EXHIBIT 99-1
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Description of the Business
Vectren Corporation (Vectren) is an Indiana corporation that was
organized on June 10, 1999, solely for the purpose of effecting
the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP,
Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy
with SIGCORP and into Vectren was consummated with a tax-free
exchange of shares and has been accounted for as a pooling of
interests. The common shareholders of SIGCORP received one and
one-third shares of Vectren common stock for each SIGCORP common
share and the common shareholders of Indiana Energy 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. (VUHI), is the
intermediate holding company for Vectren's three operating
public utilities, Indiana Gas Company, Inc. (Indiana Gas),
formerly a wholly owned subsidiary of Indiana Energy, Southern
Indiana Gas and Electric Company (SIGECO), formerly a wholly
owned subsidiary of SIGCORP, and the Ohio operations (defined
hereafter). VUHI's regulated subsidiaries serve approximately
one million customers. 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's Ohio operations provide natural
gas distribution and transportation services to Dayton, Ohio and
16 counties in west central Ohio.
Vectren is involved in non-regulated activities through three
primary business groups: Energy Services, Utility Services, and
Communications. Energy Services trades and markets natural gas
and provides energy performance contracting services. Utility
Services provides utility products and services, such as
underground construction and facilities locating, meter reading
and materials management, and the mining and sale of coal.
Communications provides integrated broadband communications
services, including local and long distance telephone, Internet
access and cable television. In addition, other businesses
invest in other energy-related opportunities and corporate
technology.
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 it would acquire the natural gas distribution assets of The
Dayton Power and Light Company (DP&L), which would add 310,000
gas distribution customers in 16 counties in west central Ohio.
On October 31, 2000, Vectren completed the approximate $465
million acquisition. Vectren acquired the natural gas
distribution assets as a tenancy in common through two wholly
owned subsidiaries. Vectren Energy Delivery of Ohio, Inc. (VEDO)
holds a 53 percent undivided ownership interest in the assets and
Indiana Gas holds a 47 percent undivided ownership interest in
the assets. VEDO is the operator of the assets, operations of
which are herein referred to as "the Ohio operations." VUHI
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 its commercial paper program.
Common Stock Offering
On January 19, 2001, Vectren filed a registration statement with
the Securities and Exchange Commission with respect to a public
offering of 5.5 million shares of new common stock. On February
8, 2001, the registration became effective and agreement was
reached to sell 5.5 million shares to a group of underwriters.
On February 14, the shares were sold, at which time the
underwriters exercised their over-allotment option to sell an
additional 825,000 shares for a total of about 6.3 million
shares. The net proceeds of $129.4 million will be used
principally to repay outstanding commercial paper utilized for
recent acquisitions.
Results of Operations
Vectren's consolidated earnings result from the operations of
its utility subsidiaries, Indiana Gas, SIGECO and the Ohio
operations, and from the non-utility operations and investments
of Vectren's non-regulated businesses.
(In millions except per share amounts)
2000 <F1> 1999 1998
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Net income before merger
and integration costs:
Regulated $ 84.0 $ 75.4 $ 69.3
Non-regulated 24.8 15.3 17.3
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Total $108.8 $ 90.7 $ 86.6
Basic earnings per share:
Regulated $ 1.37 $ 1.23 $ 1.13
Non-regulated .41 .25 .28
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Total $ 1.78 $ 1.48 $ 1.41
<F1> Before merger and integration costs of $52.5 million
($36.8 million after tax), or $.60 on a basic earnings
per share basis.
Net Income
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Consolidated net income was $72.0 million, or $1.18 on a basic
earnings per share basis, for the year ended December 31, 2000.
Consolidated net income before merger and integration costs of
$52.5 million, including $11.4 million of additional depreciation
included in depreciation and amortization (see merger and
integration costs below), was $108.8 million, or $1.78 per share,
for the year ended December 31, 2000, as compared to net income
of $90.7 million, or $1.48 per share, and $86.6 million, or $1.41
per share, for 1999 and 1998, respectively. Vectren's 2000
results reflect two months of results of the Ohio operations.
Dividends
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On October 28, 2000, Vectren's board of directors increased the
quarterly dividend on common stock to 25.5 cents per share from
24.25 cents per share. This resulted in total dividends paid of
98 cents compared to 94 cents in 1999. In 1998, dividends paid
totaled 90 cents per share.
Utility Margin (Utility Operating Revenues Less Utility Cost of
Gas, Cost of Fuel for Electric Generation and Purchased Electric
Energy)
- -------------------------------------------------
Vectren's utility gas margin increased $33.1 million to $266.2
million compared to the twelve-month period in 1999, $28.2
million of the increase reflected the inclusion of the Ohio
operations' results for two months. The remaining $4.9 million,
or 2 percent, increase attributable to Indiana Gas and SIGECO gas
operations reflects 8 percent (11.9MMDth) greater throughput
(combined sales and transportation) due to much colder
temperatures during the fourth quarter of 2000 than the 1999
period and a 2 percent growth in customers. Residential and
commercial sales rose 7 percent and 10 percent, respectively.
Temperatures were 11 percent colder during the current twelve-
month period and approached normal for the year. These favorable
impacts on gas margin were partially offset by a $3.8 million
disallowance of recoverable gas costs by the Indiana Utility
Regulatory Commission (IURC), charged against gas revenues in
December 2000 (see Rate and Regulatory Matters).
In 1999, gas utility margin was $233.1 million, as compared to
$217.3 million for the prior year. The 1999 increase is
primarily attributable to weather being 8 percent colder than the
same period in 1998 and the addition of new residential and
commercial customers.
Vectren's utilities' rates for gas transportation generally
provide for the same margins as are earned on the sale of gas
under their 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 was $552.5 million in 2000, $266.4 million
in 1999 and $270.0 million in 1998. Excluding $83.2 million
related to the Ohio operations for two months, total cost of gas
sold increased $202.9 million, or 76 percent, for the year ended
December 31, 2000 compared to 1999, primarily due to
significantly higher average per unit purchased gas costs. The
total average cost per dekatherm of gas purchased by Indiana Gas
and SIGECO was $5.77 in 2000 compared to $3.58 in 1999. The
price changes are due primarily to changing commodity costs in
the marketplace. Lower average per unit costs of gas sold during
1999 as compared to 1998 more than offset the impact of the
increased throughput, causing the slight decline in 1999 cost of
gas sold. Vectren's utility subsidiaries are generally allowed
full recovery of such changes in purchased gas costs from their
retail customers through commission-approved gas cost adjustment
mechanisms (see Rate and Regulatory Matters).
Electric margin rose $8.3 million, or 4 percent, to $228.8
million for the twelve-month period in 2000 compared to the same
period in 1999. Although unit prices were lower than in 1999,
sales to the wholesale energy markets contributed $4.4 million of
the margin increase with volumes up 39 percent for 2000 compared
to 1999. Additionally, the impact of much colder temperatures on
electric heating sales and a 5 percent growth in commercial
customers contributed to the 2000 electric margin increase. Mild
summer temperatures impacted both 2000 and 1999. Retail and
firm wholesale electric sales for 2000 increased 2 percent and
total electric sales increased 8 percent.
Electric utility margin for the year ended December 31, 1999 was
$220.5 million, compared to $211.9 million for the prior year.
The $8.6 million increase in margin reflects a 5 percent increase
in retail and firm wholesale electric sales primarily due to
stronger industrial and commercial sales and a $1.0 million
increase in margin from sales to other wholesale customers.
Although sales to other wholesale customers declined 17 percent
in 1999 due to milder summer temperatures which eased demand in
these markets, several new sales contracts produced higher
average unit sales prices to these customers.
A 1 percent increase in electric generation and higher per unit
coal costs resulted in a $4.9 million, or 7 percent, increase in
fuel costs for electric generation for 2000 compared to the prior
year. Fuel costs for electric generation increased $1.1 million,
or 2 percent, in 1999.
Although SIGECO's sales of electric energy to other wholesale
customers are provided primarily from otherwise unutilized
capacity, SIGECO's purchases of electricity from other utilities
for resale to other wholesale customers typically represent the
majority of SIGECO's total purchased electric energy costs. The
39 percent increase in sales to other wholesale customers
combined with higher average market prices caused purchased
electric energy costs to increase $15.6 million, or 75 percent,
for the year ended December 31, 2000 compared to 1999. During
1999, total purchases of electric energy declined 13 percent due
to the 17 percent decline in sales to wholesale customers,
however higher average market prices for energy purchased
resulted in total costs remaining comparable to 1998 costs.
Non-Utility Margin (Energy Services and Other Revenues Less Cost
of Energy Services and Other)
- -----------------------------------------------------
Total margin from Vectren's non-utility operations (primarily
the operating companies of its Energy Services, Utility Services,
and Communications groups) for the twelve month period in 2000
was $20.3 million compared to $13.7 million and $10.1 million for
the same periods in 1999 and 1998, respectively. The $6.6
million increase in 2000 and $3.6 million increase in 1999 were
primarily from the Energy Services group reflecting the continued
growth of its natural gas marketing operations and its
performance contracting and energy efficiency project operations,
including several large government contracts in progress. Energy
Services' margin increased $3.6 million and $3.7 million for
2000 and 1999, respectively. Expanded coal mining operations at
Utility Services and additional municipal projects at
Communications also contributed an additional $2.5 million to the
rise in 2000 non-utility margin.
During 2000, the cost of energy services and other, which was
chiefly the cost of natural gas purchased for resale by Energy
Services and project contract costs at Energy Services and
Communications, rose $225.7 million, or 91 percent, compared to
1999 due primarily to significantly higher per unit purchased gas
costs and growth in gas sales at Energy Services, following $45.1
million higher costs in 1998.
Operating Expenses (excluding Cost of Gas Sold, Cost of Fuel for
Electric Generation, Purchased Electric Energy and Cost of Energy
Services and Other)
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Excluding $7.1 million in expenses related to the Ohio
operations, Vectren's other operating expenses increased $2.9
million, or less than 2 percent, for the year ended December 31,
2000, compared to the same period in 1999. The increase is
attributable to higher operating expenses related to continued
growth in operations at certain non-regulated subsidiaries,
primarily Energy Services. Other operating expenses rose $7.8
million, or 4 percent, for 1999 as compared to 1998. This
increase reflects greater other general operating expenses at
Vectren's utility subsidiaries, including expenses associated
with the new customer information and work management systems and
rental expense related to buildings previously owned. Higher
other operating expenses were also experienced at Energy Services
and Communications due to the continuing growth in their
operations.
Depreciation and amortization increased $18.7 million, or 21
percent, and $5.4 million, or 7 percent, for the years ended
December 31, 2000 and December 31, 1999, respectively. The
increase in 2000 expense is chiefly the result of additional
depreciation related to merger integration activities (see below)
and $1.7 million of depreciation of utility plant and
amortization of goodwill related to the Ohio operations.
Goodwill related to the acquisition of the Ohio operations of
approximately $198 million is being amortized on a straight-line
basis over a 40 year period. The remaining $5.6 million, or 6
percent, increase in expense over 1999 and the increase in
expense over 1998 reflects depreciation of normal additions of
utility plant at Indiana Gas and SIGECO.
Taxes other than income taxes rose $8.1 million, or 27 percent,
during 2000 due to $7.1 million related to the Ohio operations,
primarily Ohio excise tax, and increased $2.5 million, or 9
percent, in 1999 due to higher gross receipts and property tax
expense.
Merger and Integration Costs
- ----------------------------
Merger and integration costs incurred for the year ended December
31, 2000 totaled $41.1 million, including $1.8 million related to
the integration of the Ohio operations. These costs relate
primarily to transaction costs, severance, and other merger and
integration activities such as signage and vehicle identification
changes. Vectren expects to realize net merger savings of nearly
$200 million over the next ten years from the elimination of
duplicate corporate and administrative programs and greater
efficiencies in operations, business processes and purchasing.
The continued merger integration activities, which will
contribute to the merger savings, will be substantially completed
in 2001.
As a result of merger integration activities, management has
identified certain information systems that are expected to be
retired in 2001. Accordingly, the useful lives of these assets
have been shortened to reflect this decision, resulting in
additional depreciation expense of approximately $11.4 million
for the year ended December 31, 2000.
In total, merger and integration costs were $52.5 million ($36.8
million after tax), or $.60 on a basic earnings per share basis,
in 2000.
Other Income
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Equity in earnings of unconsolidated investments increased $5.9
million for the year ended December 31, 2000, compared to the
prior year. The increase in 2000 is due primarily to a $7.0
million pre-tax net gain related to the restructuring of
Communications' investment in SIGECOM. The increase was
partially offset by lower pre-tax earnings recognized from
ProLiance Energy Services, LLC (ProLiance), Energy Services'
energy marketing joint venture, and lower other investment
earnings.
Equity in earnings of unconsolidated investments decreased $0.5
million for 1999, compared to 1998. The decrease in 1999
reflected lower pre-tax earnings recognized from ProLiance.
Other-net increased $8.0 million for the year ended December 31,
2000, compared to the prior year due primarily to increased
interest income mainly from Vectren's investments in structured
finance and investment transactions and increased capitalized
interest on utility construction expenditures. SIGECO's final
$1.4 million sale in 1998 of a portion of emission allowance
credits to another utility under a five-year agreement was the
primary reason other-net declined $1.2 million in 1999.
Interest Expense
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Interest expense for the twelve-month period in 2000 rose $14.3
million, or 33 percent, compared to 1999. The increase was due
primarily to increased working capital requirements resulting
from extremely high natural gas prices, additional debt required
for Vectren's increased financial investment activities,
interest related to the financing of the acquisition of the Ohio
operations, and higher average interest rates on utility debt and
short-term borrowings than incurred during 1999. Interest
expense increased $2.5 million to $42.9 million for 1999, as
compared to 1998, due to increased average debt outstanding
required primarily to fund Vectren's increased financial
investment activities and higher average interest rates on
utility debt.
Income Taxes
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Federal and state income taxes declined $11.5 million in 2000,
compared to 1999 due primarily to $30.1 million lower pre-tax
earnings and to additional tax benefits realized from certain non-
regulated investments, which were partially offset by the non-
deductibility of certain merger costs. Federal and state income
taxes increased $3.4 million, or 8 percent during 1999 compared
to 1998 due primarily to higher pre-tax income in 1999 and the
favorable impact on the 1998 effective tax rate of the
liquidation of a leveraged lease investment.
Other Operating Matters
Acquisition of Miller Pipeline Corporation
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On December 13, 2000, Reliant Services, LLC (Reliant), a 50
percent owned, non-regulated utility services affiliate of
Vectren and Cinergy Corporation (Cinergy), purchased the common
stock of Miller Pipeline Corporation from NiSource, Inc. for
$68.3 million. Vectren and Cinergy each contributed $16 million
of equity, and the remaining $36.3 million was funded with 7-year
intermediate bank loans. Miller Pipeline Corporation 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 will expand Vectren's utility
services business by adding underground pipeline construction,
replacement and repair to existing utility services.
