UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
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: 1-15467
VECTREN CORPORATION
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(Exact name of registrant as specified in its charter)
INDIANA 35-2086905
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20 N.W. 4th Street, Evansville, Indiana, 47708
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(Address of principal executive offices)
(Zip Code)
812-491-4000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - Without Par Value 75,867,037 April 30, 2004
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Class Number of Shares Date
Table of Contents
Item Page
Number Number
PART I. FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Vectren Corporation and Subsidiary Companies
Consolidated Condensed Balance Sheets 1-2
Consolidated Condensed Statements of Income 3
Consolidated Condensed Statements of Cash Flows 4
Notes to Unaudited Consolidated Condensed Financial Statements 5
2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
3 Quantitative and Qualitative Disclosures About Market Risk 32
4 Controls and Procedures 32
PART II. OTHER INFORMATION
1 Legal Proceedings 33
6 Exhibits and Reports on Form 8-K 33
Signatures 34
Definitions
AFUDC: allowance for funds used MMBTU: millions of British thermal
during construction units
APB: Accounting Principles Board MW: megawatts
EITF: Emerging Issues Task Force MWh/GWh: megawatt hours/millions of
megawatt hours (gigawatt hours)
FASB: Financial Accounting Standards NOx: nitrogen oxide
Board
FERC: Federal Energy Regulatory OUCC: Indiana Office of the Utility
Commission Consumer Counselor
IDEM: Indiana Department of PUCO: Public Utilities Commission of
Environmental Management Ohio
IURC: Indiana Utility Regulatory SFAS: Statement of Financial
Commission Accounting Standards
MCF/BCF: millions/billions of USEPA: United States Environmental
cubic feet Protection Agency
MDth/MMDth: thousands/millions Throughput: combined gas sales and
of dekatherms gas transportation volumes
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
March 31, December 31,
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2004 2003
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ASSETS
Current Assets
Cash & cash equivalents $ 24.6 $ 15.3
Accounts receivable - less reserves
of $2.4 & 3.2, respectively 174.0 137.3
Accrued unbilled revenues 102.7 137.8
Inventories 47.3 70.4
Recoverable fuel & natural gas costs 8.9 20.3
Prepayments & other current assets 29.7 131.1
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Total current assets 387.2 512.2
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Utility Plant
Original cost 3,280.9 3,250.7
Less: accumulated depreciation &
amortization 1,258.2 1,247.0
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Net utility plant 2,022.7 2,003.7
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Investments in unconsolidated affiliates 193.8 176.1
Other investments 121.4 122.9
Non-utility property - net 221.6 222.3
Goodwill - net 205.0 205.0
Regulatory assets 84.8 89.6
Other assets 22.6 21.6
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TOTAL ASSETS $ 3,259.1 $ 3,353.4
===============================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
March 31, December 31,
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2004 2003
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LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 62.0 $ 85.3
Accounts payable to affiliated companies 54.4 86.4
Accrued liabilities 171.0 109.3
Short-term borrowings 131.0 274.9
Current maturities of long-term debt 15.0 15.0
Long-term debt subject to tender 13.5 13.5
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Total current liabilities 446.9 584.4
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Long-term Debt - Net of Current Maturities
& Debt Subject to Tender 1,072.8 1,072.8
Deferred Income Taxes & Other Liabilities
Deferred income taxes 234.5 235.4
Regulatory liabilities & other removal costs 239.0 235.0
Deferred credits & other liabilities 155.4 153.6
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Total deferred credits & other liabilities 628.9 624.0
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Minority Interest in Subsidiary 0.3 0.3
Commitments & Contingencies (Notes 7-10)
Cumulative, Redeemable Preferred Stock of
a Subsidiary 0.1 0.2
Common Shareholders' Equity
Common stock (no par value) - issued &
outstanding 75.9 and 75.6, respectively 523.3 520.4
Retained earnings 595.7 562.4
Accumulated other comprehensive loss (8.9) (11.1)
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Total common shareholders' equity 1,110.1 1,071.7
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,259.1 $ 3,353.4
================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited - In millions, except per share data)
Three Months Ended March 31,
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2004 2003
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OPERATING REVENUES
Gas utility $ 505.1 $ 509.2
Electric utility 88.8 83.5
Energy services & other 51.4 33.6
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Total operating revenues 645.3 626.3
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OPERATING EXPENSES
Cost of gas sold 365.6 364.8
Fuel for electric generation 22.9 20.8
Purchased electric energy 4.4 4.5
Cost of energy services & other 40.0 25.5
Other operating 68.6 62.6
Depreciation & amortization 32.5 31.4
Taxes other than income taxes 22.7 22.0
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Total operating expenses 556.7 531.6
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OPERATING INCOME 88.6 94.7
OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated
affiliates 16.9 8.8
Other income (expense) - net (5.7) (1.1)
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Total other income 11.2 7.7
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Interest expense 19.3 18.9
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INCOME BEFORE INCOME TAXES 80.5 83.5
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Income taxes 25.7 27.7
Minority interest in & preferred dividend
requirements of subsidiaries - 0.1
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NET INCOME $ 54.8 $ 55.7
============================================================================
AVERAGE COMMON SHARES OUTSTANDING 75.5 67.7
DILUTED COMMON SHARES OUTSTANDING 75.8 67.8
EARNINGS PER SHARE OF COMMON STOCK:
BASIC $ 0.73 $ 0.82
DILUTED $ 0.72 $ 0.82
DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ 0.29 $ 0.28
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In millions)
Three Months Ended March 31,
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2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 54.8 $ 55.7
Adjustments to reconcile net income to cash
from operating activities:
Depreciation & amortization 32.5 31.4
Deferred income taxes & investment tax credits (2.3) 4.0
Equity in earnings of unconsolidated affiliates (16.9) (8.8)
Net unrealized (gain) on derivative instruments (2.8) (0.9)
Pension & postretirement periodic benefit cost 4.3 3.5
Other non-cash charges - net 11.2 4.6
Changes in working capital accounts:
Accounts receivable & accrued unbilled revenue (5.6) (23.9)
Inventories 21.6 18.6
Recoverable fuel & natural gas costs 11.4 10.2
Prepayments & other current assets 107.9 68.1
Accounts payable, including to affiliated
companies (55.3) (66.9)
Accrued liabilities 60.6 29.0
Changes in noncurrent assets (1.0) (3.5)
Changes in noncurrent liabilities (2.8) (0.1)
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Net cash flows from operating activities 217.6 121.0
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock option exercises &
other stock plans 2.3 2.2
Requirements for:
Dividends on common stock (21.5) (18.6)
Retirement of long-term debt - (39.9)
Redemption of preferred stock of subsidiary (0.1) (0.1)
Net change in short-term borrowings (143.9) (17.6)
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Net cash flows from financing activities (163.2) (74.0)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Unconsolidated affiliate distributions 2.0 0.9
Notes receivable & other collections 0.6 9.0
Requirements for:
Capital expenditures, excluding AFUDC equity (44.5) (44.2)
Unconsolidated affiliate investments (3.2) (5.2)
Notes receivable & other investments - (4.0)
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Net cash flows from investing activities (45.1) (43.5)
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Net increase in cash & cash equivalents 9.3 3.5
Cash & cash equivalents at beginning of period 15.3 25.1
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Cash & cash equivalents at end of period $ 24.6 $ 28.6
================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Vectren Corporation (the Company or Vectren), an Indiana corporation, is an
energy and applied technology holding company headquartered in Evansville,
Indiana. The Company'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 or Vectren North),
Southern Indiana Gas and Electric Company (SIGECO or Vectren South), and the
Ohio operations. VUHI also has other assets that provide information technology
and other services to the three utilities. 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.
Indiana Gas provides natural gas distribution and transportation services to a
diversified customer base in 49 of Indiana's 92 counties. SIGECO provides
electric generation, transmission, and distribution services to 8 counties in
southwestern Indiana, including counties surrounding Evansville, and
participates in the wholesale power market. SIGECO also provides natural gas
distribution and transportation services to 10 counties in southwestern Indiana,
including counties surrounding Evansville. Indiana Gas and SIGECO generally do
business as Vectren Energy Delivery of Indiana, Inc. The Ohio operations, owned
as a tenancy in common by Vectren Energy Delivery of Ohio, Inc. (VEDO), a wholly
owned subsidiary, (53% ownership) and Indiana Gas (47% ownership), provide
natural gas distribution and transportation services to 17 counties in west
central Ohio, including counties surrounding Dayton. VUHI's consolidated
operations are collectively referred to as the Utility Group.
The Company is also involved in nonregulated activities in four primary business
areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure
Services, and Broadband (collectively, the Nonregulated Group). Energy Marketing
and Services markets natural gas and provides energy management services,
including energy performance contracting services. Coal Mining mines and sells
coal and generates IRS Code Section 29 investment tax credits relating to the
production of coal-based synthetic fuels. Utility Infrastructure Services
provides underground construction and repair, facilities locating, and meter
reading services. Broadband invests in broadband communication services such as
analog and digital cable television, high-speed Internet and data services, and
advanced local and long distance phone services. In addition, the Nonregulated
Group has other businesses that provide utility services and municipal broadband
consulting, and that invest in energy-related opportunities, real estate, and
leveraged leases. The Nonregulated Group supports the Company's regulated
utilities pursuant to service contracts by providing natural gas supply
services, coal, utility infrastructure services, and other services.
2. Basis of Presentation
The interim consolidated condensed financial statements included in this report
have been prepared by the Company, without audit, as provided in the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted as provided in such rules and regulations. The Company
believes that the information in this report reflects all adjustments necessary
to fairly state the results of the interim periods reported. These consolidated
condensed financial statements and related notes should be read in conjunction
with the Company's audited annual consolidated financial statements for the year
ended December 31, 2003, filed on Form 10-K. Because of the seasonal nature of
the Company's utility operations, the results shown on a quarterly basis are not
necessarily indicative of annual results.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
3. Share-Based Compensation
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees"
(APB 25) and related interpretations when measuring compensation expense for its
share-based compensation plans.
Stock Option Plans
The exercise price of stock options awarded under the Company's stock option
plans is equal to the fair market value of the underlying common stock on the
date of grant. Accordingly, no compensation expense has been recognized for
stock option plans. In January 2004, 219,000 options to purchase shares of
common stock at an exercise price of $24.74 were issued to management. The grant
vests over three years.
