Ex. 99.2
INDIANA GAS COMPANY, INC.
REPORTING PACKAGE
For the year ended December 31, 2004
Contents
Page
Number
Audited Financial Statements
Report of Independent Registered Public Accounting Firm 1
Balance Sheets 2-3
Statements of Income 4
Statements of Cash Flows 5
Statements of Common Shareholder's Equity 6
Notes to Financial Statements 7
Results of Operations 20
Selected Operating Statistics 22
Basis of Presentation
These annual financial statements should be read in conjunction with the audited
annual consolidated financial statements and the notes thereto of Vectren
Corporation (Vectren) and Vectren Utility Holdings, Inc. (VUHI), the parent
companies of Indiana Gas, filed on Form 10-K for the year ended December 31,
2004. Vectren and VUHI make available their Securities and Exchange Commission
filings and recent annual reports free of charge through its website at
www.vectren.com.
Frequently Used Terms
AFUDC: allowance for funds used during MCF/MMCF/BCF: thousands/millions/
construction billions of cubic feet
APB: Accounting Principles Board MDth/MMDth: thousands/millions of
dekatherms
EITF: Emerging Issues Task Force OUCC: Indiana Office of the Utility
Consumer Counselor
FASB: Financial Accounting Standards SFAS: Statement of Financial
Board Accounting Standards
FERC: Federal Energy Regulatory USEPA: United States Environmental
Commission Protection Agency
IDEM: Indiana Department of Throughput: combined gas sales and gas
Environmental Management transportation volumes
IURC: Indiana Utility Regulatory Commission
INDEPENDENT AUDITORS'REPORT
To the Shareholder and Board of Directors of Indiana Gas Company, Inc.: We have
audited the accompanying balance sheets of Indiana Gas Company, Inc. (the
"Company") as of December 31, 2004 and 2003, and the related statements of
income, common shareholder's equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Indiana Gas Company, Inc. as of December 31,
2004 and 2003, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------------------------
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
February 23, 2005
FINANCIAL STATEMENTS
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(In thousands)
- --------------------------------------------------------------------------------
December 31,
2004 2003
- --------------------------------------------------------------------------------
ASSETS
Utility Plant
Original cost $ 1,251,508 $ 1,200,665
Less: accumulated depreciation &
amortization 424,118 404,680
- --------------------------------------------------------------------------------
Net utility plant 827,390 795,985
- --------------------------------------------------------------------------------
Current Assets
Cash & cash equivalents 1,624 2,856
Accounts receivable - less reserves of $447 &
$1,940, respectively 58,554 45,079
Receivables due from other Vectren companies 234 5
Accrued unbilled revenues 86,334 63,582
Inventories 14,074 15,631
Recoverable fuel & natural gas costs 13,728 16,140
Prepayments & other current assets 66,442 70,157
- --------------------------------------------------------------------------------
Total current assets 240,990 213,450
- --------------------------------------------------------------------------------
Investment in the Ohio operations 220,779 222,020
Other investments 3,050 2,930
Non-utility property - net 152 202
Regulatory assets 19,890 21,237
Other assets 3,123 3,158
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 1,315,374 $ 1,258,982
================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(In thousands)
December 31,
2004 2003
- --------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDER'S EQUITY
Capitalization
Common Shareholder's Equity
Common stock (no par value) $ 367,995 $ 367,995
Retained earnings 86,582 88,650
- --------------------------------------------------------------------------------
Total common shareholder's equity 454,577 456,645
- --------------------------------------------------------------------------------
Long-term debt payable to third parties - net of
current maturities & debt subject to tender 167,417 196,417
Long-term debt payable to VUHI 184,448 184,448
- --------------------------------------------------------------------------------
Total capitalization 806,442 837,510
- --------------------------------------------------------------------------------
Commitments & Contingencies (Notes 3, 4, 7, 8 & 9)
Current Liabilities
Accounts payable 32,111 22,973
Accounts payable to affiliated companies 62,549 51,005
Payables to other Vectren companies 6,957 5,389
Accrued liabilities 48,072 36,530
Short-term borrowings payable to VUHI 109,211 63,974
Current maturities of long-term debt - 15,000
Long-term debt subject to tender 10,000 3,500
- --------------------------------------------------------------------------------
Total current liabilities 268,900 198,371
- --------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 75,576 63,890
Regulatory liabilities 132,825 123,646
Deferred credits & other liabilities 31,631 35,565
- --------------------------------------------------------------------------------
Total deferred credits & other liabilities 240,032 223,101
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,315,374 $1,258,982
================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF INCOME
(In thousands)
For the Years Ended
December 31,
- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
OPERATING REVENUES $ 686,103 $ 668,214
COST OF GAS 474,452 450,674
- --------------------------------------------------------------------------------
GAS OPERATING MARGIN 211,651 217,540
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 89,820 85,814
Depreciation & amortization 45,049 43,250
Income taxes 10,915 16,054
Taxes other than income taxes 18,453 16,899
- --------------------------------------------------------------------------------
Total operating expenses 164,237 162,017
- --------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 47,414 55,523
OTHER INCOME (EXPENSE)
Equity in earnings (losses) of the
Ohio operations - net of tax 7,207 5,817
Other income (expense) - net (832) (728)
- --------------------------------------------------------------------------------
Total other income (expense) 6,375 5,089
- --------------------------------------------------------------------------------
Interest expense 29,353 29,081
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ 24,436 $ 31,531
================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 24,436 $ 31,531
Adjustments to reconcile net income to cash
from operating activities:
Depreciation & amortization 45,049 43,250
Deferred income taxes & investment tax
credits 11,252 15,483
Pension & postretirement periodic benefit
cost 1,588 1,549
Equity in earnings of the Ohio operations -
net of tax (7,207) (5,817)
Other non-cash charges - net 6,696 6,531
Changes in working capital accounts:
Accounts receivable, including due from
Vectren companies & accrued unbilled
revenue (42,059) (2,347)
Inventories 1,104 (2,345)
Recoverable fuel & natural gas costs 2,412 (5,899)