Additional Investment with Utilicom Networks
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Vectren Advanced Communications (VAC), a wholly owned non-
regulated subsidiary, was formed to hold Vectren's investments
in Utilicom Networks, LLC (Utilicom Networks) and related
entities. Utilicom Networks is a provider of bundled
communications services through high capacity broadband networks,
including high speed Internet service, cable television and
telephone service.
In January 2000, VAC completed the restructuring of its
investment in SIGECOM, LLC (SIGECOM), which is a venture between
VAC and Utilicom Networks that provides communications services
to the greater Evansville, Indiana area. On January 28, 2000,
affiliates of The Blackstone Group, a private equity fund,
invested in Class B units of Utilicom Networks. Concurrent with
this investment, VAC exchanged its 49 percent preferred equity
interest in SIGECOM for $16.5 million of convertible subordinated
debt of Utilicom Networks, a Class A equity position in Utilicom
Networks and an indirect common equity interest in SIGECOM. VAC
has a 14 percent interest in SIGECOM. The debt is convertible
into Class A units of Utilicom Networks at the option of VAC or
upon the event of a public offering of stock by Utilicom
Networks. The investment restructuring resulted in a pre-tax gain
of $8 million, which is classified in equity in earnings in
unconsolidated investments in the accompanying Consolidated
Statements of Income. For the year ending December 31, 2000,
Vectren also recognized losses of $1 million to reflect its share
of Utilicom Networks' and SIGECOM's operating results. At
December 31, 2000, VAC's equity investment in SIGECOM related
entities was $8.2 million.
In December 2000, VAC invested an additional $8.1 million with
Utilicom Networks in the form of convertible subordinated debt as
part of Utilicom Networks' plans to raise $600 million in
capital to establish operating ventures in Indianapolis, Indiana
and Dayton, Ohio and to recapitalize the SIGECOM venture.
Vectren is committed to invest up to $100 million, inclusive of
the $8.1 million already invested, in the form of convertible
subordinated debt, subject to Utilicom Networks obtaining all
required funding. The debt is convertible into common equity
interests in the Indianapolis and Dayton ventures at the option
of VAC or upon the event of a public offering of stock by
Utilicom Networks. At December 31, 2000, VAC's investment in
convertible debt totals approximately $25 million and upon
conversion, VAC would have up to a 31 percent interest in the
Indianapolis and Dayton ventures and up to a 10 percent interest
in Utilicom Networks, assuming completion of all required
funding.
Both the Indianapolis and Dayton projects have received all
necessary regulatory approvals and are in advanced stages of pre-
engineering and pre-construction planning. Pole attachment
rights have been secured, and launch dates of early 2002 are
expected.
Operation of Warrick Generating Station
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On August 21, 2000, SIGECO announced that no later than April 18,
2001, ALCOA, INC. (ALCOA) would 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. Transition of the
plant operations is expected to be completed in March 2001.
Realignment
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Effective January 1, 2001, the utility operations were
reorganized into two primary business units, Energy Delivery and
Power Supply.
ProLiance Energy, LLC
ProLiance, a 50 percent owned, non-regulated, energy marketing
affiliate of Vectren, began providing natural gas and related
services to Indiana Gas, Citizens Gas and Coke Utility (Citizens
Gas) and others effective April 1, 1996. The sale of gas and
provision of other services to Indiana Gas by ProLiance is
subject to regulatory review through the quarterly gas cost
adjustment (GCA) process administered by the IURC.
On September 12, 1997, the IURC issued a decision finding the gas
supply and portfolio administration agreements between ProLiance
and Indiana Gas and ProLiance and Citizens Gas to be consistent
with the public interest. 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.
In August 1998, Indiana Gas, Citizens Gas and ProLiance each
received a Civil Investigative Demand (CID) from the United
States Department of Justice requesting information relating to
Indiana Gas' and Citizens Gas' relationship with and the
activities of ProLiance. The Department of Justice issued the
CID to gather information regarding ProLiance's formation and
operations, and to determine if trade or commerce has been
restrained. Indiana Gas has provided all information requested
and management continues to believe that there are no significant
issues in this matter.
Indiana Gas continues to record gas costs in accordance with the
terms of the ProLiance contract and Vectren continues to record
its proportional share of ProLiance's earnings. Pretax income
of $5.4 million and $6.7 million was recognized as ProLiance's
contribution to earnings for the years ended December 31, 2000
and 1999, respectively. Earnings recognized from ProLiance are
included in equity in earnings of unconsolidated investments on
the Consolidated Statements of Income. At December 31, 2000 and
1999, Vectren has reserved approximately $2.4 million and $1.7
million, respectively, of ProLiance's earnings after tax pending
resolution of the remaining issues.
Environmental Matters
Clean Air Act
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NOx SIP CALL MATTER. In October 1997, the United States
Environmental Protection Agency (USEPA) proposed a rulemaking
that could require uniform nitrogen oxide (NOx) emissions
reductions of 85 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 (the Act).
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 (IDEM) 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.
On September 20, 2000, petitioners filed a Petition of Writ of
Certiori with the United States Supreme Court requesting review
of the D.C. Circuit Court's March 3, 2000 Order. The Court has
not yet ruled on the Petition for Certiorari. The USEPA granted
Section 126 Petitions filed by northeastern states that require
named sources in the eastern half of Indiana to achieve NOx
reduction by May 1, 2003. No SIGECO facilities are named in the
Section 126 Petitions filed by northeastern states, therefore
SIGECO's compliance date remains May 31, 2004.
The proposed NOx emissions budget for Indiana stipulated in the
USEPA's final ruling requires a 36 percent reduction in total
NOx emissions from Indiana. The ruling, pending finalization of
state rule making, could require SIGECO to lower its system-wide
emissions by approximately 70 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.
MERCURY EMISSIONS. Under the Act, the USEPA is required to study
emissions from power plants in order to determine if additional
regulations are necessary to protect public health. The USEPA
reported its study to Congress in February 1998. That study
concluded that of all toxic pollution examined, mercury posed the
greatest concern to public health. An earlier USEPA study
concluded that the largest single source of human-caused mercury
pollution in the United States was coal-fired power plants.
After completion of the study, the Act required the USEPA to
determine whether to proceed with the development of regulations.
The USEPA announced that it had affirmatively decided that
mercury air emissions from power plants should be regulated.
On December 14, 2000, the USEPA released a statement announcing
that reductions of mercury emissions from coal-fired plants will
be required in the near future. The USEPA has indicated they
will propose regulations by December 2003 and will begin
developing those regulations shortly. Industry, the public, and
state, local and tribal governments will have an opportunity to
participate in the process. The USEPA will then issue final
regulations by December 2004.
CULLEY GENERATING STATION INVESTIGATION MATTER. The USEPA
initiated an investigation under Section 114 of the Act of
SIGECO's coal-fired electric generating units in commercial
operation by 1977 to determine compliance with environmental
permitting requirements related to repairs, maintenance,
modifications and operations changes. The focus of the
investigation was to determine whether new source performance
standards should be applied to the modifications and whether the
best available control technology was, or should have been, used.
Numerous other electric utilities were, and are currently, being
investigated by the USEPA under an industry-wide review for
similar compliance. SIGECO responded to all of the USEPA's data
requests during the investigation. In July 1999, SIGECO received
a letter from the Office of Enforcement and Compliance Assurance
of the USEPA discussing the industry-wide investigation, vaguely
referring to the investigation of SIGECO and inviting SIGECO to
participate in a discussion of the issues. No specifics were
noted; furthermore, the letter stated that the communication was
not intended to serve as a notice of violation. Subsequent
meetings were conducted in September and October with the USEPA
and targeted utilities, including SIGECO, regarding potential
remedies to the USEPA's general allegations.
On November 3, 1999, the USEPA filed a lawsuit against seven
utilities, including SIGECO. The USEPA alleges that, beginning
in 1992, SIGECO violated the Act by: (i) making modifications to
its Culley Generating Station in Yankeetown, Indiana without
obtaining required permits; (ii) making major modifications to
the Culley Generating Station without installing the best
available emission control technology; and (iii) failing to
notify the USEPA of the modifications. In addition, the lawsuit
alleges that the modifications to the Culley Generating Station
required SIGECO to begin 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 Act. Because proper maintenance does not
require permits, application of the best available emission
control technology, notice to the USEPA, or compliance with new
source performance standards, SIGECO believes that the lawsuit is
without merit, and intends to vigorously defend the lawsuit.
The lawsuit seeks fines against SIGECO in the amount of $27,500
per day per violation. The lawsuit does not specify the number
of days or violations the USEPA believes occurred. The lawsuit
also seeks a court order requiring SIGECO to install the best
available emissions technology at the Culley Generating Station.
If the USEPA is successful in obtaining an order, SIGECO
estimates that it would incur capital costs of approximately $40
million to $50 million complying with the order. In the event
that SIGECO is required to install system-wide NOx emission
control equipment, as a result of the NOx SIP call issue, the
majority of the $40 million to $50 million for best available
emissions technology at Culley Generating Station would be
included in the $160 million expenditure previously discussed.
The USEPA has also issued an administrative notice of violation
to SIGECO making the same allegations, but alleging that
violations began in 1977.
While it is possible that SIGECO could be subjected to criminal
penalties if the Culley Generating Station continues to operate
without complying with the new source performance standards and
the allegations are determined by a court to be valid, SIGECO
believes such penalties are unlikely as the USEPA and the
electric utility industry have a bonafide dispute over the proper
interpretation of the Act. Consequently, SIGECO anticipates at
this time that the plant will continue to operate while the
matter is being decided.
INFORMATION REQUEST. On January 23, 2001, SIGECO received an
information request from the USEPA under Section 114(a) of the
Act for historical operational information on the Warrick and
A.B. Brown generating stations. SIGECO plans to provide all
information requested, and management believes that no
significant issues will arise from this request.
Manufactured Gas Plants
- -----------------------
In the past, Indiana Gas and others operated facilities for the
manufacture of gas. Given the availability of natural gas
transported by pipelines, these facilities have not been operated
for many years. Under currently applicable environmental laws
and regulations, Indiana Gas, and the others, may now be required
to take remedial action if certain byproducts are found above the
regulatory thresholds at these sites.
Indiana Gas has identified the existence, location and certain
general characteristics of 26 gas manufacturing and storage sites
for which it may have some remedial responsibility. Indiana Gas
has completed a remedial investigation/feasibility study (RI/FS)
at one of the sites under an agreed order between Indiana Gas and
the Indiana Department of Environmental Management (IDEM), and a
Record of Decision (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 that may be incurred
in connection with addressing these sites cannot be determined at
this time, Indiana Gas has accrued costs that it reasonably
expects to incur.
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 December 31, 2000,
Indiana Gas has received and recorded settlements from all known
insurance carriers in an aggregate amount of approximately $20.3
million.
Environmental matters related to manufactured gas plants have had
no material impact on earnings since costs recorded to date
approximate PRP and insurance settlement recoveries. While
Indiana Gas has recorded all costs which it presently expects to
incur in connection with activities at these sites, it is
possible that future events may require some level of additional
remedial activities which are not presently foreseen.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133),
which requires that every derivative instrument be recorded on
the balance sheet as an asset or liability measured at its fair
value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met.
SFAS 133, as amended, is effective for fiscal years beginning
after June 15, 2000 and must be applied to derivative instruments
and certain derivative instruments embedded in hybrid contracts
that were issued, acquired or substantively modified after
December 31, 1998. Vectren has completed the process of
identifying all derivative instruments, determining fair market
values of these derivatives, designating and documenting hedge
relationships, and evaluating the effectiveness of those hedge
relationships. As a result of the successful completion of this
process, Vectren adopted SFAS 133 as of January 1, 2001.
SFAS 133 requires that as of the date of initial adoption, the
difference between the fair market value of derivative
instruments recorded on the balance sheet and the previous
carrying amount of those derivatives be reported in net income or
other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle in accordance with
Accounting Principles Board Opinion No. 20 "Accounting
Changes."
A limited number of Vectren's contracts are defined as
derivatives under SFAS 133. These derivatives are forward
physical contracts for both the purchase and sale of natural gas
and electricity by its wholly owned gas marketing subsidiary,
SIGCORP Energy Services, Inc. (SES) and SIGECO, respectively, and
an interest rate swap.
SES's primary business is the buying and re-selling of physical
natural gas to the industrial market segment. SES manages its
pricing risk by entering into corresponding gas commodity
contracts that ensure a reasonable matching of the associated
risk. In addition, SES utilizes gas storage facilities to ensure
operational as well as price risk management of its forward
positions. Minimal open positions in terms of price, volume and
specified delivery locations do occur and are managed by SES
using the above instruments and through management reporting.
These commodity contracts and gas storage facilities are for the
normal purchase and sale of natural gas and therefore do not
require fair value accounting under SFAS 133. SES also utilizes
price swap agreements that are accounted for under SFAS 133 to
mitigate price risk related to certain forward physical
contracts. These derivatives have not been designated as hedges,
accordingly, the changes in market value will be recorded
currently in earnings. The mark to market impact of these
derivatives has been reflected as part of the transition
adjustment recorded to earnings on January 1, 2001.
Derivatives used in the power marketing operations are used to
effectively manage the utilization of SIGECO's generation
capability. These derivatives include forward physical wholesale
sales and purchases. The forward sales contracts are generally
used to sell the excess generation capacity of SIGECO when demand
conditions warrant this activity. These contracts are for the
normal purchase and sale of electricity and therefore do not
require fair value accounting under SFAS 133. The forward
purchase contracts are entered into as part of "buy-sell"
transactions with other utilities and power marketers. These
contracts are derivatives and do not qualify for hedge
accounting, accordingly, they have been marked to market
currently in earnings. The mark to market impact of these
derivatives has been reflected as part of the transition
adjustment recorded to earnings on January 1, 2001.
The interest rate swap is used to hedge the exposure to interest
rate risk associated with VUHI's $150 million floating rate
notes that bear interest at the three month US dollar LIBOR rate
plus .75 percent that were issued on December 28, 2000. The swap
was entered into concurrently with the issuance of the floating
rate debt. Vectren has formally documented the hedging
relationship between the swap and floating rate debt as well as
its risk management objectives and strategies for undertaking
each hedge transaction. The swap has been designated as a cash
flow hedge and the mark to market impact has been reflected as
part of the transition adjustment recorded to other comprehensive
income on January 1, 2001.
The cumulative impact of the adoption of SFAS 133 on January 1,
2001 is a gain of approximately $6.3 million due to the
derivatives used in power marketing operations. The impact of
the derivatives used by SES and the interest rate swap was
immaterial.
Rate and Regulatory Matters
As a result of the ongoing appeal of a generic order issued by
the Indiana Utility Regulatory Commission (IURC) in August 1999
regarding guidelines for the recovery of purchased power costs,
SIGECO entered into a settlement agreement with the Indiana
Office of Utility Consumer Counselor (OUCC) that provides certain
terms with respect to the recoverability of such costs. The
settlement, originally approved by the IURC on August 9, 2000,
has been extended by agreement through March 2002. Under the
settlement, SIGECO can recover the entire cost of purchased power
up to an established benchmark, and during forced outages, SIGECO
will bear a limited share of its purchased power costs regardless
of the market costs at that time. Based on this agreement,
SIGECO believes it has significantly limited its exposure to
unrecoverable purchased power costs.
