UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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
incorporation or organization) Identification No.)
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 April 30, 2005
-------------------------------- -- --------------
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 15
3 Quantitative and Qualitative Disclosures About Market Risk 24
4 Controls and Procedures 24
PART II. OTHER INFORMATION
1 Legal Proceedings 24
6 Exhibits and Reports on Form 8-K 24
Signatures 25
Access to Information
Vectren Corporation makes available all SEC filings and recent annual reports
free of charge, including those of its wholly owned subsidiaries, through its
website at www.vectren.com, or by request, directed to Investor Relations at the
mailing address, phone number, or email address that follows:
Mailing Address: Phone Number: Investor Relations Contact:
P.O. Box 209 (812) 491-4000 Steven M. Schein
Evansville, Indiana Vice President, Investor Relations
47702-0209 sschein@vectren.com
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 NOx: nitrogen oxide
Board
FERC: Federal Energy Regulatory OUCC: Indiana Office of the Utility
Commission Consumer Counselor
IDEM: Indiana Department of PUCO: Public Utilities Commission of
Environmental Management Ohio
IURC: Indiana Utility Regulatory SFAS: Statement of Financial
Commission Accounting Standards
MCF/BCF: thousands/billions of cubic USEPA: United States Environmental
feet Protection Agency
MDth/MMDth: thousands/millions of Throughput: combined gas sales and gas
dekatherms transportation volumes
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
March 31, December 31,
- --------------------------------------------------------------------------------
2005 2004
- --------------------------------------------------------------------------------
ASSETS
------
Current Assets
Cash & cash equivalents $ 15.7 $ 5.7
Accounts receivable - less reserves of $2.1 &
$1.9, respectively 169.0 147.5
Receivables due from other Vectren companies 0.2 4.0
Accrued unbilled revenues 110.9 161.2
Inventories 38.0 53.0
Recoverable fuel & natural gas costs - 17.7
Prepayments & other current assets 38.0 138.2
- --------------------------------------------------------------------------------
Total current assets 371.8 527.3
- --------------------------------------------------------------------------------
Utility Plant
Original cost 3,482.6 3,465.2
Less: accumulated depreciation & amortization 1,321.1 1,309.0
- --------------------------------------------------------------------------------
Net utility plant 2,161.5 2,156.2
- --------------------------------------------------------------------------------
Investments in unconsolidated affiliates 0.2 0.2
Other investments 20.3 19.6
Non-utility property - net 153.3 149.6
Goodwill - net 205.0 205.0
Regulatory assets 79.5 82.5
Other assets 7.2 7.3
- --------------------------------------------------------------------------------
TOTAL ASSETS $2,998.8 $3,147.7
================================================================================
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)
March 31, December 31,
- --------------------------------------------------------------------------------
2005 2004
- --------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDER'S EQUITY
----------------------------------
Current Liabilities
Accounts payable $ 35.1 $ 97.3
Accounts payable to affiliated companies 69.6 98.8
Payables to other Vectren companies 18.4 15.8
Refundable fuel & natural gas costs 24.0 6.3
Accrued liabilities 184.9 110.0
Short-term borrowings 117.0 308.3
Long-term debt subject to tender 10.0 10.0
- --------------------------------------------------------------------------------
Total current liabilities 459.0 646.5
- --------------------------------------------------------------------------------
Long-Term Debt - Net of Current Maturities &
Debt Subject to Tender 941.3 941.3
Deferred Income Taxes & Other Liabilities
Deferred income taxes 245.6 240.8
Regulatory liabilities 256.4 251.7
Deferred credits & other liabilities 82.9 81.9
- --------------------------------------------------------------------------------
Total deferred credits & other liabilities 584.9 574.4
- --------------------------------------------------------------------------------
Commitments & Contingencies (Notes 6 - 8)
Cumulative, Redeemable Preferred Stock
of a Subsidiary - 0.1
Common Shareholder's Equity
Common stock (no par value) 592.9 592.9
Retained earnings 420.7 392.5
- --------------------------------------------------------------------------------
Total common shareholder's equity 1,013.6 985.4
- --------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $2,998.8 $3,147.7
================================================================================
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)
Three Months Ended March 31,
- -------------------------------------------------------------------------------
2005 2004
- -------------------------------------------------------------------------------
OPERATING REVENUES
Gas utility $ 516.7 $ 505.1
Electric utility 94.7 88.8
Other 0.2 0.3
- -------------------------------------------------------------------------------
Total operating revenues 611.6 594.2
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 370.9 365.6
Fuel for electric generation 26.9 22.9
Purchased electric energy 2.3 4.4
Other operating 61.6 62.1
Depreciation & amortization 33.4 29.6
Taxes other than income taxes 21.8 22.3
- -------------------------------------------------------------------------------
Total operating expenses 516.9 506.9
- -------------------------------------------------------------------------------
OPERATING INCOME 94.7 87.3
OTHER INCOME (EXPENSE)
Other income - net 2.2 1.9
Equity in earnings of unconsolidated
affiliates - 0.2
- -------------------------------------------------------------------------------
Total other income 2.2 2.1
- -------------------------------------------------------------------------------
INTEREST EXPENSE 16.9 17.0
- -------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 80.0 72.4
- -------------------------------------------------------------------------------
INCOME TAXES 31.9 27.7
- -------------------------------------------------------------------------------
NET INCOME $ 48.1 $ 44.7
===============================================================================
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)
Three Months Ended March 31,
- ----------------------------------------------------------------------------------
2005 2004
- ----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 48.1 $ 44.7
Adjustments to reconcile net income to cash from
operating activities:
Depreciation & amortization 33.4 29.6
Deferred income taxes & investment tax credits 1.6 (0.7)
