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 September 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 61,387,217 November 10, 2000
- ----------------------------- ---------------- ----------------
Class Number of shares Date
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 Results of Operations 18-28
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
Signatures 31
3
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
September 30 December 31
2000 1999 1999
ASSETS
Current Assets:
Cash and cash equivalents $ 19,009 $ 15,554 $ 17,351
Temporary investments 826 538 903
Accounts receivable, less
reserves of $3,241, $3,052 and
$3,949, respectively 134,821 95,178 123,612
Accrued unbilled revenues 21,058 19,973 55,370
Inventories 47,897 50,588 58,863
Prepaid gas delivery service 46,788 25,810 20,937
Recoverable fuel and natural
gas costs 30,680 7,230 5,585
Prepayments and other current
assets 31,376 23,137 23,091
-------- -------- ---------
Total current assets 332,455 238,008 305,712
Utility Plant:
Original cost 2,419,568 2,351,129 2,367,831
Less: accumulated depreciation
and amortization 1,069,471 1,023,347 1,031,498
--------- --------- ---------
Net utility plant 1,350,097 1,327,782 1,336,333
Other Investments:
Investments in leveraged leases 91,253 83,769 85,737
Investments in partnerships and
other corporations 80,873 74,485 74,644
Notes receivable 62,384 24,083 32,271
Other 2,008 984 996
--------- --------- ---------
Total other investments 236,518 183,321 193,648
Nonutility property, net of
accumulated depreciation 89,530 60,356 64,474
Other Assets:
Deferred charges 20,578 24,904 34,149
Unamortized debt costs 14,970 15,947 15,843
Demand side management programs 25,686 25,404 25,298
Other 3,134 5,010 5,010
---------- ---------- ----------
Total other assets 64,368 71,265 80,300
TOTAL ASSETS $2,072,968 $1,880,732 $1,980,467
========== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
September 30 December 31
2000 1999 1999
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Current maturities of
adjustable rate bonds
subject $ 53,700 $ 53,700 $ 53,700
to tender
Current maturities of long-
term debt and other
obligations 258 866 776
Short-term borrowings 310,545 167,511 207,638
Accounts payable 115,040 75,698 95,827
Refunds to customers and
customer deposits 13,556 30,101 27,396
Accrued taxes 14,344 18,175 26,602
Accrued interest 12,617 7,620 12,097
Other current liabilities 50,506 51,375 49,467
--------- -------- ---------
Total current liabilities 570,566 405,046 473,503
Deferred Credits and Other Liabilities:
Deferred income taxes 203,219 208,619 215,520
Accrued postretirement
benefits other than pensions 44,675 42,282 40,942
Unamortized investment tax
credits 23,756 26,113 25,524
Other 18,111 8,561 8,297
--------- -------- ---------
Total deferred credits and
other liabilities 289,761 285,575 290,283
Commitments and Contingencies
Minority interest in subsidiary 1,900 1,557 916
Capitalization:
Long-term debt and other
obligations, net of current
maturities 484,074 467,771 486,726
Preferred stock of subsidiary:
Redeemable 8,076 8,192 8,192
Nonredeemable 8,889 11,090 11,090
-------- -------- ---------
Total preferred stock 16,965 19,282 19,282
Common stock (no par value) -
issued and outstanding
61,219, 61,287 and 61,305, 213,742 215,018 215,917
respectively
Retained earnings 495,886 486,560 493,918
Accumulated other
comprehensive income 74 (77) (78)
--------- --------- ----------
Total common shareholders'
equity 709,702 701,501 709,757
Total capitalization 1,210,741 1,188,554 1,215,765
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,072,968 $1,880,732 $1,980,467
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
5
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands, except per share data)
Three Months Nine Months
Ended September 30 Ended September 30
2000 1999 2000 1999
OPERATING REVENUES:
Gas utility $ 90,156 $68,258 $391,486 $ 342,087
Electric utility 97,936 94,171 249,215 238,960
Energy services and other 129,762 68,731 300,074 178,188
-------- ------- ------- --------
Total operating revenues 317,854 231,160 940,775 759,235
OPERATING EXPENSES:
Cost of gas sold 54,948 32,465 229,373 174,581
Fuel for electric
generation 19,606 20,171 51,722 51,529
Purchased electric energy 12,449 8,406 25,085 18,731
Cost of energy services
and other 123,894 63,967 285,856 168,601
Other operating 46,021 48,314 142,620 139,087
Merger costs 864 - 31,306 -
Depreciation and
amortization 26,315 21,797 75,008 64,816
Taxes other than income
taxes 6,114 6,643 22,170 21,420
-------- ------- -------- --------
Total operating expenses 290,211 201,763 863,140 638,765
OPERATING INCOME 27,643 29,397 77,635 120,470
OTHER INCOME:
Equity in earnings of
unconsolidated
investments 2,399 2,937 16,950 9,476
Other - net 4,278 3,651 14,497 6,657
-------- ------- -------- --------
Total other income 6,677 6,588 31,447 16,133
INTEREST EXPENSE 13,348 10,586 37,940 30,583
-------- ------- -------- --------
INCOME BEFORE PREFERRED DIVIDENDS AND
INCOME TAXES 20,972 25,399 71,142 106,020
PREFERRED DIVIDEND REQUIREMENT OF
SUBSIDIARY 241 270 776 809
-------- ------- -------- --------
-
INCOME BEFORE INCOME TAXES 20,731 25,129 70,366 105,211
INCOME TAXES 4,871 8,323 23,527 35,837
-------- ------- -------- --------
NET INCOME BEFORE MINORITY INTEREST
15,860 16,806 46,839 69,374
MINORITY INTEREST IN SUBSIDIARY