Prepayments & other current assets 3,827 (33,179)
Accounts payable, including to Vectren
companies & affiliated companies 22,250 (40,434)
Accrued liabilities 10,868 5,605
Changes in noncurrent assets (362) 1,049
Changes in noncurrent liabilities (5,822) (4,830)
- --------------------------------------------------------------------------------
Net cash flows from operating activities 74,032 10,147
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Additional capital contribution - 125,000
Long-term term debt payable to VUHI - 37,140
Requirements for:
Retirement of long-term debt, including premiums
paid (37,500) (53,432)
Dividend to parent (26,504) (21,942)
Net change in short-term borrowings, including
from VUHI 45,237 (44,208)
- --------------------------------------------------------------------------------
Net cash flows from financing activities (18,767) 42,558
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Distributions from Ohio operations 8,448 4,214
Requirements for :
Capital expenditures (64,945) (57,792)
- --------------------------------------------------------------------------------
Net cash flows from investing activities (56,497) (53,578)
- --------------------------------------------------------------------------------
Cash, cash equivalents, & invested cash with other Vectren companies:
Net increase (decrease) (1,232) (873)
At beginning of period 2,856 3,729
- --------------------------------------------------------------------------------
At end of period $ 1,624 $ 2,856
================================================================================
Cash paid during the year for:
Interest $ 28,087 $ 29,591
Income taxes 17,342 23,120
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
(In thousands)
Common Retained
Stock Earnings Total
- --------------------------------------------------------------------------------
Balance at January 1, 2003 $ 242,995 $ 79,061 $ 322,056
Net income & comprehensive income 31,531 31,531
Common stock:
Additional capital contribution 125,000 125,000
Dividends to parent (21,942) (21,942)
- --------------------------------------------------------------------------------
Balance at December 31, 2003 $ 367,995 $ 88,650 $ 456,645
Net income & comprehensive income 24,436 24,436
Common stock:
Dividends to parent (26,504) (26,504)
- --------------------------------------------------------------------------------
Balance at December 31, 2004 $ 367,995 $ 86,582 $ 454,577
================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation,
provides energy delivery services to approximately 555,000 natural gas customers
located in central and southern Indiana. Indiana Gas is a direct, wholly owned
subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct, wholly
owned subsidiary of Vectren Corporation (Vectren). Indiana Gas generally does
business as Vectren Energy Delivery of Indiana, Inc. Vectren is an energy and
applied technology holding company headquartered in Evansville, Indiana.
Investment in the Ohio Operations
The Company holds a 47% interest in the Ohio operations and the remaining 53% is
held by Vectren Energy Delivery of Ohio, Inc. (VEDO). VEDO is also a wholly
owned subsidiary of Vectren. The Ohio operations provide energy delivery
services to approximately 315,000 natural gas customers located near Dayton in
west central Ohio. VEDO is the operator of the assets.
Indiana Gas' ownership is accounted for using the equity method in accordance
with APB Opinion No. 18, "The Equity Method of Accounting for Investments in
Common Stock" and is included in investment in the Ohio operations, and its
interest in the results of operations is included in equity in earnings of the
Ohio operations. Additional information on the Company's investment in the Ohio
operations is included in Note 3.
2. Summary of Significant Accounting Policies
A. Cash & Cash Equivalents
All highly liquid investments with an original maturity of three months or less
at the date of purchase are considered cash equivalents.
B. Inventories
Inventories consist of the following:
At December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Gas in storage - at LIFO cost $ 11,138 $ 13,335
Materials & supplies 1,914 -
Other 1,022 2,296
- --------------------------------------------------------------------------------
Total inventories $ 14,074 $ 15,631
================================================================================
Based on the average cost of gas purchased during December, the cost of
replacing gas in storage carried at LIFO cost exceeded LIFO cost at December 31,
2004, and 2003, by approximately $26 million and $22 million, respectively. All
other inventories are carried at average cost.
C. Utility Plant & Depreciation
Utility plant is stated at historical cost, including AFUDC. Depreciation of
utility property is provided using the straight-line method over the estimated
service lives of the depreciable assets.
The original cost of utility plant, together with depreciation rates expressed
as a percentage of original cost, follows:
At & For the Year Ended December 31,
- -------------------------------------------------------------------------------------------
(In thousands) 2004 2003
- -------------------------------------------------------------------------------------------
Depreciation Depreciation
Percent of Percent of
Original Original Original Original
Cost Cost Cost Cost
- -------------------------------------------------------------------------------------------
Utility plant $ 1,214,245 3.7% $ 1,164,699 3.9%
Construction work in progress 37,263 - 35,966 -
- -------------------------------------------------------------------------------------------
Total original cost $ 1,251,508 $ 1,200,665
===========================================================================================
AFUDC represents the cost of borrowed and equity funds used for construction
purposes and is charged to construction work in progress during the construction
period and is included in Other - net in the Statements of Income. The total
AFUDC capitalized into utility plant and the portion of which was computed on
borrowed and equity funds for all periods reported follows:
Year Ended December 31,
- -------------------------------------------------------------------------
(In thousands) 2004 2003
- -------------------------------------------------------------------------
AFUDC - borrowed funds $ 230 $ 106
AFUDC - equity funds 125 19
- -------------------------------------------------------------------------
Total AFUDC capitalized $ 355 $ 125
=========================================================================
Maintenance and repairs, including the cost of removal of minor items of
property and planned major maintenance projects, are charged to expense as
incurred unless deferral is authorized by a rate order. When property that
represents a retirement unit is replaced or removed, the cost of such property
is charged to Utility plant, with an offsetting charge to Accumulated
depreciation, and Regulatory liabilities for the cost of removal.
