-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WOhPWdyAv2xGWxqz4hjm5oRBbM6c+m6rDhYz+NT02qujXYDoUTaVDcFRjiGnL4cR rSzGUjj1TlhR2pQrty84Sw== 0001096385-03-000158.txt : 20031113 0001096385-03-000158.hdr.sgml : 20031113 20031113101201 ACCESSION NUMBER: 0001096385-03-000158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VECTREN CORP CENTRAL INDEX KEY: 0001096385 STANDARD INDUSTRIAL CLASSIFICATION: GAS & OTHER SERVICES COMBINED [4932] IRS NUMBER: 352086905 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15467 FILM NUMBER: 03996058 BUSINESS ADDRESS: STREET 1: 20 NW FOURTH ST CITY: EVANSVILLE STATE: IN ZIP: 47708 BUSINESS PHONE: 8124914000 MAIL ADDRESS: STREET 1: 20 NW FOURTH ST CITY: EVANSVILLE STATE: IN ZIP: 47708 10-Q 1 vvc_10q-sep03.txt VECTREN CORP 10Q 3RD QTR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 1-15467 VECTREN CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-2086905 - --------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20 N.W. 4th Street, Evansville, Indiana, 47708 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) 812-491-4000 ------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock- Without Par Value 75,617,313 October 31, 2003 ------------------------------- ---------------- ---------------- Class Number of Shares Date Table of Contents Item Page Number Number PART I. FINANCIAL INFORMATION 1 Financial Statements (Unaudited) Vectren Corporation and Subsidiary Companies Consolidated Condensed Balance Sheets 1-2 Consolidated Condensed Statements of Income 3 Consolidated Condensed Statements of Cash Flows 4 Notes to Unaudited Consolidated Condensed Financial Statements 5-19 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 20-42 3 Quantitative and Qualitative Disclosures About Market Risk 42 4 Controls and Procedures 43 PART II. OTHER INFORMATION 1 Legal Proceedings 43 6 Exhibits and Reports on Form 8-K 44-45 Signatures 46 Definitions AFUDC: allowance for funds used MMBTU: millions of British thermal during construction units APB: Accounting Principles Board MW: megawatts EITF: Emerging Issues Task Force MWh / GWh: megawatt hours/millions of megawatt hours (gigawatt hours) FASB: Financial Accounting Standards NOx: nitrogen oxide Board FERC: Federal Energy Regulatory OUCC: Indiana Office of the Utility Commission Consumer Counselor IDEM: Indiana Department of PUCO: Public Utilities Commission Environmental Management of Ohio IURC: Indiana Utility Regulatory SFAS: Statement of Financial Commission Accounting Standards MCF / BCF: millions / billions of cubic USEPA: United States Environmental feet Protection Agency MDth / MMDth: thousands / millions of Throughput: combined gas sales and dekatherms gas transportation volumes PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited - In millions) - ------------------------------------------------------------------------------- September 30, December 31, 2003 2002 - ----------------------------------------------- ------------- ------------ ASSETS ------ Current Assets Cash & cash equivalents $ 11.7 $ 25.1 Accounts receivable-less reserves of $5.0 & $5.5, respectively 88.3 154.4 Accrued unbilled revenues 42.3 116.1 Inventories 61.6 62.8 Recoverable fuel & natural gas costs 31.5 22.1 Prepayments & other current assets 166.5 93.0 - ------------------------------------------------------------------------------- Total current assets 401.9 473.5 - ------------------------------------------------------------------------------- Utility Plant Original cost 3,178.5 3,037.1 Less: accumulated depreciation & amortization 1,456.8 1,389.0 - ------------------------------------------------------------------------------- Net utility plant 1,721.7 1,648.1 - ------------------------------------------------------------------------------- Investments in Unconsolidated Affiliates 166.3 153.3 Other Investments 117.9 124.3 Non-utility Property-Net 215.2 228.0 Goodwill-Net 202.2 202.2 Regulatory Assets 84.7 75.2 Other Assets 22.1 21.9 - ------------------------------------------------------------------------------- TOTAL ASSETS $ 2,932.0 $ 2,926.5 =============================================================================== The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited - In millions) - ------------------------------------------------------------------------------- September 30, December 31, 2003 2002 - -------------------------------------------- ------------- ------------ LIABILITIES & SHAREHOLDERS' EQUITY --------------------------------- Current Liabilities Accounts payable $ 61.9 $ 101.7 Accounts payable to affiliated companies 49.6 86.4 Accrued liabilities 108.5 119.9 Short-term borrowings 200.8 399.5 Current maturities of long-term debt - 39.8 Long-term debt