Attached files
Exhibit
99.1
ProLiance
Holdings, LLC and Subsidiaries
Consolidated
Financial Statements for the
Years
Ended September 30, 2009, 2008 and 2007
and
Independent Auditors’ Report
|
PROLIANCE
HOLDINGS, LLC AND SUBSIDIARIES
TABLE
OF CONTENTS
Page
INDEPENDENT
AUDITORS’ REPORT
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1
|
Consolidated
Statements of Financial Position as of September 30, 2009 and
2008
Consolidated
Statements of Operations for the Years Ended
|
2
3
|
|
September 30,
2009, 2008 and 2007
|
Consolidated
Statements of Changes in Equity for the Years Ended
|
4
|
|
September
30, 2009, 2008 and 2007
|
Consolidated
Statements of Cash Flows for the Years Ended
|
5
|
|
September 30,
2009, 2008 and 2007
|
|
|
Notes
to Consolidated Financial Statements
|
6–17
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DELOITTE
& Touche LLP
111
Monument Circle
Suite
2000
Indianapolis,
IN 46204-5120
USA
Tel.
+1 317 464 8600
Fax.
+1 317-464 8500
www.deloitte.com
INDEPENDENT
AUDITORS’ REPORT
ProLiance
Holdings, LLC:
We have
audited the accompanying consolidated statements of financial position of
ProLiance Holdings, LLC and Subsidiaries (the Company) as of
September 30, 2009 and 2008, and the related consolidated statements of
operations, changes in equity, and cash flows for each of the three years in the
period ended September 30, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 2009
and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
/s/Deloitte & Touche,
LLP
November 24,
2009
-1-
PROLIANCE
HOLDINGS, LLC AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
||||||||
AS
OF SEPTEMBER 30, 2009 AND 2008
|
||||||||
(In
thousands)
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 66,210 | $ | 6,894 | ||||
Gas
accounts receivable (less allowance of $709 and $897,
respectively)
|
81,805 | 203,102 | ||||||
Gas
inventory
|
166,445 | 361,507 | ||||||
Derivatives — at
fair value
|
34,954 | 68,251 | ||||||
Other
current assets
|
6,285 | 3,938 | ||||||
Total
current assets
|
355,699 | 643,692 | ||||||
PROPERTY
AND EQUIPMENT — Net
|
17,479 | 19,144 | ||||||
INVESTMENT
IN UNCONSOLIDATED AFFILIATES
|
5,781 | 25,074 | ||||||
NOTES
RECEIVABLE FROM UNCONSOLIDATED AFFILIATES
|
37,077 | 53,849 | ||||||
OTHER
|
1,212 | 844 | ||||||
TOTAL
ASSETS
|
$ | 417,248 | $ | 742,603 | ||||
LIABILITIES
AND EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Gas
accounts payable
|
$ | 88,654 | $ | 182,166 | ||||
Deferred
revenue
|
48,055 | 106,121 | ||||||
Derivatives — at
fair value
|
30,589 | 57,887 | ||||||
Current
maturities of long-term debt
|
1,375 | |||||||
Short-term
borrowings
|
93,000 | |||||||
Other
current liabilities
|
6,028 | 13,844 | ||||||
Total
current liabilities
|
173,326 | 454,393 | ||||||
OTHER
ACCRUED LIABILITIES
|
689 | 502 | ||||||
COMMITMENTS
AND CONTINGENCIES (Note 13)
|
||||||||
MINORITY
INTEREST
|
3,419 | 3,001 | ||||||
EQUITY:
|
||||||||
Members’
equity
|
259,791 | 288,248 | ||||||
Accumulated
other comprehensive loss
|
(19,977 | ) | (3,541 | ) | ||||
Total
equity
|
239,814 | 284,707 | ||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 417,248 | $ | 742,603 | ||||
See
notes to consolidated financial statements.
|
-2-
PROLIANCE
HOLDINGS, LLC AND SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
FOR
THE YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
|
||||||||||||
(In
thousands)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
REVENUES
— Gas marketing:
|
||||||||||||
Affiliated
gas marketing
|
$ | 798,604 | $ | 1,294,123 | $ | 1,065,662 | ||||||
Nonaffiliated
gas marketing
|
1,152,834 | 1,433,668 | 1,228,247 | |||||||||
|
||||||||||||
Total
gas marketing revenues
|
1,951,438 | 2,727,791 | 2,293,909 | |||||||||
COST
OF GAS SOLD
|
1,890,384 | 2,637,227 | 2,185,844 | |||||||||
OTHER
OPERATING EXPENSES
|
30,638 | 31,914 | 31,365 | |||||||||
OPERATING
INCOME
|
30,416 | 58,650 | 76,700 | |||||||||
OTHER
(EXPENSE) INCOME:
|
||||||||||||
Equity
in (loss) earnings of affiliates
|
(32,573 | ) | (432 | ) | 737 | |||||||
Interest
income
|
2,653 | 4,260 | 5,907 | |||||||||
Interest
expense
|
(645 | ) | (1,535 | ) | (561 | ) | ||||||
Total
other (expense) income
|
(30,565 | ) | 2,293 | 6,083 | ||||||||
INCOME
(LOSS) BEFORE MINORITY INTEREST
|
(149 | ) | 60,943 | 82,783 | ||||||||
MINORITY
INTEREST
|
418 | 547 | 424 | |||||||||
NET
INCOME (LOSS)
|
$ | (567 | ) | $ | 60,396 | $ | 82,359 | |||||
See
notes to consolidated financial statements.
|
-3-
PROLIANCE
HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
||||||||||||
FOR
THE YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
|
||||||||||||
(In
thousands)
|
||||||||||||
Vectren
Energy
|
||||||||||||
Marketing
&
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Citizens
|
|||||||||||
Services,
Inc.
