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: 1-15467
VECTREN CORPORATION
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(Exact name of registrant as specified in its charter)
INDIANA 35-2086905
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(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
20 N.W. 4th Street, Evansville, Indiana, 47708
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(Address of principal executive offices)
(Zip Code)
812-491-4000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock- Without Par Value 76,082,813 April 30, 2005
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Class Number of Shares Date
Table of Contents
Item Page
Number Number
PART I. FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Vectren Corporation and Subsidiary Companies
Consolidated Condensed Balance Sheets 1-2
Consolidated Condensed Statements of Income 3
Consolidated Condensed Statements of Cash Flows 4
Notes to Unaudited Consolidated Condensed Financial
Statements 5
2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
3 Quantitative and Qualitative Disclosures About Market Risk 32
4 Controls and Procedures 32
PART II. OTHER INFORMATION
1 Legal Proceedings 32
2 Unregistered Sales of Equity Securities and Use of Proceeds 32
6 Exhibits 33
Signatures 33
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/BCF: millions / billions of cubic feet USEPA: United States Environmental
Protection Agency
MDth/MMDth: thousands / millions of Throughput: combined gas sales and
dekatherms gas transportation volumes
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
March 31, December 31,
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2005 2004
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ASSETS
------
Current Assets
Cash & cash equivalents $ 11.0 $ 9.6
Accounts receivable - less reserves of
$2.4 & $2.0, respectively 192.9 173.5
Accrued unbilled revenues 121.4 176.6
Inventories 46.5 67.6
Recoverable fuel & natural gas costs - 17.7
Prepayments & other current assets 49.1 141.3
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Total current assets 420.9 586.3
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Utility Plant
Original cost 3,482.6 3,465.2
Less: accumulated depreciation & amortization 1,321.1 1,309.0
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Net utility plant 2,161.5 2,156.2
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Investments in unconsolidated affiliates 196.1 180.0
Other investments 115.8 115.1
Non-utility property - net 235.9 229.2
Goodwill - net 207.1 207.1
Regulatory assets 79.5 82.5
Other assets 30.5 30.5
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TOTAL ASSETS $3,447.3 $3,586.9
===============================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited - In millions)
March 31, December 31,
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2005 2004
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LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Current Liabilities
Accounts payable $ 56.5 $ 123.8
Accounts payable to affiliated companies 78.3 109.3
Refundable fuel & natural gas costs 24.0 6.3
Accrued liabilities 190.4 125.8
Short-term borrowings 235.3 412.4
Current maturities of long-term debt 38.5 38.5
Long-term debt subject to tender 10.0 10.0
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Total current liabilities 633.0 826.1
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Long-term Debt - Net of Current Maturities &
Debt Subject to Tender 1,016.2 1,016.6
Deferred Income Taxes & Other Liabilities
Deferred income taxes 240.4 234.0
Regulatory liabilities 256.4 251.7
Deferred credits & other liabilities 166.7 163.2
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Total deferred credits & other liabilities 663.5 648.9
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Minority Interest in Subsidiary 0.4 0.4
Commitments & Contingencies (Notes 7-10)
Cumulative, Redeemable Preferred Stock of a
Subsidiary - 0.1
Common Shareholders' Equity
Common stock (no par value) - issued &
outstanding 75.9 and 75.6, respectively 527.5 526.8
Retained earnings 616.6 583.0
Accumulated other comprehensive loss (9.9) (15.0)
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Total common shareholders' equity 1,134.2 1,094.8
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,447.3 $3,586.9
===============================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited - In millions, except per share data)
Three Months Ended March 31,
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2005 2004
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OPERATING REVENUES
Gas utility $ 516.7 $ 505.1
Electric utility 94.7 88.8
Energy services & other 65.8 51.4
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Total operating revenues 677.2 645.3
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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
Cost of energy services & other 51.6 40.0
Other operating 71.1 71.2
Depreciation & amortization 37.1 32.5
Taxes other than income taxes 22.1 22.7
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Total operating expenses 582.0 559.3
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OPERATING INCOME 95.2 86.0
OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated
affiliates 6.4 16.9
Other income (expense) - net 2.4 (3.1)
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Total other income 8.8 13.8
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INTEREST EXPENSE 20.1 19.3
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INCOME BEFORE INCOME TAXES 83.9 80.5
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INCOME TAXES 27.8 25.7
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NET INCOME $ 56.1 $ 54.8
============================================================================
AVERAGE COMMON SHARES OUTSTANDING 75.6 75.5
DILUTED COMMON SHARES OUTSTANDING 76.1 75.8
EARNINGS PER SHARE OF COMMON STOCK:
BASIC $ 0.74 $ 0.73
DILUTED $ 0.74 $ 0.72
DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ 0.30 $ 0.29
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In millions)
Three Months Ended March 31,
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2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 56.1 $ 54.8
Adjustments to reconcile net income
to cash from operating activities:
Depreciation & amortization 37.1 32.5
Deferred income taxes & investment tax credits (0.2) (2.3)
Equity in earnings of unconsolidated affiliates (6.4) (16.9)
Net unrealized gain on derivative instruments (2.5) (2.8)
Pension & postretirement periodic benefit cost 4.5 4.3
Other non-cash charges - net 6.0 11.2
Changes in working capital accounts:
Accounts receivable & accrued unbilled
revenue 30.2 (5.6)
Inventories 21.1 21.6
Recoverable/refundable fuel & natural gas costs 35.4 11.4
Prepayments & other current assets 94.7 107.9
Accounts payable, including to affiliated
companies (98.3) (55.3)
Accrued liabilities 67.0 60.6
Changes in noncurrent assets 2.5 (1.0)
Changes in noncurrent liabilities (1.8) (2.8)
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Net cash flows from operating activities 245.4 217.6
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock option exercises & other
stock plans - 2.3
Requirements for:
Dividends on common stock (22.5) (21.5)
Retirement of long-term debt (0.1) -
Redemption of preferred stock of
subsidiary (0.1) (0.1)
Net change in short-term borrowings (177.1) (143.9)
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Net cash flows from financing activities (199.8) (163.2)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Unconsolidated affiliate distributions 1.4 2.0
Notes receivable & other collections 0.5 0.6
Requirements for:
Capital expenditures, excluding AFUDC
equity (43.4) (44.5)
Unconsolidated affiliate investments (2.7) (3.2)
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Net cash flows from investing activities (44.2) (45.1)
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Net increase in cash & cash equivalents 1.4 9.3
Cash & cash equivalents at beginning of period 9.6 15.3
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Cash & cash equivalents at end of period $ 11.0 $ 24.6
===================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Vectren Corporation (the Company or Vectren), an Indiana corporation, is an
energy and applied technology holding company headquartered in Evansville,
Indiana. The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc.
