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 September 30, 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: 1-16739
VECTREN UTILITY HOLDINGS, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-2104850
------------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20 N.W. 4th Street, Evansville, Indiana, 47708
--------------------------------------------------
(Address of principal executive offices)
(Zip Code)
812-491-4000
----------------------------------------------------
(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__ No |X|
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 10 October 31, 2004
------------------------------- -- ----------------
Class Number of Shares Date
Table of Contents
Item Page
Number Number
PART I. FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Vectren Utility Holdings, Inc 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 26
4 Controls and Procedures 26
PART II. OTHER INFORMATION
1 Legal Proceedings 26
6 Exhibits 26
Signatures 27
Access to Information
Vectren Corporation makes available all SEC filings and recent annual reports
free of charge, including those of its wholly owned subsidiary, Vectren Utility
Holdings, Inc., through its website at www.vectren.com, or by request, directed
to Investor Relations at the mailing address, phone number, or email address
that follows:
Mailing Address: Phone Number: Investor Relations Contact:
P.O. Box 209 (812) 491-4000 Steven M. Schein
Evansville, Indiana 47702-0209 Vice President, Investor
Relations
sschein@vectren.com
Definitions
AFUDC: allowance for funds used during MMBTU: millions of British thermal
construction units
APB: Accounting Principles Board MW: megawatts
EITF: Emerging Issues Task Force MWh/GWh: megawatt hours/thousands
of megawatt hours (gigawatt hours)
FASB: Financial Accounting Standards Board NOx: nitrogen oxide
FERC: Federal Energy Regulatory Commission OUCC: Indiana Office of the Utility
Consumer Counselor
IDEM: Indiana Department of Environmental PUCO: Public Utilities Commission
Management of Ohio
IURC: Indiana Utility Regulatory Commission SFAS: Statement of Financial
Accounting Standards
MCF/MMCF/BCF: thousands/millions/billions of USEPA: United States Environmental
cubic feet Protection Agency
MDth/MMDth: thousands/millions of dekatherms Throughput: combined gas sales and
gas transportation volumes
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash & cash equivalents $ 3.4 $ 8.1
Accounts receivable-less reserves of $1.4 &
$3.1, respectively 75.9 114.0
Receivables due from other Vectren companies 0.3 1.7
Accrued unbilled revenues 38.7 128.7
Inventories 60.0 55.1
Recoverable fuel & natural gas costs 38.5 20.3
Prepayments & other current assets 154.7 131.3
- --------------------------------------------------------------------------------
Total current assets 371.5 459.2
- --------------------------------------------------------------------------------
Utility Plant
Original cost 3,401.5 3,250.7
Less: accumulated depreciation & amortization 1,294.2 1,247.0
- --------------------------------------------------------------------------------
Net utility plant 2,107.3 2,003.7
- --------------------------------------------------------------------------------
Investments in unconsolidated affiliates 0.2 1.8
Other investments 19.7 20.6
Non-utility property - net 143.7 141.3
Goodwill - net 205.0 205.0
Regulatory assets 88.2 89.6
Other assets 5.5 3.9
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 2,941.1 $ 2,925.1
================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
- --------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 71.7 $ 63.0
Accounts payable to affiliated companies 51.3 80.3
Payables to other Vectren companies 12.5 13.3
Accrued liabilities 88.1 93.9
Short-term borrowings 211.0 185.2
Current maturities of long-term debt 15.2 15.0
Long-term debt subject to tender 10.0 13.5
- --------------------------------------------------------------------------------
Total current liabilities 459.8 464.2
- --------------------------------------------------------------------------------
Long-Term Debt - Net of Current Maturities &
Debt Subject to Tender 951.4 960.5
Deferred Income Taxes & Other Liabilities
Deferred income taxes 226.0 201.5
Regulatory liabilities & other removal costs 247.8 235.0
Deferred credits & other liabilities 81.4 83.9
- --------------------------------------------------------------------------------
Total deferred credits & other liabilities 555.2 520.4
- --------------------------------------------------------------------------------
Commitments & Contingencies (Notes 6 - 8)
Cumulative, Redeemable Preferred Stock of a
Subsidiary 0.1 0.2
Common Shareholder's Equity
Common stock (no par value) 592.7 589.8
Retained earnings 381.9 390.0
- --------------------------------------------------------------------------------
Total common shareholder's equity 974.6 979.8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 2,941.1 $ 2,925.1
================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited - In millions, except per share data)
- --------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------
OPERATING REVENUES
Gas utility $ 112.4 $ 115.0 $ 771.6 $ 788.8
Electric utility 102.3 95.5 280.2 254.2
Other - 0.2 0.5 0.6
- --------------------------------------------------------------------------------
Total operating revenues 214.7 210.7 1,052.3 1,043.6
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 67.2 71.3 529.8 539.9
Fuel for electric generation 25.8 24.8 72.4 66.2
Purchased electric energy 5.3 4.2 16.6 12.5
Other operating 52.0 51.4 165.8 161.9
Depreciation & amortization 33.1 30.4 94.5 88.8
Taxes other than income taxes 9.6 9.2 42.4 41.8
- --------------------------------------------------------------------------------
Total operating expenses 193.0 191.3 921.5 911.1
- --------------------------------------------------------------------------------
OPERATING INCOME 21.7 19.4 130.8 132.5
OTHER INCOME (EXPENSE) - NET
Other income(expense)-net 2.3 2.3 3.8 1.0
Equity in earnings (losses) of
unconsolidated affiliates - (0.1) 0.2 (0.5)
- --------------------------------------------------------------------------------
Total other income(expense)-net 2.3 2.2 4.0 0.5
- --------------------------------------------------------------------------------
Interest expense 16.7 17.1 50.2 49.5
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7.3 4.5 84.6 83.5
- --------------------------------------------------------------------------------
Income taxes 2.8 2.1 32.7 32.4
- --------------------------------------------------------------------------------
NET INCOME $ 4.5 $ 2.4 $ 51.9 $ 51.1
================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In millions)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
2004 2003
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 51.9 $ 51.1
Adjustments to reconcile net income to cash from
operating activities:
Depreciation & amortization 94.5 88.8
Deferred income taxes & investment tax credits 28.6 17.4
Pension & postretirement periodic benefit cost 4.3 4.4
Equity in (earnings) losses of unconsolidated
affiliates (0.2) 0.5
Net unrealized losses on derivative instruments 1.0 0.4
Other non-cash charges - net 7.2 13.8
Changes in working capital accounts:
Accounts receivable, including to Vectren
companies & accrued unbilled revenue 121.3 178.5
