
expenses were higher during the six months ended June 30,
2000 due to a first quarter 1999 reduction in restructuring
charges at Indiana Gas of $1.3 million.
For the twelve months ended June 30, 2000, other operating
expenses increased $12.7 million, or 6.9 percent, compared
to the prior year. In addition to the items noted above,
the increase reflects additional costs related to the
implementation of a new customer information system at
Indiana Gas in January 1999.
Depreciation and amortization increased $4.2 million, or
19.4 percent, and $5.7 million, or 13.2 percent, for the
three and six months ended June 30, 2000. Depreciation and
amortization increased $8.5 million, or 10.1 percent, for
the twelve months ended June 30, 2000. The increase is the
result of merger integration activities (see below) and
additions to plant to serve new customers and to maintain
dependable service to existing customers.
Taxes other than income taxes increased $1.0 million, $1.3
million and $4.0 million, respectively, during the recent
three, six and twelve months due to higher gross receipts
and property tax expense.
Merger and Merger Related Costs
Merger costs incurred for the three and six months ended
June 30, 2000 totaled $3.3 million and $30.4 million,
respectively. These costs relate primarily to transaction
costs, severance and other merger integration activities.
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 complete by 2001.
As a result of merger integration activities, management has
identified certain information systems which are expected to
be retired in 2001. Accordingly, the useful lives of these
assets have been shortened to reflect this decision,
resulting in an increase in depreciation expense of
approximately $3.3 million for the three, six and twelve
months ended June 30, 2000.
21
Other Income
Equity in Earnings of Unconsolidated Investments decreased
slightly for the three months ended June 30, 2000. A $1.6
million increase in pre-tax earnings from leveraged lease
investments at Vectren Financial Group offset the $1.0
million common equity interest restructuring charge at
SIGECOM (see Note 11 of the Notes to Consolidated Financial
Statements) and a $0.8 million reduction in pre-tax earnings
from Proliance.
Equity in Earnings of Unconsolidated Investments increased
by $8.0 million for the six months ended June 30, 2000,
compared to the prior year period. The increase is due
primarily to an $8.0 million pre-tax gain recorded in the
first quarter of 2000 on the restructuring of SIGECOM (see
Note 11 of the Notes to Consolidated Financial Statements)
as well as increased investment earnings at Vectren's
Financial Group, which added several leveraged lease
investments totaling $50 million in late 1999. These
increases are partially offset by the $1.0 million common
equity interest restructuring charge at SIGECOM (see above)
and lower pre-tax earnings recognized from ProLiance. The
$2.4 million reduction in ProLiance's earnings is primarily
attributed to the timing effects of ProLiance's net position
on financial instruments held to hedge storage inventories
and the restructuring of several transportation contracts to
provide less seasonality in Proliance's earnings.
Equity in Earnings of Unconsolidated Investments increased
by $9.8 million for the twelve months ended June 30, 2000,
compared to the prior year period. The increase is due
primarily to the $8.0 million pre-tax gain recorded in the
first quarter of 2000 on the restructuring of SIGECOM as
well as increased investment earnings at Vectren's Financial
Group, reflecting the additional leveraged lease investments
discussed above. These increases were partially offset by
the $1.0 million common equity interest restructuring charge
at SIGECOM (see above) and lower pre-tax earnings recognized
from ProLiance. The $4.8 million reduction in ProLiance's
earnings is consistent with the decrease described above.
Other - net increased $6.7 million, $7.2 million and $9.6
million, respectively, for the three, six and twelve months
ended June 30, 2000, compared to the prior year periods due
to increased interest income ($1.3 million, $1.8 million and
$3.1 million for the three, six and twelve months ended June
30, 2000 compared to the year ago periods) mainly from
Vectren's Financial Group, a $2.3 million gain on the sale
of a partial interest in Energy Services' energy efficiency
and performance contracting joint venture and a $1.1 million
premium earned by Financial Group for a loan guarantee, both
of which occurred in the second quarter of 2000.
Interest Expense
Interest expense increased by $2.5 million, $4.6 million and
$7.4 million, respectively, for the three, six and twelve
months ended June 30, 2000, when compared to the same
periods a year ago. The increase is due primarily to
additional debt required for Financial Group's increased
financial investment activities and to higher average
interest rates on utility debt and short-term borrowings.