(VUHI), serves as the intermediate holding company for three operating public
utilities: Indiana Gas Company, Inc. (Indiana Gas), Southern Indiana Gas and
Electric Company (SIGECO), and the Ohio operations. VUHI also has other assets
that provide information technology and other services to the three utilities.
VUHI's consolidated operations are collectively referred to as the Utility
Group. 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.
The Company is also involved in nonregulated activities in three primary
business areas: Energy Marketing and Services, Coal Mining, and Utility
Infrastructure Services. Energy Marketing and Services markets natural gas and
provides energy management services, including energy performance contracting
services. Coal Mining mines and sells coal and generates IRS Code Section 29 tax
credits relating to the production of coal-based synthetic fuels. Utility
Infrastructure Services provides underground construction and repair, facilities
locating, and meter reading services. In addition, there are other businesses
that invest in broadband communication services, energy-related opportunities,
real estate, and leveraged leases, among other activities. These operations are
collectively referred to as the Nonregulated Group. The Nonregulated Group
supports the Company's regulated utilities pursuant to service contracts by
providing natural gas supply services, coal, utility infrastructure services,
and other services.
2. Basis of Presentation
The interim consolidated condensed financial statements included in this report
have been prepared by the Company, without audit, as provided in the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted as provided in such rules and regulations. The Company
believes that the information in this report reflects all adjustments necessary
to fairly state the results of the interim periods reported. These consolidated
condensed financial statements and related notes should be read in conjunction
with the Company's audited annual consolidated financial statements for the year
ended December 31, 2004, filed March 2, 2005, 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. 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.
These reclassifications had no impact on reported net income.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
3. Share-Based Compensation
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees"
(APB 25) and related interpretations when measuring compensation expense for its
share-based compensation plans.
Stock Option Plans
The exercise price of stock options awarded under the Company's stock option
plans is equal to the fair market value of the underlying common stock on the
date of grant. Accordingly, no compensation expense has been recognized for
stock option plans. In January 2005, 286,400 options to purchase shares of
common stock at an exercise price of $26.63 were issued to management. The grant
vests over three years.
Other Plans
In addition to its stock option plans, the Company also maintains restricted
stock and phantom stock plans for executives, strategic employees, and
non-employee directors. In January 2005, 138,900 restricted shares at a fair
value of $26.63 per share were issued to management. The shares vest over four
years.
Compensation expense associated with these restricted stock and phantom stock
plans for the three months ended March 31, 2005 and 2004, was $1.3 million ($0.7
million after tax) and $0.8 million ($0.5 million after tax), respectively. The
amount of expense is consistent with the amount of expense that would have been
recognized if the Company used the fair value based method described in SFAS No.
123 "Accounting for Stock Based Compensation" (SFAS 123), as amended, to value
these awards.
Pro forma Information
Following is the effect on net income and earnings per share as if the fair
value based method described in SFAS 123 had been applied to all share-based
compensation plans:
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In millions, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------
Net Income:
As reported $ 56.1 $ 54.8
Add: Share-based employee compensation included
in reported net income - net of tax 0.7 0.5
Deduct: Total share-based employee compensation
expense determined under fair value based
method for all awards - net of tax 1.0 0.7
- --------------------------------------------------------------------------------
Pro forma net income $ 55.8 $ 54.6
================================================================================
Basic Earnings Per Share:
As reported $ 0.74 $ 0.73
Pro forma 0.74 0.72
Diluted Earnings Per Share:
As reported $ 0.74 $ 0.72
Pro forma 0.73 0.72
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.
4. Comprehensive Income
Comprehensive income consists of the following:
Three Months Ended March 31,
- ------------------------------------------------------------------------------
(In millions) 2005 2004
- ------------------------------------------------------------------------------
Net income $ 56.1 $ 54.8
Comprehensive income of unconsolidated
affiliates - net of tax 5.1 2.2
- ------------------------------------------------------------------------------
Total comprehensive income $ 61.2 $ 57.0
==============================================================================
Other comprehensive income arising from unconsolidated affiliates is the
Company's portion of ProLiance Energy, LLC's and Reliant Services, LLC's
accumulated other comprehensive income related to their use of cash flow hedges,
including commodity contracts and interest rate swaps, and the Company's portion
of Haddington Energy Partners, LP's accumulated other comprehensive income
related to its unrealized gains and losses of "available for sale securities,"
as defined by SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities."
5. Earnings Per Share
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share assumes the conversion of stock options into
common shares and the lifting of restrictions on issued restricted shares using
the treasury stock method to the extent the effect would be dilutive. The
following table sets forth the computation of basic and diluted earnings per
share.
Three Months Ended March 31,
- --------------------------------------------------------------------------------
(In millions, except per share data) 2005 2004
- --------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted EPS - Net income $ 56.1 $ 54.8
================================================================================
Denominator:
Denominator for basic EPS - Weighted average
common shares outstanding 75.6 75.5
Conversion of stock options and lifting of
restrictions on issued restricted stock 0.5 0.3
- --------------------------------------------------------------------------------
Denominator for diluted EPS - Adjusted weighted
average shares outstanding and assumed
conversions outstanding 76.1 75.8
================================================================================
Basic earnings per share $ 0.74 $ 0.73
Diluted earnings per share $ 0.74 $ 0.72
For the three months ended March 31, 2004, options to purchase an additional
22,274 shares of the Company's common stock were outstanding, but were not
included in the computation of diluted earnings per share because their effect
would have been antidilutive. Exercise prices for options excluded from the
computation ranged from $24.90 to $25.59. For the three months ended March 31,
2005, no antidilutive shares were outstanding.
6. Retirement Plans & Other Postretirement Benefits
The Company maintains three qualified defined benefit pension plans, a
nonqualified supplemental executive retirement plan (SERP), and three other
postretirement benefit plans. The qualified pension plans and the SERP are
aggregated under the heading "Pension Benefits." Other postretirement benefit
plans are aggregated under the heading "Other Benefits."