Pension & postretirement periodic benefit cost 1.5 1.5
Equity in earnings of unconsolidated affiliates - (0.2)
Net unrealized gain on derivative instruments (2.5) (2.8)
Other non-cash charges - net 2.1 3.6
Changes in working capital accounts:
Accounts receivable, including to Vectren
companies & accrued unbilled revenue 30.6 (16.1)
Inventories 15.0 15.9
Recoverable/refundable fuel & natural gas costs 35.4 11.4
Prepayments & other current assets 102.7 116.8
Accounts payable, including to Vectren
companies & affiliated companies (88.8) (56.3)
Accrued liabilities 78.6 65.5
Changes in noncurrent assets 2.7 (0.2)
Changes in noncurrent liabilities (1.0) (1.8)
- ----------------------------------------------------------------------------------
Net cash flows from operating activities 258.1 210.9
- ----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from additional capital contribution - 1.4
Requirements for:
Dividends to parent (19.9) (20.0)
Redemption of preferred stock of subsidiary (0.1) (0.1)
Net change in short-term borrowings (191.3) (145.2)
- ----------------------------------------------------------------------------------
Net cash flows from financing activities (211.3) (163.9)
- ----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Requirements for capital expenditures,
excluding AFUDC equity (36.8) (42.6)
- ----------------------------------------------------------------------------------
Net cash flows from investing activities (36.8) (42.6)
- ----------------------------------------------------------------------------------
Net increase in cash & cash equivalents 10.0 4.4
Cash & cash equivalents at beginning of period 5.7 8.1
- ----------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 15.7 $ 12.5
==================================================================================
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 energy delivery services to approximately 555,000 natural
gas customers located in central and southern Indiana. SIGECO provides energy
delivery services to approximately 136,000 electric customers and approximately
110,000 gas customers located near Evansville in southwestern Indiana. SIGECO
also owns and operates electric generation to serve its electric customers and
optimizes those assets in the wholesale power market. Indiana Gas and SIGECO
generally do business as Vectren Energy Delivery of Indiana. The Ohio operations
provide energy delivery services to approximately 315,000 natural gas customers
located near Dayton in west central Ohio. The Ohio operations are 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). The Ohio
operations generally do business as Vectren Energy Delivery of Ohio.
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, 2004, filed March 9, 2005 on Form 10-K. Certain amounts from
the prior period reported in this Quarterly Report on Form 10-Q have been
reclassified to conform to the 2005 financial statement presentation. 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 $117.0 million is outstanding at March 31, 2005, and VUHI's $550.0 million
unsecured senior notes outstanding at March 31, 2005. 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.
Condensed Consolidating Statement of Income for the three months ended March 31,
2005 (in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- -------------------------------------- ---------- ------- ------------ ------------
OPERATING REVENUES
Gas utility $ 516.7 $ - $ - $ 516.7
Electric utility 94.7 - - 94.7
Other - 9.1 (8.9) 0.2
- ------------------------------------------------------------------------------------------
Total operating revenues 611.4 9.1 (8.9) 611.6
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 370.9 - - 370.9
Fuel for electric generation 26.9 - - 26.9
Purchased electric energy 2.3 - - 2.3
Other operating 68.8 - (7.2) 61.6
Depreciation & amortization 29.0 4.3 0.1 33.4
Taxes other than income taxes 21.5 0.2 0.1 21.8
- --------------------------------------------------------------------- -------------------
Total operating expenses 519.4 4.5 (7.0) 516.9
- ------------------------------------------------------------------------------------------
OPERATING INCOME 92.0 4.6 (1.9) 94.7
OTHER INCOME (EXPENSE)
Equity in earnings of consolidated
companies - 46.4 (46.4) -
Equity in earnings of unconsolidated
affiliates - - - -
Other income (expense) - net (0.1) 9.5 (7.2) 2.2
- --------------------------------------------------------------------- -------------------
Total other income (expense) (0.1) 55.9 (53.6) 2.2
- ------------------------------------------------------------------------------------------
Interest expense 15.9 10.2 (9.2) 16.9
- --------------------------------------------------------------------- -------------------
INCOME BEFORE INCOME TAXES 76.0 50.3 (46.3) 80.0
- ------------------------------------------------------------------------------------------
Income taxes 29.6 2.2 0.1 31.9
- ------------------------------------------------------------------------------------------
NET INCOME $ 46.4 $ 48.1 $ (46.4) $ 48.1
==========================================================================================
Condensed Consolidating Statement of Income for the three months ended March 31,
2004 (in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- ------------------------------------ ---------- ------- ------------ ------------
OPERATING REVENUES
Gas utility $ 505.1 $ - $ - $ 505.1
Electric utility 88.8 - - 88.8
Other - 9.4 (9.1) 0.3
- ------------------------------------------------------------------------------------------
Total operating revenues 593.9 9.4 (9.1) 594.2
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 365.6 - - 365.6
Fuel for electric generation 22.9 - - 22.9
Purchased electric energy 4.4 - - 4.4
Other operating 69.0 0.2 (7.1) 62.1
Depreciation & amortization 25.3 4.3 - 29.6
Taxes other than income taxes 22.0 0.3 - 22.3
- ------------------------------------------------------------------------------------------
Total operating expenses 509.2 4.8 (7.1) 506.9
- ------------------------------------------------------------------------------------------
OPERATING INCOME 84.7 4.6 (2.0) 87.3
OTHER INCOME (EXPENSE)
Equity in earnings of consolidated
companies - 43.1 (43.1) -
Equity in losses of unconsolidated
affiliates - 0.2 - 0.2
Other income (expense) - net (0.6) 8.4 (5.9) 1.9
- ------------------------------------------------------------------------------------------
Total other income (expense) - net (0.6) 51.7 (49.0) 2.1
- ------------------------------------------------------------------------------------------
Interest expense 15.8 9.1 (7.9) 17.0
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 68.3 47.2 (43.1) 72.4
- ------------------------------------------------------------------------------------------
Income taxes 25.2 2.5 - 27.7
- ------------------------------------------------------------------------------------------