|
Resources
|
Total
|
||||||||||
BALANCE
— October 1, 2006
|
$ | 119,917 | $ | 72,243 | $ | 192,160 | ||||||
Comprehensive
income:
|
||||||||||||
Net
income for the year ended September 30, 2007
|
50,239 | 32,120 | 82,359 | |||||||||
Other
comprehensive income (gain on cash flow
|
||||||||||||
hedges
— net)
|
15,758 | 10,074 | 25,832 | |||||||||
|
||||||||||||
Total
comprehensive income
|
65,997 | 42,194 | 108,191 | |||||||||
|
||||||||||||
Distributions
|
(21,910 | ) | (14,007 | ) | (35,917 | ) | ||||||
BALANCE
— September 30, 2007
|
164,004 | 100,430 | 264,434 | |||||||||
Comprehensive
income:
|
||||||||||||
Net
income for the year ended September 30, 2008
|
36,842 | 23,554 | 60,396 | |||||||||
Other
comprehensive loss (loss on cash flow
|
||||||||||||
hedges
— net)
|
(15,417 | ) | (9,857 | ) | (25,274 | ) | ||||||
|
||||||||||||
Total
comprehensive income
|
21,425 | 13,697 | 35,122 | |||||||||
|
||||||||||||
Distributions
|
(9,058 | ) | (5,791 | ) | (14,849 | ) | ||||||
BALANCE
— September 30, 2008
|
176,371 | 108,336 | 284,707 | |||||||||
Comprehensive
loss:
|
||||||||||||
Net
loss for the year ended September 30, 2009
|
(346 | ) | (221 | ) | (567 | ) | ||||||
Other
comprehensive loss (loss on cash flow
|
||||||||||||
hedges
— net)
|
(10,026 | ) | (6,410 | ) | (16,436 | ) | ||||||
Total
comprehensive loss
|
(10,372 | ) | (6,631 | ) | (17,003 | ) | ||||||
Distributions
|
(17,013 | ) | (10,877 | ) | (27,890 | ) | ||||||
BALANCE
— September 30, 2009
|
$ | 148,986 | $ | 90,828 | $ | 239,814 | ||||||
See
notes to consolidated financial statements.
|
-4-
PROLIANCE
HOLDINGS, LLC AND SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
FOR
THE YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
|
||||||||||||
(In
thousands)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
income (loss)
|
$ | (567 | ) | $ | 60,396 | $ | 82,359 | |||||
Adjustments
to reconcile net income (loss) to net cash provided by (used
in)
|
||||||||||||
operating
activities:
|
||||||||||||
Depreciation
|
2,023 | 2,278 | 2,216 | |||||||||
Amortization
|
1,348 | 538 | 443 | |||||||||
Provision
for uncollectible accounts — net of write offs and
|
||||||||||||
recoveries
|
(188 | ) | 147 | 158 | ||||||||
Equity
in loss (earnings) of affiliates
|
32,573 | 432 | (737 | ) | ||||||||
Minority
interest
|
418 | 547 | 424 | |||||||||
(Increase)
decrease in assets and liabilities:
|
||||||||||||
Accounts
receivable
|
119,359 | (82,004 | ) | 4,140 | ||||||||
Gas
inventory
|
195,062 | (97,449 | ) | (30,333 | ) | |||||||
Derivative
related accounts
|
(10,377 | ) | (26,359 | ) | 11,446 | |||||||
Other
assets
|
(4,330 | ) | 1,313 | 259 | ||||||||
Accounts
payable
|
(93,512 | ) | 44,303 | 5,421 | ||||||||
Deferred
revenue
|
(58,066 | ) | 28,107 | (9,770 | ) | |||||||
Other
liabilities
|
(7,629 | ) | 18 | (21,250 | ) | |||||||
Net
cash provided by (used in) operating activities
|
176,114 | (67,733 | ) | 44,776 | ||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Capital
expenditures — net of retirements
|
(358 | ) | (2,171 | ) | (3,218 | ) | ||||||
Investment
in unconsolidated affiliates
|
(1,250 | ) | (4,075 | ) | (3,494 | ) | ||||||
Decrease
(Increase) in notes receivable issued to unconsolidated
affiliates
|
6,750 | (13,335 | ) | (7,199 | ) | |||||||
Unconsolidated
affiliate dividends
|
380 | 625 | ||||||||||
(Increase)
decrease in escrow accounts
|
(55 | ) | (42 | ) | 83 | |||||||
Net
cash provided by (used in) investing activities
|
5,467 | (18,998 | ) | (13,828 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
(Decrease)
increase in short-term borrowings
|
(93,000 | ) | 93,000 | |||||||||
Repayment
of long-term debt
|
(1,375 | ) | (500 | ) | (500 | ) | ||||||
Distributions
to members
|
(27,890 | ) | (14,849 | ) | (35,917 | ) | ||||||
Net
cash (used in) provided by financing activities
|
(122,265 | ) | 77,651 | (36,417 | ) | |||||||
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
59,316 | (9,080 | ) | (5,469 | ) | |||||||
CASH
AND CASH EQUIVALENTS — Beginning of period
|
6,894 | 15,974 | 21,443 | |||||||||
CASH
AND CASH EQUIVALENTS — End of period
|
$ | 66,210 | $ | 6,894 | $ | 15,974 | ||||||
CASH
PAID FOR INTEREST
|
$ | 654 | $ | 1,547 | $ | 567 | ||||||
See
notes to consolidated financial statements.
|
-5-
PROLIANCE
HOLDINGS, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2009, 2008 AND 2007
1.
|
ORGANIZATION
AND NATURE OF BUSINESS
|
ProLiance
Holdings, LLC (Holdings) is a holding company for ProLiance
Energy, LLC (Energy), ProLiance Transportation and Storage, LLC (PTS)
and ProLiance Capital, LLC. Holdings was formed on April 1, 2007 and
is owned jointly by Citizens Resources, a wholly owned subsidiary of Citizens
Energy Group (Citizens Gas) and Vectren Energy Marketing &
Services, Inc. (Vectren Energy), a wholly owned subsidiary of Vectren
Corporation (Vectren). Energy is an energy marketing, management services, asset
development and operations company. Holdings is headquartered in Indianapolis,
Indiana.