Net Periodic Benefit Cost
A summary of the components of net periodic benefit cost follows:
Three Months Ended March 31,
- ----------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------- ---------------------
(In millions) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------
Service cost $ 1.4 $ 1.6 $ 0.3 $ 0.3
Interest cost 3.5 3.3 1.3 1.5
Expected return on plan assets (3.3) (3.3) (0.1) (0.2)
Amortization of prior service cost 0.4 0.2 - -
Amortization of transitional obligation - - 0.7 0.7
Amortization of actuarial loss (gain) 0.4 0.2 (0.1) -
- ----------------------------------------------------------------------------------
Net periodic benefit cost $ 2.4 $ 2.0 $ 2.1 $ 2.3
==================================================================================
Employer Contributions to Qualified Pension Plans
Currently, the Company expects to contribute approximately $3.7 million to its
pension plan trusts for 2005. Through March 31, 2005, no contributions to the
pension plan trusts have been made.
Amendment to Plans
Pension and postretirement periodic cost has increased from approximately $13
million in 2002 to over $16 million in 2004. Preliminary estimates of 2005
periodic cost approximated $18 million. In January 2005, the Company announced
the amendment of certain postretirement benefit plans, effective January 1,
2006. The amendment will result in an estimated $3 million decrease in 2005
periodic cost. Two of the unions that represent bargaining employees at the
Company's regulated subsidiaries have advised the Company that it is their
position that these changes are not permitted under the existing collective
bargaining agreements which govern the relationship between the employees and
the affected subsidiaries. With assistance from legal counsel, management has
analyzed the unions' position and continues to believe that the Company has
reserved the right to amend the affected plans and that changing these benefits
for retirees is not a mandatory subject of bargaining. Future changes in health
care costs, work force demographics, interest rates, or plan changes could
significantly affect the estimated cost of these future benefits.
7. Transactions with ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides services to a
broad range of municipalities, utilities, industrial operations, schools, and
healthcare institutions located throughout the Midwest and Southeast United
States. ProLiance's primary customers include Vectren's utilities and
nonregulated gas supply operations as well as Citizens Gas. ProLiance's primary
businesses include gas marketing, gas portfolio optimization, and other
portfolio and energy management services. The Company, including its retail gas
supply operations, contracted for all natural gas purchases through ProLiance in
all periods presented. The Company accounts for its investment in ProLiance
using the equity method of accounting.
As part of a settlement agreement approved by the IURC during July 2002, the gas
supply agreements with Indiana Gas and SIGECO, were approved and extended
through March 31, 2007. The utilities may decide to conduct a "request for
proposal" (RFP) for a new supply administrator, or they may decide to make an
alternative proposal for procurement of gas supply. That decision will be made
by December 2005. To the extent an RFP is conducted, ProLiance is fully expected
to participate in the RFP process for service to the utilities after March 31,
2007.
Transactions with ProLiance
Purchases from ProLiance for resale and for injections into storage for the
three months ended March 31, 2005 and 2004, totaled $253.4 million and $247.9
million, respectively. Amounts owed to ProLiance at March 31, 2005, and December
31, 2004, for those purchases were $77.8 million and $108.2 million,
respectively, and are included in Accounts payable to affiliated companies.
Amounts charged by ProLiance for gas supply services are established by supply
agreements with each utility.
ProLiance Contingency
In 2002, a civil lawsuit was filed in the United States District Court for the
Northern District of Alabama by the City of Huntsville, Alabama d/b/a Huntsville
Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville Utilities
asserted claims based on alleged breach of contract with respect to the
provision of portfolio services and/or pricing advice, fraud, fraudulent
inducement, and other theories, including conversion and violations under the
Racketeering, Influenced and Corrupt Organizations Act (RICO). These claims
related generally to: (1) alleged breach of contract in providing advice and/or
administering portfolio arrangements; (2) alleged promises to provide gas at a
below-market rate; (3) the creation and repayment of a "winter levelizing
program" instituted by ProLiance in conjunction with the Manager of Huntsville's
Gas Utility to allow Huntsville Utilities to pay its gas bills from the winter
of 2000-2001 over an extended period of time coupled with the alleged ignorance
about the program on the part of Huntsville Utilities' Gas Board and other
management, and; (4) conversion of Huntsville Utilities' gas storage supplies to
repay the balance owed on the winter levelizing program and the alleged lack of
authority of Huntsville Utilities' gas manager to approve those sales.
In early 2005, a jury trial commenced and on February 10, 2005, the jury
returned a verdict largely in favor of Huntsville Utilities and awarded
Huntsville Utilities compensatory damages of $8.2 million and punitive damages
of $25.0 million. The jury rejected Huntsville Utilities' claim of conversion.
The jury also rejected a counter claim by ProLiance for payment of amounts due
from Huntsville Utilities. Following that verdict, there were a number of issues
presented to the judge for resolution. Huntsville made a claim under federal law
that it was entitled to have the compensatory damage award trebled. The judge
has rejected that request. ProLiance made a claim against Huntsville for unjust
enrichment, which was also rejected by the judge. Still pending before the judge
is a request by Huntsville's lawyers for $2.7 million in attorneys' fees.
ProLiance has contested that request. It is anticipated that post-judgment
motions will be filed with the judge. Absent a substantial reduction to the
judgment, ProLiance would expect to initiate the appeal process as ProLiance's
management believes there are reasonable grounds for appeal which offer a basis
for reversal of the entire verdict.
While it is reasonably possible that a liability has been incurred by ProLiance,
it is not possible to predict the ultimate outcome of an appeal of the verdict.
ProLiance recorded a reserve of $3.9 million as of December 31, 2004, reflective
of their assessment of the lower end of the range of potential exposure on
certain issues identified in the case and inclusive of estimated ongoing
litigation costs. Amounts due from Huntsville Utilities were fully reserved by
ProLiance in 2003.
As an equity investor in ProLiance, the Company reflected its share of the
charge, or $1.4 million after tax, in its 2004 results. It is not expected that
an unfavorable outcome on appeal will have a material adverse effect on the
Company's consolidated financial position or its liquidity, but an unfavorable
outcome could be material to the Company's earnings.
8. Commitments & Contingencies
Legal Proceedings
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations.
IRS Section 29 Investment Tax Credit Recent Developments
Vectren's Coal Mining operations are comprised of Vectren Fuels, Inc. (Fuels),
which includes its coal mines and related operations and Vectren Synfuels, Inc.
(Synfuels). Synfuels holds one limited partnership unit (an 8.3% interest) in
Pace Carbon Synfuels Investors, LP (Pace Carbon), a Delaware limited partnership
formed to develop, own, and operate four projects to produce and sell coal-based
synthetic fuel utilizing Covol technology.