Other Plans
In addition to its stock option plans, the Company also maintains restricted
stock and phantom stock plans for executives and non-employee directors. In
January 2004, 133,500 restricted shares at a fair value of $24.74 per share were
issued to management. The shares vest over four years.
Compensation expense associated with these restricted stock and phantom stock
plans for the three months ended March 31, 2004 and 2003, was $0.8 million ($0.5
million after tax) and $0.7 million ($0.4 million after tax), respectively. The
amount of expense is consistent with the amount of expense that would have been
recognized if the Company used the fair value based method described in SFAS No.
123 "Accounting for Stock Based Compensation" (SFAS 123), as amended, to value
these awards.
Pro forma Information
Following is the effect on net income and earnings per share as if the fair
value based method described in SFAS 123 had been applied to all share-based
compensation plans:
Three Months Ended March 31,
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(In millions, except per share amounts) 2004 2003
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Net Income:
As reported $ 54.8 $ 55.7
Add: Share-based employee compensation included
in reported net income - net of tax 0.5 0.4
Deduct: Total share-based employee compensation
expense determined under fair value based
method for all awards - net of tax 0.7 0.7
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Pro forma net income $ 54.6 $ 55.4
===============================================================================
Basic Earnings Per Share:
As reported $ 0.73 $ 0.82
Pro forma 0.73 0.82
Diluted Earnings Per Share:
As reported $ 0.72 $ 0.82
Pro forma 0.72 0.82
4. Comprehensive Income
Comprehensive income consists of the following:
Three Months Ended March 31,
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(In millions) 2004 2003
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Net income $ 54.8 $ 55.7
Comprehensive income of unconsolidated
affiliates - net of tax 2.2 7.5
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Total comprehensive income $ 57.0 $ 63.2
==============================================================================
Accumulated other comprehensive income arising from unconsolidated affiliates is
the Company's portion of ProLiance Energy, LLC's and Reliant Services, LLC's
accumulated comprehensive income related to its use of cash flow hedges,
including commodity contracts and interest rate swaps, and the Company's portion
of Haddington Energy Partners, LP's accumulated comprehensive income related to
its unrealized gains and losses of "available for sale securities."
5. Earnings Per Share
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share assumes the conversion of stock options into
common shares and the lifting of restrictions on issued restricted shares using
the treasury stock method to the extent the effect would be dilutive. The
following table sets forth the computation of basic and diluted earnings per
share.
Three Months Ended March 31,
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(In millions, except per share data) 2004 2003
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Numerator:
Numerator for basic and diluted EPS -
Net income $ 54.8 $ 55.7
===============================================================================
Denominator:
Denominator for basic EPS - Weighted average
common shares outstanding 75.5 67.7
Conversion of stock options and lifting of
restrictions on issued restricted stock 0.3 0.1
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Denominator for diluted EPS - Adjusted weighted
average shares outstanding and assumed
conversions outstanding 75.8 67.8
===============================================================================
Basic earnings per share $ 0.73 $ 0.82
Diluted earnings per share $ 0.72 $ 0.82
For the three months ended March 31, 2004 and 2003, options to purchase an
additional 22,274 and 1,287,562, respectively, shares of the Company's common
stock were outstanding, but were not included in the computation of diluted
earnings per share because their effect would be antidilutive. Exercise prices
for options excluded from the computation ranged from $24.90 to $25.59 in 2004
and from $22.54 to $25.59 in 2003.
6. Retirement Plans & Other Postretirement Benefits
The Company maintains three qualified defined benefit pension plans, a
nonqualified supplemental executive retirement plan (SERP), and three other
postretirement benefit plans. The qualified pension plans and the SERP are
aggregated under the heading "Pension Benefits." Other postretirement benefit
plans are aggregated under the heading "Other Benefits."
Net Periodic Benefit Costs
A summary of the components of net periodic benefit cost follows:
Three Months Ended March 31,
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Pension Benefits Other Benefits
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(In millions) 2004 2003 2004 2003
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Service cost $ 1.6 $ 1.5 $ 0.3 $ 0.2
Interest cost 3.3 3.4 1.5 1.4
Expected return on plan assets (3.3) (3.7) (0.2) (0.2)
Amortization of prior service cost 0.2 0.2 - -
Amortization of transitional (asset)
obligation - (0.1) 0.7 0.7
Amortization of actuarial loss (gain) 0.2 0.1 - (0.1)
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Net periodic benefit cost $ 2.0 $ 1.4 $ 2.3 $ 2.0
================================================================================
Employer Contributions to Qualified Pension Plans
Currently, the Company expects to contribute approximately $6.6 million to its
pension plant trusts for 2004. Through March 31, 2004, $1.3 million has been
contributed to its pension plan trusts.
FSP 106-1
The recently enacted Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Medicare Act) provides a prescription drug benefit as well as a
federal subsidy to sponsors of certain retiree health care benefit plans. As
allowed by FASB Staff Position No. 106-1 (FSP 106-1), the Company has elected to
defer reflecting the effects of the Medicare Act on the accumulated benefit
obligation and net periodic postretirement benefit cost in these financial
statements and accompanying notes. The Company's deferral election expires upon
the occurrence of any event that triggers a required remeasurement of plan
assets or obligations, or upon the issuance of specific authoritative guidance
on the accounting for the federal subsidy. Such guidance is pending and when
issued could require the Company to adjust previously reported information.
7. Transactions with ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility, provides natural gas and related
services to the Company. ProLiance's primary businesses include gas marketing,
gas portfolio optimization, and other portfolio and energy management services.
ProLiance's primary customers are utilities and other large end use customers.
Transactions with ProLiance
Purchases from ProLiance for resale and for injections into storage for the
three months ended March 31, 2004 and 2003, totaled $247.9 million and $265.7
million, respectively. Amounts owed to ProLiance at March 31, 2004, and December
31, 2003, for those purchases were $53.8 million and $86.0 million,
respectively, and are included in Accounts payable to affiliated companies.
Amounts charged by ProLiance for gas supply services are established by supply
agreements with each utility.
ProLiance Contingency
There is currently a lawsuit pending in the United States District Court for the
Northern District of Alabama filed by the City of Huntsville, Alabama d/b/a
Huntsville Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville
Utilities asserts claims based on negligent provision of portfolio services
and/or pricing advice, fraud, fraudulent inducement, and other theories. These
claims relate generally to several basic arguments: (1) negligence in providing
advice and/or administering portfolio arrangements; (2) alleged promises to
provide gas at a below-market rate; (3) the creation and repayment of a "winter
levelizing program" instituted by ProLiance in conjunction with the manager of
Huntsville's Gas Utility, to allow Huntsville Utilities to pay its gas bills
over an extended period of time coupled with the alleged ignorance about the
program on the part of Huntsville Utilities' Gas Board, and; (4) the sale of
Huntsville Utilities' gas storage supplies to repay the balance owed on the
winter levelizing program and the authority of Huntsville Utilities' gas manager
to approve those sales. In a press conference on May 21, 2002, Huntsville
Utilities asserted its monetary damages to be approximately $10 million, and
seeks to treble that amount. ProLiance has made counterclaims asserting breach
of contract, among others, based on Huntsville Utilities' refusal to take gas
under fixed price agreements. Both parties have denied the charges contained in
the respective claims.
In 2003, ProLiance established reserves for amounts due from Huntsville
Utilities due to uncertainties surrounding collection. ProLiance believes its
actions were proper under the contract and amendments signed by the manager of
Huntsville's Gas Utility, and is vigorously defending the suit. ProLiance is
insured under a policy providing defense costs which may provide in whole or in
part, indemnification within the policy limits for claims asserted against
ProLiance. Accordingly, no other loss contingencies have been recorded at this
time. However, it is not possible to predict or determine the outcome of this
litigation and accordingly there can be no assurance that ProLiance will
prevail. It is not currently expected that costs associated with this matter
will have a material adverse effect on Vectren's consolidated financial position
or liquidity but an unfavorable outcome could possibly be material to Vectren's
earnings.
8. Commitments & Contingencies
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. See Note 7 regarding the
ProLiance contingency and Note 9 regarding environmental matters.
IRS Section 29 Investment Tax Credit Recent Developments
Vectren's Coal Mining operations are comprised of Vectren Fuels, Inc. (Fuels),
which includes its coal mines and related operations and Vectren Synfuels, Inc.
(Synfuels). Synfuels holds one limited partnership unit (an 8.3% interest) in
Pace Carbon Synfuels Investors, LP (Pace Carbon), a Delaware limited partnership
formed to develop, own, and operate four projects to produce and sell coal-based
synthetic fuel utilizing Covol technology.
Under Section 29 of the Internal Revenue Code, manufacturers such as Pace Carbon
receive a tax credit for every ton of synthetic fuel sold. To qualify for the
credits, the synthetic fuel must meet three primary conditions: 1) there must be
a significant chemical change in the coal feedstock, 2) the product must be sold
to an unrelated person, and 3) the production facility must have been placed in
service before July 1, 1998.
In past rulings, the Internal Revenue Service (IRS) has concluded that the
synthetic fuel produced at the Pace Carbon facilities should qualify for Section
29 tax credits. The IRS issued a private letter ruling with respect to the four
projects on November 11, 1997, and subsequently issued an updated private letter
ruling on September 23, 2002.
As a partner in Pace Carbon, Vectren has reflected total tax credits under
Section 29 in its consolidated results through March 31, 2004, of approximately
$43 million. Vectren has been in a position to fully utilize the credits
generated and continues to project full utilization.
During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year
and later expanded the audit to include tax years 1999, 2000, and 2001. Based on
conclusions reached in an industry-wide review and recently issued private
letter rulings involving other synthetic fuel facilities, Vectren believes these
audits may soon be resolved. However, the IRS has not directly notified Pace
Carbon of any resolution. Further, the Permanent Subcommittee on Investigations
of the U.S. Senate's committee on Governmental Affairs has initiated an
investigation on the subject of these income tax credits.
Vectren believes it is justified in its reliance on the private letter rulings
for the Pace Carbon facilities, that the test results that Pace Carbon presented
to the IRS in connection with its private letter rulings are scientifically
valid, and that Pace Carbon has operated its facilities in compliance with its
private letter rulings and Section 29 of the Internal Revenue Code. However, at
this time, Vectren cannot provide any assurance as to the outcome that these
uncertainties may have on Vectren's consolidated financial position or
liquidity.