Commodity prices for natural gas purchases during the last six
months of 2000 unexpectedly increased significantly, primarily
due to the expectation of a colder winter, which led to increased
demand and tighter supplies. Vectren's utility subsidiaries are
allowed full recovery of such charges in purchased gas costs from
their retail customers through commission-approved gas cost
adjustment mechanisms, and margin on gas sales should not be
impacted. On October 11, 2000,
Indiana Gas filed for approval of its regular quarterly GCA. In
early December, the IURC issued an interim order approving the
request by Indiana Gas for a GCA factor for December 2000. On
January 4, 2001, the IURC approved the January and February 2001
GCA as filed. The order also addressed the claim by the OUCC
that a portion of the requested GCA be disallowed because Indiana
Gas should have entered into additional commitments for this
winter's gas supply in late 1999 and early 2000. In procuring
gas supply for this winter, Indiana Gas followed the gas
procurement practices that it had employed over the last several
years. In response to the claim by the OUCC, the IURC found that
there should be a $3.8 million disallowance related to gas
procurement for the winter season. As a result, Indiana Gas
recognized a pre-tax charge of $3.8 million in December 2000.
Both Indiana Gas and the OUCC have appealed this ruling. The
Citizens Action Coalition of Indiana, Inc., a not for profit
consumer advocate, has also filed with the IURC a petition to
intervene and a notice of appeal of the order.
Competition
The utility industry has been undergoing dramatic structural
change for several years, resulting in increasing competitive
pressures faced by electric and gas utility companies. Increased
competition may create greater risks to the stability of utility
earnings generally and may in the future reduce our earnings from
retail electric and gas sales. Currently, several states,
including Ohio, have passed legislation that allows electricity
customers to choose their electricity supplier in a competitive
electricity market and several other states are considering such
legislation. At the present time, Indiana has not adopted such
legislation. Ohio regulation provides for choice of commodity
for all gas customers. Vectren plans to implement this choice
for all of its gas customers in Ohio by 2002. Indiana has not
adopted any regulation requiring gas choice except for large
volume customers.
Quantitative and Qualitative Disclosures about Market Risk
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 maximum 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, Vectren acknowledges that
there may be times during the business cycle that the guideline
may be exceeded. At December 31, 2000, Vectren's short-term
debt, including adjustable rate bonds, represented 56 percent of
the company's total debt portfolio, due primarily to financing
the approximate $465 million acquisition of the Ohio operations
initially with short-term debt and the increased working capital
requirements resulting from higher purchased gas costs and
increased customer consumption. The short-term debt utilized
for the Ohio operations acquisition will be replaced over time
with permanent financing (see Liquidity and Capital Resources).
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.
SES 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 is not material. SES sells fixed-
price and capped-price products and reduces its market price
risk through the use of fixed-price supplier contracts and
storage assets.
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. These forward physical contracts expose
SIGECO to electricity market price risk.
With respect to the provision of electric energy and natural gas
to its retail customers in Indiana, SIGECO is permitted by
statute to pass through its purchase costs to its customers.
Regarding electric energy, this ability to pass through all
costs is arguably limited to the fuel cost component of electric
energy purchases and does not encompass demand costs. After
issuance in 1999 of a generic order by the IURC regarding the
recoverability of the cost of purchased electric power which
resulted in appeals by certain parties, SIGECO and several other
Indiana electric utilities entered into a settlement with the
OUCC which sets a benchmark for the recoverability of such costs
and provides assurance that regardless of the market cost of
power during outage situations, SIGECO will be able to recoup
the majority of its costs. The IURC approved the settlement in
1999 and thereby vacated its prior order and all litigation
regarding the issue was terminated. This settlement has been
extended through March 2002.
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 December 31, 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.
Liquidity and Capital Resources
Vectren's capitalization objective is 40-50 percent permanent
capitalization. This objective may have varied, and will vary,
from time to time, depending on particular business opportunities
and seasonal factors that affect the company's operation.
Vectren's common equity component was 51 percent and 56 percent
of its total capitalization, including current maturities of long-
term debt, at December 31, 2000 and 1999, respectively. The
common equity component of 51 percent at December 31, 2000 is
expected to be reduced in 2001 upon the refinancing of a
substantial amount of short-term debt to long-term debt.
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. Additionally, during the four year period 2001
through 2004, construction costs for NOx emissions control
equipment are estimated to total approximately $160 million. For
the years ended December 31, 2000 and 1999, capital expenditures
totaled $164.3 million and $132.2 million, respectively. The
increase in capital expenditures for 2000 is related primarily to
the additional coal mine development costs at Utility Services.
Vectren's anticipated investments in non-regulated affiliates
during the next five years will also require funding. Capital
expenditures and investments in affiliates for the five year
period 2001 - 2005 are as follows:
In millions 2001 2002 2003 2004 2005 Total
----- ----- ----- ----- ----- -----
Capital expenditures
Utility (1) (2) (3) $160.3 $143.3 $143.1 $122.8 $135.5 $705.0
Non-regulated (4) 66.0 23.4 27.1 11.0 7.6 135.1
------ ------ ------ ------ ------ ------
Total capital
expenditures 226.3 166.7 170.2 133.8 143.1 840.1
------ ------ ------ ------ ------ ------
Non-regulated
investments $ 83.5 $ 39.2 $ 33.3 $ 17.9 $ 11.0 $184.9
(1) Includes expenditures for NOx compliance of approximately
$40 million in 2001, $30 million in 2002, $55 million in
2003 and $35 million in 2004.
(2) Includes expenditures for an 80-megawatt gas combustion
turbine generator of $20 million in 2001 and $13 million
in 2002.
(3) Includes expenditures for additional generation assets of
approximately $40 million in 2005.
(4) Includes expenditures for corporate technology hardware
and software of approximately $48 million in 2001.
During the five year period 2001 - 2005, maturities and sinking
fund requirements on long-term debt subject to mandatory
redemption, in millions, are $0.3 in 2001, $16.0 in 2003, $15.0
in 2004, and $38.0 in 2005.
At December 31, 2000, Vectren had $969 million of short-term
borrowing capacity for use in its utility and non-regulated
operations, of which approximately $209 million was available.
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. During 2000, however, short-term
borrowings related to working capital requirements were greatest
during the last six months of the year due to the higher natural
gas costs. On October 31, 2000, Vectren completed the
acquisition of the Ohio operations 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.
Vectren's primary source of liquidity to fund working capital
requirements has been cash generated from operations, which
totaled approximately $40.7 million, $149.2 million and $156.6
million in 2000, 1999 and 1998 respectively. Cash from
operations decreased during 2000 as compared to 1999 by
approximately $108.8 million. The decrease is primarily
attributable to merger and integration costs causing lower net
income, increased recoverable fuel and natural gas costs and
increased working capital requirements resulting from higher
natural gas costs. The decrease in 1999 cash flow from
operations as compared to 1998 of approximately $7.4 million is
primarily attributable to unfavorable changes in working capital
accounts offset by increased net income.
At December 31, 2000, Indiana Gas is not in compliance with the
total indebtedness to capitalization ratio contained in its back
up credit facility for its commercial paper program. The non-
compliance resulted from the indebtedness incurred to purchase
its ownership interest in the Ohio operations. A waiver on the
Indiana Gas facility has been obtained to waive the non-
compliance through and including March 31, 2001. Subject to
regulatory approval, Vectren will provide an equity investment in
Indiana Gas to bring Indiana Gas into compliance. No amount is
outstanding under the back up facility.
On December 21, 2000, Vectren Capital Corporation, a wholly owned
subsidiary that provides financing for Vectren's non-regulated
subsidiaries' operations and investments, issued $78 million of
private placement intermediate term notes to three institutional
investors. The issues and their terms are: $38.0 million, due
December 21, 2005, at 7.67 percent; $17.5 million, due December
21, 2007, at 7.83 percent; and $22.5 million, due December 21,
2010, at 7.98 percent. The proceeds were used to repay
outstanding short-term borrowings.
In December 2000, Indiana Gas filed a prospectus with the SEC
with respect to the issuance of $70 million in debt securities.
On of December 28, 2000, $20 million of 15-Year Insured Quarterly
(IQ) Notes bearing interest at a rate of 7.15 percent per year
and $50 million of 30-Year IQ Notes bearing interest at a rate of
7.45 percent per year were issued. The 15-Year IQ Notes will
mature on December 15, 2015, and 30-Year IQ Notes will mature on
December 16, 2030, unless, in each case, redeemed prior to that
date. Indiana Gas will have the option to redeem the 15-Year IQ
Notes, in whole or in part, from time to time on or after
December 15, 2004. Indiana Gas will have the option to redeem
the 30-Year IQ Notes in whole or in part, from time to time on or
after December 15, 2005. The net proceeds of the debt issuance
were used to repay outstanding commercial paper.
On December 28, 2000, VUHI issued $150 million in floating rate
notes to repay an equal amount of outstanding commercial paper
utilized for the Ohio operations acquisition. The notes bear
interest at a rate equal to the three month US dollar LIBOR rate
plus .75 percent. Concurrently with the completion of this
financing, a floating rate to fixed rate swap was executed which
in effect resulted in a fixed rate of 6.64 percent on the notes.
On January 19, 2001, Vectren filed a registration statement with
the Securities and Exchange Commission with respect to a public
offering of 5.5 million shares of new common stock. On February
8, 2001, the registration became effective and agreement was
reached to sell 5.5 million shares to a group of underwriters.
On February 14, the shares were sold, at which time the
underwriters exercised their over-allotment option to sell an
additional 825,000 shares for a total of 6.3 million shares. The
net proceeds of $129.4 million will be used principally to repay
outstanding commercial paper utilized for recent acquisitions.
On March 1, 2000, the interest rate on $31.5 million of
Adjustable Rate Pollution Control Bonds of SIGECO, due March 1,
2025, was changed from 3.00 percent to 4.30 percent. The new
interest rate was fixed through February 29, 2001. Also on March
1, 2000, the interest rate on $22.2 million of Adjustable Rate
Pollution Control Bonds of SIGECO, due March 1, 2020, was changed
from 3.05 percent to 4.45 percent. The new interest rate was
also fixed through February 28, 2001. For financial statement
presentation, the $53.7 million of Adjustable Rate Pollution
Control Bonds are shown as a current liability. The two series
of bonds will be re-set for a five-year period effective March 1,
2001.
Financing Activities
Vectren expects the majority of its utility capital expenditures
requirements and debt security redemptions to be provided by
internally generated funds.
Indiana Gas' and SIGECO's credit ratings on outstanding debt at
December 31, 2000 were A/A2 and A/A1, respectively. VUHI's
commercial paper related to the October 2000 the Ohio operations
acquisition has a credit rating of A-1/P-2. Indiana Gas'
commercial paper retains an A-1/P-1 rating.
Cash flow from financing activities of $638.7 million for the
year ended December 31, 2000 includes $697.0 million of
additional net borrowings offset by $60.0 million of dividends on
shares of common stock. This is an increase of $576.5 million
over prior year due primarily to funding the acquisition of the
Ohio operations and increased working capital requirements.
Cash required for investing activities of $681.5 million for the
year ended December 31, 2000 includes, among other things, $463.3
million required for the Ohio operations acquisition, $164.3
million of capital expenditures and $32.0 million additional
notes receivable. This is an increase of $480.1 million over
prior year due primarily to the Ohio operations acquisition.
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
Results of Operations and Financial Condition, including, but not
limited to Vectren's realization of net merger savings and
ProLiance, are forward-looking statements. Such statements are
based on management's beliefs, as well as assumptions made by
and information currently available to management. When used in
this filing, the words "believe," "anticipate," "endeavor,"
"estimate," "expect," "objective," "projection,"
"forecast," "goal," and similar expressions are intended to
identify forward-looking statements. In addition to any
assumptions and other factors referred to specifically in
connection with such forward-looking statements, factors that
could cause Vectren and its subsidiaries' actual results to
differ materially from those contemplated in any forward-looking
statements included, among others, the following:
* 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 Results of Operations and Financial Condition.
* Changes in federal, state or local legislature requirements,
such as changes in tax laws or rates, environmental laws and
regulations.
Vectren and its subsidiaries undertake no obligation to publicly
update or revise any forward-looking statements, whether as a
result of changes in actual results, changes in assumptions, or
other factors affecting such statements.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Vectren Corporation is responsible for the
preparation of the consolidated financial statements and the
related financial data contained in this report. The financial
statements are prepared in conformity with accounting principles
generally accepted in the United States and follow accounting
policies and principles applicable to regulated public utilities.
The integrity and objectivity of the data in this report,
including required estimates and judgments, are the
responsibility of management. Management maintains a system of
internal control and utilizes an internal auditing program to
provide reasonable assurance of compliance with company policies
and procedures and the safeguard of assets.
The board of directors pursues its responsibility for these
financial statements through its audit committee, which meets
periodically with management, the internal auditors and the
independent auditors, to assure that each is carrying out its
responsibilities. Both the internal auditors and the independent
auditors meet with the audit committee of Vectren Corporation's
board of directors, with and without management representatives
present, to discuss the scope and results of their audits, their
comments on the adequacy of internal accounting control and the
quality of financial reporting.
/s/ Niel C. Ellerbrook
Niel C. Ellerbrook
Chairman and Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Vectren
Corporation:
We have audited the accompanying consolidated balance sheets of
Vectren Corporation (an Indiana corporation) and subsidiary
companies as of December 31, 2000 and 1999, and the related
consolidated statements of income, common shareholders' equity
and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the
responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Vectren Corporation and subsidiary companies as of
December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Indianapolis, Indiana,
January 24, 2001 (except with
respect to the matter
discussed in Note 22, as to
which the date is February 14,
2001).