Under Section 29 of the Internal Revenue Code, manufacturers such as Pace Carbon
receive a tax credit for every ton of synthetic fuel sold. To qualify for the
credits, the synthetic fuel must meet three primary conditions: 1) there must be
a significant chemical change in the coal feedstock, 2) the product must be sold
to an unrelated person, and 3) the production facility must have been placed in
service before July 1, 1998.
In past rulings, the Internal Revenue Service (IRS) has concluded that the
synthetic fuel produced at the Pace Carbon facilities should qualify for Section
29 tax credits. The IRS issued a private letter ruling with respect to the four
projects on November 11, 1997, and subsequently issued an updated private letter
ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected
total tax credits under Section 29 in its consolidated results through March 31,
2005, of approximately $61 million. To date, Vectren has been in a position to
fully recognize the credits generated. Primarily from the use of these credits,
the Company was in an Alternative Minimum Tax (AMT) position in 2004 and expects
to be in that position in 2005. As a result, the Company has an AMT credit
carryforward of approximately $34 million at March 31, 2005.
During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year
and later expanded the audit to include tax years 1999, 2000, and 2001. In May
2004, the IRS completed its audit of the 1998 to 2001 tax returns of Pace Carbon
requesting only minor modifications to previously filed returns. There were no
changes to any of the filed Section 29 tax credit calculations. The Permanent
Subcommittee on Investigations of the U.S. Senate's Committee on Governmental
Affairs, however, has an ongoing investigation related to Section 29 tax
credits.
Further, Section 29 tax credits are only available when the price of oil is less
than a base price specified by the tax code, as adjusted for inflation. The
Company does not believe that credits realized in prior years will be affected
by the limitation, but an average NYMEX price in excess of approximately $60 per
barrel for the remainder of 2005, could limit Section 29 tax credits in 2005 and
beyond. In January 2005, the Company executed an insurance arrangement that
partially limits the Company's exposure if a limitation on the availability of
tax credits were to occur in 2005 and/or 2006 due to oil prices. The insurance
policy protects approximately two-thirds of the expected 2005 and one-third of
the expected 2006 tax credits.
Vectren believes it is justified in its reliance on the private letter rulings
and recent IRS audit results for the Pace Carbon facilities. Additionally, the
Company does not currently expect oil price limitations on the credits.
Therefore, the Company will continue to recognize Section 29 tax credits as they
are earned until there is either a change in the tax code or the IRS'
interpretation of that tax code.
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.
Guarantees & Product Warranties
Vectren Corporation issues guarantees to third parties on behalf of its
unconsolidated affiliates. Such guarantees allow those affiliates to execute
transactions on more favorable terms than the affiliate could obtain without
such a guarantee. Guarantees may include posted letters of credit, leasing
guarantees, and performance guarantees. As of March 31, 2005, guarantees issued
and outstanding on behalf of unconsolidated affiliates approximated $6 million.
The Company has also issued a guarantee approximating $4 million related to the
residual value of an operating lease that expires in 2006.
Vectren Corporation has accrued no liabilities for these guarantees as they
relate to guarantees issued among related parties or were executed prior to the
adoption of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". Liabilities accrued for, and activity related to, product warranties
are not significant.
9. Environmental Matters
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, 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.
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.
10.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.
11.Impact of Recently Issued Accounting Guidance
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.
EITF 04-06
At its March 2005 meeting, the EITF Task Force reached a consensus on EITF 04-06
"Accounting for Stripping Costs Incurred during Production in the Mining
Industry"(EITF 04-06) that stripping costs incurred during the production phase
of a mine are variable production costs that should be included in the cost of
the inventory produced during the period that the stripping costs are incurred.
EITF 04-06 is effective for the first reporting period in fiscal years beginning
after December 15, 2005, with early adoption permitted.
It has been the Company's policy to account for such costs as mine development
costs. If material, any unamortized costs that cannot be reclassified to
inventory must be charged to earnings as a cumulative effect of change in
accounting principle. The Company is in the process of determining if the impact
of this standard will be material to its operating results.
12.Segment Reporting
The Company segregates its operations into three groups: 1) Utility Group,
2) Nonregulated Group, and 3) Corporate and Other Group.
The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations,
which consist of the Company's regulated operations (the Gas Utility Services
and Electric Utility Services operating segments), and other operations that
provide information technology and other support services to those regulated
operations. In total, there are three operating segments of the Utility Group as
defined by SFAS 131 "Disclosure About Segments of an Enterprise and Related
Information" (SFAS 131). Gas Utility Services provides natural gas distribution
and transportation services in nearly two-thirds of Indiana and to west central
Ohio. Electric Utility Services provides electricity primarily to southwestern
Indiana, and includes the Company's power generating and marketing operations.
For these regulated operations the Company uses after tax operating income as a
measure of profitability, consistent with regulatory reporting requirements. The
Company cross manages its regulated operations as separated between Energy
Delivery, which includes the gas and electric transmission and distribution
functions, and Power Supply, which includes the power generating and marketing
operations. For the Utility Group's other operations, net income is used as the
measure of profitability.
The Nonregulated Group is comprised of one operating segment as defined by SFAS
131 that includes various subsidiaries and affiliates offering and investing in
energy marketing and services, coal mining and utility infrastructure services,
among other broadband and energy-related opportunities.
The Corporate and Other Group is comprised of one operating segment as defined
by SFAS 131 that includes unallocated corporate expenses such as branding and
charitable contributions, among other activities, that benefit the Company's
other operating segments. Information related to the Company's business segments
is summarized below:
Three Months Ended March 31,
- -------------------------------------------------------------------------------
(In millions) 2005 2004
- -------------------------------------------------------------------------------
Revenues
Utility Group
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)
- -------------------------------------------------------------------------------
Total Utility Group 611.6 594.2
- -------------------------------------------------------------------------------
Nonregulated Group 89.5 70.4
Corporate & Other Group - -
Eliminations (23.9) (19.3)
- -------------------------------------------------------------------------------
Consolidated Revenues $ 677.2 $ 645.3
===============================================================================
Profitability Measure
Utility Group: 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
- -------------------------------------------------------------------------------
Utility Group Net Income 48.1 44.7
- -------------------------------------------------------------------------------
Nonregulated Group Net Income 8.9 10.6
Corporate & Other Group Net Loss (0.9) (0.5)
- -------------------------------------------------------------------------------
Consolidated Net Income $ 56.1 $ 54.8
===============================================================================
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 Corporation (the Company or Vectren), an Indiana corporation, is an
energy and applied technology holding company headquartered in Evansville,
Indiana. The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc.