Guarantees & Product Warranties
Vectren Corporation issues guarantees to third parties on behalf of its
unconsolidated affiliates. Such guarantees allow those affiliates to execute
transactions on more favorable terms than the affiliate could obtain without
such a guarantee. Guarantees may include posted letters of credit, leasing
guarantees, and performance guarantees. As of March 31, 2004, guarantees issued
and outstanding on behalf of unconsolidated affiliates approximated $6 million.
The Company has also issued a guarantee approximating $4 million related to the
residual value of an operating lease that expires in 2006.
Vectren Corporation has accrued no liabilities for these guarantees as they
relate to guarantees issued among related parties or were executed prior to the
adoption of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". Liabilities accrued for, and activity related to, product warranties
are not significant.
9. Environmental Matters
NOx SIP Call Matter
The Company has initiated steps toward compliance with Indiana's State
Implementation Plan (SIP) of the Clean Air Act (the Act). These steps include
installing Selective Catalytic Reduction (SCR) systems at Culley Generating
Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown
Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to
atmospheric nitrogen and water using ammonia in a chemical reaction. This
technology is known to currently be the most effective method of reducing
nitrogen oxide (NOx) emissions where high removal efficiencies are required.
The IURC has issued orders that approve:
> the Company's project to achieve environmental compliance by investing
in clean coal technology;
> a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs
incurred;
> a mechanism whereby, prior to an electric base rate case, the Company
may recover through a rider that is updated every six months, an eight
percent return on its weighted capital costs for the project; and
> ongoing recovery of operating costs, including depreciation and
purchased emission allowances through a rider mechanism, related to
the clean coal technology once the facility is placed into service.
Based on the level of system-wide emissions reductions required and the control
technology utilized to achieve the reductions, the current estimated clean coal
technology construction cost is consistent with amounts approved in the IURC's
orders and is expected to be expended through 2006. Through March 31, 2004,
$158.5 million has been expended. After the equipment is installed and
operational, related annual operating expenses, including depreciation expense,
are estimated to be between $24 million and $27 million. A portion of those
expenses began in October 2003 when the Culley SCR became operational. The 8
percent return on capital investment approximates the return authorized in the
Company's last electric rate case in 1995 and includes a return on equity.
The Company expects to achieve timely compliance as a result of the project.
Construction of the first SCR at Culley was placed into service in October 2003,
and construction of the Warrick 4 and Brown SCR's is proceeding on schedule to
achieve full compliance with the requirements of the NOx SIP Call. Installation
of SCR technology as planned is expected to reduce the Company's overall NOx
emissions to levels compliant with Indiana's NOx emissions budget allotted by
the USEPA. Therefore, the Company has recorded no accrual for potential
penalties that may result from noncompliance.
Manufactured Gas Plants
In the past, Indiana Gas, SIGECO, 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 (VRP) and is currently conducting some level of
remedial activities, including groundwater monitoring at certain sites, where
deemed appropriate, and will continue remedial activities at the sites as
appropriate and necessary.
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.
In October 2002, the Company received a formal information request letter from
the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO
and not currently enrolled in the IDEM's VRP. In response, SIGECO submitted to
the IDEM the results of preliminary site investigations conducted in the
mid-1990's. These site investigations confirmed that based upon the conditions
known at the time, the sites posed no risk to human health or the environment.
Follow up reviews have been initiated by the Company to confirm that the sites
continue to pose no such risk.
On October 6, 2003, SIGECO filed applications to enter four of the manufactured
gas plant sites in IDEM's VRP. The remaining site is currently being addressed
in the VRP by another Indiana utility. SIGECO added those four sites into the
renewal of the global Voluntary Remediation Agreement that Indiana Gas has in
place with IDEM for its manufactured gas plant sites. That renewal was approved
by the IDEM on February 24, 2004. The total costs, including PRP involvement and
insurance recoveries, and if necessary, remedial work at the four SIGECO sites,
cannot be determined at this time.
10. Rate & Regulatory Matters
Vectren South (SIGECO) Gas Base Rate Settlement
On March 12, 2004, Vectren South filed a petition with the IURC to adjust its
base rates and charges for its gas distribution business in southwestern Indiana
to recover the ongoing cost of operating and maintaining the approximately
3,000-mile distribution and storage system used to serve more than 110,000
customers. On March 26, 2004, SIGECO reached a definitive agreement with the
OUCC regarding the proposed changes to the base rates and charges for its gas
distribution business in southwestern Indiana. The settlement agreement was
filed with the IURC and completes a collaborative effort between Vectren South
and the OUCC to streamline the formal regulatory review process. On June 2,
2004, the IURC will conduct a public hearing to consider approval of the filed
settlement.
The settlement agreement provides for: 1) a rate increase of $5.7 million, 2) a
rate design for the revenue increase, including a larger monthly customer
charge, intended to address earnings volatility related to weather, and 3)
recovery of the on-going costs associated with the federal Pipeline Safety
Improvement Act of 2002. Under the settlement, a Pipeline Safety Improvement
Tracker provides for the recovery of incremental non-capital dollars, capped at
$750,000 the first year and $500,000 thereafter. Costs in excess of the annual
cap amounts are deferred for future recovery.
The proposed rate settlement only addresses "non-gas" costs, including the costs
of constructing, operating and maintaining the Company's natural gas system.
While the timing of an order on the settlement is uncertain, the Company
believes than an order will be issued in the third quarter of 2004.
Vectren North (Indiana Gas) Base Rate Filing
On March 19, 2004, Vectren North filed a petition with the IURC to adjust its
base rates and charges for its gas distribution business in a 49 county region
covering central and southeastern Indiana. If the filing is approved, Indiana
Gas expects to increase its base rates by approximately $47 million to recover
the ongoing cost of operating, maintaining and expanding the approximately
12,000-mile distribution and storage system used to serve more than 525,000
customers. The petition only addresses Indiana Gas' "non-gas" costs which are
incurred to build, operate and maintain the pipes, other equipment and systems
that are used to deliver gas. The filing also includes a normal temperature
adjustment (NTA) mechanism to reduce the impact on customer bills caused by
variations in weather and to address earnings volatility related to weather.
With the NTA, historic average temperatures serve as the basis for computing
customers' bills, thereby smoothing out the effects of significant temperature
fluctuations. The timing and ultimate outcome of this regulatory initiative is
uncertain.
VEDO Gas Base Rate Pre-filing Notice
On April 16, 2004, VEDO issued a pre-filing notice to the PUCO of a request to
adjust base rates and charges for VEDO's gas distribution business in a
17-county region covering west central Ohio. If the filing is approved, VEDO
expects to increase base rates up to $25 million to recover the ongoing cost of
operating, maintaining and expanding the approximately 5,200-mile distribution
system used to serve more than 310,000 customers. The official application is
expected to be filed in late May. VEDO's request is subject to review and
approval by the PUCO. The petition only addresses VEDO's "non-gas costs," which
are incurred to build, operate and maintain pipelines, other equipment and
systems that are used to deliver gas across VEDO's system to its customers. The
filing also includes a proposed conservation tariff that will expand and provide
incentives for the Company to promote home weatherization and energy
conservation programs. The proposed tariff provides resources for consumers to
decrease natural gas usage through energy efficiency measures, and it allows the
company to proactively sponsor conservation without negatively impacting
earnings. The timing and ultimate outcome of this regulatory initiative is
uncertain.
Gas Cost Recovery (GCR) Audit Proceedings
There is an Ohio requirement that Ohio gas utilities undergo a biannual audit of
their gas acquisition practices in connection with the gas cost recovery (GCR)
mechanism. In the case of VEDO, the two-year period began in November 2000,
coincident with the Company's acquisition of the Ohio operations and
commencement of service in Ohio. The audit provides the initial review of the
portfolio administration arrangement between VEDO and ProLiance. The external
auditor retained by the PUCO staff recently submitted an audit report wherein it
recommended a disallowance of approximately $7 million of previously recovered
gas costs. The Company believes a large portion of the third party auditor
recommendations is without merit. There are two elements of the recommendations
relating to the treatment of a pipeline refund and a penalty collectively
totaling $1.2 million, which VEDO does not oppose. A hearing has been held, and
the PUCO staff has recommended a $6.1 million disallowance. The Ohio Consumer
Counselor has recommended an $11.5 million disallowance. For this PUCO audit
period, any disallowance relating to the Company's ProLiance arrangement will be
shared by the Company's joint venture partner. Based on a review of the matters,
the Company has reserved $1.1 million for its estimated share of a potential
disallowance. The Company believes that these proceedings will not likely have a
material effect on the Company's operating results or financial condition.
However, the Company can provide no assurance as to the ultimate outcome of this
proceeding. The Company anticipates the PUCO's decision will be issued later
this year.
11. Impact of Recently Issued Accounting Guidance
SFAS No. 132 (Revised 2003)
In December 2003, FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132), to
improve financial statement disclosures for defined benefit and other
postretirement benefit plans. The incremental annual disclosure requirements
were reflected in the Company's Form 10-K for the year ended December 31, 2003.
The adoption did not impact the Company's results of operations or financial
condition. The incremental interim disclosure requirements are included in these
financial statements in Note 6.
FIN 46/46R (Revised in December 2003)
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 (VIE) and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies related to VIE's and thus
improves comparability between enterprises engaged in similar activities when
those activities are conducted through VIE's. In December 2003, the FASB
completed its deliberations of proposed modifications to FIN 46 and decided to
codify both the proposed modifications and other decisions previously issued
through certain FASB Staff Positions into one document that was issued as a
revision to the original Interpretation (FIN 46R). FIN 46R currently applies to
VIE's created after January 31, 2003, and to VIE's in which an enterprise
obtains an interest after that date. For entities created prior to January 31,
2003, FIN 46R is to be adopted no later than the end of the first interim or
annual reporting period ending after March 15, 2004.
The Company has neither created nor obtained an interest in a VIE since January
31, 2003. Certain other entities that the Company was involved with prior to
that date have been evaluated and determined to be VIE's. The Company has
investments in partnership-like structures as a limited partner or as a
subordinated lender. The activities of these entities are to purchase or
construct as well as operate multifamily housing and office properties. The
Company's exposure to loss is limited to its investment which as of March 31,
2004, and December 31, 2003, totaled $16.9 million and $17.1 million,
respectively, of Investments in unconsolidated affiliates, and $20.9 million at
both dates of Other investments. The Company is also the equity owner in three
leveraged leases where its exposure to loss is limited to its net investment
which approximated $6 million as of both March 31, 2004, and December 31, 2003.
The Company is not required to consolidate any of these entities upon adoption
of FIN 46R.