Income Taxes
Federal and state income taxes declined $0.1 million, $8.9
million and $6.9 million, respectively, for the three, six
and twelve months ended June 30, 2000, compared to the same
periods a year ago due primarily to lower earnings resulting
from merger and merger related costs of $6.5 million, $33.7
million and $33.7 million, respectively, and to additional
tax benefits realized from certain non-regulated
subsidiaries, which were partially offset by higher
effective tax rates resulting from the nondeductibility of
certain merger costs.
22
Other Operating Matters
Acquisition of the Gas Distribution Assets of
The Dayton Power and Light Company
On December 15, 1999, Indiana Energy (now Vectren) announced
that the board of directors had approved a definitive
agreement under which the company would acquire the natural
gas distribution assets of The Dayton Power and Light
Company (DP&L), which will add 305,000 gas distribution
customers in 16 counties in west central Ohio. The
acquisition, with a purchase price of $425 million, is
expected to be funded with short-term debt which will be
replaced over time with permanent financing. This
transaction is conditioned upon the approval of several
regulatory bodies. In June 2000, the Department of Justice
concluded that it had completed its review of its Hart Scott
Rodino notification filings and would take no further
action. In July 2000, the Public Utilities Commission of
Ohio granted approval for the transaction. Vectren is
awaiting approval from the SEC for the transaction under the
Public Utility Holding Company Act. Other remaining
approvals include the Federal Communications Commission's
authorization of the transfer of radio licenses held by
DP&L, and action by certain local authorities regarding the
transfer of operating rights. Management expects to
complete the transaction during the third quarter of 2000.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a 50 percent owned non-
regulated 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 (the gas supply agreements) to be consistent with the
public interest. 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 and two
other pricing terms, 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. The IURC has not yet established a schedule
for conducting these additional proceedings.
The IURC's September 12, 1997, decision was appealed to the
Indiana Court of Appeals by certain Petitioners, including
the Indiana Office of Utility Consumer Counselor, the
Citizens Action Coalition of Indiana, and a small group of
large-volume customers. On October 8, 1998, the Indiana
Court of Appeals issued a decision which reversed and
remanded the case to the IURC with instructions that the gas
supply agreements be disapproved. The basis for the decision
was that because the gas supply agreements provide for index
based pricing of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have been the
subject of an application for approval of an alternative
regulatory plan under Indiana statutory law.
On April 22, 1999, the Indiana Supreme Court granted a
petition for transfer of the case and will now consider the
appeal of the IURC's decision and issue its own decision on
the merits of the appeal at a later date. By granting
transfer, the Supreme Court has vacated the Court of
Appeals' decision.
If the Supreme Court reverses the IURC's decision, the case
will be remanded to the IURC for further proceedings
regarding the public interest in the gas supply agreements.
If the Supreme Court affirms the IURC's decision, as
described above, the reasonableness of certain of the gas
costs incurred by Indiana Gas under the gas supply
agreements will be further reviewed by the IURC in the
consolidated GCA proceeding. The existence of significant
benefits to the utilities and their customers resulting from
ProLiance's services has not been challenged on appeal.
Indiana Gas and Citizens Gas are continuing to utilize
ProLiance for their gas supplies.
23
On or about August 11, 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.
Pretax income of $1.5 million and $2.3 million was
recognized as ProLiance's contribution to earnings for the
three months ended June 30, 2000 and 1999, respectively.
Pretax income of $4.8 million and $7.2 million was
recognized as ProLiance's contribution to earnings for the
six months ended June 30, 2000 and 1999, respectively.
Pretax income of $4.2 million and $9.0 million was
recognized as ProLiance's contribution to earnings for the
twelve months ended June 30, 2000 and 1999, respectively.
Earnings recognized from ProLiance are included in Equity in
Earnings of Unconsolidated Investments on the Consolidated
Statements of Income.
At June 30, 2000, Vectren has reserved approximately $2.2
million of ProLiance earnings after tax. Total after-tax
ProLiance earnings recognized to date approximate $18.1
million. This amount includes earnings from all of
ProLiance's business activities, and therefore is believed
to be a conservative estimate of the upper risk limit.