D. Impairment Review of Long-Lived Assets
Long-lived assets are reviewed as facts and circumstances indicate that the
carrying amount may be impaired. This review is performed in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS 144). SFAS 144 establishes one accounting model for all impaired
long-lived assets and long-lived assets to be disposed of by sale or otherwise.
SFAS 144 requires the evaluation for impairment involve the comparison of an
asset's carrying value to the estimated future cash flows the asset is expected
to generate over its remaining life. If this evaluation were to conclude that
the carrying value of the asset is impaired, an impairment charge would be
recorded based on the difference between the asset's carrying amount and its
fair value (less costs to sell for assets to be disposed of by sale) as a charge
to operations or discontinued operations.
E. Regulation
SFAS 71
Retail public utility operations affecting Indiana customers are subject to
regulation by the IURC. The Company's accounting policies give recognition to
the rate-making and accounting practices of these agencies and to accounting
principles generally accepted in the United States, including the provisions of
SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS
71). Regulatory assets represent probable future revenues associated with
certain incurred costs, which will be recovered from customers through the
rate-making process. Regulatory liabilities represent probable expenditures by
the Company for removal costs or future reductions in revenues associated with
amounts that are to be credited to customers through the rate-making process.
The Company assesses the recoverability of costs recognized as regulatory assets
and the ability to continue to account for its activities based on the criteria
set forth in SFAS 71. Based on current regulation, the Company believes such
accounting is appropriate. If all or part of the Company's operations cease to
meet the criteria of SFAS 71, a write-off of related regulatory assets and
liabilities could be required. In addition, the Company would be required to
determine any impairment to the carrying value of its utility plant and other
regulated assets.
Regulatory assets consist of the following:
At December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Future amounts recoverable from ratepayers:
Income taxes $ 8,176 $ 8,915
Rate case expenses 548 -
Other - 113
- --------------------------------------------------------------------------------
8,724 9,028
Amounts deferred for future recovery:
Other 290 -
Amounts currently recovered through base rates:
Unamortized debt issue costs & premiums
paid to reacquire debt 10,876 12,209
- --------------------------------------------------------------------------------
Total regulatory assets $ 19,890 $ 21,237
================================================================================
The $10.9 million currently being recovered through base rates is earning a
return with a weighted average recovery period of 10.5 years. The Company has
rate orders for deferred costs not yet in rates and therefore believes that
future recovery is probable.
Cost of Removal and SFAS 143
The Company collects an estimated cost of removal of its utility plant through
depreciation rates established by regulatory proceedings. The Company records
amounts expensed in advance of payments as a regulatory liability because the
liability does not meet the threshold of a legal asset retirement obligation
(ARO) as defined by SFAS No. 143, "Accounting for Asset Retirement Obligations"
(SFAS 143). At December 31, 2004, and 2003, such removal costs approximated $133
million and $124 million, respectively.
SFAS 143 requires entities to record the fair value of a liability for a legal
ARO in the period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss. To the extent
regulation is involved, such gain or loss may be deferred. The Company adopted
this statement on January 1, 2003. The adoption was not material to the
Company's results of operations.
Refundable or Recoverable Gas Costs
All metered gas rates contain a gas cost adjustment clause that allows the
Company to charge for changes in the cost of purchased gas. The Company records
any under-or-over-recovery resulting from gas adjustment clauses each month in
revenues. A corresponding asset or liability is recorded until the under-or-
over-recovery is billed or refunded to utility customers. The cost of gas sold
is charged to operating expense as delivered to customers.
F. Revenues
Revenues are recorded as products and services are delivered to customers. To
more closely match revenues and expenses, the Company records revenues for all
gas delivered to customers but not billed at the end of the accounting period.
G. Utility Receipts Taxes
A portion of utility receipts taxes are included in rates charged to customers.
Accordingly, the Company records these taxes received as a component of
Operating revenues. Utility receipts taxes paid are recorded as a component of
Taxes other than income taxes.
H. Earnings Per Share
Earnings per share are not presented as Indiana Gas' common stock is wholly
owned by Vectren Utility Holdings, Inc.
I. Other Significant Policies
Included elsewhere in these notes are significant accounting policies related to
the investment in the Ohio operations (Note 3), intercompany allocations and
income taxes (Note 4) and derivatives (Note 10).
J. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
3. Investment in the Ohio Operations
The Company's investment in the Ohio operations is accounted for using the
equity method of accounting, and the investment is periodically examined for
other than temporary declines in value. The Company's share of the Ohio
operations after tax earnings is recorded in equity in earnings of the Ohio
operations. Because the Ohio operations is responsible for its income taxes and
is also within Vectren's consolidated tax group, no additional tax provision for
these earnings is included in these financial statements. Dividends are recorded
as a reduction of the carrying value of the investment when received. Goodwill
which is a component of the Company's net investment is accounted for in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 142 uses an impairment-only approach to account for the effect of goodwill
on the operating results.