EITF 03-01
In March 2004, the EITF issued a consensus on Issue No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
(EITF 03-01). In this consensus, the Task Force required certain quantitative
and qualitative disclosures related to debt and marketable equity securities
classified as "available-for-sale" or "held-to-maturity" that are in an
unrealized loss position at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. In addition, the Task
Force developed a basic model in evaluating whether investments within the scope
of EITF 03-01 have other-than-temporary impairment. The Company is required to
adopt the recognition and measurement provisions of EITF 03-01 in the third
quarter of fiscal 2004. The Company is assessing the impact EITF 03-01 may have
on its operations.
12. Segment Reporting
The Company segregates its operations into three groups: 1) Utility Group, 2)
Nonregulated Group, and 3) Corporate and Other Group.
The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations,
which consist of the Company's regulated operations (the Gas Utility Services
and Electric Utility Services operating segments), and other operations that
provide information technology and other support services to those regulated
operations. In total, there are three operating segments of the Utility Group as
defined by SFAS 131 "Disclosure About Segments of an Enterprise and Related
Information" (SFAS 131). Gas Utility Services provides natural gas distribution
and transportation services in nearly two-thirds of Indiana and to west central
Ohio. Electric Utility Services provides electricity primarily to southwestern
Indiana, and includes the Company's power generating and marketing operations.
For these regulated operations the Company uses after tax operating income as a
measure of profitability, consistent with regulatory reporting requirements. The
Company cross manages its regulated operations as separated between Energy
Delivery, which includes the gas and electric transmission and distribution
functions, and Power Supply, which includes the power generating and marketing
operations. For the Utility Group's other operations, net income is used as the
measure of profitability.
The Nonregulated Group is comprised of one operating segment as defined by SFAS
131 that includes various subsidiaries and affiliates offering and investing in
energy marketing and services, coal mining, utility infrastructure services, and
broadband communications, among other energy-related opportunities.
The Corporate and Other Group is comprised of one operating segment as defined
by SFAS 131 that includes unallocated corporate expenses such as branding and
charitable contributions, among other activities, that benefit the Company's
other operating segments.
Information related to the Company's business segments is summarized below:
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In millions) 2004 2003
- --------------------------------------------------------------------------------
Revenues
Utility Group
Gas Utility Services $ 505.1 $ 509.2
Electric Utility Services 88.8 83.5
Other Operations 9.4 6.6
Eliminations (9.1) (6.4)
- --------------------------------------------------------------------------------
Total Utility Group 594.2 592.9
- --------------------------------------------------------------------------------
Nonregulated Group 70.4 53.2
Corporate & Other Group - 0.2
Eliminations (19.3) (20.0)
- --------------------------------------------------------------------------------
Consolidated Revenues $ 645.3 $ 626.3
================================================================================
Profitability Measure
Utility Group: Regulated Operating Income
(Operating Income Less Applicable Income Taxes)
Gas Utility Services $ 46.1 $ 47.3
Electric Utility Services 13.4 16.3
- --------------------------------------------------------------------------------
Total Regulated Operating Income 59.5 63.6
- --------------------------------------------------------------------------------
Regulated other income (expense) - net (0.6) 0.4
Regulated interest expense & preferred dividends (15.8) (15.5)
- --------------------------------------------------------------------------------
Regulated Net Income 43.1 48.5
- --------------------------------------------------------------------------------
Other Operations Net Income 1.6 (1.2)
- --------------------------------------------------------------------------------
Utility Group Net Income 44.7 47.3
- --------------------------------------------------------------------------------
Nonregulated Group Net Income 10.6 8.5
Corporate & Other Group Net Loss (0.5) (0.1)
- --------------------------------------------------------------------------------
Consolidated Net Income $ 54.8 $ 55.7
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Description of the Business
Vectren Corporation (the Company or Vectren), an Indiana corporation, is an
energy and applied technology holding company headquartered in Evansville,
Indiana. The Company'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 or Vectren North),
Southern Indiana Gas and Electric Company (SIGECO or Vectren South), and the
Ohio operations. VUHI also has other assets that provide information technology
and other services to the three utilities. 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.
Indiana Gas provides natural gas distribution and transportation services to a
diversified customer base in 49 of Indiana's 92 counties. SIGECO provides
electric generation, transmission, and distribution services to 8 counties in
southwestern Indiana, including counties surrounding Evansville, and
participates in the wholesale power market. SIGECO also provides natural gas
distribution and transportation services to 10 counties in southwestern Indiana,
including counties surrounding Evansville. Indiana Gas and SIGECO generally do
business as Vectren Energy Delivery of Indiana, Inc. The Ohio operations, owned
as a tenancy in common by Vectren Energy Delivery of Ohio, Inc. (VEDO), a wholly
owned subsidiary, (53% ownership) and Indiana Gas (47% ownership), provide
natural gas distribution and transportation services to 17 counties in west
central Ohio, including counties surrounding Dayton. VUHI's consolidated
operations are collectively referred to as the Utility Group.
The Company is also involved in nonregulated activities in four primary business
areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure
Services, and Broadband (collectively, the Nonregulated Group). Energy Marketing
and Services markets natural gas and provides energy management services,
including energy performance contracting services. Coal Mining mines and sells
coal and generates IRS Code Section 29 investment tax credits relating to the
production of coal-based synthetic fuels. Utility Infrastructure Services
provides underground construction and repair, facilities locating, and meter
reading services. Broadband invests in broadband communication services such as
analog and digital cable television, high-speed Internet and data services, and
advanced local and long distance phone services. In addition, the Nonregulated
Group has other businesses that provide utility services and municipal broadband
consulting, and that invest in energy-related opportunities, real estate, and
leveraged leases. The Nonregulated Group supports the Company's regulated
utilities pursuant to service contracts by providing natural gas supply
services, coal, utility infrastructure services, and other services.
Executive Summary of Consolidated Results of Operations
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto.
Three Months Ended March 31,
- ----------------------------------------------------------------------------
(In millions, except per share data) 2004 2003
- ----------------------------------------------------------------------------
Net income $ 54.8 $ 55.7
Attributed to:
Utility Group $ 44.7 $ 47.3
Nonregulated Group 10.6 8.5
Corporate & other (0.5) (0.1)
- ----------------------------------------------------------------------------
Basic earnings per share $ 0.73 $ 0.82
Attributed to:
Utility Group $ 0.60 $ 0.70
Nonregulated Group 0.14 0.13
Corporate & other (0.01) (0.01)
Results
For the three months ended March 31, 2004, net income was $54.8 million, or $.73
per share, compared to $55.7 million, or $0.82 per share for the three months
ended March 31, 2003. Of the reduction in earnings per share, $0.01 per share
was due to the decline in net income and $0.08 per share was attributable to an
increase of 7.7 million in weighted average shares outstanding resulting
primarily from the equity offering in August 2003.
Utility Group earnings were $44.7 million for the three months ended March 31,
2004, compared to $47.3 million in the prior year. The $2.6 million decrease in
Utility Group earnings resulted primarily from the effects of weather 10% warmer
in 2004 compared to 2003, which decreased results approximately $5.0 million
after tax. The Utility Group decrease was partially offset by the recovery of
NOx expenditures and related operating expenses which increased earnings $0.8
million after tax, and the $1.2 million after tax charge in 2003 resulting from
the Company's investment in BABB International (BABB).
Nonregulated Group earnings were $10.6 million for the three months ended March
31, 2004, compared to $8.5 million in the prior year. The $2.1 million increase
in Nonregulated earnings resulted from a $5.3 million after tax gain recognized
on the sale of an investment held by one of the Company's equity method
investments and a $1.3 million increase in operating results from the Coal
Mining Group, offset largely by a $4.5 million after tax charge related to the
write down of the Company's broadband-related investments.
The Utility Group generates revenue primarily from the delivery of natural gas
and electric service to its customers. The primary source of cash flow for the
Utility Group results from the collection of customer bills and the payment for
goods and services procured for the delivery of gas and electric services. The
results of the Utility Group are impacted by weather patterns in its service
territory and general economic conditions both in its service territory as well
as nationally.
The Nonregulated Group generates revenue or earnings from the provision of
services to customers. The activities of the Nonregulated Group are closely
linked to the utility industry, and the results of those operations are
generally impacted by factors similar to those impacting the overall utility
industry.
The Company has in place a disclosure committee that consists of senior
management as well as financial management. The committee is actively involved
in the preparation and review of the Company's SEC filings.
Dividends
Dividends declared for the three months ended March 31, 2004, were $0.285 per
share compared to $0.275 per share for the same period in 2003.
Detailed Discussion of Results of Operations
Following is a more detailed discussion of the results of operations of the
Company's Utility Group and Nonregulated Group. The detailed results of
operations for the Utility Group and Nonregulated Group are presented and
analyzed before the reclassification and elimination of certain intersegment
transactions necessary to consolidate those results into the Company's
Consolidated Condensed Statements of Income. The operations of the Corporate and
Other Group are not significant.
Results of Operations of the Utility Group
The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations,
which consist of the Company's regulated operations (the Gas Utility Services
and Electric Utility Services operating segments), and other operations that
provide information technology and other support services to those regulated
operations. Gas Utility Services provides natural gas distribution and
transportation services in nearly two-thirds of Indiana and to west central
Ohio. Electric Utility Services provides electricity primarily to southwestern
Indiana, and includes the Company's power generating and marketing operations.
Results of operations of the Utility Group before certain intersegment
eliminations and reclassifications are summarized below:
Three Months Ended March 31,
- --------------------------------------------------------------------------
(In millions, except per share data) 2004 2003
- --------------------------------------------------------------------------
OPERATING REVENUES
Gas utility $ 505.1 $ 509.2
Electric utility 88.8 83.5
Other 0.3 0.2
- --------------------------------------------------------------------------
Total operating revenues 594.2 592.9
- --------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 365.6 364.8
Fuel for electric generation 22.9 20.8
Purchased electric energy 4.4 4.5
Other operating 60.1 56.6
Depreciation & amortization 29.6 28.8
Taxes other than income taxes 22.3 21.7
- --------------------------------------------------------------------------
Total operating expenses 504.9 497.2
- --------------------------------------------------------------------------
OPERATING INCOME 89.3 95.7
OTHER INCOME (EXPENSE)
Other income (expense) - net (0.1) (1.5)
Equity in earnings (losses) of
unconsolidated affiliates 0.2 (0.5)
- --------------------------------------------------------------------------
Total other income (expense) 0.1 (2.0)
- --------------------------------------------------------------------------
Interest expense 17.0 16.5
- --------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 72.4 77.2
- --------------------------------------------------------------------------
Income taxes 27.7 29.9
- --------------------------------------------------------------------------
NET INCOME $ 44.7 $ 47.3
==========================================================================
BASIC EARNINGS PER SHARE $ 0.60 $ 0.70
==========================================================================
Utility Group earnings were $44.7 million for the three months ended March 31,
2004, compared to $47.3 million in the prior year. The $2.6 million decrease in
Utility Group earnings resulted primarily from the effects of weather 10% warmer
in 2004 compared to 2003, which decreased results approximately $5.0 million
after tax. The Utility Group decrease was partially offset by the recovery of
NOx expenditures and related operating expenses which increased earnings $0.8
million after tax, and the $1.2 million after tax charge in 2003 resulting from
the Company's investment in BABB.
