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EX-32 - EXHIBIT 32 - VECTREN UTILITY HOLDINGS INCvuhi9302016ex32.htm
EX-31.2 - EXHIBIT 31.2 - VECTREN UTILITY HOLDINGS INCvuhi9302016ex312.htm
EX-31.1 - EXHIBIT 31.1 - VECTREN UTILITY HOLDINGS INCvuhi9302016ex311.htm

                            
                    

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2016
OR

[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission file number:   1-16739

VECTREN UTILITY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)


INDIANA
 
35-2104850
(State or other jurisdiction of incorporation or organization)
 
 
(IRS Employer Identification No.)


One Vectren Square, Evansville, IN 47708
(Address of principal executive offices)
(Zip Code)

(812) 491-4000
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes   o No




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o                                                                                                        Accelerated filer o
Non-accelerated filer ý (Do not check if a smaller reporting company)                               Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes     ý 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
 
10
 
October 31, 2016
Class
 
Number of Shares
 
Date


Access to Information

Vectren Corporation makes available all SEC filings and recent annual reports, including those of its wholly owned subsidiaries, free of charge through its website at www.vectren.com as soon as reasonably practicable after electronically filing or furnishing the reports to the SEC, or by request, directed to Investor Relations at the mailing address, phone number, or email address that follows:

Mailing Address:
One Vectren Square
Evansville, Indiana  47708
 
Phone Number:
(812) 491-4000
 
Investor Relations Contact:
David E. Parker Director, Investor Relations vvcir@vectren.com

Definitions

AFUDC: allowance for funds used during construction
IDEM:  Indiana Department of Environmental Management
 
ASC: Accounting Standards Codification
IURC:  Indiana Utility Regulatory Commission
ASU: Accounting Standards Update
kV: Kilovolt
BTU / MMBTU:  British thermal units / millions of BTU
MCF / BCF: thousands / billions of cubic feet
DOT:  Department of Transportation
MDth / MMDth: thousands / millions of dekatherms
EPA:  Environmental Protection Agency
MISO: Midcontinent Independent System Operator
FAC: Fuel Adjustment Clause
MW:  megawatts
FASB:  Financial Accounting Standards Board
MWh / GWh:  megawatt hours / thousands of megawatt hours (gigawatt hours)
 
FERC:  Federal Energy Regulatory Commission
 
OUCC:  Indiana Office of the Utility Consumer Counselor
 
GAAP: Generally Accepted Accounting Principles
PUCO:  Public Utilities Commission of Ohio
GCA: Gas Cost Adjustment
XBRL:  eXtensible Business Reporting Language



                            
                    

Table of Contents




2


                            
                    

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited – In millions)

 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current Assets
 
 
 
Cash & cash equivalents
$
6.0

 
$
6.2

     Accounts receivable - less reserves of $3.3 & $3.0, respectively
74.9

 
92.3

Accrued unbilled revenues
41.9

 
85.7

Inventories
126.4

 
125.3

Recoverable fuel & natural gas costs
22.9

 

Prepayments & other current assets
52.3

 
49.0

Total current assets
324.4

 
358.5

Utility Plant
 

 
 

Original cost
6,419.8

 
6,090.4

Less:  accumulated depreciation & amortization
2,527.3

 
2,415.5

Net utility plant
3,892.5

 
3,674.9

Investments in unconsolidated affiliates
0.2

 
0.2

Other investments
22.9

 
20.1

Nonutility plant - net
156.7

 
149.7

Goodwill
205.0

 
205.0

Regulatory assets
192.7

 
152.1

Other assets
49.1

 
32.2

TOTAL ASSETS
$
4,843.5

 
$
4,592.7



















The accompanying notes are an integral part of these condensed consolidated financial statements.


3


                            
                    


VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited – In millions)

 
September 30,
2016
 
December 31,
2015
LIABILITIES & SHAREHOLDER'S EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
161.0

 
$
168.5

Payables to other Vectren companies
24.8

 
25.7

Accrued liabilities
125.9

 
128.4

Short-term borrowings
131.2

 
14.5

Current maturities of long-term debt

 
13.0

Total current liabilities
442.9

 
350.1

Long-Term Debt - Net of Current Maturities
1,379.9

 
1,379.2

 
 
 
 
Deferred Credits & Other Liabilities
 

 
 

Deferred income taxes
821.6

 
758.4

Regulatory liabilities
450.9

 
433.9

Deferred credits & other liabilities
148.2

 
135.9

Total deferred credits & other liabilities
1,420.7

 
1,328.2

Commitments & Contingencies (Notes 7 - 10)


 


Common Shareholder's Equity
 

 
 

Common stock (no par value)
829.4

 
799.9

Retained earnings
770.6

 
735.3

Total common shareholder's equity
1,600.0

 
1,535.2

TOTAL LIABILITIES & SHAREHOLDER'S EQUITY
$
4,843.5

 
$
4,592.7




















The accompanying notes are an integral part of these condensed consolidated financial statements.

4


                            
                    

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited – In millions)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
OPERATING REVENUES
 
 
 
 
 
 
 
Gas utility
$
117.7

 
$
108.5

 
$
530.8

 
$
590.1

Electric utility
173.5

 
164.4

 
463.3

 
466.0

Other
0.1

 
0.1

 
0.2

 
0.2

Total operating revenues
291.3

 
273.0

 
994.3

 
1,056.3

OPERATING EXPENSES
 

 
 

 
 
 
 
Cost of gas sold
29.1

 
27.3

 
174.6

 
235.8

Cost of fuel & purchased power
50.9

 
47.9

 
140.3

 
144.9

Other operating
79.4

 
79.5

 
250.8

 
260.8

Depreciation & amortization
55.2

 
52.4

 
162.8

 
156.6

Taxes other than income taxes
12.7

 
11.8

 
42.9

 
43.0

Total operating expenses
227.3

 
218.9

 
771.4

 
841.1

OPERATING INCOME
64.0

 
54.1

 
222.9

 
215.2

Other income - net
6.7

 
4.0

 
20.1

 
13.3

Interest expense
17.2

 
16.6

 
52.2

 
49.5

INCOME BEFORE INCOME TAXES
53.5

 
41.5

 
190.8

 
179.0

Income taxes
18.6

 
14.6

 
68.5

 
64.7

NET INCOME
$
34.9

 
$
26.9

 
$
122.3

 
$
114.3
























The accompanying notes are an integral part of these condensed consolidated financial statements.

5


                            
                    

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited – In millions)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
122.3

 
$
114.3

Adjustments to reconcile net income to cash from operating activities:
 
 
 
 Depreciation & amortization
162.8

 
156.6

 Deferred income taxes & investment tax credits
63.4

 
39.7

 Expense portion of pension & postretirement benefit cost
3.1

 
3.5

 Provision for uncollectible accounts
4.8

 
5.1

 Other non-cash items - net
2.1

 
4.1

 Changes in working capital accounts:
 
 
 
                Accounts receivable & accrued unbilled revenues
56.4

 
112.3

  Inventories
(1.1
)
 
(6.5
)
  Recoverable/refundable fuel & natural gas costs
(30.8
)
 
27.1

  Prepayments & other current assets
(6.1
)
 
40.3

                Accounts payable, including to Vectren companies
                    & affiliated companies
(32.6
)
 
(58.8
)
  Accrued liabilities
5.4

 
3.6

Cash to fund pension plans
(15.0
)
 
(19.6
)
Changes in noncurrent assets
(34.9
)
 
(14.9
)
Changes in noncurrent liabilities
(4.0
)
 
(4.4
)
Net cash provided by operating activities
295.8

 
402.4

CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from:
 

 
 

Long-term debt - net of issuance costs

 
37.5

            Additional capital contribution
29.5

 
4.7

Requirements for:
 

 
 

       Dividends to parent
(87.0
)
 
(82.8
)
Retirement of long-term debt
(13.0
)
 
(5.0
)
     Net change in short-term borrowings
116.7

 
(86.2
)
Net cash used in financing activities
46.2

 
(131.8
)
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Proceeds from other investing activities

 
3.1

Changes in restricted cash
2.5

 
(9.7
)
Requirements for:


 
 
            Capital expenditures, excluding AFUDC equity
(344.7
)
 
(279.4
)
Net cash used in investing activities
(342.2
)
 
(286.0
)
Net change in cash & cash equivalents
(0.2
)
 
(15.4
)
Cash & cash equivalents at beginning of period
6.2

 
19.3

Cash & cash equivalents at end of period
$
6.0

 
$
3.9






The accompanying notes are an integral part of these condensed consolidated financial statements.