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
As of December 31,
2000 1999
---------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,170 $ 17,351
Temporary investments - 903
Accounts receivable, less reserves of
$5,716 and $3,949, respectively 295,351 123,612
Accrued unbilled revenues 143,365 55,370
Inventories 95,245 58,863
Prepaid gas delivery service 34,849 20,937
Recoverable fuel and natural gas costs 96,084 5,585
Prepayments and other current assets 20,998 23,091
---------- ---------
Total current assets 701,062 305,712
---------- ---------
Utility Plant:
Original cost 2,788,794 2,367,831
Less: accumulated depreciation and
amortization 1,233,033 1,031,498
---------- ----------
Net utility plant 1,555,761 1,336,333
---------- ----------
Other Investments:
Investments in leveraged leases 93,145 85,737
Investments in partnerships and
other corporations 108,645 74,644
Notes receivable 64,276 32,271
Other 1,057 996
---------- -----------
Total other investments 267,123 193,648
---------- -----------
Nonutility property, net of accumulated
depreciation 103,477 64,474
Other Assets:
Deferred charges, net 31,094 31,672
Goodwill, net 197,977 -
Regulatory assets 52,246 47,593
Other 447 1,035
--------- ----------
Total other assets 281,764 80,300
--------- ----------
TOTAL ASSETS $2,909,187 $1,980,467
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
As of December 31,
2000 1999
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of adjustable rate
bonds subject to tender $ 53,700 $ 53,700
Current maturities of long-term debt
and other obligations 249 776
Short-term borrowings 759,908 207,638
Accounts payable 304,021 95,827
Refunds to customers and customer
deposits 22,922 27,396
Accrued taxes 556 26,602
Accrued interest 10,272 12,097
Other current liabilities 70,750 49,467
--------- ---------
Total current liabilities 1,222,378 473,503
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 229,911 215,520
Accrued postretirement benefits other
than pensions 45,883 40,942
Unamortized investment tax credit 23,165 25,524
Other 5,826 8,297
-------- ----------
Total deferred credits and other
liabilities 304,785 290,283
-------- --------
Commitments and Contingencies (Notes 6, 7,
15, 17, 18 and 19)
Minority Interest in Subsidiary 1,421 916
Long-term debt and other obligations, net
of current maturities 631,954 486,726
Preferred stock of subsidiary:
Redeemable 8,076 8,192
Nonredeemable 8,889 11,090
-------- --------
Total preferred stock 16,965 19,282
-------- ---------
Common stock (no par value) - issued and
outstanding 61,419 and 61,305,
respectively 217,720 215,917
Retained earnings 506,462 493,918
Accumulated other comprehensive income 7,502 (78)
--------- ---------
Total common shareholders' equity 731,684 709,757
--------- ---------
Total capitalization 1,380,603 1,215,765
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,909,187 $1,980,467
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
2000 1999 1998
---------- ---------- ----------
OPERATING REVENUES:
Gas utility $ 818,753 $ 499,573 $ 487,260
Electric utility 336,409 307,569 297,865
Energy services and other 493,528 261,275 212,581
--------- --------- ----------
Total operating revenues 1,648,690 1,068,417 997,706
--------- --------- ---------
OPERATING EXPENSES:
Cost of gas sold 552,540 266,429 269,999
Fuel for electric generation 71,170 66,305 65,222
Purchased electric energy 36,394 20,791 20,762
Cost of energy services and
other 473,258 247,590 202,441
Other operating 199,591 189,622 181,818
Merger and integration costs 41,145 - -
Depreciation and amortization 105,661 86,998 81,558
Taxes other than income taxes 38,010 29,910 27,369
--------- --------- ---------
Total operating expenses 1,517,769 907,645 849,169
--------- --------- ---------
OPERATING INCOME 130,921 160,772 148,537
OTHER INCOME:
Equity in earnings of
unconsolidated investments 17,554 11,642 12,104
Other - net 16,951 8,902 10,105
--------- --------- ---------
Total other income 34,505 20,544 22,209
--------- --------- ---------
INTEREST EXPENSE 57,133 42,862 40,301
--------- --------- ---------
INCOME BEFORE PREFERRED DIVIDENDS
AND INCOME TAXES 108,293 138,454 130,445
PREFERRED DIVIDEND REQUIREMENT OF
SUBSIDIARY 1,017 1,078 1,095
--------- --------- ---------
INCOME BEFORE INCOME TAXES 107,276 137,376 129,350
INCOME TAXES 34,232 45,708 42,328
--------- --------- ---------
NET INCOME BEFORE MINORITY
INTEREST 73,044 91,668 87,022
MINORITY INTEREST IN SUBSIDIARY 1,004 920 422
--------- --------- ---------
NET INCOME $ 72,040 $ 90,748 $ 86,600
========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING 61,297 61,306 61,578
DILUTED COMMON SHARES OUTSTANDING 61,380 61,430 61,756
BASIC EARNINGS PER AVERAGE SHARE
OF COMMON STOCK $1.18 $1.48 $1.41
DILUTED EARNINGS PER AVERAGE SHARE
OF COMMON STOCK $1.17 $1.48 $1.40
The accompanying notes are an integral part of these
consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2000 1999 1998
---------- ---------- ----------
.
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 72,040 $ 90,748 $ 86,600
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and
amortization 105,661 86,998 81,558
Preferred dividend
requirement of subsidiary 1,017 1,078 1,095
Deferred income taxes and
investment tax credits 12,032 8,548 (1,644)
(Gain) loss on sale or
retirement of assets
or investments (8,961) - (2,102)
Undistributed earnings
of unconsolidated
investments (10,554) (11,642) (12,104)
Changes in assets and liabilities:
Receivables - net (246,771) (19,978) 18,052
Inventories 17,817 7,823 (30,110)
Prepaid gas delivery
service (13,912) (20,937) 17,024
Recoverable fuel and
natural gas costs (82,343) 346 3,198
Prepayments and other
current assets 7,553 (7,805) (8,242)
Regulatory assets (4,653) 1,718 (3,494)
Accounts payable,
refunds to customers,
customer deposits
And other current
liabilities 217,122 1,514 7,208
Accrued taxes and
interest (27,871) 13,585 (9,522)
Accrued post-retirement
benefits and other
than pensions 4,941 3,455 2,472
Other - net (2,411) (6,226) 6,598
---------- --------- ---------
Total adjustments (31,333) 58,477 69,987
Net cash flows from
operating activities 40,707 149,225 156,587
---------- --------- ---------
CASH FLOWS (REQUIRED FOR) FROM
FINANCING ACTIVITIES
Issuance (retirement) of
common stock 1,803 (1,349) (6,075)
Retirement of preferred stock (2,317) (116) (116)
Proceeds from long-term debt 178,000 110,000 60,052
Retirement of long-term debt
and other obligations (33,299) (67,067) (50,828)
Net change in short-term
borrowings 552,270 81,655 12,253
Dividends on common stock (59,977) (57,365) (55,727)
Other 2,175 (3,614) (675)
---------- --------- ---------
Net cash flows (required
for) from financing
activities 638,655 62,144 (41,116)
---------- --------- ---------
CASH FLOWS (REQUIRED FOR) FROM
INVESTING ACTIVITIES
Capital expenditures (164,266) (132,159) (135,069)
Investment in leveraged
leases (850) (49,734) 5,194
Investments in partnerships
and other corporations (29,446) (10,711) (11,512)
Change in notes receivable (32,005) (11,899) 1,032
Cash distributions from
unconsolidated investments 7,033 4,550 7,806
Proceeds from sale of assets - - 13,317
Acquisition of DPL gas
distribution assets (463,301) - -
Other 1,292 (1,456) 3,074
--------- --------- ---------
Net cash flows (required
for) investing activities (681,543) (201,409) (116,158)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (2,181) 9,960 (687)
Cash and cash equivalents at
beginning of period 17,351 7,391 8,078
--------- --------- ---------
Cash and cash equivalents at end
of period $ 15,170 $ 17,351 $ 7,391
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements..
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
( in thousands)
Common Stock
-----------------------------
Restricted
Stock
Shares Amount Grants
-------- -------- ----------
Balance at December 31, 1997 61,621 $225,049 $(1,708)
Net income
Other comprehensive income
adjustments (net of tax)
Common stock dividends
($0.90 per share)
Common stock repurchases (215) (4,834)
Common stock issuances for
Executives' and Directors'
Stock plans, net of amortization 14 (1,572) 331
Common stock issuance expense
Other
-------- -------- --------
Balance at December 31, 1998 61,420 $218,643 $(1,377)
Net income
Other comprehensive income
adjustments (net of tax)
Common stock dividends
($0.94 per share)
Common stock repurchases (113) (2,331)
Common stock issuances for
Executives' and Directors'
stock plans, net of amortization (2) 1,150 (168)
Other
-------- -------- --------
Balance at December 31, 1999 61,305 $217,462 $(1,545)
Net income
Other comprehensive income
adjustments (net of tax)
Common stock dividends
($0.98 per share)
Common stock repurchases (86) (2,176)
Common stock issuances for
Executives' and Directors'
stock plans, net of amortization 200 3,979
Other
-------- -------- ---------
Balance at December 31, 2000 61,419 $219,265 $(1,545)
======== ======== ========
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
--------- -------------- --------
Balance at December 31, 1997 $430,248 $ 77 $653,666
Net income 86,600 86,600
Other comprehensive income
adjustments (net of tax) (89) (89)
Common stock dividends
($0.90 per share) (55,727) (55,727)
Common stock repurchases (4,834)
Common stock issuances for
Executives' and Directors'
Stock plans, net of
amortization (1,241)
Common stock issuance expense (33) (33)
Other (428) (428)
--------- ---------- --------
Balance at December 31, 1998 $460,660 $(12) $677,914
Net income 90,748 90,748
Other comprehensive income
adjustments (net of tax) (66) (66)
Common stock dividends
($0.94 per share) (57,365) (57,365)
Common stock repurchases (2,331)
Common stock issuances for
Executives' and Directors'
stock plans, net of
amortization 982
Other (125) (125)
-------- ---------- --------
Balance at December 31, 1999 $493,918 $(78) $709,757
Net income 72,040 72,040
Other comprehensive income 7,580 7,580
adjustments (net of tax)
Common stock dividends (59,977) (59,977)
($0.98 per share)
Common stock repurchases (2,176)
Common stock issuances for
Executives' and Directors'
stock plans, net of
amortization 3,979
Other 481 481
-------- ---------- --------
Balance at December 31, 2000 $506,462 $7,502 $731,684
======== =========== ========
The accompanying notes are an integral part of these
consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
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 the common shareholders of Indiana Energy 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. (VUHI), is the
intermediate holding company for Vectren's three operating
public utilities, Indiana Gas Company, Inc. (Indiana Gas),
formerly a wholly owned subsidiary of Indiana Energy, Southern
Indiana Gas and Electric Company (SIGECO), formerly a wholly
owned subsidiary of SIGCORP, and the Ohio operations (defined
hereafter). 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. The Ohio
operations provide natural gas distribution and transportation
services to Dayton, Ohio and 16 counties in west central Ohio.
Vectren is involved in non-regulated activities through three
primary business groups: Energy Services, Utility Services and
Communications. Energy Services trades and markets natural gas
and provides energy performance contracting services. Utility
Services provides utility products and services, such as
underground construction and facilities locating, meter reading
and materials management, and the mining and sale of coal.
Communications provides integrated broadband communications
services, including local and long distance telephone, Internet
access and cable television. In addition, other businesses
invest in other energy-related opportunities and corporate
technology.
2. Acquisition of the Natural Gas Distribution Assets of The
Dayton Power and Light Company
On October 31, 2000, Vectren acquired the natural gas
distribution assets of The Dayton Power and Light Company (DP&L)
for approximately $465 million. The acquisition has been
accounted for as a purchase transaction in accordance with
Accounting Principles Board (APB) Opinion No. 16 and accordingly,
the results of operations of the acquired businesses are included
in the accompanying financial statements since the date of
acquisition.
Vectren acquired the natural gas distribution assets as a tenancy
in common through two separate wholly owned subsidiaries.
Vectren Energy Delivery of Ohio, Inc. (VEDO) holds a 53 percent
undivided ownership interest in the assets and Indiana Gas holds
a 47 percent undivided ownership interest. VEDO is the operator
of the assets, operations of which are referred to as "the Ohio
operations." VUHI 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 its commercial paper program.
Goodwill has been recognized for the amount of the excess of the
purchase price paid over the book value of the net assets
acquired and is being amortized on a straight line basis over 40
years. Goodwill recognized as a result of the acquisition is
$198 million. The purchase price is subject to adjustment based
on the finalization of the closing balance sheet in accordance
with the Asset Purchase Agreement.
The following table depicts, for the years ended December 31,
2000 and 1999, unaudited pro forma consolidated information, as
if the acquisition of the Ohio operations occurred on January 1,
1999. The pro forma summary information presented below is not
necessarily indicative of the results that actually would have
occurred if the transaction indicated above had been consummated
at the beginning of the periods presented and is not intended to
be a projection of future results.
Unaudited Year Ended December 31,
In thousands, except per share amounts 2000 1999
--------- -----------
Total operating revenues $ 1,831,136 $ 1,287,283
----------- -----------
Net income $ 72,007 $ 87,402
----------- -----------
Average shares outstanding:
Basic 61,297 61,306
Diluted 61,380 61,430
Earnings per average share of common
stock:
Basic $1.17 $1.43
Diluted $1.17 $1.42
3. Merger and Integration Costs
Merger and integration costs incurred for the year ended December
31, 2000 totaled $41.1 million, including $1.8 million related to
the integration of the Ohio operations. These costs relate
primarily to transaction costs, severance and other merger and
integration activities such as signage and vehicle identification
changes. At March 31, 2000, Vectren accrued $27.2 million for
merger related costs and the accrual remaining for such costs at
December 31, 2000 is $1.8 million. In addition, during 2000,
$13.9 million of merger and integration costs were charged
directly to expense. The merger integration activities will be
substantially completed in 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
additional depreciation expense of approximately $11.4 million
for the year ended December 31, 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
years ended December 31, 1999 and 1998 are as follows (in
millions):
Three months Twelve months Twelve months
ended ended ended
March 31, December 31, December 31,
2000 1999 1998
------------- -------------- --------------
Indiana Energy:
Operating Revenues $ 172.0 $ 433.3 $ 440.6
Net Income $ 22.1 $ 38.7 $ 36.1
SIGCORP:
Operating Revenues $ 187.4 $ 604.5 $ 557.1
Net Income $ 19.3 $ 52.1 $ 50.5
5. Summary of Significant Accounting Policies
A. Principles of Consolidation
The accompanying consolidated financial statements for the years
ended December 31, 1999 and 1998 of Vectren and its subsidiary
companies reflect the company on a historical basis as restated
for the effects of the pooling-of-interests transaction completed
on March 31, 2000 between Indiana Energy and SIGCORP. The
consolidated financial statements include the accounts of Vectren
and its wholly owned and majority owned subsidiaries, after
elimination of intercompany transactions. Investments in limited
partnerships and less than majority-owned affiliates are
accounted for on the equity method. The financial statements
also reflect the consolidation of a majority-owned affiliate,
Energy Systems Group, LLC, which was an equity method investment
of Indiana Energy and SIGCORP prior to the merger.
B. Investments in Partnerships and Other Corporations
Investments in partnerships and other corporations, which are
more than 20 percent owned but less than majority owned, are
accounted for by the equity method. Vectren's share of net
income or loss from these investments is recorded in equity in
earnings of unconsolidated affiliates. Dividends are recorded as
a reduction of the carrying value of the investment when
received.
Investments in other corporations less than 20 percent owned are
carried at cost less writedowns for declines in value judged to
be other than temporary. Dividends are recorded as other income
when received.
C. Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to conform to the current year presentation.
These reclassifications have no impact on net income previously
reported.
D. Utility Plant and Depreciation
Utility plant is stated at historical cost, including an
allowance for the cost of funds used during construction.
Depreciation of utility property is provided using the straight-
line method over the estimated service lives of the depreciable
assets.
The average depreciation rates, expressed as a percentage of
original cost, were 3.5 percent, 3.7 percent and 3.8 percent for
the years ended December 31, 2000, 1999 and 1998, respectively.