Throughout this discussion, the terms Gas Utility margin and Electric Utility
margin are used. Gas Utility margin and Electric Utility margin could be
considered non-GAAP measures of income. Gas Utility margin is calculated as Gas
utility revenues less the Cost of gas sold. Electric Utility margin is
calculated as Electric utility revenues less Fuel for electric generation and
Purchased electric energy. These measures exclude Other operating expenses,
Depreciation and amortization, and Taxes other than income taxes, which are
included in the calculation of operating income. The Company believes Gas
Utility and Electric Utility margins are better indicators of relative
contribution than revenues since gas prices and fuel costs can be volatile and
are generally collected on a dollar for dollar basis from customers. Margins
should not be considered an alternative to, or a more meaningful indicator of
operating performance than, operating income or net income as determined in
accordance with accounting principles generally accepted in the United States.
Significant Fluctuations
Utility Group Margin
Margin generated from the sale of natural gas and electricity to residential and
commercial customers is seasonal and impacted by weather patterns in its service
territory. Margin generated from sales to industrial and other contract
customers is impacted by overall economic conditions. In general, margin is not
sensitive to variations in gas or fuel costs. It is, however, impacted by the
collection of state mandated taxes which fluctuate with gas costs and also some
level of price sensitive fluctuation in volumes sold. Electric generating asset
optimization activities are primarily affected by market conditions, the level
of excess generating capacity, and electric transmission availability. Following
is a discussion and analysis of margin generated from regulated utility
operations.
Gas Utility Margin (Gas Utility Revenues less Cost of Gas Sold) Gas Utility
margin and throughput by customer type follows:
Three Months Ended March 31,
- -------------------------------------------------------------------------------
(In millions) 2004 2003
- -------------------------------------------------------------------------------
Residential $ 90.4 $ 94.7
Commercial 28.1 29.7
Contract 18.0 18.5
Other 3.0 1.5
- -------------------------------------------------------------------------------
Total gas utility margin $ 139.5 $ 144.4
===============================================================================
Sold & transported volumes in MMDth:
To residential & commercial customers 57.3 61.8
To contract customers 29.2 30.3
- -------------------------------------------------------------------------------
Total throughput 86.5 92.1
===============================================================================
Gas Utility margins for the three months ended March 31, 2004, were $139.5
million, a decrease of $4.9 million, or 3%, compared to the prior year period.
It is estimated that weather 10% warmer than the prior year and 3% warmer than
normal decreased margins $7.7 million and was the primary contributor to the
decreased throughput. The decrease was partially offset by increased customers,
consumption, and higher utility receipts and excise taxes. The average cost per
dekatherm of gas purchased for the three months ended March 31, 2004, was $6.60
compared to $6.53 in 2003.
Electric Utility Margin (Electric Utility Revenues less Fuel for Electric
Generation and Purchased Electric Energy)
Electric Utility margin by revenue type follows:
Three Months Ended March 31,
- -----------------------------------------------------------------------------
(In millions) 2004 2003
- -----------------------------------------------------------------------------
Residential & commercial $ 35.5 $ 33.3
Industrial 14.4 12.3
Municipalities & other 4.6 4.5
- -----------------------------------------------------------------------------
Total retail & firm wholesale 54.5 50.1
Asset optimization 7.0 8.1
- -----------------------------------------------------------------------------
Total electric utility margin $ 61.5 $ 58.2
=============================================================================
Retail & Firm Wholesale Margin
For the three months ended March 31, 2004, margin from serving native load and
firm wholesale customers was $54.5 million, an increase of $4.4 million when
compared to 2003. Margin increased $3.6 million over 2003 due to the increase in
retail electric rates related to recovery of NOx compliance expenditures and
related operating expenses. Margins from industrial customers increased $2.1
million over 2003 reflecting some economic recovery. The effects of weather
partially offset these increases by approximately $0.7 million. Total retail and
firm wholesale volumes sold increased 6% to 1.50 GWh in 2004 compared to 1.42
GWh in 2003.
Margin from Asset Optimization Activities
Periodically, generation capacity is in excess of that needed to serve native
load and firm wholesale customers. The Company markets this unutilized capacity
to optimize the return on its owned generation assets. Substantially all of
these contracts are integrated with portfolio requirements around power supply
and delivery and are short-term purchase and sale transactions that expose the
Company to limited market risk.
Following is a reconciliation of asset optimization activity:
Three Months Ended March 31,
- -------------------------------------------------------------------------------
(In millions) 2004 2003
- -------------------------------------------------------------------------------
Beginning of Period Net Asset Optimization
Position $ (0.4) $ 0.7
Statement of Income Activity
Net mark-to-market gains 2.8 0.9
Net realized gains recognized 4.2 7.2
- -------------------------------------------------------------------------------
Net activity in electric utility margin 7.0 8.1
- -------------------------------------------------------------------------------
Net cash received & other adjustments (3.2) (9.2)
- -------------------------------------------------------------------------------
End of Period Net Asset Optimization Position $ 3.4 $ (0.4)
===============================================================================
For the three months ended March 31, 2004 and 2003, volumes sold into the
wholesale market were 0.51 GWh compared to 1.45 GWh in 2003, while volumes
purchased were 0.47 GWh in 2004 compared to 1.26 GWh in 2003. A portion of
volumes purchased in the wholesale market is used to serve native load and firm
wholesale customers, and in 2004 compared to 2003, greater amounts of purchased
power have been required for native load due to scheduled and unscheduled
outages of owned generation, which has reduced capacity available for
optimization. The decrease in margin is due largely to market conditions and
price volatility this quarter, compared to the same quarter last year.
Following is information regarding asset optimization activities included in
Electric utility revenues and Fuel for electric generation in the Statements of
Income:
Three Months Ended March 31,
- -----------------------------------------------------------------------------
(In millions) 2004 2003
- -----------------------------------------------------------------------------
Activity related to:
Sales contracts $ 11.9 $ 47.2
Purchase contracts (6.0) (36.7)
Net mark-to-market gains realized 2.8 0.9
- -----------------------------------------------------------------------------
Net asset optimization revenue 8.7 11.4
- -----------------------------------------------------------------------------
Fuel for electric generation 1.7 3.3
- -----------------------------------------------------------------------------
Asset optimization margin $ 7.0 $ 8.1
=============================================================================
Utility Group Operating Expenses
For the three months ended March 31, 2004, other operating and depreciation &
amortization expenses increased $3.5 million and $0.8 million, respectively,
compared to 2003. The increases resulted from $1.5 million of additional
operating expenses and $0.8 million of additional depreciation expense
associated with NOx compliance. The remaining increase in other operating
expenses is primarily due to higher labor and benefit costs.
Utility Group Total Other Income (Expense)
For the three months ended March 31, 2004, total other income (expense)
increased $2.1 million compared to 2003. The increase was primarily attributable
to $2.5 million in charges taken against the Company's equity method investment
in BABB. In the first quarter of 2003, the Company recorded a $2.0 million write
down of its investment in BABB as well as $0.5 million of equity method losses.
Utility Group Interest Expense
For the three months ended March 31, 2004, interest expense increased $0.5
million compared to 2003. The increase reflects the impact of permanent
financing completed in 2003 whereby short-term variable rate debt was converted
to fixed rate debt at a higher interest rate.
Utility Group Income Tax
For the three months ended March 31, 2004, Federal and state income taxes
decreased $2.2 million primarily due to fluctuations in pre-tax income.
Environmental Matters
NOx SIP Call Matter
The Company has initiated steps toward compliance with Indiana's State
Implementation Plan (SIP) of the Clean Air Act (the Act). These steps include
installing Selective Catalytic Reduction (SCR) systems at Culley Generating
Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown
Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to
atmospheric nitrogen and water using ammonia in a chemical reaction. This
technology is known to currently be the most effective method of reducing
nitrogen oxide (NOx) emissions where high removal efficiencies are required.
The IURC has issued orders that approve:
> the Company's project to achieve environmental compliance by investing
in clean coal technology;
> a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs
incurred;
> a mechanism whereby, prior to an electric base rate case, the Company
may recover through a rider that is updated every six months, an eight
percent return on its weighted capital costs for the project; and
> ongoing recovery of operating costs, including depreciation and
purchased emission allowances through a rider mechanism, related to
the clean coal technology once the facility is placed into service.
Based on the level of system-wide emissions reductions required and the control
technology utilized to achieve the reductions, the current estimated clean coal
technology construction cost is consistent with amounts approved in the IURC's
orders and is expected to be expended through 2006. Through March 31, 2004,
$158.5 million has been expended. After the equipment is installed and
operational, related annual operating expenses, including depreciation expense,
are estimated to be between $24 million and $27 million. A portion of those
expenses began in October 2003 when the Culley SCR became operational. The 8
percent return on capital investment approximates the return authorized in the
Company's last electric rate case in 1995 and includes a return on equity.
The Company expects to achieve timely compliance as a result of the project.
Construction of the first SCR at Culley was placed into service in October 2003,
and construction of the Warrick 4 and Brown SCR's is proceeding on schedule to
achieve full compliance with the requirements of the NOx SIP Call. Installation
of SCR technology as planned is expected to reduce the Company's overall NOx
emissions to levels compliant with Indiana's NOx emissions budget allotted by
the USEPA. Therefore, the Company has recorded no accrual for potential
penalties that may result from noncompliance.
Manufactured Gas Plants
In the past, Indiana Gas, SIGECO, 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 (VRP) and is currently conducting some level of
remedial activities, including groundwater monitoring at certain sites, where
deemed appropriate, and will continue remedial activities at the sites as
appropriate and necessary.
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.
