UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________________
Commission file number: 1-6494
INDIANA GAS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
INDIANA 35-0793669
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20 N.W. Fourth Street, Evansville, Indiana 47708
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 812-491-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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None None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|. No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___. No |X|.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of June
28, 2002 was zero. All shares outstanding of the Registrant's common stock were
held by Vectren Corporation.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock- Without Par Value 690.001 March 15, 2003
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Class Number of Shares Date
Omission of Information by Certain Wholly Owned Subsidiaries
The Registrant is a wholly owned subsidiary of Vectren Utility Holdings, Inc.
and meets the conditions set forth in General Instructions (I)(1)(a) and (b) of
Form 10-K and is therefore filing with the reduced disclosure format
contemplated thereby.
Definitions
AFUDC: allowance for funds used during MCF / BCF: millions / billions of cubic feet
construction
APB: Accounting Principles Board MDth / MMDth: thousands /millions of
dekatherms
EITF: Emerging Issues Task Force NOx: nitrogen oxide
FASB: Financial Accounting Standards OUCC: Indiana Office of the Utility Consumer
Board Counselor
FERC: Federal Energy Regulatory Commission SFAS: Statement of Financial Accounting
Standards
IDEM: Indiana Department of Environmental USEPA: United States Environmental
Management Protection Agency
IURC: Indiana Utility Regulatory Commission Throughput: combined gas sales and gas
transportation volumes
Table of Contents
Item Page
Number Number
Part I
1 Business (A)........................................................1
2 Properties .........................................................1
3 Legal Proceedings...................................................2
4 Submission of Matters to Vote of Security Holders (A)...............2
Part II
5 Market for the Company's Common Equity and
Related Stockholder Matters .......................................2
6 Selected Financial Data (A).........................................2
7 Management's Discussion and Analysis of Results of
Operations and Financial Condition (A)............................ 3
7A Qualitative and Quantitative Disclosures About Market Risk.........10
8 Financial Statements and Supplementary Data........................13
9 Change in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................60
Part III
10 Directors and Executive Officers of the Registrant (A).............60
11 Executive Compensation (A).........................................60
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters (A)....................60
13 Certain Relationships and Related Transactions (A).................60
Part IV
14 Controls and Procedures............................................61
15 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...............................................62
Signatures.........................................................65
(A) Omitted or amended as the Registrant is a wholly-owned subsidiary of
Vectren Utility Holdings, Inc. and meets the conditions set forth in
General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing
with the reduced disclosure format contemplated thereby.
Access to Information
Vectren Corporation makes available all SEC filings and recent annual reports
free of charge, including those of its wholly owned subsidiaries, through its
website at www.vectren.com, or by request, directed to Investor Relations at the
mailing address, phone number, or email address that follows:
Mailing Address: Phone Number: Investor Relations Contact:
P.O. Box 209 (812) 491-4000 Steven M. Schein
Evansville, Indiana Vice President, Investor Relations
47702-0209 sschein@vectren.com
Explanatory Note
This Amendment No. 1 to Form 10-K filed on Form 10-K/A for the year ended
December 31, 2002, is being filed to clarify various disclosures in the Results
of Operations section of Item 7 of Part II and the Statements of Cash Flows and
Notes 2 and 6 to Indiana Gas Company, Inc.'s Financial Statements and Note 2 to
the Ohio Operations' Financial Statements of Item 8 of Part II. All information
contained herein is as of February 26, 2003, and does not reflect any events or
changes in information that may have occurred subsequent to February 26, 2003.
For a discussion of events and developments relating to periods subsequent to
February 26, 2003, see the Company's reports filed with the Securities and
Exchange Commission for such subsequent periods, including the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003.
PART I
ITEM 1. BUSINESS
Description of the Business
Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation,
provides natural gas distribution and transportation services to a diversified
customer base in 49 of Indiana's 92 counties. Indiana Gas is a direct wholly
owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct,
wholly owned subsidiary of Vectren Corporation (Vectren).
Vectren, an Indiana corporation, is an energy and applied technology holding
company headquartered in Evansville, Indiana. Vectren was organized on June 10,
1999 solely for the purpose of effecting the merger of Indiana Energy, Inc.
(Indiana Energy) and SIGCORP, Inc. (SIGCORP). 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 in
accordance with Accounting Principles Board (APB) Opinion No. 16 "Business
Combinations."
Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding
company for its three operating public utilities: 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. Both Vectren and VUHI are exempt from registration pursuant to
Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935.
Investment in the 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 for approximately $471 million, including
transaction costs, as a tenancy in common through two separate wholly owned
subsidiaries. Vectren Energy Delivery of Ohio, Inc. (VEDO) holds a 53% undivided
ownership interest in the assets, and Indiana Gas holds a 47% undivided
ownership interest. VEDO is the operator of the assets, and these assets are
referred to as "the Ohio operations." Indiana Gas' ownership is accounted for on
the equity method in accordance with APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." Indiana Gas' initial investment was
approximately $218.1 million. The Ohio operations provide natural gas
distribution and transportation services to 17 counties in west central Ohio,
including counties surrounding Dayton.
Because the Ohio operations are a significant subsidiary as defined by Rule 3-09
of Regulation S-X, the financial statements of the Ohio operations are included
in this filing under Part II Item 8 Financial Statements and Supplementary Data.
The narrative description of the business, competition and personnel sections
were intentionally omitted. See the table of contents of this Annual Report on
Form 10-K for explanation.
ITEM 2. PROPERTIES
Indiana Gas
Indiana Gas owns and operates four gas storage fields located in Indiana
covering 58,489 acres of land with an estimated ready delivery from storage
capability of 4.2 BCF of gas with delivery capabilities of 119,160 MCF per day.
Indiana Gas also owns and operates three liquefied petroleum (propane) air-gas
manufacturing plants located in Indiana with the ability to store 1.5 million
gallons of propane and manufacture for delivery 31,000 MCF of manufactured gas
per day. In addition to its owned storage and manufacturing and daily delivery
capabilities, Indiana Gas contracts for a maximum of 17.2 BCF of gas
availability across various pipelines with a delivery capability of 283,298 MCF
per day. Indiana Gas' gas delivery system includes 11,590 miles of distribution
and transmission mains, all of which are in Indiana except for pipeline
facilities extending from points in northern Kentucky to points in southern
Indiana so that gas may be transported to Indiana and sold or transported by
Indiana Gas to ultimate customers in Indiana.
Ohio operations
The Ohio operations owns and operates three liquefied petroleum (propane)
air-gas manufacturing plants and one cavern for propane storage, all of which
are located in Ohio. The plants and cavern can store 3.7 million gallons of
propane, and the plants can manufacture for delivery 51,047 MCF of manufactured
gas per day. In addition to its owned storage and manufacturing and daily
delivery capabilities, the Ohio operations contracts for a maximum of 13.2 BCF
of gas availability across various pipelines with a delivery capability of
281,491 MCF per day. The Ohio operations' gas delivery system includes 5,176
miles of distribution and transmission mains, all of which are located in Ohio.
ITEM 3. LEGAL PROCEEDINGS
Indiana Gas is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations. Legal proceedings involving
transactions with ProLiance were substantially resolved during 2002. See Note 5
of its financial statements included in Part II Item 8 Financial Statements and
Supplementary Data for a discussion of regulatory matters related to ProLiance.
ITEM 4. Submission of Matters to Vote of Security Holders
Intentionally omitted. See the table of contents of this Annual Report on Form
10-K for explanation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price
All of the outstanding shares of Indiana Gas' common stock are owned by VUHI.
Indiana Gas' common stock is not traded.
There are no outstanding options or warrants to purchase Indiana Gas' common
equity or securities convertible into Indiana Gas' common equity. Additionally,
Indiana Gas has no plans to publicly offer any of its common equity.
Dividends Paid to Parent
During 2002, Indiana Gas paid dividends to its parent company of $6.9 million,
$7.7 million, $7.7 million, and zero in the first, second, third, and fourth
quarters, respectively.
During 2001, Indiana Gas paid dividends to its parent company of $7.9 million,
$7.1 million, $7.7 million, and $3.3 million in the first, second, third, and
fourth quarters, respectively.
On January 22, 2003, the board of directors declared a dividend $7.3 million
payable to its parent company on March 3, 2003.
Dividends on shares of common stock are payable at the discretion of the board
of directors out of legally available funds. Future payments of dividends, and
the amounts of these dividends, will depend on the Company's financial
condition, results of operations, capital requirements, and other factors.
ITEM 6. SELECTED FINANCIAL DATA
Intentionally omitted. See the table of contents of this Annual Report on Form
10-K for explanation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Pursuant to General Instructions I(2)(a) of Form 10-K, the following analysis of
the results of operations is presented in lieu of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto. As discussed in Note 3 in the financial
statements, subsequent to the issuance of the Company's 2001 financial
statements, the Company's management determined that previously issued financial
statements should be restated. As a result, the Company has restated its 2001
and 2000 financial statements and has decreased reported retained earnings as of
January 1, 2000 by $1.2 million. The restatement had the effect of decreasing
net income for 2001 by approximately $8.1 million and increasing net income for
2000 by $0.2 million. Note 3 to the financial statements includes a summary of
the significant effects of the restatement. The effect of the restatement on
quarterly results, including previously reported 2002 quarterly information, is
discussed in Note 14. The following discussion and analysis gives effect to the
restatement.
Results of Operations
In 2002, net income was $34.5 million, an increase of $31.2 million when
compared to 2001, as restated. The year ended December 31, 2001 included
nonrecurring merger, integration, and restructuring costs totaling $11.7 million
after tax. In addition to the nonrecurring 2001 items, the increase reflects
improved margins and lower operating costs. These resulted from favorable
weather and a return to lower gas prices and the related reduction in costs
incurred in 2001.
In 2001, net income of $3.3 million decreased $8.1 million when compared to
2000. The year ended December 31, 2000 included nonrecurring merger and
integration costs totaling $19.5 million after tax. The decrease reflects lower
earnings resulting from extraordinarily high gas costs early in 2001 that
unfavorably impacted margins and operating costs including uncollectible
accounts expense, interest, and excise taxes; heating weather that was 9% warmer
than the prior year; and a weakened national economy.
Restatement of Previously Reported Results
The Company identified adjustments that, in the aggregate, reduced previously
reported 2001 earnings by approximately $8.1 million after tax and other
adjustments, as described below, related to 2000 and prior periods. Adjustments
were also made to previously reported 2002 quarterly results. In addition to
adjustments affecting previously reported net income, other reclassifications
were made to the previously reported 2001 and 2000 results to conform with the
2002 presentation.
Previously Reported 2001 and 2000 Net Income Adjustments
The Company determined that $8.3 million ($5.2 million after tax) of gas costs
were improperly recorded as recoverable gas costs due from customers. The error
related primarily to the accounting for natural gas inventory and resulted in an
overstatement of 2001 earnings.
The Company also identified an accounting error related to certain employee
benefit and other related costs that are routinely accumulated on the balance
sheet and systematically cleared to operating expense and capital projects.
Because of inadequate loading rates, these costs were not fully cleared to
operating expense and capital projects in 2001. As a result, 2001 earnings were
overstated by $2.2 million ($1.4 million after tax).
The Company identified reconciliation errors and other errors related to the
recording of estimates, including estimates used in the calculation of unbilled
revenue. As a result of changes to unbilled revenue and other additional items,
2001 earnings were reduced by $1.8 million ($1.0 million after tax). The
Company's equity in earnings of the Ohio operations also was restated, resulting
in a decrease to 2001 earnings of $0.5 million.
In 2000, the Company identified reconciliation errors, including errors in
billing and collections, and other errors related to the recording of estimates
that decreased earnings by $0.3 million ($0.2 million after tax). The Company's
equity in earnings of the Ohio operations also was restated, resulting in an
increase to earnings of $0.4 million. The impact of the restatement of results
for the year ended 2000 is an increase to net income of $0.2 million.
Previously Reported 2002 Quarterly Net Income Adjustments
For the nine months ended September 30, 2002, earnings increased approximately
$1.3 million from those previously reported. The increase is primarily the
result of $1.3 million of software conversion errors of which $0.9 million ($0.6
million after tax) were originally reflected in 2002 that are now reflected in
common shareholder's equity as of January 1, 2000. The Company identified other
adjustments that were not significant, either individually or in the aggregate
that increased previously reported 2002 quarterly pre-tax and after tax earnings
by approximately $1.1 million and $0.7 million, respectively.
Beginning Retained Earnings Adjustments
In addition to the adjustment of software conversion costs discussed above, the
Company identified other errors that were not significant, either individually
or in the aggregate that relate to years prior to 2000. As a result of these
additional items, beginning common shareholder's equity was reduced by $0.6
million. Accordingly, retained earnings as of January 1, 2000 reflects a
cumulative net decrease of $1.2 million.
Other Balance Sheet Adjustments
Certain reclassifications were made to reflect separate Company current and
deferred income taxes that are included in Vectren's consolidated tax position.
These reclassifications are the principal adjustments to intercompany
receivables and payables as well as prepayments and other current assets and
deferred income taxes.
The Company has restated its financial statements to give effect to the matters
discussed above. A summary of the significant effects of the restatement on
previously reported financial position and results of operations is included in
Note 3 to the financial statements. The effects of the restatement on 2001
quarterly results and on 2002 previously reported quarterly information, is
discussed in Note 14. The financial statements are included under Item 8
Financial Statements and Supplementary Data.
Nonrecurring Items in 2001 and 2000
Merger and Integration Costs
Merger and integration costs incurred for the years ended December 31, 2001 and
2000 were $0.6 million and $16.8 million, respectively. Merger and integration
activities resulting from the 2000 merger were completed in 2001.
Since March 31, 2000, $17.4 million has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$11.9 million. Of this amount, $4.8 million related to employee and executive
severance costs, $5.0 million related to transaction costs and regulatory filing
fees incurred prior to the closing of the merger, and the remaining $2.1 million
related to employee relocations that occurred prior to or coincident with the
merger closing. At December 31, 2001, the remaining accrual related to employee
severance was not significant. The remaining $5.5 million was expensed ($4.9
million in 2000 and $0.6 million in 2001) for accounting fees resulting from
merger related filing requirements, consulting fees related to integration
activities such as organization structure, employee travel between company
locations, internal labor of employees assigned to integration teams, investor
relations communication activities, and certain benefit costs.
During the merger planning process, approximately 81 positions were identified
for elimination. As of December 31, 2001, all such identified positions have
been vacated.
The integration activities experienced by the Company included such things as
information system consolidation, process review and definition, organization
design and consolidation, and knowledge sharing.
As a result of merger integration activities, management retired certain
information systems in 2001. Accordingly, the useful lives of these assets were
shortened to reflect this decision. These information system assets are owned by
a wholly owned subsidiary of Vectren, and the fees allocated by the subsidiary
for the use of these systems by the Company's subsidiaries are reflected in
other operating expenses. As a result of the shortened useful lives, additional
fees were incurred by the Company, resulting in additional other operating
expense of $9.6 million for the year ended December 31, 2001 and $11.4 million
for the year ended December 31, 2000.
In total, for the year ended December 31, 2001, merger and integration costs
totaled $10.2 million ($6.3 million after tax) compared to $28.2 million ($19.5
million after tax) in 2000.
Restructuring Costs
As part of continued cost saving efforts, in June 2001, the Company's management
and board of directors approved a plan to restructure, primarily, its regulated
operations. The restructuring plan included the elimination of certain
administrative and supervisory positions in its utility operations and corporate
office. Charges of $5.4 million were expensed in June 2001 as a direct result of
the restructuring plan. Additional charges of $3.3 million were incurred during
the remainder of 2001 primarily for consulting fees, employee relocation, and
duplicate facilities costs. In total, the Company incurred restructuring charges
of $8.7 million, ($5.4 million after tax) in 2001. These charges were comprised
of $3.2 million for employee severance, related benefits and other employee
related costs, $4.0 million for lease termination fees related to duplicate
facilities and other facility costs, and $1.5 million for consulting and other
fees incurred through December 31, 2001. The restructuring program was completed
during 2001, except for the departure of certain employees impacted by the
restructuring which occurred during 2002 and the final settlement of the lease
obligation which has yet to occur. (See Note 12 for further information on
restructuring costs.)
Significant Fluctuations
Gas Utility Margin
Gas Utility margin for the year ended December 31, 2002 of $207.0 million
increased $11.2 million, or 6%. The increase is primarily due to weather 6%
cooler for the year and 31% cooler in the fourth quarter. The effects of
primarily cooler weather resulted in an overall 6% increase in total throughput
to 118,241 MDth in 2002 from 111,885 MDth in 2001. Total throughput in 2000 was
126,960 MDth.
Gas Utility margin for the year ended December 31, 2001 of $195.9 million
decreased $11.3 million, compared to 2000. The primary factors contributing to
this decrease were weather that was 9% warmer than the prior year and the
unfavorable impact resulting from extraordinarily high gas costs early in 2001,
coupled with the effects of a weakened economy. These decreases were offset
somewhat by customer growth of nearly 1% compared to 2000 and by a $3.8 million
disallowance of recoverable gas costs by the IURC, charged against gas revenues
in December 2000.
Cost of gas sold was $320.4 million in 2002, $373.6 million in 2001, and $390.5
million in 2000. Cost of gas sold decreased $53.2 million, or 14%, during 2002
compared to 2001, primarily due to a return to lower gas prices somewhat offset
by an increase in retail volumes sold. Cost of gas sold decreased $16.9 million,
or 4%, in 2001. The decrease is primarily due to lower volumes sold due to the
warmer weather and a weakened economy, offset by an increase in gas prices. The
total average cost per dekatherm of gas purchased was $4.71 in 2002, $5.86 in
2001, and $5.77 in 2000. The price changes are due primarily to changing
commodity costs in the marketplace.