Following is summarized financial data of the Ohio operations:
Year Ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Operating revenues $ 329,729 $ 341,362
Gas operating margin 104,020 102,998
Operating income 15,600 11,759
Net income 15,334 12,376
At December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Net utility plant $ 285,244 $ 267,968
Current assets 142,341 130,708
Goodwill - net 199,457 199,457
Other non-current assets 9,826 9,970
- --------------------------------------------------------------------------------
Total assets $ 636,868 $ 608,103
================================================================================
Owners' net investment $ 431,619 $ 434,401
Current liabilities 110,263 93,049
Noncurrent liabilities 94,986 80,653
- --------------------------------------------------------------------------------
Total liabilities & owners' net investment $ 636,868 $ 608,103
================================================================================
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, a two-year audit period ended in November 2002.
That audit period provided the PUCO staff its initial review of the portfolio
administration arrangement between VEDO and ProLiance. The external auditor
retained by the PUCO staff submitted an audit report in the fall of 2003 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. 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 recorded $1.1 million for its estimated share of a potential
disallowance. A PUCO decision on this matter is yet to be issued. The Company is
also unable to determine the effects that a PUCO decision for the audit period
ended in November 2002 may have on results in audit periods beginning after
November 2002.
VEDO Pending Base Rate Increase Settlement
On February 4, 2005, the Company filed with the PUCO a settlement agreement that
had been entered into with several parties, including the PUCO staff, in its
base rate case. The Ohio Office of the Consumer Counselor (OCC) is opposing the
settlement. Earlier in 2004 VEDO had filed with the PUCO a request to adjust its
base rates and charges for its gas distribution business serving more than
315,000 customers located in west central Ohio. The settlement provides for a
$15.7 million increase in VEDO's base distribution rates to cover the ongoing
costs of operating, maintaining, and expanding the approximately 5,200-mile
distribution system. The settlement increase includes $1.1 million of funding
for weatherization and conservation programs for low income customers.
Evidentiary hearings were completed in the case on February 9, 2005. Review and
approval by the PUCO is necessary before the settlement is effective. The
proposed new rate design includes a larger service charge, which will address,
to some extent, earnings volatility related to weather. The settlement also
permits VEDO the annual recovery of on-going costs associated with the Pipeline
Safety Improvement Act of 2002. Based upon the PUCO's actions in other
proceedings, the Company would expect an order near the end of the first quarter
of 2005.
Ohio Uncollectible Accounts Expense Tracker
On December 17, 2003, the PUCO approved a request by VEDO and several other
regulated Ohio gas utilities to establish a mechanism to recover uncollectible
account expense outside of base rates. The tariff mechanism establishes an
automatic adjustment procedure to track and recover these costs instead of
providing the recovery of the historic amount in base rates. Through this order,
VEDO received authority to defer its 2003 uncollectible accounts expense to the
extent it differs from the level included in base rates. The Company estimated
the difference to approximate $4 million in excess of that included in base
rates, and reversed and deferred that amount for future recovery. In 2004, the
Company recorded revenues of $3.3 million which is equal to the level of
uncollectible accounts expense recognized for Ohio residential customers.
4. Transactions with Other Vectren Companies
Support Services and Purchases
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, technology, finance,
tax, risk management, human resources, which includes charges for restricted
stock compensation and for pension and other postretirement benefits not
directly charged to subsidiaries. These costs have been allocated using various
allocators, primarily number of employees, number of customers and/or revenues.
Allocations are based on cost. Indiana Gas received corporate allocations
totaling $56.7 million and $58.0 million for the years ended December 31, 2004,
and 2003, respectively.
Retirement Plans and Other Postretirement Benefits
Vectren has multiple defined benefit pension plans and postretirement plans that
require accounting as described in SFAS No. 87 "Employers' Accounting for
Pensions" and SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions," respectively. An allocation of expense is determined by
Vectren's actuaries, comprised of only service cost and interest on that service
cost, by subsidiary based on headcount at each measurement date. These costs are
directly charged to individual subsidiaries. Other components of costs (such as
interest cost and asset returns) are charged to individual subsidiaries through
the corporate allocation process discussed above. Neither plan assets nor the
FAS 87/106 liability is allocated to individual subsidiaries since these assets
and obligations are derived from corporate level decisions. Further, Vectren
satisfies the future funding requirements of plans and the payment of benefits
from general corporate assets. This allocation methodology is consistent with
"multiemployer" benefit accounting as described in SFAS 87 and 106.
For the years ended December 31, 2004, and 2003, periodic pension costs totaling
$1.3 million and $1.2 million, respectively, were directly charged by Vectren to
the Company. For the years ended December 31, 2004, and 2003, other periodic
postretirement benefit costs totaling $0.3 million and $0.3 million,
respectively, were directly charged by Vectren to the Company. As of December
31, 2004, and 2003, $18.3 million and $22.2 million, respectively, is included
in Deferred credits & other liabilities and represents expense directly charged
to the Company that is yet to be funded to Vectren, and $2.4 million and $2.2
million, respectively, is included in Other assets for amounts funded in advance
to Vectren.
Cash Management and Borrowing Arrangements
The Company participates in a centralized cash management program with Vectren,
other wholly owned subsidiaries, and banks which permits funding of checks as
they are presented. See Note 6 regarding long-term and short-term intercompany
borrowing arrangements.
Share-Based Incentive Plans
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based
Payments" (SFAS 123R) that will require compensation costs related to
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments issued. In
addition, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. SFAS 123(R) replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The effective date of SFAS 123R for
the Company is July 1, 2005. SFAS 123R provides for multiple transition methods,
and the Company is still evaluating potential methods for adoption. Indiana Gas
does not have share-based compensation plans separate from Vectren. An
insignificant number of the Company's employees participate in Vectren's share-
based compensation plans. The adoption of this standard is not expected to have
any material effect on the Company's operating results or financial condition.