Resolution of the above proceedings may also impact future
operations and earnings contributions from ProLiance. Based
on the IURC's findings described above, management believes
the ProLiance issues may be resolved near the levels that
are already being reserved, and therefore, while these
proceedings are pending, management does not anticipate
changing the level at which it reserves ProLiance earnings.
However, no assurance of this outcome can be provided.
Environmental Matters
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 threshold
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 (ROD) was issued by 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 (VRP) 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.
Indiana Gas has accrued the estimated costs for further
investigation, remediation, groundwater monitoring and
related costs for the sites. While the total costs which
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.
Indiana Gas has recovered these estimated accrued costs from
insurance carriers and other potentially responsible parties
(PRPs). Indiana Gas has PRP agreements in place for 19 of
the 26 sites, which serve to limit Indiana Gas' share of
response costs at these 19 sites to between 20 and 50
percent. For these sites, Indiana Gas has accrued only its
proportionate share of the estimated response costs.
24
With respect to insurance coverage, as of June 30, 2000,
Indiana Gas has recorded settlements from all known
insurance carriers in an aggregate amount of approximately
$20.1 million.
These environmental matters 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.
Clean Air Act
In October 1997, the United States Environmental Protection
Agency (USEPA) proposed a rulemaking that could require
uniform NOx emissions reductions of 85 percent 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, which requires 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.
Midwestern states (the alliance) have been working together
to determine the most appropriate compliance strategy as an
alternative to the USEPA proposal. The alliance submitted
its proposal, which calls for a smaller, phased in reduction
of NOx levels, to the USEPA and the Indiana Department of
Environmental Management in June 1998.
In July 1998, Indiana submitted its proposed plan to the
USEPA in response to the USEPA's proposed new NOx rule and
the emissions budget proposed for Indiana. The Indiana
plan, which calls for a reduction of NOx emissions to a rate
of 0.25 lb/mmBtu by 2003, is less stringent than the USEPA
proposal but more stringent than the alliance proposal.
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.
During the second quarter of 1999, the USEPA lost two
federal court challenges to key air-pollution control
requirements. In the first ruling by the U.S. Circuit Court
of Appeals for the District of Columbia on May 14, 1999, the
Court struck down the USEPA's attempt to tighten the one-
hour ozone standard to an eight-hour standard and the
attempt to tighten the standard for particulate emissions,
finding the actions unconstitutional. In the second ruling
by the same Court on May 25, 1999, the Court placed an
indefinite stay on the USEPA's attempts to reduce the
allowed NOx emissions rate from levels required by the Clean
Air Act Amendments of 1990. The USEPA appealed both court
rulings. On October 29, 1999, the Court refused to
reconsider its May 14, 1999 ruling.
On March 3, 2000, the D.C. Circuit 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
by no later than September 30, 1999. Numerous petitioners,
including several states, have filed petitions for rehearing
with the U.S. Court of Appeals for the District of Columbia
in Michigan v. the USEPA. On June 22, 2000, the D.C. Circuit
Court of Appeals denied petition for rehearing en banc and
lifted its May 25, 1999 stay.
25
The proposed NOx emissions budget for Indiana stipulated in
the USEPA's final ruling requires a 36 percent reduction in
total NOx emissions from Indiana. The ruling could require
SIGECO to lower its system-wide emissions by approximately
70 percent. 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 $100
million, and related additional operation and maintenance
expenses could be an estimated $8 million to $10 million,
annually. Under the USEPA implementation schedule, the
emissions reductions and required control equipment must be
implemented and in place by May 15, 2003.
The USEPA initiated an investigation under Section 114 of
the Clean Air Act (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 Clean Air 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 complying 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 Clean Air 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 $100 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
Clean Air Act. Consequently, SIGECO anticipates at this
time that the plant will continue to operate while the
matter is being decided.
26
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard
(SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement, as amended by SFAS No.