(VUHI), serves as the intermediate holding company for three operating public
utilities: Indiana Gas Company, Inc. (Indiana Gas), Southern Indiana Gas and
Electric Company (SIGECO), and the Ohio operations. VUHI also has other assets
that provide information technology and other services to the three utilities.
VUHI's consolidated operations are collectively referred to as the Utility
Group. 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.
The Utility Group generates revenue primarily from the delivery of natural gas
and electric service to its customers. The primary source of cash flow for the
Utility Group results from the collection of customer bills and the payment for
goods and services procured for the delivery of gas and electric services. The
results of the Utility Group are impacted by weather patterns in its service
territory and general economic conditions both in its Indiana and Ohio service
territories as well as nationally.
The Company is also involved in nonregulated activities in three primary
business areas: Energy Marketing and Services, Coal Mining, and Utility
Infrastructure Services. Energy Marketing and Services markets natural gas and
provides energy management services, including energy performance contracting
services. Coal Mining mines and sells coal and generates IRS Code Section 29 tax
credits relating to the production of coal-based synthetic fuels. Utility
Infrastructure Services provides underground construction and repair, facilities
locating, and meter reading services. In addition, there are other businesses
that invest in broadband communication services, energy-related opportunities,
real estate, and leveraged leases among other activities. These operations are
collectively referred to as the Nonregulated Group. The Nonregulated Group
supports the Company's regulated utilities pursuant to service contracts by
providing natural gas supply services, coal, utility infrastructure services,
and other services.
The Nonregulated Group generates revenue or earnings from the provision of
services to customers. The activities of the Nonregulated Group are closely
linked to the utility industry, and the results of those operations are
generally impacted by factors similar to those impacting the overall utility
industry.
The Company has in place a disclosure committee that consists of senior
management as well as financial management. The committee is actively involved
in the preparation and review of the Company's SEC filings.
Executive Summary of Consolidated Results of Operations
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto.
Three Months Ended March 31,
- -------------------------------------------------------------------------------
(In millions, except per share data) 2005 2004
- -------------------------------------------------------------------------------
Net income $ 56.1 $ 54.8
Attributed to: Utility Group $ 48.1 $ 44.7
Nonregulated Group 8.9 10.6
Corporate & other (0.9) (0.5)
- -------------------------------------------------------------------------------
Basic earnings per share $ 0.74 $ 0.73
Attributed to: Utility Group $ 0.63 $ 0.60
Nonregulated Group 0.12 0.14
Corporate & other (0.01) (0.01)
Results
For the three months ended March 31, 2005, net income was $56.1 million, or $.74
per share, compared to $54.8 million, or $0.73 per share for the three months
ended March 31, 2004.
Utility Group 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
Utility Group 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.
Nonregulated Group earnings were $8.9 million for the three months ended March
31, 2005, compared to $10.6 million in the prior year. The Company's primary
nonregulated business groups, Energy Marketing and Services, Coal Mining, and
Utility Infrastructure Services, contributed $9.4 million to 2005 earnings, down
slightly from the $10.0 million contributed in 2004. The slight decrease is
attributable to lower earnings from gas marketing and performance contracting
operations, offset by increased earnings from mining operations.
The 2004 contribution from Other Businesses reflects an after tax gain of $5.3
million recognized on the sale of an investment held by Haddington Energy
Partners which was largely offset by a $4.5 million after tax charge related to
the write down of the Company's broadband investments.
Dividends
Dividends declared for the three months ended March 31, 2005, were $0.295 per
share compared to $0.285 per share for the same period in 2004.
Detailed Discussion of Results of Operations
Following is a more detailed discussion of the results of operations of the
Company's Utility Group and Nonregulated Group. The detailed results of
operations for the Utility Group and Nonregulated Group are presented and
analyzed before the reclassification and elimination of certain intersegment
transactions necessary to consolidate those results into the Company's
Consolidated Statements of Income. Corporate and Other operations are not
significant.
Results of Operations of the Utility Group
The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations,
which consist of the Company's regulated operations 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. In total, these regulated operations supply
natural gas and/or electricity to nearly one million customers. The results of
operations of the Utility Group before certain intersegment eliminations and
reclassifications for the three months ended March 31, 2005 and 2004, follow:
Three Months Ended March 31,
- -------------------------------------------------------------------------------
(In millions, except per share data) 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 (expense) - net 2.2 1.9
Equity in earnings (losses) of
unconsolidated affiliates - 0.2
- -------------------------------------------------------------------------------
Total other income (expense) 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
===============================================================================
CONTRIBUTION TO VECTREN BASIC EPS $ 0.63 $ 0.60
===============================================================================
Utility Group 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
Utility Group earnings is due to the implementation of new gas base rates in the
company's Indiana service territories, higher electric revenues associated with
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.
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
Utility Group Margin
Margin generated from the sale of natural gas and electricity to residential and
commercial customers is seasonal and impacted by weather patterns in the
Company's service territories. Margin generated from sales to large customers
(generally industrial, other contract, and firm wholesale customers) is
primarily impacted 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 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 recognized 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.
Utility Group Operating Expenses
Other Operating
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.
Utility Group 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
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.
Results of Operations of the Nonregulated Group
The Nonregulated Group is comprised of three primary business areas: Energy
Marketing and Services, Coal Mining, and Utility Infrastructure Services. Energy
Marketing and Services markets natural gas and provides energy management
services, including energy performance contracting services. Coal Mining mines
and sells coal and generates IRS Code Section 29 investment tax credits relating
to the production of coal-based synthetic fuels. Utility Infrastructure Services
provides underground construction and repair, facilities locating, and meter
reading services. In addition, there are other businesses that invest in
broadband communication services, energy-related opportunities, real estate, and
leveraged leases, among other activities. The Nonregulated Group supports the
Company's regulated utilities pursuant to service contracts by providing natural
gas supply services, coal, utility infrastructure services, and other services.