Vectren follows the practice of charging maintenance and repairs,
including the cost of removal of minor items of property, to
expense as incurred. When property that represents a retirement
unit is replaced or removed, the cost of such property is
credited to utility plant, and such cost, together with the cost
of removal less salvage, is charged to accumulated depreciation.
E. Nonutility Plant
Nonutility plant consists of property and equipment used by
Vectren's non-regulated operations. Costs of nonutility plant
are charged against income over their estimated useful lives,
using the straight-line method of depreciation. Repairs and
maintenance, which are not considered betterments and do not
extend the useful life of nonutility plant, are charged to
expense as incurred. When nonutility plant is retired, or
otherwise disposed of, the asset and accumulated depreciation are
removed and the resulting gain or loss is reflected in income.
F. 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, income taxes and acquired
assets and liabilities were as follows:
Year Ended December 31,
In thousands 2000 1999 1998
-------- -------- --------
Cash paid during the year for
Interest (net of amount
capitalized) $ 55,734 $ 34,826 $ 35,798
Income taxes 53,450 36,909 53,311
-------- -------- --------
Details of acquisition (Note 2)
Book value of assets
acquired $278,080 - -
Liabilities assumed 7,881 - -
-------- -------- --------
Net assets acquired $270,199 - -
======== ======== ========
G. Revenues
Revenues are recorded as products and services are delivered to
customers. To more closely match revenues and expenses,
Vectren's utility subsidiaries record revenues for all gas and
electricity delivered to customers but not billed at the end of
the accounting period.
H. Inventories
Inventories primarily consist of gas in underground storage, fuel
for electric generation and materials and supplies. Gas in
underground storage at SIGECO and Indiana Gas is valued using
last-in, first-out (LIFO) method, while all other inventories,
including the acquired inventories of the Ohio operations, are
valued using the average cost method. Based on the average cost
of gas purchased during December, the cost of replacing the
current portion of gas in underground storage exceeded LIFO cost
at December 31, 2000 and 1999 by approximately $64.3 million and
$23.2 million, respectively. Inventories consist of the
following:
At December 31,
In thousands 2000 1999
-------- ---------
Fuel (coal and oil) for electric
generation $ 4,368 $ 12,824
Materials and supplies 16,958 15,224
Emission allowances 3,860 4,437
Gas in storage - at LIFO cost 18,988 23,068
Gas in storage - at average cost 49,424 -
Other 1,647 3,310
-------- --------
Total inventories $ 95,245 $ 58,863
======== ========
I. Refundable or Recoverable Gas Costs, Fuel for Electric
Production and Purchased Power
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 that 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.
Vectren's utility subsidiaries 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.
J. Allowance for Funds used During Construction
An allowance for funds used during construction (AFUDC), which
represents the cost of borrowed and equity funds used for
construction purposes, is charged to construction work in
progress during the period of construction and included in other
- - net on the Consolidated Statements of Income.
The table below reflects the total AFUDC capitalized and the
portion of which was computed on borrowed and equity funds for
all periods reported.
Year Ended December 31,
In thousands 2000 1999 1998
-------- -------- --------
AFUDC - borrowed funds $ 2,634 $ 3,090 $ 2,394
AFUDC - equity funds 2,645 739 230
-------- -------- --------
Total AFUDC capitalized $ 5,279 $ 3,829 $ 2,624
======== ======== ========
K. Income Taxes
The liability method of accounting is used for income taxes under
which deferred income taxes are recognized, at currently enacted
income tax rates, to reflect the tax effect of temporary
differences between the book and tax bases of assets and
liabilities. Deferred investment tax credits are being amortized
over the life of the related asset.
L. Use of Estimates
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 financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
these estimates.
M. Regulation
The utility operations of Indiana Gas and SIGECO are subject to
regulation by the Indiana Utility Regulatory Commission (IURC)
and the Ohio operations are subject to regulation by the Public
Utilities Commission of Ohio (PUCO). The wholesale energy sales
of SIGECO are subject to regulation by the Federal Energy
Regulatory Commission (FERC). The accounting policies of Vectren
and its utility subsidiaries give recognition to the ratemaking
and accounting practices of these agencies and to accounting
principles generally accepted in the United States, including the
provisions of Statement of Financial Accounting Standards No. 71
"Accounting for the Effects of Certain Types of Regulation"
(SFAS 71). Regulatory assets represent probable future revenues
associated with certain incurred costs, which will be recovered
from customers through the ratemaking process. Regulatory
liabilities represent probable future reductions in revenues
associated with amounts that are to be credited to customers
through the ratemaking process.
The following regulatory assets and liabilities are reflected in
the financial statements:
At December 31,
In thousands 2000 1999
---------- ---------
Regulatory Assets:
Demand side management programs $ 26,243 $ 25,298
Unamortized premium on reacquired debt 4,192 4,416
Unamortized debt discount and expenses 16,741 13,233
Regulatory income tax asset 4,723 2,741
Other 347 1,905
---------- ---------
Regulatory assets in other assets 52,246 47,593
Recoverable fuel and natural gas costs 96,084 5,585
---------- ---------
Total regulatory assets $ 148,330 $ 53,178
========== =========
Regulatory Liabilities:
Refundable gas costs - $ 10,204
========== =========
As of December 31, 2000, the recovery of $126.9 million of
Vectren's $148.3 million of total regulatory assets is reflected
in rates charged to customers. The remaining $21.4 million of
regulatory assets, which are not yet included in rates, represent
SIGECO's demand side management (DSM) costs incurred after 1993.
When SIGECO files its next electric base rate case, these costs
will be included in rate base and requested to earn a return.
Amortization of the costs over a period anticipated to be 15
years will be recovered through rates as a cost of operations.
Indiana Gas was authorized as part of an August 17, 1994
financing order from the IURC to amortize over a 15-year period
the debt discount and expense related to new debt issues and
future debt issues and future premiums paid for debt reacquired
in connection with refinancing. Debt discount and expense for
issues in place prior to this order are being amortized over the
lives of the related issues. Premiums paid prior to this order
for debt reacquired in connection with refinancing are being
amortized over the life of the refunding issue. SIGECO's debt
discounts and expense related to new debt issues and premiums
paid for debt reacquired is being amortized over the lives of the
related issues.
Of the $126.9 million of regulatory assets currently reflected in
rates, a total of $9.1 million is earning a return: $4.9 million
of pre-1994 DSM costs and $4.2 million of unamortized premium on
reacquired debt. The remaining recovery periods for the DSM
costs and premium on reacquired debt are 11.5 years and 20 years,
respectively. The remaining $117.9 million of regulatory assets
included in rates, but not earning a return, are being recovered
over varying periods: $7.1 million of fuel costs and $89.0
million of gas costs, over 12 months; $4.7 million of regulatory
income tax asset, over approximately 30 years; and $16.8 million
of unamortized debt discount and expense to be recovered as
discussed above.
Vectren's utility subsidiaries' policy is to continually assess
the recoverability of costs recognized as regulatory assets and
the ability to continue to account for their activities in
accordance with SFAS 71, based on the criteria set forth in SFAS
71. Based on current regulation, the utility subsidiaries
believe such accounting is appropriate. If all or part of
Vectren's utility operations cease to meet the criteria of SFAS
71, a write-off of related regulatory assets and liabilities
would be required. In addition, Vectren would be required to
determine any impairment to the carrying costs of deregulated
plant and inventory assets.
N. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which requires that every derivative
instrument be recorded on the balance sheet as an asset or
liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
SFAS 133, as amended, is effective for fiscal years beginning
after June 15, 2000 and must be applied to derivative instruments
and certain derivative instruments embedded in hybrid contracts
that were issued, acquired or substantively modified after
December 31, 1998. Vectren has completed the process of
identifying all derivative instruments, determining fair market
values of these derivatives, designating and documenting hedge
relationships, and evaluating the effectiveness of those hedge
relationships. As a result of the successful completion of this
process, Vectren adopted SFAS 133 as of January 1, 2001.
SFAS 133 requires that as of the date of initial adoption, the
difference between the fair market value of derivative
instruments recorded on the balance sheet and the previous
carrying amount of those derivatives be reported in net income or
other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle in accordance with APB
20, "Accounting Changes."
A limited number of Vectren's contracts are defined as
derivatives under SFAS 133. These derivatives are forward
physical contracts for both the purchase and sale of natural gas
and electricity by its wholly owned gas marketing subsidiary,
SIGCORP Energy Services, Inc (SES) and SIGECO, respectively, and
an interest rate swap.
SES's primary business is the buying and re-selling of physical
natural gas to the industrial market segment. SES manages its
pricing risk by entering into corresponding gas commodity
contracts that ensure a reasonable matching of the associated
risk. In addition, SES takes physical delivery of gas in storage
facilities to ensure operational as well as price risk management
of its forward positions. Open positions in terms of price,
volume and specified delivery locations do occur and are managed
by SES using the above instruments and through management
reporting. These commodity contracts and gas storage facilities
involve the normal purchase and sale of natural gas and therefore
do not require fair value accounting under SFAS 133. SES also
utilizes price swap agreements that are accounted for under SFAS
133 to mitigate price risk related to certain forward physical
contracts. These derivatives have not been designated as hedges,
accordingly, the changes in market value will be recorded
currently in earnings. The mark to market impact of these
derivatives has been reflected as part of the transition
adjustment recorded to earnings on January 1, 2001.
Derivatives used in the power marketing operations are used to
effectively manage the utilization of SIGECO's generation
capability. These derivatives include forward physical wholesale
sales and purchases. The forward sales contracts are generally
used to sell the excess generation capacity of SIGECO when demand
conditions warrant this activity. These contracts are for the
normal purchase and sale of electricity and therefore do not
require fair value accounting under SFAS 133. The forward
purchase contracts are entered into as part of "buy-sell"
transactions with other utilities and power marketers. These
contracts are derivatives and do not qualify for hedge
accounting, accordingly, they have been marked to market
currently in earnings. The mark to market impact of these
derivatives has been reflected as part of the transition
adjustment recorded to earnings on January 1, 2001.
The interest rate swap is used to hedge the exposure to interest
rate risk associated with VUHI's $150 million floating rate
notes. The swap was entered into concurrently with the issuance
of the floating rate debt. Vectren has formally documented the
hedging relationship between the swap and floating rate debt as
well as its risk management objectives and strategies for
undertaking the hedging transaction. The swap has been
designated as a cash flow hedge and the mark to market impact has
been reflected as part of the transition adjustment recorded to
other comprehensive income on January 1, 2001.
The cumulative impact of the adoption of SFAS 133 on January 1,
2001 is an earnings gain of approximately $6.3 million due to the
derivatives used in power marketing operations. The impact of
the derivatives used by SES and the interest rate swap was
immaterial.
O. Comprehensive Income
Comprehensive income is a measure of all changes in equity of an
enterprise which result from the transactions or other economic
events during the period other than transactions with
shareholders. This information is reported in the Consolidated
Statements of Common Shareholders' Equity. Vectren's
components of accumulated other comprehensive income (loss)
include unrealized gains (losses) on available for sale
securities and
its portion of ProLiance Energy, LLC's (ProLiance) other
comprehensive income. Vectren records its portion of
ProLiance's other comprehensive income as increases or decreases
to the investment account with a corresponding adjustment to
other comprehensive income. As of December 31, 2000, Vectren has
recorded an adjustment to other comprehensive income of $7.5
million related to its investment in ProLiance. ProLiance's
other comprehensive income was adjusted due its adoption of SFAS
133.
6. ProLiance Energy, LLC
ProLiance, a 50 percent owned, non-regulated, energy marketing
affiliate of Vectren, began providing natural gas and related
services to Indiana Gas, Citizens Gas and Coke Utility (Citizens
Gas) and others effective April 1, 1996. The sale of gas and
provision of other services to Indiana Gas by ProLiance is
subject to regulatory review through the quarterly gas cost
adjustment (GCA) process administered by the IURC.
On September 12, 1997, the IURC issued a decision finding the gas
supply and portfolio administration agreements between ProLiance
and Indiana Gas and ProLiance and Citizens Gas to be consistent
with the public interest. 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 $5.4 million, $6.7 million, and $7.0 million was recognized as
ProLiance's contribution to earnings for the years ended
December 31, 2000, 1999 and 1998, respectively. Earnings
recognized from ProLiance are included in equity in earnings of
unconsolidated investments on the Consolidated Statements of
Income. At December 31, 2000, and 1999, Vectren has reserved
approximately $2.4 million and $1.7 million, respectively, of
ProLiance's earnings pending resolution of the remaining issues.
7. Vectren Advanced Communications
Vectren Advanced Communications (VAC), a wholly owned non-
regulated subsidiary, was formed to hold Vectren's investments
in Utilicom Networks, LLC (Utilicom Networks) and related
entities. Utilicom Networks is a provider of bundled
communications services through high capacity broadband networks,
including high speed Internet service, cable television and
telephone service
In January 2000, VAC completed the restructuring of its
investment in SIGECOM, LLC (SIGECOM), which is a venture between
VAC and Utilicom Networks which provides communications services
to the greater Evansville, Indiana area. On January 28, 2000,
affiliates of The Blackstone Group, a private equity fund,
invested in Class B units of Utilicom Networks. Concurrent with
this investment, VAC exchanged its 49 percent preferred equity
interest in SIGECOM for $16.5 million of convertible subordinated
debt of Utilicom Networks, a Class A equity position in Utilicom
Networks and an indirect common equity interest in SIGECOM. VAC
has a 14 percent interest in SIGECOM. The debt is convertible
into Class A units of Utilicom Networks at the option of VAC or
upon the event of a public offering of stock by Utilicom
Networks. The investment restructuring resulted in a pre-tax gain
of $8 million, which is classified in equity in earnings in
unconsolidated investments in the accompanying Consolidated
Statements of Income. For the year ending December 31, 2000,
Vectren also recognized losses of $1 million to reflect its share
of Utilicom Networks' and SIGECOM's operating results. At
December 31, 2000, VAC's equity investment in SIGECOM related
entities was $8.2 million.
In December 2000, VAC invested an additional $8.1 million with
Utilicom Networks in the form of convertible subordinated debt as
part of Utilicom Networks' plans to raise $600 million in
capital to establish operating ventures in Indianapolis, Indiana
and Dayton, Ohio and to recapitalize the SIGECOM venture.
Vectren is committed to invest up to $100 million, inclusive of
the $8.1 million already invested, in the form of convertible
subordinated debt, subject to Utilicom Networks obtaining all
required funding. The debt is convertible into common equity
interests in the Indianapolis and Dayton ventures at the option
of VAC or upon the event of a public offering of stock by
Utilicom Networks. At December 31, 2000, VAC's investment in
convertible debt totals approximately $25 million and upon
conversion, VAC would have up to a 31 percent interest in the
Indianapolis and Dayton ventures and up to a 10 percent interest
in Utilicom Networks, assuming completion of all required
funding.
8. Short-Term Borrowings
At December 31, 2000, Vectren has approximately $969 million of
short-term borrowing capacity, including $803 million for its
regulated operations and $166 million for its non-regulated
operations, of which approximately $149 million is available for
regulated operations and $60 million is available for non-
regulated operations. See the table below for outstanding
balances and interest rates.