Inventories (5.4) 8.3
Recoverable fuel & natural gas costs (18.2) (9.4)
Prepayments & other current assets (21.8) (80.7)
Accounts payable, including to Vectren
companies & affiliated companies (21.1) (128.8)
Accrued liabilities (9.9) 3.7
Changes in noncurrent assets (5.4) (3.3)
Changes in noncurrent liabilities (8.0) (3.4)
- --------------------------------------------------------------------------------
Net cash flows from operating activities 218.8 141.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Additional capital contribution 2.9 167.5
Long-term debt issuance - net of issuance
costs & hedging proceeds - 202.9
Requirements for:
Dividends to parent (60.0) (56.9)
Redemption of preferred stock of subsidiary (0.1) (0.1)
Retirement of long-term debt, including
premiums paid (12.7) (121.9)
Other financing activities - (1.7)
Net change in short-term borrowings 25.8 (182.5)
- --------------------------------------------------------------------------------
Net cash flows from financing activities (44.1) 7.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from other investing activities 3.5 0.1
Requirements for:
Capital expenditures, excluding AFUDC - equity (182.9) (153.5)
Unconsolidated affiliate and other investments - (1.1)
- --------------------------------------------------------------------------------
Net cash flows from investing activities (179.4) (154.5)
- --------------------------------------------------------------------------------
Net decrease in cash & cash equivalents (4.7) (5.9)
Cash & cash equivalents at beginning of period 8.1 10.5
- --------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 3.4 $ 4.6
================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Vectren Utility Holdings, Inc. (VUHI or the Company), an Indiana corporation,
serves as the intermediate holding company for Vectren Corporation's (Vectren)
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. Vectren is an
energy and applied technology holding company headquartered in Evansville,
Indiana. 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 9 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.
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. Subsidiary Guarantor and Consolidating Information
The Company's three operating utility companies, SIGECO, Indiana Gas, and VEDO
are guarantors of VUHI's $350.0 million in short-term credit facilities, of
which $210.6 million is outstanding at September 30, 2004, and VUHI's $550.0
million unsecured senior notes outstanding at September 30, 2004. The guarantees
are full and unconditional and joint and several, and VUHI has no subsidiaries
other than the subsidiary guarantors. However, VUHI does have operations other
than those of the subsidiary guarantors. Pursuant to Article 3-10 of Regulation
S-X, disclosure of the results of operations and balance sheets of the
subsidiary guarantors separate from the parent company's operations is required.
Following are consolidating financial statements including information on the
combined operations of the subsidiary guarantors separate from the other
operations of the parent company.
Consolidating Statement of Income for the three months ended September 30, 2004
(in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- -------------------------- ----------- --------- ------------ -------------
OPERATING REVENUES
Gas utility $ 112.4 $ - $ - $ 112.4
Electric utility 102.3 - - 102.3
Other - 7.4 (7.4) -
- --------------------------------------------------------------------------------
Total operating revenues 214.7 7.4 (7.4) 214.7
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 67.2 - - 67.2
Fuel for electric generation 25.8 - - 25.8
Purchased electric energy 5.3 - - 5.3
Other operating 57.6 1.8 (7.4) 52.0
Depreciation & amortization 28.6 4.5 - 33.1
Taxes other than income taxes 9.4 0.2 - 9.6
- -------------------------------------------------------------------------------
Total operating expenses 193.9 6.5 (7.4) 193.0
- --------------------------------------------------------------------------------
OPERATING INCOME 20.8 0.9 - 21.7
OTHER INCOME (EXPENSE) - NET
Equity in losses of
consolidated companies - 3.1 (3.1) -
Equity in earnings of
unconsolidated affiliates - - - -
Other income (expense) - net 1.3 9.2 (8.2) 2.3
- --------------------------------------------------------------------------------
Total other income
(expense)-net 1.3 12.3 (11.3) 2.3
- --------------------------------------------------------------------------------
Interest expense 15.6 9.3 (8.2) 16.7
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6.5 3.9 (3.1) 7.3
- --------------------------------------------------------------------------------
Income taxes 3.4 (0.6) - 2.8
- --------------------------------------------------------------------------------
NET INCOME $ 3.1 $ 4.5 $ (3.1) $ 4.5
================================================================================
Consolidating Statement of Income for the three months ended September 30, 2003
(in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- --------------------------- ------------- -------- ------------ -------------
OPERATING REVENUES
Gas utility $ 115.0 $ - $ - $ 115.0
Electric utility 95.5 - - 95.5
Other - 6.6 (6.4) 0.2
- --------------------------------------------------------------------------------
Total operating revenues 210.5 6.6 (6.4) 210.7
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 71.3 - - 71.3
Fuel for electric generation 24.8 - - 24.8
Purchased electric energy 4.2 - - 4.2
Other operating 57.6 0.2 (6.4) 51.4
Depreciation & amortization 26.1 4.3 - 30.4
Taxes other than income taxes 9.0 0.2 - 9.2
- --------------------------------------------------------------------------------
Total operating expenses 193.0 4.7 (6.4) 191.3
- --------------------------------------------------------------------------------
OPERATING INCOME 17.5 1.9 - 19.4
OTHER INCOME (EXPENSE) - NET
Equity in losses of
consolidated companies - 1.4 (1.4) -
Equity in earnings of
unconsolidated affiliates - (0.1) - (0.1)
Other income (expense) - net 1.8 7.4 (6.9) 2.3
- --------------------------------------------------------------------------------
Total other income
(expense) - net 1.8 8.7 (8.3) 2.2
- --------------------------------------------------------------------------------
Interest expense 15.7 8.3 (6.9) 17.1
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3.6 2.3 (1.4) 4.5
- --------------------------------------------------------------------------------
Income taxes 2.2 (0.1) - 2.1
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1.4 $ 2.4 $ (1.4) $ 2.4
================================================================================
Consolidating Statement of Income for the nine months ended September 30, 2004
(in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- --------------------------- ----------- ---------- ------------ ------------
OPERATING REVENUES
Gas utility $ 771.6 $ - $ - $ 771.6
Electric utility 280.2 - - 280.2
Other - 25.5 (25.0) 0.5
- --------------------------------------------------------------------------------
Total operating revenues 1,051.8 25.5 (25.0) 1,052.3
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 529.8 - - 529.8
Fuel for electric generation 72.4 - - 72.4
Purchased electric energy 16.6 - - 16.6
Other operating 190.4 0.4 (25.0) 165.8
Depreciation & amortization 81.3 13.2 - 94.5