Guarantees of Parent Company Debt
Vectren's three operating utility companies, Indiana Gas, Southern Indiana Gas
and Electric Company, Inc. (SIGECO) and VEDO are guarantors of VUHI's $350
million in short-term credit facilities, of which approximately $308.0 million
is outstanding at December 31, 2004, and VUHI's $550 million unsecured senior
notes outstanding at December 31, 2004. The guarantees are full and
unconditional and joint and several, and VUHI has no subsidiaries other than the
subsidiary guarantors.
Income Taxes
Vectren and subsidiary companies file a consolidated federal income tax return.
For financial reporting purposes, Indiana Gas' current and deferred tax expense
is computed on a separate company basis.
A reconciliation of the federal statutory rate to the effective income tax rate
follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
Statutory rate 35.0 % 35.0 %
State & local taxes, net of federal benefit 7.4 6.4
Amortization of investment tax credit (3.2) (2.2)
All other - net (0.4) (0.8)
- --------------------------------------------------------------------------------
Effective tax rate 38.8 % 38.4 %
================================================================================
The components of income tax expense and utilization of investment tax credits
follow:
Year Ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Current:
Federal $ (1,800) $ (3,127)
State 1,463 3,698
- --------------------------------------------------------------------------------
Total current taxes (337) 571
- --------------------------------------------------------------------------------
Deferred:
Federal 10,422 15,981
State 1,744 423
- --------------------------------------------------------------------------------
Total deferred taxes 12,166 16,404
- --------------------------------------------------------------------------------
Amortization of investment tax credits (914) (921)
- --------------------------------------------------------------------------------
Total income taxes $ 10,915 $ 16,054
================================================================================
The liability method of accounting is used for income taxes under which deferred
income taxes are recognized to reflect the tax effect of temporary differences
between the book and tax bases of assets and liabilities at currently enacted
income tax rates. Significant components of the net deferred tax liability
follow:
At December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Non-current deferred tax liabilities (assets):
Depreciation & cost recovery timing differences $ 78,826 $ 66,655
Regulatory assets recoverable through future
rates 10,080 11,311
Regulatory liabilities to be settled through
future rates (1,904) (2,396)
Employee benefit obligations (9,982) (11,695)
Other - net (1,444) 15
- --------------------------------------------------------------------------------
Net non-current deferred tax liability 75,576 63,890
- --------------------------------------------------------------------------------
Current deferred tax liability:
Deferred fuel costs - net 2,729 3,118
- --------------------------------------------------------------------------------
Net deferred tax liability $ 78,305 $ 67,008
================================================================================
At December 31, 2004, and 2003, investment tax credits totaling $3.5 million and
$4.4 million, respectively, are included in Deferred credits and other
liabilities. These investment tax credits are amortized over the lives of the
related investments. The Company has no tax credit carryforwards at December 31,
2004.
5. Transactions with Vectren Affiliates
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides natural gas
and related services to Indiana Gas, SIGECO, the Ohio operations, Citizens Gas
and others. ProLiance's primary business is optimizing the gas portfolios of
utilities and providing services to large end use customers.
Transactions with ProLiance
Purchases from ProLiance for resale and for injections into storage for the
years ended December 31, 2004, and 2003, totaled $479.5 million and $451.8
million, respectively. Amounts owed to ProLiance at December 31, 2004, and 2003,
for those purchases were $61.8 million and $50.7 million, respectively, and are
included in Accounts payable to affiliated companies in the Balance Sheets.
Amounts charged by ProLiance for gas supply services are established by supply
agreements with each utility.
Other Affiliate Transactions
Vectren has ownership interests in other affiliated companies accounted for
using the equity method of accounting that perform underground construction and
repair, facilities locating, and meter reading services to the Company. For the
years ended December 31, 2004, and 2003, fees for these services and
construction-related expenditures paid by the Company to Vectren affiliates
totaled $20.9 million and $25.4 million, respectively. Amounts charged by these
affiliates are market based. Amounts owed to unconsolidated affiliates other
than ProLiance totaled $0.8 million and $0.3 million at December 31, 2004, and
2003, respectively, and are included in Accounts payable to affiliated companies
in the Balance Sheets.
6. Borrowing Arrangements & Other Financing Transactions
Long-Term Debt
Senior unsecured obligations outstanding and classified as long-term follow:
At December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Fixed Rate Senior Unsecured Notes Payable to VUHI:
2011, 6.625% $ 98,953 $ 98,953
2018, 5.75% 37,140 37,140
2031, 7.25% 48,355 48,355
- --------------------------------------------------------------------------------
Total long-term debt payable to VUHI $ 184,448 $ 184,448
================================================================================
Fixed Rate Senior Unsecured Notes Payable to Third Parties:
2004, Series F, 6.36% $ - $ 15,000
2007, Series E, 6.54% 6,500 6,500
2013, Series E, 6.69% 5,000 5,000
2015, Series E, 7.15% 5,000 5,000
2015, Insured Quarterly, 7.15% - 20,000
2015, Series E, 6.69% 5,000 5,000
2015, Series E, 6.69% 10,000 10,000
2025, Series E, 6.53% 10,000 10,000
2027, Series E, 6.42% 5,000 5,000
2027, Series E, 6.68% 1,000 3,500
2027, Series F, 6.34% 20,000 20,000
2028, Series F, 6.36% 10,000 10,000
2028, Series F, 6.55% 20,000 20,000
2029, Series G, 7.08% 30,000 30,000
2030, Insured Quarterly, 7.45% 49,917 49,917
- --------------------------------------------------------------------------------
Total long-term debt outstanding payable to third
parties 177,417 214,917
Current maturities - (15,000)
Debt subject to tender (10,000) (3,500)
- --------------------------------------------------------------------------------
Long-term debt payable to third parties - net of
current maturities & debt subject to tender $ 167,417 $ 196,417
================================================================================
Issuances Payable to VUHI in 2003
In 2003, the Company issued $37.1 million of long-term debt payable to VUHI. The
note has terms identical to the terms of notes issued by VUHI in July 2003
through a public offering. Those notes have an interest rate of 5.75% priced at
99.177% to yield 5.80% to maturity and are due August 2018. They have no sinking
fund requirements, and interest payments are due semi-annually. The notes may be
called by VUHI, in whole or in part, at any time for an amount equal to accrued
and unpaid interest, plus the greater of 100% of the principal amount or the sum
of the present values of the remaining payments of principal and interest,
discounted to the redemption date on a semi-annual basis at the Treasury Rate,
as defined in VUHI's indenture, plus 25 basis points. At present, VUHI has no
intent to call the notes; therefore the notes are classified as long term on the
accompanying Balance Sheets.