subject to tender 10.0 26.6 - ------------------------------------------------------------------------------- Total current liabilities 430.8 773.9 - ------------------------------------------------------------------------------- Long-term Debt-Net of Current Maturities & Debt Subject to Tender 1,091.5 954.2 Deferred Income Taxes & Other Liabilities Deferred income taxes 215.1 195.5 Deferred credits & other liabilities 140.0 130.8 - ------------------------------------------------------------------------------- Total deferred credits & other liabilities 355.1 326.3 - ------------------------------------------------------------------------------- Minority Interest in Subsidiary 0.3 1.9 Commitments & Contingencies (Notes 9, 10 & 11) Cumulative, Redeemable Preferred Stock of a Subsidiary 0.2 0.3 Common Shareholders' Equity Common stock (no par value) - issued & outstanding 75.6 and 67.9, respectively 519.6 350.0 Retained earnings 539.8 530.4 Accumulated other comprehensive income (5.3) (10.5) - ------------------------------------------------------------------------------- Total common shareholders' equity 1,054.1 869.9 - ------------------------------------------------------------------------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 2,932.0 $ 2,926.5 =============================================================================== The accompanying notes are an integral part of these consolidated condensed financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited - In millions, except per share data) - -------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, --------------------- -------------------- 2003 2002 2003 2002 - ---------------------------------------- --------------------- -------------------- As Restated, As Restated, See Note 3 See Note 3 ---------- ----------- OPERATING REVENUES Gas utility $ 115.7 $ 88.5 $ 790.3 $ 586.7 Electric utility 134.0 189.6 343.6 475.3 Energy services & other 29.1 26.2 90.8 252.8 - ------------------------------------------------------------------------------------- Total operating revenues 278.8 304.3 1,224.7 1,314.8 - ------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 72.0 45.7 541.4 357.7 Fuel for electric generation 24.9 22.8 66.3 59.7 Purchased electric energy 42.6 93.0 101.8 239.5 Cost of energy services & other 22.0 16.3 66.6 223.1 Other operating 57.2 54.8 179.4 168.4 Depreciation & amortization 32.9 30.4 96.7 88.1 Taxes other than income taxes 9.0 9.8 42.1 38.3 - ------------------------------------------------------------------------------------- Total operating expenses 260.6 272.8 1,094.3 1,174.8 - ------------------------------------------------------------------------------------- OPERATING INCOME 18.2 31.5 130.4 140.0 OTHER INCOME (EXPENSE) Equity in earnings (losses) of unconsolidated affiliates (2.3) 1.7 6.4 8.5 Other - net 8.4 3.7 6.2 9.0 - ------------------------------------------------------------------------------------- Total other income (expense) 6.1 5.4 12.6 17.5 - ------------------------------------------------------------------------------------- Interest expense 19.6 19.5 56.7 58.8 - ------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 4.7 17.4 86.3 98.7 - ------------------------------------------------------------------------------------- Income taxes (2.6) 3.6 19.2 27.0 Minority interest in & preferred dividend requirements of subsidiaries - 0.3 - 0.1 - ------------------------------------------------------------------------------------- NET INCOME $ 7.3 $ 13.5 $ 67.1 $ 71.6 ===================================================================================== COMMON SHARES OUTSTANDING: BASIC 71.6 67.6 69.0 67.6 DILUTED 71.9 67.8 69.3 67.8 EARNINGS PER SHARE OF COMMON STOCK: BASIC $ 0.10 $ 0.20 $ 0.97 $ 1.06 DILUTED 0.10 0.20 0.97 1.06 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.28 $ 0.27 $ 0.83 $ 0.80
The accompanying notes are an integral part of these consolidated condensed financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited - In millions) - ---------------------------------------------------------------------------------- Nine Months Ended September 30, --------------------- 2003 2002 - --------------------------------------------------------- --------------------- As Restated, See Note 3 ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 67.1 $ 71.6 Adjustments to reconcile net income to cash from operating activities: Depreciation & amortization 96.7 88.1 Deferred income taxes & investment tax credits 18.1 3.8 Equity in earnings of unconsolidated affiliates (6.4) (8.5) Net unrealized (gain) loss on derivative instruments (0.4) 3.1 Pension and postretirement expense 10.5 9.9 Other non-cash charges- net 6.5 5.6 Changes in working