Taxes other than income taxes 41.6 0.8 - 42.4
- --------------------------------------------------------------------------------
Total operating expenses 932.1 14.4 (25.0) 921.5
- --------------------------------------------------------------------------------
OPERATING INCOME 119.7 11.1 - 130.8
OTHER INCOME (EXPENSE) - NET
Equity in earnings of
consolidated companies - 46.1 (46.1) -
Equity in earnings of
unconsolidated affiliates - 0.2 - 0.2
Other income (expense) - net 2.0 25.8 (24.0) 3.8
- --------------------------------------------------------------------------------
Total other income
(expense)-net 2.0 72.1 (70.1) 4.0
- --------------------------------------------------------------------------------
Interest expense 46.8 27.4 (24.0) 50.2
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 74.9 55.8 (46.1) 84.6
- --------------------------------------------------------------------------------
Income taxes 28.8 3.9 - 32.7
- --------------------------------------------------------------------------------
NET INCOME $ 46.1 $ 51.9 $ (46.1) $ 51.9
================================================================================
Consolidating Statement of Income for the nine months ended September 30, 2003
(in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- --------------------------- ---------- -------- ------------ ------------
OPERATING REVENUES
Gas utility $ 788.8 $ - $ - $ 788.8
Electric utility 254.2 - - 254.2
Other - 19.8 (19.2) 0.6
- --------------------------------------------------------------------------------
Total operating revenues 1,043.0 19.8 (19.2) 1,043.6
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 539.9 - - 539.9
Fuel for electric generation 66.2 - - 66.2
Purchased electric energy 12.5 - - 12.5
Other operating 180.1 1.0 (19.2) 161.9
Depreciation & amortization 76.9 11.9 - 88.8
Taxes other than income taxes 41.1 0.7 - 41.8
- --------------------------------------------------------------------------------
Total operating expenses 916.7 13.6 (19.2) 911.1
- --------------------------------------------------------------------------------
OPERATING INCOME 126.3 6.2 - 132.5
OTHER INCOME (EXPENSE) - NET
Equity in earnings of
consolidated companies - 49.8 (49.8) -
Equity in losses of
unconsolidated affiliates - (0.5) - (0.5)
Other income (expense)-net 2.0 19.2 (20.2) 1.0
- --------------------------------------------------------------------------------
Total other income
(expense) - net 2.0 68.5 (70.0) 0.5
- --------------------------------------------------------------------------------
Interest expense 46.6 23.1 (20.2) 49.5
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 81.7 51.6 (49.8) 83.5
- --------------------------------------------------------------------------------
Income taxes 31.9 0.5 - 32.4
- --------------------------------------------------------------------------------
NET INCOME $ 49.8 $ 51.1 $ (49.8) $ 51.1
================================================================================
Consolidating Statement of Cash Flows for the nine months ended September 30,
2004 (in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- -------------------------- ------------ -------- ------------ ------------
- --------------------------------------------------------------------------------
NET CASH FLOWS FROM
OPERATING ACTIVITIES $ 192.5 $ 16.5 $ 9.8 $ 218.8
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from additional
capital contribution - 2.9 - 2.9
Requirements for:
Dividends to parent (60.0) (60.0) 60.0 (60.0)
Retirement of
long-term debt (2.9) - (9.8) (12.7)
Redemption of preferred
stock of subsidiary (0.1) - - (0.1)
Net change in short-term
borrowings 30.4 26.2 (30.8) 25.8
- --------------------------------------------------------------------------------
Net cash flows from
financing activities (32.6) (30.9) 19.4 (44.1)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Consolidated subsidiary
distributions - 60.0 (60.0) -
Other investing activities 1.1 2.4 - 3.5
Requirements for:
Capital expenditures,
excluding AFUDC equity (167.1) (15.8) - (182.9)
Net change in notes
receivable to other
Vectren companies - (30.8) 30.8 -
- --------------------------------------------------------------------------------
Net cash flows from
investing activities (166.0) 15.8 (29.2) (179.4)
- --------------------------------------------------------------------------------
Net decrease in cash &
cash equivalents (6.1) 1.4 (4.7)
Cash & cash equivalents at
beginning of period 7.4 0.7 8.1
- --------------------------------------------------------------------------------
Cash & cash equivalents at
end of period $ 1.3 $ 2.1 $ - $ 3.4
================================================================================
Consolidating Statement of Cash Flows for the nine months ended September 30,
2003 (in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- -------------------------- ------------ --------- ------------ -------------
- --------------------------------------------------------------------------------
NET CASH FLOWS FROM
OPERATING ACTIVITIES $ 114.2 $ 27.1 $ - $ 141.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Additional capital
contribution 140.0 167.5 (140.0) 167.5
Long-term debt issuance-
net of issuance costs
& hedging proceeds 99.0 202.9 (99.0) 202.9
Requirements for:
Retirement of long-term
debt, including premiums
paid (121.9) - - (121.9)
Dividends to parent (56.9) (56.9) 56.9 (56.9)
Redemption of preferred
stock of subsidiary (0.1) - - (0.1)
Other financing activities (1.7) - - (1.7)
Net change in short-term
borrowings (38.7) (192.0) 48.2 (182.5)
- --------------------------------------------------------------------------------
Net cash flows from
financing activities 19.7 121.5 (133.9) 7.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Consolidated subsidiary
distributions - 56.9 (56.9) -
Unconsolidated affiliate
distributions - 0.1 - 0.1
Requirements for:
Capital expenditures,
excluding AFUDC equity (146.6) (6.9) - (153.5)
Consolidated subsidiary
investments - (140.0) 140.0 -
Unconsolidated affiliate
and other investments - (1.1) - (1.1)
Net change in notes receivable
to other Vectren companies 8.5 (59.3) 50.8 -
- --------------------------------------------------------------------------------
Net cash flows from
investing activities (138.1) (150.3) 133.9 (154.5)
- --------------------------------------------------------------------------------
Net decrease in cash &
cash equivalents (4.2) (1.7) (5.9)
Cash & cash equivalents at
beginning of period 10.2 0.3 10.5
- --------------------------------------------------------------------------------
Cash & cash equivalents
at end of period $ 6.0 $ (1.4) $ - $ 4.6
================================================================================
Consolidating Balance Sheet as of September 30, 2004 (in millions):
ASSETS Subsidiary Parent
------ Guarantors Company Eliminations Consolidated
---------- --------- ------------ -------------
Current Assets
Cash & cash equivalents $ 1.3 $ 2.1 $ - $ 3.4
Accounts receivable-
less reserves 75.8 9.9 (9.8) 75.9
Receivables due from
other Vectren companies 0.3 7.3 (7.3) 0.3
Accrued unbilled revenues 38.7 - - 38.7
Inventories 60.0 - - 60.0
Recoverable fuel &
natural gas costs 38.5 - - 38.5
Prepayments & other
current assets 155.9 3.0 (4.2) 154.7
- --------------------------------------------------------------------------------