Operating Expenses
Other Operating
Other operating expenses decreased $17.5 million for the year ended December 31,
2002 when compared to 2001. The decrease results primarily from lower charges
for the use of corporate assets which had useful lives shortened as a result of
the merger and a return to lower gas prices and the related reduction in costs
incurred in 2001. Specific expenses affected by increased gas costs in 2001 were
uncollectible accounts expense and contributions to low income heating
assistance programs.
Other operating expenses for the year ended December 31, 2001 decreased $2.7
million or 3% compared to 2000. The 2001 decrease results, primarily, from
reduced charges for those assets which had their useful lives shortened as part
of the merger and merger synergies in the current year, offset by increased
uncollectible accounts expense resulting from increased gas costs.
Depreciation and Amortization
Depreciation and amortization increased $2.6 million, or 7%, and $1.4 million,
or 4%, in 2002 and in 2001, respectively. The increases are due to depreciation
of normal utility plant additions.
Income Tax
Federal and state income taxes increased $13.2 million in 2002 when compared to
2001 and decreased $8.2 million in 2001 compared to 2000. The changes in income
taxes result principally from fluctuations in pre-tax earnings. The effective
tax rate in 2000 was higher due to the nondeductibility of certain merger and
integration costs.
Equity in Earnings of the Ohio Operations
As described in Note 1 to the financial statements included in Part II Item 8
Financial Statements and Supplementary Data, Indiana Gas has a 47% undivided
interest in the Ohio operations acquired by Vectren on October 31, 2000. Equity
in earnings of the Ohio operations represents Indiana Gas' portion of the Ohio
operations' net income. The financing costs associated with VEDO's 53% ownership
interest are not included in the Ohio operations' equity in earnings. Earnings
increased in 2002 compared to 2001 and decreased in 2001 compared to 2000 as a
result of warm weather, high gas prices, and increased costs that resulted from
high gas prices in 2001. Earnings in 2002 also increased due the discontinuance
of amortization of goodwill embedded in the investment pursuant to SFAS 142.
Such amortization approximated $1.5 million after tax in 2001.
Interest Expense
Interest expense decreased $3.6 million in 2002 compared to 2001. The decrease
is attributable to lower outstanding borrowings during 2002 and lower average
interest rates on adjustable rate debt.
Interest expense increased $13.6 million in 2001 compared to 2000. The increase
is due primarily to interest related to the financing of its investment in the
Ohio operations and increased working capital requirements resulting from higher
natural gas prices.
Critical Accounting Policies
Management is required to make judgements, assumptions, and estimates that
affect the amounts reported in the financial statements and the related
disclosures that conform to accounting principles generally accepted in the
United States. Note 2 to the financial statements describes the significant
accounting policies and methods used in the preparation of the financial
statements. Certain estimates used in the financial statements are subjective
and use variables that require judgement. These include the estimates to perform
asset impairments tests. The Company makes other estimates in the course of
accounting for unbilled revenue, the effects of regulation, and intercompany
allocations that are critical to the Company's financial results but that are
less likely to be impacted by near term changes. Other estimates that
significantly affect the Company's results, but are not necessarily critical to
operations, include depreciation of utility plant and the allowance for doubtful
accounts, among others. Actual results could differ from these estimates.
Asset Impairment Test
The Company's 47% ownership interest in the Ohio operations is accounted for
using the equity method of accounting. The remaining 53% ownership interest also
resides within Vectren's consolidated group. The investment in the Ohio
operations was tested for impairment in accordance with APB No. 18 "The Equity
Method of Accounting for Investments in Common Stock." This test was performed
while Vectren performed its initial impairment analysis of its goodwill,
including that related to the acquisition of the Ohio operations, as required by
SFAS 142. An impairment test performed in accordance with APB 18 requires that
the carrying value of the investment be examined for other than temporary
declines in value. While making such examination, the Company considered various
factors including that no impairment was recognized by Vectren when it performed
an impairment analysis of its Gas Utility Services operating segment which
includes the operations of Indiana Gas and the Ohio operations. Vectren
performed this analysis using a discounted cash flow model. Based on these
factors, the Company determined there was no impairment of its investment in the
Ohio operations.
The use of a discounted cash flow model requires significant judgement in
applying a discount rate, growth assumptions, company expense allocations, and
longevity of cash flows. A 100 basis point increase in the discount rate or a
10% decrease in the cash flow growth assumption utilized in the cash flow
analysis would not have changed the results of the analysis.
Unbilled Revenues
To more closely match revenues and expenses, the Company records revenues for
all gas delivered to customers but not billed at the end of the accounting
period. The Company uses actual units billed during the month to allocate
unbilled units. Those allocated units are multiplied by rates in effect during
the month to calculate unbilled revenue at balance sheet dates. While certain
estimates are used in the calculation of unbilled revenue, these estimates are
not subject to near term changes.
Regulation
At each reporting date, the Company reviews current regulatory trends in the
markets in which it operates. This review involves judgement and is critical in
assessing the recoverability of regulatory assets as well as the ability to
continue to account for its activities based on the criteria set forth in SFAS
No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71).
Based on the Company's current review, it believes its regulatory assets are
probable of recovery. If all or part of the Company's operations cease to meet
the criteria of SFAS 71, a write-off of related regulatory assets and
liabilities could be required. In addition, the Company would be required to
determine any impairment to the carrying value of its utility plant and other
regulated assets. In the unlikely event of a change in the current regulatory
environment, such write-offs and impairment charges could be significant.
Intercompany Allocations
Support Services
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, finance, tax, risk
management, and human resources, which includes charges for restricted stock
compensation and for pension and other postretirement benefits not directly
charged to subsidiaries. These costs have been allocated using various
allocators, primarily number of employees, number of customers and/or revenues.
Allocations are based on cost. Management believes that the allocation
methodology is reasonable and approximates the costs that would have been
incurred had the Company secured those services on a stand-alone basis. In
addition, Vectren negotiates service and construction contracts on behalf of its
utilities to obtain those services at less cost than the utility may otherwise
be able to obtain on its own. The allocation methodology is not subject to near
term changes.
Pension and Other Postretirement Obligations
Vectren satisfies the future funding requirements of its pension and other
postretirement plans and the payment of benefits from general corporate assets.
An allocation of expense is determined by Vectren's actuaries, comprised of only
service cost and interest on that service cost, by subsidiary based on headcount
at each measurement date. These costs are directly charged to individual
subsidiaries. Other components of costs (such as interest cost from prior
service and asset returns) are charged to individual subsidiaries through the
corporate allocation process discussed above. Plan assets nor the FAS 87/106
liability are allocated to individual subsidiaries since these assets and
obligations are derived from corporate level decisions. Further, Vectren
satisfies the future funding requirements of plans and the payment of benefits
from general corporate assets. Management believes these direct charges when
combined with benefit-related corporate charges discussed in "support services"
above approximate costs that would have been incurred if the Company accounted
for benefit plans on a stand-alone basis. Vectren annually measures its
obligations on September 30.
Vectren estimates the expected return on plan assets, discount rate, rate of
compensation increase, and future health care costs, among other things, and
relies on actuarial estimates to assess the future potential liability and
funding requirements of pension and postretirement plans. Vectren used the
following weighted average assumptions to develop 2002 annual costs and the
ending benefit obligations recognized in its consolidated financial statements:
a discount rate of 6.75%, an expected return on plan assets before expenses of
9.00%, a rate of compensation increase of 4.25%, and a health care cost trend
rate of 10% in 2002 declining to 5% in 2006. During 2002, Vectren reduced the
discount rate and rate of compensation increase by 50 basis points from those
assumptions used in 2001 due to the general decline in interest rates and other
market conditions that occurred in 2002. Future changes in health care costs,
work force demographics, interest rates, or plan changes could significantly
affect the estimated cost of these future benefits that are allocated to VUHI
and its subsidiaries.
Impact of Recently Issued Accounting Guidance
EITF 02-03
In October 2002, the EITF reached a final consensus in EITF Issue 02-03 "Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities" (EITF
02-03) that gains and losses (realized and unrealized) on all derivative
instruments within the scope of SFAS 133 should be shown net in the income
statement, whether or not settled physically, if the derivative instruments are
held for "trading purposes." The consensus rescinded EITF Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF 98-10) as well as other decisions reached on energy trading
contracts at the EITF's June 2002 meeting. The Company does not engage in any
activities subject to EITF 02-03.
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Any costs of removal recorded in
accumulated depreciation pursuant to regulatory authority will require
disclosure in future periods. The Company adopted this statement on January 1,
2003. The adoption was not material to the Company's results of operations or
financial condition.
FASB Interpretation (FIN) 45
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken. The objective of
the initial measurement of that liability is the fair value of the guarantee at
its inception. The initial recognition and measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
Although management is still evaluating the impact of FIN 45 on its financial
position and results of operations, the adoption is not expected to have a
material effect.
FIN 46
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies to variable interest
entities and, thus improves comparability between enterprises engaged in similar
activities when those activities are conducted through variable interest
entities. FIN 46 applies to variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies to the Company's third quarter for
variable interest entities in which the Company holds a variable interest
acquired before February 1, 2003. Although management is still evaluating the
impact of FIN 46 on its financial position and results of operations, the
adoption is not expected to have a material effect.
Forward-Looking Information
A "safe harbor" for forward-looking statements is provided by the Private
Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of
1995 was adopted to encourage such forward-looking statements without the threat
of litigation, provided those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statement. Certain matters described in Management's Discussion
and Analysis of Results of Operations and Financial Condition 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 the
Company's actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following:
o Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; unusual maintenance or repairs;
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; or gas pipeline system constraints.
o Increased competition in the energy environment including effects of
industry restructuring and unbundling.
o 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.
o 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 and
distribution, natural gas gathering and processing, and similar entities
with regulatory oversight.
o Economic conditions including the effects of an economic downturn,
inflation rates, and monetary fluctuations.
o 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.
o Direct or indirect effects on our business, financial condition or
liquidity resulting from a change in credit ratings, changes in interest
rates, and/or changes in market perceptions of the utility industry and
other energy-related industries.
o Employee workforce factors including changes in key executives, collective
bargaining agreements with union employees, or work stoppages.
o Legal and regulatory delays and other obstacles associated with mergers,
acquisitions, and investments in joint ventures.
o Costs and other effects of legal and administrative proceedings,
settlements, investigations, claims, and other matters.
o Changes in federal, state or local legislature requirements, such as
changes in tax laws or rates, environmental laws and regulations.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of changes in actual results,
changes in assumptions, or other factors affecting such statements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks associated with commodity prices,
interest rates, and counter-party credit. These financial exposures are
monitored and managed by the Company as an integral part of its overall risk
management program. The Company does not execute derivative contracts for
speculative or trading purposes.
Interest Rate Risk
The Company is exposed to interest rate risk associated with its adjustable rate
borrowing arrangements. Its risk management program seeks to reduce the
potentially adverse effects that market volatility may have on operations. The
Company tries to limit the amount of adjustable rate borrowing arrangements
exposed to short-term interest rate volatility to a maximum of 25% of total
debt. However, there are times when this targeted level of interest rate
exposure may be exceeded. At December 31, 2002, such obligations represented 21%
of the Company's total debt portfolio. To manage this exposure, the Company may
periodically use derivative financial instruments to reduce earnings
fluctuations caused by interest rate volatility.
Market risk is estimated as the potential impact resulting from fluctuations in
interest rates on adjustable rate borrowing arrangements exposed to short-term
interest rate volatility including bank notes, lines of credit, commercial
paper, and certain adjustable rate long-term debt instruments. At December 31,
2002 and 2001, the combined borrowings under these facilities totaled $108.2
million and $134.3 million, respectively. Based upon average borrowing rates
under these facilities during the years ended December 31, 2002 and 2001, an
increase of 100 basis points (1%) in the rates would have increased interest
expense by $0.8 million and $2.7 million, respectively.
Commodity Price Risk and Other Risks
The Company has limited exposure to commodity price risk for purchases and sales
of natural gas for retail customers due to current Indiana regulations, which
subject to compliance with those regulations, allow for recovery of such
purchases through natural gas cost adjustment mechanisms. The Company does not
engage in wholesale gas marketing activities that may expose it to market risk
associated with fluctuating natural gas commodity prices.
Commodity prices for natural gas purchases were significantly higher during the
2000 - 2001 heating season, primarily due to colder temperatures, increased
demand and tighter supplies. Although the Company's operations are exposed to
limited commodity price risk, volatile natural gas prices can result in higher
working capital requirements; increased expenses including unrecoverable
interest costs, uncollectible accounts expense, and unaccounted for gas; and
some level of price sensitive reduction in volumes sold.
The Company's customer receivables from gas sales and gas transportation
services are primarily derived from a diversified base of residential,
commercial, and industrial customers located in Indiana. The Company manages
credit risk associated with its receivables by continually reviewing
creditworthiness and requests cash deposits or refunds cash deposits based on
that review.
ITEM 8. Financial Statements and Supplementary Data
Table of Contents
Page
Number
Financial Information of Indiana Gas Company, Inc.
1 Management's Responsibility for Financial Statements ............ 14
2 Independent Auditors' Report .................................... 15
3 Audited Financial Statements..................................... 16
4 Notes to Audited Financial Statements............................ 21
Financial Statement Schedule of Indiana Gas Company, Inc. (a)
5 Schedule II-Valuation and Qualifying Accounts for the
years ended December 31, 2002, 2001, and 2000................... 63
Financial Information of the Ohio operations
1 Management's Responsibility for Financial Statements ............ 41
2 Independent Auditors' Report..................................... 42
3 Financial Statements............................................. 43
4 Notes to Financial Statements.................................... 48
Financial Statement Schedule of the Ohio operations (a)
5 Schedule II-Valuation and Qualifying Accounts for
the years ended December 31, 2002, 2001, and for
the period November 1, 2000 (Inception) through
December 31, 2000............................................... 64
(a) All other schedules are omitted as the required information is inapplicable
or the information is presented in the Financial Statements or related notes.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Indiana Gas Company, Inc. (Indiana Gas) is responsible for the
preparation of the 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, is 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 of Indiana Gas' parent company, Vectren Corporation,
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 & Chief Executive Officer
February 26, 2003
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors of Indiana Gas Company, Inc.:
We have audited the accompanying balance sheets of Indiana Gas Company, Inc. as
of December 31, 2002 and 2001, and the related statements of income, common
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedule listed in the Table of Contents at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of Indiana Gas Company, Inc. as of December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2, effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangibles."