capital accounts: Accounts receivable & accrued unbilled revenue 129.8 94.4 Inventories 1.2 3.3 Recoverable fuel & natural gas costs (9.4) 29.5 Prepayments & other current assets (77.7) (11.3) Accounts payable, including to affiliated companies (76.6) (15.3) Accrued liabilities (18.8) (0.1) Changes in other noncurrent assets (2.2) (2.2) Changes in other noncurrent liabilities (2.4) (8.8) - ---------------------------------------------------------------------------------- Net cash flows from operating activities 136.0 263.1 - ---------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Long-term debt issuance - net of issue costs & hedging proceeds 202.9 - Common stock issuance- net of issue costs 163.2 - Stock option exercises & other stock plans 5.2 1.1 Requirements for: Retirement of long-term debt, including premiums paid (121.9) (6.3) Dividends on common stock (57.7) (53.7) Redemption of preferred stock of subsidiary (0.1) (0.2) Other financing activities (1.7) - Net change in short-term borrowings (198.7) (63.7) - ---------------------------------------------------------------------------------- Net cash flows from financing activities (8.8) (122.8) - ---------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Notes receivable & other collections 15.3 3.9 Unconsolidated affiliate distributions 13.5 5.3 Requirements for: Capital expenditures, excluding AFUDC-equity (150.7) (150.2) Unconsolidated affiliate investments (12.3) (7.5) Notes receivable & other investments (6.4) (0.4) - ---------------------------------------------------------------------------------- Net cash flows from investing activities (140.6) (148.9) - ---------------------------------------------------------------------------------- Net decrease in cash & cash equivalents (13.4) (8.6) Cash & cash equivalents at beginning of period 25.1 25.0 - ---------------------------------------------------------------------------------- Cash & cash equivalents at end of period $ 11.7 $ 16.4 ==================================================================================
The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Nature of Operations Vectren Corporation (the Company or Vectren), an Indiana corporation, is an energy and applied technology holding company headquartered in Evansville, Indiana. The Company was organized on June 10, 1999, solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with APB Opinion No. 16 "Business Combinations" (APB 16). The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc. (VUHI), serves as the intermediate holding company for its three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana Energy, Southern Indiana Gas and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, and the Ohio operations. VUHI also has other assets that provide information technology and other services to the three utilities. Both Vectren and VUHI are exempt from registration pursuant to Section 3(a) (1) and 3(c) of the Public Utility Holding Company Act of 1935. Indiana Gas provides natural gas distribution and transportation services to a diversified customer base in 49 of Indiana's 92 counties. SIGECO provides electric generation, transmission, and distribution services to 8 counties in southwestern Indiana, including counties surrounding Evansville, and participates in the wholesale power market. SIGECO also provides natural gas distribution and transportation services to 10 counties in southwestern Indiana, including counties surrounding Evansville. The Ohio operations, owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc.(VEDO), a wholly owned subsidiary, (53 % ownership) and Indiana Gas (47 % ownership), provide natural gas distribution and transportation services to 17 counties in west central Ohio, including counties surrounding Dayton. The Company is also involved in nonregulated activities in four primary business areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure Services, and Broadband. Energy Marketing and Services markets natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal to the Company's utility operations and to other parties and generates IRS Code Section 29 investment tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. Broadband invests in broadband communication services such as analog and digital cable television, high-speed Internet and data services, and advanced local and long distance phone services. In addition, the nonregulated group has other businesses that provide utility services, municipal broadband consulting, and retail products and services and that invest in energy-related opportunities, real estate, and leveraged leases. 