Debt Call
During 2004, the Company called $20.0 million of insured quarterly senior
unsecured notes. The notes, originally due in 2015, were called at par.
During 2003, the Company called two senior unsecured notes. The first note had a
remaining principal amount of $21.3 million, an interest rate of 9.375%, was
originally due in 2021, and was redeemed at 105.525% of the stated principal
amount. The second note had a principal amount of $13.5 million, an interest
rate of 6.75%, was originally due in 2028, and was redeemed at the principal
amount. Pursuant to regulatory authority, the premiums paid to retire the net
carrying value of these notes totaling $1.1 million were deferred as a
regulatory asset. The proceeds to fund the early redemption were received from
VUHI in the form of new long-term debt discussed above and $125 million in
additional equity. To generate the initial proceeds to fund these transactions,
in July 2003, VUHI completed a public offering of long-term debt netting
proceeds of approximately $203 million, and Vectren completed a public offering
of common stock in August 2003 netting proceeds of approximately $163 million.
Other Debt Payments
Other Company debt totaling $17.5 million in 2003 was retired pursuant to normal
terms.
Long-Term Debt Sinking Fund Requirements & Maturities
Maturities and sinking fund requirements on long-term debt during the five years
following 2004 (in millions) are zero in 2005, zero in 2006, $6.5 in 2007, zero
in 2008 and zero in 2009.
Long-Term Debt Put & Call Provisions
Certain long-term debt issues contain put and call provisions that can be
exercised on various dates before maturity. The put or call provisions are not
triggered by specific events, but are based upon dates stated in the note
agreements. Debt which may be put to the Company during the years following 2004
(in millions) is $10.0 in 2005, zero in 2006, $20.0 in 2007, zero in 2008, and
$40.0 thereafter. Debt that may be put to the Company within one year is
classified as Long-term debt subject to tender in current liabilities.
Short-Term Borrowings
As of December 31, 2004, the Company has no short-term borrowing arrangements
with third parties and relies entirely on the short-term borrowing arrangements
of VUHI for short-term working capital needs. Borrowings outstanding at December
31, 2004, and 2003, were $109.2 million and $64.0 million, respectively. The
intercompany credit line totals $325 million, but is limited to VUHI's available
capacity ($42 million of additional capacity at December 31, 2004) and is
subject to the same terms and conditions as VUHI's commercial paper program.
Short-term borrowings bear interest at VUHI's weighted average daily cost of
short-term funds.
See the table below for interest rates and outstanding balances.
Year ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Weighted average total outstanding during
the year due from VUHI (in thousands) $ 31,151 $ 97,178
Weighted average interest rates during the year:
VUHI 1.86% 1.35%
Covenants
Borrowing arrangements contain customary default provisions; restrictions on
liens, sale leaseback transactions, mergers or consolidations, and sales of
assets; and restrictions on leverage and interest coverage, among other
restrictions. As of December 31, 2004, the Company was in compliance with all
financial covenants.
7. Commitments & Contingencies
Commitments
Firm purchase commitments for commodities total $9.6 million in 2005.
Legal Proceedings
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations. See Note 8 regarding
environmental matters.
8. Environmental Matters
In the past, Indiana Gas and others operated facilities for the manufacture of
gas. Given the availability of natural gas transported by pipelines, these
facilities have not been operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas and others may now be required
to take remedial action if certain byproducts are found above the regulatory
thresholds at these sites.
Indiana Gas has identified the existence, location, and certain general
characteristics of 26 gas manufacturing and storage sites for which it may have
some remedial responsibility. Indiana Gas has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites under an agreed
order between Indiana Gas and the IDEM, and a Record of Decision was issued by
the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at
additional sites, Indiana Gas has submitted several of the sites to the IDEM's
Voluntary Remediation Program (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.
9. Rate & Regulatory Matters
Gas Base Rate Settlement
On November 30, 2004, the IURC approved a $24 million base rate increase for
Indiana Gas' gas distribution business. The new rate design includes a larger
service charge, which is intended to address to some extent earnings volatility
related to weather. The base rate change in Indiana Gas' service territory was
implemented on December 1, 2004, resulting in additional 2004 revenues of $2.2
million.
The order also permits Indiana Gas to recover the on-going costs to comply with
the Pipeline Safety Improvement Act of 2002. The Pipeline Safety Improvement
Tracker provides for the recovery of incremental non-capital dollars, capped at
$750,000 the first year and $2.5 million per year thereafter. Any costs incurred
in excess of these annual caps are to be deferred for future recovery.