402 570 983 861
NET INCOME $ 15,458 $ 16,236 $ 45,856 $ 68,513
======== ======== ======== =========
AVERAGE COMMON SHARES OUTSTANDING
61,219 61,287 61,257 61,306
DILUTED COMMON SHARES OUTSTANDING
61,302 61,387 61,332 61,446
BASIC EARNINGS PER AVERAGE SHARE OF
COMMON STOCK $ 0.25 $ 0.26 $ 0.75 $ 1.12
======== ======== ======== ========
DILUTED EARNINGS PER AVERAGE SHARE OF
COMMON STOCK $ 0.25 $ 0.26 $ 0.75 $ 1.12
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands, except per share data)
Twelve Months
Ended September 30
2000 1999
OPERATING REVENUES:
Gas utility $ 548,972 $ 488,191
Electric utility 317,824 306,143
Energy services and other 383,161 242,829
---------- ---------
Total operating revenues 1,249,957 1,037,163
OPERATING EXPENSES:
Cost of gas sold 321,221 255,402
Fuel for electric generation 66,498 64,782
Purchased electric energy 27,145 26,800
Cost of energy services and other 364,845 230,736
Other operating 193,155 186,653
Merger costs 31,306 -
Depreciation and amortization 97,190 85,428
Taxes other than income taxes 30,660 29,018
---------- ---------
Total operating expenses 1,132,020 878,819
OPERATING INCOME 117,937 158,344
OTHER INCOME
Equity in earnings of
unconsolidated investments 19,116 12,542
Other - net 16,742 7,538
---------- ---------
Total other income 35,858 20,080
INTEREST EXPENSE 50,219 40,982
--------- ---------
INCOME BEFORE PREFERRED DIVIDENDS AND INCOME TAXES
103,576 137,442
PREFERRED DIVIDEND REQUIREMENT OF SUBSIDIARY 1,045 1,081
--------- ---------
INCOME BEFORE INCOME TAXES 102,531 136,361
INCOME TAXES 33,398 45,512
--------- ---------
NET INCOME BEFORE MINORITY INTEREST 69,133 90,849
MINORITY INTEREST IN SUBSIDIARY 1,042 893
--------- ---------
NET INCOME $ 68,091 $ 89,956
========= =========
AVERAGE COMMON SHARES OUTSTANDING 61,269 61,347
DILUTED COMMON SHARES OUTSTANDING 61,345 61,509
BASIC EARNINGS PER AVERAGE SHARE OF COMMON STOCK
$ 1.11 $ 1.47
========= =========
DILUTED EARNINGS PER AVERAGE SHARE OF COMMON STOCK
$ 1.11 $ 1.46
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
7
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Thousands)
Nine Months Twelve Months
Ended September 30 Ended September 30
2000 1999 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 45,856 $ 68,513 $ 68,091 $ 89,956
Adjustments to reconcile
net income to cash
provided from operating
activities -
Depreciation and
amortization 75,008 64,816 97,190 85,428
Preferred dividend
requirement of
subsidiary 776 809 1,045 1,081
Deferred income
taxes and invest-
ment tax credits (14,069) 2,236 (7,757) 6,006
(Gain) loss on sale
or retirement of
assets (8,961) 730 (8,961) 730
Undistributed
earnings of
unconsolidated
investments (9,950) (9,477) (12,116) (12,543)
--------- --------- --------- ---------
42,804 59,114 69,401 80,702
Changes in assets
and liabilities -
Receivables - net 25,399 43,853 (38,432) (26,421)
Inventories 10,966 16,098 2,691 14,588
Accounts payable,
refunds to customers,
customer deposits,
other current
liabilities 6,412 (14,002) 21,928 11,984
Accrued taxes and
interest (11,738) 681 1,166 4,764
Prepayments and
other current
assets (33,380) (9,150) (31,689) (9,515)
Prepaid gas
delivery service (25,851) (25,810) (20,978) (25,810)
Accrued post-
retirement
benefits other
than pensions 3,733 4,795 2,393 3,043
Other - net 14,512 805 4,890 (5,159)
--------- --------- --------- ---------
Total adjustments 32,857 76,384 11,370 48,176
Net cash flows
from operating
activities 78,713 144,897 79,461 138,132
CASH FLOWS (REQUIRED FOR) FROM FINANCING ACTIVITIES
Retirement of common
stock - (2,248) - (5,893)
Retirement of preferred
stock (2,317) (116) (2,317) (116)
Proceeds from long-term
debt 35,000 80,000 64,392 80,000
Retirement of long-term
debt and other
obligations (38,170) (57,052) (48,697) (57,269)
Net change in short-term
borrowings 102,907 41,528 143,034 89,169
Dividends on common stock (44,370) (42,959) (58,887) (57,030)
Other 1,206 (528) 577 (2,428)
--------- --------- --------- ---------
Net cash flows
from financing
activities 54,256 18,625 98,102 46,433
CASH FLOWS (REQUIRED FOR) FROM INVESTING ACTIVITIES
Capital expenditures (98,370) (101,486) (128,134) (141,076)
Investment in leveraged
leases (369) (44,737) (48) (43,930)
Investments in
partnerships and other
corporations (3,656) (13,631) (19,404) (21,530)
Change in notes
receivable (30,113) (3,711) (38,301) (7,146)
Change in nonutility
property 3,950 (19) 306 3,688
Cash distributions from
unconsolidated
investments 3,352 4,145 4,898 4,921
Other (6,105) 4,080 6,575 11,758
--------- --------- --------- ---------
Net cash flows
(required for)
investing activities (131,311) (155,359) (174,108) (193,315)
Net increase (decrease)
in cash 1,658 8,163 3,455 (8,750)
Cash and cash equivalents at
beginning of period 17,351 7,391 15,554 24,304
--------- --------- --------- ---------
Cash and cash equivalents at end of
period $ 19,009 $ 15,554 $ 19,009 $ 15,554
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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 whose wholly-owned
subsidiary, Vectren Utility Holdings, Inc., is the holding
company of Vectren's 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. 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. On
October 31, 2000, the acquisition of the natural gas distribution
assets of The Dayton Power and Light Company was completed (see
Note 5).