138, establishes accounting and reporting standards
requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts,
be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and
requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive
hedge accounting. Vectren is required to adopt SFAS No. 133
no later than January 1, 2001. In certain of its operations,
Vectren utilizes derivative instruments to manage pricing
decisions, minimize the risk of price volatility, and
minimize price risk exposure in the energy markets. Vectren
has not quantified the impact of adopting this statement on
its financial position or results of operations.
Liquidity and Capital Resources
Vectren's capitalization objectives are 45-60 percent common
and preferred equity and 40-55 percent long-term debt. These
objectives 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 common equity component was 59 percent of its
total capitalization at June 30, 2000.
The acquisition of the gas distribution assets of DP&L, at a
cost of $425 million, is expected to be funded with short-
term debt which will be replaced over time with permanent
financing.
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 for fiscal
2000 are estimated at approximately $150 million of which
$62.9 million have been expended through June 30, 2000. For
the twelve months ended June 30, 2000, capital expenditures
totaled $129.2 million.
Vectren has $306 million of short-term borrowing capacity
for use in its utility and non-regulated operations, of
which approximately $123 million was available at June 30,
2000.
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 at their highest and gas storage facilities
are being refilled.
Financing Activities
On July 3, 2000, all of SIGECO's $9,975,000 Adjustable Rate
Pollution Control Revenue Bonds were remarketed and the
interest rate was reset to 4.75% from 4.55%. The new
interest rate will be effective from July 1, 2000 through
June 30, 2001.
On July 7, 2000, SIGECO repurchased 22,000 shares of its
4.75% nonredeemable $100 par value preferred stock at a
purchase price of $84.25 per share. The stock was
repurchased as treasury stock and is to be retired.
Vectren expects the majority of its capital expenditures
requirements and debt security redemptions to be provided by
internally generated funds.
27
Indiana Gas' and SIGECO's credit ratings on outstanding debt
at June 30, 2000 were AA-/Aa2 and AA/Aa2, respectively.
Cash required for financing activities of $21.9 million for
the six months ended June 30, 2000 includes $29.5 million of
dividends on common stock and $7.7 million of additional net
borrowings. Cash from financing activities of $106.0 million
for the twelve months ended June 30, 2000 includes $58.8
million of dividends on common stock and $164.8 million of
additional net borrowings.
Cash required for investing activities of $87.3 million for
the six months ended June 30, 2000 includes, among other
things, $62.9 million of capital expenditures, $29.5 million
additional notes receivable and $10.1 million of non utility
property additions. Cash required for investing activities
of $222.7 million for the twelve months ended June 30, 2000
includes, among other things, $129.2 million of capital
expenditures, $40.8 million additional notes receivable,
$17.9 million of non utility property additions and $46.5
million addition of leveraged leases.
Forward-Looking Information
A "safe harbor" for forwarding-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
Financial Condition and Results of Operations, including but
not limited to, Vectren's realization of net merger savings,
ProLiance and the acquisition of gas distribution assets of
the DP&L, 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 Corporation and its subsidiaries'
actual results to differ materially from those contemplated
in any forward-looking statements included, among others,
the following:
* 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.
* Increased competition in the energy environment
including effects of industry restructuring and unbundling.
* 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.
* 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.
* Economic conditions including inflation rates and
monetary fluctuations.
28
* 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.
* 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.
* Employee workforce factors including changes in key
executives, collective bargaining agreements with union
employees, or work stoppages.
* Legal and regulatory delays and other obstacles
associated with mergers, acquisitions, and investments in
joint ventures.
* Costs and other effects of legal and administrative
proceedings, settlements, investigations, claims, and other
matters, including, but not limited to, those described in
the Other Operating Matters section of Management's
Discussion and Analysis of Financial Condition and Results
of Operations.
* Changes in federal, state or local legislature
requirements, such as changes in tax laws or rates,
environmental laws and regulations.
Vectren Corporation 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.
Seasonality
Because of the seasonal nature of Vectren's utility
operations, the results shown on a quarterly basis are not
necessarily indicative of annual results.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Vectren's debt portfolio contains a substantial amount of
fixed-rate long-term debt and, therefore, does not expose
the company to the risk of material earnings or cash flow
loss due to changes in market interest rates. Vectren
attempts to mitigate its exposure to interest rate
fluctuations through management of its short-term borrowings
and the use of interest rate hedging instruments. An
internal guideline to manage short-term interest rate
exposure has been established. This guideline targets a
level of 25 percent of the company's total debt portfolio to
consist of adjustable rate bonds with a maturity of less
than one year, short-term notes and commercial paper.