As discussed in Note 3, the accompanying 2001 and 2000 financial statements have
been restated.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
February 26, 2003
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(In thousands)
December 31, December 31,
2002 2001
- ------------------------------------------------ ------------ ------------
(As Restated,
ASSETS See Note 3)
Utility Plant
Original cost $ 1,148,614 $ 1,095,450
Less: Accumulated depreciation & amortization 492,673 458,310
- -------------------------------------------------------------------------------
Net utility plant 655,941 637,140
- -------------------------------------------------------------------------------
Current Assets
Cash & cash equivalents 3,729 268
Accounts receivable-less reserves of $1,399 &
$987, respectively 48,446 47,426
Receivables from other Vectren companies 10,754 11,692
Accrued unbilled revenues 53,192 36,028
Inventories 13,286 14,941
Recoverable natural gas costs 10,241 26,674
Prepayments & other current assets 37,090 35,825
- -------------------------------------------------------------------------------
Total current assets 176,738 172,854
- -------------------------------------------------------------------------------
Investment in the Ohio operations 220,417 223,564
Other investments 2,459 1,734
Non-utility property-net 253 303
Regulatory assets 18,132 15,181
Other assets 4,207 10,334
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 1,078,147 $ 1,061,110
===============================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(In thousands)
December 31, December 31,
2002 2001
- ---------------------------------------------- ------------- ------------
(As Restated,
LIABILITIES & SHAREHOLDER'S EQUITY See Note 3)
Capitalization
Common shareholder's equity
Common stock (no par value) $ 242,995 $ 242,995
Retained earnings 79,061 66,882
Accumulated other comprehensive loss - (2,382)
- --------------------------------------------------------------------------------
Total common shareholder's equity 322,056 307,495
- --------------------------------------------------------------------------------
Long-term debt-net of debt subject to tender
& current maturities 228,480 260,972
Long-term debt due to VUHI 147,275 147,270
- --------------------------------------------------------------------------------
Total capitalization 697,811 715,737
- --------------------------------------------------------------------------------
Commitments & Contingencies (Notes 4, 7-9)
Current Liabilities
Accounts payable 33,728 26,856
Accounts payable to affiliated companies 47,255 21,332
Payables to other Vectren companies 39,876 11,435
Accrued liabilities 28,994 40,550
Short-term borrowings due to VUHI 108,182 134,298
Long-term debt subject to tender - 11,500
Current maturities of long-term debt 38,750 1,250
- --------------------------------------------------------------------------------
Total current liabilities 296,785 247,221
- --------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 45,601 46,258
Deferred credits & other liabilities 37,950 51,894
- --------------------------------------------------------------------------------
Total deferred income taxes & other liabilities 83,551 98,152
- --------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,078,147 $ 1,061,110
================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF INCOME
(In thousands)
Year Ended December 31,
- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
(As Restated, See Note 3)
-------------------------
OPERATING REVENUES $527,443 $ 569,478 $597,631
COST OF GAS 320,418 373,610 390,474
- -------------------------------------------------------------------------------
GAS OPERATING MARGIN 207,025 195,868 207,157
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 78,965 96,468 99,188
Merger & integration costs - 576 16,846
Restructuring costs - 8,668 -
Depreciation & amortization 40,661 38,053 36,659
Income taxes 12,096 (1,074) 7,121
Taxes other than income taxes 15,084 15,802 15,858
- -------------------------------------------------------------------------------
Total operating expenses 146,806 158,493 175,672
- -------------------------------------------------------------------------------
OPERATING INCOME 60,219 37,375 31,485
OTHER INCOME
Equity in earnings of the Ohio
operations-net of tax 5,855 2,326 3,157
Other - net 858 (344) (749)
- -------------------------------------------------------------------------------
Total other income 6,713 1,982 2,408
- -------------------------------------------------------------------------------
Interest expense 32,413 36,062 22,462
- -------------------------------------------------------------------------------
NET INCOME $ 34,519 $ 3,295 $ 11,431
===============================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
- ---------------------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------- -------- ------------------------
CASH FLOWS FROM (REQUIRED FOR) OPERATING ACTIVITIES (As Restated, See Note 3)
-----------------------
Net income $ 34,519 $ 3,295 $ 11,431
Adjustments to reconcile net income to cash
from operating activities:
Depreciation & amortization 40,661 38,053 36,659
Deferred income taxes & investment tax credits (14,445) (22,699) 13,682
Pension & postretirement expense 1,690 1,684 5,289
Equity in earnings of the Ohio operations (5,855) (2,326) (3,157)
Other non-cash charges- net 4,542 13,323 5,729
Changes in working capital accounts:
Accounts receivable, including due from Vectren
companies & accrued unbilled revenue (23,449) 69,567 (91,135)
Inventories 1,655 (2,937) 1,531
Recoverable fuel & natural gas costs 16,433 11,422 (48,300)
Prepayments & other current assets (1,265) 26,306 (28,840)
Accounts payable, including to Vectren
companies & affiliated companies 49,156 (41,913) 72,675
Accrued liabilities (2,773) (11,812) (4,379)
Changes in other assets 2,387 (18,713) (18,747)
Changes in other liabilities (7,135) (6,674) 9,624
- ---------------------------------------------------------------------------------------------
Net cash flows from (required for)
operating activities 96,121 56,576 (37,938)
- ---------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED FOR) FROM FINANCING ACTIVITIES
Proceeds from:
Long-term debt due to VUHI - 147,270 -
Additional capital contribution - 100,000 -
Long-term debt - - 70,000
Requirements for:
Dividends on common stock (22,340) (25,938) (26,337)
Retirement of long-term debt (6,492) (7,387) (740)
Net change in short-term borrowings, including
due to VUHI (26,111) (218,626) 270,752
- ---------------------------------------------------------------------------------------------
Net cash flows (required for) from
financing activities (54,943) (4,681) 313,675
- ---------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES
Proceeds from:
Distributions from the Ohio operations 9,002 - -
Other - - 4,700
Requirements for:
Capital expenditures (45,225) (51,927) (62,409)
Investment in the Ohio operations - - (218,081)
Other investments (1,494) - -
- ---------------------------------------------------------------------------------------------
Net cash flows (required for)
investing activities (37,717) (51,927) (275,790)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash & cash equivalents 3,461 (32) (53)
Cash & cash equivalents at beginning of period 268 300 353
- ---------------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 3,729 $ 268 $ 300
=============================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
(In thousands)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Loss Total
- -----------------------------------------------------------------------------------------------------
Balance at January 1, 2000, As Report $142,995 $105,627 $ - $248,622
Restatement adjustment - (1,196) - (1,196)
- ----------------------------------------------------------------------------------------------------
Balance at January 1, 2000, As Restated 142,995 104,431 - 247,426
Net income & comprehensive income, As Restated 11,431 11,431
Common stock dividends (26,337) (26,337)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2000, As Restated 142,995 89,525 - 232,520
Comprehensive income:
Net income, As Restated 3,295 3,295
Minimum pension liability adjustments- net of tax (2,382) (2,382)
- ----------------------------------------------------------------------------------------------------
Total comprehensive income, As Restated 913
- ----------------------------------------------------------------------------------------------------
Common stock:
Issuance 100,000 100,000
Dividends (25,938) (25,938)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2001, As Restated 242,995 66,882 (2,382) 307,495
Comprehensive income:
Net income 34,519 34,519
Minimum pension liability adjustments- net of tax 2,382 2,382
- ----------------------------------------------------------------------------------------------------
Total comprehensive income 36,901
- ----------------------------------------------------------------------------------------------------
Common stock dividends (22,340) (22,340)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $242,995 $ 79,061 $ - $322,056
====================================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Overview
Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation,
provides natural gas distribution and transportation services to a diversified
customer base in 49 of Indiana's 92 counties. Indiana Gas is a direct wholly
owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct,
wholly owned subsidiary of Vectren Corporation (Vectren).
Vectren, an Indiana corporation, is an energy and applied technology holding
company headquartered in Evansville, Indiana. Vectren was organized on June 10,
1999 solely for the purpose of effecting the merger of Indiana Energy, Inc.
(Indiana Energy) and SIGCORP, Inc. (SIGCORP). 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 in
accordance with Accounting Principles Board (APB) Opinion No. 16 "Business
Combinations."
Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding
company for its three operating public utilities: 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. Both Vectren and VUHI are exempt from registration pursuant to
Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935.
Investment in the 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 for approximately $471 million, including
transaction costs, as a tenancy in common through two separate wholly owned
subsidiaries. Vectren Energy Delivery of Ohio, Inc. (VEDO) holds a 53% undivided
ownership interest in the assets, and Indiana Gas holds a 47% undivided
ownership interest. VEDO is the operator of the assets, and these assets are
referred to as "the Ohio operations." Indiana Gas' ownership is accounted for on
the equity method in accordance with APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." Indiana Gas' initial investment was
approximately $218.1 million. The Ohio operations provide natural gas
distribution and transportation services to 17 counties in west central Ohio,
including counties surrounding Dayton.
Because the Ohio operations are a significant subsidiary as defined by Rule 3-09
of Regulation S-X, the financial statements of the Ohio operations are included
in this filing under Part II Item 8 Financial Statements and Supplementary Data.
2. Summary of Significant Accounting Policies
A. Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less
at the date of purchase are considered cash equivalents. Cash paid during the
periods reported for interest and income taxes follows:
Year Ended December 31,
- ---------------------------------------------------------------------------
In thousands 2002 2001 2000
- ---------------------------------------------------------------------------
Cash paid during the year for:
Interest (net of amount capitalized) $ 30,926 $ 32,611 $ 22,957
Income taxes 18,073 5,157 23,188
- ---------------------------------------------------------------------------
B. Inventories
Inventories consist of the following:
At December 31,
- -------------------------------------------------------------------------
In thousands 2002 2001
- -------------------------------------------------------------------------
Gas in storage-at LIFO cost $ 12,497 $ 13,895
Other 789 1,046
- -------------------------------------------------------------------------
Total inventories $ 13,286 $ 14,941
=========================================================================
Based on the average cost of gas purchased during December, the cost of
replacing the current portion of gas in storage carried at LIFO cost exceeded
LIFO cost at December 31, 2002 and 2001 by approximately $14.0 million and $2.0
million, respectively. All other inventories are carried at average cost.
C. Utility Plant and Depreciation
Utility plant is stated at historical cost, including AFUDC. Depreciation of
utility property is provided using the straight-line method over the estimated
service lives of the depreciable assets. The original cost of utility plant,
together with depreciation rates expressed as a percentage of original cost,
follows:
At & For the Year Ended December 31,
- --------------------------------------------------------------------------------------------
In thousands 2002 2001
- ----------------------------- ---------------------------- ----------------------------
Depreciation Depreciation
Rates as a Rates as a
Percent of Percent of
Original Cost Original Cost Original Cost Original Cost
- --------------------------------------------------------------------------------------------
Utility plant $ 1,104,811 3.9% $1,031,344 3.8%
Construction work in progress 43,803 - 64,106 -
- --------------------------------------------------------------------------------------------
Total original cost $ 1,148,614 $1,095,450
============================================================================================
AFUDC represents the cost of borrowed and equity funds used for construction
purposes and is charged to construction work in progress during the construction
period and is included in other - net in the Statements of Income. The total
AFUDC capitalized into utility plant and the portion of which was computed on
borrowed and equity funds for all periods reported follows:
Year Ended December 31,
- ----------------------------------------------------------------------------
In thousands 2002 2001 2000
- ----------------------------------------------------------------------------
AFUDC - borrowed funds $ 594 $ 444 $ 487
AFUDC - equity funds 240 545 595
- ----------------------------------------------------------------------------
Total AFUDC capitalized $ 834 $ 989 $ 1,082
============================================================================
Maintenance and repairs, including the cost of removal of minor items of
property and planned major maintenance projects, are charged 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.
D. Impairment Review of Long-Lived Assets
Long-lived assets are reviewed as facts and circumstances indicate that the
carrying amount may be impaired. This review is performed in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS 144), which the Company adopted as required on January 1, 2002. SFAS 144
establishes one accounting model for all impaired long-lived assets and
long-lived assets to be disposed of by sale or otherwise. SFAS 144 replaced
authoritative guidance in SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) and
certain aspects of APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business." SFAS
144 retains the framework of SFAS 121 and requires the evaluation for impairment
involve the comparison of an asset's carrying value to the estimated future cash
flows the asset is expected to generate over its remaining life. If this
evaluation were to conclude that the carrying value of the asset is impaired, an
impairment charge would be recorded based on the difference between the asset's
carrying amount and its fair value (less costs to sell for assets to be disposed
of by sale) as a charge to operations or discontinued operations.
E. Investment in the Ohio operations
The Company's investment in the Ohio operations is accounted for using the
equity method of accounting. The Company's share of the Ohio operations after
tax earnings is recorded in equity in earnings of the Ohio operations. Because
the Ohio operations is responsible for its income taxes and is also within
Vectren's consolidated tax group, no additional tax provision for these earnings
is included in these financial statements. Dividends are recorded as a reduction
of the carrying value of the investment when received. Goodwill which is a
component of the Company's net investment is accounted for in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company
adopted SFAS 142, as required on January 1, 2002. SFAS 142 changed the
accounting for goodwill from an amortization approach to an impairment-only
approach. As required by SFAS 142, amortization of goodwill ceased on January 1,
2002. Periodically the Company examines the carrying value of its investment for
other than temporary declines in value. Following is a reconciliation of
reported net income to an adjusted net income that excludes amortization for
years ended December 31, 2001 and 2000:
In thousands 2001 2000
- --------------------------------------- --------------------------------
Net Income, As Reported $ 3,295 $ 11,431
Add: amortization in equity in earnings
of the Ohio operations 1,472 235
- -----------------------------------------------------------------------------
Net Income, As Adjusted $ 4,767 $ 11,666
=============================================================================
F. Regulation
SFAS 71
Retail public utility operations affecting Indiana customers are subject to
regulation by the IURC. The Company's accounting policies give recognition to
the rate-making and accounting practices of this agency and to accounting
principles generally accepted in the United States, including the provisions of
SFAS 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
rate-making process. Regulatory liabilities represent probable future reductions
in revenues associated with amounts that are to be credited to customers through
the rate-making process.
The Company assesses the recoverability of costs recognized as regulatory assets
and the ability to continue to account for its activities based on the criteria
set forth in SFAS 71. Based on current regulation, the Company believes such
accounting is appropriate. If all or part of the Company's operations cease to
meet the criteria of SFAS 71, a write-off of related regulatory assets and
liabilities could be required. In addition, the Company would be required to
determine any impairment to the carrying value of its utility plant and other
regulated assets.
Regulatory assets consist of the following:
At December 31,
- -----------------------------------------------------------------
In thousands 2002 2001
- -----------------------------------------------------------------
Unamortized debt discount & expenses $ 11,971 $ 13,101
Regulatory income tax asset 6,158 2,080
Other 3 -
- -----------------------------------------------------------------
Total regulatory assets $ 18,132 $ 15,181
=================================================================
As of December 31, 2002, all regulatory assets are reflected in rates charged to
customers, of which $0.4 million is earning a return. At December 31, 2002, the
weighted average recovery period of regulatory assets, other than those arising
from book - tax basis differences, included in rates is 12.8 years. Regulatory
income tax assets are recovered as deferred tax assets and liabilities discussed
in Note 4 become payable or receivable.
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.
Refundable or Recoverable Gas Costs
All metered gas rates contain a gas cost adjustment clause that allows the
Company to charge for changes in the cost of purchased gas. The Company records
any under-or-over-recovery resulting from gas adjustment clauses each month in
revenues. A corresponding asset or liability is recorded until the
under-or-over-recovery is billed or refunded to utility customers. The cost of
gas sold is charged to operating expense as delivered to customers.
G. Comprehensive Income
Comprehensive income is a measure of all changes in equity that result from the
transactions or other economic events during the period from non-shareholder
transactions. This information is reported in the Statements of Common
Shareholder's Equity. The transaction resulting in other comprehensive income
relates to a minimum pension liability adjustment which is a loss of $3.8
million ($2.4 million after tax) in 2001. In 2002, all such liabilities were
transferred to Vectren.
H. Revenues
Revenues are recorded as products and services are delivered to customers. To
more closely match revenues and expenses, the Company records revenues for all
gas delivered to customers but not billed at the end of the accounting period.
I. Excise and Gross Receipts Taxes
Excise taxes and gross receipts taxes are included in rates charged to
customers. Accordingly, the Company records these taxes received as a component
of operating revenues. Excise and gross receipts taxes paid are recorded as a
component of taxes other than income taxes.
J. 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.
K. Earnings Per Share
Earnings per share are not presented as the Company's common stock is wholly
owned by Vectren Utility Holdings, Inc.
3. Restatement of Previously Reported Results
The Company identified adjustments that, in the aggregate, reduced previously
reported 2001 earnings by approximately $8.1 million after tax and other
adjustments, as described below, related to 2000 and prior periods. Adjustments
were also made to previously reported 2002 quarterly results. In addition to
adjustments affecting previously reported net income, other reclassifications
were made to the previously reported 2001 and 2000 results to conform with the
2002 presentation.
Previously Reported 2001 and 2000 Net Income Adjustments
The Company determined that $8.3 million ($5.2 million after tax) of gas costs
were improperly recorded as recoverable gas costs due from customers. The error
related primarily to the accounting for natural gas inventory and resulted in an
overstatement of 2001 earnings.
The Company also identified an accounting error related to certain employee
benefit and other related costs that are routinely accumulated on the balance
sheet and systematically cleared to operating expense and capital projects.
Because of inadequate loading rates, these costs were not fully cleared to
operating expense and capital projects in 2001. As a result, 2001 earnings were
overstated by $2.2 million ($1.4 million after tax).
The Company identified reconciliation errors and other errors related to the
recording of estimates, including estimates used in the calculation of unbilled
revenue. As a result of changes to unbilled revenue and other additional items,
2001 earnings were reduced by $1.8 million ($1.0 million after tax). The
Company's equity in earnings of the Ohio operations also was restated, resulting
in a decrease to 2001 earnings of $0.5 million.
In 2000, the Company identified reconciliation errors, including errors in
billing and collection accounts, and other errors related to the recording of
estimates that decreased earnings by $0.3 million ($0.2 million after tax). The
Company's equity in earnings of the Ohio operations also was restated, resulting
in an increase to earnings of $0.4 million. The impact of the restatement of
results for the year ended 2000 is an increase to net income of $0.2 million.
Previously Reported 2002 Quarterly Net Income Adjustments
For the nine months ended September 30, 2002, earnings increased approximately
$1.3 million from those previously reported. The increase is primarily the
result of $1.3 million of software conversion errors of which $0.9 million ($0.6
million after tax) were originally reflected in 2002 that are now reflected in
common shareholder's equity as of January 1, 2000. The Company identified other
adjustments that were not significant, either individually or in the aggregate
that increased previously reported 2002 quarterly pre-tax and after tax earnings
by approximately $1.1 million and $0.7 million, respectively.
Beginning Retained Earnings Adjustments
In addition to the adjustment of software conversion costs discussed above, the
Company identified other errors that were not significant, either individually
or in the aggregate that relate to years prior to 2000. As a result of these
additional items, beginning common shareholder's equity was reduced by $0.6
million. Accordingly, retained earnings as of January 1, 2000 reflects a
cumulative net decrease of $1.2 million.
Other Balance Sheet Adjustments
Certain reclassifications were made to reflect separate Company current and
deferred income taxes that are included in Vectren's consolidated tax position.
These reclassifications are the principal adjustments to intercompany
receivables and payables as well as prepayments and other current assets and
deferred income taxes.
The Company has restated its financial statements to give effect to the matters
discussed above. Following is a summary of the significant effects of the
restatement on previously reported financial position and results of operations.
The effects of the restatement on 2001 quarterly results and on 2002 previously
reported quarterly information, is discussed in Note 14. Note 14 is unaudited.