Nonregulated Group earnings for the three months ended March 31, 2005 and 2004,
follow:
Three Months Ended March 31,
- -------------------------------------------------------------------------------
(In millions, except per share amounts) 2005 2004
- -------------------------------------------------------------------------------
NET INCOME $ 8.9 $ 10.6
===============================================================================
CONTRIBUTION TO VECTREN BASIC EPS $ 0.12 $ 0.14
===============================================================================
NET INCOME ATTRIBUTED TO:
Energy Marketing & Services $ 6.0 $ 7.0
Coal Mining 4.4 3.6
Utility Infrastructure (1.0) (0.6)
Other Businesses (0.5) 0.6
Nonregulated Group earnings were $8.9 million for the three months ended March
31, 2005, compared to $10.6 million in the prior year. The Company's primary
nonregulated business groups, Energy Marketing and Services, Coal Mining, and
Utility Infrastructure Services, contributed $9.4 million to 2005 earnings, down
slightly from the $10.0 million contributed in 2004. The slight decrease is
attributable to lower earnings from gas marketing and performance contracting
operations, offset by increased earnings from mining operations.
The 2004 contribution from Other Businesses reflects an after tax gain of $5.3
million recognized on the sale of an investment held by Haddington Energy
Partners which was largely offset by a $4.5 million after tax charge related to
the write down of the Company's broadband-related investments.
Energy Marketing & Services
Energy Marketing and Services is comprised of the Company's gas marketing
operations, performance contracting operations, and retail gas supply
operations.
Gas marketing operations are performed through the Company's investment in
ProLiance Energy LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas). ProLiance's primary
businesses include gas marketing, gas portfolio optimization, and other
portfolio and energy management services. ProLiance's primary customers include
Vectren's utilities and nonregulated gas supply operations as well as Citizen's
Gas and other large end-use customers. The Company accounts for its investment
in ProLiance using the equity method of accounting.
As part of a settlement agreement approved by the IURC during July 2002, the gas
supply agreements with Indiana Gas and SIGECO, were approved and extended
through March 31, 2007. The utilities may decide to conduct a "request for
proposal" (RFP) for a new supply administrator, or they may decide to make an
alternative proposal for procurement of gas supply. That decision will be made
by December 2005. To the extent an RFP is conducted, ProLiance is fully
expected to participate in the RFP process for service to the utilities after
March 31, 2007.
Energy Systems Group, LLC (ESG), a wholly owned subsidiary, provides energy
performance contracting and facility upgrades through its design and
installation of energy-efficient equipment throughout the Midwest and Southeast
United States.
Vectren Retail, LLC (d/b/a Vectren Source), a wholly owned subsidiary, provides
natural gas and other related products and services in Ohio and Indiana, serving
nearly 120,000 customers opting for choice among energy providers.
Net income generated by Energy Marketing and Services for the quarter ended
March 31, 2005, was $6.0 million compared to $7.0 million in 2004. In both
periods presented, gas marketing operations, performed through ProLiance,
provided the primary earnings contribution, totaling $6.4 million in 2005, a
slight decrease from the $6.9 million contributed in 2004. The decrease is
attributable to pre-verdict legal fees associated with litigation between
ProLiance and the City of Huntsville, Alabama (Huntsville Utilities). The
remaining decrease in earnings contribution is primarily attributable to the
timing of performance contracting operations. For the quarter, Vectren Source's
retail gas supply operations earned $0.8 million, compared to $0.6 million in
the prior period. Source's earnings contribution was also impacted by warmer
than normal weather.
ProLiance Contingency
In 2002, a civil lawsuit was filed in the United States District Court for the
Northern District of Alabama by the City of Huntsville, Alabama d/b/a Huntsville
Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville Utilities
asserted claims based on alleged breach of contract with respect to the
provision of portfolio services and/or pricing advice, fraud, fraudulent
inducement, and other theories, including conversion and violations under the
Racketeering, Influenced and Corrupt Organizations Act (RICO). These claims
related generally to: (1) alleged breach of contract in providing advice and/or
administering portfolio arrangements; (2) alleged promises to provide gas at a
below-market rate; (3) the creation and repayment of a "winter levelizing
program" instituted by ProLiance in conjunction with the Manager of Huntsville's
Gas Utility to allow Huntsville Utilities to pay its gas bills from the winter
of 2000-2001 over an extended period of time coupled with the alleged ignorance
about the program on the part of Huntsville Utilities' Gas Board and other
management, and; (4) conversion of Huntsville Utilities' gas storage supplies to
repay the balance owed on the winter levelizing program and the alleged lack of
authority of Huntsville Utilities' gas manager to approve those sales.
In early 2005, a jury trial commenced and on February 10, 2005, the jury
returned a verdict largely in favor of Huntsville Utilities and awarded
Huntsville Utilities compensatory damages of $8.2 million and punitive damages
of $25.0 million. The jury rejected Huntsville Utilities' claim of conversion.
The jury also rejected a counter claim by ProLiance for payment of amounts due
from Huntsville Utilities. Following that verdict, there were a number of issues
presented to the judge for resolution. First, Huntsville made a claim under
federal law that it was entitled to have the compensatory damage award trebled.
The judge has rejected that request. Second, ProLiance made a claim against
Huntsville for unjust enrichment, which was also rejected by the judge. Still
pending before the judge is a request by Huntsville's lawyers for $2.7 million
in attorneys' fees. ProLiance has contested that request. It is anticipated that
post-judgment motions will be filed with the judge. Absent a substantial
reduction to the judgment, ProLiance would expect to initiate the appeal process
as ProLiance's management believes there are reasonable grounds for appeal which
offer a basis for reversal of the entire verdict.
While it is reasonably possible that a liability has been incurred by ProLiance,
it is not possible to predict the ultimate outcome of an appeal of the verdict.
ProLiance recorded a reserve of $3.9 million as of December 31, 2004, reflective
of their assessment of the lower end of the range of potential exposure on
certain issues identified in the case and inclusive of estimated ongoing
litigation costs. Amounts due from Huntsville Utilities were fully reserved by
ProLiance in 2003.
As an equity investor in ProLiance, the Company reflected its share of the
charge, or $1.4 million after tax, in its 2004 results. It is not expected that
an unfavorable outcome on appeal will have a material adverse effect on the
Company's consolidated financial position or its liquidity, but an unfavorable
outcome could be material to the Company's earnings.
Coal Mining
The Coal Mining group mines and sells coal to the Company's utility operations
and to third parties through its wholly owned subsidiary Vectren Fuels, Inc.
(Fuels). The Coal Mining Group also generates IRS Code Section 29 tax credits
resulting from the production of coal-based synthetic fuels through its 8.3%
ownership interest in Pace Carbon Synfuels, LP (Pace Carbon). In addition, Fuels
receives synfuel-related fees from synfuel producers unrelated to Pace Carbon
for a portion of its coal production.