On
April 1, 2007, Citizens Resources and Vectren Energy contributed their
membership interests in Energy to Holdings. On October 1, 2007, Energy
transferred its sole membership interests in Ohio Valley Hub, LLC (OVH),
Northern Storage, LLC (Northern Storage) and PTS to Holdings and
subsequently, Holdings transferred its sole membership interests in OVH and
Northern Storage to PTS.
The Board
of Representatives of Holdings (Board) has a cash distribution practice that
distributes approximately 40–50% of Holdings’ net income to its members.
Distributions are accrued and paid quarterly upon declaration by the Board and
are split 61% and 39% between Vectren Energy and Citizens Resources,
respectively. Distributions are funded by Energy via dividends to
Holdings.
Energy is
the supplier of gas and related services to Indiana Gas Company (IGC), Citizens
Gas, Westfield Gas, Southern Indiana Gas & Electric Company (SIGECO)
and Vectren Retail, as well as a provider of similar services to other utilities
and customers in Indiana and other states. IGC, SIGECO and Vectren Retail are
all wholly owned subsidiaries of Vectren. IGC and SIGECO are commonly known as
Vectren Energy Delivery of Indiana (VEDI). IGC is also known as Vectren North
and SIGECO is also known as Vectren South. Westfield Gas is a wholly owned
subsidiary of Citizens Gas.
Wholly-owned
subsidiaries of PTS include ProLiance Transportation &
Storage-Liberty, LLC (PTS-Liberty), ProLiance Transportation &
Storage-Heartland (PTS-Heartland), OVH and Northern Storage.
Liberty
Gas Storage, LLC (Liberty), a joint venture between PTS-Liberty and a
subsidiary of Sempra Energy (SE), is a development project for salt-cavern
natural gas storage facilities. PTS-Liberty is the minority member with a
25 percent interest, which it accounts for using the equity method. The
project was expected to include 17 Bcf of capacity in its north facility
(previously referred to as the Sulfur site, located near Sulfur, Louisiana), and
an additional 17 Bcf of capacity in its south facility (previously referred
to as the Hackberry site, near Hackberry, Louisiana). As more fully described in
Note 12, it is now expected that only the south facility will be completed
by the joint venture. This facility is expected to provide at least 17 Bcf of
capacity. The Liberty pipeline system is currently connected with several
interstate pipelines, including the Cameron Interstate Pipeline operated by
Sempra Pipelines & Storage, and will connect area LNG regasification
terminals to an interstate natural gas transmission system and storage
facilities. Holdings’ investment in Liberty is $37.1 million at
September 30, 2009, after reflecting the charge discussed in
Note 12.
-6-
PTS-Heartland
is a joint venture partner with Citizens Resources. The joint venture
(Heartland) owns and operates a 25-mile pipeline in Central Indiana. OVH is a
regulated pipeline with assets in southern Indiana. Northern Storage owns a 51%
equity interest in Lee 8 Storage Partnership (Lee 8), a Michigan
partnership. Lee 8 maintains and operates a natural gas storage field in
Calhoun County, Michigan. Lee 8 financial information and the related
minority interest are recorded in consolidation.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Risk Management Activities and
Derivatives — Energy enters into various purchase and sale contracts
to manage its price risk exposure including commodity and basis risk. Price risk
exposure is created through Energy’s various business activities, which include
storage optimization and providing gas management services and gas supply
services to wholesale, commercial and industrial customers, municipalities and
utilities. Derivatives are primarily used to hedge the forecasted purchases and
sales of gas and are treated as cash flow hedges with the change in fair value,
to the extent the hedges are effective, recorded to Accumulated Other
Comprehensive Income or Loss (AOCI). Periodically, Energy may also enter into
derivatives that are not accounted for as cash flow hedges.
Derivative
instruments utilized in connection with these activities are accounted for in
accordance with guidance issued by the FASB. In most cases, this guidance
requires a derivative to be recorded on the consolidated statements of financial
position as an asset or liability measured at its fair value and that changes in
the derivative’s fair value be recognized currently in the consolidated
statement of operations unless specific hedge accounting criteria are
met.
Derivative
instruments have been reflected as “Derivatives, at fair value” in the
consolidated statements of financial position. The change in value is recorded
in the consolidated statements of operations as a component of cost of gas sold
unless the transactions qualify for cash flow hedge accounting, which allows the
gains or losses to be recorded, to the extent the hedges are effective, to AOCI
until the hedged item is recognized as a component of cost of gas sold in the
consolidated statement of operations. The market prices used to value these
transactions reflect management’s best estimate considering various factors
including closing exchange quotations and volatility factors underlying the
commitments. Ineffectiveness related to cash flow hedges is recorded as a
component of cost of gas in the consolidated statements of operations. The
amount of ineffectiveness related to cash flow hedges that was recorded in the
consolidated statements of operations was a loss of $1.5 million, a loss of
$0.4 million and a gain of $1.1 million during the fiscal years ended
September 30, 2009, 2008 and 2007, respectively. The ineffectiveness
relates primarily to basis (the physical location of the underlying versus the
financial instrument).