At December 31,
In thousands 2000 1999
-------- --------
Outstanding:
Bank Loans $146,494 $124,638
2001, Note Payable, 6.6425% 150,000 -
Commercial paper 463,414 83,000
-------- --------
Total short term borrowings $759,908 $207,638
======== ========
Weighted average interest rates:
Bank Loans 6.95% 8.08%
Commercial paper 6.87% 6.30%
Weighted average interest rates during
the year:
Bank Loans 6.98% 5.76%
Commercial paper 6.53% 5.40%
Weighted average total outstanding during
the year $318,822 $163,762
At December 31, 2000, Indiana Gas is not in compliance with the
total indebtedness to capitalization ratio contained in its back
up credit facility for its commercial paper program. The non-
compliance resulted from the indebtedness incurred to purchase
its ownership interest in the Ohio operations. A waiver has been
obtained from the banks on the Indiana Gas facility to waive the
non-compliance through and including March 31, 2001. Subject to
regulatory approval, Vectren will provide an equity investment in
Indiana Gas to bring Indiana Gas back into compliance. No amount
is outstanding under the back up credit facility.
9. Long-Term Debt and Other Obligations
First mortgage bonds, notes payable and partnership obligations
outstanding and classified as long-term are as follows:
At December 31,
In thousands 2000 1999
--------- ---------
Southern Indiana Gas and Electric Company
First Mortgage Bonds due:
2014, 4.60% Pollution Control Series A $ 22,500 $ 22,500
Adjustable Rate Pollution Control:
2015, Series A, presently 4.55% 9,975 9,975
2016, 8.875% 13,000 13,000
2020, 4.40% Pollution Control Series B 4,640 4,640
Adjustable Rate Environmental Improvement:
2023, Series B, presently 6% 22,800 22,800
2023, 7.60% 45,000 45,000
2025, 7.625% 20,000 20,000
2029, 6.72% 80,000 80,000
2030, 4.40% Pollution Control Series B 22,000 22,000
-------- --------
Total first mortgage bonds $239,915 $239,915
-------- --------
Notes Payable:
Tax Exempt, due 2003, 6.25% $ 1,000 $ 1,000
-------- --------
Indiana Gas Company
- -------------------
Notes Payable due:
2003, Series F, 5.75% $ 15,000 $ 15,000
2004, Series F, 6.36% 15,000 15,000
2007, Series E, 6.54% 6,500 6,500
2013, Series E, 6.69% 5,000 5,000
2015, Series E, 7.15% 5,000 5,000
2015, Insured Quarterly Notes, 7.15% 20,000 -
2015, Series E, 6.69% 5,000 5,000
2015, Series E, 6.69% 10,000 10,000
2021, Private Placement, 9.375%
25,000 25,000
2021, Series A, 9.125% 7,000 7,000
2025, Series E, 6.31% 5,000 5,000
2025, Series E, 6.53% 10,000 10,000
2027, Series E, 6.42% 5,000 5,000
2027, Series E, 6.68% 3,500 3,500
2027, Series F, 6.34% 20,000 20,000
2028, Series F, 6.75% 14,109 14,849
2028, Series F, 6.36% 10,000 10,000
2028, Series F, 6.55% 20,000 20,000
2029, Series G, 7.08% 30,000 30,000
2030, Insured Quarterly Notes, 7.45% 50,000 -
-------- --------
Total notes payable $281,109 $211,849
-------- --------
Non-Regulated
- -------------
Notes Payable:
2005, Senior note, 7.67% $ 38,000 $ -
2007, Senior note, 7.83% 17,500 -
2010, Senior note, 7.98% 22,500 -
Insurance Company, due 2012, 7.43% 35,000 35,000
Other 249 2,371
-------- ---------
Total notes payable and other $113,249 $ 37,371
-------- --------
Total long-term debt outstanding $635,273 $490,135
Less: Maturities and sinking fund
requirements (249) (776)
Unamortized debt premium and
discount, net (3,070) (2,633)
-------- --------
Total long-term debt and other
obligations, net of current maturities $631,954 $486,726
======== ========
Consolidated maturities and sinking fund requirements on long-
term debt subject to mandatory redemption during the five years
following 2000 (in millions) are $0.3 in 2001, $16.0 in 2003,
$15.0 in 2004, and $38.0 in 2005.
In addition to the obligations presented in the table above,
SIGECO has $53.7 million of adjustable rate pollution control
series first mortgage bonds which could, at the election of the
bondholder, be tendered to SIGECO annually in March. If
SIGECO's agent is unable to remarket any bonds tendered at that
time, SIGECO would be required to obtain additional funds for
payment to bondholders. For financial statement presentation
purposes those bonds subject to tender in 2001 are shown as
current liabilities. The two series of bonds will be re-set for a
five-year period effective March 1, 2001.
Provisions under which certain of Indiana Gas' Series E Notes
were issued entitle the holders of $25.0 million of these notes
to put the debt back to Indiana Gas at face value at certain
specified dates before maturity. Long-term debt subject to the
put provisions during the five years following 2000 (in millions)
is $6.5 in 2002, $3.5 in 2004 and $10.0 in 2005.
The annual sinking fund requirement of SIGECO's first mortgage
bonds is 1 percent of the greatest amount of bonds outstanding
under the Mortgage Indenture. This requirement may be satisfied
by certification to the Trustee of unfunded property additions in
the prescribed amount as provided in the Mortgage Indenture.
SIGECO intends to meet the 2001 sinking fund requirement by this
means and, accordingly, the sinking fund requirement for 2001 is
excluded from current liabilities on the Consolidated Balance
Sheets. At December 31, 2000, $220.9 million of SIGECO's
utility plant remained unfunded under SIGECO's Mortgage
Indenture.
The above debt agreements contain certain financial covenants and
other restrictions with which Vectren must comply. Except as
described in Note 8, Vectren was in compliance with all remaining
financial covenants and restrictions.
On December 21, 2000, Vectren Capital Corporation, a wholly owned
subsidiary that provides financing for Vectren's non-regulated
subsidiaries' operations and investments, issued $78 million of
private placement senior notes to three institutional investors.
The issues and their terms are $38.0 million, due December 21,
2005, at 7.67 percent; $17.5 million, due December 21, 2007, at
7.83 percent; and $22.5 million, due December 21, 2010, at 7.98
percent. The net proceeds were used to repay outstanding short-
term borrowings.
On October 5, 1999, Indiana Gas issued $30 million in principal
amount of Series G Medium-term Notes bearing interest at the per
annum rate of 7.08 percent with a maturity date of October 5,
2029. In December 2000, Indiana Gas filed a prospectus with the
Securities and Exchange Commission with respect to the issuance
of $70 million in debt securities. On December 28, 2000, $20
million of 15-Year Insured Quarterly (IQ) Notes bearing interest
at a rate of 7.15 percent per year and $50 million of 30-Year IQ
Notes bearing interest at a rate of 7.45 percent per year were
issued. The 15-Year IQ Notes will mature on December 15, 2015,
and the 30-Year IQ Notes will mature on December 16, 2030,
unless, in each case, redeemed prior to that date. Indiana Gas
will have the option to redeem the 15-Year IQ Notes, in whole or
in part, from time to time on or after December 15, 2004.
Indiana Gas will have the option to redeem the 30-Year IQ Notes
in whole or in part, from time to time on or after December 15,
2005. The net proceeds of the debt issuance were used to repay
outstanding commercial paper utilized for general corporate
purposes.
10. Fair Value of Financial Instruments
The carrying values and estimated fair values of Vectren's
financial instruments were as follows:
At December 31,
In thousands 2000 1999
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Short-term borrowings $759,908 $759, 908 $207,638 $207,638
Partnership obligations
(includes amounts
due within one year 249 312 845 905
Redeemable preferred
stock of subsidiary 7,500 7,737 7,500 7,538
Long term debt (includes
Amounts due within
one year) 685,903 758,478 541,202 544,928
Certain methods and assumptions must be used to estimate the fair
value of financial instruments. Because of the short maturity of
notes payable, the carrying amounts approximate fair values for
these financial instruments. The fair value of Vectren's long-
term debt was estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to Vectren
for debt of the same remaining maturities. The fair value of
partnership obligations was estimated based on current quoted
market rate of comparable debt. The fair value of redeemable
preferred stock of SIGECO was based on the current quoted market
rate of long-term debt with similar characteristics.
Under current regulatory treatment, call premiums on
reacquisition of long-term debt are generally recovered in
customer rates over the life of the refunding issue or over a 15-
year period (see Note 5M ). Accordingly, any reacquisition would
not be expected to have a material effect on Vectren's financial
position or results of operations.
The market price used to value these transactions reflects
management's best estimate of market prices considering various
factors, including published prices for certain delivery
locations, time value and volatility factors underlying the
commitments.
11. Common Stock
On March 31, 2000, the merger of Indiana Energy and SIGCORP with
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 1.333 shares of Vectren
common stock for each SIGCORP common share and the common
shareholders of Indiana Energy 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 Vectren board of directors has adopted a Shareholder Rights
Agreement. Under the Shareholder Rights Agreement, the Vectren
board of directors has declared a dividend distribution of one
right for each outstanding Vectren common share. A right will
attach to each Vectren common share Vectren issues. Each right
entitles the holder to purchase from Vectren one share at a price
of $65.00 per share (subject to adjustment to prevent dilution).
Initially, the rights will not be exercisable. The rights only
become exercisable 10 days following a public announcement that a
person or group of affiliated or associated persons (Vectren
Acquiring Person) has acquired beneficial ownership of 15 percent
or more of the outstanding Vectren common shares (or a 10 percent
acquirer who is determined by the Vectren board of directors to
be an adverse person), or 10 days following the announcement of
an intention to make a tender offer or exchange offer the
consummation of which would result in any person or group
becoming a Vectren Acquiring Person. The Vectren Shareholder
Rights Agreement expires October 21, 2009.
Conversion of Options
- ---------------------
Certain SIGCORP and SIGECO employees held options to purchase
SIGCORP common shares granted under the 1994 SIGECO Stock Option
Plan and other employee compensation benefits arrangements. When
the merger was consummated, each unexpired and unexercised option
to purchase SIGCORP common shares was automatically converted
into an option to purchase the number of Vectren common shares
that could have been purchased under the original option
multiplied by 1.333. The exercise price per Vectren common share
under the new option is equal to the original per share price
divided by 1.333. The new Vectren options will otherwise be
subject to the same terms and conditions as the original SIGCORP
options. The expiration dates for options outstanding as of
December 31, 2000, ranged from July 13, 2004 to July 19, 2009.
This stock option activity for the past three years, converted to
Vectren common shares, was as follows:
At December 31,
2000 1999 1998
-------- -------- ---------
Outstanding at January 1 931,004 671,389 610,742
Granted - 272,783 99,973
Cancelled (30,955) - -
Exercised (40,608) (13,168) (39,326)
-------- -------- ---------
Outstanding at December 31 859,441 931,004 671,389
======== ======== =========
Exercisable at December 31 781,415 658,221 508,892
Reserved for future grants at
end of year - - 272,783
Weighted Average Option Price:
Exercisable $18.41 $17.53 $15.88
Outstanding at end of year $18.23 $18.33 $17.46
At December 31, 2000
Options Outstanding Options Exercisable
------------------------------------- -------------------
Weighted
Number of Average Weighted Number of Weighted
Range of Options Remaining Average Options Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices Life Price Price
----------- ----------- ------------ -------- ----------- --------
$12.03-$14.43 229,230 3.4 $13.82 229,230 $13.82
14.44-16.84 50,779 4.0 15.32 50,779 15.32
16.85-19.24 52,124 5.2 17.44 52,124 17.44
19.25-21.65 431,908 7.8 20.09 353,882 20.05
24.05 95,400 7.3 24.05 95,400 24.05
- ------------ ----------- ------------ -------- ---------- --------
$12.03-$24.05 859,441 6.2 $18.41 781,415 $18.23
============ =========== =========== ======== ========== ========
Vectren accounts for stock compensation in accordance with APB
25, "Accounting for Stock Issued to Employees." Under APB 25,
no compensation cost has been recognized for stock options. Had
compensation cost for stock options been determined consistent
with SFAS No. 123 "Accounting for Stock-based Compensation,"
net income would have been reduced to the following pro forma
amounts:
At December 31,
In thousands, except per share amounts) 2000 1999 1998
------- ------- -------
Net Income:
As reported $72,040 $90,748 $86,600
Pro forma 71,583 90,077 86,085
Basic Earnings Per Share:
As reported $1.18 $1.48 $1.41
Pro forma 1.17 1.47 1.40
Diluted Earnings Per Share:
As reported $1.17 $1.48 $1.40
Pro forma 1.17 1.47 1.39
The fair value of each option granted used to determine pro forma
net income is estimated as of the date of grant using the Black-
Scholes option pricing model with the following weighted average
assumptions used for grants in the years ended December 31, 1999
and 1998: risk-free interest rate of 6.46 percent and 4.44
percent, respectively; expected option term of five years;
expected volatilities of 34.00 percent and 33.16 percent,
respectively; and dividend rates of 4.46 percent and 3.77
percent, respectively. No options were granted in 2000.
Conversion of Restricted Stock
- -----------------------------
Indiana Energy had an Executive Restricted Stock Plan for the
principal officers of the company and participating subsidiary
companies. Indiana Energy also had a Directors' Restricted
Stock Plan through which non-employee directors receive one-third
of their combined compensation (exclusive of attendance fees) as
directors of Indiana Energy, Indiana Gas or IEI Investments, Inc.
in shares of Indiana Energy's common stock subject to certain
restrictions on transferability.
Upon consummation of the merger, the restrictions on each
outstanding share of restricted stock of Indiana Energy lapsed
and all shares of Indiana Energy that were issued as restricted
stock were treated as unrestricted shares of Indiana Energy in
the merger exchange. During 2000, Vectren adopted these plans
and restricted shares were issued to executives and non-employee
directors.
Common stock dividends of Vectren may be reinvested under a
Dividend Reinvestment and Stock Purchase Plan. Common shares
purchased in connection with the plan are currently being
acquired through the open market.
At December 31, 2000 and 1999, respectively, shares of common
stock reserved for issuance were as follows:
At December 31,
2000 1999
-------- ---------
Dividend Reinvestment and Stock
Purchase Plan 1,018,435 417,836
Executive Restricted Stock Plan 222,726 346,319
Directors' Restricted Stock Plan 50,116 54,994
Retirement Savings Plan 853,423 964,208
Total 2,144,700 1,783,357
12. Earnings Per Share
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings
per share assumes the conversion of stock options into common
shares using the treasury stock method to the extent the effect
would be dilutive.
The following table illustrates the basic and dilutive earnings
per share calculations.