Coal Mining net income for the three months ended March 31, 2005, was $4.4
million, as compared to $3.6 million in 2004. Earnings from the Mining
operations were $1.3 million in 2005 compared to $0.7 million in 2004. The
contribution from Mining operations increased despite rising commodity
operations costs, primarily due to greater production and higher revenue per
ton. Synfuel-related results for the quarter, which include earnings from Pace
Carbon and synfuel processing fees earned by Fuels, increased $0.2 million. This
increase reflects higher production of synthetic fuel produced by Pace Carbon as
the result of the relocation of a previously underperforming plant.
IRS Section 29 Tax Credit Recent Developments
Under Section 29 of the Internal Revenue Code, manufacturers of synthetic fuel
such as Pace Carbon receive a tax credit for every ton of synthetic fuel sold.
To qualify for the credits, the synthetic fuel must meet three primary
conditions: 1) there must be a significant chemical change in the coal
feedstock, 2) the product must be sold to an unrelated person, and 3) the
production facility must have been placed in service before July 1, 1998.
In past rulings, the Internal Revenue Service (IRS) has concluded that the
synthetic fuel produced at the Pace Carbon facilities should qualify for Section
29 tax credits. The IRS issued a private letter ruling with respect to the four
projects on November 11, 1997, and subsequently issued an updated private letter
ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected
Section 29 tax credits in its consolidated results through March 31, 2005, of
approximately $61 million. To date, Vectren has been in a position to fully
recognize the credits generated. Primarily from the use of these credits, the
Company was in an Alternative Minimum Tax (AMT) position in 2004 and expects to
be in that position in 2005. As a result, the Company has an AMT credit
carryforward of $33.7 million at March 31, 2005.
During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year
and later expanded the audit to include tax years 1999, 2000, and 2001. In May
2004, the IRS completed its audit of the 1998 to 2001 tax returns of Pace Carbon
requesting only minor modifications to previously filed returns. There were no
changes to any of the filed Section 29 tax credit calculations. The Permanent
Subcommittee on Investigations of the U.S. Senate's Committee on Governmental
Affairs, however, has an ongoing investigation related to Section 29 tax
credits.
Further, Section 29 tax credits are only available when the price of oil is less
than a base price specified by the tax code, as adjusted for inflation. The
Company does not believe that credits realized in prior years will be affected
by the limitation, but an average NYMEX price in excess of $60 per barrel for
the remainder of 2005, could limit Section 29 tax credits in 2005 and beyond. In
January 2005, the Company executed an insurance arrangement that partially
limits the Company's exposure if a limitation on the availability of tax credits
were to occur in 2005 and/or 2006 due to oil prices. The insurance policy
protects approximately two-thirds of the expected 2005 and one-third of the
expected 2006 tax credits. The insurance was purchased with no significant
impact to 2005 expected results.
Vectren believes it is justified in its reliance on the private letter rulings
and recent IRS audit results for the Pace Carbon facilities. Additionally, the
Company does not currently expect oil price limitations on the credits.
Therefore, the Company will continue to recognize Section 29 tax credits as they
are earned until there is either a change in the tax code or the IRS'
interpretation of that tax code.
Utility Infrastructure Services
Utility Infrastructure Services provides underground construction and repair to
gas, water, and telecommunications companies primarily through its investment in
Reliant Services, LLC (Reliant) and Reliant's 100 percent ownership in Miller
Pipeline. Reliant is a 50 percent owned strategic alliance with an affiliate of
Cinergy Corp. and is accounted for using the equity method of accounting. For
the three months ended March 31, 2005, Infrastructure's operations operated at a
seasonal loss of $1.0 million, compared to a loss of $0.6 million in 2004.
Other Businesses
Other Businesses reported a loss of $0.5 million in 2005 compared to earnings of
$0.6 million in 2004. The cause of the earnings decrease results primarily from
a net gain of $$0.8 million in 2004 resulting from transactions that involved
the Company's investment in the Haddington Energy Partnerships, offset by write
downs of the Company's broadband-related businesses and investments.
The Haddington Energy Partnerships are equity method investments that invest in
energy-related ventures. During 2004, these partnerships sold their investments
in SAGO Energy, LP, (SAGO) for cash. The Company recognized its portion of the
after tax gain totaling $5.3 million, or $0.07 per share.
During 2004, the Company evaluated its broadband investments and strategy and
determined that it was unlikely it would make additional investments in these
operations. As a result, the Company recognized impairment charges associated
with its broadband-related investments totaling $7.5 million ($4.5 million after
tax), or $0.06 per share. Approximately $6.0 million of the charge relates to
the write-off of investments made in companies that were to provide broadband
services to the Indianapolis, Indiana and Dayton, Ohio markets and to write down
the Company's cost method investment in SIGECOM, LLC, which provides broadband
services to the Evansville, Indiana area. The remaining portion of the charge is
associated with the write down of broadband-related inventory held by a wholly
owned subsidiary that performed municipal broadband consulting services.
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.
EITF 04-06
At its March 2005 meeting, the EITF Task Force reached a consensus on EITF 04-06
"Accounting for Stripping Costs Incurred during Production in the Mining
Industry"(EITF 04-06) that stripping costs incurred during the production phase
of a mine are variable production costs that should be included in the cost of
the inventory produced during the period that the stripping costs are incurred.
EITF 04-06 is effective for the first reporting period in fiscal years beginning
after December 15, 2005, with early adoption permitted.
It has been the Company's policy to account for such costs as mine development
costs. If material, any unamortized costs that cannot be reclassified to
inventory must be charged to earnings as a cumulative effect of change in
accounting principle. The Company is in the process of determining if the impact
of this standard will be material to its operating results.
Financial Condition
Within Vectren's consolidated group, VUHI funds the short-term and long-term
financing needs of the Utility Group operations, and Vectren Capital Corp
(Vectren Capital) funds short-term and long-term financing needs of the
Nonregulated Group and corporate operations. Vectren Corporation guarantees
Vectren Capital's debt, but does not guarantee VUHI's debt. Vectren Capital's
long-term and short-term obligations outstanding at March 31, 2005, totaled
$113.0 million and $118.3 million, respectively. VUHI's outstanding long-term
and short-term borrowing arrangements are jointly and severally guaranteed by
Indiana Gas, SIGECO, and VEDO. VUHI's long-term and short-term obligations
outstanding at March 31, 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.
The Company's common stock dividends are primarily funded by utility operations.
Nonregulated operations have demonstrated sustained profitability, and the
ability to generate cash flows. These cash flows are primarily reinvested in
other nonregulated ventures, but are also used to fund a portion of the
Company's dividends, and from time to time may be reinvested in utility
operations or used for corporate expenses.
VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at
March 31, 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. Vectren Capital's senior unsecured debt is
rated BBB+/Baa2. The ratings of Moody's and Standard and Poor's are categorized
as investment grade. 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 operations. The Company's equity
component was 52% and 51% of permanent capitalization at 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.
The Company expects the majority of its capital expenditures, investments, and
debt security redemptions to be provided by internally generated funds. However,
due to significant capital expenditures and expected growth in nonregulated
operations, the Company may require additional permanent financing.
Sources & Uses of Liquidity
Operating Cash Flow
The Company's primary historical source of liquidity to fund working capital
requirements has been cash generated from operations. Cash flow from operating
activities increased $27.8 million during the three months ended March 31, 2005,
compared to 2004 primarily as a result of increased earnings before non-cash
charges and also as a result of favorable changes in working capital accounts.
Increased earnings before non-cash charges results from lower amounts of
earnings from unconsolidated affiliates and higher amounts of depreciation
expense. Favorable working capital changes are partially attributed to recovery
of gas and fuel costs.
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 $199.8 million for the three
months ended March 31, 2005, includes a net decrease of short-term borrowings of
$177.1 million, $33.2 million more than was repaid during the three months ended
March 31, 2004. The additional debt repayments were principally the result of
increased cash flow from operations. Common stock dividends have increased over
the prior period due to board authorized increases in the dividend rate.
Investing Cash Flow
Cash flow required for investing activities was $44.2 million for the three
months ended March 31, 2005, and was comparable to 2004. For the three months
ended March 31, 2005 and 2004, requirements for capital expenditures were $43.4
million and $44.5 million, respectively.
Available Sources of Liquidity
At March, 31, 2005, the Company has $615 million of short-term borrowing
capacity, including $355 million for the Utility Group and $260 million for the
wholly owned Nonregulated Group and corporate operations, of which approximately
$238 million is available for the Utility Group operations and approximately
$142 million is available for the wholly owned Nonregulated Group and corporate
operations.
On 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.
The Company periodically issues new shares to satisfy dividend reinvestment plan
and stock option plan requirements. These new issuances added additional
liquidity of $2.3 million in 2004.
Potential Uses of Liquidity
Planned Capital Expenditures & Investments
Investments in total company capital expenditures and nonregulated
unconsolidated affiliates for the remainder of 2005 are estimated to approximate
$250 million.
Ratings Triggers
At March 31, 2005, $113.0 million of Vectren Capital's senior unsecured notes
were subject to cross-default and ratings trigger provisions that would provide
that the full balance outstanding is subject to prepayment if the ratings of
Indiana Gas or SIGECO declined to BBB/Baa2. In addition, accrued interest and a
make whole amount based on the discounted value of the remaining payments due on
the notes would also become payable. The credit rating of Indiana Gas' senior
unsecured debt and SIGECO's secured debt remains one level and three levels,
respectively, above the ratings trigger.
Other Guarantees and Letters of Credit
In the normal course of business, Vectren issues guarantees to third parties on
behalf of its consolidated subsidiaries and unconsolidated affiliates. Such
guarantees allow those subsidiaries and affiliates to execute transactions on
more favorable terms than the subsidiary or affiliate could obtain without such
a guarantee. Guarantees may include posted letters of credit, leasing
guarantees, and performance guarantees. As of March 31, 2005, guarantees issued
and outstanding on behalf of unconsolidated affiliates approximated $6 million.
In addition, the Company has also issued a guarantee approximating $4 million
related to the residual value of an operating lease that expires in 2006.
Through March 31, 2005, the Company has not been called upon to satisfy any
obligations pursuant to its guarantees.
Forward-Looking Information
A "safe harbor" for forward-looking statements is provided by the Private
Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of
1995 was adopted to encourage such forward-looking statements without the threat
of litigation, provided those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statement. Certain matters described in Management's Discussion
and Analysis of Results of Operations and Financial Condition are
forward-looking statements. Such statements are based on management's beliefs,
as well as assumptions made by and information currently available to
management. When used in this filing, the words "believe," "anticipate,"
"endeavor," "estimate," "expect," "objective," "projection," "forecast," "goal,"
and similar expressions are intended to identify forward-looking statements. In
addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, factors that could cause the
Company's actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following:
o Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; unusual maintenance or repairs;
unanticipated changes to fossil fuel costs; unanticipated changes to gas
supply costs, or availability due to higher demand, shortages,
transportation problems or other developments; environmental or pipeline
incidents; transmission or distribution incidents; unanticipated changes to
electric energy supply costs, or availability due to demand, shortages,
transmission problems or other developments; or electric transmission or
gas pipeline system constraints.
o Increased competition in the energy environment including effects of
industry restructuring and unbundling.
o Regulatory factors such as unanticipated changes in rate-setting policies
or procedures, recovery of investments and costs made under traditional
regulation, and the frequency and timing of rate increases.
o Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board; the Securities and Exchange
Commission; the Federal Energy Regulatory Commission; state public utility
commissions; state entities which regulate electric and natural gas
transmission and distribution, natural gas gathering and processing,
electric power supply; and similar entities with regulatory oversight.
o Economic conditions including the effects of an economic downturn,
inflation rates, 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 The performance of projects undertaken by the Company's nonregulated
businesses and the success of efforts to invest in and develop new
opportunities, including but not limited to, the realization of Section 29
income tax credits and the Company's coal mining, gas marketing, and
broadband strategies.
o Direct or indirect effects on our business, financial condition or
liquidity resulting from a change in 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 Vectren 2004 Form 10-K and is 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. See the notes to the consolidated financial statements
regarding investments in unconsolidated affiliates, commitments and
contingencies, environmental matters, and rate and regulatory matters. The
consolidated condensed financial statements are included in Part 1 Item 1.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Periodically, the Company purchases shares from the open market to satisfy share
requirements associated with the Company's share-based compensation plans. The
following chart contains information regarding open market purchases made by the
Company to satisfy share-based compensation requirements during the three months
ended March 31, 2005.
- -----------------------------------------------------------------------------------
Total Number of Maximum Number
Number of Shares Purchased as of Shares That May
Shares Average Price Part of Publicly Be Purchased Under
Period Purchased Paid Per Share Announced Plans These Plans
- -------------- --------- -------------- ------------------- ------------------
January 1-31 - - - -
February 1-28 9,429 $27.76 - -
March 1-31 - - - -
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 CORPORATION
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)