Energy
has a Risk Oversight Committee composed of member, corporate and business
segment representatives that oversees all commodity price, weather and credit
risk activities, including Energy’s marketing, risk management services and
hedging activities. The committee’s duties are to establish Energy’s commodity
risk policies, allocate board-approved commercial risk limits, approve use of
new products and commodities, monitor positions and ensure compliance with
Energy’s risk management policies and procedures and limits established by
Holdings’ board of directors.
Energy
expects that all amounts recorded in AOCI at September 30, 2009 will be
reclassified to cost of gas sold in the consolidated statements of operations
during future fiscal periods as the forecasted transactions are completed. The
approximate amount of gain or loss expected to be reclassified to the
consolidated statements of operations during the fiscal years ended
September 30, 2010, 2011 and 2012 is a loss of $19.6 million, a loss
of $0.5 million and a gain of $0.1 million, respectively (based upon
market conditions at September 30, 2009) and will be offset by the
execution of physical transactions. No cash flow hedges were discontinued during
the years ended September 30, 2009, 2008 and 2007, as a result of a
forecasted transaction becoming improbable. At September 30, 2009, Energy
has derivatives that settle at various dates through April 2012.
-7-
The
activity affecting AOCI included the following (in thousands):
2009
|
2008
|
2007
|
||||||||||
Beginning
AOCI, consisting of net unrealized losses on derivatives
|
||||||||||||
qualifying
as cash flow hedges at the beginning of the period
|
$ | (3,541 | ) | $ | 21,733 | $ | (4,099 | ) | ||||
Unrealized
hedging gains (losses) arising during the period on
|
||||||||||||
derivatives
qualifying as cash flow hedges
|
(60,511 | ) | (110,752 | ) | 15,950 | |||||||
Reclassification
adjustment transferred to net income
|
44,555 | 85,898 | 9,882 | |||||||||
Change
in equity share of unconsolidated affiliate’s AOCI
|
(480 | ) | (420 | ) | ||||||||
Ending
AOCI, consisting of net unrealized losses on derivatives
|
||||||||||||
qualifying
as cash flow hedges at the end of the period
|
$ | (19,977 | ) | $ | (3,541 | ) | $ | 21,733 |
Energy is
also exposed to credit risk as a result of nonperformance by counterparties.
Energy maintains credit policies with regard to its counterparties that
management believes significantly minimize overall credit risk. These policies
include a thorough review of the financial statements of counterparties on a
regular basis and, when necessary, require that collateral, such as letters of
credit, be maintained. In addition, Energy sets exposure limits with regard to
counterparties. Most derivative instruments are traded on a highly-liquid
exchange with significant collateral requirements. To a lesser extent,
Over-the-Counter (OTC) derivative instruments are utilized and these
counterparties are subjected to the same credit review practices as physical
counterparties.
Cash and Cash
Equivalents — Cash equivalents consist of short-term, highly liquid
investments that are readily convertible into cash and have original maturities
of less than ninety days. Included in cash and cash equivalents at
September 30, 2009 were $10.0 million of compensating
balances.
Revenues — Revenue is
recognized in the period the gas is delivered to customers or services are
rendered. Revenues are derived principally from sales of gas and related
services to commercial and industrial companies, municipalities, local
distribution companies and other marketing companies. The concentration of
credit risk in the gas industry affects Energy’s overall exposure to credit risk
because customers may be similarly affected by changes in economic and other
conditions. Energy has not experienced significant credit losses on receivables
from such sales.
Deferred
revenue at September 30, 2009 and 2008 consists of revenue related to
advance payments from IGC for services to be provided during the heating season.
Revenue deferred at year end will be recognized when the services are delivered.
All deferred revenue as of September 30, 2009 will be recognized during
2010 and 2011.
Excise
and utility receipts taxes are invoiced to, and collected from, customers, but
are not included in gas marketing revenues in the statements of operations (net
presentation). The amounts invoiced are remitted to the respective governmental
authorities. During 2009 and 2008, $8.5 million and $10.2 million were
remitted, respectively.
Income Taxes — As a
limited liability company, Holdings is treated as a pass through entity for
income tax purposes. Accordingly, the accompanying financial statements do not
include any provision for Federal income taxes since Holdings’ operating results
are passed through to its members for inclusion in their Federal income tax
returns.
Gas Inventory — The
carrying value of inventory is at lower of cost or market. Recoverability is
measured by a comparison of the carrying amount of gas inventory to future net
undiscounted cash flows expected to be generated by the asset. If the carrying
amount exceeds its estimated future cash flows, a lower of cost or market charge
is recognized by the amount in which the carrying amount of the asset exceeds
the fair value of the asset.
Energy
recognized a lower of cost or market charge of $46.4 million in 2008. The
charge was offset by the realization of hedge gains previously deferred through
AOCI, resulting in no impact to the consolidated statements of operations. The
deferred hedge gains reclassified to earnings from AOCI were related to the
forecasted transactions supporting the physical gas inventory. Energy did not
recognize any lower of cost or market charges during 2009 or 2007.
-8-
The
carrying value of inventory at September 30, 2009 and 2008, was
$166.4 million and $361.5 million (approximately $3.70 per MMBtu and
$7.33 per MMBtu, respectively).
Property and Equipment —
Property and equipment is recorded at cost. Routine maintenance and repairs are
expensed as incurred. Depreciation of property and equipment is provided on the
straight-line method over the estimated useful lives of the assets
(2–30 years) or the lease period. At September 30, property and
equipment consisted of the following (in thousands):
2009
|
2008
|
|||||||
Leasehold
improvements
|
$ | 2,307 | $ | 2,300 | ||||
Storage
and pipeline equipment
|
23,138 | 23,022 | ||||||
Office
furniture and equipment
|
974 | 971 | ||||||
Computer
applications and equipment
|
7,241 | 7,117 | ||||||
Total
property and equipment
|
33,660 | 33,410 | ||||||
Less
— accumulated depreciation
|
(16,181 | ) | (14,266 | ) | ||||
Property
and equipment — net
|
$ | 17,479 | $ | 19,144 |
Holdings
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. If the carrying amount exceeds its
estimated future cash flows, an impairment charge is recognized by the amount in
which the carrying amount of the asset exceeds the fair value of the asset.