Vectren is also 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, 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
accounting principles generally accepted in the United States
have been omitted as provided in such rules and regulations.
Vectren believes that the information in this report reflects all
adjustments necessary to fairly state the results of the interim
periods reported, 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 accounting principles
generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the
notes thereto included in Vectren's 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.
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, nine and twelve months ended
September 30, 2000 totaled $0.9 million, $31.3 million and $31.3
million, respectively. These costs relate primarily to
transaction costs, severance and other merger integration
activities.
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 months ended and $6.7 million for the nine and
twelve months ended September 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, nine and twelve months ended September 30, 1999 are as
follows (in millions):
Three Three Nine Twelve
months months months months
ended ended ended ended
March September September September
31, 2000 30, 1999 30, 1999 30, 1999
-------- --------- ---------- ----------
Indiana Energy:
Operating Revenues $172.0 $60.9 $295.2 $420.5
Net Income $22.1 $(4.0) $27.5 $41.8
SIGCORP:
Operating Revenues $187.4 $158.0 $440.0 $588.7
Net Income $19.3 $20.3 $41.0 $48.2
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 would acquire the natural gas distribution
assets of The Dayton Power and Light Company (DP&L), which would
add 305,000 gas distribution customers in 16 counties in west
central Ohio. 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. In October 2000, Vectren received approval
from the SEC under the Public Utility Holding Company Act, the
final approval necessary to complete the transaction. On October
31, 2000, Vectren completed the approximate $465 million
acquisition. Operations will be conducted under the name Vectren
Energy Delivery of Ohio, Inc. (VEDO). Under VEDO's ownership
structure, VEDO holds a 53 percent undivided ownership interest
in VEDO and Indiana Gas has a 47 percent undivided ownership
interest. Vectren Utility Holdings, Inc.(VUHI), the holding
company of Vectren's operating public utilities, established a
$435 million commercial paper program to fund the majority of
the acquisition. This facility was utilized at October 31, 2000,
and will be replaced over time with permanent financing. VEDO's
portion of the acquisition was funded with short-term borrowings
from VUHI. Indiana Gas' portion of the acquisition was funded
with a combination of short-term borrowings from VUHI and
commercial paper.
6. Gas in Underground Storage
Based on the average cost of gas purchased during September 2000,
the cost of replacing the current portion of gas in underground
storage exceeded LIFO cost at September 30, 2000 by approximately
$42.6 million.
7. Refundable or Recoverable Fuel and Natural Gas 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 covers the
period through March 31, 2001. The parties have agreed to
attempt to negotiate an 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:
Nine Months Ended Twelve Months Ended
September 30 September 30
2000 1999 2000 1999
-------- ------- --------- ---------
- ---
Thousands
Interest (net of amount $35.1 $30.5 $39.4 $38.4
capitalized)
Income taxes $42.9 $34.0 $45.9 $37.5
9. 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.
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. Through a series of appeals, the order was finally
considered by the Indiana Supreme Court.
On September 22, 2000, the Indiana Supreme Court issued a
decision affirming the IURC's decision on Proliance in all
respects. However, until the three pricing issues reserved by the
IURC are resolved, Vectren will continue to reserve a portion of
its share of ProLiance earnings.
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
$0.7 million and $0.6 million was recognized as ProLiance's
contribution to earnings for the three months ended September 30,
2000 and 1999, respectively. Pretax income of $5.6 million and
$7.8 million was recognized as ProLiance's contribution to
earnings for the nine months ended September 30, 2000 and 1999,
respectively. Pretax income of $4.5 million and $10.3 million
was recognized as ProLiance's contribution to earnings for the
twelve months ended September 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 September 30, 2000, Vectren has
reserved approximately $2.3 million of ProLiance earnings after
tax, pending resolution of the remaining unresolved issues.
10. 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,
subject to obtaining satisfactory financing. 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 that is classified in
Other Income in the accompanying Consolidated Statements of
Income. In June 2000, Vectren Advanced Communications recognized
a $1.0 million write down of its common equity investment in
SIGECOM, eliminating its common equity investment. As of
September 30, 2000, Vectren Advanced Communications' investment
in SIGECOM was $8.2 million.