NET INCOME $ 43.1 $ 44.7 $ (43.1) $ 44.7
==========================================================================================
Condensed Consolidating Statement of Cash Flows for the three months ended March
31, 2005 (in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- ---------------------------------------- ---------- ------- ------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 249.6 $ 8.5 $ - $ 258.1
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Requirements for:
Dividends to parent (19.9) (19.9) 19.9 (19.9)
Redemption of preferred stock
of subsidiary (0.1) - - (0.1)
Net change in short-term borrowings,
including to other Vectren companies (162.4) (164.1) 135.2 (191.3)
- --------------------------------------------------------------------------------------------
Net cash flows from financing
activities (182.4) (184.0) 155.1 (211.3)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from consolidated subsidiary
distributions - 19.9 (19.9) -
Requirements for:
Capital expenditures, excluding
AFUDC equity (28.7) (8.1) - (36.8)
Net change in notes receivable to
other Vectren companies (26.9) 162.1 (135.2) -
- --------------------------------------------------------------------------------------------
Net cash flows from investing
activities (55.6) 173.9 (155.1) (36.8)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash & cash
equivalents 11.6 (1.6) 10.0
Cash & cash equivalents at beginning
of period 4.7 1.0 5.7
- --------------------------------------------------------------------------------------------
Cash & cash equivalents at end of
period $ 16.3 $ (0.6) $ - $ 15.7
============================================================================================
Condensed Consolidating Statement of Cash Flows for the three months ended March
31, 2004 (in millions):
Subsidiary Parent
Guarantors Company Eliminations Consolidated
- ---------------------------------------- ---------- ------- ------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 201.6 $ 9.3 $ - $ 210.9
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from additional capital
contribution - 1.4 - 1.4
Requirements for:
Dividends to parent (20.0) (20.0) 20.0 (20.0)
Redemption of preferred stock of
subsidiary (0.1) - - (0.1)
Net change in short-term borrowings,
including to other
Vectren companies (81.5) (87.9) 24.2 (145.2)
- --------------------------------------------------------------------------------------------
Net cash flows from financing
activities (101.6) (106.5) 44.2 (163.9)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from consolidated subsidiary
distributions - 20.0 (20.0) -
Requirements for:
Capital expenditures, excluding
AFUDC equity (39.0) (3.6) - (42.6)
Net change in notes receivable to
other Vectren companies (56.5) 80.7 (24.2) -
- --------------------------------------------------------------------------------------------
Net cash flows from investing
activities (95.5) 97.1 (44.2) (42.6)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash & cash
equivalents 4.5 (0.1) 4.4
Cash & cash equivalents at beginning of
period 7.4 0.7 8.1
- --------------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 11.9 $ 0.6 $ - $ 12.5
============================================================================================
Condensed Consolidating Balance Sheet as of March 31, 2005 (in millions):
ASSETS Subsidiary Parent
------ Guarantors Company Eliminations Consolidated
---------- ------- ------------ ------------
Current Assets
Cash & cash equivalents $ 16.3 $ (0.6) $ - $ 15.7
Accounts receivable - less reserves 168.9 0.1 - 169.0
Receivables due from other Vectren
companies 0.1 164.6 (164.5) 0.2
Accrued unbilled revenues 110.9 - - 110.9
Inventories 38.0 - - 38.0
Recoverable fuel & natural gas costs - - - -
Prepayments & other current assets 39.5 (0.3) (1.2) 38.0
- ------------------------------------------------------------------------------------------
Total current assets 373.7 163.8 (165.7) 371.8
- ------------------------------------------------------------------------------------------
Utility Plant
Original cost 3,482.6 - - 3,482.6
Less: accumulated depreciation &
amortization 1,321.1 - - 1,321.1
- ------------------------------------------------------------------------------------------
Net utility plant 2,161.5 - - 2,161.5
- ------------------------------------------------------------------------------------------
Investments in consolidated subsidiaries - 978.0 (978.0) -
Notes receivable from consolidated
subsidiaries 26.9 443.1 (470.0) -
Investments in unconsolidated affiliates 0.2 - - 0.2
Other investments 14.2 6.1 - 20.3
Non-utility property - net 5.3 148.0 - 153.3
Goodwill - net 205.0 - - 205.0
Regulatory assets 73.9 5.6 - 79.5
Other assets 3.9 3.3 - 7.2
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $2,864.6 $1,747.9 $(1,613.7) $2,998.8
==========================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY Subsidiary Parent
---------------------------------- Guarantors Company Eliminations Consolidated
---------- ------- ------------ ------------
Current Liabilities
Accounts payable $ 30.8 $ 4.3 $ - $ 35.1
Accounts payable to affiliated
companies 69.3 0.3 - 69.6
Payables to other Vectren companies 31.2 - (12.8) 18.4
Refundable fuel & natural gas costs 24.0 - - 24.0
Accrued liabilities 171.1 14.8 (1.0) 184.9
Short-term borrowings - 117.0 - 117.0
Short-term borrowings from
other Vectren companies 151.7 26.9 (178.6) -
Current maturities of long-term debt - - - -
Long-term debt subject to tender 10.0 - - 10.0
- ------------------------------------------------------------------------------------------
Total current liabilities 488.1 163.3 (192.4) 459.0
- ------------------------------------------------------------------------------------------
Long-Term Debt
Long-term debt - net of current
maturities & debt subject to tender 393.4 547.9 - 941.3
Long-term debt due to VUHI 443.3 - (443.3) -
- ------------------------------------------------------------------------------------------
Total long-term debt - net 836.7 547.9 (443.3) 941.3
- ------------------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 232.0 13.6 - 245.6
Regulatory liabilities 251.1 5.3 - 256.4
Deferred credits & other liabilities 78.7 4.2 - 82.9
- ------------------------------------------------------------------------------------------
Total deferred credits & other
liabilities 561.8 23.1 - 584.9
- ------------------------------------------------------------------------------------------
Cumulative, Redeemable Preferred Stock
of a Subsidiary - - - -
Common Shareholder's Equity
Common stock (no par value) 611.3 592.9 (611.3) 592.9
Retained earnings 366.7 420.7 (366.7) 420.7
- ------------------------------------------------------------------------------------------
Total common shareholder's equity 978.0 1,013.6 (978.0) 1,013.6