Holdings did not recognize any impairment during 2009, 2008 or
2007.
Use of Estimates — The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Consolidation — The
accompanying consolidated financial statements include the accounts of Holdings
and its wholly owned and majority owned subsidiaries, after elimination of
intercompany transactions.
3.
|
IMPACT
OF RECENTLY ISSUED ACCOUNTING
GUIDANCE
|
Effective
September 30, 2009, Holdings adopted FASB guidance related to the FASB
Accounting Standards Codification (ASC) and the Hierarchy of GAAP. This
statement identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. This
statement replaces prior guidance related to the hierarchy of GAAP and
establishes the FASB ASC as the source of authoritative accounting
principles recognized by the FASB. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. Holdings’
adoption of this guidance did not have any impact on its financial position,
results of operations or cash flows.
-9-
On
October 1, 2008, Holdings adopted FASB guidance related to accounting for
income taxes. This guidance prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of tax positions
taken or expected to be taken in an income tax return. This guidance also
addresses the reversal of tax positions, balance sheet classification, interest
and penalties, disclosure and transition. Holdings’ adoption of this guidance
did not have any impact on its financial position, results of operations or cash
flows.
On
October 1, 2008, Holdings adopted FASB guidance related to fair value
measurements and disclosures. This guidance defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements; however, the standard impacts how other fair value based GAAP is
applied. Holdings’ adoption of this guidance did not have a material impact on
its financial position, results of operations or cash flows. See additional
disclosure at Note 8.
On
October 1, 2008, Holdings adopted FASB guidance that permits entities to
measure many financial instruments and certain other items at fair value. Items
eligible for the fair value measurement option include: financial assets and
financial liabilities with certain exceptions; firm commitments that would
otherwise not be recognized at inception and that involve only financial
instruments; nonfinancial insurance contracts and goods or services; and host
financial instruments resulting from separation of an embedded financial
derivative instrument from a nonfinancial hybrid instrument. The fair value
option may be applied instrument by instrument, with few exceptions, is an
irrevocable election and is applied only to entire instruments. Holdings did not
apply the fair value impact to any instrument.
On
September 30, 2009, Holdings early adopted FASB guidance that enhanced the
previous derivative instrument disclosures and requires that objectives for
using derivative instruments be disclosed in terms of underlying risk and
accounting designation in order to better convey the purpose of derivative use
in terms of the risks that the entity is intending to manage. Entities are
required to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for, and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. Tabular disclosure of fair value amounts and gains
and losses on derivative instruments and related hedged items is required.
Holdings’ adoption of this guidance did not have any impact on its financial
position, results of operations or cash flows. See additional disclosure at
Note 6.
Effective
September 30, 2008, Holdings adopted FASB guidance that permits a reporting
entity to offset fair value amounts recognized for the right to reclaim or the
obligation to return cash collateral against fair value amounts recognized for
derivative instruments executed with the same counterparty under a master
netting arrangement. Holdings implemented the guidance as a change in accounting
principle through retrospective application. For the year ended
September 30, 2007, $22.6 million related to margin liabilities was
reclassified from Other Accounts Payable to Derivative Liabilities and
$7.5 million was reclassified from Derivative Liabilities to Derivatives
Assets in the consolidated statement of financial position. The change in
derivative related accounts decreased $10.8 million and the change in
accounts payable increased by the same amount in the consolidated statements of
cash flows for the year ended September 30, 2007. The consolidated
statements of financial position herein reflects the gross derivative positions
and fair value amounts for cash collateral with the same counterparty when
management believes a legal right of offset exists. At September 30, 2009,
the amount of margin liability recorded in Derivative liabilities was
$1.1 million. At September 30, 2008, the amount of margin deposits
recorded in Derivative assets was $2.9 million.
-10-
Effective
September 30, 2009, Holdings adopted FASB guidance that establishes general
standards of accounting for, and disclosure of, events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. Holdings’ adoption of this guidance did not have any impact on its
financial position, results of operations or cash flows. Management considered
subsequent events through November 24, 2009.
In
December 2007, the FASB issued guidance that establishes accounting and
reporting standards that require that the ownership percentages in subsidiaries
held by parties other than the parent be clearly identified, labeled, and
presented separately from the parent’s equity in the equity section of the
consolidated statement of financial position; that the amount of consolidated
net income attributable to the parent and the noncontrolling interest to be
clearly identified and presented on the face of the consolidated statement of
operations; that changes in the parent’s ownership interest while it retains
control over its subsidiary be accounted for consistently; that when a
subsidiary is deconsolidated, any retained noncontrolling equity investment be
initially measured at fair value; and that sufficient disclosure is made to
clearly identify and distinguish between the interests of the parent and the
noncontrolling owners. This guidance applies to all entities that prepare
consolidated financial statements, except for non-profit entities. This guidance
is effective for fiscal years beginning after December 31, 2008. Early
adoption is not permitted. Holdings will adopt this guidance on October 1,
2009, and is currently assessing the impact this statement will have on its
financial position and results of operations.
In June
2009, the FASB issued guidance that changes how a reporting entity determines a
primary beneficiary that would consolidate the variable interest entity (VIE)
from a quantitative risk and rewards approach to a qualitative approach based on
which variable interest holder has the power to direct the economic performance
related activities of the VIE as well as the obligation to absorb losses or
right to receive benefits that could potentially be significant to the VIE. This
guidance requires the primary beneficiary assessment to be performed on an
ongoing basis. This guidance also requires enhanced disclosures that will
provide more transparency about a company’s involvement in a VIE. This guidance
is effective for a reporting entity’s first annual reporting period that begins
after November 15, 2009. Holdings will adopt this guidance on
October 1, 2010, and is currently assessing the impact this statement will
have on its financial position and results of operations.