6


                            
                    

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
Organization and Nature of Operations

Vectren Utility Holdings, Inc. (the Company, Utility Holdings or VUHI), an Indiana corporation, was formed on March 31, 2000 to serve as the intermediate holding company for Vectren Corporation’s (Vectren) three operating public utilities:  Indiana Gas Company, Inc. (Indiana Gas or Vectren Energy Delivery of Indiana - North), Southern Indiana Gas and Electric Company (SIGECO or Vectren Energy Delivery of Indiana - South), and Vectren Energy Delivery of Ohio, Inc. (VEDO).  Utility Holdings also has other assets that provide information technology and other services to the three utilities.  Vectren, an Indiana corporation, is an energy holding company headquartered in Evansville, Indiana and was organized on June 10, 1999.  Both Vectren and Utility Holdings are holding companies as defined by the Energy Policy Act of 2005 (Energy Act).

Indiana Gas provides energy delivery services to approximately 586,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to approximately 144,000 electric customers and approximately 111,000 gas customers located near Evansville in southwestern Indiana.  SIGECO also owns and operates electric generation assets 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.  VEDO provides energy delivery services to approximately 316,000 natural gas customers located near Dayton in west central Ohio.

2.
Basis of Presentation

The interim condensed consolidated 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 and include a review of subsequent events through the date the financial statements were issued.  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 information in this report reflects all adjustments which are, in the opinion of management, necessary to fairly state the interim periods presented, inclusive of adjustments that are normal and recurring in nature.  These interim condensed consolidated 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, 2015, filed with the Securities and Exchange Commission on March 9, 2016, on Form 10-K.  Because of the seasonal nature of the Company’s utility operations, the results shown on a quarterly basis are not necessarily indicative of annual results.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

3.
Subsidiary Guarantor and Consolidating Information

The Company’s three operating utility companies, SIGECO, Indiana Gas, and VEDO are guarantors of Utility Holdings’ $350 million in short-term credit facilities, of which $131 million was outstanding at September 30, 2016. The operating utility companies are also guarantors of Utility Holdings’ unsecured senior notes with a par value of $996 million outstanding at September 30, 2016.  The guarantees are full and unconditional and joint and several, and Utility Holdings has no direct subsidiaries other than the subsidiary guarantors.   However, Utility Holdings does have operations other than those of the subsidiary guarantors.  Pursuant to Item 3-10 of Regulation S-X, disclosure of the results of operations and balance sheets of the subsidiary guarantors, which are 100 percent owned, separate from the parent company’s operations is required.  Following are condensed consolidating financial statements including information on the combined operations of the subsidiary guarantors separate from the other operations of the parent company.  Pursuant to a tax sharing agreement, consolidating tax effects, which are calculated on a separate return basis, are reflected at the parent level.


7


                            
                    

Condensed Consolidating Balance Sheet as of September 30, 2016 (in millions):
 ASSETS
Subsidiary
 
Parent
 
Eliminations &
 
 
 
Guarantors
 
Company
 
Reclassifications
 
Consolidated
Current Assets
 
 
 
 
 
 
 
Cash & cash equivalents
$
4.1

 
$
1.9

 
$

 
$
6.0

Accounts receivable - less reserves
74.7

 
0.2

 

 
74.9

Intercompany receivables
30.5

 
128.8

 
(159.3
)
 

Accrued unbilled revenues
41.9

 

 

 
41.9

Inventories
126.3

 
0.1

 

 
126.4

Recoverable fuel & natural gas costs
22.9

 

 

 
22.9

Prepayments & other current assets
53.3

 
2.4

 
(3.4
)
 
52.3

Total current assets
353.7

 
133.4

 
(162.7
)
 
324.4

Utility Plant
 

 
 

 
 

 
 

Original cost
6,419.8

 

 

 
6,419.8

Less:  accumulated depreciation & amortization
2,527.3

 

 

 
2,527.3

Net utility plant
3,892.5

 

 

 
3,892.5

Investments in consolidated subsidiaries

 
1,545.8

 
(1,545.8
)
 

Notes receivable from consolidated subsidiaries

 
945.4

 
(945.4
)
 

Investments in unconsolidated affiliates
0.2

 

 

 
0.2

Other investments
22.5

 
0.4

 

 
22.9

Nonutility plant - net
1.7

 
155.0

 

 
156.7

Goodwill - net
205.0

 

 

 
205.0

Regulatory assets
176.3

 
16.4

 

 
192.7

Other assets
56.5

 
0.9

 
(8.3
)
 
49.1

TOTAL ASSETS
$
4,708.4

 
$
2,797.3

 
$
(2,662.2
)
 
$
4,843.5

 
 
 
 
 
 
 
 
LIABILITIES & SHAREHOLDER'S EQUITY
Subsidiary
 
Parent
 
Eliminations &
 
 

 
Guarantors
 
Company
 
Reclassifications
 
Consolidated
Current Liabilities
 

 
 

 
 

 
 

Accounts payable
$
154.4

 
$
6.6

 
$

 
$
161.0

Intercompany payables
20.7

 

 
(20.7
)
 

Payables to other Vectren companies
16.9

 
7.9

 

 
24.8

Accrued liabilities
110.4

 
18.9

 
(3.4
)
 
125.9

Short-term borrowings

 
131.2

 

 
131.2

Intercompany short-term borrowings
108.1

 
30.5

 
(138.6
)
 

Total current liabilities
410.5

 
195.1

 
(162.7
)
 
442.9

Long-Term Debt
 

 
 

 
 

 
 

     Long-term debt
384.3

 
995.6

 

 
1,379.9

Long-term debt due to VUHI
945.4

 

 
(945.4
)
 

Total long-term debt - net
1,329.7

 
995.6

 
(945.4
)
 
1,379.9

Deferred Credits & Other Liabilities
 

 
 

 
 

 
 

Deferred income taxes
821.8

 
(0.2
)
 

 
821.6

Regulatory liabilities
449.6

 
1.3

 

 
450.9

Deferred credits & other liabilities
151.0

 
5.5

 
(8.3
)
 
148.2

Total deferred credits & other liabilities
1,422.4

 
6.6

 
(8.3
)
 
1,420.7

Common Shareholder's Equity
 

 
 

 
 

 
 

Common stock (no par value)
842.6

 
829.4

 
(842.6
)
 
829.4

Retained earnings
703.2

 
770.6

 
(703.2
)
 
770.6

Total common shareholder's equity
1,545.8

 
1,600.0

 
(1,545.8
)
 
1,600.0

TOTAL LIABILITIES & SHAREHOLDER'S EQUITY
$
4,708.4

 
$
2,797.3

 
$
(2,662.2
)
 
$
4,843.5


8


                            
                    

Condensed Consolidating Balance Sheet as of December 31, 2015 (in millions):
ASSETS
Subsidiary
 
Parent
 
Eliminations &
 
 
 
Guarantors
 
Company
 
Reclassifications
 
Consolidated
Current Assets
 
 
 
 
 
 
 
Cash & cash equivalents
$
5.5

 
$
0.7

 
$

 
$
6.2

Accounts receivable - less reserves
92.3

 

 

 
92.3

Intercompany receivables
51.2

 
142.9

 
(194.1
)
 

Accrued unbilled revenues
85.7

 

 

 
85.7

Inventories
125.3

 

 

 
125.3

Prepayments & other current assets
49.3

 
4.1

 
(4.4
)
 
49.0

Total current assets
409.3

 
147.7

 
(198.5
)
 
358.5

Utility Plant
 

 
 

 
 

 
 

Original cost
6,090.4

 

 

 
6,090.4

Less:  accumulated depreciation & amortization
2,415.5

 

 

 
2,415.5

Net utility plant
3,674.9

 

 

 
3,674.9

Investments in consolidated subsidiaries

 
1,467.0

 
(1,467.0
)
 