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $2,864.6 $1,747.9 $(1,613.7) $2,998.8
==========================================================================================
Condensed Consolidating Balance Sheet as of December 31, 2004 (in millions):
ASSETS Subsidiary Parent
------ Guarantors Company Eliminations Consolidated
---------- ------- ------------ ------------
Current Assets
Cash & cash equivalents $ 4.7 $ 1.0 $ - $ 5.7
Accounts receivable - less reserves 147.4 0.1 - 147.5
Receivables due from other Vectren
companies 1.7 327.0 (324.7) 4.0
Accrued unbilled revenues 161.2 - - 161.2
Inventories 53.0 - - 53.0
Recoverable fuel & natural gas costs 17.7 - - 17.7
Prepayments & other current assets 136.4 4.2 (2.4) 138.2
- ------------------------------------------------------------------------------------------
Total current assets 522.1 332.3 (327.1) 527.3
- ------------------------------------------------------------------------------------------
Utility Plant
Original cost 3,465.2 - - 3,465.2
Less: accumulated depreciation &
amortization 1,309.0 - - 1,309.0
- ------------------------------------------------------------------------------------------
Net utility plant 2,156.2 - - 2,156.2
- ------------------------------------------------------------------------------------------
Investments in consolidated subsidiaries - 951.5 (951.5) -
Notes receivable from consolidated
subsidiaries - 443.1 (443.1) -
Investments in unconsolidated affiliates 0.2 - - 0.2
Other investments 13.5 6.1 - 19.6
Non-utility property - net 5.3 144.3 - 149.6
Goodwill - net 205.0 - - 205.0
Regulatory assets 76.8 5.7 - 82.5
Other assets 3.8 3.5 - 7.3
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $2,982.9 $1,886.5 $(1,721.7) $3,147.7
==========================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY Subsidiary Parent
---------------------------------- Guarantors Company Eliminations Consolidated
---------- ------- ------------ ------------
Current Liabilities
Accounts payable $ 87.9 $ 9.4 $ - $ 97.3
Accounts payable to affiliated
companies 98.6 0.2 - 98.8
Payables to other Vectren companies 26.0 0.6 (10.8) 15.8
Refundable fuel & natural gas costs 6.3 - - 6.3
Accrued liabilities 100.8 11.6 (2.4) 110.0
Short-term borrowings 0.3 308.0 - 308.3
Short-term borrowings from
other Vectren companies 313.8 - (313.8) -
Current maturities of long-term debt - - - -
Long-term debt subject to tender 10.0 - - 10.0
- ---------------------------------------------------------------------------------------------------
Total current liabilities 643.7 329.8 (327.0) 646.5
- ---------------------------------------------------------------------------------------------------
Long-Term Debt
Long-term debt - net of current
maturities & debt subject to tender 393.4 547.9 - 941.3
Long-term debt due to VUHI 443.1 - (443.1) -
- ---------------------------------------------------------------------------------------------------
Total long-term debt - net 836.5 547.9 (443.1) 941.3
- ---------------------------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 226.8 14.0 - 240.8
Regulatory liabilities 246.2 5.5 - 251.7
Deferred credits & other liabilities 78.0 3.9 - 81.9
- ---------------------------------------------------------------------------------------------------
Total deferred credits & other
liabilities 551.0 23.4 - 574.4
- ---------------------------------------------------------------------------------------------------
Cumulative, Redeemable Preferred Stock of
a Subsidiary 0.1 - - 0.1
Common Shareholder's Equity
Common stock (no par value) 611.3 592.9 (611.3) 592.9
Retained earnings 340.3 392.5 (340.3) 392.5
- ---------------------------------------------------------------------------------------------------
Total common shareholder's equity 951.6 985.4 (951.6) 985.4
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $2,982.9 $1,886.5 $(1,721.7) $3,147.7
===================================================================================================
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 $21.8 million and $21.8 million for the three months ended March 31,
2005 and 2004, 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 March 31, 2005 and
2004, totaled $23.4 million and $18.8 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 (Citizen's Gas), provides natural gas
and related services to the Company's utilities, Citizen's Gas, and others.
ProLiance's primary businesses is optimizing the gas portfolios and providing
services to large end use customers.
Transactions with ProLiance
Purchases from ProLiance for resale and for injections into storage for the
three months ended March 31, 2005 and 2004, totaled $217.4 million and $219.1
million, respectively. Amounts owed to ProLiance at March 31, 2005, and December
31, 2004, for those purchases were $69.1 million and $97.7 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
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,
except those discussed herein, pending against the Company that are likely to
have a material adverse effect on its financial position or results of
operations.
United States Securities and Exchange Commission Inquiry into 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 Vectren'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. There is pending a request by Vectren for an order of exemption under
Section 3(a)(1) of PUHCA. Vectren also claims the benefit of the exemption
pursuant to Rule 2 under Section 3(a)(1) of PUHCA by filing 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. The amendment changed
the method of aggregating wholesale power sales and purchases outside of Indiana
from that previously reported. The new method is to aggregate by delivery point.
The amendment also submitted clarifications as to activity outside of Indiana
related to gas utility operations.
7. Environmental Matters
NOx SIP Call Matter
The Company has taken steps to comply 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:
o the Company's project to achieve environmental compliance by investing in
clean coal technology;
o a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs incurred;
o a mechanism whereby, prior to an electric base rate case, the Company may
recover through a rider that is updated every six months, an 8% return on
its weighted capital costs for the project; and
o ongoing recovery of operating costs, including depreciation and purchased
emission allowances, related to the clean coal technology once the facility
is placed into service.
Through March 31, 2005, approximately $238 million (excluding AFUDC) has been
expended, and three of the four SCR's are operational. Once all equipment is
installed and operational, related annual operating expenses, including
depreciation expense, are estimated to be between $24 million and $27 million.
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.