Total current assets 370.5 22.3 (21.3) 371.5
- --------------------------------------------------------------------------------
Utility Plant
Original cost 3,401.5 - - 3,401.5
Less: accumulated
depreciation &
amortization 1,294.2 - - 1,294.2
- --------------------------------------------------------------------------------
Net utility plant 2,107.3 - - 2,107.3
- --------------------------------------------------------------------------------
Investments in consolidated
subsidiaries - 942.3 (942.3) -
Notes receivable from
consolidated subsidiaries - 654.2 (654.2) -
Investments in
unconsolidated affiliates 0.2 - - 0.2
Other investments 13.2 6.5 - 19.7
Non-utility property - net 5.4 138.3 - 143.7
Goodwill - net 205.0 - - 205.0
Regulatory assets 82.3 5.9 - 88.2
Other assets 4.6 0.9 - 5.5
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 2,788.5 $ 1,770.4 $ (1,617.8) $ 2,941.1
================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY
----------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
---------- -------- ------------ ------------
Current Liabilities
Accounts payable $ 69.5 $ 2.2 $ - $ 71.7
Accounts payable to
affiliated companies 51.2 0.1 - 51.3
Payables to other
Vectren companies 19.8 - (7.3) 12.5
Accrued liabilities 82.2 12.8 (6.9) 88.1
Short-term borrowings 0.4 210.6 - 211.0
Short-term borrowings from
other Vectren companies 208.4 - (208.4) -
Current maturities of
long-term debt 15.2 - - 15.2
Long-term debt subject
to tender 10.0 - - 10.0
- --------------------------------------------------------------------------------
Total current liabilities 456.7 225.7 (222.6) 459.8
- --------------------------------------------------------------------------------
Long-Term Debt
Long-term debt - net of
current maturities &
debt subject to tender 413.4 547.8 (9.8) 951.4
Long-term debt due
to VUHI 443.1 - (443.1) -
- --------------------------------------------------------------------------------
Total long-term
debt - net 856.5 547.8 (452.9) 951.4
- --------------------------------------------------------------------------------
Deferred Income Taxes & Other
Liabilities
Deferred income taxes 213.1 12.9 - 226.0
Regulatory liabilities
& other removal costs 242.1 5.7 - 247.8
Deferred credits &
other liabilities 77.7 3.7 - 81.4
- --------------------------------------------------------------------------------
Total deferred credits
& other liabilities 532.9 22.3 - 555.2
- --------------------------------------------------------------------------------
Cumulative, Redeemable
Preferred Stock of
a Subsidiary 0.1 - - 0.1
Common Shareholder's Equity
Common stock (
no par value) 611.3 592.7 (611.3) 592.7
Retained earnings 331.0 381.9 (331.0) 381.9
- --------------------------------------------------------------------------------
Total common
shareholder's equity 942.3 974.6 (942.3) 974.6
- --------------------------------------------------------------------------------
TOTAL LIABILITIES &
SHAREHOLDER'S EQUITY $ 2,788.5 $ 1,770.4 $ (1,617.8) $ 2,941.1
================================================================================
Consolidating Balance Sheet as of December 31, 2003 (in millions):
ASSETS Subsidiary Parent
------ Guarantors Company Eliminations Consolidated
---------- --------- ------------ ------------
Current Assets
Cash & cash equivalents $ 7.4 $ 0.7 $ - $ 8.1
Accounts receivable -
less reserves 113.6 0.4 - 114.0
Receivables due from
other Vectren companies 0.2 10.5 (9.0) 1.7
Accrued unbilled revenues 128.7 - - 128.7
Inventories 55.1 - - 55.1
Recoverable fuel &
natural gas costs 20.3 - - 20.3
Prepayments & other
current assets 138.2 0.9 (7.8) 131.3
- --------------------------------------------------------------------------------
Total current assets 463.5 12.5 (16.8) 459.2
- --------------------------------------------------------------------------------
Utility Plant
Original cost 3,250.7 - - 3,250.7
Less: accumulated
depreciation &
amortization 1,247.0 - - 1,247.0
- --------------------------------------------------------------------------------
Net utility plant 2,003.7 - - 2,003.7
- --------------------------------------------------------------------------------
Investments in consolidated
subsidiaries - 956.2 (956.2) -
Notes receivable from
consolidated subsidiaries - 623.4 (623.4) -
Investments in
unconsolidated affiliates 0.2 1.6 - 1.8
Other investments 14.3 6.3 - 20.6
Non-utility property - net 5.6 135.7 - 141.3
Goodwill - net 205.0 - - 205.0
Regulatory assets 83.4 6.2 - 89.6
Other assets 3.9 - - 3.9
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 2,779.6 $ 1,741.9 $ (1,596.4) $ 2,925.1
================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY
- ----------------------------------
Subsidiary Parent
Guarantors Company Eliminations Consolidated
----------- -------- ------------ -------------
Current Liabilities
Accounts payable $ 57.5 $ 5.5 $ - $ 63.0
Accounts payable to
affiliated companies 80.2 0.1 - 80.3
Payables to other
Vectren companies 22.3 - (9.0) 13.3
Accrued liabilities 95.7 8.8 (10.6) 93.9
Short-term borrowings 0.8 184.4 - 185.2
Short-term borrowings from
other Vectren companies 177.6 - (177.6) -
Current maturities
of long-term debt 15.0 - - 15.0
Long-term debt
subject to tender 13.5 - - 13.5
- --------------------------------------------------------------------------------
Total current liabilities 462.6 198.8 (197.2) 464.2
- --------------------------------------------------------------------------------
Long-Term Debt
Long-term debt - net of
current maturities &
debt subject to tender 412.9 547.6 - 960.5
Long-term debt due to VUHI 443.0 - (443.0) -
- --------------------------------------------------------------------------------
Total long-term
debt - net 855.9 547.6 (443.0) 960.5
- --------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 194.8 6.7 - 201.5
Regulatory liabilities &
other removal costs 228.8 6.2 - 235.0
Deferred credits &
other liabilities 81.1 2.8 - 83.9
- --------------------------------------------------------------------------------
Total deferred credits &
other liabilities 504.7 15.7 - 520.4
- --------------------------------------------------------------------------------
Cumulative, Redeemable
Preferred Stock of a Subsidiary 0.2 - - 0.2
Common Shareholder's Equity
Common stock (no par value) 611.3 589.8 (611.3) 589.8
Retained earnings 344.9 390.0 (344.9) 390.0
- --------------------------------------------------------------------------------
Total common
shareholder's equity 956.2 979.8 (956.2) 979.8
- --------------------------------------------------------------------------------
TOTAL LIABILITIES &
SHAREHOLDER'S EQUITY $ 2,779.6 $ 1,741.9 $ (1,596.4) $ 2,925.1
================================================================================
4. Transactions with Other Vectren Companies
Support Services and Purchases
Vectren and certain subsidiaries of Vectren provide corporate and general and
administrative services to the Company including legal, 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
allocation techniques, primarily number of employees, number of customers and/or
revenues. Allocations are based on cost. VUHI received corporate allocations
totaling $17.0 million and $18.0 million for the three months ended September
30, 2004 and 2003, respectively. VUHI received corporate allocations totaling
$59.2 million and $52.6 million for the nine months ended September 30, 2004 and
2003, respectively.