4.
|
CREDIT
FACILITIES
|
Energy
has a 364-day, unsecured, committed, revolving credit agreement (credit
agreement) with eight financial institutions that expires on June 14, 2010.
The credit agreement includes a variable rate line of credit facility and a
letter of credit facility. The credit agreement allows a total of
$315 million to be outstanding on the combined facilities. Surety bonds,
performance bonds and payment guarantees reduce the amount available under the
credit agreement. The facility has a sub-commitment limitation of
$50.0 million for letters of credit. The credit agreement is guaranteed by
PTS, subsidiaries of PTS and subsidiaries of Energy.
Energy
must maintain Consolidated Tangible Net Worth (Members’ Equity) in an amount not
less than $195 million plus 30 percent of consolidated net earnings after
June 30, 2009. Energy was in compliance with all financial covenants
related to this credit agreement as of September 30, 2009. As of
September 30, 2009, Energy had no borrowings under the line of credit
facility. As of September 30, 2008, Energy had borrowed $93.0 million
under the line of credit facility (at a 3.75% rate). As of September 30,
2009 and 2008, Energy had $1.9 million and $2.4 million of letters of
credit outstanding under the line of credit facility, respectively.
Lee 8
paid off a term loan agreement on March 31, 2009. The outstanding balance
on the loan at September 30, 2008 was $1.4 million (includes
$0.7 million related to other minority interests).
-11-
5.
|
AFFILIATED
NOTES RECEIVABLE
|
During
2009, 2008, and 2007, PTS-Liberty issued notes to Liberty. The original
principal amount of the notes totaled $53.2 million, $49.5 million and
$35.7 million at September 30, 2009, 2008 and 2007. Interest accrues
on the notes at fixed rates ranging from 2.87% to 5.05% and is added to the
outstanding principal amount. The notes have five-year terms from their date of
issuance with the latest maturity date of July 1, 2013. In September 2009,
Liberty repaid $10.5 million of notes to PTS-Liberty. Interest income
related to the notes was $2.4 million, $2.0 million and
$1.5 million in 2009, 2008 and 2007. The charge discussed in Note 12
did not impact the expected repayment of the notes.
6.
|
DERIVATIVE
FAIR VALUES AND INCOME STATEMENT
IMPACTS
|
The
following tables present information about Holdings’ derivative instruments and
hedging activities. The first table provides a financial position overview of
Holdings’ Derivative Assets and Liabilities as of September 30, 2009, while
the latter tables provide a breakdown of the related impact on the results of
operations for the twelve months ended September 30, 2009.
Fair
Value of Derivative Instruments (in thousands)
|
|||||||||
September
30, 2009
|
|||||||||
Derivative
Designation
|
Derivative
|
Derivative
|
|||||||
Derivative
|
under
ASC 815
|
Assets
|
Liabilities
|
||||||
Fair
Value
|
Fair
Value (5)
|
||||||||
Commodity
contracts (1) (2)
|
Hedge
instrument
|
$ | 34,346 | $ | 29,035 | ||||
Commodity
contracts (1) (3)
|
Non-hedge
|
||||||||
instrument
(4)
|
608 | 444 | |||||||
$ | 34,954 | $ | 29,479 |
1)
|
Commodity
contracts represent exchange-traded futures and swaps. These contracts are
subject to master netting arrangements and qualify for net presentation on
the Consolidated Statements of Financial Position; however, Holdings has
elected a gross presentation.
|
2)
|
The
fair value shown for commodity contracts is comprised of derivative
volumes totaling 82.2 billion cubic feet (Bcf). These volumes are
disclosed in absolute terms, not net. Swaps constitute 18.4 Bcf of the
total.
|
3)
|
The
fair value shown for commodity contracts is comprised of derivative
volumes totaling 0.2 billion cubic feet (Bcf). These volumes are
disclosed in absolute terms, not net.
|
4)
|
These
contracts represent speculative positions.
|
5)
|
The
net derivative liability is $30.6 million as shown on the
Consolidated Statements of Financial position, and is comprised of the
gross derivative liabilities related to commodity contracts shown above
and margin liability (collateral owed to the exchange) of
$1.1 million.
|
-12-
Unrealized
gains and losses and settled amounts are recognized on the Consolidated
Statements of Operations as Revenue or as Cost of Gas Sold for natural gas
derivatives.
Derivative
Impact on Results of Operations (in thousands)
|
||||||
Derivative
Designation
|
Statements
of
|
|||||
Derivative
instrument
|
under
ASC 815
|
Operations
Location
|
2009
|
|||
Commodity
contracts
|
Hedge
instrument
|
Gains
in Cost of Gas Sold
|
$ | 44,555 | ||
Commodity
contracts
|
Non-hedge instrument
|
Gains
in Cost of Gas Sold
|
1,022 | |||
$ | 45,577 |
7.
|
FAIR
VALUE OF OTHER FINANCIAL
INSTRUMENTS
|
The
carrying values of cash and cash equivalents, accounts receivable, accounts
payable and short-term borrowings are a reasonable estimate of their fair
values, due to their short-term nature. The carrying value of long-term debt
approximates its fair value.