Clean Air Interstate Rule & Clean Air Mercury Rule
In March of 2005 USEPA finalized two new air emission reduction regulations. The
Clean Air Interstate Rule (CAIR) is an allowance cap and trade program requiring
further reductions in Nitrogen Oxides (NOx) and Sulfur Dioxide (SO2) emissions
from coal-burning power plants. The Clean Air Mercury Rule (CAMR) is an
allowance cap and trade program requiring further reductions in mercury
emissions from coal-burning power plants. Both sets of regulations require
emission reductions in two phases. The first phase deadline for both rules is
2010, and the second phase deadline for compliance with the emission reductions
required under CAIR is 2015, while the second phase deadline for compliance with
the emission reduction requirements of CAMR is 2018. The Company is evaluating
compliance options and fully expects to be in compliance by the required
deadlines.
8. Rate & Regulatory Matters
SIGECO and Indiana Gas Base Rate Settlements
On June 30, 2004, the IURC approved a $5.7 million base rate increase for
SIGECO's gas distribution business, and on November 30, 2004, approved a $24
million base rate increase for Indiana Gas' gas distribution business. The new
rate designs include a larger service charge, which is intended to address to
some extent earnings volatility related to weather. The base rate change in
SIGECO's service territory was implemented on July 1, 2004, resulting in
additional revenues in the first quarter of 2005 of $1.6 million. The base rate
change in Indiana Gas' service territory was implemented on December 1, 2004,
resulting in additional revenues in the first quarter of 2005 of $6.3 million.
VEDO Base Rate Increase Settlement
On April 13, 2005, the PUCO approved a $15.7 million base rate increase for
VEDO's gas distribution business. The new rate design includes a larger service
charge, which is intended to address to some extent earnings volatility related
to weather. The new rates also provide for funding of conservation programs and
the recovery of on-going costs to comply with the Pipeline Safety Improvement
Act of 2002. The base rate change was implemented on April 14, 2005.
Accordingly, no impact of the VEDO base rate change has been reflected in the
interim financial statements for 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, a two-year audit period ended in November 2002.
That audit period provided the PUCO staff its initial review of the portfolio
administration arrangement between VEDO and ProLiance. The external auditor
retained by the PUCO staff submitted an audit report in the fall of 2003 wherein
it recommended a disallowance of approximately $7 million of previously
recovered gas costs. The Company believes a large portion of the third party
auditor recommendations is without merit. A hearing has been held, and the PUCO
staff has recommended a $6.1 million disallowance. The Ohio Consumer Counselor
has recommended an $11.5 million disallowance. For this PUCO audit period, any
disallowance relating to the Company's ProLiance arrangement will be shared by
the Company's joint venture partner. Based on a review of the matters, the
Company has recorded $1.1 million for its estimated pretax share of a potential
disallowance. A PUCO decision on this matter is yet to be issued. The Company is
also unable to determine the effects that a PUCO decision for the audit period
ended in November 2002 may have on results in audit periods beginning after
November 2002.
9. Impact of Recently Issued Accounting Guidance
SFAS 123 (revised 2004)
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based
Payments" (SFAS 123R) that will require compensation costs related to all
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments issued.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. SFAS 123R replaces SFAS 123 and supersedes
APB 25. In April 2005, the SEC extended the effective date of SFAS 123R to
January 1, 2006 for calendar year companies like the Company. SFAS 123R provides
for multiple transition methods, and the Company is still evaluating potential
methods for adoption. The adoption of this standard is not expected to have a
material effect on the Company's operating results or financial condition.
FIN 47
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), an
interpretation of SFAS143. The interpretation is effective for the Company no
later than December 31, 2005. FIN 47 clarifies that a legal obligation to
perform an asset retirement activity that is conditional on a future event is
within SFAS 143's scope. It also clarifies the meaning of the term "conditional
asset retirement obligation" as a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of an asset retirement obligation that is conditional on a future event if
the liability's fair value can be estimated reasonably. The interpretation
provides examples of conditional asset retirement obligations that may need to
be recognized under the provisions of FIN 47, including asbestos and utility
pole removal and dismantling plant. The interpretation also clarifies when an
entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. FIN 47 requires the reassessment of whether a
portion of accrued removal costs should be recharacterized as a liability under
generally accepted accounting principles. FIN 47 may also require the accrual of
additional liabilities and could result in increased near-term expense. The
Company is currently assessing the impact this interpretation will have on its
financial statements.
10. Segment Reporting
The Company's operations consist of regulated operations and other operations
that provide information technology and other support services to those
regulated operations. The Company segregates its regulated operations into a Gas
Utility Services operating segment and an Electric Utility Services operating
segment. The Gas Utility Services segment provides natural gas distribution and
transportation services to nearly two-thirds of Indiana and to west central
Ohio. The Electric Utility Services segment provides electric distribution
services primarily to southwestern Indiana, and includes the Company's power
generating and marketing operations. 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 these regulated
operations the Company uses after tax operating income as a measure of
profitability, consistent with regulatory reporting requirements. For the
Utility Group's other operations, net income is used as the measure of
profitability. In total, there are three operating segments as defined by SFAS
131 "Disclosure About Segments of an Enterprise and Related Information" (SFAS
131).
Information related to the Company's business segments is summarized below:
Three Months Ended March 31,
- ---------------------------------------------------------------------------
(In millions) 2005 2004
- ---------------------------------------------------------------------------
Revenues
Gas Utility Services $ 516.7 $ 505.1
Electric Utility Services 94.7 88.8
Other Operations 9.1 9.4
Eliminations (8.9) (9.1)
- ---------------------------------------------------------------------------
Consolidated Revenues $ 611.6 $ 594.2
===========================================================================
Profitability Measure
Regulated Operating Income
(Operating Income Less Applicable Income
Taxes)
Gas Utility Services $ 45.1 $ 46.1
Electric Utility Services 17.3 13.4
- ---------------------------------------------------------------------------
Total Regulated Operating Income 62.4 59.5
- ---------------------------------------------------------------------------
Regulated other income (expense) - net (0.1) (0.6)
Regulated interest expense & preferred
dividends (15.9) (15.8)
- ---------------------------------------------------------------------------
Regulated Net Income 46.4 43.1
- ---------------------------------------------------------------------------
Other Operations Net Income 1.7 1.6
- ---------------------------------------------------------------------------
Consolidated Net Income $ 48.1 $ 44.7
===========================================================================
2004 Gas Utility Services regulated operating income was favorably impacted by a
$3.2 million adjustment to utility plant depreciation expense. 2004 Electric
Utility Services regulated operating income was unfavorably impacted by a $2.2
million adjustment to regulatory asset amortization.