10. Derivatives & Other Financial Instruments
Accounting Policy for Derivatives
The Company executes derivative contracts in the normal course of operations
while buying and selling commodities to be used in operations and managing risk.
When an energy contract that is a derivative is designated and documented as a
normal purchase or normal sale, it is exempted from mark-to-market accounting.
Otherwise, energy contracts and financial contracts that are derivatives are
recorded at market value as current or non-current assets or liabilities
depending on their value and on when the contracts are expected to be settled.
The offset resulting from carrying the derivative at fair value on the balance
sheet is charged to earnings unless it qualifies as a hedge or is subject to
SFAS 71. When hedge accounting is appropriate, the Company assesses and
documents hedging relationships between the derivative contract and underlying
risks as well as its risk management objectives and anticipated effectiveness.
When the hedging relationship is highly effective, derivatives are designated as
hedges. The market value of the effective portion of the hedge is marked to
market in accumulated other comprehensive income for cash flow hedges or as an
adjustment to the underlying's basis for fair value hedges. The ineffective
portion of hedging arrangements is marked-to-market through earnings. The offset
to contracts affected by SFAS 71 are marked-to-market as a regulatory asset or
liability. Market value for all derivative contracts is determined using quoted
market prices from independent sources. Following is a more detailed discussion
of the Company's use of mark-to-market accounting related to natural gas
procurement.
The Company's operations have limited exposure to commodity price risk for
purchases and sales of natural gas for retail customers due to current Indiana
regulations which, subject to compliance with those regulations, allow for
recovery of such purchases through natural gas cost adjustment mechanisms.
Although the Company's operations are exposed to limited commodity price risk,
volatile natural gas prices can result in higher working capital requirements,
increased expenses including unrecoverable interest costs, uncollectible
accounts expense, and unaccounted for gas, and some level of price- sensitive
reduction in volumes sold. The Company mitigates these risks by executing
derivative contracts that manage the price of forecasted natural gas purchases.
These contracts are subject to regulation which allows for reasonable and
prudent hedging costs to be recovered through rates. When regulation is
involved, SFAS 71 controls when the offset to mark-to-market accounting is
recognized in earnings. The market value of natural gas procurement derivative
contracts at December 31, 2004 was not significant.
Fair Value of Other Financial Instruments
The carrying values and estimated fair values of the Company's other financial
instruments follow:
At December 31,
- ---------------------------------------------------------------------------------------------------
2004 2003
--------------------------- ------------------------------
(In thousands) Carrying Est. Fair Carrying Est. Fair
Amount Value Amount Value
- ------------------------------------ ---------------------------- ------------------------------
Long-term debt due to third parties $ 177,417 $ 184,300 $ 214,917 $227,290
Long-term debt due to VUHI 184,448 202,406 184,448 200,823
Short-term debt due to VUHI 109,211 109,211 63,974 63,974
- ----------------------------------------------------------------------------------------------------
Certain methods and assumptions must be used to estimate the fair value of
financial instruments. The fair value of the Company's other financial
instruments was estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for instruments
with similar characteristics. Because of the maturity dates and variable
interest rates of short-term borrowings, its carrying amount approximates its
fair value.
Under current regulatory treatment, call premiums on reacquisition of long-term
debt are generally recovered in customer rates over the life of the refunding
issue or over a 15-year period. Accordingly, any reacquisition would not be
expected to have a material effect on the Company's financial position or
results of operations.
11. Additional Operational & Balance Sheet
Information
Other - net in the Statements of Income consists of the following:
Year Ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
AFUDC $ 355 $ 125
Other income 381 696
Interest income 197 -
Other expense (1,765) (1,549)
- --------------------------------------------------------------------------------
Total other - net $ (832) $ (728)
================================================================================
Prepayments and other current assets in the Balance Sheets consist of the
following:
At December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Prepaid gas delivery service $ 58,490 $ 45,820
Prepaid taxes 7,069 22,974
Other prepayments & current assets 883 1,363
- --------------------------------------------------------------------------------
Total prepayments & other current assets $ 66,442 $ 70,157
================================================================================
Accrued liabilities in the Balance Sheets consist of the following:
At December 31,
- --------------------------------------------------------------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Accrued taxes $11,125 $10,443
Refunds to customers & customer deposits 13,618 10,362
Accrued interest 2,937 4,293
Deferred income taxes 2,729 3,118
Other 17,663 8,314
- --------------------------------------------------------------------------------
Total accrued liabilities $ 48,072 $ 36,530
================================================================================
12. Impact of Recently Issued Accounting Guidance
FIN 46/46-R (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. Adoption of
FIN 46R did not have a material impact on the Company's results of operations or
financial position.
13. Quarterly Financial Data (Unaudited)
Information in any one quarterly period is not indicative of annual results due
to the seasonal variations common to the Company's utility operations.
Summarized quarterly financial data for 2004 and 2003 follows:
- --------------------------------------------------------------------------------
(In thousands) Q1 Q2 Q3 Q4
- --------------------------------------------------------------------------------
2004
Results of Operations:
Operating revenues 298,666 $98,607 $ 71,059 $ 217,771
Gas operating margin 83,892 36,182 27,786 63,791
Operating income (loss) 29,426 2,665 (3,025) 18,348
Net income (loss) 27,043 (5,113) (11,074) 13,580
2003
Results of Operations:
Operating revenues $ 295,380 $ 104,846 $ 73,606 $ 194,382
Gas operating margin 86,396 40,312 27,698 63,134
Operating income (loss) 32,631 6,175 (2,125) 18,842
Net income (loss) 30,172 (3,134) (11,136) 15,629
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto and the annual reports filed on Forms
10-K of both Vectren and VUHI.