The effects on the income statement for the year ending December 31, 2001
follow:
As Reported Adjustments As Restated
- -------------------------------------------------------------------------------
OPERATING REVENUES $ 580,258 $ (10,780) $ 569,478
COST OF GAS 373,610 - 373,610
- -------------------------------------------------------------------------------
GAS OPERATING MARGIN 206,648 (10,780) 195,868
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 95,250 1,218 96,468
Merger & integration costs 576 - 576
Restructuring costs 8,668 - 8,668
Depreciation & amortization 38,053 - 38,053
Income taxes 3,556 (4,630) (1,074)
Taxes other than income taxes 15,802 - 15,802
- -------------------------------------------------------------------------------
Total operating expenses 161,905 (3,412) 158,493
- -------------------------------------------------------------------------------
OPERATING INCOME 44,743 (7,368) 37,375
OTHER INCOME
Equity in earnings of the Ohio
operations-net of tax 2,822 (496) 2,326
Other - net (190) (154) (344)
- -------------------------------------------------------------------------------
Total other income 2,632 (650) 1,982
- -------------------------------------------------------------------------------
Interest expense 36,009 53 36,062
- -------------------------------------------------------------------------------
NET INCOME $ 11,366 $ (8,071) $ 3,295
===============================================================================
The effects on the income statement for the year ending December 31, 2000
follow:
As Reported Adjustments As Restated
- -------------------------------------------------------------------------------
OPERATING REVENUES $ 598,113 $ (482) $ 597,631
COST OF GAS 390,474 - 390,474
- -------------------------------------------------------------------------------
GAS OPERATING MARGIN 207,639 (482) 207,157
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 99,810 (622) 99,188
Merger & integration costs 16,846 - 16,846
Restructuring costs - - -
Depreciation & amortization 36,659 - 36,659
Income taxes 7,251 (130) 7,121
Taxes other than income taxes 15,858 - 15,858
- -------------------------------------------------------------------------------
Total operating expenses 176,424 (752) 175,672
- -------------------------------------------------------------------------------
OPERATING INCOME 31,215 270 31,485
OTHER INCOME
Equity in earnings of the Ohio
operations-net of tax 2,721 436 3,157
Other - net (318) (431) (749)
- -------------------------------------------------------------------------------
Total other income 2,403 5 2,408
- -------------------------------------------------------------------------------
Interest expense 22,409 53 22,462
- -------------------------------------------------------------------------------
NET INCOME $ 11,209 $ 222 $ 11,431
===============================================================================
The effects on the balance sheet as of December 31, 2001 follow:
ASSETS As Reported Adjustments As Restated
--------------------------
Utility Plant
Original cost $ 1,094,349 $ 1,101 $ 1,095,450
Less: Accumulated depreciation &
amortization 458,310 - 458,310
- ------------------------------------------------------------------------------------
Net utility plant 636,039 1,101 637,140
- ------------------------------------------------------------------------------------
Current Assets
Cash & cash equivalents 294 (26) 268
Accounts receivable-less reserves 49,788 (2,362) 47,426
Receivables from other Vectren companies 2,252 9,440 11,692
Accrued unbilled revenues 38,557 (2,529) 36,028
Inventories 15,341 (400) 14,941
Recoverable natural gas costs 34,497 (7,823) 26,674
Prepayments & other current assets 48,067 (12,242) 35,825
- ------------------------------------------------------------------------------------
Total current assets 188,796 (15,942) 172,854
- ------------------------------------------------------------------------------------
Investment in the Ohio operations 223,624 (60) 223,564
Other investments 1,734 - 1,734
Non-utility property-net 303 - 303
Regulatory assets 14,720 461 15,181
Other assets 9,652 682 10,334
- ------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,074,868 $ (13,758) $ 1,061,110
====================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY
Capitalization
Common shareholder's equity
Common stock (no par value) $ 242,995 $ - $ 242,995
Retained earnings 75,927 (9,045) 66,882
Accumulated other comprehensive loss (2,382) - (2,382)
- ------------------------------------------------------------------------------------
Total common shareholder's equity 316,540 (9,045) 307,495
- ------------------------------------------------------------------------------------
Long-term debt-net of debt subject to
tender & current maturities 260,972 - 260,972
Long-term debt due to VUHI 147,270 - 147,270
- ------------------------------------------------------------------------------------
Total capitalization 724,782 (9,045) 715,737
- ------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 25,642 1,214 26,856
Accounts payable to affiliated companies 21,337 (5) 21,332
Payables to other Vectren companies 9,755 1,680 11,435
Accrued liabilities 42,757 (2,207) 40,550
Short-term borrowings due to VUHI 134,298 - 134,298
Long-term debt subject to tender 11,500 - 11,500
Current maturities of long-term debt 1,250 - 1,250
- ------------------------------------------------------------------------------------
Total current liabilities 246,539 682 247,221
- ------------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 50,970 (4,712) 46,258
Deferred credits & other liabilities 52,577 (683) 51,894
- ------------------------------------------------------------------------------------
Total deferred income taxes & other
liabilities 103,547 (5,395) 98,152
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,074,868 $ (13,758) $ 1,061,110
====================================================================================
4. Transactions with Other Vectren Companies
Support Services
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, finance, tax, risk
management, and human resources, which includes charges for restricted stock
compensation and for pension and other postretirement benefits not directly
charged to subsidiaries. These costs have been allocated using various
allocators, primarily number of employees, number of customers and/or revenues.
Allocations are based on cost. In addition, Vectren negotiates service and
construction contracts on behalf of its utilities to obtain those services at
less cost than the utility may otherwise be able to obtain on its own. For the
year ended December 31, 2002, 2001, and 2000, amounts billed by other wholly
owned subsidiaries of Vectren to the Company were $50.6 million, $63.3 million,
and $51.1 million, respectively.
Retirement Plans and Other Postretirement Benefits
Vectren has multiple defined benefit pension plans and postretirement plans that
require accounting as described in SFAS No. 87 "Employers' Accounting for
Pensions and SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions," respectively. Subsequent to the merger forming Vectren, an
allocation of expense is determined by Vectren's actuaries, comprised of only
service cost and interest on that service cost, by subsidiary based on headcount
at each measurement date. These costs are directly charged to individual
subsidiaries. Other components of costs (such as interest cost from prior
service and asset returns) are charged to individual subsidiaries through the
corporate allocation process discussed above. Plan assets nor the SFAS 87/106
liability is allocated to individual subsidiaries since these assets and
obligations are derived from corporate level decisions. Further, Vectren
satisfies the future funding requirements of plans and the payment of benefits
from general corporate assets. This allocation methodology is consistent with
"multiemployer" benefit accounting as described in SFAS 87 and 106.
For the years ended December 31, 2002 and 2001 pension expense totaling $1.3
million in both years was directly charged by Vectren to the Company. For the
years ended December 31, 2002 and 2001other benefit expenses totaling $0.4
million in both years were directly charged by Vectren to the Company. In 2000,
the Company recognized $5.3 million in charges for participation in Vectren
benefit plans. As of December 31, 2002 and 2001, $25.0 million and $29.2 million
is included in other non-current liabilities and represents expense directly
charged to the Company that is yet to be funded to Vectren, and $3.5 million and
$4.8 million is included in other assets for amounts funded in advance to
Vectren.
Cash Management and Borrowing Arrangements
The Company participates in a centralized cash management program with Vectren,
other wholly owned subsidiaries, and banks which permits funding of checks as
they are presented.
See Note 6 regarding long-term and short-term intercompany borrowing
arrangements.
Guarantees of Parent Company Debt
Vectren's three operating utility companies, VEDO, Indiana Gas, and SIGECO are
guarantors of VUHI's $350.0 million commercial paper program, of which
approximately $239.1 million is outstanding at December 31, 2002 and VUHI's
$350.0 million unsecured senior notes outstanding at December 31, 2001. VUHI has
no independent assets or operations, the guarantees are full and unconditional
and joint and several, and VUHI has no subsidiaries other than the subsidiary
guarantors.
Stock Based Incentive Plans
Indiana Gas does not have stock-based compensation plans separate from Vectren.
An insignificant number of Indiana Gas' employees participate in Vectren's
stock-based compensation plans.
Income Taxes
Vectren and subsidiary companies file a consolidated federal income tax return.
For financial reporting purposes, Indiana Gas' current and deferred tax expense
is computed on a separate company basis. Because the Ohio operations is
responsible for its income taxes and is also within Vectren's consolidated tax
group, no additional tax provision for these earnings is included in these
financial statements. The components of income tax expense and utilization of
investment tax credits follows:
Year Ended December 31,
- -----------------------------------------------------------------------------
In thousands 2002 2001 2000
- -----------------------------------------------------------------------------
Current:
Federal $ 24,305 $ 20,811 $ (6,403)
State 2,236 814 (158)
- -----------------------------------------------------------------------------
Total current taxes 26,541 21,625 (6,561)
- -----------------------------------------------------------------------------
Deferred:
Federal (12,332) (21,048) 13,462
State (1,188) (724) 1,152
- -----------------------------------------------------------------------------
Total deferred taxes (13,520) (21,772) 14,614
- -----------------------------------------------------------------------------
Amortization of investment tax credits (925) (927) (932)
- -----------------------------------------------------------------------------
Total income tax expense $ 12,096 $ (1,074) $ 7,121
=============================================================================
The liability method of accounting is used for income taxes under which deferred
income taxes are recognized to reflect the tax effect of temporary differences
between the book and tax bases of assets and liabilities at currently enacted
income tax rates. Significant components of the net deferred tax liability as of
December 31, 2002 and 2001 follow:
At December 31,
- ------------------------------------------------------------------------------
In thousands 2002 2001
- ------------------------------------------------------------------------------
Noncurrent deferred tax liabilities (assets):
Depreciation & cost recovery timing differences $ 53,338 $ 63,935
Regulatory assets recoverable through future rates 11,703 8,832
Regulatory liabilities to be settled through
future rates (5,545) (6,752)
Employee benefit obligations (15,704) (14,333)
Other - net 1,809 (5,424)
- ------------------------------------------------------------------------------
Net noncurrent deferred tax liability 45,601 46,258
- ------------------------------------------------------------------------------
Current deferred tax liabilities (assets):
Deferred fuel costs-net 2,245 13,049
LIFO inventory - (2,020)
- ------------------------------------------------------------------------------
Net current deferred tax liability 2,245 11,029
- ------------------------------------------------------------------------------
Net deferred tax liability $ 47,846 $ 57,287
==============================================================================
At December 31, 2002 and 2001, investment tax credits totaling $5.4 million and
$6.3 million, respectively, are included in deferred credits and other
liabilities. These investment tax credits are amortized over the lives of the
related investments. Indiana Gas has no tax credit carryforwards at December 31,
2002. Alternative Minimum Tax credit carryforwards of approximately $5.2 million
were utilized in 2001.
A reconciliation of the statutory rate to the effective income tax rate follows:
Year Ended December 31,
- ------------------------------------------------------------------------------
In thousands 2002 2001 2000
- ------------------------------------------------------------------------------
Tax at federal statutory rate $14,316 $ (83) $6,267
State and local taxes, net of federal benefit 594 58 640
Nondeductible merger costs - - 1,946
Amortization of investment tax credit (925) (927) (932)
All other-net (1,889) (122) (800)
- ------------------------------------------------------------------------------
Effective tax rate $12,096 $ (1,074) $7,121
==============================================================================
5. Transactions with Vectren Affiliates
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides natural gas
and related services to Indiana Gas, the Ohio operations, Citizens Gas and
others. ProLiance also began providing service to SIGECO and Vectren Retail, LLC
(the Company's retail gas marketer) in 2002. ProLiance's primary business is
optimizing the gas portfolios of utilities and providing services to large end
use customers. Vectren continues to account for its investment in ProLiance
using the equity method of accounting.
Regulatory Matters
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 and that ProLiance is not subject to regulation by the IURC
as a public utility. However, with respect to the pricing of gas commodity
purchased from ProLiance, the price paid by ProLiance to the utilities for the
prospect of using pipeline entitlements if and when they are not required to
serve the utilities' firm customers, and the pricing of fees paid by the
utilities to ProLiance for portfolio administration services, the IURC concluded
that additional review in the GCA process would be appropriate and directed that
these matters be considered further in a consolidated GCA proceeding involving
Indiana Gas and Citizens Gas.
On June 4, 2002, Indiana Gas and Citizens Gas, together with the OUCC and other
consumer parties, entered into and filed with the IURC a settlement setting
forth the terms for resolution of all pending regulatory issues related to
ProLiance, including the three pricing issues. On July 23, 2002, the IURC
approved the settlement filed by the parties. The GCA proceeding has been
concluded and new supply agreements between Indiana Gas, SIGECO, Citizens Gas,
and ProLiance have been approved and extended through March 31, 2007. ProLiance
will also have the opportunity, if it so elects, to participate in a "request
for proposal" process for service to the utilities after March 31, 2007.
For past services provided to Indiana Gas by ProLiance, Indiana Gas made refunds
to retail customers pursuant to the settlement totaling $6.4 million in the
fourth quarter of 2002. A subsidiary of Vectren's nonregulated operations has
indemnified Indiana Gas for the amount of the refund as well as any other
amounts incurred as a result of the settlement. Accordingly, the refund had no
effect on operating margin or net income.
Transactions with ProLiance
Purchases from ProLiance for resale and for injections into storage for the
years ended December 31, 2002, 2001, and 2000 totaled $321.6 million, $396.5
million, and $401.4 million, respectively. Amounts charged by ProLiance for gas
supply services are established by supply agreements.
Other Affiliate Transactions
Vectren has ownership interests in other affiliated companies accounted for
using the equity method of accounting that provide materials management,
underground construction and repair, facilities locating, and meter reading
services to the Company. For the years ended December 31, 2002, 2001, and 2000,
fees for these services and construction-related expenditures totaled $29.5
million, $21.1 million, and $6.6 million, respectively. Amounts charged by these
affiliates are market based.
Payables to Affiliates
Amounts owed to unconsolidated affiliates of Vectren approximated $47.3 million
and $21.3 million at December 31, 2002 and 2001, respectively, and are included
in accounts payable to affiliated companies in the Balance Sheets.
6. Borrowing Arrangements
Long-Term Debt
Senior unsecured obligations outstanding and classified as long-term follows:
At December 31,
- -------------------------------------------------------------------------------
In thousands 2002 2001
- -------------------------------------------------------------------------------
Fixed Rate Senior Unsecured Notes Payable to VUHI:
2011, 6.625% $ 98,920 $ 98,920
2031, 7.25% 48,355 48,350
- -------------------------------------------------------------------------------
Total long-term debt to VUHI $ 147,275 $ 147,270
===============================================================================
Fixed Rate Senior Unsecured Notes Payable
to Third Parties:
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, 7.15% 20,000 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%,
$1,250 due annually in 2002 23,750 25,000
2025, Series E, 6.31% - 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% 13,563 13,722
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, 7.45% 49,917 50,000
- -------------------------------------------------------------------------------
Total long-term debt outstanding due to third parties 267,230 273,722
Less: Current maturities 38,750 1,250
Debt subject to tender - 11,500
- -------------------------------------------------------------------------------
Total long-term debt-net 228,480 $ 260,972
===============================================================================
Issuances Payable to VUHI
At December 31, 2001, the Company has $147.3 million of long-term debt
outstanding with VUHI. Of this amount, $48.4 million has terms that are
identical to the terms of notes issued by VUHI in October 2001 (October Notes)
and $98.9 million has terms identical to the notes issued by VUHI in December
2001 (December Notes), both through public offerings. The October Notes have an
aggregate principal amount of $100.0 million and an interest rate of 7.25%. The
December Notes have an aggregate principal amount of $250.0 million and an
interest rate of 6.625%, priced at 99.302% to yield 6.69% to maturity.
The issues have no sinking fund requirements, and interest payments are due
quarterly for the October Notes and semi-annually for the December Notes. The
October Notes are due October 2031, but may be called by VUHI, in whole or in
part, at any time after October 2006 at 100% of the principal amount plus any
accrued interest thereon. The December Notes are due December 2011, but may be
called by VUHI, in whole or in part, at any time for an amount equal to accrued
and unpaid interest, plus the greater of 100% of the principal amount of the
notes to be redeemed or the sum of the present values of the remaining scheduled
payments of principal and interest, discounted to the redemption date on a
semi-annual basis at the Treasury Rate, as defined in VUHI's indenture, plus 25
basis points.
Issuances Payable to Third Parties
In December 2000, $20.0 million of 15-Year Insured Quarterly (IQ) Notes at an
interest rate of 7.15% and $50.0 million of 30-Year IQ Notes at an interest rate
of 7.45% were issued. Indiana Gas may call the 15-Year IQ Notes, in whole or in
part, from time to time on or after December 15, 2004 and has 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 IQ notes have no sinking fund requirements. The net
proceeds totaled $67.9 million. Both the quarterly interest payments and the
principal amount of the IQ Notes are insured by Ambac Assurance Corporation.
Long-Term Debt Put and Call Provisions
On January 15, 2003, the Company called the remaining $23.8 million of Indiana
Gas' 9.375% private placement notes originally due in 2021. Since the proceeds
to repay the notes were generated from short-term borrowings, these notes are
classified in current maturities of long-term debt at December 31, 2002.
Certain long-term debt issues contain put and call provisions that can be
exercised on various dates before maturity. The put or call provisions are not
triggered by specific events, but are based upon dates stated in the note
agreements. Debt subject to tender during the years following 2002 (in millions)
is zero in 2003, $3.5 in 2004, $10.0 in 2005, zero in 2006, $20.0 in 2007, and
$40.0 thereafter. Debt that may be put to the Company within one year is
classified as debt subject to tender in current liabilities.
Long-Term Debt Sinking Fund Requirements and Maturities
Maturities and sinking fund requirements on long-term debt, including debt to be
called, during the five years following 2002 (in millions) are $38.8 in 2003,
$15.0 in 2004, zero in 2005, zero in 2006, and $6.5 in 2007.
Short-Term Borrowings
As of December 31, 2002, the Company has no short-term borrowing arrangements
with third parties and relies entirely on the short-term borrowing arrangements
of VUHI for short-term working capital needs. Borrowings outstanding at December
31, 2002 were $108.2 million. The intercompany credit line totals $325.0
million, but is limited to VUHI's available capacity ($85.9 million of
additional capacity at December 31, 2002) and is subject to the same terms and
conditions as VUHI's commercial paper program. Short-term borrowings bear
interest at VUHI's weighted average daily cost of short-term funds.
See the table below for interest rates and outstanding balances.