However, it is acknowledged that there may be times that the
guideline may be exceeded.
ProLiance engages in energy hedging activities to manage
pricing decisions, minimize the risk of price volatility,
and minimize price risk exposure in the energy markets.
ProLiance's market exposure arises from storage inventory,
imbalances and fixed-price purchase and sale commitments,
which are entered into to support ProLiance's operating
activities. Currently, ProLiance buys and sells physical
commodities and utilizes financial instruments to hedge its
market exposure. However, net open positions in terms of
price, volume and specified delivery point do occur.
ProLiance manages open positions with policies which limit
its exposure to market risk and require reporting potential
financial exposure to its management and its members. As a
result of ProLiance's risk management policies, Vectren does
not believe that ProLiance's exposure to market risk will
result in material earnings or cash flow loss to the
company.
29
SIGECO utilizes contracts for the forward sale of
electricity to effectively manage the utilization of its
available generating capability. Such contracts include
forward physical contracts for wholesale sales of its
generating capability, during periods when SIGECO's
available generating capability is expected to exceed the
demands of its retail, or native load, customers. To
minimize the risk related to these forward contracts, SIGECO
may utilize call option contracts to hedge against the
unexpected loss of its generating capability during periods
of heavy demand. SIGECO also utilizes forward physical
contracts for the wholesale purchase of generating
capability to resell to other utilities and power marketers
through non-firm "buy-resell" transactions where the sale
and purchase prices of power are concurrently set. As of
June 30, 2000 management believes exposure from these
positions was not material.
Exposure to electricity market price risk results from the
use of forward contracts to effectively manage the supply
of, and demand for, the generation capability of SIGECO's
generating plants related to its wholesale power marketing
activities. SIGECO is not currently exposed to market risks
for purchases of electric energy power and natural gas for
its retail customers due to current Indiana regulations
which allow for recovery of such purchases through SIGECO's
fuel and natural gas cost adjustment mechanisms. A 1999
generic order issued by the IURC established new guidelines
for the recovery of purchased electric power costs through
the fuel adjustment clauses. This order was appealed by the
Indiana Office of the Utility Consumer Counselor (OUCC). On
August 9, 2000, the IURC approved a settlement between
SIGECO and the OUCC which resolved all issues between SIGECO
and the OUCC regarding the IURC's generic order and
dismissed the OUCC's appeal. The settlement pertains to the
summer months of 2000 and the parties have agreed to
collaborate on a permanent agreement covering future
periods. The settlement provides a price cap on the
recovery from retail electric customers of purchased power
costs incurred by SIGECO during normal economic dispatch
conditions and provides for 85 percent recoverability of
purchased power costs incurred during unplanned forced
outages. SIGECO does not anticipate the potential limitation
of recoverability of its purchased power costs to be
material under this settlement.
Vectren's wholly owned energy services subsidiary utilizes
forward physical contracts for both the purchase and sale of
natural gas to its customers, primarily through "back-to-
back" transactions where the sale and purchase prices of
natural gas are concurrently set. Management believes that
exposure from these positions was not material. This
subsidiary sells fixed-price and capped-price products, and
reduces its market price risk through the use of fixed-price
supplier contracts and storage assets.
Vectren is also exposed to counterparty credit risk when a
supplier defaults upon a contract to pay or deliver the
commodity. To mitigate risk, procedures to determine and
monitor the creditworthiness of counterparties have been
established.
At June 30, 2000, Vectren was not engaged in other contracts
which would cause exposure to the risk of material earnings
or cash flow loss due to changes in market commodity prices,
foreign currency exchange rates, or interest rates.
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10 of the Notes to the Consolidated Financial
Statements for discussion of litigation matters relating to
the gas supply and portfolio administration agreements
between ProLiance and Indiana Gas and ProLiance and Citizens
Gas.