Executive Summary of Results of Operations
Indiana Gas generates revenue primarily from the delivery of natural gas service
to its customers. The primary source of cash flow results from the collection of
customer bills and the payment for goods and services procured for the delivery
of gas services. Results are impacted by weather patterns in its service
territory and general economic conditions both in its service territory as well
as nationally.
In 2004, Earnings were $24.4 million as compared to $31.5 million in 2003. The
$7.1 million decrease in earnings is due primarily to weather which decreased
earnings an estimated $4.3 million after tax, and increased operating expenses.
During 2004, the Company initiated a base rate case for gas service territory.
An order was received in December 2004, and on an annual basis, will increase
margins an estimated $24.0 million. During 2004 the rate increase provided
additional margin of $2.2 million. The order also allows for the recovery of
pipeline integrity management costs capped at $2.5 million beginning in 2006,
with any costs greater than those amounts deferred for future recovery.
Significant Fluctuations
Gas Operating Margin
Margin generated from the sale of natural gas to residential and commercial
customers is seasonal and impacted by weather patterns in the Company's service
territory. Margin generated from sales to large customers (generally industrial
and other contract customers) is impacted primarily by overall economic
conditions. Margin is also impacted by the collection of state mandated taxes,
which fluctuate with gas costs, and is also impacted by some level of price
sensitivity in volumes sold. Following is a discussion and analysis of margin
generated from regulated utility operations.
- --------------------------------------------------------------------------------
For the year
Ended December 31,
----------------------------
(In thousands) 2004 2003
- --------------------------------------------------------------------------------
Residential & commercial $ 183,382 $ 186,649
Contract 26,916 26,379
Other 1,353 4,512
- --------------------------------------------------------------------------------
Total gas utility margin $ 211,651 $ 217,540
================================================================================
Volumes in MDth:
Sold to residential & commercial customers 63,755 68,316
Sold & transported to contract customers 50,899 51,290
- --------------------------------------------------------------------------------
Total throughput 114,654 119,606
================================================================================
Gas utility margins were $211.7 million for the year ended December 31, 2004.
This represents a decrease in gas utility margin of $5.9 million compared to
2003. Heating weather for the year ended December 31, 2004, was 8% warmer than
normal and 8% warmer than the prior year. The estimated unfavorable impact on
gas utility margin caused by weather was approximately $7.2 million compared to
2003. Indiana base rate increases added $2.2 million compared to the prior year.
Also offsetting the effects of weather were increased late and reconnect fees,
and customer growth. Gas sold and transported volumes were 4% less in 2004,
compared to the prior year. The decreased throughput was primarily attributable
to weather. The average cost per dekatherm of gas purchased was $7.10 in 2004
and $6.53 in 2003.
Operating Expenses
Other Operating
Other operating expenses increased $4.0 million for the year ended December 31,
2004, as compared to 2003. The increase is primarily attributable to increased
charges for use of corporate assets, which increased $3.3 million. The remaining
year over year increase was primarily attributable to increased labor and
benefit costs.
Depreciation & Amortization
For the year ended December 31, 2004, depreciation expense increased $1.8
million compared to 2003. The increase resulted primarily from normal additions
to utility plant.
Income Taxes
For the year ended December 31, 2004, income taxes were $5.1 million lower than
2003 primarily due to decreased earnings before taxes and equity in earnings
from the Ohio operations.
Taxes Other Than Income Taxes
Taxes other than income taxes increased $1.6 million in 2004 compared to 2003.
Almost all of the 2004 increase corresponds with increased collections of
utility receipts taxes due to higher revenues.
Other Income
Equity in Earnings of the Ohio Operations
Equity in earnings of the Ohio operations represents Indiana Gas' 47% interest
in the Ohio operations' net income. The financing costs associated with VEDO's
53% ownership interest are not included in the Ohio operations' equity in
earnings. Earnings in 2004 have increased over 2003 primarily due to lower
depreciation in 2004 compared to 2003 due to a true-up of depreciation rates to
existing regulatory orders and decreased operating expenses in 2004 due to the
effects of regulatory orders associated with Ohio choice programs and
uncollectible accounts expense. The Ohio operations' net income was $15.3
million in 2004 and $12.4 million in 2003. Indiana Gas' share of those earnings
was $7.2 million and 5.8 million, respectively. Interest costs arising from
financing arrangements utilized for the purchase of the Ohio operations are not
reflected in the above-summarized financial information. Had the financing
arrangements of Indiana Gas and VEDO used to facilitate the purchase of the Ohio
operations been pushed down, the net income would have been $6.0 million and
$2.9 million for the years ended December 31, 2004 and 2003, respectively.
SELECTED GAS OPERATING STATISTICS:
- --------------------------------------------------------------------------------
For the Year Ended
December 31,
-------------------------------
2004 2003
- --------------------------------------------------------------------------------
OPERATING REVENUES (In thousands):
Residential $ 462,507 $ 452,042
Commercial & Contract 216,942 210,047
Misc Revenue 6,654 6,125
----------------------------
$ 686,103 $ 668,214
============================
MARGIN (In thousands):
Residential $ 141,875 $ 144,945
Commercial & Contract 68,423 68,081
Misc Revenue 1,353 4,514
----------------------------
$ 211,651 $ 217,540
============================
GAS SOLD & TRANSPORTED (In MDth):
Residential 44,661 48,146
Commercial & Contract 69,993 71,460
----------------------------
114,654 119,606
============================
YEAR END CUSTOMERS:
Residential 506,713 498,340
Commercial & Contract 49,256 48,574
----------------------------
555,969 546,914
============================
WEATHER AS A % OF NORMAL:
Heating Degree Days 92% 100%