Year ended December 31,
- ----------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------
Weighted average total outstanding during
the year due to VUHI (in thousands) $ 78,903 $ 159,632 $ 36,367
Weighted average total outstanding during
the year due to third parties (in thousands) $ - $ 112,182 $ 99,257
Weighted average interest rates during the year:
VUHI 2.02% 5.24% 6.62%
Commercial paper N/A 4.65% 6.10%
Bank loans N/A N/A 7.10%
Covenants
Borrowing arrangements contain customary default provisions, restrictions on
liens, sale leaseback transactions, mergers or consolidations, and sales of
assets; and restrictions on leverage and interest coverage, among other
restrictions. As of December 31, 2002, the Company was in compliance with all
financial covenants.
7. Commitments and Contingencies
Commitments
Firm commitments to purchase natural gas for years following December 31, 2002
totaled (in millions) $35.3 in 2003, $7.2 in 2004, and $1.2 in 2005.
Legal Proceedings
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations.
8. Environmental Matters
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 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 IDEM, and a Record of Decision was issued by
the 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 the IDEM's
Voluntary Remediation Program 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.
In conjunction with data compiled by environmental consultants, 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 recorded costs that it reasonably expects to incur
totaling approximately $20.4 million.
The estimated accrued costs are limited to Indiana Gas' proportionate share of
the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26
sites with other potentially responsible parties (PRP), which serve to limit
Indiana Gas' share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, Indiana Gas has received and recorded
settlements from all known insurance carriers in an aggregate amount
approximating $20.4 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.
9. Rate and Regulatory Matters
Commodity prices for natural gas purchases were significantly higher during the
2000 - 2001 heating season, primarily due to colder temperatures, increased
demand and tighter supplies. Subject to compliance with applicable state laws,
Vectren's utility subsidiaries are allowed full recovery of such changes in
purchased gas costs from their retail customers through commission-approved gas
cost adjustment mechanisms.
In March 2001, the Company reached agreement with the Indiana Office of Utility
Consumer Counselor (OUCC) and the Citizens Action Coalition of Indiana, Inc.
(CAC) regarding the matters raised by an IURC Order that disallowed $3.8 million
of the Company's gas procurement costs for the 2000 - 2001 heating season which
was recognized during the year ended December 31, 2000. As part of the
agreement, the Company agreed to contribute an additional $1.7 million, of which
$1.0 million was contributed to the Company's service territory, to assist
qualified low income gas customers, and the Company agreed to credit $3.3
million of the $3.8 million disallowed amount to its customers' April 2001
utility bills in exchange for both the OUCC and the CAC dropping their appeals
of the IURC Order. In April 2001, the IURC issued an order approving the
settlement. Substantially all of the financial assistance for low income gas
customers has been distributed in 2001.
10. Risk Management, Derivatives, and Other Financial Instruments
The Company is exposed to market risks associated with commodity prices,
interest rates, and counter-party credit. These financial exposures are
monitored and managed by the Company as an integral part of its overall risk
management program. The Company does not execute derivative contracts for
speculative or trading purposes.
Interest Rate Risk
The Company is exposed to interest rate risk associated with its adjustable rate
borrowing arrangements. Its risk management program seeks to reduce the
potentially adverse effects that market volatility may have on operations. The
Company tries to limit the amount of adjustable rate borrowing arrangements
exposed to short-term interest rate volatility to a maximum of 25% of total
debt. However, there are times when this targeted level of interest rate
exposure may be exceeded. To manage this exposure, the Company may periodically
use derivative financial instruments to reduce earnings fluctuations caused by
interest rate volatility.
Commodity Price Risk and Other Risks
The Company has limited exposure to commodity price risk for purchases and sales
of natural gas for retail customers due to current Indiana regulations, which
subject to compliance with those regulations, allow for recovery of such
purchases through natural gas cost adjustment mechanisms. The Company does not
engage in wholesale gas marketing activities that may expose it to market risk
associated with fluctuating natural gas commodity prices.
Although the Company's regulated operations are exposed to limited commodity
price risk, volatile natural gas prices can result in higher working capital
requirements; increased expenses including unrecoverable interest costs,
uncollectible accounts expense, and unaccounted for gas; and some level of price
sensitive reduction in volumes sold.
The Company's customer receivables from gas sales and gas transportation
services are primarily derived from a diversified base of residential,
commercial, and industrial customers located in Indiana. The Company manages
credit risk associated with its receivables by continually reviewing
creditworthiness and requests cash deposits or refunds cash deposits based on
that review.
Impact of New Accounting Principle
In June 1998, the FASB issued SFAS 133, which required that every derivative
instrument be recorded on the balance sheet as an asset or liability measured at
its market value and that changes in the derivative's market value be recognized
currently in earnings unless specific hedge or regulatory accounting criteria
are met.
SFAS 133, as amended, required that as of the date of initial adoption, the
difference between the market value of derivative instruments recorded on the
balance sheet and the previous carrying amount of those derivatives be reported
in net income, other comprehensive income, or regulatory assets or liabilities,
as appropriate. A change in earnings or other comprehensive income was reported
as a cumulative effect of a change in accounting principle in accordance with
APB Opinion No. 20, "Accounting Changes."
As of and since the date of adoption on January 1, 2001, the Company was not
engaged in any derivative or hedging activity as defined by SFAS 133, as
amended; therefore, there was no impact at adoption and has been no impact since
adoption.
Fair Value of Other Financial Instruments
The carrying values and estimated fair values of the Company's other financial
instruments are as follows:
At December 31,
- ----------------------------------------------------------------------------------------
2002 2001
-------------------- --------------------
Carrying Est. Fair Carrying Est. Fair
In thousands Amount Value Amount Value
- -------------------------------------- -------------------- --------------------
Long-term debt due to third parties $267,230 $ 280,983 $273,722 $272,848
Long-term debt due to VUHI 147,275 157,392 147,270 147,270
Short-term debt due to VUHI 108,182 108,182 134,298 134,298
- ----------------------------------------------------------------------------------------
Certain methods and assumptions must be used to estimate the fair value of
financial instruments. The fair value of the Company's other financial
instruments was estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for instruments
with similar characteristics. Because of the maturity dates and variable
interest rates of short-term borrowings, its carrying amount approximates its
fair value.
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. Accordingly, any reacquisition would not be
expected to have a material effect on the Company's financial position or
results of operations.
11. Additional Operational and Balance Sheet Information
Prepayments and other current assets in the Balance Sheets consists of the
following:
At December 31,
- ----------------------------------------------------------------------------
In thousands 2002 2001
- ----------------------------------------------------------------------------
Prepaid gas delivery service $ 36,632 $ 33,987
Other prepayments & current assets 458 1,838
- ----------------------------------------------------------------------------
Total prepayments & other current assets $ 37,090 $ 35,825
============================================================================
Accrued liabilities in the Balance Sheets consists of the following:
At December 31,
- ----------------------------------------------------------------------------
In thousands 2002 2001
- ----------------------------------------------------------------------------
Accrued taxes $ 8,106 $ 11,321
Refunds to customers & customer deposits 7,245 6,618
Accrued interest 4,631 4,710
Deferred income taxes 2,245 11,029
Other 6,767 6,872
- ----------------------------------------------------------------------------
Total accrued liabilities $ 28,994 $ 40,550
============================================================================
Other - net in the Statements of Income consists of the following:
Year ended December 31,
- ------------------------------------------------------------------------------
In thousands 2002 2001 2000
- ------------------------------------------------------------------------------
AFUDC $ 834 $ 989 $ 1,082
Other income 741 655 1,232
Other expense (717) (1,988) (3,063)
- ------------------------------------------------------------------------------
Total other - net $ 858 $ (344) $ (749)
==============================================================================
12. Special Charges in 2001 and 2000
Restructuring and Related Charges
As part of continued cost saving efforts, in June 2001, Vectren's management and
the board of directors approved a plan to restructure, primarily, its regulated
operations. The restructuring plan included the elimination of certain
administrative and supervisory positions in its utility operations and corporate
office. Charges of $5.4 million were expensed in June 2001 as a direct result of
the restructuring plan. Additional charges of $3.3 million were incurred during
the remainder of 2001 primarily for consulting fees, employee relocation, and
duplicate facilities costs. In total, the Company has incurred restructuring
charges of $8.7 million. These charges were comprised of $3.2 million for
employee severance, related benefits and other employee related costs, $4.0
million for lease termination fees related to duplicate facilities and other
facility costs, and $1.5 million for consulting and other fees incurred through
December 31, 2001.
The $3.2 million of severance and related costs includes $0.5 million of
deferred compensation payable at various times through 2016. The $4.0 million of
lease termination fees includes $1.0 million of non-cash charges for impaired
leasehold improvements.
Employee severance and related costs are associated with approximately 45
employees. Employee separation benefits include severance, healthcare, and
outplacement services. As of December 31, 2001, approximately 38 employees had
exited the business. The restructuring program was completed during 2001, except
for the departure of the remaining employees impacted by the restructuring which
occurred during 2002 and the final settlement of the lease obligation which has
yet to occur.
In June 2001, the Company established accruals totaling $4.6 million ($2.6
million for severance and $2.0 million for lease termination fees). Throughout
2001 additional expenses totaling $1.0 million for lease termination fees and
$0.3 million for severance were incurred. Cash payments in 2001 totaled $1.9
million, all of which related to severance payments. As of December 31, 2001,
the remaining accrual related to the restructuring was $4.0 million. Of that
amount, $1.0 million remained accrued for severance, half of which relates to
deferred compensation arrangements, and $3.0 million remained for lease
termination fees. During 2002, the accrual for severance did not substantially
change, and $1.0 million of lease costs were paid. At December 31, 2002, the
remaining accrual was $2.8 million ($0.8 million for severance and $2.0 million
for lease termination fees). The restructuring accrual is included in accrued
liabilities.
Merger and Integration Costs
Merger and integration costs incurred for the years ended December 31, 2001 and
2000 were $0.6 million and $16.8 million, respectively. Merger and integration
activities resulting from the 2000 merger were completed in 2001. Merger costs
are reflected in the financial statements of Vectren's operating subsidiaries in
which merger savings are expected to be realized.
Since March 31, 2000, $17.4 million has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$11.9 million. Of this amount, $4.8 million related to employee and executive
severance costs, $5.0 million related to transaction costs and regulatory filing
fees incurred prior to the closing of the merger, and the remaining $2.1 million
related to employee relocations that occurred prior to or coincident with the
merger closing. At December 31, 2001, the remaining accrual related to employee
severance was not significant. The remaining $5.5 million was expensed ($4.9
million in 2000 and $0.6 million in 2001) for accounting fees resulting from
merger related filing requirements, consulting fees related to integration
activities such as organization structure, employee travel between company
locations, internal labor of employees assigned to integration teams, investor
relations communication activities, and certain benefit costs.
During the merger planning process, approximately 81 positions were identified
for elimination. As of December 31, 2001, all such identified positions have
been vacated.
The integration activities experienced by the Company included such things as
information system consolidation, process review and definition, organization
design and consolidation, and knowledge sharing.
As a result of merger integration activities, management retired certain
information systems in 2001. Accordingly, the useful lives of these assets were
shortened to reflect this decision. These information system assets are owned by
a wholly owned subsidiary of Vectren, and the fees allocated by the subsidiary
for the use of these systems by the Company's subsidiaries are reflected in
other operating expenses. As a result of the shortened useful lives, additional
fees were incurred by the Company, resulting in additional other operating
expense of $9.6 million ($6.0 million after tax) for the year ended December 31,
2001 and $11.4 million ($7.1 million after tax) for the year ended December 31,
2000.
13. Impact of Recently Issued Accounting Guidance
EITF 02-03
In October 2002, the EITF reached a final consensus in EITF Issue 02-03 "Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities" (EITF
02-03) that gains and losses (realized and unrealized) on all derivative
instruments within the scope of SFAS 133 should be shown net in the income
statement, whether or not settled physically, if the derivative instruments are
held for "trading purposes." The consensus rescinded EITF Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF 98-10) as well as other decisions reached on energy trading
contracts at the EITF's June 2002 meeting. The Company does not engage in any
activities subject to EITF 02-03.
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Any costs of removal recorded in
accumulated depreciation pursuant to regulatory authority will require
disclosure in future periods. The Company adopted this statement on January 1,
2003. The adoption was not material to the Company's results of operations or
financial condition.
FASB Interpretation (FIN) 45
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken. The objective of
the initial measurement of that liability is the fair value of the guarantee at
its inception. The initial recognition and measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
Although management is still evaluating the impact of FIN 45 on its financial
position and results of operations, the adoption is not expected to have a
material effect.
FIN 46
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies to variable interest
entities and, thus improves comparability between enterprises engaged in similar
activities when those activities are conducted through variable interest
entities. FIN 46 applies to variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies to the Company's third quarter for
variable interest entities in which the Company holds a variable interest
acquired before February 1, 2003. Although management is still evaluating the
impact of FIN 46 on its financial position and results of operations, the
adoption is not expected to have a material effect.
14. Quarterly Financial Data (Unaudited)
As more fully described in Note 3, the Company has restated the results for the
year ended December 31, 2001, including each quarter, as well as the first three
quarters of 2002 to appropriately account for certain transactions. Provided
below is a comparison of restated summarized quarterly financial data to
summarized quarterly financial data previously reported. Summarized quarterly
financial data for 2001 and 2000 follows:
In thousands Q1 Q2 Q3 Q4
- ----------------------- -------------------- ------------------ ------------------ --------
As As As As As As As
2002 Operating data (1) Reported Restated Reported Restated Reported Restated Reported
--------- -------- -------- -------- -------- -------- --------
Operating revenues $ 197,897 $ 200,201 $83,611 $ 83,953 $ 57,544 $ 57,900 $ 185,389
Gas operating margin 71,137 73,441 38,142 38,483 27,896 28,253 66,848
Operating income 25,863 26,610 6,910 7,640 758 682 25,287
Net income (loss) 23,255 23,591 (205) 498 (9,580) (9,338) 19,768
In thousands Q1 Q2 (2) Q3 Q4 (4)
- -------------------------- ------------------- ------------------ ------------------ ------------------
As As As As As As As As
2001 Operating Data (1)(3) Reported Restated Reported Restated Reported Restated Reported Restated
------------ ----------------------- ---------- ---------------------- -------
Operating revenues $287,972 $289,575 $91,106 $ 89,405 $ 58,122 $ 53,662 $143,058 $136,836
Gas operating margin 72,734 74,337 39,723 38,094 30,747 26,287 63,444 57,150
Operating income (loss) 23,796 25,178 (1,093) (1,988) (959) (4,112) 22,999 18,297
Net income (loss) 15,127 16,358 (11,563) (12,440) (10,346) (13,516) 18,148 12,893
1. Information in any one quarterly period is not indicative of annual results
due to the seasonal variations common to the Company's utility operations.
2. Q2 of 2001 includes restructuring charges as described in Note 6.
3. 2001 includes merger and integration charges as described in Note 6.
4. The benefit clearing adjustment and primarily all of the inventory
adjustment discussed in Note 3 were recorded in Q4 of 2001.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Natural Gas Distribution Assets owned jointly by Indiana
Gas Company, Inc. and Vectren Energy Delivery of Ohio, Inc. (the Ohio
operations) is responsible for the preparation of the 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, is 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 of the Ohio operations' parent company, Vectren
Corporation, 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 & Chief Executive Officer
February 26, 2003
INDEPENDENT AUDITORS' REPORT
To the Owners and Boards of Directors of
Vectren Energy Delivery of Ohio, Inc. and Indiana Gas Company, Inc.
We have audited the accompanying balance sheets of the Natural Gas Distribution
Assets owned jointly by Indiana Gas Company, Inc. and Vectren Energy Delivery of
Ohio, Inc. (the Ohio operations) as of December 31, 2002 and 2001, and the
related statements of income, owners' net investment and cash flows for each of
the two years in the period ended December 31, 2002. Our audits also included
the financial statement schedule listed in the Table of Contents at Item 15.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Ohio operations as of December 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such 2002 and 2001 financial statement schedules, when considered in
relation to the basic 2002 and 2001 financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 2, effective January 1, 2002, the Ohio operations adopted
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangibles."
As discussed in Note 3, the accompanying 2001 financial statements have been
restated.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
February 26, 2003
THE OHIO OPERATIONS
BALANCE SHEETS
(In thousands)
At December 31,
- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
(As Restated,
ASSETS See Note 3)
Utility Plant
Original cost $ 362,453 $ 351,618
Less accumulated depreciation 167,552 159,575
- -------------------------------------------------------------------------------
Net utility plant 194,901 192,043
- -------------------------------------------------------------------------------
Current Assets
Cash & cash equivalents 4,306 5,179
Accounts receivable-less reserves of $454 &
$900, respectively 31,866 33,790
Receivables from other Vectren companies 10,548 26,916
Accrued unbilled revenues 26,481 24,044
Inventories 3,017 2,265
Recoverable natural gas costs 2,226 21,312
Notes receivable from other Vectren companies 8,531 -
Prepayments & other current assets 43,227 42,607
- -------------------------------------------------------------------------------
Total current assets 130,202 156,113
- -------------------------------------------------------------------------------
Other investments 630 206
Non-utility property-net 1,605 1,605
Goodwill-net 196,641 195,991
Regulatory assets 2,323 -
Other assets 312 3,073
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 526,614 $ 549,031
===============================================================================
The accompanying notes are an integral part of these financial statements.
THE OHIO OPERATIONS
BALANCE SHEETS
(In thousands)
At December 31,
- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
(As Restated,
LIABILITIES & OWNERS' NET INVESTMENT See Note 3)
Capitalization
Owners' net investment in the natural gas
distribution assets $ 435,372 $ 463,303
Commitments & Contingencies (Notes 4 & 6)
Current Liabilities
Accounts payable 12,365 22,119
Accounts payable to affiliated companies 27,938 16,103
Payables to other Vectren companies 7,791 9,689
Accrued liabilities 24,657 22,922
- -------------------------------------------------------------------------------
Total current liabilities 72,751 70,833
- -------------------------------------------------------------------------------
Deferred Credits & Other Liabilities
Deferred income taxes 17,023 14,216
Other liabilities 1,468 679
- -------------------------------------------------------------------------------
Total deferred credits & other liabilities 18,491 14,895
- -------------------------------------------------------------------------------
TOTAL LIABILITIES & OWNERS' NET INVESTMENT $ 526,614 $ 549,031
===============================================================================
The accompanying notes are an integral part of these financial statements.