2. Basis of Presentation The interim consolidated condensed financial statements included in this report have been prepared by the Company, without audit, as provided in the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted as provided in such rules and regulations. The Company believes that the information in this report reflects all adjustments necessary to fairly state the results of the interim periods reported. These consolidated condensed financial statements and related notes should be read in conjunction with the Company's audited annual consolidated financial statements for the year ended December 31, 2002, filed on Form 10-K/A. 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. Restatement of Previously Reported Information Subsequent to the issuance of the Company's 2002 quarterly financial statements, the Company's management determined that previously issued financial statements should be restated. The restatement had the effect of decreasing net income for the three months ended September 30, 2002, by $0.5 million after tax, or $0.01 on a basic earnings per share basis, and for the nine months ended September 30, 2002 by $2.3 million after tax, or $0.03 on a basic earnings per share basis. In the second quarter of 2002, the Company recorded $5.2 million ($3.2 million after tax) of carrying costs for demand side management (DSM) programs pursuant to existing IURC orders and based on an improved regulatory environment. Subsequently, management determined that the accrual of such carrying costs was more appropriate in periods prior to 2000 when DSM program expenditures were made. Therefore, such carrying costs originally reflected in 2002 quarterly results were reversed and reflected in common shareholders' equity as of January 1, 2000. The Company also identified other adjustments for various reconciliation errors and other errors related primarily to the recording of estimates. These adjustments were not significant, either individually or in the aggregate, and decreased previously reported pre-tax and after tax earnings for the three months ended September 30, 2002, by approximately $0.8 million and $0.5 million, respectively, and increased previously reported pre-tax and after tax earnings for the nine months ended September 30, 2002, by approximately $1.8 million and $0.9 million (including a $0.2 million tax adjustment), respectively. In addition, the Company reduced previously reported Energy services and other revenues and Cost of energy services and other by $12.9 million for the nine months ended September 30, 2002, reflecting the adoption of EITF Issue No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." Following is a summary of the effects of the restatement on previously reported results of operations for the three months ended September 30, 2002.
In millions - ------------------------------------------------------------------------------------ OPERATING REVENUES As reported Adjustments As Restated ----------- ----------- ----------- Gas utility $ 88.1 $ 0.4 $ 88.5 Electric utility 190.0 (0.4) 189.6 Energy services & other 26.4 (0.2) 26.2 - ------------------------------------------------------------------------------------ Total operating revenues 304.5 (0.2) 304.3 - ------------------------------------------------------------------------------------ OPERATING EXPENSES Cost of gas sold 45.7 - 45.7 Fuel for electric generation 22.9 (0.1) 22.8 Purchased electric energy 92.5 0.5 93.0 Cost of energy services & other 16.4 (0.1) 16.3 Other operating 54.3 0.5 54.8 Depreciation & amortization 30.4 - 30.4 Taxes other than income taxes 9.8 - 9.8 - ------------------------------------------------------------------------------------ Total operating expenses 272.0 0.8 272.8 - ------------------------------------------------------------------------------------ OPERATING INCOME 32.5 (1.0) 31.5 OTHER INCOME Equity in earnings of unconsolidated affiliates 1.7 - 1.7 Other - net 3.5 0.2 3.7 - ------------------------------------------------------------------------------------ Total other income 5.2 0.2 5.4 - ------------------------------------------------------------------------------------ Interest expense 19.5 - 19.5 - ------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 18.2 (0.8) 17.4 - ------------------------------------------------------------------------------------ Income taxes 3.9 (0.3) 3.6 Minority interest in and preferred dividends requirement of subsidiaries 0.3 - 0.3 - ------------------------------------------------------------------------------------ NET INCOME $ 14.0 $ (0.5) 13.5 ====================================================================================
Following is a summary of the effects of the restatement on previously reported results of operations for the nine months ended September 30, 2002.