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 energy delivery services to approximately 555,000 natural
gas customers located in central and southern Indiana. SIGECO provides energy
delivery services to approximately 136,000 electric customers and approximately
110,000 gas customers located near Evansville in southwestern Indiana. SIGECO
also owns and operates electric generation to serve its electric customers and
optimizes those assets in the wholesale power market. Indiana Gas and SIGECO
generally do business as Vectren Energy Delivery of Indiana. The Ohio operations
provide energy delivery services to approximately 315,000 natural gas customers
located near Dayton in west central Ohio. The Ohio operations are 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). The Ohio
operations generally do business as Vectren Energy Delivery of Ohio.
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 were $48.1 million for the three months ended March 31, 2005, compared
to $44.7 million in the prior year. The $3.4 million increase in the Company's
earnings is due to the implementation of new gas base rates in the Company's
Indiana service territories, higher electric revenues associated with recovery
of pollution control investments, and increased wholesale electric margins. Gas
base rate increases added margin of $7.9 million, or $4.7 million after tax.
These increases were partially offset by the impact of warmer weather on
customer usage during this high consumption quarter and increased depreciation
expense and income taxes. For the quarter ended March 31, 2005, heating weather
7 percent warmer than normal and 3 percent warmer than the prior year reduced
first quarter 2005 margins by an estimated $4.8 million ($2.9 million after tax)
and by an estimated $3.0 million ($1.7 million after tax) when compared to the
same period last year.
The Company generates revenue primarily from the delivery of natural gas and
electric service to its customers. The primary source of cash flow results from
the collection of customer bills and the payment for goods and services procured
for the delivery of gas and electric services. The 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.
Significant Fluctuations
Throughout this discussion, the terms Gas Utility margin and Electric Utility
margin are used. Gas Utility margin and Electric Utility margin could be
considered non-GAAP measures of income. Gas Utility margin is calculated as Gas
utility revenues less the Cost of gas sold. Electric Utility margin is
calculated as Electric utility revenues less Fuel for electric generation and
Purchased electric energy. These measures exclude Other operating expenses,
Depreciation and amortization, and Taxes other than income taxes, which are
included in the calculation of operating income. The Company believes Gas
Utility and Electric Utility margins are better indicators of relative
contribution than revenues since gas prices and fuel costs can be volatile and
are generally collected on a dollar for dollar basis from customers. Margins
should not be considered an alternative to, or a more meaningful indicator of
operating performance than, operating income or net income as determined in
accordance with accounting principles generally accepted in the United States.
Margin
Margin generated from the sale of natural gas and electricity to residential and
commercial customers is seasonal and impacted by weather patterns in its service
territory. Margin generated from sales to industrial and other contract
customers is impacted by overall economic conditions. In general, margin is not
sensitive to variations in gas or fuel costs. It is, however, impacted by the
collection of state mandated taxes which fluctuate with gas costs and also some
level of price sensitive fluctuation in volumes sold. Electric generating asset
optimization activities are primarily affected by market conditions, the level
of excess generating capacity, and electric transmission availability. Following
is a discussion and analysis of margin generated from regulated utility
operations.
Gas Utility Margin (Gas Utility Revenues less Cost of Gas Sold)
Gas Utility margin and throughput by customer type follows:
Three Months Ended March 31,
- -----------------------------------------------------------------------------
(In millions) 2005 2004
- -----------------------------------------------------------------------------
Residential $ 94.8 $ 91.7
Commercial 32.9 31.5
Industrial 15.6 14.9
Miscellaneous 2.5 1.4
- -----------------------------------------------------------------------------
Total gas utility margin $ 145.8 $ 139.5
=============================================================================
Sold & transported volumes in MMDth:
To residential & commercial customers 55.0 59.1
To industrial customers 26.8 27.4
- -----------------------------------------------------------------------------
Total throughput 81.8 86.5
=============================================================================
Gas Utility margins for the three months ended March 31, 2005, were $145.8
million, an increase of $6.3 million, or 4 percent, compared to the prior year
period. The rate case orders implemented in the second half of 2004 added margin
of $7.9 million. This increase in revenues reflects new gas rates designed to
recover the majority of the authorized increase evenly through higher customer
charges and non-weather sensitive usage rates. It is estimated that weather 7
percent warmer than normal and 3 percent warmer than prior year decreased
margins $2.6 million and was the primary contributor to the decreased
throughput. The remaining change is primarily attributable to expense recovery
pursuant to Ohio regulatory trackers. The average cost per dekatherm of gas
purchased for the three months ended March 31, 2005, was $7.29 compared to $6.60
in 2004.
Electric Utility Margin (Electric Utility Revenues less Fuel for Electric
Generation and Purchased Electric Energy)
Electric Utility margin by revenue type follows:
Three Months Ended March 31,
- ------------------------------------------------------------------------------
(In millions) 2005 2004
- ------------------------------------------------------------------------------
Residential & commercial $ 37.1 $ 35.2
Industrial 15.3 14.5
Municipalities & other 4.1 4.8
- ------------------------------------------------------------------------------
Total retail & firm wholesale 56.5 54.5
Asset optimization 9.0 7.0
- ------------------------------------------------------------------------------
Total electric utility margin $ 65.5 $ 61.5
==============================================================================
Retail & Firm Wholesale Margin
For the three months ended March 31, 2005, margin from serving native load and
firm wholesale customers was $56.5 million, an increase of $2.0 million when
compared to 2004. Margin increased $2.6 million due to the increase in retail
electric rates related to recovery of environmental compliance expenditures and
related operating expenses. The effects of weather partially offset the increase
by approximately $0.4 million. Resulting primarily from weather, total retail
and firm wholesale volumes sold decreased 4% to 1,439.2 GWh in 2005, compared to
1,499.7 GWh in 2004.