In October 2002, the Company received a formal information request letter from
the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO
and not currently enrolled in the IDEM's VRP. In response, SIGECO submitted to
the IDEM the results of preliminary site investigations conducted in the
mid-1990's. These site investigations confirmed that based upon the conditions
known at the time, the sites posed no risk to human health or the environment.
Follow up reviews have been initiated by the Company to confirm that the sites
continue to pose no such risk.
On October 6, 2003, SIGECO filed applications to enter four of the manufactured
gas plant sites in IDEM's VRP. The remaining site is currently being addressed
in the VRP by another Indiana utility. SIGECO added those four sites into the
renewal of the global Voluntary Remediation Agreement that Indiana Gas has in
place with IDEM for its manufactured gas plant sites. That renewal was approved
by the IDEM on February 24, 2004. The total costs, including PRP involvement and
insurance recoveries, and if necessary, remedial work at the four SIGECO sites,
cannot be determined at this time.
Rate and Regulatory Matters
Vectren South (SIGECO) Gas Base Rate Settlement
On March 12, 2004, Vectren South filed a petition with the IURC to adjust its
base rates and charges for its gas distribution business in southwestern Indiana
to recover the ongoing cost of operating and maintaining the approximately
3,000-mile distribution and storage system used to serve more than 110,000
customers. On March 26, 2004, SIGECO reached a definitive agreement with the
OUCC regarding the proposed changes to the base rates and charges for its gas
distribution business in southwestern Indiana. The settlement agreement was
filed with the IURC and completes a collaborative effort between Vectren South
and the OUCC to streamline the formal regulatory review process. On June 2,
2004, the IURC will conduct a public hearing to consider approval of the filed
settlement.
The settlement agreement provides for: 1) a rate increase of $5.7 million, 2) a
rate design for the revenue increase, including a larger monthly customer
charge, intended to address earnings volatility related to weather, and 3)
recovery of the on-going costs associated with the federal Pipeline Safety
Improvement Act of 2002. Under the settlement, a Pipeline Safety Improvement
Tracker provides for the recovery of incremental non-capital dollars, capped at
$750,000 the first year and $500,000 thereafter. Costs in excess of the annual
cap amounts are deferred for future recovery.
The proposed rate settlement only addresses "non-gas" costs, including the costs
of constructing, operating and maintaining the Company's natural gas system.
While the timing of an order on the settlement is uncertain, the Company
believes than an order will be issued in the third quarter of 2004.
Vectren North (Indiana Gas) Base Rate Filing
On March 19, 2004, Vectren North filed a petition with the IURC to adjust its
base rates and charges for its gas distribution business in a 49 county region
covering central and southeastern Indiana. If the filing is approved, Indiana
Gas expects to increase its base rates by approximately $47 million to recover
the ongoing cost of operating, maintaining and expanding the approximately
12,000-mile distribution and storage system used to serve more than 525,000
customers. The petition only addresses Indiana Gas' "non-gas" costs which are
incurred to build, operate and maintain the pipes, other equipment and systems
that are used to deliver gas. The filing also includes a normal temperature
adjustment (NTA) mechanism to reduce the impact on customer bills caused by
variations in weather and to address earnings volatility related to weather.
With the NTA, historic average temperatures serve as the basis for computing
customers' bills, thereby smoothing out the effects of significant temperature
fluctuations. The timing and ultimate outcome of this regulatory initiative is
uncertain.
VEDO Gas Base Rate Pre-filing Notice
On April 16, 2004, VEDO issued a pre-filing notice to the PUCO of a request to
adjust base rates and charges for VEDO's gas distribution business in a
17-county region covering west central Ohio. If the filing is approved, VEDO
expects to increase base rates up to $25 million to recover the ongoing cost of
operating, maintaining and expanding the approximately 5,200-mile distribution
system used to serve more than 310,000 customers. The official application is
expected to be filed in late May. VEDO's request is subject to review and
approval by the PUCO. The petition only addresses VEDO's "non-gas costs," which
are incurred to build, operate and maintain pipelines, other equipment and
systems that are used to deliver gas across VEDO's system to its customers. The
filing also includes a proposed conservation tariff that will expand and provide
incentives for the Company to promote home weatherization and energy
conservation programs. The proposed tariff provides resources for consumers to
decrease natural gas usage through energy efficiency measures, and it allows the
company to proactively sponsor conservation without negatively impacting
earnings. The timing and ultimate outcome of this regulatory initiative is
uncertain.
Gas Cost Recovery (GCR) Audit Proceedings
There is an Ohio requirement that Ohio gas utilities undergo a biannual audit of
their gas acquisition practices in connection with the gas cost recovery (GCR)
mechanism. In the case of VEDO, the two-year period began in November 2000,
coincident with the Company's acquisition of the Ohio operations and
commencement of service in Ohio. The audit provides the initial review of the
portfolio administration arrangement between VEDO and ProLiance. The external
auditor retained by the PUCO staff recently submitted an audit report wherein it
recommended a disallowance of approximately $7 million of previously recovered
gas costs. The Company believes a large portion of the third party auditor
recommendations is without merit. There are two elements of the recommendations
relating to the treatment of a pipeline refund and a penalty collectively
totaling $1.2 million, which VEDO does not oppose. A hearing has been held, and
the PUCO staff has recommended a $6.1 million disallowance. The Ohio Consumer
Counselor has recommended an $11.5 million disallowance. For this PUCO audit
period, any disallowance relating to the Company's ProLiance arrangement will be
shared by the Company's joint venture partner. Based on a review of the matters,
the Company has reserved $1.1 million for its estimated share of a potential
disallowance. The Company believes that these proceedings will not likely have a
material effect on the Company's operating results or financial condition.
However, the Company can provide no assurance as to the ultimate outcome of this
proceeding. The Company anticipates the PUCO's decision will be issued later
this year.
Results of Operations of the Nonregulated Group
The Nonregulated Group is comprised of four primary business areas: Energy
Marketing and Services, Coal Mining, Utility Infrastructure Services, and
Broadband. Energy Marketing and Services markets natural gas and provides energy
management services, including energy performance contracting services. Coal
Mining mines and sells coal and generates IRS Code Section 29 investment tax
credits relating to the production of coal-based synthetic fuels. Utility
Infrastructure Services provides underground construction and repair, facilities
locating, and meter reading services. Broadband invests in broadband
communication services such as analog and digital cable television, high-speed
Internet and data services, and advanced local and long distance phone services.
In addition, the Nonregulated Group has other businesses that provide utility
services and municipal broadband consulting, and that invest in energy-related
opportunities, real estate, and leveraged leases. The Nonregulated Group
supports the Company's regulated utilities pursuant to service contracts by
providing natural gas supply services, coal, utility infrastructure services,
and other services. The results of operations of the Nonregulated Group before
certain intersegment eliminations and reclassifications for the three months
ended March 31, 2004 and 2003, follow:
- -----------------------------------------------------------------------------
(In millions, except per share amounts) 2004 2003
- -----------------------------------------------------------------------------
Energy services & other revenues $ 70.4 $ 53.2
Operating Expenses:
Cost of energy services & other 58.9 44.7
Operating expenses 12.0 9.1
- -----------------------------------------------------------------------------
Total operating expenses 70.9 53.8
- -----------------------------------------------------------------------------
OPERATING LOSS 0.5 0.6
OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated affiliates 16.7 9.3
Other income (expense) - net (4.6) 1.1
- -----------------------------------------------------------------------------
Total other income 12.1 10.4
- -----------------------------------------------------------------------------
Interest expense 2.8 2.4
- -----------------------------------------------------------------------------
INCOME BEFORE TAXES 8.8 7.4
Income taxes (1.8) (1.2)
Minority interest - 0.1
- -----------------------------------------------------------------------------
NET INCOME $ 10.6 $ 8.5
=============================================================================
BASIC EARNINGS PER SHARE $ 0.14 $ 0.13
=============================================================================
NET INCOME ATTRIBUTED TO:
Energy Marketing & Services $ 7.0 $ 8.1
Coal Mining 3.6 2.3
Utility Infrastructure (0.6) (1.0)
Broadband (3.4) -
Other Businesses 4.0 (0.9)
Nonregulated Group earnings were $10.6 million for the three months ended March
31, 2004, compared to $8.5 million in the prior year. The $2.1 million increase
in Nonregulated earnings resulted from a $5.3 million after tax gain recognized
on the sale of an investment held by one of the Company's equity method
investments and a $1.3 million increase in operating results from the Coal
Mining Group, offset largely by a $4.5 million after tax charge related to the
write down of the Company's broadband-related investments and decreased results
from the Energy Marketing Services Group.
Energy Marketing & Services
Energy Marketing and Services is comprised of the Company's gas marketing
operations, performance contracting operations, and its retail gas supply and
other related products and services operations.
Gas marketing operations are performed through the Company's investment in
ProLiance Energy LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility. ProLiance provides natural gas and
related services to the Company. ProLiance's primary businesses include gas
marketing, gas portfolio optimization, and other portfolio and energy management
services. ProLiance's primary customers are utilities and other large end use
customers.
Energy Systems Group, LLC (ESG) provides energy performance contracting and
facility upgrades through its design and installation of energy-efficient
equipment. Prior to April 2003, ESG was a consolidated venture between the
Company and Citizens Gas with the Company owning two-thirds. In April 2003, the
Company purchased the remaining interest in ESG for approximately $4 million.
Vectren Retail, LLC (d/b/a Vectren Source) provides natural gas and other
related products and services primarily in Ohio, serving approximately 100,000
customers opting for choice among energy providers.
Net income generated by Energy Marketing and Services for the three months ended
March 31, 2004, was $7.0 million, as compared to $8.1 million in 2003. Gas
marketing operations, performed through ProLiance, contributed $6.9 million in
earnings in 2004, as compared to $8.5 million in 2003. The $1.6 million decrease
from 2003 was principally due to more volatile gas prices in 2003. Vectren
Source contributed $0.6 million in earnings for the three months ended March 31,
2004, an increase of $0.7 million over 2003. The increase was principally due to
increased customers and increased margins per unit of throughput. The
performance contracting operations, performed through ESG, had net losses of
$0.5 million for the three months ended March 31, 2004, compared to break even
results in 2003. The decrease resulted principally from the timing of projects
year over year.