Vectren Fuels, Inc., a wholly owned subsidiary of Vectren, owns and operates
coal mines from which SIGECO purchases fuel used for electric generation.
Amounts paid for such purchases for the three months ended September 30, 2004
and 2003, totaled $22.0 million and $20.5 million, respectively. Amounts paid
for such purchases for the nine months ended September 30, 2004 and 2003,
totaled $61.1 million and $58.7 million, respectively.
Share-Based Incentive Plans
VUHI does not have share-based compensation plans separate from Vectren. An
insignificant number of VUHI's employees participate in Vectren's share-based
compensation plans.
5. 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's regulated utilities and nonregulated gas retail
operations. ProLiance's primary businesses include gas marketing, gas portfolio
optimization, and other portfolio and energy management services. ProLiance's
primary customers are its members' 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 September 30, 2004 and 2003, totaled $160.7 million and
$148.3 million, respectively, and for the nine months ended September 30, 2004
and 2003, totaled $562.9 million and $575.8 million, respectively. Amounts owed
to ProLiance at September 30, 2004, and December 31, 2003, for those purchases
were $48.1 million and $79.9 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.
6. 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
environmental matters.
SEC Inquiry regarding PUHCA Exemption
In July 2004, the Company received a letter from the SEC regarding its exempt
status under the Public Utility Holding Company Act of 1935 (PUHCA). The letter
asserts that VUHI's out of state electric power sales exceed the amount
previously determined by the SEC to be acceptable in order to qualify for the
exemption. VUHI claims exemption from registration under Section 3(a)(1) of
PUHCA by rule 2. As required by the rule, VUHI files an annual statement on SEC
Form U-3A-2. The Company has responded to the SEC inquiry and filed an amended
Form U-3A-2 for the year ended December 31, 2003.
7. 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
construction cost is consistent with amounts approved in the IURC's orders.
Through September 30, 2004, $207 million has been expended, and three of the
four SCR's are operational. After the equipment is installed and operational,
related annual operating expenses, including depreciation expense, are estimated
to be between $24 million and $27 million. The Company is recovering the
operational costs associated with the SCR's and related technology. 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 has achieved timely compliance through the reduction of 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, SIGECO,
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. On July 13, 2004, SIGECO filed a declaratory
judgment action against its insurance carriers seeking a judgment finding its
carriers liable under the policies for coverage of further investigation and any
necessary remediation costs that SIGECO may accrue under the VRP program. The
total investigative costs, and if necessary, costs of remediation at the four
SIGECO sites, as well as the amount of any PRP or insurance recoveries, cannot
be determined at this time.
Jacobsville Superfund Site
On July 22, 2004, the USEPA listed the Jacobsville Neighborhood Soil
Contamination site in Evansville, Indiana, on the National Priorities List under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The USEPA has identified four sources of historic lead contamination.
These four sources shut down manufacturing operations years ago. When drawing up
the boundaries for the listing, the USEPA included a 250 acre block of
properties surrounding the Jacobsville neighborhood, including Vectren's Wagner
Operations Center. Vectren's property has not been named as a source of the lead
contamination, nor does the USEPA's soil testing to date indicate that the
Vectren property contains lead contaminated soils. Vectren's own soil testing,
completed during the construction of the Operations Center did not indicate that
the Vectren property contains lead contaminated soils. At this time, Vectren
anticipates only additional soil testing, if required by the USEPA.
8. 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 June 30, 2004, the IURC approved a $5.7 million base rate increase
for Vectren South's gas distribution business in southwestern Indiana. The rate
settlement only addresses Vectren South's "non-gas" costs which are incurred to
build, operate, and maintain the pipelines, other equipment and systems that are
used to deliver gas across Vectren South's system to its customers. The base
rate change was implemented on July 1, 2004.
The order also permits Vectren South to recover the on-going costs associated
with Vectren South's compliance with the federal Pipeline Safety Improvement Act
of 2002. Implementation of these compliance activities will include additional
patrols, leakage surveys and direct observation of approximately 90 miles of
Vectren South's transmission pipeline system. The Pipeline Safety Improvement
Tracker provides for the recovery of up to $750,000 the first year and $500,000
thereafter, subject to OUCC review and IURC approval that the costs are
prudently incurred. Any costs incurred in excess of these levels will be
deferred for future recovery.