THE OHIO OPERATIONS
STATEMENTS OF INCOME
(In thousands)
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
- -----------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------
Unaudited
----------
(As Restated, See Note 3)
-------------------------
OPERATING REVENUES $ 296,123 $ 351,516 $ 113,615
COST OF GAS 198,315 262,585 83,163
- -----------------------------------------------------------------------------
GAS OPERATING MARGIN 97,808 88,931 30,452
- -----------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 43,897 40,894 7,735
Merger & integration costs - 1,631 1,794
Restructuring costs - 517 -
Depreciation & amortization 10,959 10,558 1,738
Income tax expense 6,803 1,822 4,440
Taxes other than income taxes 23,996 22,357 7,121
- -----------------------------------------------------------------------------
Total operating expenses 85,655 77,779 22,828
- -----------------------------------------------------------------------------
OPERATING INCOME 12,153 11,152 7,624
Other expense (income)-net (423) 5,925 893
Interest expense 119 277 13
- -----------------------------------------------------------------------------
NET INCOME $ 12,457 $ 4,950 $ 6,718
=============================================================================
The accompanying notes are an integral part of these financial statements.
THE OHIO OPERATIONS
STATEMENTS OF CASH FLOWS
(in thousands)
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
- ---------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------
Unaudited
-----------
CASH FLOWS FROM (REQUIRED FOR) OPERATING ACTIVITIES (As Restated, See Note 3)
-------------------------
Net income $ 12,457 $ 4,950 $ 6,718
Adjustments to reconcile net income to cash
from operating activities:
Depreciation & amortization 10,959 15,456 2,557
Deferred income taxes 380 7,159 7,918
Other non-cash charges-net 4,192 6,295 1,123
Changes in working capital accounts
Accounts receivable, including due from Vectren
companies & accrued unbilled revenue 10,805 2,193 (81,544)
Inventories (752) 47,736 3,965
Recoverable natural gas costs 19,086 9,864 (21,129)
Prepayments & other current assets (620) (34,833) (2,314)
Accounts payable, including to Vectren
companies & affiliated companies 1,409 (24,189) 72,470
Accrued liabilities 1,839 6,819 6,991
Changes in other assets 2,761 (886) 2,957
Changes in other liabilities 789 679 -
- ---------------------------------------------------------------------------------------------
Net cash flows from (required for)
operating activities 63,305 41,243 (288)
- ---------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED FOR) FROM FINANCING ACTIVITIES
Cash reverted to VEDO and Indiana Gas (40,388) (19,795) -
Net change in short-term borrowings - (952) 952
- ---------------------------------------------------------------------------------------------
Net cash flows (required for)
from financing activities (40,388) (20,747) 952
- ---------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES
Capital expenditures (15,259) (15,212) (563)
Net change in short-term notes receivable (8,531) - -
Other investments - (206) -
- ---------------------------------------------------------------------------------------------
Net cash flows (required for)
investing activities (23,790) (15,418) (563)
- ---------------------------------------------------------------------------------------------
Net (decrease) increase in cash & cash equivalents (873) 5,078 101
Cash & cash equivalents at beginning of period 5,179 101 -
- ---------------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 4,306 $ 5,179 $ 101
=============================================================================================
The accompanying notes are an integral part of these financial statements.
THE OHIO OPERATIONS
STATEMENTS OF OWNERS' NET INVESTMENT
(in thousands)
Balance at Inception (Unaudited) $ -
Capital contribution, As Restated (Unaudited) 469,131
Net income & comprehensive income, As Restated (Unaudited) 6,718
- -----------------------------------------------------------------------------
Balance at December 31, 2000, As Restated (Unaudited) 475,849
- -----------------------------------------------------------------------------
Net income & comprehensive income, As Restated 4,950
Capital contribution, As Restated (Unaudited) 2,299
Cash reverted to VEDO and Indiana Gas, As Restated (19,795)
- -----------------------------------------------------------------------------
Balance at December 31, 2001, As Restated 463,303
- -----------------------------------------------------------------------------
Net income & comprehensive income 12,457
Cash reverted to VEDO and Indiana Gas (40,388)
- -----------------------------------------------------------------------------
Balance at December 31, 2002 $ 435,372
=============================================================================
The accompanying notes are an integral part of these financial statements.
THE OHIO OPERATIONS
NOTES TO THE FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Vectren Energy Delivery of Ohio's Natural Gas Distribution Assets (the Ohio
operations) provide natural gas distribution and transportation services to 17
counties in west central Ohio, including counties surrounding Dayton. The Ohio
operations were acquired from the Dayton Power and Light Company by Vectren
Corporation (Vectren) on October 31, 2000 for $471 million, including
transaction costs. The acquisition was accounted for as a purchase transaction
in accordance with Accounting Principles Board (APB) Opinion No. 16 "Business
Combinations" (APB 16) and accordingly, the results of operations of the
acquired assets are included in the accompanying financial statements since the
date of acquisition.
Vectren acquired the Ohio operations as a tenancy in common through two separate
wholly owned subsidiaries. Vectren Energy Delivery of Ohio, Inc., an Ohio
corporation, (VEDO) holds a 53% undivided ownership interest in the Ohio
operations, and Indiana Gas Company, Inc., an Indiana Corporation, holds a 47%
undivided ownership interest. The owners contributed the acquired assets and
liabilities assumed to the Ohio operations. VEDO is the operator of the Ohio
operations.
Vectren, an Indiana corporation, is an energy and applied technology holding
company headquartered in Evansville, Indiana. Vectren was organized on June 10,
1999 solely for the purpose of effecting the merger of Indiana Energy, Inc.
(Indiana Energy) and SIGCORP, Inc. (SIGCORP). 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 in
accordance with APB 16.
Vectren's wholly owned subsidiary, Vectren Utility Holdings, Inc. (VUHI), serves
as the intermediate holding company for its 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. Both Vectren and
VUHI are exempt from registration pursuant to Section 3(a)(1) and 3(c) of the
Public Utility Holding Company Act of 1935.
The purchase price was allocated to the assets and liabilities acquired based on
the fair value of those assets and liabilities as of the acquisition date.
Because of the regulatory environment in which the Ohio operations operate, the
book value of rate-regulated assets and liabilities is generally considered to
be fair value. The fair value of assets contributed approximated $276.8 million
($1.6 million contributed in 2001 and $275.2 million contributed in 2000), and
the fair value of liabilities contributed approximated $7.9 million. Goodwill,
in the amount of $202.5 million, was recognized for the excess amount of the
purchase price paid over the fair value of the net assets acquired.
2. Summary of Significant Accounting Policies
A. Basis of Presentation
The financial statements for the period November 1, 2000 (Inception) though
December 31, 2000 included in this report have been prepared by management,
without audit, as provided in the rules and regulations of the Securities and
Exchange Commission. Management of the Ohio operations believes that the
information in this report reflects all adjustments necessary to fairly state
the results of the period reported. Financial information in these financial
statements and related notes for the period November 1, 2000 (Inception) through
December 31, 2000 should be read in conjunction with Vectren's annual financial
statements for the year ended December 31, 2002 filed on Form 10-K and Indiana
Gas' annual financial statements included in this filing. Because of the
seasonal nature of the Ohio operations' operations, the results shown for the
period November 1, 2000 (Inception) though December 31, 2000 are not necessarily
indicative of annual results.
Because of the manner in which the Ohio operations were acquired, the financing
costs associated with acquisition have not been pushed down to these financial
statements. Had the financing arrangements used by Indiana Gas and VEDO to
facilitate the acquisition been pushed down to the Ohio operations, the
following operating results would have occurred:
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
- -------------------------------------------------------------------------------
In thousands 2002 2001 2000
- -------------------------------------------------------------------------------
Unaudited
-------------
OPERATING REVENUES $ 296,123 $ 351,516 $ 113,615
COST OF GAS 198,315 262,585 83,163
- -------------------------------------------------------------------------------
GAS OPERATING MARGIN 97,808 88,931 30,452
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 43,897 40,894 7,735
Merger & integration costs - 1,631 1,794
Restructuring costs - 517 -
Depreciation & amortization 10,959 10,558 1,738
Income tax 1,352 (5,188) 2,487
Taxes other than income taxes 23,996 22,357 7,121
- -------------------------------------------------------------------------------
Total operating expenses 80,204 70,769 20,875
- -------------------------------------------------------------------------------
OPERATING INCOME 17,604 18,162 9,577
Other expense (income)-net (423) 5,925 893
Interest expense 15,106 19,549 5,381
- -------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,921 $ (7,312) $ 3,303
===============================================================================
B. 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.
C. Cash and cash equivalents
All highly liquid investments with an original maturity of three months or less
at the date of purchase are considered cash equivalents. Cash paid during the
periods reported for interest and income taxes follows:
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Unaudited
------------
Cash paid during the year for
Income taxes $ 4,678 $ 2,415 $ 2,331
Interest (net of amount capitalized) 2 238 8
D. Inventories
Inventories are valued using the average cost method and consist of the
following:
At December 31,
- ----------------------------------------------------------------------------
In thousands 2002 2001
- ----------------------------------------------------------------------------
Gas in storage $ 1,481 $ 769
Other 1,536 1,496
- ----------------------------------------------------------------------------
Total inventories $ 3,017 $ 2,265
============================================================================
E. Utility Plant and Depreciation
Utility plant is stated at historical cost, including AFUDC. Depreciation of
utility property is provided using the straight-line method over the estimated
service lives of the depreciable assets. The original cost of utility plant,
together with depreciation rates expressed as a percentage of original cost,
follows:
2002 2001
----------------------------- ------------------------------
Depreciation Depreciation
Rates as a Rates as a
Percent of Percent of
In thousands Original Cost Original Cost Original Cost Original Cost
- -----------------------------------------------------------------------------------------------
Gas utility plant $ 352,640 3.9% $ 336,710 3.1%
Construction work in progress 9,813 - 14,908 -
- -----------------------------------------------------------------------------------------------
Total original cost $ 362,453 $ 351,618
===============================================================================================
AFUDC represents the cost of borrowed and equity funds used for construction
purposes and is charged to construction work in progress during the construction
period and included in other - net in the Statements of Operations. The total
AFUDC capitalized into utility plant and the portion of which was computed on
borrowed and equity funds for all periods reported was not significant.
Maintenance and repairs, including the cost of removal of minor items of
property and planned major maintenance projects, are charged 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.
F. Impairment Review of Long-Lived Assets
Long-lived assets are reviewed as facts and circumstances indicate that the
carrying amount may be impaired. This review is performed in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS 144), which the Company adopted as required on January 1, 2002. SFAS 144
establishes one accounting model for all impaired long-lived assets and
long-lived assets to be disposed of by sale or otherwise. SFAS 144 replaced
authoritative guidance in SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) and
certain aspects of APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business." SFAS
144 retains the framework of SFAS 121 and requires the evaluation for impairment
involve the comparison of an asset's carrying value to the estimated future cash
flows the asset is expected to generate over its remaining life. If this
evaluation were to conclude that the carrying value of the asset is impaired, an
impairment charge would be recorded based on the difference between the asset's
carrying amount and its fair value (less costs to sell for assets to be disposed
of by sale) as a charge to operations or discontinued operations.
G. Goodwill
Goodwill is accounted for in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). The Ohio operations adopted SFAS 142, as required
on January 1, 2002. SFAS 142 changed the accounting for goodwill from an
amortization approach to an impairment-only approach. Thus, amortization of
goodwill that was not included as an allowable cost for rate-making purposes
ceased upon SFAS 142's adoption.
Goodwill is to be tested for impairment at a reporting unit level at least
annually. The impairment review consists of a comparison of the fair value of a
reporting unit to its carrying amount. If the fair value of a reporting unit is
less than its carrying amount, an impairment loss is recognized in operations.
Prior to the adoption of SFAS 142, the Ohio operations amortized goodwill on a
straight-line basis over 40 years. SFAS 142 required an initial impairment
review of all goodwill within six months of the adoption date. Results of the
initial impairment review were to be treated as a change in accounting principle
in accordance with APB Opinion No. 20 "Accounting Changes." Initial impairment
reviews to be performed within six months of adoption of SFAS 142 were completed
and resulted in no impairment. The impairment test is performed at the beginning
of each year. Following is a reconciliation of reported net income to an
adjusted net income that excludes amortization for years ended December 31, 2001
and 2000:
In thousands 2001 2000
- ---------------------------------- ----------------------------------
Net Income, As Reported $ 4,950 $ 6,718
Add: amortization of goodwill 3,131 501
- ----------------------------------------------------------------------------
Net Income, As Adjusted $ 8,081 $ 7,219
============================================================================
H. Regulation
SFAS 71
Retail public utility operations affecting Ohio customers are subject to
regulation by the PUCO. The Ohio operations' accounting policies give
recognition to the rate-making and accounting practices of the PUCO and to
accounting principles generally accepted in the United States, including the
provisions of SFAS 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 rate-making process. Regulatory liabilities represent probable
future reductions in revenues associated with amounts that are to be credited to
customers through the rate-making process.
The Company assesses the recoverability of costs recognized as regulatory assets
and the ability to continue to account for its activities based on the criteria
set forth in SFAS 71. Based on current regulation, the Company believes such
accounting is appropriate. If all or part of the Company's operations cease to
meet the criteria of SFAS 71, a write-off of related regulatory assets and
liabilities could be required. In addition, the Company would be required to
determine any impairment to the carrying value of its utility plant and other
regulated assets.
At December 31, 2002, the Ohio operations have $2.3 million in regulatory
assets, all of which are related to income taxes. These assets are reflected in
rates but are not earning a return. Regulatory income tax assets are recovered
as deferred tax assets and liabilities discussed in Note 4 become payable or
receivable.
Refundable or Recoverable Gas Costs
All metered gas rates contain a gas cost adjustment clause that allows the Ohio
operations to charge for changes in the cost of purchased gas. The Ohio
operations record any under-or-over-recovery resulting from gas adjustment
clauses each month in revenues. A corresponding asset or liability is recorded
until the under-or-over-recovery is billed or refunded to utility customers. The
cost of gas sold is charged to operating expense as delivered to customers.
I. Revenues
Revenues are recorded as products and services are delivered to customers. To
more closely match revenues and expenses, the Ohio operations records revenues
for all gas delivered to customers but not billed at the end of the accounting
period. Also included in revenues are amounts charged to customers through a
surcharge for recovery of arrearages from certain eligible low-income
households.
J. Excise Taxes
Excise taxes and gross receipts taxes are included in rates charged to
customers. Accordingly, the Company records these taxes received as a component
of operating revenues, which totaled $20.2 million in 2002, $16.5 million in
2001, and $5.1 million in 2000. Excise and gross receipts taxes paid are
recorded as a component of taxes other than income taxes.
K. Earnings Per Share
Earnings per share are not presented as the Ohio operations are ultimately
wholly owned by Vectren Utility Holdings, Inc.
3. Restatement of Previously Reported Results
The Company identified adjustments that, in the aggregate, decreased previously
reported 2001 earnings by approximately $1.1 million after tax and that in the
aggregate increased previously reported 2000 results by approximately $0.9
million. In addition to adjustments affecting previously reported net income,
other reclassifications were made to the previously reported 2001 and 2000
results to conform with the 2002 presentation.
Previously Reported 2001 and 2000 Net Income Adjustments
The Company identified an accounting error related to certain employee benefit
and other related costs that are routinely accumulated on the balance sheet and
systematically cleared to operating expense and capital projects. Because of
inadequate loading rates, these costs were not fully cleared to operating
expense and capital projects in 2001. As a result, 2001 earnings were overstated
by $1.9 million ($1.2 million after tax).
The Company also identified an error related to estimates used in the
calculation of unbilled revenue that increased earnings by $1.4 million ($0.9
million after tax). Other reconciliation errors and other errors related to the
recording of estimates that were not significant, either individually or in the
aggregate, decreased 2001 earnings by $1.2 million ($0.8 million after tax).
The Company also determined that certain billings and collections had been
improperly recorded in 2000, resulting in an understatement of gas revenue by
$2.3 million ($1.5 million after tax)(unaudited). Other errors that were not
significant, either individually or in the aggregate, were identified that
increased earnings by $0.8 million ($0.6 million after tax) (unaudited). The
impact of the restatement of results for the year ended 2000 is an increase to
pre-tax income and net income of $1.5 million (unaudited) and $0.9 million
(unaudited), respectively.
Amortization expense associated with the purchase of the Ohio operations was in
previous financial statements reflected in depreciation and amortization.
Because this amortization is not an allowable cost for rate making purposes,
such amortization has been reclassified below operating income to other-net.
Such amortization expense was approximately $4.9 million in 2001 and $0.8
million in 2000.
Other Balance Sheet Adjustments
Certain reclassifications were made to reflect separate Company current and
deferred income taxes that result in Vectren's consolidated tax position. These
reclassifications are the principal adjustments to intercompany receivables and
payables as well as to prepayments and other current assets and deferred income
taxes. The Company also reclassified all previously recorded goodwill not
included in rates to goodwill on the balance sheet. This adjustment resulted a
$3.0 million decrease in prepayments and other current assets and a $3.0 million
increase in goodwill.
The Company has restated its financial statements to give effect to the matters
discussed above. Following is a summary of the significant effects of the
restatement on previously reported financial position and results of operations.