ProLiance Contingency
There is currently a lawsuit pending in the United States District Court for the
Northern District of Alabama filed by the City of Huntsville, Alabama d/b/a
Huntsville Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville
Utilities asserts claims based on negligent provision of portfolio services
and/or pricing advice, fraud, fraudulent inducement, and other theories. These
claims relate generally to several basic arguments: (1) negligence in providing
advice and/or administering portfolio arrangements; (2) alleged promises to
provide gas at a below-market rate; (3) the creation and repayment of a "winter
levelizing program" instituted by ProLiance in conjunction with the manager of
Huntsville's Gas Utility, to allow Huntsville Utilities to pay its gas bills
over an extended period of time coupled with the alleged ignorance about the
program on the part of Huntsville Utilities' Gas Board, and; (4) the sale of
Huntsville Utilities' gas storage supplies to repay the balance owed on the
winter levelizing program and the authority of Huntsville Utilities' gas manager
to approve those sales. In a press conference on May 21, 2002, Huntsville
Utilities asserted its monetary damages to be approximately $10 million, and
seeks to treble that amount. ProLiance has made counterclaims asserting breach
of contract, among others, based on Huntsville Utilities' refusal to take gas
under fixed price agreements. Both parties have denied the charges contained in
the respective claims.
In 2003, ProLiance established reserves for amounts due from Huntsville
Utilities due to uncertainties surrounding collection. ProLiance believes its
actions were proper under the contract and amendments signed by the manager of
Huntsville's Gas Utility, and is vigorously defending the suit. ProLiance is
insured under a policy providing defense costs which may provide in whole or in
part, indemnification within the policy limits for claims asserted against
ProLiance. Accordingly, no other loss contingencies have been recorded at this
time. However, it is not possible to predict or determine the outcome of this
litigation and accordingly there can be no assurance that ProLiance will
prevail. It is not currently expected that costs associated with this matter
will have a material adverse effect on Vectren's consolidated financial position
or liquidity but an unfavorable outcome could possibly be material to Vectren's
earnings.
Coal Mining
The Coal Mining Group mines and sells coal to the Company's utility operations
and to other third parties through its wholly owned subsidiary Vectren Fuels,
Inc. (Fuels). The Coal Mining Group also generates IRS Code Section 29
investment tax credits relating to the production of coal-based synthetic fuels
through its 8.3% ownership interest in Pace Carbon Synfuels, LP (Pace Carbon).
Pace Carbon developed, owns, and operates four projects to produce and sell
coal-based synthetic fuel (synfuel) utilizing Covol technology. Vectren accounts
for is investment in Pace Carbon using the equity method. In addition, Fuels
receives synfuel-related fees from synfuel producers unrelated to Pace Carbon
for a portion of its coal production.
Coal Mining net income for the three months ended March 31, 2004, was $3.6
million, compared to $2.3 million in 2003. Synfuel-related results, which
include earnings from Pace Carbon and synfuel processing fees earned by Fuels,
contributed $2.9 million of the earnings in 2004 compared to $2.3 million in
2003. Increasing production of synthetic fuel by Pace Carbon in 2004 and 2003
has generated a greater amount of Section 29 tax credits that have been utilized
by the Company, reducing income tax expense. The increase in synfuel-related
earnings was further complemented by improved mining operations due to improved
pricing and better mining conditions. Mining operations increased from breakeven
results for the three months ended March 31, 2003, to $0.7 million in 2004.
IRS Section 29 Investment Tax Credit Recent Developments
Under Section 29 of the Internal Revenue Code, manufacturers such as Pace Carbon
receive a tax credit for every ton of synthetic fuel sold. To qualify for the
credits, the synthetic fuel must meet three primary conditions: 1) there must be
a significant chemical change in the coal feedstock, 2) the product must be sold
to an unrelated person, and 3) the production facility must have been placed in
service before July 1, 1998.
In past rulings, the Internal Revenue Service (IRS) has concluded that the
synthetic fuel produced at the Pace Carbon facilities should qualify for Section
29 tax credits. The IRS issued a private letter ruling with respect to the four
projects on November 11, 1997, and subsequently issued an updated private letter
ruling on September 23, 2002.
As a partner in Pace Carbon, Vectren has reflected total tax credits under
Section 29 in its consolidated results through March 31, 2004, of approximately
$43 million. Vectren has been in a position to fully utilize the credits
generated and continues to project full utilization.
During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year
and later expanded the audit to include tax years 1999, 2000, and 2001. Based on
conclusions reached in an industry-wide review and recently issued private
letter rulings involving other synthetic fuel facilities, Vectren believes these
audits may soon be resolved. However, the IRS has not directly notified Pace
Carbon of any resolution. Further, the Permanent Subcommittee on Investigations
of the U.S. Senate's committee on Governmental Affairs has initiated an
investigation on the subject of these income tax credits.
Vectren believes it is justified in its reliance on the private letter rulings
for the Pace Carbon facilities, that the test results that Pace Carbon presented
to the IRS in connection with its private letter rulings are scientifically
valid, and that Pace Carbon has operated its facilities in compliance with its
private letter rulings and Section 29 of the Internal Revenue Code. However, at
this time, Vectren cannot provide any assurance as to the outcome that these
uncertainties may have on Vectren's consolidated financial position or
liquidity.
Broadband and Other Businesses
The Company is a minority investor in SIGECOM, LLC (SIGECOM), located in
Evansville, Indiana. SIGECOM provides broadband service to over 29,000
customers, averaging nearly 3 revenue generating units per customer. In the
Company's continued evaluation of the industry and the strategic alternatives
for its broadband-related investments, the Company performed a valuation of its
SIGECOM investment. Additionally, while franchises are still in place for the
Indianapolis, Indiana and Dayton, Ohio markets, it is unlikely that the Company
would be involved in future expansion of those markets. As a result, the Company
recorded impairment charges for its investment in SIGECOM and its franchises in
the Indianapolis and Dayton markets, totaling $3.6 million after tax. The
Company also wrote down its investment in inventory by $0.9 million after tax at
Vectren Communications Services, Inc. (VCS), as a result of current expectations
about realizability in today's market. VCS is a component of the Other
Businesses Group. Total impairment charges for the three months ended March 31,
2004, resulting from these analyses, were $7.5 million ($4.5 million after tax),
or $0.06 per share.
Haddington Energy Partnerships, a component of the Other Businesses Group, are
equity method investments that invest in energy-related ventures. In March 2004,
these partnerships sold their investments in SAGO Energy, LP, (SAGO) for cash.
The Company recognized its portion of the pre-tax gain totaling $9.0 million
($5.3 million after tax), or $0.07 per share in March 2004. SAGO is an
independent, full service, midstream company providing natural gas producers
with processing, gathering, marketing and other related services, with assets in
Texas and Louisiana.
Significant Fluctuations of Consolidated Operations
Revenues and Cost of Revenues
The Nonregulated Group's consolidated results are primarily affected by ESG,
Fuels, Vectren Source, and VCS. Nonregulated revenues and cost of revenues
increased $17.2 million and $14.2 million, respectively, for the three months
ended March 31, 2004, compared to 2003. The principal reason for the increases
is due to Vectren Source's operations. Vectren Source's revenues were $34.7
million for the three months ended March 31, 2004, compared to $15.9 million in
2003 and its costs of revenues were $30.3 million for 2004 compared to $13.9
million in 2003. The increased revenues and costs resulted from additional
customers counts, increased customer consumption, and increased average selling
prices. Margins from Vectren Source increased $2.4 million to $4.4 million for
the three months ended March 31, 2004, compared to 2003.
Operating Expenses
For the three months ended March 31, 2004, operating expenses increased $3.1
million compared to 2003. The increase resulted primarily from increased
business activity at Vectren Source and includes the $1.5 million pre tax write
down of inventory at VCS.
Significant Fluctuations of Unconsolidated Affiliates and Investments
Equity in Earnings of Unconsolidated Affiliates
The primary components of equity in earnings of unconsolidated affiliates relate
to the earnings of the Haddington partnerships, earnings of ProLiance, and
losses incurred by Pace Carbon. For the three months ended March 31, 2004, the
Company's portion of the Haddington partnerships' earnings was $9.3 million
compared to break even results in 2003. For the three months ended March 31,
2004, the Company's portion of ProLiance's earnings was $11.6 million compared
to $14.2 million in 2003. For the three months ended March 31, 2004 and 2003,
the Company's portion of Pace Carbon losses was $3.4 million and $3.5 million,
respectively.
Other Income (Expense) - Net
Other income (expense) - net reflects $6.0 million of impairment charges
associated with the Broadband operations.
Impact of Recently Issued Accounting Guidance
SFAS No. 132 (Revised 2003)
In December 2003, FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132), to
improve financial statement disclosures for defined benefit and other
postretirement benefit plans. The incremental annual disclosure requirements
were reflected in the Company's Form 10-K for the year ended December 31, 2003.
The adoption did not impact the Company's results of operations or financial
condition. The incremental interim disclosure requirements are included in these
financial statements in Note 6.
FIN 46/46R (Revised in December 2003)
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 (VIE) and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies related to VIE's and thus
improves comparability between enterprises engaged in similar activities when
those activities are conducted through VIE's. In December 2003, the FASB
completed its deliberations of proposed modifications to FIN 46 and decided to
codify both the proposed modifications and other decisions previously issued
through certain FASB Staff Positions into one document that was issued as a
revision to the original Interpretation (FIN 46R). FIN 46R currently applies to
VIE's created after January 31, 2003, and to VIE's in which an enterprise
obtains an interest after that date. For entities created prior to January 31,
2003, FIN 46R is to be adopted no later than the end of the first interim or
annual reporting period ending after March 15, 2004.
The Company has neither created nor obtained an interest in a VIE since January
31, 2003. Certain other entities that the Company was involved with prior to
that date have been evaluated and determined to be VIE's. The Company has
investments in partnership-like structures as a limited partner or as a
subordinated lender. The activities of these entities are to purchase or
construct as well as operate multifamily housing and office properties. The
Company's exposure to loss is limited to its investment which as of March 31,
2004, and December 31, 2003, totaled $16.9 million and $17.1 million,
respectively, of Investments in unconsolidated affiliates, and $20.9 million at
both dates of Other investments. The Company is also the equity owner in three
leveraged leases where its exposure to loss is limited to its net investment
which approximated $6 million as of both March 31, 2004, and December 31, 2003.
The Company is not required to consolidate any of these entities upon adoption
of FIN 46R.