Vectren North (Indiana Gas) Pending Base Rate Settlement
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. On October 12, 2004, the Company
announced a settlement agreement with several parties, including the Indiana
Office of Utility Consumer Counselor, the Indiana Gas Industrial Group, and the
Citizens Action Coalition of Indiana, Inc. The settlement agreement provides for
a $24 million increase in Vectren North's base distribution rates to cover the
ongoing cost of operating, maintaining, and expanding the approximately
12,000-mile distribution and storage system used to serve more than 545,000
customers. Once implemented, the new rate design will include a larger service
charge, which is intended to address to some extent earnings volatility related
to weather. The settlement also permits Vectren North to recover the on-going
costs associated with the federal Pipeline Safety Improvement Act of 2002. The
Pipeline Safety Improvement Tracker provides for the recovery of incremental
non-capital dollars, capped at $2.5 million per year. Costs in excess of the
annual cap are to be deferred for future recovery. The IURC will hold a hearing
on the settlement on November 22, 2004, and Commission action is expected
shortly thereafter.
VEDO Pending Base Rate Filing
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. On May 24, 2004, the official
application and Standard Filing Requirements were filed with the PUCO. 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. 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, which, if approved, will enable the Company to
proactively support conservation and promote home weatherization and the
reduction of energy consumption. Based on the PUCO's regulatory process, the
PUCO staff report relating to the Company's request is expected to be submitted
in November 2004. Based upon the PUCO's actions in other proceedings, the
Company would expect a Commission order in this case late in the first quarter
of 2005.
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 audit period ended in November
2002. The audit provides the 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 an
approximate $6 million disallowance. The Ohio Consumer Counselor has recommended
an approximate $12 million disallowance, which includes interest. 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 $1.9 million for its estimated share of any
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 may have on
results in audit periods beginning after November 2002.
9. Impact of Recently Issued Accounting Guidance
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. Adoption of
FIN 46R did not have a material impact on the Company's results of operations or
financial position.
10.Segment Reporting
VUHI's operations consist of 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, VUHI has three operating segments 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 to 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
VUHI's other operations, net income is used as the measure of profitability.
Information related to the Company's business segments is summarized below:
- --------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------
(In millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Revenues
Gas Utility Services $ 112.4 $ 115.0 $ 771.6 $ 788.8
Electric Utility Services 102.3 95.5 280.2 254.2
Other Operations 7.4 6.6 25.5 19.8
Eliminations (7.4) (6.4) (25.0) (19.2)
- --------------------------------------------------------------------------------
Consolidated Revenues $ 214.7 $ 210.7 $ 1,052.3 $ 1,043.6
================================================================================
Profitability Measure
Regulated Operating Income
(Operating Income Less
Applicable Income Taxes)
Gas Utility Services $ (4.2) $ (6.0) $ 43.0 $ 45.4
Electric Utility
Services 21.7 21.3 48.2 49.0
- --------------------------------------------------------------------------------
Total Regulated
Operating Income 17.5 15.3 91.2 94.4
- --------------------------------------------------------------------------------
Regulated other income - net 1.3 1.8 1.8 2.0
Regulated interest
expense & preferred
dividends (15.7) (15.7) (46.9) (46.6)
- --------------------------------------------------------------------------------
Regulated Net Income 3.1 1.4 46.1 49.8
- --------------------------------------------------------------------------------
Other Operations
Net Income 1.4 1.0 5.8 1.3
- --------------------------------------------------------------------------------
Consolidated Net Income $ 4.5 $ 2.4 $ 51.9 $ 51.1
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Description of the Business
Vectren Utility Holdings, Inc. (VUHI or the Company), an Indiana corporation,
serves as the intermediate holding company for Vectren Corporation's (Vectren)
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. Vectren is an
energy and applied technology holding company headquartered in Evansville,
Indiana. 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 9 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 generates revenue primarily from the delivery of natural gas and electric
service to its customers. The Company's 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 and electric services. The Company's results are
impacted by weather patterns in its service territory and general economic
conditions both in its service territory as well as nationally.
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.
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.
Earnings for the three months ended September 30, 2004 were $4.5 million
compared to $2.4 million for the same period last year. The $2.1 million
increase was primarily due to the recovery of NOx related environmental
expenditures, increased gas base rates in the Vectren South territory, increased
demand in large electric customer margins, and higher earnings from wholesale
power marketing operations. Utility Group earnings were $51.9 million for the
nine months ended September 30, 2004, compared to $51.1 million in the prior
year. Earnings increased due to the return on additional NOx related
environmental expenditures which were partially offset by reduced wholesale
power activities. The Company estimates that mild weather unfavorably impacted
third quarter earnings by $2.2 million after tax and year-to-date earnings by
approximately $6.4 million after tax over the prior year periods.
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. 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
Margin
Margin generated from the sale of natural gas and electricity 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, other contract, and firm wholesale 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. 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 Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
(In millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Residential & Commercial $ 35.5 $ 34.8 $ 198.8 $ 207.4
Contract 9.7 9.7 38.6 37.9
Other - (0.8) 4.4 3.6
- --------------------------------------------------------------------------------
Total gas utility margin $ 45.2 $ 43.7 $ 241.8 $ 248.9
================================================================================
Sold & transported volumes in MMDth:
To residential & commercial
customers 6.7 7.0 76.1 82.5
To contract customers 17.5 18.1 65.3 66.9
- --------------------------------------------------------------------------------
Total throughput 24.2 25.1 141.4 149.4
================================================================================
Gas utility margins were $45.2 million and $241.8 million for the three and nine
months ended September 30, 2004. This represents an increase in gas utility
margin in the third quarter, a non-heating base load usage quarter, of $1.5
million or 3%, and a decrease year-to-date of $7.1 million or 3%. The quarterly
increase is primarily due to increased base rates in the Vectren South service
territory. The 2003 quarter results also reflect a $0.7 million charge
associated with a PUCO GCR audit proceeding. These increases are offset by the
effects of weather which decreased gas utility margin an estimated $1.4 million.