8.
|
FAIR
VALUE MEASUREMENTS
|
FASB
guidance requires additional disclosures about Holdings’ financial assets and
liabilities that are measured at fair value. Beginning in October 2008, assets
and liabilities recorded at fair value in the Consolidated Statements of
Financial Position are categorized based upon the level of judgment associated
with the inputs used to measure their value. Hierarchical levels, as defined in
FASB guidance and explained in the following paragraphs, are directly related to
the amount of subjectivity associated with the inputs to fair valuations of
these assets and liabilities:
Level 1 — Inputs are
unadjusted quoted prices in active markets for identical assets or liabilities
at the measurement date. The types of assets carried at Level 1 fair value
generally are financial derivatives, investments and equity securities listed in
active markets. Holdings’ commodity contracts (New York Mercantile Exchange
futures and swaps) are classified as Level 1.
Level 2 — Inputs, other
than quoted prices included in Level 1, are observable for the asset or
liability, either directly or indirectly. Level 2 inputs include quoted prices
for similar instruments in active markets, and inputs other than quoted prices
that are observable for the asset or liability. Fair value assets and
liabilities that are generally included in this category are derivatives with
fair values based on inputs from actively quoted markets. OTC swaps are
classified as Level 2. Holdings utilized OTC swaps during 2009; however, none
were outstanding as of September 30, 2009.
Level 3 — Inputs are
unobservable for the asset or liability, and include situations where there is
little, if any, market activity for the asset or liability. In certain cases,
the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the level in the fair value hierarchy within
which the fair value measurement in its entirety falls has been determined based
on the lowest level input that is significant to the fair value measurement in
its entirety. Unobservable inputs reflect Holdings’ judgments about the
assumptions market participants would use in pricing the asset or liability
since limited market data exists. Holdings develops these inputs based on the
best information available, including Holdings’ own data.
-13-
The following table presents
information about Holdings’ assets and liabilities (including derivatives that
are presented net) measured at fair value on a recurring basis as of
September 30, 2009, and indicate the fair value hierarchy of the valuation
techniques utilized by Holdings to determine such fair
value.
Level
1
|
Level
2
|
Level
3
|
Netting
|
Total
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Assets
|
||||||||||||||||||||
Derivative
assets
|
$ | 34,954 | $ | $ | $ | $ | 34,954 | |||||||||||||
Total
assets
|
$ | 34,954 | $ | $ | $ | $ | 34,954 | |||||||||||||
Liabilities
|
||||||||||||||||||||
Derivative
liabilities
|
$ | 29,479 | $ | $ | $ | 1,110 | $ | 30,589 | ||||||||||||
Total
liabilities
|
$ | 29,479 | $ | $ | $ | 1,110 | $ | 30,589 |
9.
|
Energy
leases its office space under operating leases. Rental expense under these
arrangements and other various operating leases for the years ended
September 30, 2009, 2008 and 2007 totaled $1.1 million,
$1.1 million and $0.9 million, respectively. Future minimum lease
payments under noncancellable operating leases as of September 30, 2009
during the fiscal years ended September 30, 2010, 2011, 2012, 2013 and 2014
are $0.7 million, $0.7 million, $0.7 million, $0.7 million
and $0.8 million, respectively.
10.
|
GAS
SALES AND PORTFOLIO ADMINISTRATION
AGREEMENTS
|
Energy
provides natural gas and related services to IGC, Citizens Gas, Westfield Gas
and SIGECO. The sale of gas and provision of other services to IGC, Citizens Gas
and SIGECO (Indiana Member Utilities) is subject to regulatory review through
the quarterly gas cost adjustment process administered by the Indiana Utility
Regulatory Commission (IURC). The Indiana Member Utilities’ contracts are
administered under a settlement agreement (commonly referred to as “GCA50”)
entered into in 2006 between the Indiana Member Utilities, the Indiana Office of
the Utility Consumer Counselor (OUCC), the Citizens Action Coalition and the
Citizens Industrial Group. Under the settlement agreement, Energy continues to
provide natural gas and related services to the Indiana Member Utilities through
March 31, 2011. Energy is required to fund $2.0 million annually to
Indiana ratepayer programs through the end of the settlement agreement which has
been recorded as a charge in each of 2009, 2008 and 2007 in the consolidated
statements of operations. The settlement agreement was approved by the
IURC.
During
2008, a settlement was reached between Vectren and Citizens Gas related to the
sharing of VEDO’s 2005 gas cost recovery disallowance. In 2005, the Public
Utilities Commission of Ohio issued an order disallowing VEDO’s recovery of gas
costs during a period of time that Energy was VEDO’s gas supplier. The
settlement between Vectren and Citizens Gas resulted in Energy paying
$4.7 million to affiliates of Vectren. The settlement and payments by the
Company settled all claims related to the matter. The amounts paid were recorded
as a reduction of “Affiliated Gas Marketing Revenues” in the consolidated
statements of operations in 2008.
-14-
11.
|
RETIREMENT
PLAN
|
Energy
has a defined contribution retirement savings plan which is qualified under
sections 401(a) and 401(k) of the Internal Revenue Code. Under the terms of the
retirement savings plan, eligible participants may direct a specified percentage
of their compensation to be invested in various investment funds. Participants
in the retirement savings plan have, subject to prescribed limitations, matching
company contributions made to the plan on their behalf. During 2009, 2008 and
2007, Energy made contributions of $1.0 million, $0.7 million and
$0.7 million, respectively, to the plan.
12.
|
CHARGE
RELATED TO INVESTMENT IN UNCONSOLIDATED
AFFILIATE
|
In 2008,
SE advised Holdings that the completion of Liberty’s development at the north
site had been delayed by subsurface and well-completion problems. Based on
testing performed in the second calendar quarter of 2009, SE determined that
attempts at corrective measures had been unsuccessful. During 2009, Liberty
recorded a charge of approximately $132.0 million to write off the caverns
and certain related assets, reflecting the abandonment of the north site. As an
equity investor in Liberty, Holdings recorded its 25% share of the charge,
totaling $32.6 million at June 30, 2009 as a reduction to “Investments
in Unconsolidated Affiliates” and Notes Receivable from Unconsolidated
Affiliates” in the amounts of $20.5 million and $12.1 million,
respectively. Holdings does not expect it to impact its future liquidity or
access to capital, nor is it expected that this situation will impact Holdings’
ability to meet the needs of its customers.