EITF 03-01
In March 2004, the EITF issued a consensus on Issue No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
(EITF 03-01). In this consensus, the Task Force required certain quantitative
and qualitative disclosures related to debt and marketable equity securities
classified as "available-for-sale" or "held-to-maturity" that are in an
unrealized loss position at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. In addition, the Task
Force developed a basic model in evaluating whether investments within the scope
of EITF 03-01 have other-than-temporary impairment. The Company is required to
adopt the recognition and measurement provisions of EITF 03-01 in the third
quarter of fiscal 2004. The Company is assessing the impact EITF 03-01 may have
on its operations.
Financial Condition
Within Vectren's consolidated group, VUHI funds the short-term and long-term
financing needs of the Utility Group operations, and Vectren Capital Corp.
(Vectren Capital) funds short-term and long-term financing needs of the
Nonregulated Group and corporate operations. Vectren Corporation guarantees
Vectren Capital's debt, but does not guarantee VUHI's debt. Vectren Capital's
long-term and short-term obligations outstanding at March 31, 2004, totaled $113
million and $89 million, respectively. VUHI's outstanding long-term and
short-term borrowing arrangements are jointly and severally guaranteed by
Indiana Gas, SIGECO, and VEDO. VUHI's long-term and short-term obligations
outstanding at March 31, 2004, totaled $550.0 million and $40.0 million,
respectively. Additionally, prior to VUHI's formation, Indiana Gas and SIGECO
funded their operations separately, and therefore, have long-term debt
outstanding funded solely by their operations.
The Company's common stock dividends are primarily funded by utility operations.
Nonregulated operations have demonstrated sustained profitability, and the
ability to generate cash flows. These cash flows are used to fund a portion of
the Company's dividends, are reinvested in other nonregulated ventures, and from
time to time may be reinvested in utility operations or used for corporate
expenses.
VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at
March 31, 2004, are A-/Baa1 as rated by Standard and Poor's Ratings Services
(Standard and Poor's) and Moody's Investors Service (Moody's), respectively.
SIGECO's credit ratings on outstanding senior unsecured debt are BBB+/Baa1.
SIGECO's credit ratings on outstanding secured debt are A-/A3. VUHI's commercial
paper has a credit rating of A-2/P-2. Vectren Capital's senior unsecured debt is
rated BBB+/Baa2. Moody's current outlook is stable while Standard and Poor's
current outlook is negative. The ratings of Moody's and Standard and Poor's are
categorized as investment grade and are unchanged from December 31, 2003. A
security rating is not a recommendation to buy, sell, or hold securities. The
rating is subject to revision or withdrawal at any time, and each rating should
be evaluated independently of any other rating. Standard and Poor's and Moody's
lowest level investment grade rating is BBB- and Baa3, respectively.
The Company's consolidated equity capitalization objective is 45-55% of total
capitalization. This objective may have varied, and will vary, depending on
particular business opportunities, capital spending requirements, and seasonal
factors that affect the Company's operation. The Company's equity component was
50% and 49% of total capitalization, including current maturities of long-term
debt and long-term debt subject to tender, at March 31, 2004, and December 31,
2003, respectively.
Sources & Uses of Liquidity
Operating Cash Flow
The Company's primary and historical source of liquidity to fund working capital
requirements has been cash generated from operations, which for the three months
ended March 31, 2004 and 2003, was $217.6 million and $121.0 million,
respectively. The increase of $95.8 million is primarily the result of favorable
changes in working capital accounts and increased earnings before non-cash
charges.
Financing Cash Flow
Although working capital requirements are generally funded by cash flow from
operations, the Company uses short-term borrowings to supplement working capital
needs when accounts receivable balances are at their highest and gas storage is
refilled. Additionally, short-term borrowings are required for capital projects
and investments until they are permanently financed.
Cash flow required for financing activities of $163.2 million for the three
months ended March 31, 2004, includes a decrease of short-term borrowings of
approximately $144 million and increased common stock dividends compared to
2003. Short-term borrowings were retired with greater operating cash flow. In
2003, $39.9 million of long-term debt was retired.
Investing Cash Flow
Cash flow required for investing activities was $45.1 million for the three
months ended March 31, 2004, and was comparable to 2003. For the three months
ended March 31, 2004 and 2003, requirements for capital expenditures were $44.5
million and $44.2 million, respectively.
Available Sources of Liquidity
At March 31, 2004, the Company has $566 million of short-term borrowing
capacity, including $351 million for the Utility Group and $215 million for the
wholly owned Nonregulated Group and corporate operations, of which approximately
$311 million is available for the Utility Group operations and approximately
$125 million is available for the wholly owned Nonregulated Group and corporate
operations.
Beginning in 2003, the Company began issuing new shares to satisfy dividend
reinvestment plan requirements. During the three months ended March 31, 2004 and
2003, new issues from stock plans added additional liquidity of approximately of
$2.3 million and $2.2 million, respectively.
Potential Uses of Liquidity
Planned Capital Expenditures & Investments
Investments in nonregulated unconsolidated affiliates and total company capital
expenditures for the remainder of 2004 are estimated to be approximately $230
million.
Ratings Triggers
At March 31, 2004, $113.0 million of Vectren Capital's senior unsecured notes
were subject to cross-default and ratings trigger provisions that would require
the full balance outstanding be subject to prepayment if the ratings of Indiana
Gas' or SIGECO's most senior securities declined to BBB/Baa2. In addition,
accrued interest and a make whole amount based on the discounted value of the
remaining payments due on the notes would also become payable. The credit rating
of Indiana Gas' senior unsecured debt and SIGECO's secured debt remain one level
and two levels, respectively, above the ratings trigger.
Other Guarantees and Letters of Credit
In the normal course of business, Vectren Corporation issues guarantees to third
parties on behalf of its consolidated subsidiaries and unconsolidated
affiliates. Such guarantees allow those subsidiaries and affiliates to execute
transactions on more favorable terms than the subsidiary or affiliate could
obtain without such a guarantee. Guarantees may include posted letters of
credit, leasing guarantees, and performance guarantees. As of March 31, 2004,
guarantees issued and outstanding on behalf of unconsolidated affiliates
approximated $6 million. In addition, the Company has also issued a guarantee
approximating $4 million related to the residual value of an operating lease
that expires in 2006. Through March 31, 2004, the Company has not been called
upon to satisfy any obligations pursuant to its guarantees.
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 fossil fuel costs; unanticipated changes to gas
supply costs, or availability due to higher demand, shortages,
transportation problems or other developments; environmental or pipeline
incidents; transmission or distribution incidents; unanticipated changes to
electric energy supply costs, or availability due to demand, shortages,
transmission problems or other developments; or electric transmission or
gas pipeline system constraints.
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 electric and natural gas
transmission and distribution, natural gas gathering and processing,
electric power supply; 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 The performance of projects undertaken by the Company's nonregulated
businesses and the success of efforts to invest in and develop new
opportunities, including but not limited to, the realization of Section 29
income tax credits and the Company's coal mining, gas marketing, and
broadband strategies.
o Direct or indirect effects on our business, financial condition or
liquidity resulting from a change in our credit rating, changes in interest
rates, and/or changes in market perceptions of the utility industry and
other energy-related industries.
o Employee or contractor 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, including, but not
limited to, those described in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various business 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's risk management program includes, among other
things, the use of derivatives to mitigate risk. The Company also executes
derivative contracts in the normal course of operations while buying and selling
commodities to be used in operations and optimizing its generation assets.
These risks are not significantly different from the information set forth in
Item 7A Quantitative and Qualitative Disclosures About Market Risk included in
the Vectren 2003 Form 10-K and is therefore not presented herein.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2004, 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 at providing
reasonable assurance that 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) is brought to their attention on a timely basis.
Disclosure controls and procedures, as defined by the Exchange Act in Rules
13a-15(e) and 15d-15(e), 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 Over Financial Reporting
During the quarter ended March 31, 2004, there have been no significant changes
to the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Internal control over financial reporting is defined by the SEC in Final Rule:
Management's Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports. The final rule
defines internal control over financial reporting as a process designed by, or
under the supervision of, the registrant's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
registrant's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that: (1) Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the registrant; (2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the registrant are being made only in accordance with
authorizations of management and directors of the registrant; and (3) Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the registrant's assets that could have a
material effect on the financial statements.
PART II. OTHER INFORMATION
ITEM 1. 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. See Notes 7 and 9 of its
unaudited consolidated condensed financial statements included in Part 1 Item 1
Financial Statements regarding the ProLiance contingency and Clean Air Act and
related legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Certifications
31.1 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002-
Chief Executive Officer
31.2 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002-
Chief Financial Officer
32 Certification Pursuant To Section 906 of The Sarbanes-Oxley Act Of 2002
(b) Reports On Form 8-K During The Last Calendar Quarter
On January 30, 2004, Vectren Corporation filed a Current Report on Form 8-K with
respect to the release of financial information to the investment community
regarding the Company's results of operations for the three and twelve month
periods ended December 30, 2003. The financial information was released to the
public through this filing.
Item 12. Results of Operations and Financial Condition
Index to Exhibits
99-1 - Press Release - Vectren Corporation Reports Fiscal 2003
Results
99-2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
On March 15, 2004, Vectren Corporation filed a Current Report on Form 8-K with
respect to the announcement of a filing for a general gas rate increase by its
wholly owned subsidiary, Southern Indiana Gas and Electric Company (Vectren
South).
Item 9. Regulation FD Disclosure
Index to Exhibits
99-1 - Vectren South seeks approval of new natural gas base rates
99-2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
On March 22, 2004, Vectren Corporation filed a Current Report on Form 8-K with
respect to the announcement of a filing for a general gas rate increase by its
wholly owned subsidiary, Indiana Gas Company, Inc. (Vectren North).
Item 9. Regulation FD Disclosure
Index to Exhibits
99-1 - Press Release - Vectren North seeks approval of new
natural gas base.
99-2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
On March 29, 2004, Vectren Corporation filed a Current Report on Form 8-K with
respect to the announcement of a definitive agreement with the Indiana Office of
Utility Consumer Counselor regarding the proposed changes to the gas
distribution base rates and charges for its wholly owned subsidiary, Southern
Indiana Gas and Electric Company (Vectren South). The settlement agreement was
filed with the Indiana Utility Regulatory Commission.
Item 9. Regulation FD Disclosure
Index to Exhibits
99-1 - Press Release- Vectren South files settlement agreement in
natural gas base rate proceeding
99-2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VECTREN CORPORATION
-----------------------
Registrant
May 7, 2004 /s/Jerome A. Benkert, Jr.
-------------------------
Jerome A. Benkert, Jr.
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/M. Susan Hardwick
-------------------------
M. Susan Hardwick
Vice President & Controller
(Principal Accounting Officer)