Heating weather for the nine months ended September 30, 2004 was 9% warmer than
normal and 13% warmer than last year and had an estimated unfavorable impact on
gas utility margin of $11.7 million. The effects of weather have been partially
offset by residential and commercial customer growth and increased large
customer margins. Gas sold and transported volumes were 5% less for the nine
months ended September 30, 2004, compared to the prior year. The decreased
throughput was primarily attributable to weather and partially offset by
customer growth. The average cost per dekatherm of gas purchased for the nine
months ended September 30, 2004, was $6.76 compared to $6.44 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 Nine Months
Ended September 30, Ended September 30,
- --------------------------------------------------------------------------------
(In millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Residential & commercial $ 46.4 $ 45.0 $ 122.0 $ 107.7
Industrial 16.2 13.3 46.5 38.4
Municipalities & other 4.3 5.5 13.1 14.6
- --------------------------------------------------------------------------------
Total retail & firm wholesale 66.9 63.8 181.6 160.7
Asset optimization 4.3 2.7 9.6 14.8
- --------------------------------------------------------------------------------
Total electric utility margin $ 71.2 $ 66.5 $ 191.2 $ 175.5
================================================================================
Retail & Firm Wholesale Margin
Electric retail and firm wholesale utility margins were $66.9 million and $181.6
million for the three and nine months ended September 30, 2004. This represents
an increase over the same period last year of $3.1 million and $20.9 million,
respectively. Margins increased $4.5 million quarter over quarter and $12.4
million for the nine month period due to an increase in retail electric rates
related to the recovery of NOx related expenditures. Margin from residential and
commercial customers (excluding the effects of NOx) decreased $2.5 million for
the quarter due primarily to the estimated effect of weather and increased $5.2
million year to date due to both weather and increased usage. Excluding the
effects of NOx recovery, margins from industrial customers increased $1.2
million for the quarter and $3.9 million for the nine month period compared to
2003, which reflects some economic recovery. Weather for the quarter was 24%
cooler than normal and 18% cooler than last year. Weather for the nine month
period was 10% cooler than normal and 11% warmer than last year. The estimated
decrease in margin due to weather was $2.3 million for the quarter, and the
estimated increase in margin for the nine month period was $1.0 million. As the
recovery under the NOx rider is a volumetric charge, it is also estimated that
mild weather has reduced the level of NOx recovery by approximately $0.5 million
for the year to date. Due to the above factors, volumes sold increased 5% to
4.76 GWh for the nine months ended September 30, 2004, compared to 4.53 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 the
margin from these activities is generated from contracts that 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 Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
In millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Beginning of Period Net Asset
Optimization Position $ 2.2 $ 0.1 $ (0.4) $ (0.7)
Statement of Income Activity
Net mark-to-market (losses)
gains realized (1.8) (0.5) (1.0) 0.4
Net realized gains recognized 6.1 3.2 10.6 14.4
- --------------------------------------------------------------------------------
Asset optimization margin 4.3 2.7 9.6 14.8
- --------------------------------------------------------------------------------
Net cash received & other
adjustments (6.8) (2.8) (9.5) (14.1)
- --------------------------------------------------------------------------------
End of Period Net Asset
Optimization Position $ (0.3) $ - $ (0.3) $ -
================================================================================
Net wholesale margins increased $1.6 million and decreased $5.2 million for the
three and nine month periods compared to last year. The change in margin both
for the quarter and nine month period is due largely to availability of excess
capacity. The year-to-date decrease in wholesale margins is attributable to an
increase in demand by native load customers due to both weather and increased
usage. Scheduled outages of owned generation, related to the installation of
environmental compliance equipment, has also reduced the year-over-year
availability of excess capacity.
Following is information regarding asset optimization activities included in
Electric utility revenues and Fuel for electric generation in the Statements of
Income:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
(In millions) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Activity related to:
Sales contracts $ 64.5 $ 42.7 $ 107.2 $ 110.9
Purchase contracts (56.8) (38.0) (90.9) (89.7)
Net mark-to-market (losses)
gains realized (1.8) (0.5) (1.0) 0.4
- --------------------------------------------------------------------------------
Net asset optimization revenue 5.9 4.2 15.3 21.6
- --------------------------------------------------------------------------------
Fuel for electric generation 1.6 1.5 5.7 6.8
- --------------------------------------------------------------------------------
Asset optimization margin $ 4.3 $ 2.7 $ 9.6 $ 14.8
================================================================================
Operating Expenses
Other operating expenses and depreciation expense for the three and nine months
ended September 30, 2004, collectively increased $3.3 million and $9.6 million,
respectively, compared to 2003. For the quarter, NOx related operating expenses
increased $2.7 million (other operating expenses of $0.8 million and
depreciation of $1.9 million). For the nine months, NOx related operating
expenses increased $6.7 million (other operating expenses of $2.9 million and
depreciation of $3.8 million). The year-to-date remaining increase in other
operating expenses is primarily due to higher labor and benefit costs. The
remaining increases in depreciation expense are primarily due to normal
additions to utility plant.
Total Other Income (Expense)
For the nine months ended September 30, 2004, total other income (expense)
increased $3.5 million compared to 2003. The increase was primarily attributable
to 2003 write-downs of the Company's investments in BABB International, which
totaled $3.9 million for the nine month period.
Interest Expense
For the nine months ended September 30, 2004, interest expense increased $0.7
million compared to 2003. The increase reflects the July 2003 issuance of
long-term debt which included conversion of short-term variable rate debt to
fixed rate higher coupon long-term debt.
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
construction cost is consistent with amounts approved in the IURC's orders.
Through September 30, 2004, $207 million has been expended, and three of the
four SCR's are operational. After the equipment is installed and operational,
related annual operating expenses, including depreciation expense, are estimated
to be between $24 million and $27 million. The Company is recovering the
operational costs associated with the SCR's and related technology. 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 has achieved timely compliance through the reduction of 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, SIGECO,
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. On July 13, 2004, SIGECO filed a declaratory
judgment action against its insurance carriers seeking a judgment finding its
carriers liable under the policies for coverage of further investigation and any
necessary remediation costs that SIGECO may accrue under the VRP program. The
total investigative costs, and if necessary, costs of remediation at the four
SIGECO sites, as well as the amount of any PRP or insurance recoveries, cannot
be determined at this time.
Jacobsville Superfund Site
On July 22, 2004, the USEPA listed the Jacobsville Neighborhood Soil
Contamination site in Evansville, Indiana, on the National Priorities List under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The USEPA has identified four sources of historic lead contamination.
These four sources shut down manufacturing operations years ago. When drawing up
the boundaries for the listing, the USEPA included a 250 acre block of
properties surrounding the Jacobsville neighborhood, including Vectren's Wagner
Operations Center. Vectren's property has not been named as a source of the lead
contamination, nor does the USEPA's soil testing to date indicate that the
Vectren property contains lead contaminated soils. Vectren's own soil testing,
completed during the construction of the Operations Center did not indicate that
the Vectren property contains lead contaminated soils. At this time, Vectren
anticipates only additional soil testing, if required by the USEPA.