- ---------------------------------------------------------------------------------- In millions - ---------------------------------------------------------------------------------- OPERATING REVENUES As reported Adjustments As Restated ----------- ----------- ----------- Gas utility $ 585.0 $ 1.7 $ 586.7 Electric utility 475.7 (0.4) 475.3 Energy services & other 265.9 (13.1) 252.8 - ---------------------------------------------------------------------------------- Total operating revenues 1,326.6 (11.8) 1,314.8 - ---------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 357.6 0.1 357.7 Fuel for electric generation 59.7 - 59.7 Purchased electric energy 239.3 0.2 239.5 Cost of energy services & other 234.9 (11.8) 223.1 Other operating 168.3 0.1 168.4 Depreciation & amortization 88.2 (0.1) 88.1 Taxes other than income taxes 38.3 - 38.3 - ---------------------------------------------------------------------------------- Total operating expenses 1,186.3 (11.5) 1,174.8 - ---------------------------------------------------------------------------------- OPERATING INCOME 140.3 (0.3) 140.0 OTHER INCOME Equity in earnings of unconsolidated affiliates 7.8 0.7 8.5 Other - net 12.6 (3.6) 9.0 - ---------------------------------------------------------------------------------- Total other income 20.4 (2.9) 17.5 - ---------------------------------------------------------------------------------- Interest expense 58.6 0.2 58.8 - ---------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 102.1 (3.4) 98.7 - ---------------------------------------------------------------------------------- Income taxes 28.1 (1.1) 27.0 Minority interest in and preferred dividends requirement of subsidiaries 0.1 - 0.1 - ---------------------------------------------------------------------------------- NET INCOME $ 73.9 $ (2.3) $ 71.6 ==================================================================================
4. Stock-Based Compensation The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees" (APB25) and related interpretations when measuring compensation expense for its stock-based compensation plans. Stock Option Plans The exercise price of stock options awarded under the Company's stock option plans is equal to the fair market value of the underlying common stock on the date of grant. Accordingly, no compensation expense has been recognized for stock option plans. In January 2003, 384,500 options to purchase shares of common stock at an exercise price of $23.19 were issued to management. The grant vests over three years. Other Plans In addition to its stock option plans, the Company also maintains restricted stock and phantom stock plans for executives and non-employee directors. In January 2003, 93,000 restricted shares with a fair value per share of $23.19 were issued to management. Those shares vest in 2006. Compensation expense recognized in the consolidated financial statements associated with these restricted stock and phantom stock plans for the three months ended September 30, 2003 and 2002, was $1.5 million ($0.9 million after tax) and income of $0.1 million ($0.1 million after tax), respectively, and for the nine months ended September 30, 2003 and 2002, was $2.9 million ($1.7 million after tax) and $1.8 million ($1.1 million after tax), respectively. The amount of expense is consistent with the amount of expense that would have been recognized if the Company used the fair value based method described in SFAS No. 123 "Accounting for Stock Based Compensation" (SFAS 123), as amended, to value these awards. Pro forma Information Following is the effect on net income and earnings per share as if the fair value based method described in SFAS 123 had been applied to the Company's stock-based compensation plans:
- -------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- In millions, except per share amounts 2003 2002 2003 2002 - ------------------------------------------- ------------------- ------------------- Net Income: As reported $ 7.3 $ 13.5 $ 67.1 $ 71.6 Add: Stock-based employee compensation included in reported net income- net of tax 0.9 (0.1) 1.7 1.1 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards- net of tax 1.2 0.2 2.7 1.7 - -------------------------------------------------------------------------------------- Pro forma $ 7.0 $ 13.2 $ 66.1 $ 71.0 ====================================================================================== Basic Earnings Per Share: As reported $ 0.10 $ 0.20 $ 0.97 $ 1.06 Pro forma 0.10 0.20 0.96 1.05 Diluted Earnings Per Share: As reported $ 0.10 $ 0.20 $ 0.97 $ 1.06 Pro forma 0.10 0.20 0.96 1.05
5. Comprehensive Income Comprehensive income consists of the following: Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- In millions 2003 2002 2003 2002 - ------------------------------- ------------------- ------------------- Net income $ 7.3 $ 13.5 $ 67.1 $ 71.6 Other comprehensive income (loss) of unconsolidated affiliates- net of tax 3.5 (5.0) 5.7 (5.2) Minimum pension liability & other - net of tax (0.5) (0.1) (0.1) (0.1) - --------------------------------------------------------------------------- Total comprehensive income $ 10.3 $ 8.4 $ 72.7 $ 66.3 =========================================================================== Other comprehensive income arising from unconsolidated affiliates is the Company's portion of ProLiance Energy, LLC's and Reliant Services, LLC's accumulated comprehensive income related to the use of cash flow hedges, including commodity contracts and interest rate swaps, and the Company's portion of Haddington Energy Partners, LP's accumulated comprehensive income related to unrealized gains and losses on "available for sale securities." At December 31, 2002, the Company incurred additional minimum pension liabilities totaling $30.0 million which is included in deferred credits and other liabilities. This liability is offset by intangible assets totaling $10.5 million, which is included in other noncurrent assets, and accumulated other comprehensive income totaling $19.5 million ($11.6 million after tax). Subsequent to September 30, 2003, the Company's actuary has calculated preliminary estimates of the Company's minimum pension liability adjustment expected at December 31, 2003. Based on this calculation, the Company expects an increase in its minimum pension liability of $9.7 million and corresponding reduction in equity of $5.8 million after tax. 6. Earnings Per Share Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share assumes the conversion of stock options into common shares and the lifting of restrictions on issued restricted shares using the treasury stock method to the extent the effect would be dilutive. The following table sets forth the computation of basic and diluted earnings per share.