Year Ended December 31,
In thousands, except
per share amounts 2000 1999
----- ------
Per Per
Income Shares Share Income Shares Share
Amount Amount
------ ------ ------ ------- ------- -------
Basic EPS $72,040 61,297 $1.18 $90,748 61,306 $1.48
Effect of
dilutive
stock options 83 124
------- ------ ------ -------- ------- -------
Diluted EPS $72,040 61,380 $1.17 $90,748 61,430 $1.48
======= ====== ====== ======== ======= =======
Year Ended December 31,
In thousands,
except
per share 1998
amounts
------
Per
Income Shares Share
Amount
------ ------- --------
Basic EPS $86,600 61,578 $1.41
Effect of
dilutive
stock options 178
------- -------- ---------
Diluted EPS $86,600 61,756 $1.40
======= ======== ========
Options to purchase 526,469 common shares for the year ended
December 31, 2000 and 99,973 common shares for the years ended
December 31, 1999 and 1998 were not included in the computation
of dilutive earnings per share because the options' exercise
prices were greater than the average market price of the common
shares during the period. Exercise prices for options excluded
from the computation ranged from $19.83 to $24.05 in 2000 and
equaled $24.05 in 1999 and 1998.
Subsequent to December 31, 2000, Vectren issued about 6.3 million
common shares in a public offering (see Note 22).
13. Retirement Plans and Other Postretirement Benefits
Prior to July 1, 2000, SIGCORP and Indiana Energy had separate
retirement and other postretirement benefit plans. The
activities in these plans are described below by company.
Effective July 1, 2000, the SIGECO and Indiana Energy pension
plans for employees not covered by a collective bargaining unit
were merged. Also effective July 1, 2000, the SIGECO and Indiana
Energy retirement savings plans for employees not covered by a
collective bargaining unit were merged, as were their
postretirement health care and life insurance plans.
Vectren has multiple defined benefit pension and other
postretirement benefit plans which cover eligible full-time
regular employees. All of the plans are non-contributory with
the exception of the health care plan which contains cost-sharing
provisions whereby employees retiring after January 1, 1996, are
required to make contributions to the plan when increases in
Indiana Energy's health care costs exceed the general rate of
inflation, as measured by the Consumer Price Index (CPI). The
nonpension plans include plans for health care and life insurance
through a combination of self-insured and fully insured plans.
The IURC has authorized SIGECO and Indiana Gas to recover the
costs related to postretirement benefits other than pensions
under the accrual method of accounting consistent with Statement
of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. Amounts accrued
prior to that authorization were deferred as allowed by the IURC
and amortized over a 60-month period.
The detailed disclosures of benefit components that follow are
based on an actuarial valuation performed for the December 31,
2000 financial statements using a measurement date as of
September 30, 2000. The disclosures required as of and for the
years ended December 31, 1999 and 1998 have been restated based
on actuarial valuations previously performed for SIGECO as of
December 31 and Indiana Gas as of September 30, respectively. In
management's opinion, disclosures from revised actuarial
valuations would not differ materially from those presented
below.
Net periodic benefit cost consisted of the following components:
Year Ended December 31,
Pension Benefits Other Benefits
--------------------------- ----------------------
In thousands 2000 1999 1998 2000 1999 1998
-------- -------- -------- ------- ------- -------
Service cost $ 4,282 $ 5,053 $ 4,056 $1,328 $ 1,502 $1,299
Interest cost 11,708 10,550 9,986 5,904 4,844 4,863
Expected return
on plan assets (15,815) (13,826) (12,742) (921) (751) (577)
Amortization of
prior service
cost 157 361 256 - - -
Amortization of
transitional
obligation
(asset) (744) (734) (734) 3,738 3,266 3,267
Recognized
actuarial gain (1,040) (10) (47) (1,475) (889) (1,204)
Settlement
charge 2,123 - - - - -
Special
termination
benefit charge 553 - - - - -
-------- -------- ------- ------ ------- -------
Net periodic
benefit cost $ 1,224 $ 1,394 $ 775 $8,574 $ 7,972 $7,648
======== ======== ======= ====== ======= =======
A reconciliation of the plan's benefit obligations, fair value
of plan assets, funded status and amounts recognized in the
Consolidated Balance Sheets follows:
At December 31,
Benefit obligation Pension Benefits Other Benefits
------------------ ----------------
In thousands 2000 1999 2000 1999
-------- -------- -------- --------
Benefit obligation at
beginning of year $151,505 $156,840 $ 68,278 $ 73,598
Service cost - benefits
earned during the year 4,282 5,053 1,328 1,502
Interest cost on projected 11,708 10,550 5,904 4,844
benefit obligation
Plan amendments 2,418 (3,278) (711) -
Acquisitions 700 - - -
Settlements 2,123 - - -
Benefits paid (10,382) (8,001) (5,396) (3,605)
Actuarial (gain) loss 4,614 (9,659) 7,975 (8,061)
-------- -------- -------- --------
Benefit obligation at end
of year $166,968 $151,505 $ 77,378 $ 68,278
========= ========= ======== ========
Fair value of Plan Assets Pension Benefits Other Benefits
---------------- ----------------
In thousands 2000 1999 2000 1999
-------- -------- -------- --------
Plan assets at fair value at
beginning of year $187,261 $180,965 $ 11,710 $ 9,511
Actual return on plan assets 16,959 14,179 595 1,434
Employer contributions - 118 4,314 4,369
Benefits paid (10,382) (8,001) (5,396) (3,604)
-------- -------- -------- --------
Fair value of plan assets at
end of year $193,838 $187,261 $ 11,223 $ 11,710
======== ======== ======== ========
Funded Status Pension Benefits Other Benefits
----------------- -------------------
In thousands 2000 1999 2000 1999
-------- -------- --------- ---------
Funded status $ 26,870 $35,756 $(66,155) $(56,568)
Unrecognized transitional
obligation (asset) (1,491) (2,279) 39,969 44,418
Unrecognized service cost 5,357 3,639 - -
Unrecognized net (gain)
loss and other (36,968) (44,733) (19,697) (28,792)
-------- -------- --------- ---------
Net amount recognized $(6,232) $(7,617) $(45,883) $(40,942)
======== ======== ========= =========
The aggregate benefit obligation and aggregate fair value of the
plan assets for pension plans with benefit obligations in excess
of plan assets were $10.5 million and $7.9 million, respectively,
as of December 31, 2000, and $5.5 million and $4.5 million,
respectively, as of December 31, 1999.
Weighted-average assumptions used in the accounting for these
plans were as follows:
Year Ended December 31,
Pension Benefits Other Benefits
----------------- ---------------
In thousands 2000 1999 2000 1999
-------- ------- ----- ------
Discount rate 7.75% 7.50% 7.75% 7.50%
Expected return on plan assets 8.50% 8.50% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
CPI rate N/A N/A 7.00% 6.50%
As of December 31, 2000, the health care cost trend is 7 percent
declining to 5 percent in 2004 and remaining level thereafter.
The accrued health care cost trend rate for 2001 is 7 percent.
The estimated cost of these future benefits could be
significantly affected by future changes in health care costs,
work force demographics, interest rates or plan changes.
A 1 percent change in the assumed health care cost trend for
Vectren's postretirement health care plan would have the
following effects:
In thousands 1% Increase 1% Decrease
Effect on the aggregate of the
service
and interest cost components $ 483 $ (394)
Effect on the postretirement
benefit obligation 5,107 (4,263)
Vectren has adopted Voluntary Employee Beneficiary Association
(VEBA) Trust Agreements for the funding of postretirement health
benefits for retirees and their eligible dependents and
beneficiaries. Annual funding is discretionary and is based on
the projected cost over time of benefits to be provided to cover
persons consistent with acceptable actuarial methods. To the
extent these postretirement benefits are funded, the benefits
will not be shown as a liability on Vectren's financial
statements.
Vectren also has defined contribution retirement savings plans
that are qualified under sections 401(a) and 401(k) of the
Internal Revenue Code. During 2000, 1999, and 1998, Vectren made
contributions to these plans of $1.6 million, $1.9 million and
$2.3 million, respectively.
14. Leveraged Leases
Southern Indiana Properties, Inc. (SIPI), a wholly owned
subsidiary, is a lessor in several leveraged lease agreements
under which real estate or equipment is leased to third parties.
The economic lives and lease terms vary with the leases. The
total equipment and facilities cost was approximately $409.7
million at December 31, 2000 and 1999. The cost of the equipment
and facilities was partially financed by nonrecourse debt
provided by lenders, who have been granted an assignment of
rentals due under the leases and a security interest in the
leased property, which they accepted as their sole remedy in the
event of default by the lessee. Such debt amounted to
approximately $380.0 million and $373.5 million at December 31,
2000 and 1999, respectively. SIPI's net investment in leveraged
leases at December 31, 2000 and 1999, respectively, was as
follows:
At December 31,
In thousands 2000 1999
-------- --------
Minimum lease payments receivable $165,210 $161,551
Estimated residual value 29,073 29,073
Less: unearned income 101,138 104,887
Investment in lease financing receivables
and loan 93,145 85,737
Less: deferred taxes arising from
leveraged leases 38,302 30,700
-------- --------
Net investment in leveraged leases $ 54,843 $ 55,037
======== ========
15. Commitments and Contingencies
Future minimum lease payments required under operating leases
that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 2000 are as follows:
In millions
2001 $ 4.1
2002 3.9
2003 3.4
2004 3.1
2005 2.4
Thereafter 6.7
---------
Total $23.6
=========
Total lease expense, in millions, was $3.4 in 2000, $2.7 in 1999,
and $2.2 in 1998.
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 6 for
litigation matters related to ProLiance and Note 17 for
litigation matters concerning the Clean Air Act.
A wholly owned subsidiary of Vectren has an 8.3 percent ownership
interest in Pace Carbon Synfuels Investors, LP (Pace Carbon), a
Delaware limited partnership formed to develop, own and operate
four projects to produce and sell coal-based synthetic fuel. 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 to the
extent it generates federal tax credits that are earned from the
production and sale of briquettes by the projects. As of
December 31, 2000, Vectren's net investment in Pace Carbon
totaled approximately $6.7 million and is included in investments
in partnerships and other corporations in the Consolidated
Balance Sheets.
A wholly owned subsidiary of Vectren has committed to invest $10
million in Haddington Energy Partners, LP (Haddington) of which
$9.8 million has been funded as of December 31, 2000.
Haddington, a Delaware limited partnership, raised $77 million to
invest in energy projects. On July 28, 2000, Vectren made a
commitment to fund an additional $20 million in Haddington Energy
Partners II, LP, 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 December 31, 2000,
Vectren had invested approximately $2.1 million of this $20
million commitment to Haddington II. The remainder of this
investment is expected to be made through 2002. As of December
31, 2000, Vectren's net investment in the Haddington Ventures
totaled approximately $13.0 million and is included in
investments in partnerships and other corporations in the
Consolidated Balance Sheets.
Vectren has entered into a contract to purchase and construct an
80-megawatt combustion gas turbine generator which will be owned
by SIGECO. The total capital cost of the project is estimated to
be $33 million during the 2001-2002 construction period.
Vectren has invested to date approximately $33 million with
Utilicom Networks. On December 22, 2000, Vectren announced its
commitment to invest up to $100 million with Utilicom Networks,
pending completion of all funding (see Note 7).
16. Income Taxes
The components of consolidated income tax expense were as
follows:
Year Ended December 31,
In thousands 2000 1999 1998
------- ------- -------
Current:
Federal $19,976 $33,028 $34,449
State 2,908 5,379 5,450
------- ------- -------
Total current taxes 22,884 38,407 39,899
------- ------- -------
Deferred:
Federal 11,591 8,238 4,625
State 2,117 1,423 181
------- ------- -------
Total deferred taxes 13,7108 9,661 4,806
------- ------- -------
Amortization of investment tax credits (2,360) (2,360) (2,377)
Consolidated income tax expense $34,232 $45,708 $42,328
======= ======= =======
A reconciliation of the statutory rate to the effective income
tax rate is as follows:
Year Ended December 31,
In thousands 2000 1999 1998
------- ------ ------
Statutory federal and state rate 37.9% 37.9% 37.9%
Nondeductible merger costs 4.0 - -
Amortization of investment tax credit (2.2) (1.7) (1.8)
Other tax credits (7.1) (3.2) (2.9)
All other, net (0.2) 0.3 (0.5)
------- ------- -------
Effective tax rate 32.4% 33.3% 32.7%
======= ======= =======
Indiana Gas, SIGECO and the Ohio operations use a normalized
method of accounting for deferred income taxes as required by the
IURC and PUCO. Deferred income taxes reflect the net tax effect
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Deferred income taxes are provided
for taxes not currently payable due to, among other things, the
use of various accelerated depreciation methods, shorter
depreciable lives and the deduction of certain construction costs
for tax purposes. Taxes deferred in prior years are being
charged and income credited as these tax effects reverse over the
lives of the related assets.
Significant components of Vectren's net deferred tax liability
as of December 31, 2000 and 1999 are as follows:
At December 31,
In thousands 2000 1999
-------- ---------
Deferred tax liabilities:
Depreciation and cost recovery
timing differences $185,113 $185,799
Deferred fuel costs, net 33,446 2,427
Leveraged leases 38,302 30,700
Regulatory assets recoverable
through future rates 28,726 30,519
Deferred tax assets:
LIFO inventory (7,900) -
Regulatory liabilities to be
settled through future rates (32,293) (29,211)
Tax credit carryforwards (17,079) -
Other - net (15,483) (4,714)
--------- ---------
Net deferred tax liability $212,832 $215,520
========= ========
At December 31, 2000, the components of the net deferred tax
liability are reflected in the Consolidated Balance Sheets as a
long-term liability of approximately $229.9 million and as a
reduction to accrued taxes in current liabilities of
approximately $17.1 million.
Investment tax credits have been deferred and are being credited
to income over the life of the property, giving rise to the
credit. The Tax Reform Act of 1986 eliminated investment tax
credits for property acquired after January 1, 1986.
At December 31, 2000, Vectren has Alternative Minimum Tax credit
carryforward of approximately $13 million, which has no
expiration date. Through certain of its non-regulated
subsidiaries and investments, Vectren also realizes Federal
income tax credits associated with affordable housing projects,
historical rehabilitation projects and projects for the
production and sale of synthetic fuels. At December 31, 2000,
Vectren has tax credit carryforwards of approximately $4.1
million which expire in 20 years.
17. Environmental Matters
Clean Air Act
- -------------
NOx SIP CALL MATTER. In October 1997, the United States
Environmental Protection Agency (USEPA) proposed a rulemaking
that could require uniform nitrogen oxide (NOx) emissions
reductions of 85 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 (the Act).
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 (IDEM) 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.
On September 20, 2000, petitioners filed a Petition of Writ of
Certiori with the United States Supreme Court requesting review
of the D.C. Circuit Court's March 3, 2000 Order. The Court has
not yet ruled on the Petition for Certiorari. The EPA granted
Section 126 Petitions filed by northeastern states that require
named sources in the eastern half of Indiana to achieve NOx
reduction by May 1, 2003. No SIGECO facilities are named in the
Section 126 Petitions filed by northeastern states, therefore the
compliance date remains 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, pending finalization of
state rule making, 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.