Notes receivable from consolidated subsidiaries

 
836.0

 
(836.0
)
 

Investments in unconsolidated affiliates
0.2

 

 

 
0.2

Other investments
19.7

 
0.4

 

 
20.1

Nonutility plant - net
1.7

 
148.0

 

 
149.7

Goodwill - net
205.0

 

 

 
205.0

Regulatory assets
135.2

 
16.9

 

 
152.1

Other assets
39.6

 
1.3

 
(8.7
)
 
32.2

TOTAL ASSETS
$
4,485.6

 
$
2,617.3

 
$
(2,510.2
)
 
$
4,592.7

 
 
 
 
 
 
 
 
LIABILITIES & SHAREHOLDER'S EQUITY
Subsidiary
 
Parent
 
Eliminations &
 
 

 
Guarantors
 
Company
 
Reclassifications
 
Consolidated
Current Liabilities
 

 
 

 
 

 
 

Accounts payable
$
161.1

 
$
7.4

 
$

 
$
168.5

Intercompany payables
12.4

 

 
(12.4
)
 

Payables to other Vectren companies
25.7

 

 

 
25.7

Accrued liabilities
120.2

 
12.6

 
(4.4
)
 
128.4

Short-term borrowings

 
14.5

 

 
14.5

Intercompany short-term borrowings
130.5

 
51.2

 
(181.7
)
 

    Current maturities of long-term debt
13.0

 

 

 
13.0

Total current liabilities
462.9

 
85.7

 
(198.5
)
 
350.1

Long-Term Debt
 

 
 

 
 

 
 

     Long-term debt - net of current maturities &
 
 
 
 
 
 
 
           debt subject to tender
383.9

 
995.3

 

 
1,379.2

Long-term debt due to VUHI
836.0

 

 
(836.0
)
 

Total long-term debt - net
1,219.9

 
995.3

 
(836.0
)
 
1,379.2

Deferred Credits & Other Liabilities
 

 
 

 
 

 
 

Deferred income taxes
763.7

 
(5.3
)
 

 
758.4

Regulatory liabilities
432.5

 
1.4

 

 
433.9

Deferred credits & other liabilities
139.6

 
5.0

 
(8.7
)
 
135.9

Total deferred credits & other liabilities
1,335.8

 
1.1

 
(8.7
)
 
1,328.2

Common Shareholder's Equity
 

 
 

 
 

 
 

Common stock (no par value)
813.1

 
799.9

 
(813.1
)
 
799.9

Retained earnings
653.9

 
735.3

 
(653.9
)
 
735.3

Total common shareholder's equity
1,467.0

 
1,535.2

 
(1,467.0
)
 
1,535.2

TOTAL LIABILITIES & SHAREHOLDER'S EQUITY
$
4,485.6

 
$
2,617.3

 
$
(2,510.2
)
 
$
4,592.7




9


                            
                    


Condensed Consolidating Statement of Income for the three months ended September 30, 2016 (in millions):
 
 
 
 
 
 
 
 
 
Subsidiary
Guarantors
 
Parent
Company
 
Eliminations &
Reclassifications
 
Consolidated
OPERATING REVENUES
 
 
 
 
 
 
 
   Gas utility
$
117.7

 
$

 
$

 
$
117.7

   Electric utility
173.5

 

 

 
173.5

   Other

 
10.6

 
(10.5
)
 
0.1

       Total operating revenues
291.2

 
10.6

 
(10.5
)
 
291.3

OPERATING EXPENSES
 
 
 
 
 
 
 
   Cost of gas sold
29.1

 

 

 
29.1

   Cost of fuel & purchased power
50.9

 

 

 
50.9

   Other operating
89.6

 

 
(10.2
)
 
79.4

   Depreciation & amortization
49.4

 
5.8

 

 
55.2

   Taxes other than income taxes
12.3

 
0.4

 

 
12.7

       Total operating expenses
231.3

 
6.2

 
(10.2
)
 
227.3

OPERATING INCOME
59.9

 
4.4

 
(0.3
)
 
64.0

Other income - net
6.3

 
12.0

 
(11.6
)
 
6.7

Interest expense
16.6

 
12.5

 
(11.9
)
 
17.2

INCOME BEFORE INCOME TAXES
49.6

 
3.9

 

 
53.5

Income taxes
17.4

 
1.2

 

 
18.6

Equity in earnings of consolidated companies, net of tax

 
32.2

 
(32.2
)
 

NET INCOME
$
32.2

 
$
34.9

 
$
(32.2
)
 
$
34.9


Condensed Consolidating Statement of Income for the three months ended September 30, 2015 (in millions):
 
 
 
 
 
 
 
 
 
Subsidiary
Guarantors
 
Parent
Company
 
Eliminations &
Reclassifications
 
Consolidated
OPERATING REVENUES
 
 
 
 
 
 
 
   Gas utility
$
108.5

 
$

 
$

 
$
108.5

   Electric utility
164.4

 

 

 
164.4

   Other

 
10.2

 
(10.1
)
 
0.1

       Total operating revenues
272.9

 
10.2

 
(10.1
)
 
273.0

OPERATING EXPENSES
 
 
 
 
 
 
 
   Cost of gas sold
27.3

 

 

 
27.3

   Cost of fuel & purchased power
47.9

 

 

 
47.9

   Other operating
89.1

 

 
(9.6
)
 
79.5

   Depreciation & amortization
46.2

 
6.2

 

 
52.4

   Taxes other than income taxes
11.4

 
0.4

 

 
11.8

       Total operating expenses
221.9

 
6.6

 
(9.6
)
 
218.9

OPERATING INCOME
51.0

 
3.6

 
(0.5
)
 
54.1

Other income - net
3.3

 
10.8

 
(10.1
)
 
4.0

Interest expense
15.9

 
11.3

 
(10.6
)
 
16.6

INCOME BEFORE INCOME TAXES
38.4

 
3.1

 

 
41.5

Income taxes
13.5

 
1.1

 

 
14.6

Equity in earnings of consolidated companies, net of tax

 
24.9

 
(24.9
)
 

NET INCOME
$
24.9

 
$
26.9

 
$
(24.9
)
 
$
26.9



10


                            
                    

Condensed Consolidating Statement of Income for the nine months ended September 30, 2016 (in millions):
 
 
 
 
 
 
 
 
 
Subsidiary
Guarantors
 
Parent
Company
 
Eliminations &
Reclassifications
 
Consolidated
OPERATING REVENUES
 
 
 
 
 
 
 
   Gas utility
$
530.8

 
$

 
$

 
$
530.8

   Electric utility
463.3

 

 

 
463.3

   Other

 
31.6

 
(31.4
)
 
0.2

       Total operating revenues
994.1

 
31.6

 
(31.4
)
 
994.3

OPERATING EXPENSES
 
 
 
 
 
 
 
   Cost of gas sold
174.6

 

 

 
174.6

   Cost of fuel & purchased power
140.3

 

 

 
140.3

   Other operating
281.2

 

 
(30.4
)
 
250.8

   Depreciation & amortization
144.9

 
17.8

 
0.1

 
162.8

   Taxes other than income taxes
41.6

 
1.3

 

 
42.9

       Total operating expenses
782.6

 
19.1

 
(30.3
)
 
771.4

OPERATING INCOME
211.5

 
12.5

 
(1.1
)
 
222.9

Other income - net
18.4

 
36.2

 
(34.5
)
 
20.1

Interest expense
50.4

 
37.4

 
(35.6
)
 
52.2

INCOME BEFORE INCOME TAXES
179.5

 
11.3

 

 
190.8

Income taxes
66.5

 
2.0

 

 
68.5

Equity in earnings of consolidated companies, net of tax

 
113.0

 
(113.0
)
 

NET INCOME
$
113.0

 
$
122.3

 
$
(113.0
)
 
$
122.3


Condensed Consolidating Statement of Income for the nine months ended September 30, 2015 (in millions):
 
 
 
 
 
 
 
 
 
Subsidiary
Guarantors
 
Parent
Company
 
Eliminations &
Reclassifications
 
Consolidated
OPERATING REVENUES
 
 
 
 
 
 
 
   Gas utility
$
590.1

 
$

 
$

 
$
590.1

   Electric utility
466.0

 