11. 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 thresholds at these sites.
Indiana Gas has identified the existence, location and certain
general characteristics of 26 gas manufacturing and storage sites
for which it may have some remedial responsibility. Indiana Gas
has completed a remedial investigation/feasibility study (RI/FS)
at one of the sites under an agreed order between Indiana Gas and
the Indiana Department of Environmental Management (IDEM), and a
Record of Decision (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.
With respect to insurance coverage, as of September 30, 2000,
Indiana Gas has received and recorded settlements from all known
insurance carriers in an aggregate amount of approximately $20.3
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
NOx SIP Call Matter. 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.
Following this decision, on August 30, 2000, the D.C. Circuit
Court of Appeals issued an extension of the SIP Call
implementation deadline, previously May 1, 2003, to May 31, 2004.
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 $160 million, which are expected to be
expended during the 2001-2004 period, and related additional
operation and maintenance expenses could be an estimated $8
million to $10 million, annually.
Culley Generating Station Investigation Matter. 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 $160 million expenditure previously discussed.
The USEPA has also issued an administrative notice of violation
to SIGECO making the same allegations, but alleging that
violations began in 1977.
While it is possible that SIGECO could be subjected to criminal
penalties if the Culley Generating Station continues to operate
without complying with the new source performance standards and
the allegations are determined by a court to be valid, SIGECO
believes such penalties are unlikely as the USEPA and the
electric utility industry have a bonafide dispute over the proper
interpretation of the Clean Air Act. Consequently, SIGECO
anticipates at this time that the plant will continue to operate
while the matter is being decided.
12. Commitments and Contingencies
Vectren is party to various legal proceedings arising in the
normal course of business. In the opinion of management, with the
exception of litigation matters related to the Clean Air Act and
Proliance, 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 9 for
litigation matters related to ProLiance and Note 11 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,
$0.6 million was advanced through September 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 September 30, 2000,
Vectren, through its subsidiary, had invested approximately $9.8
million of its original $10 million commitment to Haddington,
with the remainder to be paid during the fourth quarter of 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. Through September 30, 2000, Vectren had invested
approximately $1.3 million of this $20 million commitment to
Haddington II. The remainder of this investment is expected to
be made through 2002.
13. 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 September 30, 2000, the subsidiary
had $178.2 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 $655 million as of
September 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, nine and twelve
months ended September 30, 2000, totaled $81.2 million, $217.5
million and $291.7 million, respectively. Indiana Gas' purchases
from ProLiance for the three, nine and twelve months ended
September 30, 1999, totaled $52.0 million, $166.1 million and
$232.6 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
September 30, 2000 totaled $22.4 million. On November 1, 2000,
the credit facility was increased to $45 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, nine and twelve months ended September 30, 2000, totaled
$4.2 million, $12.4 million and $16.6 million, respectively.
Indiana Gas' purchases of these services during the three, nine
and twelve months ended September 30, 1999, totaled $3.8 million,
$12.3 million and $16.9 million, respectively.
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 $1.1 million, $3.1 million and $4.0
million, respectively, for the three, nine and twelve months
ended September 30, 2000. Amounts paid by Indiana Gas to Reliant
totaled $1.1 million, $2.5 million and $2.7 million,
respectively, for the three, nine and twelve months ended
September 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 $48.9 million at September 30, 2000.
Amounts owed to unconsolidated affiliates totaled $32.8 million,
$21.3 million and $28.8 million at September 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 $17.3 million, $6.5 million and
$6.6 million at September 30, 2000 and 1999 and December 31,
1999, respectively, and are included in Accounts Receivable on
the Consolidated Balance Sheets.