The effects on the income statement for the year ending December 31, 2001
follow:
In Thousands As Reported Adjustments As Restated
- -----------------------------------------------------------------------------
OPERATING REVENUES $ 350,144 $ 1,372 $ 351,516
COST OF GAS 261,785 800 262,585
- -----------------------------------------------------------------------------
GAS OPERATING MARGIN 88,359 572 88,931
- -----------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 38,410 2,484 40,894
Merger & integration costs 1,631 - 1,631
Restructuring costs 517 - 517
Depreciation & amortization 15,526 (4,968) 10,558
Income tax expense 2,501 (679) 1,822
Taxes other than income taxes 22,432 (75) 22,357
- -----------------------------------------------------------------------------
Total operating expenses 81,017 (3,238) 77,779
- -----------------------------------------------------------------------------
OPERATING INCOME 7,342 3,810 11,152
Other expense (income) - net 1,232 4,693 5,925
Interest expense 105 172 277
- -----------------------------------------------------------------------------
NET INCOME $ 6,005 $ (1,055) $ 4,950
=============================================================================
The effects on the income statement for the period for the period November 1,
2000 (Inception) though December 31, 2000:
Unaudited
- -------------------------------------------------------------------------------
In Thousands As Reported Adjustments As Restated
- -------------------------------------------------------------------------------
OPERATING REVENUES $ 111,356 $ 2,259 $ 113,615
COST OF GAS 83,163 - 83,163
- -------------------------------------------------------------------------------
GAS OPERATING MARGIN 28,193 2,259 30,452
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 6,969 766 7,735
Merger & integration costs 1,794 - 1,794
Depreciation & amortization 2,557 (819) 1,738
Income tax expense 3,822 618 4,440
Taxes other than income taxes 7,121 - 7,121
- -------------------------------------------------------------------------------
Total operating expenses 22,263 565 22,828
- -------------------------------------------------------------------------------
OPERATING INCOME 5,930 1,694 7,624
Other expense (income) - net 61 832 893
Interest expense 79 (66) 13
- -------------------------------------------------------------------------------
NET INCOME $ 5,790 $ 928 $ 6,718
===============================================================================
The effects on the balance sheet as of December 31, 2001 follow:
In thousands As Reported Adjustment As Restated
- ------------------------------------------------------------------------------------
ASSETS
Utility Plant
Original cost $ 350,802 $ 816 $ 351,618
Less accumulated depreciation 159,575 - 159,575
- ------------------------------------------------------------------------------------
Net utility plant 191,227 816 192,043
- ------------------------------------------------------------------------------------
Current Assets
Cash & cash equivalents 6,420 (1,241) 5,179
Accounts receivable-less reserve 34,222 (432) 33,790
Receivables from other Vectren companies 3,172 23,744 26,916
Accrued unbilled revenues 22,690 1,354 24,044
Inventories 2,495 (230) 2,265
Recoverable natural gas costs 19,853 1,459 21,312
Prepayments & other current assets 54,674 (12,067) 42,607
- ------------------------------------------------------------------------------------
Total current assets 143,526 12,587 156,113
- ------------------------------------------------------------------------------------
Other investments 206 - 206
Non-utility property-net 1,605 - 1,605
Goodwill-net 193,078 2,913 195,991
Other assets 3,161 (88) 3,073
- ------------------------------------------------------------------------------------
TOTAL ASSETS $ 532,803 $ 16,228 $ 549,031
====================================================================================
LIABILITIES & OWNERS' NET INVESTMENT
Capitalization
Owners' net investment in the natural gas
distribution assets $ 463,209 $ 94 $ 463,303
Current Liabilities
Accounts payable 22,189 (70) 22,119
Accounts payable to affiliated companies 16,070 33 16,103
Payables to other Vectren companies 249 9,440 9,689
Accrued liabilities 22,396 526 22,922
- ------------------------------------------------------------------------------------
Total current liabilities 60,904 9,929 70,833
- ------------------------------------------------------------------------------------
Deferred Credits & Other Liabilities
Deferred income taxes 8,034 6,182 14,216
Other liabilities 656 23 679
- ------------------------------------------------------------------------------------
Total deferred credits & other liabilities 8,690 6,205 14,895
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES & OWNERS' NET INVESTMENT $ 532,803 $ 16,228 $ 549,031
====================================================================================
4. Transactions With Other Vectren Companies
Support Services
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, finance, tax, risk
management, and human resources, which includes charges for restricted stock
compensation and for pension and other postretirement benefits not directly
charged to subsidiaries. These costs have been allocated using various
allocators, primarily number of employees, number of customers and/or revenues.
Allocations are based on cost. In addition, Vectren negotiates service and
construction contracts on behalf of its utilities to obtain those services at
less cost than the utility may otherwise be able to obtain on its own. The Ohio
operations received corporate allocations approximating $30.8 million, $10.0
million, and $2.7 million (unaudited) for the years ended December 31, 2002, and
2001, and for the period November 1, 2000 (Inception) through December 31, 2000,
respectively.
Income Taxes
Vectren and subsidiary companies file a consolidated federal income tax return.
For financial reporting purposes, the Ohio operations' current and deferred tax
expense is computed on a separate company basis. The components of income tax
expense follows:
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
- -------------------------------------------------------------------------------
In thousands 2002 2001 2000
- -------------------------------------------------------------------------------
Unaudited
------------
Current:
Federal $ 6,988 $ (5,379) $ (2,976)
State (565) 42 (502)
- -------------------------------------------------------------------------------
Total current taxes 6,423 (5,337) (3,478)
- -------------------------------------------------------------------------------
Deferred:
Federal (127) 7,217 7,345
State 507 (58) 573
- -------------------------------------------------------------------------------
Total deferred taxes 380 7,159 7,918
- -------------------------------------------------------------------------------
Total income tax expense $ 6,803 $ 1,822 $ 4,440
===============================================================================
A reconciliation of the statutory rate to the effective income tax rate follows:
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
- -------------------------------------------------------------------------------
In thousands 2002 2001 2000
- -------------------------------------------------------------------------------
Unaudited
-------------
Tax at statutory federal rate $ 6,741 $ 2,370 $ 3,905
Other- net 62 (548) 535
- --------------------------------------------------------------------------------
Effective tax rate $ 6,803 $ 1,822 $ 4,440
===============================================================================
The liability method of accounting is used for income taxes under which deferred
income taxes are recognized to reflect the tax effect of temporary differences
between the book and tax bases of assets and liabilities at currently enacted
income tax rates.
Significant components of the net deferred tax liability as of December 31, 2002
and 2001 follow:
At December 31,
- -------------------------------------------------------------------------------
In thousands 2002 2001
- -------------------------------------------------------------------------------
Noncurrent deferred tax liabilities (assets):
Depreciation & cost recovery timing
differences $18,493 $15,389
Regulatory assets recoverable through
future rates 2,473 -
Regulatory liabilities to be settled
through future rates (150) -
Employee benefit obligations (956) (707)
Other - net (2,837) (466)
- -------------------------------------------------------------------------------
Net noncurrent deferred tax liability 17,023 14,216
- -------------------------------------------------------------------------------
Current deferred tax liabilities (assets):
Deferred fuel costs-net 757 861
- -------------------------------------------------------------------------------
Net current deferred tax liability 757 861
- -------------------------------------------------------------------------------
Net deferred tax liability $17,780 $15,077
===============================================================================
Stock-Based Incentive Plans
VEDO and Indiana Gas as owners do not have stock-based compensation plans
separate from Vectren. An insignificant number of their employees participate in
Vectren's stock-based compensation plans.
Cash Management and Borrowing Arrangements
The Ohio operations have no borrowing arrangements with third parties and rely
entirely on the short-term borrowing arrangements of VUHI for working capital
needs. At December 31, 2002 and 2001 no such borrowings were outstanding.
Periodically the Ohio operations will accumulate cash in excess of its
short-term needs and such cash is remitted to VUHI. At December 31, 2002, the
Ohio operations had $8.5 million in short-term notes receivable due from VUHI.
VEDO has no significant independent assets or operations apart from its 53%
ownership interest in the Ohio operations, and VEDO is able to meet interest
payments and any other obligation only through cash reverted from the Ohio
operations. For the years ended December 31, 2002 and 2001, cash reverted to
VEDO totaled $31.4 million and $19.8 million, respectively. For the year ended
December 31, 2002, cash reverted to Indiana Gas totaled $9.0 million. No cash
was reverted to owners in 2000.
5. Transactions with Vectren Affiliates
Vectren has an ownership interest in ProLiance Energy, LLC (ProLiance), a
nonregulated, energy marketing affiliate. ProLiance provides natural gas supply
and related services to the Ohio operations. Purchases from ProLiance for resale
and for injections into storage for the years ended December 31, 2002, 2001, and
for the period November 1, 2000 (Inception) through December 31, 2000
approximated $195.3 million, $241.1 million and $77.5 million (unaudited),
respectively. Amounts charged by ProLiance for gas supply services are
established by supply agreements.
Vectren has ownership interests in other companies that provide materials
management, underground construction and repair, facilities locating, and meter
reading to the Ohio operations. Fees of these services and construction-related
expenditures for the years ended December 31, 2002 and 2001 and for the period
November 1, 2000 (Inception) through December 31, 2000 approximated $6.5
million, $6.0 million, and $0.4 million (unaudited), respectively. Amounts
charged by these affiliates are market based.
Amounts owed to unconsolidated affiliates of Vectren approximated $27.9 million
and $16.1 million at December 31, 2002 and 2001, respectively, and are included
in accounts payable to affiliated companies.
6. Commitments and Contingencies
Commitments
Firm commitments to purchase natural gas for years following December 31, 2002
totaled (in millions) $35.9 in 2003, $7.9 in 2004, and $1.2 in 2005.
Legal Proceedings
VEDO and Indiana Gas as owners are party to various legal proceedings arising in
the normal course of the Ohio operations' business. In the opinion of
management, there are no legal proceedings pending that are likely to have a
material adverse effect on its financial position or results of operations.
7. Risk Management and New Accounting Principle
Risk Management
The Ohio operations have limited exposure to commodity price risk for purchases
and sales of natural gas for retail customers due to current Ohio regulations,
which subject to compliance with those regulations, allow for recovery of such
purchases through natural gas cost adjustment mechanisms. The Ohio operations
does not engage in wholesale gas marketing activities that may expose it to
market risk associated with fluctuating natural gas commodity prices.
Although the Company's regulated operations are exposed to limited commodity
price risk, volatile natural gas prices can result in higher working capital
requirements; increased expenses including unrecoverable interest costs,
uncollectible accounts expense, and unaccounted for gas; and some level of price
sensitive reduction in volumes sold.
The Ohio operations' customer receivables from gas sales and gas transportation
services are primarily derived from a diversified base of residential,
commercial, and industrial customers located in west central Ohio. The Company
manages credit risk associated with its receivables by continually reviewing
creditworthiness and requests cash deposits or refunds cash deposits based on
that review.
Impact of New Accounting Principle
In June 1998, the FASB issued SFAS 133, which required that every derivative
instrument be recorded on the balance sheet as an asset or liability measured at
its market value and that changes in the derivative's market value be recognized
currently in earnings unless specific hedge or regulatory accounting criteria
are met.
SFAS 133, as amended, required that as of the date of initial adoption, the
difference between the market value of derivative instruments recorded on the
balance sheet and the previous carrying amount of those derivatives be reported
in net income, other comprehensive income, or regulatory assets or liabilities,
as appropriate. A change in earnings or other comprehensive income was reported
as a cumulative effect of a change in accounting principle in accordance with
APB Opinion No. 20, "Accounting Changes."
As of and since the date of adoption on January 1, 2001, the Ohio operations
were not engaged in any derivative or hedging activity as defined by SFAS 133,
as amended; therefore, there was no impact at adoption and has been no impact
since adoption.
8. Additional Operational and Balance Sheet Information
Other - net in the Statements of Income consists of the following:
Inception
Year Ended Year Ended through
December 31, December 31, December 31,
- -------------------------------------------------------------------------------
In thousands 2002 2001 2000
- -------------------------------------------------------------------------------
Unaudited
------------
Amortization of goodwill and other $ - $ 4,899 $ 819
Other expense (income) - net (423) 1,026 74
- -------------------------------------------------------------------------------
Total other - net $ (423) $ 5,925 $ 893
===============================================================================
Accrued liabilities consists of the following:
At December 31,
- ----------------------------------------------------------------------------
In thousands 2002 2001
- ----------------------------------------------------------------------------
Accrued taxes $ 14,586 $ 13,048
Refunds to customers & customer deposits 9,200 8,577
Deferred income taxes 757 861
Other 114 436
- ----------------------------------------------------------------------------
Total accrued liabilities $ 24,657 $ 22,922
============================================================================
Prepayments and other current assets consists of the following:
At December 31,
- ----------------------------------------------------------------------------
In thousands 2002 2001
- ----------------------------------------------------------------------------
Prepaid gas delivery service $ 33,624 $ 33,674
Prepaid income taxes 4,771 5,379
Other prepayments & current assets 4,832 3,554
- ----------------------------------------------------------------------------
Total prepayments & other current assets $ 43,227 $ 42,607
============================================================================
9. Special Charges in 2001 and 2000
Restructuring and Related Charges
As part of continued cost saving efforts, in June 2001, management and the board
of directors of Vectren approved a plan to restructure, primarily, its regulated
operations. The restructuring plan included the elimination of certain
administrative and supervisory positions in its utility operations and corporate
office. Charges of approximately $0.5 million were expensed in June 2001 as a
direct result of the restructuring plan, primarily for employee severance and
employee relocation and consulting fees incurred as of that date. The accrual is
associated with approximately 10 employees. Employee separation benefits include
severance, healthcare, and outplacement services. Other than structured payments
per the terms of severance agreements, the restructuring program with respect to
the Ohio operations was completed during 2001. Such structured payments were
made in 2002. The remaining accrual for employee separation payments as of
December 31, 2001 approximated $0.2 million and was utilized in 2002.
Merger and Integration Costs
Merger and integration costs incurred for the year ended December 31, 2001 and
for the period November 1, 2000 (Inception) through December 31, 2000
approximated $1.6 million and $1.8 million (unaudited), respectively. Merger and
integration activities, resulting from the 2000 purchase, were completed in
2001. These costs have been for employee relocation, accounting fees resulting
from filing requirements, consulting fees related to integration activities such
as organization structure, employee travel between company locations, internal
labor of employees assigned to integration teams, investor relations
communication activities, and certain benefit costs.
10. Impact of Recently Issued Accounting Guidance
EITF 02-03
In October 2002, the EITF reached a final consensus in EITF Issue 02-03 "Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities" (EITF
02-03) that gains and losses (realized and unrealized) on all derivative
instruments within the scope of SFAS 133 should be shown net in the income
statement, whether or not settled physically, if the derivative instruments are
held for "trading purposes." The consensus rescinded EITF Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF 98-10) as well as other decisions reached on energy trading
contracts at the EITF's June 2002 meeting. The Ohio operations do not engage in
any activities subject to EITF 02-03.
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Any costs of removal recorded in
accumulated depreciation pursuant to regulatory authority will require
disclosure in future periods. The Company adopted this statement on January 1,
2003. The adoption was not material to the Company's results of operations or
financial condition.
FASB Interpretation (FIN) 45
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken. The objective of
the initial measurement of that liability is the fair value of the guarantee at
its inception. The initial recognition and measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
Although management is still evaluating the impact of FIN 45 on its financial
position and results of operations, the adoption is not expected to have a
material effect.
FIN 46
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies to variable interest
entities and, thus improves comparability between enterprises engaged in similar
activities when those activities are conducted through variable interest
entities. FIN 46 applies to variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies to the Company's third quarter for
variable interest entities in which the Company holds a variable interest
acquired before February 1, 2003. Although management is still evaluating the
impact of FIN 46 on its financial position and results of operations, the
adoption is not expected to have a material effect.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Disclosure with respect to this Item, has been previously provided on Form 8-K
originally filed with the SEC on March 26, 2002, as amended on Form 8-K/A filed
with the SEC on May 20, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Intentionally omitted. See the table of contents of this Amended Annual Report
on Form 10-K/A for explanation.
ITEM 11. EXECUTIVE COMPENSATION
Intentionally omitted. See the table of contents of this Amended Annual Report
on Form 10-K/A for explanation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Intentionally omitted. See the table of contents of this Amended Annual Report
on Form 10-K/A for explanation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Intentionally omitted. See the table of contents of this Amended Annual Report
on Form 10-K/A for explanation.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing of the report, the Company carried out an
evaluation under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer of the effectiveness and the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective in bringing to their attention on a timely basis material information
relating to the Company required to be disclosed by the Company in its filings
under the Securities Exchange Act of 1934 (Exchange Act).
Disclosure controls and procedures, as defined by the Exchange Act in Rules
13a-14(c) and 15d-14(c), are controls and other procedures of the Company that
are designed to ensure that information required to be disclosed by the Company
in the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms. "Disclosure controls and procedures" include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in its Exchange Act reports is accumulated and
communicated to the Company's management, including its principal executive and
financial officers, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control
Since the evaluation of disclosure controls and procedures, there have been no
significant changes to the Company's internal controls and procedures or
significant changes in other factors that could significantly affect the
Company's internal controls and procedures. However, in Note 3 to the financial
statements (included in Item 8) which discusses the restatement of 2001 and 2000
previously reported information, the Company identified certain errors, the net
effect of which, related primarily to gas inventory accounting and the proper
clearing of employee benefit related costs routinely accumulated on the balance
sheet. These errors resulted primarily from insufficient account reconciliation
procedures. The Company has taken steps to improve these internal controls.