 

 
466.0

   Other

 
30.6

 
(30.4
)
 
0.2

       Total operating revenues
1,056.1

 
30.6

 
(30.4
)
 
1,056.3

OPERATING EXPENSES
 
 
 
 
 
 
 
   Cost of gas sold
235.8

 

 

 
235.8

   Cost of fuel & purchased power
144.9

 

 

 
144.9

   Other operating
289.4

 

 
(28.6
)
 
260.8

   Depreciation & amortization
137.4

 
19.0

 
0.2

 
156.6

   Taxes other than income taxes
41.6

 
1.4

 

 
43.0

       Total operating expenses
849.1

 
20.4

 
(28.4
)
 
841.1

OPERATING INCOME
207.0

 
10.2

 
(2.0
)
 
215.2

Other income - net
11.7

 
31.7

 
(30.1
)
 
13.3

Interest expense
47.6

 
34.0

 
(32.1
)
 
49.5

INCOME BEFORE INCOME TAXES
171.1

 
7.9

 

 
179.0

Income taxes
63.6

 
1.1

 

 
64.7

Equity in earnings of consolidated companies, net of tax

 
107.5

 
(107.5
)
 

NET INCOME
$
107.5

 
$
114.3

 
$
(107.5
)
 
$
114.3



11


                            
                    

Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2016 (in millions):
 
Subsidiary
Guarantors
 
Parent
Company
 
Eliminations
 
Consolidated
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
255.0

 
$
40.8

 
$

 
$
295.8

 CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

 
 

 
 

Proceeds from
 

 
 

 
 

 
 

Long-term debt - net of issuance costs
109.4

 

 
(109.4
)
 

Additional capital contribution from parent
29.5

 
29.5

 
(29.5
)
 
29.5

Requirements for:
 

 
 

 
 

 
 

Dividends to parent
(63.7
)
 
(87.0
)
 
63.7

 
(87.0
)
        Retirement of long term debt
(13.0
)
 

 

 
(13.0
)
Net change in intercompany short-term borrowings
(22.3
)
 
(20.8
)
 
43.1

 

Net change in short-term borrowings

 
116.7

 

 
116.7

Net cash used in financing activities
39.9

 
38.4

 
(32.1
)
 
46.2

 CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

 
 

 
 

Proceeds from:
 

 
 

 
 

 
 

Consolidated subsidiary distributions

 
63.7

 
(63.7
)
 

Requirements for:
 
 
 

 
 

 
 

Capital expenditures, excluding AFUDC equity
(319.6
)
 
(25.1
)
 

 
(344.7
)
Consolidated subsidiary investments

 
(29.5
)
 
29.5

 

Changes in restricted cash
2.5

 

 

 
2.5

Net change in long-term intercompany notes receivable

 
(109.4
)
 
109.4

 

Net change in short-term intercompany notes receivable
20.8

 
22.3

 
(43.1
)
 

Net cash used in investing activities
(296.3
)
 
(78.0
)
 
32.1

 
(342.2
)
Net change in cash & cash equivalents
(1.4
)
 
1.2

 

 
(0.2
)
Cash & cash equivalents at beginning of period
5.5

 
0.7

 

 
6.2

Cash & cash equivalents at end of period
$
4.1

 
$
1.9

 
$

 
$
6.0


Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2015 (in millions):
 
Subsidiary
Guarantors
 
Parent
Company
 
Eliminations
 
Consolidated
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
351.7

 
$
50.7

 
$

 
$
402.4

CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

 
 

 
 

Proceeds from:
 

 
 

 
 

 
 

 Long-term debt, net of issuance costs
37.5

 

 

 
37.5

Additional capital contribution from parent
4.7

 
4.7

 
(4.7
)
 
4.7

Requirements for:
 
 
 
 
 
 
 
Dividends to parent
(77.4
)
 
(82.8
)
 
77.4

 
(82.8
)
     Retirement of long term debt
(5.0
)
 

 

 
(5.0
)
Net change in intercompany short-term borrowings
1.7

 
46.5

 
(48.2
)
 

Net change in short-term borrowings

 
(86.2
)
 

 
(86.2
)
Net cash used in financing activities
(38.5
)
 
(117.8
)
 
24.5

 
(131.8
)
 CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

 
 

 
 

Proceeds from:
 

 
 

 
 

 
 

Consolidated subsidiary distributions

 
77.4

 
(77.4
)
 

Other investing activities

 
3.1

 

 
3.1

Requirements for:
 

 
 

 
 

 
 

Capital expenditures, excluding AFUDC equity
(260.8
)
 
(18.6
)
 

 
(279.4
)
       Consolidated subsidiary investments

 
(4.7
)
 
4.7

 

Changes in restricted cash
(9.7
)
 

 

 
(9.7
)
Net change in short-term intercompany notes receivable
(46.5
)
 
(1.7
)
 
48.2

 

Net cash used in investing activities
(317.0
)
 
55.5

 
(24.5
)
 
(286.0
)
Net change in cash & cash equivalents
(3.8
)
 
(11.6
)
 

 
(15.4
)
Cash & cash equivalents at beginning of period
6.9

 
12.4

 

 
19.3

Cash & cash equivalents at end of period
$
3.1

 
$
0.8

 
$

 
$
3.9


12


                            
                    

4.
Excise and Utility Receipts Taxes

Excise taxes and a portion of utility receipts taxes are included in rates charged to customers.  Accordingly, the Company records these taxes received as a component of operating revenues, which totaled $5.3 million and $5.0 million in the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, these taxes totaled $20.2 million and $22.1 million, respectively. Expenses associated with excise and utility receipts taxes are recorded as a component of Taxes other than income taxes.

5.
Supplemental Cash Flow Information

As of September 30, 2016 and December 31, 2015, the Company has accruals related to utility and nonutility plant purchases totaling approximately $43.0 million and $18.1 million, respectively.

6.
Transactions with Other Vectren Companies and Affiliates

Vectren Infrastructure Services Corporation (VISCO)
VISCO, a wholly owned subsidiary of Vectren, provides underground pipeline construction and repair services. VISCO's customers include Utility Holdings’ utilities and fees incurred by Utility Holdings and its subsidiaries totaled $36.3 million and $36.6 million for the three months ended September 30, 2016 and 2015, respectively, and for the nine months ended September 30, 2016 and 2015 totaled $93.1 million and $85.9 million, respectively. Amounts owed to VISCO at September 30, 2016 and December 31, 2015 are included in Payables to other Vectren companies in the Condensed Consolidated Balance Sheets.

Support Services & Purchases
Vectren provides corporate and general and administrative services to the Company and allocates certain costs to the Company, including costs for share-based compensation and for pension and other postretirement benefits that are not directly charged to subsidiaries. These costs are allocated using various allocators, including number of employees, number of customers and/or the level of payroll, revenue contribution and capital expenditures.  Allocations are at cost.  For the three months ended September 30, 2016 and 2015, Utility Holdings received corporate allocations totaling $11.7 million and $12.0 million, respectively. For the nine months ended September 30, 2016 and 2015, Utility Holdings received corporate allocations totaling $44.4 million and $39.5 million, respectively. The increase in corporate allocations in 2016 compared to 2015 is driven by higher performance-based compensation primarily due to the increase in Vectren's stock price.

The Company does not have share-based compensation plans and pension and other postretirement plans separate from Vectren and allocated costs include participation in Vectren's plans. The allocation methodology for retirement costs is consistent with FASB guidance related to “multiemployer” benefit accounting.

7.
Commitments & Contingencies

Commitments
The Company has both firm and non-firm commitments, some of which are five and ten-year agreements, to purchase natural gas, electricity, and coal as well as certain transportation and storage rights. Costs arising from these commitments, while significant, are pass-through costs, generally collected dollar-for-dollar from retail customers through regulator-approved cost recovery mechanisms.

Legal & Regulatory Proceedings
The Company is party to various legal proceedings, audits, and reviews by taxing authorities and other government agencies arising in the normal course of business.  In the opinion of management, there are no legal proceedings or other regulatory reviews or audits pending against the Company that are likely to have a material adverse effect on its financial condition, results of operations or cash flows.