14. 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 Nine Months
Ended September 30 Ended September 30
2000 <F1> 1999 2000 <F1> 1999
--------- -------- ---------- --------
Operating Revenues:
Gas Utility Services $90,156 $68,258 $391,486 $342,087
Electric Utility
Services 97,936 94,171 249,215 238,960
Non-regulated
Operations 144,438 82,699 344,048 218,670
Intersegment
Eliminations (14,676) (13,968) (43,974) (40,482)
--------- -------- --------- --------
Total operating
revenues $317,854 $231,160 $940,775 $759,235
Interest Expense:
Gas Utility Services $5,909 $4,405 $16,736 $13,221
Electric Utility
Services 4,505 4,458 13,286 13,511
Non-regulated
Operations 6,193 3,550 16,361 8,325
Intersegment
Eliminations (3,259) (1,827) (8,443) (4,474)
-------- -------- -------- --------
Total interest expense $13,348 $10,586 $37,940 $30,583
Income Taxes:
Gas Utility Services $(5,372) $(3,899) $1,388 $12,094
Electric Utility
Services 10,360 10,794 17,886 21,073
Non-regulated
Operations (20) 1,424 4,349 2,690
Intersegment
Eliminations (97) 4 (96) (20)
-------- -------- --------- --------
Total income taxes $4,871 $8,323 $23,527 $35,837
Depreciation and amortization:
Gas Utility Services $10,303 $9,877 $30,827 $29,183
Electric Utility
Services 9,510 10,060 29,338 30,178
Non-regulated
Operations 6,502 1,860 14,843 5,455
--------- -------- --------- --------
Total depreciation and
amortization $26,315 $21,797 $75,008 $64,816
Net (loss) income:
Gas Utility Services $(7,508) $(5,762) $(200) $21,889
Electric Utility
Services 17,570 17,572 26,053 34,413
Non-regulated
Operations 5,554 4,426 20,161 12,211
Intersegment
Eliminations (158) - (158) -
-------- -------- --------- --------
Net income $15,458 $16,236 $45,856 $68,513
Capital Expenditures:
Gas Utility Services $17,268 $24,103 $50,691 $56,524
Electric Utility
Services 9,720 12,844 30,753 38,703
Non-regulated
Operations 8,511 1,496 16,926 6,259
--------- -------- -------- --------
Total capital
expenditures $35,499 $38,443 $98,370 $101,486
--------- -------- ---------- --------
Twelve Months
Ended September 30
2000 <F1> 1999
----------- -----------
Operating Revenues:
Gas Utility Services $548,972 $488,191
Electric Utility Services 317,824 306,143
Non-regulated Operations 440,247 294,727
Intersegment Eliminations (57,086) (51,898)
---------- ----------
Total operating revenues $1,249,957 $1,037,163
Interest Expense:
Gas Utility Services $22,263 $17,818
Electric Utility Services 17,762 18,257
Non-regulated Operations 20,570 10,376
Intersegment Eliminations (10,376) (5,469)
--------- ---------
Total interest expense $50,219 $40,982
Income Taxes:
Gas Utility Services $7,959 $19,806
Electric Utility Services 21,309 22,740
Non-regulated Operations 4,235 3,246
Intersegment Eliminations (105) (280)
-------- --------
Total income taxes $33,398 $45,512
Depreciation and amortization:
Gas Utility Services $40,858 $38,580
Electric Utility Services 39,398 39,600
Non-regulated Operations 16,934 7,248
-------- --------
Total depreciation and amortization
$97,190 $85,428
Net (loss) income:
Gas Utility Services $11,523 $36,307
Electric Utility Services 33,460 38,196
Non-regulated Operations 23,266 15,348
Intersegment Eliminations (158) 105
-------- --------
Net income $68,091 $89,956
Capital Expenditures:
Gas Utility Services $67,085 $72,225
Electric Utility Services 42,688 58,280
Non-regulated Operations 18,361 10,571
--------- ---------
Total capital expenditures $128,134 $141,076
--------- ----------
As of As of
September 30 December 31
2000 1999 1999
--------- --------- -----------
Total Assets:
Gas Utility Services $911,322 $824,760 $882,948
Electric Utility
Services 755,198 746,739 751,159
Non-regulated 654,887 481,514 509,572
Operations
Intersegment
Eliminations (248,439) (172,281) (163,212)
Total assets $2,072,968 $1,880,732 $1,980,467
<FN>
<F1> The 2000 amounts include merger and merger related costs (see
Note 3).
</FN>
15. 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. SFAS No. 133 requires that a company 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. In
preparation for the implementation of this new statement, Vectren
has formed a team to identify and analyze its contracts which
could be subject to the new statement, develop required
documentation, define relevant processes and information systems
needs and promote internal awareness of the requirements and
potential effects of the new statement. While Vectren continues
to analyze and follow the development of implementation
guidelines, at this time, Vectren has not quantified the impact
of adopting this statement on its financial position or results
operations and is unable to predict whether the implementation of
this accounting standard will be material to its results of
operations or financial position. However, the adoption of SFAS
No. 133 could increase volatility in earnings and other
comprehensive income.
16. 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, whose wholly-owned
subsidiary, Vectren Utility Holdings, Inc., is the holding
company of Vectren's 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
natural gas distribution and electric power generation and
distribution 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 $15.5 million, or $0.25 on a basic
earnings per share basis, for the three months ended September
30, 2000. Consolidated net income before merger and merger
related charges of $4.2 million, including $3.3 million of
accelerated depreciation included in depreciation and
amortization (see merger and merger related costs below), was
$18.0 million ($0.29 per share) for the three months ended
September 30, 2000, as compared to net income of $16.2 million
($0.26 per share) for the same period in 1999.
Consolidated net income was $45.9 million ($0.75 per share) for
the nine months ended September 30, 2000. Consolidated net
income before merger and merger related charges of $38.0 million
(including $6.7 million of accelerated depreciation) was $73.7
million ($1.20 per share) for the nine months ended September 30,
2000, as compared to net income of $68.5 million ($1.12 per
share) for the same period in 1999.
Consolidated net income was $68.1 million ($1.11 per share) for
the twelve months ended September 30, 2000. Consolidated net
income before merger and merger related charges of $38.0 million
(including $6.7 million of accelerated depreciation) was $95.9
million ($1.56 per share) for the twelve months ended September
30, 2000, as compared to net income of $90.0 million ($1.47 per
share) 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 September 30, 2000 of
$35.2 million was comparable to the same period last year.
Gas margin for the nine months ended September 30, 2000 was
$162.1 million compared to $167.5 million for the same period in
1999. Gas margin was lower for the nine months ended September
30, 2000 due to weather being 3 percent warmer than the prior
year period and 14 percent warmer than normal. The weather-
related decrease in gas margin was partially offset by additional
residential and commercial customer growth.