Holdings’
investment has been made in cash contributions and by issuing notes receivable.
During 2009, 2008 and 2007, cash contributions totaled $1.3 million,
$4.1 million and $2.8 million, respectively, and notes receivable
issued totaled $3.7 million, $13.3 million and $7.2 million
respectively (see Note 5).
At
September 30, summarized information from Liberty’s statements of financial
position consisted of the following (in thousands):
2009
|
2008
|
2007
|
||||||||||
Current
assets
|
$ | 10,562 | $ | 46,623 | $ | 5,927 | ||||||
Noncurrent
assets
|
275,992 | 383,761 | 340,178 | |||||||||
Current
liabilities
|
23,146 | 10,971 | 3,855 | |||||||||
Noncurrent
liabilities
|
329,003 | 356,857 | 292,692 | |||||||||
(Deficit)
Equity
|
(65,595 | ) | 62,556 | 49,558 |
For the
fiscal years ended September 30, 2009, 2008 and 2007, summarized
information from Liberty’s statements of operations consisted of the following
(in thousands):
2009
|
2008
|
2007
|
||||||||||
Revenues
|
$ | 3,384 | $ | 41 | ||||||||
Operating
loss
|
(133,007 | ) | (5,031 | ) | $ | (983 | ) | |||||
Net
(loss) gain
|
(133,151 | ) | (4,775 | ) | 713 |
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Energy
self reported to the Federal Energy Regulatory Commission (FERC) in October 2007
possible non-compliance with the FERC’s capacity release policies. Energy has
taken corrective actions to assure that current and future transactions are
compliant. Energy is committed to full regulatory compliance and is cooperating
fully with the FERC regarding these issues. In June 2009, Energy agreed to and
paid a civil penalty of $3.0 million.
Energy
has entered into various firm transportation and storage agreements. Under these
agreements, Energy must make specified minimum payments which extend through
2029. At September 30, 2009, the estimated aggregated amounts of such
required future payments were $73.8 million, $76.7 million,
$69.1 million, $53.1 million, $42.1 million and
$312.6 million for 2010, 2011, 2012, 2013, 2014 and thereafter,
respectively. During 2009, 2008 and 2007, fixed payments under these agreements
were $65.0 million, $58.3 million and $42.1 million,
respectively. Energy also made variable payments under these agreements in 2009,
2008 and 2007. Variable payments include storage injection and withdrawal
charges, and commodity transportation charges.
-15-
Holdings
and its subsidiaries are party to various other legal proceedings in the
ordinary course of business. In the opinion of management of Holdings, however,
no other such proceedings pending against Holdings are likely to have a material
adverse effect on Holdings’ financial condition, results of operations or cash
flows.
14.
|
RELATED
PARTY TRANSACTIONS
|
Heartland,
a 50/50 joint venture between PTS and Citizens Resources, owns and operates a
25-mile pipeline in Central Indiana. Heartland built and operates a 16-inch
diameter pipeline to transport up to 80,000 MMBtu per day of natural gas.
Heartland is accounted for under the equity method. During 2009, Heartland made
distributions of $0.1 million to PTS.
Energy
has two 15-year transportation agreements with Heartland. The transportation
agreements provide for 45,000 and 25,000 MMBtu per day of firm capacity
deliverability. Additionally, Energy has two 15-year storage agreements with
Heartland. The storage agreements provide for 4,860,000 and 2,000,000 MMBtu of
storage capacity annually. Annual demand payments are $2.5 million per year
and the transportation rates are tariff based. Short-term contracts are based on
market rates.
Energy
purchases transportation and storage services from OVH at regulated rates as
approved by the IURC. Short-term contracts of one month or less are based on
market rates.
OVH
leases from SIGECO 10,000 MMBtu per day of deliverability and 2,750,000 MMBtu of
storage capacity at SIGECO’s Monroe City Storage Field. Annual lease payments
total $0.2 million and are due monthly. The original lease term ended
November 1, 2009 and is automatically renewed for additional one-year
terms. Notice to terminate must be provided eighteen months in advance of the
annual termination date, and such termination is subject to the concurrence of
the OUCC.
-16-
Energy
engages in significant transactions with affiliates of Vectren and Citizens Gas.
Sales to affiliates of Vectren and Citizens Gas for the periods ended
September 30, 2009, 2008 and 2007 exceeded 10% of total revenue. The
following table sets forth significant related party transactions (in
thousands):
Citizens
|
||||||||
Vectren
|
Gas
|
|||||||
Affiliates
|
Affiliates
|
|||||||
2009
|
||||||||
Revenues
|
$ | 597,247 | $ | 201,357 | ||||
Cost
of gas sold
|
74,260 | |||||||
Accounts
receivable — gas
|
25,317 | 7,707 | ||||||
Accounts
payable — gas
|
2,439 | |||||||
2008
|
||||||||
Revenues
|
$ | 944,632 | $ | 349,491 | ||||
Cost
of gas sold
|
104,390 | |||||||
Accounts
receivable — gas
|
54,612 | 27,975 | ||||||
Accounts
payable — gas
|
6,206 | |||||||
2007
|
||||||||
Revenues
|
$ | 780,876 | $ | 284,786 | ||||
Cost
of gas sold
|
2,602 | |||||||
Accounts
receivable — gas
|
36,958 | 20,245 | ||||||
Accounts
payable — gas
|
3,162 | 255 | ||||||
Interest
income
|
121 |