13


                            
                    

8.
Gas Rate & Regulatory Matters

Regulatory Treatment of Investments in Natural Gas Infrastructure Replacement
The Company monitors and maintains its natural gas distribution system to ensure natural gas is delivered in a safe and efficient manner. The Company's natural gas utilities are currently engaged in programs to replace bare steel and cast iron infrastructure and other activities in both Indiana and Ohio to mitigate risk, improve the system, and comply with applicable regulations, many of which are the result of federal pipeline safety requirements. Laws passed in both Indiana and Ohio provide utilities the opportunity to timely recover costs of federally mandated projects and other infrastructure improvement projects outside of a base rate proceeding.

In April 2011, Indiana Senate Bill 251 (Senate Bill 251) was signed into Indiana law. The law provides a framework to recover 80 percent of federally mandated costs through a periodic rate adjustment mechanism outside of a general rate case. Such costs include a return on the federally mandated capital investment, based on the overall rate of return most recently approved by the IURC, along with recovery of depreciation and other operating costs associated with these mandates. The remaining 20 percent of those costs is deferred for future recovery in the utility's next general rate case.

In April 2013, Indiana Senate Bill 560 (Senate Bill 560) was signed into Indiana law. This legislation supplements Senate Bill 251 described above, and provides for cost recovery outside of a base rate proceeding for projects that either improve electric and gas system reliability and safety or are economic development projects that provide rural areas with access to gas service. Provisions of the legislation require that, among other things, requests for recovery include a seven-year project plan. Once the plan is approved by the IURC, 80 percent of such costs are eligible for current recovery using a periodic rate adjustment mechanism. Recoverable costs include a return on the investment that reflects the current capital structure and associated costs, with the exception of the rate of return on equity, which remains fixed at the rate determined in the Company's last rate case. Recoverable costs also include recovery of depreciation and other operating expenses. The remaining 20 percent of project costs are deferred and recovered in the utility’s next general rate case, which must be filed before the expiration of the seven-year plan. The adjustment mechanism is capped at an annual increase in retail revenues of no more than two percent.

In June 2011, Ohio House Bill 95 (House Bill 95) was signed into law. Outside of a base rate proceeding, this legislation permits a natural gas utility to apply for recovery of much of its capital expenditure program. This legislation also allows for the deferral of costs, such as depreciation, property taxes, and debt-related post-in-service carrying costs until recovery is approved by the PUCO.

Indiana Recovery and Deferral Mechanisms
The Company's Indiana natural gas utilities received Orders in 2008 and 2007 associated with the most recent base rate cases. These Orders authorized the deferral of financial impacts associated with bare steel and cast iron replacement activities. The Orders provide for the deferral of depreciation and post-in-service carrying costs on qualifying projects totaling $20 million annually at Indiana Gas and $3 million annually at SIGECO. The debt-related post-in-service carrying costs are currently recognized in the Condensed Consolidated Statements of Income. The recording of post-in-service carrying costs and depreciation deferral is limited by individual qualifying project to three years after being placed into service at SIGECO and four years after being placed into service at Indiana Gas. At September 30, 2016 and December 31, 2015, the Company has regulatory assets totaling $21.7 million and $19.9 million, respectively, associated with the deferral of depreciation and debt-related post-in-service carrying cost activities. Beginning in 2014, all bare steel and cast iron replacement activities are now part of the Company’s seven-year capital investment plan discussed below.

Requests for Recovery under Indiana Regulatory Mechanisms
On August 27, 2014, the IURC issued an Order (August 2014 Order) approving the Company’s seven-year capital infrastructure replacement and improvement plan (the Plan), beginning in 2014, and the proposed accounting authority and recovery. Compliance projects and other infrastructure improvement projects were approved pursuant to Senate Bill 251 and 560, respectively. As provided in the two laws, the Order approved semi-annual filings for rate recovery of 100 percent of the costs, inclusive of return, related to these capital investments and operating expenses, with 80 percent of the costs, including a return, recovered currently via an approved tracking mechanism and 20 percent of the costs deferred and recovered in the Company’s next base rate proceeding. In addition, the Order established guidelines to annually update the

14


                            
                    

seven-year capital investment plan. Finally, the Order approved the Company’s proposal to recover eligible costs via a fixed monthly charge per residential customer.

On March 30, 2016, the IURC issued an Order (March 2016 Order) re-approving approximately $890 million of the Company’s gas infrastructure modernization projects requested in the third update of the Plan, and approving the inclusion in rates of actual investments made through June 30, 2015. While most of the proposed capital spend has been approved as proposed, approximately $80 million of projects were not approved for recovery through the mechanisms pursuant to these filings. Specifically, Vectren proposed to add a new project to its Plan pursuant to Senate Bill 560 totaling about $65 million. The project, which consists of a 20-mile transmission line and other related investments required to support industrial customer growth and ongoing system reliability in the Lafayette, Indiana area, as well as allows the Company to further diversify its gas supply portfolio via access to shale gas in the Marcellus and Utica reserves, was excluded for recovery under the Plan. The IURC stated because the project was not in the original plan filed in 2013, it does not qualify for cost recovery under this law. In the March 2016 Order, the IURC did pre-approve the project for rate base inclusion upon the filing of the next base rate case. The Company believes that such plan updates should be expected to accommodate new projects that emerge during the term of the plan as ongoing risk assessments determine that new projects are required. The Company filed an appeal of the March 2016 Order on April 29, 2016 to challenge the IURC's finding which limits the scope of the Plan updates. The outcome of the appeal is expected in 2017.

On June 29, 2016, the IURC issued an Order (June 2016 Order) approving the inclusion in rates of investments made from July 2015 to December 2015. Through the June 2016 Order, approximately $262 million of the approved capital investment plan has been spent and included for recovery as of December 31, 2015.

In October 2016, the Company submitted its fifth semi-annual filing, seeking approval of the recovery of investments made through June 30, 2016, as well as updates to the approved seven-year capital investment plan. The updated plan reflects total capital expenditures of approximately $950 million for 2014 through 2020, an increase of $60 million from the previous plan approved in March 2016. This increase is primarily due to additional costs related to pipeline safety and compliance requirements under Senate Bill 251. The Company expects an order in this proceeding in early 2017.

At September 30, 2016 and December 31, 2015, the Company has regulatory assets related to the Plan totaling $42.4 million and $28.6 million, respectively, associated with the return on investment as well as the deferral of depreciation and other operating expenses.

Ohio Recovery and Deferral Mechanisms
The PUCO Order approving the Company's 2009 base rate case in the Ohio service territory authorized a distribution replacement rider (DRR). The DRR's primary purpose is recovery of investments in utility plant and related operating expenses associated with replacing bare steel and cast iron pipelines, as well as certain other infrastructure investments. This rider is updated annually for qualifying capital expenditures and allows for a return on those capital expenditures based on the rate of return approved in the 2009 base rate case. In addition, deferral of depreciation and the ability to accrue debt-related post-in-service carrying costs is also allowed until the related capital expenditures are included in the DRR. The Order also initially established a prospective bill impact evaluation on the annual deferrals. Due to the expiration of the initial five-year term for the DRR in early 2014, the Company filed a request in August 2013 to extend and expand the DRR. On February 19, 2014, the PUCO issued an Order approving a Stipulation entered into by the PUCO Staff and the Company which provided for the extension of the DRR for the recovery of costs incurred through 2017 and expanded the types of investment covered by the DRR to include recovery of certain other infrastructure investments. The Order limits the resulting DRR fixed charge per month for residential and small general service customers to specific graduated levels over the next five years. The capital expenditure plan is subject to the graduated caps on the fixed DRR monthly charge applicable to residential and small general service customers approved in the Order. In the event the Company exceeds these caps, amounts in excess can be deferred for future recovery; however, the remaining capital expenditure plan to be included for recovery in future DRR filings, estimated to be approximately $100 million to $120 million for 2016 and 2017, is not expected to exceed those caps. The Order also approved the Company's commitment that the DRR can only be further extended as part of a base rate case. In total, the Company has made capital investments on projects that are now in-service under the DRR totaling $232 million as of September 30, 2016, of which $204 million has been approved for recovery in the DRR through December 31, 2015. Regulatory assets associated with post-in-service carrying costs and depreciation deferrals were $22.9 million and $18.2

15


                            
                    

million at September 30, 2016 and December 31, 2015, respectively. In August 2016, the Company received approval to adjust the DRR rates, effective September 1, 2016, for recovery of costs incurred through December 31, 2015.