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 June 30, 2004, the IURC approved a $5.7 million base rate increase
for Vectren South's gas distribution business in southwestern Indiana. The rate
settlement only addresses Vectren South's "non-gas" costs which are incurred to
build, operate, and maintain the pipelines, other equipment and systems that are
used to deliver gas across Vectren South's system to its customers. The base
rate change was implemented on July 1, 2004.
The order also permits Vectren South to recover the on-going costs associated
with Vectren South's compliance with the federal Pipeline Safety Improvement Act
of 2002. Implementation of these compliance activities will include additional
patrols, leakage surveys and direct observation of approximately 90 miles of
Vectren South's transmission pipeline system. The Pipeline Safety Improvement
Tracker provides for the recovery of up to $750,000 the first year and $500,000
thereafter, subject to OUCC review and IURC approval that the costs are
prudently incurred. Any costs incurred in excess of these levels will be
deferred for future recovery.
Vectren North (Indiana Gas) Pending Base Rate Settlement
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. On October 12, 2004, the Company
announced a settlement agreement with several parties, including the Indiana
Office of Utility Consumer Counselor, the Indiana Gas Industrial Group, and the
Citizens Action Coalition of Indiana, Inc. The settlement agreement provides for
a $24 million increase in Vectren North's base distribution rates to cover the
ongoing cost of operating, maintaining and expanding the approximately
12,000-mile distribution and storage system used to serve more than 545,000
customers. Once implemented, the new rate design will include a larger service
charge, which is intended to address to some extent earnings volatility related
to weather. The settlement also permits Vectren North to recover the on-going
costs associated with the federal Pipeline Safety Improvement Act of 2002. The
Pipeline Safety Improvement Tracker provides for the recovery of incremental
non-capital dollars, capped at $2.5 million per year. Costs in excess of the
annual cap are to be deferred for future recovery. The IURC will hold a hearing
on the settlement on November 22, 2004, and Commission action is expected
shortly thereafter.
VEDO Pending Base Rate Filing
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. On May 24, 2004, the official
application and Standard Filing Requirements were filed with the PUCO. 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. 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, which, if approved, will enable the Company to
proactively support conservation and promote home weatherization and the
reduction of energy consumption. Based on the PUCO's regulatory process, the
PUCO staff report relating to the Company's request is expected to be submitted
in November 2004. Based upon the PUCO's actions in other proceedings, the
Company would expect a Commission order in this case late in the first quarter
of 2005.
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 audit period ended in November
2002. The audit provides the 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 an
approximate $6 million disallowance. The Ohio Consumer Counselor has recommended
an approximate$12 million disallowance, which includes interest. 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 $1.9 million for its estimated share of any
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 may have on
results in audit periods beginning after November 2002.
SEC Inquiry regarding PUHCA Exemption
In July 2004, the Company received a letter from the SEC regarding its exempt
status under the Public Utility Holding Company Act of 1935 (PUHCA). The letter
asserts that VUHI's out of state electric power sales exceed the amount
previously determined by the SEC to be acceptable in order to qualify for the
exemption. VUHI claims exemption from registration under Section 3(a)(1) of
PUHCA by rule 2. As required by the rule, VUHI files an annual statement on SEC
Form U-3A-2. The Company has responded to the SEC inquiry and filed an amended
Form U-3A-2 for the year ended December 31, 2003.
Financial Condition
Within Vectren's consolidated group, VUHI funds the short-term and long-term
financing needs of utility operations. Vectren does not guarantee VUHI's debt.
VUHI's outstanding long-term and short-term borrowing arrangements are jointly
and severally guaranteed by Indiana Gas, SIGECO, and VEDO. The guarantees are
full and unconditional and joint and several, and VUHI has no subsidiaries other
than the subsidiary guarantors. Information about the subsidiary guarantors as a
group is included in Note 3 to the condensed consolidated financial statements.
VUHI's long-term and short-term obligations outstanding at September 30, 2004,
totaled $550.0 million and $210.6 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.
VUHI's operations have historically funded almost all of Vectren's common stock
dividends.
VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at
September 30, 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. 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% of total permanent capitalization, including current maturities of long-term
debt and long-term debt subject to tender, at both September 30, 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 nine months
ended September 30, 2004 and 2003, was $218.8 million and $141.3 million,
respectively. The increase of $77.5 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 $44.1 million for the nine months
ended September 30, 2004, includes a net increase of short-term borrowings of
approximately $25.8 million and increased dividends paid to its parent company
compared to 2003. In 2003, Vectren infused common equity into utility operations
and VUHI issued long-term debt and used the proceeds to retire higher rate debt
and permanently finance short-term borrowings for plant construction projects.
Investing Cash Flow
Cash flow required for investing activities was $179.4 million for the nine
months ended September 30, 2004, an increase of $24.9 million over 2003. The
increase in investing activities results primarily from capital expenditures,
which totaled $182.9 million in 2004 compared to $153.5 million in 2003.
Available Sources of Liquidity
VUHI's short-term credit facility was renewed on June 24, 2004 at $350 million,
a slight increase from the previous year's renewal level of $346 million.
Instead of the traditional 364-day facility, the facility was renewed for a
5-year period ending June 2009. At September 30, 2004, the Company has $355
million of short-term borrowing capacity, of which approximately $144 million is
available.
Potential Uses of Liquidity
Planned Capital Expenditures & Investments
Capital expenditures for the remainder of 2004 are estimated to be approximately
$73 million. For 2005, capital expenditures are estimated at approximately $205
million.
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 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 Company's 2003 Form 10-K and is therefore not presented herein.
ITEM 4. CONTROLS AND PROCEDURES
Changes in Internal Control over Financial Reporting
In preparation for required reporting under the Sarbanes Oxley Act of 2002,
Section 404, the Company is conducting a thorough review of its internal control
over financial reporting, including disclosure controls and procedures. Based on
this review, the Company has made internal control enhancements, and will
continue to make future enhancements, to its internal controls over financing
reporting some of which may be material; however, during the quarter ended
September 30, 2004, there have been no 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.
Evaluation of Disclosure Controls and Procedures
As of September 30, 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.
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 Note 7 of its unaudited
consolidated condensed financial statements included in Part 1 Item 1 Financial
Statements regarding the Clean Air Act and related legal proceedings.
ITEM 6. EXHIBITS
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
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 UTILITY HOLDINGS, INC.
Registrant
November 12, 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)