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 the entire
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 Ended March 31,
- -------------------------------------------------------------------------------
(In millions) 2005 2004
- -------------------------------------------------------------------------------
Beginning of Period Net Balance Sheet
Position $ (0.6) $ (0.4)
Statement of Income Activity
Net mark-to-market gains 2.5 2.8
Net realized gains 6.5 4.2
------------------------------------------------------------------------------
Net activity in electric utility margin 9.0 7.0
- -------------------------------------------------------------------------------
Net cash received & other adjustments (6.0) (3.2)
- -------------------------------------------------------------------------------
End of Period Net Balance Sheet Position $ 2.4 $ 3.4
===============================================================================
Net asset optimization margins increased $2.0 million compared to 2004 due to an
increase in available capacity. The availability of excess capacity was reduced
in 2004 by scheduled outages of owned generation related to the installation of
environmental compliance equipment.
Operating Expenses
For the three months ended March 31, 2005, other operating expenses decreased
$0.5 million, compared to the same period in 2004. The decrease was primarily
due to $1.1 million in lower NOx operating expenses, offset somewhat by
increased costs for scrubber chemicals, gasoline, and other costs.
Depreciation & Amortization
Depreciation expense increased $3.8 million in 2005, compared to 2004.
Installation of environmental compliance equipment accounted for $1.4 million of
the increase. In addition, the first quarter of 2004 was $1.8 million lower due
to an adjustment of Ohio depreciation rates and amortization of Indiana
regulatory assets.
Income Taxes
For the three months ended March 31, 2005, Federal and state income taxes
increased $4.2 million primarily due to higher pre-tax income.
Environmental Matters
Clean Air Act
NOx SIP Call Matter
The Company has taken steps to comply 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:
o the Company's project to achieve environmental compliance by investing in
clean coal technology;
o a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs incurred;
o a mechanism whereby, prior to an electric base rate case, the Company may
recover through a rider that is updated every six months, an 8% return on
its weighted capital costs for the project; and
o ongoing recovery of operating costs, including depreciation and purchased
emission allowances, related to the clean coal technology once the facility
is placed into service.
Through March 31, 2005, $238 million has been expended, and three of the four
SCR's are operational. Once all equipment is installed and operational, related
annual operating expenses, including depreciation expense, are estimated to be
between $24 million and $27 million.
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.
Information Request
On January 23, 2001, SIGECO received an information request from the USEPA under
Section 114 of the Clean Air Act for historical operational information on the
Warrick and A.B. Brown generating stations. SIGECO has provided all information
requested with the most recent correspondence provided on March 26, 2001.
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.
Clean Air Interstate Rule & Clean Air Mercury Rule
In March of 2005 USEPA finalized two new air emission reduction regulations. The
Clean Air Interstate Rule (CAIR) is an allowance cap and trade program requiring
further reductions in Nitrogen Oxides (NOx) and Sulfur Dioxide (SO2) emissions
from coal-burning power plants. The Clean Air Mercury Rule (CAMR) is an
allowance cap and trade program requiring further reductions in mercury
emissions from coal-burning power plants. Both sets of regulations require
emission reductions in two phases. The first phase deadline for both rules is
2010, and the second phase deadline for compliance with the emission reductions
required under CAIR is 2015, while the second phase deadline for compliance with
the emission reduction requirements of CAMR is 2018. The Company is evaluating
compliance options and fully expects to be in compliance by the required
deadlines.
Rate and Regulatory Matters
SIGECO and Indiana Gas Base Rate Settlements
On June 30, 2004, the IURC approved a $5.7 million base rate increase for
SIGECO's gas distribution business, and on November 30, 2004, approved a $24
million base rate increase for Indiana Gas' gas distribution business. The new
rate designs include a larger service charge, which is intended to address to
some extent earnings volatility related to weather. The base rate change in
SIGECO's service territory was implemented on July 1, 2004, resulting in
additional revenues in the first quarter of 2005 of $1.6 million. The base rate
change in Indiana Gas' service territory was implemented on December 1, 2004,
resulting in additional revenues in the first quarter of 2005 of $6.3 million.
VEDO Gas Base Rate Settlement
On April 13, 2005, the PUCO approved a $15.7 million base rate increase for
VEDO's gas distribution business. The new rate design includes a larger service
charge, which is intended to address to some extent earnings volatility related
to weather. The new rates also provide for funding of conservation programs and
the recovery of on-going costs to comply with the Pipeline Safety Improvement
Act of 2002. The base rate change was implemented on April 14, 2005.
Accordingly, no impact of the VEDO base rate change has been reflected in the
interim financial statements for the first quarter of 2005. Incremental 2005
revenues resulting from the rate increase are expected to approximate $12.9
million.
Gas Cost Recovery (GCR) Audit Proceedings
There is an Ohio requirement that Ohio gas utilities undergo a biannual audit of
their gas acquisition practices in connection with the gas cost recovery (GCR)
mechanism. In the case of VEDO, a two-year audit period ended in November 2002.
That audit period provided the PUCO staff its initial review of the portfolio
administration arrangement between VEDO and ProLiance. The external auditor
retained by the PUCO staff submitted an audit report in the fall of 2003 wherein
it recommended a disallowance of approximately $7 million of previously
recovered gas costs. The Company believes a large portion of the third party
auditor recommendations is without merit. A hearing has been held, and the PUCO
staff has recommended a $6.1 million disallowance. The Ohio Consumer Counselor
has recommended an $11.5 million disallowance. For this PUCO audit period, any
disallowance relating to the Company's ProLiance arrangement will be shared by
the Company's joint venture partner. Based on a review of the matters, the
Company has recorded $1.1 million for its estimated pretax share of a potential
disallowance. A PUCO decision on this matter is yet to be issued. The Company is
also unable to determine the effects that a PUCO decision for the audit period
ended in November 2002 may have on results in audit periods beginning after
November 2002.