Given the extension of the DRR through 2017, as discussed above, and the continued ability to defer other capital expenses under House Bill 95, it is anticipated that the Company will not file a general rate case for the inclusion in rate base of the above costs until the expiration of the DRR.

The PUCO has also issued Orders approving the Company's filings under Ohio House Bill 95. These Orders approve deferral of the Company’s Ohio capital expenditure program for items not covered by the DRR as well as expenditures necessary to comply with PUCO rules, regulations, orders, and system expansion to some new customers. Ohio House Bill 95 Orders also have established a prospective bill impact evaluation on the cumulative deferrals, limiting the total deferrals at a level which would equal $1.50 per residential and small general service customer per month. As of September 30, 2016, the Company's deferrals have not reached this bill impact cap. On May 2, 2016, the Company submitted its most recent annual report required under its House Bill 95 Order. This report covers the Company's capital expenditure program through calendar year 2016.

Pipeline and Hazardous Materials Safety Administration (PHMSA)
In March of 2016, PHMSA published a notice of proposed rulemaking (NPRM) on the safety of gas transmission and gathering lines. The proposed rule addresses many of the remaining requirements of the 2011 Pipeline Safety Act, with a particular focus on extending integrity management rules to address a much larger portion of the natural gas infrastructure and adds requirements to address broader threats to the integrity of a pipeline system.  The Company is evaluating the impact that these proposed rules will have on its integrity management programs and transmission and distribution systems. Further, the Company is reviewing the Underground Natural Gas Storage Safety Recommendations from a joint Department of Energy and PHMSA led interagency task force. PHMSA has final rules pending that address requirements related to plastic pipe, operator qualifications, valve installation and rupture detection, and underground storage integrity management.  Each of these rules is expected to be published by PHMSA in 2017.  Additionally, PHMSA has recently finalized a rule on excess flow valves, which will go into effect in 2017. These rules will increase the potential for capital expenditures and increase operating and maintenance expenses.  The Company believes that the cost to comply with these new rules would be considered federally mandated costs and therefore should be recoverable using the regulatory recovery mechanisms referenced above.

9. Electric Rate & Regulatory Matters

SIGECO Electric Environmental Compliance Filing
On January 28, 2015, the IURC issued an Order (January Order) approving the Company’s request for approval of capital investments in its coal-fired generation units to comply with new EPA mandates related to mercury and air toxic standards (MATS) effective in 2015 and to address an outstanding Notice of Violation (NOV) related to sulfur trioxide emissions from the EPA. As of September 30, 2016, approximately $30 million has been spent on equipment to control mercury in both air and water emissions, and $40 million to address the issues raised in the NOV. The total investment is estimated to be between $70 million and $75 million. The Order approved the Company’s request for deferred accounting treatment, as supported by provisions under Indiana Senate Bill 29 (Senate Bill 29) and Senate Bill 251. The accounting treatment includes the deferral of depreciation and property tax expense related to these investments, accrual of post-in-service carrying costs, and deferral of incremental operating expenses related to compliance with these standards. The initial phase of the projects went into service in 2014, with the remaining investment occurring in 2015 and 2016. As of September 30, 2016, the Company has approximately $5.8 million deferred related to depreciation, property tax, and operating expense, and $2.3 million deferred related to post-in-service carrying costs.

In June 2015, Joint Appellants’ Citizens Action Coalition of Indiana, Inc., Sierra Club, Inc., and Valley Watch, Inc. (the appellants) challenged the IURC's January Order. On October 29, 2015, the Indiana Court of Appeals issued an opinion that affirmed the IURC’s findings with regard to equipment required to comply with MATS and certain national pollutant discharge elimination system rules (approximately $35 million) but remanded the case to the IURC to determine whether a certificate of public convenience and necessity (CPCN) should be issued for the equipment required by the NOV (approximately $40

16


                            
                    

million). On June 22, 2016, the IURC issued an Order granting the Company a CPCN for the NOV-required equipment. On July 21, 2016, the appellants initiated an appeal of the IURC's June 22, 2016 Order challenging the findings made by the IURC. The Company believes the IURC decision is well founded and will ultimately be upheld. The outcome of the appeal is expected in 2017.

SIGECO Electric Demand Side Management (DSM) Program Filing
On August 31, 2011, the IURC issued an Order approving an initial three-year DSM plan in the SIGECO electric service territory that complied with the IURC’s energy saving targets. Consistent with the Company’s proposal, the Order approved, among other items, the following: 1) recovery of costs associated with implementing the DSM Plan; 2) the recovery of a performance incentive mechanism based on measured savings related to certain DSM programs; and 3) lost margin recovery associated with the implementation of DSM programs for large customers. On June 20, 2012, the IURC issued an Order approving a small customer lost margin recovery mechanism, inclusive of all previous deferrals. For the nine months ended September 30, 2016 and 2015, the Company recognized electric utility revenue of $8.2 million and $7.5 million, respectively, associated with this approved lost margin recovery mechanism.

On March 28, 2014, Indiana Senate Bill 340 was signed into law. This legislation ended electric DSM programs on December 31, 2014 that had been conducted to meet the energy savings requirements established by the IURC in 2009. The legislation also allows for industrial customers to opt out of participating in energy efficiency programs. As of January 1, 2016, approximately 80 percent of the Company’s eligible industrial load has opted out of participation in the applicable energy efficiency programs. The Company filed a request for IURC approval of a new portfolio of DSM programs on May 29, 2014 to be offered in 2015. On October 15, 2014, the IURC issued an Order approving a Settlement between the OUCC and the Company regarding the new portfolio of DSM programs effective January 2015, and new programs for 2015 were implemented during the first quarter of 2015.

On May 6, 2015, Indiana's governor signed Indiana Senate Bill 412 (Senate Bill 412) into law requiring electricity suppliers to submit energy efficiency plans to the IURC at least once every three years. Senate Bill 412 also permits the recovery of all program costs, including lost revenues and financial incentives associated with those plans and approved by the IURC. The Company made its first filing pursuant to this bill in June 2015, which proposed energy efficiency programs for calendar years 2016 and 2017. In September 2015, the Company received an Order to continue offering and recovering the associated cost of its 2015 programs until March 31, 2016. In October 2015, the OUCC and Citizens Action Coalition of Indiana filed testimony recommending the rejection of the Company’s plan, contending it was not reasonable under the terms of Senate Bill 412 due to the program design and the Company’s proposal to recover lost revenues and incentives associated with the measures. Vectren filed rebuttal testimony in October 2015 defending the plan’s compliance with Senate Bill 412.

On March 23, 2016, the IURC issued an Order approving the Company’s 2016-2017 energy efficiency programs. The Order provides for cost recovery of program and administrative expenses and includes performance incentives for reaching energy savings goals. The Order also included a lost margin recovery mechanism that now limits that recovery related to new programs to the shorter of four years or the life of the installed energy efficiency measure. Prior electric energy efficiency orders did not limit lost margin recovery in this manner. This ruling follows three other recent IURC decisions implementing the same lost margin recovery limitation with respect to other electric utilities in Indiana. The Company is committed to continuing to promote and drive participation in its 2016-2017 energy efficiency programs and beyond and has therefore appealed this lost margin recovery restriction.

FERC Return on Equity (ROE) Complaints
On November 12, 2013, certain parties representing a group of industrial customers filed a joint complaint with the FERC under Section 206 of the Federal Power Act against the MISO and various MISO transmission owners, including SIGECO (first complaint case). The joint parties sought to reduce the 12.38 percent ROE used in the MISO transmission owners’ rates, including SIGECO’s formula transmission rates, to 9.15 percent covering the refund period from November 12, 2013 through February 11, 2015 (first refund period). On September 28, 2016, the FERC issued a final order authorizing a 10.32 percent base ROE for the first refund period and prospectively through the date of the order in a second complaint case as detailed below.