Gas utility margin for the twelve months ended September 30, 2000
was $227.8 million compared to $232.8 million for the same period
last year primarily due to 2 percent warmer weather during the
current twelve month period. The weather-related decrease in gas
margin was partially offset by additional residential and
commercial customer growth.
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.
Total cost of gas sold increased $22.5 million, or 69 percent;
$54.8 million, or 31 percent; and $65.8 million, or 26 percent,
respectively, for the three, nine and twelve month periods ended
September 30, 2000 compared to the same periods one year ago due
to significantly higher average per unit purchased gas costs.
Indiana Gas and SIGECO are allowed full recovery of such changes
in purchased gas costs from their retail customers through
commission-approved gas cost adjustment mechanisms.
Electric utility margin for the quarter ended September 30, 2000
of $65.9 million was comparable to the same period last year.
Electric utility margin for the nine months ended September 30,
2000 was $172.4 million as compared to $168.7 million for the
same period in 1999. The increase is due primarily to increased
sales to other utilities and power marketers.
Electric utility margin for the twelve months ended September 30,
2000, was $224.2 million compared to $214.6 million for the same
period last year. The $9.6 million increase in margin reflected
a $4.2 million increase in margin from sales to other utilities
and power marketers and a 3 percent increase in retail and firm
wholesale electric sales primarily due to stronger industrial and
commercial sales.
Fuel for electric generation for the three, nine and twelve month
periods ended September 30, 2000 was comparable to costs incurred
in the same periods one year ago. Purchased electric energy
increased $4.0 million, or 48 percent, and $6.4 million, or 34
percent, respectively for the three and nine months ended
September 30, 2000 compared to the year ago periods due to the
increased sales to other utilities and power marketers.
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, Energy Services
and Communications groups) for the quarter ended September 30,
2000 was $5.9 million compared to $4.8 million for the same
period in 1999. The $1.1 million increase was primarily in the
Energy Services group reflecting the continued growth of its
natural gas marketing and fuel supply management services and
continued growth in its performance contracting and energy
efficiency project operations, including several large government
contracts in progress.
Non-utility margin for the nine months ended September 30, 2000
was $14.2 million compared to $9.6 million for the same period
last year. The Energy Services group and the Communications group
contributed an additional $3.0 million and $1.3 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 September 30,
2000, was $18.3 million compared to $12.1 million for the year
ago period. Operating margin for the Energy Services group and
the Communications group increased $4.2 million and $2.0 million,
respectively, during the twelve months ended September 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 decreased $2.3 million, or 4.7 percent,
for the three months ended September 30, 2000, when compared to
the same period a year ago. The decrease is attributed to a $1.3
million reduction in generation facility maintenance expenses and
a $1.4 million reduction in general and administrative expenses.
Other operating expenses increased $3.5 million, or 2.5 percent,
for the nine months ended September 30, 2000, when compared to
the same period a year ago. The nine month increase is primarily
attributed to $2.4 million higher operating expenses related to
continued growth in operations at certain non-regulated
subsidiaries. Additionally, operating expenses were higher
during the nine months ended September 30, 2000 as compared to
the comparable period in 1999 due to a first quarter 1999
reversal of part of a restructuring reserve at Indiana Gas of
$1.3 million.
For the twelve months ended September 30, 2000, other operating
expenses increased $6.5 million, or 3.5 percent, compared to the
prior year. In addition to the items noted above, the increase
reflects additional support costs related to the implementation
of a new customer information system at Indiana Gas. A $2.2
million decrease in maintenance expenses, all of which is
attributed to the utility subsidiaries, partially offset the
increased operating expenses.
Depreciation and amortization increased $4.5 million, or 20.7
percent; $10.2 million, or 15.7 percent; and $11.8 million, or
13.8 percent, respectively, for the three, nine and twelve months
ended September 30, 2000. The increases are the result of the
merger integration activities (see below) and additions to plant.
Merger and Merger Related Costs
Merger costs incurred for the three, nine, and twelve months
ended September 30, 2000 totaled $0.9, $31.3 million and $31.3
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 that 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 months and $6.7 million for the nine and twelve
months ended September 30, 2000.
Other Income
Equity in Earnings of Unconsolidated Investments for the three
months ended September 30, 2000 was comparable to the same period
one year ago.
Equity in Earnings of Unconsolidated Investments increased by
$7.5 million for the nine months ended September 30, 2000,
compared to the prior year period. The increase is due primarily
to an $8.0 million pre-tax gain recorded during the first quarter
of 2000 on the restructuring of SIGECOM (see Note 10 of the Notes
to Consolidated Financial Statements) as well as a $3.6 million
increase in leveraged lease investment earnings at Financial
Group, which added leveraged lease investments totaling $50
million in late 1999. These increases were partially offset by
a $1.0 million write-down of common equity interest in SIGECOM
(see Note 10 of the Notes to Consolidated Financial Statements)
and lower pre-tax earnings recognized from ProLiance. A $1.6
million reduction in Proliance's earnings is primarily attributed
to ProLiance's net position on financial instruments held to
hedge storage inventories, the restructuring of several
transportation contracts to provide less seasonality in
Proliance's earnings and lower unit sales margins.