See Note 12 of the Notes to the Consolidated Financial
Statements for discussion of the litigation matters relating
to USEPA allegations that SIGECO violated the Clean Air Act.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description
99.1 Vectren Corporation Employment Agreement between
Vectren Corporation and Niel C. Ellerbrook dated
as of March 31, 2000
99.2 Vectren Corporation Employment Agreement between
Vectren Corporation and Andrew E. Goebel dated as
of March 31, 2000
99.3 Vectren Corporation Employment Agreement between
Vectren Corporation and Jerome A. Benkert dated as
of March 31, 2000
99.4 Vectren Corporation Employment Agreement between
Vectren Corporation and Carl L. Chapman dated as
of March 31, 2000
99.5 Vectren Corporation Employment Agreement between
Vectren Corporation and Ronald E. Christian dated
as of March 31, 2000
99.6 Vectren Corporation Employment Agreement between
Vectren Corporation and Timothy M. Hewitt dated
as of March 31, 2000
99.7 Vectren Corporation Employment Agreement between
Vectren Corporation and J. Gordon Hurst dated as
of March 31, 2000
99.8 Vectren Corporation Employment Agreement between
Vectren Corporation and Richard G. Lynch dated as
of March 31, 2000
27 Financial Data Schedule, filed herewith.
Form 8-K's
On April 14, 2000 Vectren Corporation filed a Current Report
on Form 8-K with respect to the merger of Indiana Energy,
Inc. and SIGCORP consummated on March 31, 2000. Items
reported included:
Item 1. Acquisition or Disposition of Assets
Item 7. Financial Statements and Exhibits
Exhibit 4 Amended and Restated Articles
Exhibit 4 Amended and Restated Bylaws
On April 27, 2000 Vectren Corporation filed a Current Report
on Form 8-K with respect to the release of summary financial
information to the investment community regarding Vectren
Corporation consolidated results of operation, financial
position and cash flows for the three-and twelve-month
periods of March 31, 2000. Items reported included:
31
Item 5. Other Events
Item 7. Exhibits
Exhibit 99-1 Press Release
Exhibit 99-2 Analyst Report-First Quarter 2000
Exhibit 99-3 Cautionary Statement for purposes of the
"Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
On April 27, 2000 Vectren filed a Current Report on Form 8-K
with respect to an analyst teleconference call held on April
27, 2000. Items reported included:
Item 5. Other Events
Item 7. Exhibits
Exhibit 99 Analyst script teleconference call dated
April 27, 2000
On May 31, 2000 Vectren filed a Current Report on Form 8-K
reporting financial results for the one and four month
periods ended April 30, 2000.
Item 5. Other Events
Item 7. Exhibits
Exhibit 99 Consolidated Operating Revenues and
Consolidated Net Income
On July 11, 2000, Vectren Corporation filed a Current Report
on Form 8-K with respect to the release of annual financial
statements and notes thereto as of December 31, 1999 and
1998 and for the years ended December 31, 1999, 1998 and
1997 to reflect the company on a historical basis as
restated for the effects of the pooling -of-interests
transaction completed on March 31, 2000 between Indiana
Energy and SIGCORP. Items reported included:
Item 5. Other Items
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Responsibility for Financial Statements
Report of Independent Public Accountants
Consolidated Financial Statements of Vectren
Corporation and Subsidiaries
Consent of Independent Public Accountants
Signatures
On July 28, 2000 Vectren Corporation filed a Current Report
on Form 8-K with respect to the release of financial
information to the investment community regarding Vectren
Corporation consolidated results of operation, financial
position and cash flows for the three-, six- and twelve-
month periods ended June 30, 2000. Items reported included:
Item 5. Other Events
Item 7. Exhibits
Exhibit 99-1 Press Release - Second Quarter 2000
Exhibit 99-2 Financial Analyst Report - Second
Quarter 2000
Exhibit 99-3 Analyst Teleconference Script
- Second Quarter 2000
Exhibit 99-4 Cautionary Statement for purposes
of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
32
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 14, 2000 /s/ M. Susan Hardwick
---------------------
M. Susan Hardwick
Vice President and Controller
August 14, 2000 /s/ Jerome E. Benkert
---------------------
Jerome E. Benkert
Executive Vice President
and Chief Financial Officer