Other Operating Matters
MISO
On April 1, 2005, the MISO Day Two energy markets commenced operation. As a
result of being a market participant, the Company now bids its own generation
into the Day Ahead and Real Time markets and procures power for its retail
customers at Locational Marginal Pricing (LMP) as determined by the MISO market.
Vectren, together with three other Indiana electric utilities, has sought
authority from the IURC to recover the costs associated with MISO's
implementation of the "Day 2 energy market." A hearing considering this request
occurred in February, 2005, and Vectren is awaiting an order at this time.
Pursuant to the pending proposal, LMP costs will be passed through to customers
in Vectren's existing fuel cost recovery proceedings, and other MISO related
costs are to be tracked and eventually recovered. The inception of these markets
has had no impact on the Company's ability to reliably serve its customers.
United States Securities and Exchange Commission Inquiry into 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 Vectren'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. There is pending a request by Vectren for an order of exemption under
Section 3(a)(1) of PUHCA. Vectren also claims the benefit of the exemption
pursuant to Rule 2 under Section 3(a)(1) of PUHCA by filing 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. The amendment changed
the method of aggregating wholesale power sales and purchases outside of Indiana
from that previously reported. The new method is to aggregate by delivery point.
The amendment also submitted clarifications as to activity outside of Indiana
related to gas utility operations
Impact of Recently Issued Accounting Guidance
SFAS 123 (revised 2004)
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based
Payments" (SFAS 123R) that will require compensation costs related to all
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments issued.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. SFAS 123R replaces SFAS 123 and supersedes
APB 25. In April 2005, the SEC extended the effective date of SFAS 123R to
January 1, 2006 for calendar year companies like the Company. SFAS 123R provides
for multiple transition methods, and the Company is still evaluating potential
methods for adoption. The adoption of this standard is not expected to have a
material effect on the Company's operating results or financial condition.
FIN 47
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), an
interpretation of SFAS 143. The interpretation is effective for the Company no
later than December 31, 2005. FIN 47 clarifies that a legal obligation to
perform an asset retirement activity that is conditional on a future event is
within SFAS 143's scope. It also clarifies the meaning of the term "conditional
asset retirement obligation" as a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of an asset retirement obligation that is conditional on a future event if
the liability's fair value can be estimated reasonably. The interpretation
provides examples of conditional asset retirement obligations that may need to
be recognized under the provisions of FIN 47, including asbestos and utility
pole removal and dismantling plant. The interpretation also clarifies when an
entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. FIN 47 requires the reassessment of whether a
portion of accrued removal costs should be recharacterized as a liability under
generally accepted accounting principles. FIN 47 may also require the accrual of
additional liabilities and could result in increased near-term expense. The
Company is currently assessing the impact this interpretation will have on its
financial statements.
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 March 31, 2005,
totaled $550.0 million and $117.0 million, respectively. Additionally, prior to
VUHI's formation, Indiana Gas and SIGECO funded their operations separately, and
therefore, have long-term debt outstanding funded solely by their operations.
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
March 31, 2005, 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 A-/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. During
January 2005, Standard and Poor's changed its current outlook to stable from
negative. In March 2005, Standard and Poor's also revised the SIGECO credit
rating on secured debt to A from A- and on unsecured debt to A- from BBB+. All
other ratings are unchanged from December 31, 2004. 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
permanent 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 52% and 51% of total capitalization, including current maturities
of long-term debt and long-term debt subject to tender, at both March 31, 2005,
and December 31, 2004, respectively. Permanent capitalization includes long-term
debt, including current maturities and debt subject to tender, as well as common
shareholders' equity and any outstanding preferred stock.
Sources & Uses of Liquidity
Operating Cash Flow
The Company's primary and historical source of liquidity to fund working capital
requirements has been cash generated from operations, which for the three months
ended March 31, 2005 and 2004, was $258.1 million and $210.9 million,
respectively. The increase of $47.2 million is primarily the result of favorable
changes in working capital accounts.
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 was $211.3 million for the three
months ended March 31, 2005. Greater amount of operating cash flow were
available to reduce short-term borrowings by approximately $46.1 million, as
compared to 2004.
Investing Cash Flow
Cash flow required for investing activities was $36.8 million and $42.6 million
for the three months ended March 31, 2005 and 2004, respectively. Capital
expenditures in 2004 were higher as a result of greater environmental compliance
expenditures in that period.
Available Sources of Liquidity
At March 31, 2005, the Company has $355 million of short-term borrowing
capacity, of which approximately $238 million is available.
January 14, 2005, the Company added $24 million of additional short-term
borrowing capacity for the Utility Group to provide incremental seasonal
borrowing capacity, raising total capacity to $379 million. This seasonal credit
line expired March 31, 2005.
Potential Uses of Liquidity
Planned Capital Expenditures
Capital expenditures for the remainder of 2005 are estimated to be approximately
$165 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, commodity prices, and monetary fluctuations.
o Changing market conditions and a variety of other factors associated with
physical energy and financial trading activities including, but not limited
to, price, basis, credit, liquidity, volatility, capacity, interest rate,
and warranty risks.
o Direct or indirect effects on our business, financial condition or
liquidity resulting from a change in credit ratings, changes in interest
rates, and/or changes in market perceptions of the utility industry and
other energy-related industries.
o Employee 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. 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.
The Company has in place a risk management committee that consists of senior
management as well as financial and operational management. The committee is
actively involved in identifying risks as well as reviewing and authorizing risk
mitigation strategies.
These risks are not significantly different from the information set forth in
Item 7A Quantitative and Qualitative Disclosures About Market Risk included in
the VUHI 2004 Form 10-K and are therefore not presented herein.
ITEM 4. CONTROLS AND PROCEDURES
Changes in Internal Controls over Financial Reporting
During the quarter ended March 31, 2005, there have been no changes to the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of March 31, 2005, the Company conducted 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.
ITEM 6. EXHIBITS
Exhibits and Certifications
31.1 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002-
Chief Executive Officer
31.2 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002-
Chief Financial Officer
32 Certification Pursuant To Section 906 of The Sarbanes-Oxley Act Of 2002
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
May 3, 2005 /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)