Equity in Earnings of Unconsolidated Investments increased by
$6.6 million for the twelve months ended September 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 write-down of
Vectren's common equity interest in SIGECOM (see Note 10 of the
Notes to Consolidated Financial Statements) and lower pre-tax
earnings recognized from ProLiance. A $4.9 million reduction in
ProLiance's earnings is due to the same reasons discussed above.
Other - net increased $0.6 million, $7.8 million and $9.2
million, respectively, for the three, nine and twelve months
ended September 30, 2000, compared to the prior year periods due
to increased interest income ($1.0 million, $2.7 million and $4.5
million for the three, nine and twelve months ended September 30,
2000 compared to the year ago periods) mainly from Vectren's
Financial Group, recognition in the second quarter of 2000 of 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.
Interest Expense
Interest expense increased by $2.8 million, $7.4 million and $9.2
million, respectively, for the three, nine and twelve months
ended September 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, additional debt at Indiana Gas primarily attributed
to higher purchased gas costs and to higher average interest
rates on utility debt and short-term borrowings.
Income Taxes
Federal and state income taxes decreased $3.5 million, $12.3
million and $12.1 million, respectively, for the three, nine and
twelve months ended September 30, 2000, compared to the same
periods a year ago due primarily to lower earnings 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.
Other Operating Matters
Acquisition of 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 would
add 305,000 gas distribution customers in 16 counties in west
central Ohio. 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. In October 2000, Vectren received approval
from the SEC under the Public Utility Holding Company Act for the
acquisition, the final approval necessary to complete the
transaction. On October 31, 2000, Vectren completed the
approximate $465 million acquisition. Operations will be
conducted under the name Vectren Energy Delivery of Ohio, Inc.
(VEDO). Under VEDO's ownership structure, VEDO holds a 53 percent
undivided ownership interest in VEDO and Indiana Gas has a 47
percent undivided ownership interest. Vectren Utility Holdings,
Inc.(VUHI), the holding company of Vectren's operating public
utilities, established a $435 million commercial paper program
to fund the majority of the acquisition. This facility was
utilized at October 31, 2000, and will be replaced over time with
permanent financing. VEDO's portion of the acquisition was
funded with short-term borrowings from VUHI. Indiana Gas'
portion of the acquisition was funded with a combination of short-
term borrowings from VUHI and commercial paper.
Acquisition of Miller Pipeline Corporation
On October 31, 2000, Reliant Services, LLC (Reliant), a 50
percent owned, non-regulated utility services affiliate of
Vectren signed a definitive agreement to purchase the common
stock of Indianapolis-based Miller Pipeline Corporation from
NiSource, Inc. for approximately $68.3 million. Miller Pipeline
is one of the nation's premier natural gas distribution
contractors with over 50 years of experience in the construction
industry, currently providing such services to Indiana Gas, among
other customers. The acquisition requires review by the United
States Department of Justice or the Federal Trade Commission
under the Hart Scott Rodino Act and should be completed by the
end of 2000.
Operation of Warrick Generating Station
On August 21, 2000, SIGECO announced that no later than April 18,
2001, Alcoa will begin operating the Warrick Generating Station.
In 1956, arrangements were made for SIGECO to operate the Warrick
Generating Station as an agent for Alcoa. Three generating units
at the plant are owned by Alcoa. SIGECO owns the fourth unit
equally with Alcoa. The operating change will have no impact on
SIGECO's generating capacity and is not expected to have any
negative impact on Vectren's financial results. Additionally,
SIGECO will retain Alcoa as a wholesale power and transmission
services customer. Planning of the plant operations transition
is underway.
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.
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. Through a series of appeals, the order was finally
considered by the Indiana Supreme Court.
On September 22, 2000, the Indiana Supreme Court issued a
decision affirming the IURC's decision on Proliance in all
respects. However, until the three pricing issues reserved by
the IURC are resolved, Vectren will continue to reserve a portion
of its share of ProLiance earnings.
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
$0.7 million and $0.6 million was recognized as ProLiance's
contribution to earnings for the three months ended September 30,
2000 and 1999, respectively. Pretax income of $5.6 million and
$7.8 million was recognized as ProLiance's contribution to
earnings for the nine months ended September 30, 2000 and 1999,
respectively. Pretax income of $4.5 million and $10.3 million
was recognized as ProLiance's contribution to earnings for the
twelve months ended September 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 September 30, 2000, Vectren has
reserved approximately $2.3 million of ProLiance earnings after
tax pending resolution of the remaining unresolved issues.
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 thresholds at these sites.
Indiana Gas has identified the existence, location and certain
general characteristics of 26 gas manufacturing and storage sites
for which it may have some remedial responsibility. Indiana Gas
has completed a remedial investigation/feasibility study (RI/FS)
at one of the sites under an agreed order between Indiana Gas and
the Indiana Department of Environmental Management (IDEM), and a
Record of Decision (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.
With respect to insurance coverage, as of September 30, 2000,
Indiana Gas has received and recorded settlements from all known
insurance carriers in an aggregate amount of approximately $20.3
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
NOx SIP Call Matter. 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.
Following this decision, on August 30, 2000, the D.C. Circuit
Court of Appeals issued an extension of the SIP Call
implementation deadline, previously May 1, 2003, to May 31, 2004.
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 $160 million, which are expected to be
expended during the 2001-2004 period, and related additional
operation and maintenance expenses could be an estimated $8
million to $10 million, annually.