Internal control, as defined in American Institute of Certified Public
Accountants Codification of Statements on Auditing Standards (AU ss.319), is a
process, effected by an entity's board of directors, management, and other
personnel, designed to provide reasonable assurance regarding the achievement of
objectives in the following categories: (a) reliability of financial reporting,
(b) effectiveness and efficiency of operations and (c) compliance with
applicable laws and regulations.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
List Of Documents Filed As Part Of This Report
Financial Statements
The financial statements and related notes of Indiana Gas and of the Ohio
operations, together with the reports of Deloitte & Touche LLP, appear in Part
II Item 8 Financial Statements and Supplementary Data of this Annual Form 10-K.
The Ohio operations are a significant subsidiary of Indiana Gas as defined by
Rule 3-09 of Regulation S-X.
Supplemental Schedules
For the years ended December 31, 2002, 2001, and 2000, Indiana Gas' and the Ohio
operations' Schedule II -- Valuation and Qualifying Accounts Financial Statement
Schedules are presented on page 63 and 64, respectively. The reports of Deloitte
& Touche LLP on these schedules may be found in Item 8.
List of Exhibits
Indiana Gas has incorporated by reference herein certain exhibits as specified
below pursuant to Rule 12b-32 under the Exchange Act.
Exhibits for the Company are listed in the Index to Exhibits beginning
on page 66.
Exhibits for the Company attached to this filing that were filed
electronically with the SEC are listed on page 70.
Reports On Form 8-K During The Last Calendar Quarter
On October 25, 2002 Indiana Gas Company, Inc. filed a Current Report on Form 8-K
with respect to the release of financial information to the investment community
regarding Vectren Corporation's results of operations, financial position and
cash flows for the three, nine, and twelve month periods ended September 30,
2002. The financial information was released to the public through this filing.
Item 5. Other Events
Item 7. Exhibits
99.1 - Press Release - Third Quarter 2002 Vectren Corporation
Earnings
99.2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
On November 27, 2002, Indiana Gas Company, Inc. filed a Current Report on Form
8-K with respect to a press release issued by Moody's Investors Service that
downgraded the credit ratings on various debt instruments issued by certain of
Vectren Corporation's wholly owned subsidiaries.
Item 5. Other Events
Item 7. Exhibits
99.1 - Press Release - Moody's Investors Service
99.2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
SCHEDULE II
Indiana Gas Company, Inc.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------
Additions
------------------
Balance at Charged Charged Deductions Balance at
Beginning to to Other from End of
Description Of Year Expenses Accounts Reserves, Net Year
- --------------------------------------------------------------------------------------------------
(In thousands)
VALUATION & QUALIFYING ACCOUNTS:
Year 2002 - Accumulated provision for
uncollectible accounts $ 987 $ 4,750 $ - $ 4,338 $ 1,399
Year 2001 - Accumulated provision for
uncollectible accounts $ 2,063 $ 7,670 $ - $ 8,746 $ 987
Year 2000 - Accumulated provision for
uncollectible accounts $ 1,739 $ 5,405 $ - $ 5,081 $ 2,063
OTHER RESERVES:
Year 2002 - Reserve for merger &
integration charges $ 200 $ - $ - $ 200 $ -
Year 2001 - Reserve for merger &
integration charges $ 1,293 $ - $ - $ 1,093 $ 200
Year 2000 - Reserve for merger &
integration charges $ - $11,900 $ - $10,607 $ 1,293
Year 2002 - Reserve for restructuring
costs $ 3,960 $ - $ - $ 1,173 $ 2,787
Year 2001 - Reserve for restructuring
costs $ - $ 5,883 $ - $ 1,923 $ 3,960
SCHEDULE II
The Ohio Operations
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------
Additions
-----------------
Balance Charged Charged Deductions Balance
Beginning to to Other from End of
Description of Period Expenses Accounts Reserves, Net Period
- ----------------------------------------------------------------------------------------------------
(In thousands)
VALUATION AND QUALIFYING
ACCOUNTS: AS RESTATED
Year 2002- Accumulated provision
for uncollectible accounts $ 900 $ 4,400 $ - $ 4,846 $ 454
Year 2001- Accumulated provision
for uncollectible accounts $ 386 $ 4,970 $ - $ 4,456 $ 900
(Unaudited)
Period 2000 - Accumulated provision
for uncollectible accounts $ - $ 1,123 $ 120 $ 857 $ 386
OTHER RESERVES:
Year 2002 - Reserve for restructuring $ 165 $ - $ - $ 165 $ -
Year 2001 - Reserve for restructuring $ - $ 165 $ - $ - $ 165
Year 2002 - Reserve for merger $ 240 $ - $ - $ 240 $ -
and integration charges
Year 2001 - Reserve for merger $ 456 $ - $ - $ 216 $ 240
and integration charges
(Unaudited)
Period 2000 - Reserve for merger $ - $ 500 $ - $ 44 $ 456
and integration charges
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 on Form 10-K/A
to the Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDIANA GAS COMPANY, INC.
Dated June 18, 2003
/S/ Niel C. Ellerbrook
------------------------------------
Niel C. Ellerbrook
Chairman and Chief Executive Officer
INDEX TO EXHIBITS
2. Plan Of Acquisition, Reorganization,
Arrangement, Liquidation Or Succession
2.1 Asset Purchase Agreement dated December 14,1999 between Indiana Energy,
Inc. and The Dayton Power and Light Company and Number-3CHK with a
commitment letter for a 364-Day Credit Facility dated December 16,1999.
(Filed and designated in Current Report on Form 8-K dated December 28,
1999, File No. 1-9091, as Exhibit 2 and 99.1.)
3. Articles Of Incorporation And By-Laws
3.1 Amended and Restated Articles of Incorporation of Indiana Gas Company, Inc.
(Filed and designated in Current Report on Form 10-K filed April 2, 2001,
File No. 1-6494, as Exhibit 3.1.)
3.2 Code of By-Laws of Indiana Gas Company, Inc. (Filed and designated in
Current Report on Form 10-K, filed April 2, 2001, File No. 1-6494, as
Exhibit 3.2.)
4. Instruments Defining The Rights Of Security
Holders, Including Indentures
4.1 Indenture dated February 1, 1991, between Indiana Gas and U.S. Bank Trust
National Association (formerly know as First Trust National Association,
which was formerly know as Bank of America Illinois, which was formerly
know as Continental Bank, National Association. Inc.'s. (Filed and
designated in Current Report on Form 8-K filed February 15, 1991, File No.
1-6494.); First Supplemental Indenture thereto dated as of February 15,
1991. (Filed and designated in Current Report on Form 8-K filed February
15, 1991, File No. 1-6494, as Exhibit 4(b).); Second Supplemental Indenture
thereto dated as of September 15, 1991, (Filed and designated in Current
Report on Form 8-K filed September 25, 1991, File No. 1-6494, as Exhibit
4(b).); Third supplemental Indenture thereto dated as of September 15, 1991
(Filed and designated in Current Report on Form 8-K filed September 25,
1991, File No. 1-6494, as Exhibit 4(c).); Fourth Supplemental Indenture
thereto dated as of December 2, 1992, (Filed and designated in Current
Report on Form 8-K filed December 8, 1992, File No. 1-6494, as Exhibit
4(b).); Fifth Supplemental Indenture thereto dated as of December 28, 2000,
(Filed and designated in Current Report on Form 8-K filed December 27,
2000, File No. 1-6494, as Exhibit 4.)
4.2 Indenture dated October 19, 2001, between Vectren Utility Holdings, Inc.,
Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company,
Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National
Association. (Filed and designated in Form 8-K, dated October 19, 2001,
File No. 1-16739, as Exhibit 4.1); First Supplemental Indenture, dated
October 19, 2001, between Vectren Utility Holdings, Inc., Indiana Gas
Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy
Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed
and designated in Form 8-K, dated October 19, 2001, File No. 1-16739, as
Exhibit 4.2); Second Supplemental Indenture, between Vectren Utility
Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and
Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank
Trust National Association. (Filed and designated in Form 8-K, dated
November 29, 2001, File No. 1-16739, as Exhibit 4.1).
4.3 Promissory Note for Long-Term Loans dated October 19, 2001, between Indiana
Gas Company, Inc. and Vectren Utility Holdings, Inc. (Filed and designated
in Current Report on Form 10-K filed March 29, 2002, File No. 1-6494, as
Exhibit 4.4.)
4.4 Promissory Note for Long-Term Loans dated November 30, 2001, between
Indiana Gas Company, Inc. and Vectren Utility Holdings, Inc. (Filed and
designated in Current Report on Form 10-K filed March 29, 2002, File No.
1-6494, as Exhibit 4.5.)
10. Material Contracts
10.1 Summary description of Southern Indiana Gas and Electric Company's
nonqualified Supplemental Retirement Plan (Filed and designated in Form
10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-17.)
10.2 Southern Indiana Gas and Electric Company 1994 Stock Option Plan (Filed and
designated in Southern Indiana Gas and Electric Company's Proxy Statement
dated February 22, 1994, File No. 1-3553, as Exhibit A.)
10.3 Southern Indiana Gas and Electric Company's nonqualified Supplemental
Retirement Plan as amended, effective April 16, 1997. (Filed and designated
in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.29.)
10.4 Vectren Corporation Retirement Savings Plan (amended and restated effective
January 1, 2002). (Filed and designated in Form 10-Q for the quarterly
period ended September 30, 2002, File No. 1-15467, as Exhibit 10.1.)
10.5 Vectren Corporation Combined Non-Bargaining Retirement Plan. (Filed and
designated in Form 10-Q for the quarterly period ended September 30, 2000,
File No. 1-15467, as Exhibit 99.2.)
10.6 Indiana Energy, Inc. Unfunded Supplemental Retirement Plan for a Select
Group of Management Employees as amended and restated effective December 1,
1998. (Filed and designated in Form 10-Q for the quarterly period ended
December 31, 1998, File No. 1-9091, as Exhibit 10-G.)
10.7 Indiana Energy, Inc. Nonqualified Deferred Compensation Plan effective
January 1, 1999. (Filed and designated in Form 10-Q for the quarterly
period ended December 31, 1998, File No. 1-9091, as Exhibit 10-H.)
10.8 Formation Agreement among Indiana Energy, Inc., Indiana Gas Company, Inc.,
IGC Energy, Inc., Indiana Energy Services, Inc., Citizens Gas & Coke
Utility, Citizens Energy Services Corporation and ProLiance Energy, LLC,
effective March 15, 1996. (Filed and designated in Form 10-Q for the
quarterly period ended March 31, 1996, File No. 1-9091, as Exhibit 10-C.)
10.9 Gas Sales and Portfolio Administration Agreement between Indiana Gas
Company, Inc. and ProLiance Energy, LLC, effective March 15, 1996, for
services to begin April 1, 1996. (Filed and designated in Form 10-Q for the
quarterly period ended March 31, 1996, File No. 1-6494, as Exhibit 10-C.)
10.10 Amended appendices to the Gas Sales and Portfolio Administration Agreement
between Indiana Gas Company, Inc. and ProLiance Energy, LLC effective
November 1, 1998. (Filed and designated in Form 10-Q for the quarterly
period ended March 31, 1999, File No. 1-6494, as Exhibit 10-A.)
10.11 Amended appendices to the Gas Sales and Portfolio Administration Agreement
between Indiana Gas Company, Inc. and ProLiance Energy, LLC effective
November 1, 1999. (Filed and designated in Form 10-K for the fiscal year
ended September 30, 1999, File No. 1-6494, as Exhibit 10-V.)
10.12 Gas Sales and Portfolio Administration Agreement between Indiana Gas
Company, Inc. and ProLiance Energy, LLC, effective August 30, 2002. (Filed
and designated in Form 10-K for the year ended December 31, 2002, File No.
1-6494, as Exhibit 10-12.)
10.13 Gas Sales and Portfolio Administration Agreement between Vectren Energy
Delivery of Ohio and ProLiance Energy, LLC, effective October 31, 2000, for
services to begin November 1, 2000. (Filed and designated in Form 10-K, for
the year ended December 31, 2001, File No. 1-15467, as Exhibit 10-24.)
10.14 Indiana Energy, Inc. Executive Restricted Stock Plan as amended and
restated effective October 1, 1998. (Filed and designated in Form 10-K for
the fiscal year ended September 30, 1998, File No. 1-9091, as Exhibit
10-O.)
10.15 Amendment to Indiana Energy, Inc. Executive Restricted Stock Plan
effective December 1, 1998. (Filed and designated in Form 10-Q for the
quarterly period ended December 31, 1998, File No. 1-9091, as Exhibit
10-I.)
10.16 Indiana Energy, Inc. Director's Restricted Stock Plan as amended and
restated effective May 1, 1997. (Filed and designated in Form 10-Q for the
quarterly period ended June 30, 1997, File No. 1-9091, as Exhibit 10-B.)
10.17 First Amendment to Indiana Energy, Inc. Directors' Restricted Stock Plan,
effective December 1, 1998. (Filed and designated in Form 10-Q for the
quarterly period ended December 31, 1998, File No. 1-9091, as Exhibit
10-J.)
10.18 Second Amendment to Indiana Energy, Inc. Directors Restricted Stock Plan,
renamed the Vectren Corporation Directors Restricted Stock Plan effective
October 1, 2000. (Filed and designated in Form 10-K for the year ended
December 31, 2000, File No. 1-15467, as Exhibit 10-34.)
10.19 Third Amendment to Indiana Energy, Inc. Directors Restricted Stock Plan,
renamed the Vectren Corporation Directors Restricted Stock Plan effective
March 28, 2001. (Filed and designated in Form 10-K for the year ended
December 31, 2000, File No. 1-15467, as Exhibit 10-35.)
10.20 Vectren Corporation At Risk Compensation Plan effective May 1, 2001.
(Filed and designated in Vectren Corporation's Proxy Statement dated March
16, 2001, File No. 1-15467, as Appendix B.)
10.21 Vectren Corporation Non-Qualified Deferred Compensation Plan, as amended
and restated effective January 1, 2001. (Filed and designated in Form 10-K,
for the year ended December 31, 2001, File No. 1-15467, as Exhibit 10.32.)
10.22 Vectren Corporation Employment Agreement between Vectren Corporation and
Niel C. Ellerbrook dated as of March 31, 2000. (Filed and designated in
Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467,
as Exhibit 99.1.)
10.23 Vectren Corporation Employment Agreement between Vectren Corporation and
Andrew E. Goebel dated as of March 31, 2000 (Filed and designated in Form
10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as
Exhibit 99.2.)
10.24 Vectren Corporation Employment Agreement between Vectren Corporation and
Jerome A. Benkert, Jr. dated as of March 31, 2000. (Filed and designated in
Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467,
as Exhibit 99.3.)
10.25 Vectren Corporation Employment Agreement between Vectren Corporation and
Ronald E. Christian dated as of March 31, 2000. (Filed and designated in
Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467,
as Exhibit 99.5.)
10.26 Vectren Corporation Employment Agreement between Vectren Corporation and
Timothy M. Hewitt dated as of March 31, 2000. (Filed and designated in Form
10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as
Exhibit 99.6.)
10.27 Vectren Corporation Retirement Agreement between Vectren Corporation and
Timothy M. Hewitt dated as of May 31, 2001. (Filed and designated in Form
10-K, for the year ended December 31, 2001, File No. 1-15467, as Exhibit
10.39.)
10.28 Vectren Corporation Employment Agreement between Vectren Corporation and
Richard G. Lynch dated as of March 31, 2000. (Filed and designated in Form
10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as
Exhibit 99.8.)
10.29 Vectren Corporation Employment Agreement between Vectren Corporation and
William S. Doty dated as of April 30, 2001. (Filed and designated in Form
10-K, for the year ended December 31, 2001, File No. 1-15467, as Exhibit
10.43.)
10.30 Vectren Corporation Retirement Agreement between Vectren Corporation and
Thomas J. Zabor dated as of May 31, 2001. (Filed and designated in Form
10-K, for the year ended December 31, 2001, File No. 1-15467, as Exhibit
10.44.)
21. Subsidiaries Of The Company
The list of the Company's significant subsidiaries is filed and designated in
Form 10-K for the year ended December 31, 2002, File No. 1-6494, as 21.1.
99. Additional Exhibits
99.1 Agreement and Plan of Merger dated as of June 11,1999 among Indiana Energy,
Inc., SIGCORP, Inc. and Vectren Corporation (the "Merger Agreement ").
(Filed and designated in Form S-4 to (No. 333-90763) filed on November 12,
1999, File No. 1-15467, as Exhibit 2.)
99.2 Amendment No.1 to the Merger Agreement dated December 14,1999 (Filed and
designated in Current Report on Form 8-K filed December 16, 1999, File No.
1-09091, as Exhibit 2.)
99.3 Amended and Restated Articles of Incorporation of Vectren Corporation
effective March 31,2000. (Filed and designated in Current Report on Form
8-K filed April 14, 2000, File No. 1-15467, as Exhibit 4.1.)
99.4 Amended and Restated Code of By-Laws of Vectren Corporation as of February
26, 2003. (Filed and designated in Form 10-K for the year ended December
31, 2002, File No. 1-15467, as Exhibit 3.2.)
99.5 Shareholders Rights Agreement dated as of October 21, 1999 between Vectren
Corporation and Equiserve Trust Company, N.A., as Rights Agent. (Filed and
designated in Form S-4 (No. 333-90763), filed November 12. 1999, File No.
1-15467, as Exhibit 4.)
99.6 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Filed Herewith.)
99.7 Chief Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed Herewith.)
99.8 Chief Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed Herewith.)
Indiana Gas Company, Inc.
2002 Form 10-K
Attached Exhibits
The following Exhibits were filed electronically with the SEC with this filing.
See Page 66 of this Amendment to the Annual Report on Form 10-K/A for a complete
list of exhibits.
Exhibit
Number Document
- ------- ---------------------------------------------
99.6 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.7 Chief Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.8 Chief Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.