MERCURY EMISSIONS. On December 14, 2000, the USEPA released a
statement announcing that reductions of mercury emissions from
coal-fired plants will be required in the near future. The USEPA
will propose regulations by December 2003 and issue final rules
by December 2004.
Under the Act, the USEPA is required to study emissions from
power plants in order to determine if additional regulations are
necessary to protect public health. The USEPA reported its study
to Congress in February 1998. That study concluded that of all
toxic pollution examined, mercury posed the greatest concern to
public health. An earlier USEPA study concluded that the largest
source of human-made mercury pollution in the United States was
coal-fired power plants.
After completion of the study, the Act required the USEPA to
determine whether to proceed with the development of regulations.
The USEPA announced that it had affirmatively decided that
mercury air emissions from power plants should be regulated.
CULLEY GENERATING STATION INVESTIGATION MATTER. The USEPA
initiated an investigation under Section 114 of the Act of
SIGECO's coal-fired electric generating units in commercial
operation by 1977 to determine compliance with environmental
permitting requirements related to repairs, maintenance,
modifications and operations changes. The focus of the
investigation was to determine whether new source performance
standards should be applied to the modifications and whether the
best available control technology was, or should have been, used.
Numerous other electric utilities were, and are currently, being
investigated by the USEPA under an industry-wide review for
similar compliance. SIGECO responded to all of the USEPA's data
requests during the investigation. In July 1999, SIGECO received
a letter from the Office of Enforcement and Compliance Assurance
of the USEPA discussing the industry-wide investigation, vaguely
referring to the investigation of SIGECO and inviting SIGECO to
participate in a discussion of the issues. No specifics were
noted; furthermore, the letter stated that the communication was
not intended to serve as a notice of violation. Subsequent
meetings were conducted in September and October with the USEPA
and targeted utilities, including SIGECO, regarding potential
remedies to the USEPA's general allegations.
On November 3, 1999, the USEPA filed a lawsuit against seven
utilities, including SIGECO. The USEPA alleges that, beginning
in 1992, SIGECO violated the Act by: (i) making modifications to
its Culley Generating Station in Yankeetown, Indiana without
obtaining required permits; (ii) making major modifications to
the Culley Generating Station without installing the best
available emission control technology; and (iii) failing to
notify the USEPA of the modifications. In addition, the lawsuit
alleges that the modifications to the Culley Generating Station
required SIGECO to begin 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 Act. Because proper maintenance does not
require permits, application of the best available emission
control technology, notice to the USEPA, or compliance with new
source performance standards, SIGECO believes that the lawsuit is
without merit, and intends to vigorously defend the lawsuit.
The lawsuit seeks fines against SIGECO in the amount of $27,500
per day per violation. The lawsuit does not specify the number
of days or violations the USEPA believes occurred. The lawsuit
also seeks a court order requiring SIGECO to install the best
available emissions technology at the Culley Generating Station.
If the USEPA is successful in obtaining an order, SIGECO
estimates that it would incur capital costs of approximately $40
million to $50 million complying with the order. In the event
that SIGECO is required to install system-wide NOx emission
control equipment, as a result of the NOx SIP call issue, the
majority of the $40 million to $50 million for best available
emissions technology at Culley Generating Station would be
included in the $160 million expenditure previously discussed.
The USEPA has also issued an administrative notice of violation
to SIGECO making the same allegations, but alleging that
violations began in 1977.
While it is possible that SIGECO could be subjected to criminal
penalties if the Culley Generating Station continues to operate
without complying with the new source performance standards and
the allegations are determined by a court to be valid, SIGECO
believes such penalties are unlikely as the USEPA and the
electric utility industry have a bonafide dispute over the proper
interpretation of the Act. Consequently, SIGECO anticipates at
this time that the plant will continue to operate while the
matter is being decided.
INFORMATION REQUEST. On January 23, 2001, SIGECO received an
information request from the USEPA under Section 114(a) of the
Act for historical operational information on the Warrick and
A.B. Brown generating stations. SIGECO plans to provide all
information requested, and management believes that no
significant issues will arise from this request.
Manufactured Gas Plants
- -----------------------
In the past, Indiana Gas and others operated facilities for the
manufacture of gas. Given the availability of natural gas
transported by pipelines, these facilities have not been operated
for many years. Under currently applicable environmental laws
and regulations, Indiana Gas and the others may now be required
to take remedial action if certain byproducts are found above the
regulatory thresholds at these sites.
Indiana Gas has identified the existence, location and certain
general characteristics of 26 gas manufacturing and storage sites
for which it may have some remedial responsibility. Indiana Gas
has completed a remedial investigation/feasibility study (RI/FS)
at one of the sites under an agreed order between Indiana Gas and
IDEM, and a Record of Decision 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 that may be incurred
in connection with addressing these sites cannot be determined at
this time, Indiana Gas has accrued costs that it reasonably
expects to incur.
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 December 31, 2000,
Indiana Gas has received and recorded settlements from all known
insurance carriers in an aggregate amount of approximately $20.3
million.
Environmental matters related to manufactured gas plants have had
no material impact on earnings since costs recorded to date
approximate PRP and insurance settlement recoveries. While
Indiana Gas has recorded all costs which it presently expects to
incur in connection with activities at these sites, it is
possible that future events may require some level of additional
remedial activities which are not presently foreseen.
18. Rate and Regulatory Matters
As a result of the ongoing appeal of a generic order issued by
the IURC in August 1999 regarding guidelines for the recovery of
purchased power costs, SIGECO entered into a settlement agreement
with the Indiana Office of Utility consumer Counselor (OUCC) that
provides certain terms with respect to the recoverability of such
costs. The settlement, originally approved by the IURC on August
9, 2000, has been extended by agreement through March 2002.
Under the settlement, SIGECO can recover the entire cost of
purchased power up to an established benchmark, and during forced
outages, SIGECO will bear a limited share of its purchased power
costs regardless of the market costs at that time. Based on this
agreement, SIGECO believes it has significantly limited its
exposure to unrecoverable purchased power costs.
Commodity prices for natural gas purchases during the last six
months of 2000 increased significantly, primarily due to the
expectation of a colder winter, which led to increased demand and
tighter supplies. Vectren's utility subsidiaries are typically
allowed full recovery of such charges in purchased gas costs from
their retail customers through commission-approved gas cost
adjustment (GCA). On October 11, 2000, Indiana Gas filed for
approval of its quarterly GCA. In early December, the IURC
issued an interim order approving the request by Indiana Gas for
a GCA factor for December 2000. On January 4, 2001, the IURC
approved the January and February 2001 GCA as filed. The order
also addressed the claim by the OUCC that a portion of the
requested GCA be disallowed because Indiana Gas should have
entered into additional commitments for this winter's gas supply
in late 1999 and early 2000. In procuring gas supply for this
winter, Indiana Gas followed the gas procurement practices that
it had employed over the last several years. In response to the
claim by the OUCC, the IURC found that there should be a $3.8
million disallowance related to gas procurement for the winter
season. As a result, Indiana Gas recognized a pre-tax charge of
$3.8 million in December 2000. Both Indiana Gas and the OUCC have
appealed this ruling. The Citizens Action Coalition of Indiana,
Inc., a not for profit consumer advocate, has also filed with the
IURC a petition to intervene and a notice of appeal of the order.
19. Affiliate Transactions
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 years ended December 31,
2000 and 1999, totaled $401.4 million and $240.7 million,
respectively. As of December 31, 2000, Vectren's net investment
in ProLiance totaled approximately $20.3 million and is included
in investments in partnerships and other corporations in the
Consolidated Balance Sheets.
ProLiance has a standby letter of credit facility with a bank for
letters up to $45.0 million. This facility is secured in part by
a support agreement from Vectren. Letters of credit outstanding
at December 31, 2000 totaled $22.0 million.
CIGMA, LLC (CIGMA), owned jointly and equally by a wholly owned
subsidiary of Vectren and a third party, provides materials
acquisition and related services that are used by Indiana Gas and
others. Indiana Gas' purchases of these services during the
years ended December 31, 2000 and 1999, totaled $17.2 million and
$17.3 million, respectively. As of December 31, 2000, Vectren's
net investment in CIGMA totaled approximately $4.2 million and is
included in investments in partnerships and other corporations in
the Consolidated Balance Sheets.
Reliant Services, LLC (Reliant), owned jointly and equally by a
wholly owned subsidiary of Vectren and Cinergy Corp., provides
utility locating, meter reading and construction services to
Indiana Gas and others. Amounts paid by Indiana Gas to Reliant
for such services totaled $3.7 million and $2.9 million for years
ended December 31, 2000 and 1999, respectively. On December 13,
2000, Reliant purchased the common stock of Miller Pipeline
Corporation from NiSource, Inc. for approximately $68.3 million.
Vectren and Cinergy Corp. each contributed $16 million of equity,
and the remaining $36.3 million was funded with 7-year
intermediate bank loans. As of December 31, 2000, Vectren's net
investment in Reliant totaled approximately $19.2 million and is
included in investments in partnerships and other corporations in
the Consolidated Balance Sheets.
Vectren is a two-thirds guarantor of certain surety bond and
other obligations of Energy Systems Group, LLC, a two-thirds
owned consolidated subsidiary. Vectren's share of the guarantee
of such obligations totaled $50.6 million at December 31, 2000.
Amounts owed to unconsolidated affiliates totaled $102.5 million
and $29.3 million at December 31, 2000 and 1999, respectively,
and are included in accounts payable on the Consolidated Balance
Sheets. The $73.2 million increase at December 31, 2000 is due
primarily to amounts owed to ProLiance resulting from the much
higher gas prices and increased customer consumption. Amounts
due from unconsolidated affiliates totaled $17.6 million and $7.6
million at December 31, 2000 and 1999, respectively, and are
included in accounts receivable on the Consolidated Balance
Sheets.
20. Segment Reporting
SFAS 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.
There were three operating segments of Vectren during 2000: (1)
Gas Utility Services, (2) Electric Utility Services, and (3) Non-
regulated Operations. The Gas Utility Services segment includes
regulated gas utilities which provide natural gas distribution
and transportation services. The Electric Utility Services
segment generates, transmits and distributes and sells
electricity within primarily southwestern Indiana communities.
The Non-regulated Operations segment is made up of various
businesses providing energy-related products and services;
telecommunication products and services; materials management,
debt collection and meter reading services; underground utility
asset location and construction services; structured finance and
investment transactions including leveraged leases of real estate
and equipment; venture capital projects; coal mining and sales;
and other energy-related services. Revenues for each segment are
principally attributable to customers in the United States.
The following tables provide information about business segments.
Vectren makes decisions on finance and dividends at the corporate
level; these topics are addressed on a consolidated basis. In
addition, adjustments have been made to the segment information
to arrive at information included in the consolidated results of
operations and financial position. These adjustments include
unallocated corporate assets, revenues and expenses and the
elimination of intercompany transactions.
At and Year Ended December 31,
In thousands 2000 1999 1998
---------- ---------- ---------
Operating Revenues:
Gas Utility Services $ 818,753 $ 499,573 $ 487,260
Electric Utility Services 336,409 307,569 297,865
Non-regulated Operations 552,838 315,367 256,220
Intersegment Eliminations (59,310) (54,092) (43,639)
--------- ---------- ---------
Total operating revenues $1,648,690 $1,068,417 $ 997,706
========== ========== =========
Interest Expense:
Gas Utility Services $ 27,969 $ 18,704 $ 17,601
Electric Utility Services 18,103 17,544 18,191
Non-regulated Operations 23,107 12,535 8,046
Intersegment Eliminations (12,046) (5,921) (3,537)
---------- ---------- ---------
Total interest expense $ 57,133 $ 42,862 $ 40,301
========== ========== =========
Income Taxes:
Gas Utility Services $ 11,538 $ 18,830 $ 16,211
Electric Utility Services 23,386 24,331 22,881
Non-regulated Operations (595) 2,575 3,148
Intersegment Eliminations (97) (28) 88
---------- ---------- ---------
Total income taxes $ 34,232 $ 45,708 $ 42,328
========== ========== =========
Net Income:
Gas Utility Services $ 15,589 $ 33,612 $ 30,931
Electric Utility Services 36,811 41,820 38,342
Non-regulated Operations 19,799 15,316 17,327
Intersegment Eliminations (159) - -
---------- ---------- ---------
Net income $ 72,040 $ 90,748 $ 86,600
========== ========== =========
Depreciation and amortization:
Gas Utility Services $ 43,791 $ 8,623 $ 37,082
Electric Utility Services 38,639 40,829 38,077
Non-regulated Operations 23,231 7,546 6,399
Intersegment Eliminations - - -
---------- ---------- ---------
Total depreciation and
amortization $ 105,661 $ 86,998 $ 81,558
========== ========== =========
Capital expenditures:
Gas Utility Services $ 73,114 $ 72,773 $ 64,701
Electric Utility Services 37,549 51,080 47,114
Non-regulated Operations 53,603 8,306 23,254
Intersegment Eliminations - - -
---------- ---------- ---------
Total capital expenditures $ 164,266 $ 132,159 $ 135,069
========== ========== =========
Identifiable assets:
Gas Utility Services $1,658,778 $ 882,948 $ 827,931
Electric Utility Services 799,104 751,159 740,746
Non-regulated Operations 749,237 505,564 326,048
Intersegment Eliminations (297,932) (159,204) (95,885)
---------- ---------- ----------
Total identifiable assets $2,909,187 $1,980,467 $1,798,840
========== ========== ==========
21. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data (in thousands of dollars
except per share amounts) for 2000 and 1999 are as follows:
2000
In thousands,
except per share
amounts Q1 Q2 Q3 Q4 Total
------- -------- -------- -------- ----------
Operating
revenues $359,444 $263,477 $317,854 $707,915 $1,648,690
Operating income 34,276 15,716 27,643 53,286 130,921
Net income 22,125 8,273 15,458 26,184 72,040
Basic earnings
per average share
of common stock 0.36 0.14 0.25 0.43 1.18
Diluted earnings
per average share
of common stock 0.36 0.13 0.25 0.43 1.17
1999
In thousands,
except per share
amounts Q1 Q2 Q3 Q4 Total
-------- -------- -------- -------- ----------
Operating
revenues $321,033 $207,042 $231,160 $309,182 $1,068,417
Operating income 68,133 22,940 29,397 40,302 160,772
Net income 40,723 11,554 16,236 22,235 90,748
Basic earnings
per average share
of common stock 0.66 0.19 0.26 0.37 1.48
Diluted earnings
per average share
of common stock 0.66 0.19 0.26 0.37 1.48
22. Subsequent Event
On January 19, 2001, Vectren filed a registration statement with
the Securities and Exchange Commission with respect to a public
offering of 5.5 million shares of new common stock. On February
8, 2001, the registration became effective and agreement was
reached to sell 5.5 million shares to a group of underwriters.
On February 14, the shares were sold, at which time, the
underwriters exercised their over-allotment option to sell an
additional 825,000 shares for a total of about 6.3 million
shares. The net proceeds of $129.4 million will be used
principally to repay outstanding commercial paper utilized for
recent acquisitions.