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A second customer complaint case was filed on February 11, 2015 covering the refund period from February 12, 2015 through May 11, 2016 (second refund period). An initial decision from the FERC administrative law judge on June 30, 2016, authorized a base ROE of 9.70 percent for the second refund period. The FERC is expected to rule on the proposed order in the second complaint case in 2017, which will authorize a base ROE for this period and prospectively from the date of the order.

Separately, on January 6, 2015, the FERC approved a MISO transmission owner joint request for an adder to the approved ROE. Under FERC regulations, transmission owners that are part of a Regional Transmission Organization (RTO) such as the MISO are authorized to earn an incentive of 50 basis points above the FERC approved ROE. The FERC deferred the implementation of this adder until the pending complaint is resolved. The adder will be applied retroactively from January 6, 2015 through May 11, 2016 and prospectively from the September 28, 2016 order in the first complaint case.

The Company has reflected these results in its financial statements. As of September 30, 2016, the Company had invested approximately $157.7 million in qualifying projects. The net plant balance for these projects totaled $137.7 million at September 30, 2016.

10.
Environmental Matters

The Company's utility operations and properties are subject to extensive environmental regulation pursuant to a variety of federal, state, and municipal laws and regulations. These environmental regulations impose, among other things, restrictions, liabilities, and obligations in connection with the storage, transportation, treatment, and disposal of hazardous substances and limit airborne emissions from electric generating facilities including particulate matter, sulfur dioxide (SO2), nitrogen oxide (NOx), and mercury, among others. Environmental legislation and regulation also requires that facilities, sites, and other properties associated with the Company's operations be operated, maintained, abandoned, and reclaimed to the satisfaction of applicable regulatory authorities. The Company's current costs to comply with these laws and regulations are significant to its results of operations and financial condition.

With the trend toward stricter standards, greater regulation, and more extensive permit requirements, the Company's investment in compliant infrastructure and the associated operating costs have increased and are expected to increase in the future. Similar to the costs associated with federal mandates in the Pipeline Safety Law, Senate Bill 251 is also applicable to federal environmental mandates impacting SIGECO's electric operations.

Air Quality
Mercury and Air Toxics (MATS) Rule
On December 21, 2011, the EPA finalized the utility MATS rule. The MATS rule sets emission limits for hazardous air pollutants for existing and new coal-fired power plants and identifies the following broad categories of hazardous air pollutants: mercury, non-mercury hazardous air pollutants (primarily arsenic, chromium, cobalt, and selenium), and acid gases (hydrogen cyanide, hydrogen chloride, and hydrogen fluoride). The rule imposes mercury emission limits for two sub-categories of coal and proposed surrogate limits for non-mercury and acid gas hazardous air pollutants.

In July 2014, a coalition of twenty-one states, including Indiana, filed a petition with the U.S. Supreme Court seeking review of the decision of the appellate court that found the EPA appropriately based its decision to list coal and oil fired generation units as a source of the pollutants at issue solely on those pollutants’ impact on public health. On June 29, 2015, the U.S. Supreme Court reversed the appellate court decision on the basis of the EPA’s failure to consider costs before determining whether it was appropriate and necessary to regulate steam electric generating units under Section 112 of the Clean Air Act. The Court did not vacate the rule, but remanded the MATS rule to the appellate court for further proceedings consistent with the opinion. In April 2016, in response to the Court's remand, the EPA affirmed its earlier conclusion in a Supplemental Finding, and in June 2016, a coalition of states and other stakeholders filed challenges to the Supplemental Finding. MATS compliance was required to commence April 16, 2015, and the Company continues to operate in full compliance with the MATS rule.


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Notice of Violation for A.B. Brown Power Plant
The Company received a NOV from the EPA in November 2011 pertaining to its A.B. Brown generating station. The NOV asserts when the facility was equipped with Selective Catalytic Reduction (SCR) systems, the correct permits were not obtained or the best available control technology to control incidental sulfuric acid mist was not installed. While the Company did not agree with the notice, it reached a final settlement with the EPA to resolve the NOV in December 2015.

As noted previously, on January 28, 2015, the IURC issued an Order approving the Company’s request for approval of capital investments on its coal-fired generation units to comply with new EPA mandates related to MATS effective in 2015 and to address the outstanding NOV. The total investment is estimated to be between $70 million and $75 million, roughly half of which has been spent to control mercury in both air and water emissions, and the remaining investment has been made to address the issues raised in the NOV.

In June 2015, Joint Appellants’ Citizens Action Coalition of Indiana, Inc., Sierra Club, Inc., and Valley Watch, Inc. (the appellants) challenged the IURC's January Order. On October 29, 2015, the Indiana Court of Appeals issued an opinion that affirmed the IURC’s findings with regard to equipment required to comply with MATS and certain national pollutant discharge elimination system rules (approximately $35 million) but remanded the case to the IURC to determine whether a certificate of public convenience and necessity (CPCN) should be issued for the equipment required by the NOV (approximately $40 million). On June 22, 2016, the IURC issued an Order granting the Company a CPCN for the NOV-required equipment. On July 21, 2016, the appellants initiated an appeal of the IURC's June 22, 2016 Order challenging the findings made by the IURC. The Company believes the IURC decision is well founded and will ultimately be upheld. The outcome of the appeal is expected in 2017.

Ozone NAAQS
On November 26, 2014, the EPA proposed to tighten the current National Ambient Air Quality Standard (NAAQS) for ozone from the current standard of 75 parts per billion (ppb) to a level with the range of 65 to 70 ppb. On October 1, 2015, the EPA finalized a new NAAQS for ozone at the high end of the range, or 70 ppb. The EPA is expected to make final determinations as to whether a region is in attainment for the new NAAQS in 2018 based upon monitoring data from 2014-2016. While it is possible that counties in southwest Indiana could be declared in non-attainment with the new standard, and thus could have an effect on future economic development activities in the Company's service territory, the Company does not anticipate any significant compliance cost impacts from the determination given its previous investment in SCR technology for NOx control on its units. In December of 2015, the EPA proposed a supplement to the current Cross State Air Pollution Rule (CSAPR) that would require further NOx reductions during the ozone season (May - September), which was finalized in September. The Company is positioned to comply with these NOx reduction requirements through its current investment in SCR technology.

One Hour SO2 NAAQS
On February 16, 2016, the EPA notified states of the commencement of a 120 day consultation period between the state and the EPA with respect to the EPA's recommendations for new non-attainment designations for the 2010 One Hour SO2 NAAQS. Identified on the list was Posey County, Indiana, where the Company's A.B. Brown Generating Station is located. While the Company is in compliance with all applicable SO2 limits in its permits, the Company reached an agreement with the state of Indiana on voluntary measures that the Company was able to implement without significant incremental costs to ensure that Posey County remains in attainment with the 2010 One Hour SO2 NAAQS. The Company's coal-fired generating fleet is 100 percent scrubbed for SO2 and 90 percent controlled for NOx.

Coal Ash Waste Disposal, Ash Ponds and Water

Coal Combustion Residuals Rule
In December 2014, the EPA released its final Coal Combustion Residuals (CCR) rule which regulates ash as non-hazardous material under Subtitle D of the Resource Conservation and Recovery Act (RCRA). On April 17, 2015, the final rule was published in the Federal Register. The final rule allows beneficial reuse of ash and the majority of the ash generated by the Company’s generating plants will continue to be reused. As it relates to the CCR rule, legislation is currently being considered by Congress that would provide for enforcement of the federal program by states rather than through citizen suits.

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Additionally, the CCR rule is currently being challenged by multiple parties in judicial review proceedings.

Under the final CCR rule, the Company is required to complete a series of integrity assessments, including seismic modeling given the Company’s facilities are located within two seismic zones, and groundwater monitoring studies to determine the remaining service life of the ponds and whether a pond must be retrofitted with liners or closed in place, with bottom ash handling conversions completed. In late 2015, using general utility industry data, the Company prepared cost estimates for the retirement of the ash ponds at the end of their useful lives, based on its interpretation of the closure alternatives contemplated in the final rule. The resulting estimates ranged from approximately $35 million to $80 million. These estimates contemplated final capping and monitoring costs of the ponds at both F.B. Culley and A.B. Brown generating stations. These rules have not been applicable to the Company's Warrick generating unit, as this unit has historically been part of a larger generating station that predominantly serves an adjacent industrial facility. The Company is in the process of preparing site specific estimates, using engineering analyses and alternative methods of closure. Significant factors impacting the resulting cost estimates include the closure time frame and the method of closure. The ongoing analysis and the refinement of assumptions may result in estimated costs that could be in excess of the current range of $35 million to $80 million.