Culley Generating Station Investigation Matter. 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 $160 million expenditure previously discussed.
The USEPA has also issued an administrative notice of violation
to SIGECO making the same allegations, but alleging that
violations began in 1977.
While it is possible that SIGECO could be subjected to criminal
penalties if the Culley Generating Station continues to operate
without complying with the new source performance standards and
the allegations are determined by a court to be valid, SIGECO
believes such penalties are unlikely as the USEPA and the
electric utility industry have a bonafide dispute over the proper
interpretation of the Clean Air Act. Consequently, SIGECO
anticipates at this time that the plant will continue to operate
while the matter is being decided.
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. SFAS No. 133 requires that a company 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. In
preparation for the implementation of this new statement, Vectren
has formed a team to identify and analyze its contracts which
could be subject to the new statement, develop required
documentation, define relevant processes and information systems
needs and promote internal awareness of the requirements and
potential effects of the new statement. While Vectren continues
to analyze and follow the development of implementation
guidelines, at this time, Vectren has not quantified the impact
of adopting this statement on its financial position or results
of operations and is unable to predict whether the implementation
of this accounting standard will be material to its results of
operations or financial position. However, the adoption of SFAS
No. 133 could increase volatility in earnings and other
comprehensive income.
Liquidity and Capital Resources
Vectren's capitalization objectives are 45-60 percent common and
preferred equity and 40-55 percent permanent 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
September 30, 2000.
On October 31, 2000, Vectren completed the acquisition of the gas
distribution assets of The Dayton Power and Light Company for a
purchase price of approximately $465 million. Commercial paper
was issued to fund the purchase and will be replaced over time
with permanent financing.
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 $98.4 million have been
expended through September 30, 2000. For the twelve months ended
September 30, 2000, capital expenditures totaled $128.1 million.
At September 30, 2000, Vectren has $371 million of short-term
borrowing capacity for use in its utility and non-regulated
operations, of which approximately $62 million was available.
Upon the closing of the DP&L transaction on October 31, 2000,
Vectren had $861 million of short-term borrowing capacity, of
which approximately $62 million was available. Vectren expects
to reduce the high level of short-term borrowings significantly
during 2001.
Short-term cash working capital is required primarily to finance
customer accounts receivable, unbilled utility revenues resulting
from cycle billing, gas in underground storage, prepaid gas
delivery services, capital expenditures and investments until
permanently financed. Short-term borrowings tend to be greatest
during the summer when accounts receivable and unbilled utility
revenues related to electricity are highest and gas storage
facilities are being refilled.
Financing Activities
Vectren expects the majority of its capital expenditures
requirements and debt security redemptions to be provided by
internally generated funds. Short-term borrowings are at a high
level due to the acquisition discussed above and the higher
natural gas costs.
Indiana Gas' and SIGECO's credit ratings on outstanding debt at
September 30, 2000 were AA-/Aa2 and AA/Aa2, respectively.
Effective October 2000, the credit ratings on Indiana Gas' and
SIGECO's outstanding debt were lowered to A/A2 and A/A1,
respectively, due to the increase in Vectren's debt resulting
from the acquisition of the DP&L assets. Vectren Utility
Holdings' commercial paper related to the October 2000
acquisition of the DP&L assets has a credit rating of A-1/P-2.
Indiana Gas' commercial paper retains a A-1/P-1 rating.
Cash flow from financing activities of $54.3 million for the nine
months ended September 30, 2000 includes $99.7 million of
additional net borrowings offset by $44.4 million of dividends on
common stock. Cash from financing activities of $98.1 million
for the twelve months ended September 30, 2000 includes $158.7
million of additional net borrowings offset by $58.9 million of
dividends on common stock.
Cash required for investing activities of $131.3 million for the
nine months ended September 30, 2000 includes, among other
things, $98.4 million of capital expenditures and $30.1 million
additional notes receivable. Cash required for investing
activities of $174.1 million for the twelve months ended
September 30, 2000 includes, among other things, $128.1 million
of capital expenditures, $38.3 million additional notes
receivable, and $19.4 million of investments in partnerships and
other corporations.
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 and
ProLiance, are forward-looking statements. Such statements are
based on management's beliefs, as well as assumptions made by and
information currently available to management. When used in this
filing, the words "believe," "anticipate," "endeavor,"
"estimate," "expect," "objective," "projection," "forecast,"
"goal," and similar expressions are intended to identify forward-
looking statements. In addition to any assumptions and other
factors referred to specifically in connection with such forward-
looking statements, factors that could cause Vectren 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.
* 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. Due to the completion of the DP&L
asset acquisition and higher natural gas prices, Vectren
anticipates that its short-term borrowings will be highest in
the beginning of 2001 and will be reduced during the year.
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.
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 September 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 covers the period through March 31, 2001.
The parties have agreed to attempt to negotiate an 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 September 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.
30
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 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 11 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 Retirement Savings Plan
99.2 Vectren Corporation Combined Non-Bargaining Retirement
Plan
27 Financial Data Schedule, filed herewith.
Reports on Form 8-K
None
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
November 14, 2000 /s/ M. Susan Hardwick
M. Susan Hardwick
Vice President and Controller
November 14, 2000 /s/ Jerome E. Benkert
Jerome E. Benkert
Executive Vice President
and Chief Financial Officer