At September 30, 2015, the Company recorded an approximate $25 million asset retirement obligation (ARO) and that amount is unchanged at September 30, 2016. The recorded ARO reflected the present value of the approximate $35 million in estimated costs in the range above. These assumptions and estimations are subject to change in the future and could materially impact the amount of the estimated ARO.

In order to maintain current operations of the ponds, the Company has spent approximately $12 million on the reinforcement of the ash pond dams and other operational changes in 2016 to meet the more stringent 2,500 year seismic event structural and safety standard in the CCR rule.

Effluent Limitation Guidelines (ELGs)
Under the Clean Water Act, the EPA sets technology-based guidelines for water discharges from new and existing facilities. On September 30, 2015, the EPA released final revisions to the existing steam electric ELGs setting stringent technology- based water discharge limits for the electric power industry. The EPA focused this rulemaking on wastewater generated primarily by pollution control equipment necessitated by the comprehensive air regulations, specifically setting strict water discharge limits for arsenic, mercury and selenium for scrubber waste waters. The ELGs will be implemented when existing water discharge permits for the plants are renewed, with compliance activities expected to commence where operations continue, within the 2018-2023 time frame. The current wastewater discharge permit for the Brown power plant was up for renewal in October and the permit for the Culley plant, is up for renewal in December 2016. During the renewal process, existing permits remain in place. The Company is working with Indiana regulators on permit renewals which will include a compliance schedule for ELGs. In no event will compliance with the ELGs be required prior to November 2018. The ELGs work in tandem with the aforementioned CCR requirements, effectively prohibiting the use of less costly lined sediment basin options for disposal of coal combustion residuals, and virtually mandate conversions to dry bottom ash handling.

Cooling Water Intake Structures
Section 316(b) of the Clean Water Act requires that generating facilities use the “best technology available” (BTA) to minimize adverse environmental impacts on a body of water. More specifically, Section 316(b) is concerned with impingement and entrainment of aquatic species in once-through cooling water intake structures used at electric generating facilities. A final rule was issued by the EPA on May 19, 2014. The final rule does not mandate cooling water tower retrofits but requires a state level case-by-case assessment of BTA for each facility. The final rule lists seven presumptive technologies which would qualify as BTA. These technologies range from intake screen modifications to cooling water tower retrofits. Ecological and technology assessment studies must be completed prior to determining BTA for the Company’s facilities. The Company is currently undertaking the required ecological studies and anticipates timely compliance in 2020-2021. To comply, the Company believes that capital investments will likely be in the range of $4 million to $8 million.


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Climate Change

On August 3, 2015, the EPA released its final Clean Power Plan (CPP) rule which requires a 32 percent reduction in carbon
emissions from 2005 levels. This results in a final emission rate goal for Indiana of 1,242 lb CO2/MWh to be achieved by 2030. The new rule gives states the option of seeking a two-year extension from the initial deadline of September 2016 to submit a final state implementation plan (SIP). Under the CPP, states have the flexibility to include energy efficiency and other measures should they choose to implement a SIP as provided in the final rule. While states are given an interim goal (1,451 lb CO2/MWh for Indiana), the final rule gives states the flexibility to shape their own emissions reduction over the 2022-2029 time period. The final rule was published in the Federal Register on October 23, 2015 and that action was immediately followed by litigation initiated by Indiana and 23 other states as a coalition challenging the rule. In January of 2016, the reviewing court denied the states’ and other parties requests to stay the implementation of the CPP pending completion of judicial review. On January 26, 2016, 29 states and state agencies, including the 24 state coalition referenced above, filed a request for immediate stay with the U.S. Supreme Court. On February 9, 2016, the U.S. Supreme Court granted a stay to delay the regulation while being challenged in court. Extensive oral argument was held in September. The stay will remain in place while the lower court concludes its review. Among other things, the stay delays the requirement to submit a final SIP by the original September 2016 deadline and could extend implementation to 2024.

In the event that a state does not submit a SIP, the EPA also released a proposed federal implementation plan (FIP), which would be imposed on those states without an approved SIP. The proposed FIP would apply an emission rate requirement directly on generating units. Under the proposed FIP, the CO2 emission rate limit for coal-fired units would start at 1,671 lbs CO2/MWh in 2022 and decrease to a final emission rate cap of 1,305 lbs CO2/MWh by 2030. While the FIP emission rate cap appears to be slightly less stringent than the state reduction goal for Indiana, the cap would apply directly to generating units and these units would not have the benefit of averaging emission rates with rates from zero-carbon sources as would be available in a SIP. Purchases of emission credits from zero-carbon sources can be made for compliance. The FIP will be subject to extensive public comments prior to finalization. Whether Indiana will file a SIP has yet to be determined. Pending that determination, the electric utilities in Indiana will continue to encourage the state's designated agency to analyze various compliance options and the possible integration into a state plan submittal.

At the time of release of the CPP, Indiana was the 5th largest carbon emitter in the nation in tons of CO2 produced from electric generation. The Company’s share of total tons of CO2 generated by Indiana's electric utilities has historically been less than 6 percent. Since 2005 through 2015, the Company has achieved a reduction in emissions of CO2 of 31 percent (on a tonnage basis) through the retirement of F.B. Culley Unit 1, expiration of municipal contracts, electric conservation, the addition of renewable generation, and the installation of more efficient dense pack turbine technology. Since emissions are further impacted by coal burn reductions and energy efficiency programs, the Company's emissions of CO2 can vary year to year. With respect to renewable generation, in 2008 and 2009, the Company executed long-term purchase power commitments for a total of 80 MW of wind energy. The Company currently has approximately 4 percent of its electricity being provided by energy sources other than coal and natural gas, due to the long-term wind contracts and landfill gas investment. With respect to CO2 emission rate, since 2005 through 2015, the Company has lowered its CO2 emission rate (as measured in lbs CO2/MWh) from 1,967 lbs CO2/MWh to 1,922 lbs CO2/MWh, for a reduction of 3 percent. The Company’s CO2 emission rate of 1,922 lbs CO2/MWh is basically the same as Indiana's average CO2 emission rate of 1,923 lbs CO2/MWh. The Company plans to consider these reductions in CO2 emissions and renewable generation in future discussions with the state to develop a possible state implementation plan.

Impact of Legislative Actions & Other Initiatives is Unknown
At this time, compliance costs and other effects associated with reductions in GHG emissions or obtaining renewable energy sources remain uncertain. The Company has gathered preliminary estimates of the costs to control GHG emissions. A preliminary investigation demonstrated costs to comply would be significant, first with regard to operating expenses and later for capital expenditures as technology becomes available to control GHG emissions. However, these compliance cost estimates were based on highly uncertain assumptions, including allowance prices if a cap and trade approach were employed, and energy efficiency targets. The Company is undertaking a detailed review of the requirements of the CPP and the proposed FIP and a review of potential compliance options. The Company will also continue to remain engaged with the Indiana legislators and regulators to assess the final rule and to develop a plan that is the least cost to its customers.

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In addition to the federal programs, the United States and 194 other countries agreed by consensus to limit GHG emissions beginning after 2020 in the 2015 United Nations Framework Convention on Climate Change Paris Agreement. The United States has proposed a 26-28 percent GHG emission reduction from 2005 levels by 2025. As previously noted, since 2005 through 2015, the Company has achieved reduced emissions of CO2 by 31 percent (on a tonnage basis). While the legislative outcome of the CPP rules remains uncertain, the Company will continue to monitor regulatory activity regarding GHG emission standards that may affect its electric generating units.

Integrated Resource Planning Process
As required by the state of Indiana, the Company is currently in the process of completing its 2016 Integrated Resource Plan (IRP). The state requires each electric utility to perform and submit an IRP that uses economic modeling to consider the costs and risks associated with available resource options to provide reliable electric service for the next twenty year period. During 2016, the Company has held two of three public stakeholder me