- --------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- (in millions except per share data) 2003 2002 2003 2002 - ---------------------------------------------- ------------------ ----------------- Numerator: Numerator for basic and diluted EPS - Net income $ 7.3 $ 13.5 $ 67.1 $ 71.6 ======================================================================================= Denominator: Denominator for basic EPS - Weighted average common shares outstanding 71.6 67.6 69.0 67.6 Conversion of stock options and lifting of restrictions on issued restricted stock 0.3 0.2 0.3 0.2 - --------------------------------------------------------------------------------------- Denominator for diluted EPS - Adjusted weighted average shares outstanding and assumed conversions outstanding 71.9 67.8 69.3 67.8 ======================================================================================= Basic earnings per share $ 0.10 $ 0.20 $ 0.97 $ 1.06 Diluted earnings per share $ 0.10 $ 0.20 $ 0.97 $ 1.06
For the three months ended September 30, 2003 and 2002, options to purchase an additional 110,663 and 87,963, respectively, shares of the Company's common stock were outstanding, but were not included in the computation of diluted earnings per share because their effect would be antidilutive. Exercise prices for options excluded from the computation ranged from $23.35 to $25.59 in 2003 and from $24.05 to $25.59 in 2002. For the nine months ended September 30, 2003 and 2002, options to purchase an additional 530,663 and 22,274, respectively, shares of the Company's common stock were outstanding, but were not included in the computation of diluted earnings per share because their effect would be antidilutive. Exercise prices for options excluded from the computation ranged from $23.19 to $25.59 in 2003 and from $24.90 to $25.59 in 2002. 7. Transactions with ProLiance Energy, LLC ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides natural gas and related services to Indiana Gas, the Ohio operations and Citizens Gas and also began providing services to SIGECO and Vectren Retail, LLC (the Company's retail gas marketer) in 2002. ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. ProLiance's primary customers are utilities and other large end use customers. Vectren's ownership percentage of ProLiance is 61%. Governance and voting rights remain at 50% for each member. Since governance of ProLiance remains equal between the members, Vectren continues to account for its investment in ProLiance using the equity method of accounting. Purchases from ProLiance for resale and for injections into storage for the three months ended September 30, 2003 and 2002, totaled $154.1 million and $93.3 million, respectively, and for the nine months ended September 30, 2003 and 2002, totaled $589.0 million and $329.6 million, respectively. Amounts owed to ProLiance at September 30, 2003 and December 31, 2002, for those purchases were $49.0 million and $84.6 million, respectively, and are included in accounts payable to affiliated companies. Amounts charged by ProLiance for gas supply services are established by supply agreements with each utility. 8. Financing Transactions Equity Issuance In March 2003, the Company filed a registration statement with the Securities and Exchange Commission with respect to a public offering of authorized but previously unissued shares of common stock. In August 2003, the registration became effective, and an agreement was reached to sell approximately 7.4 million shares to a group of underwriters. The net proceeds totaled $163.2 million. VUHI Debt Issuance In July 2003, VUHI issued senior unsecured notes with an aggregate principal amount of $200 million in two $100 million tranches. The first tranche are 10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746% to yield 5.28% to maturity (2013 Notes). The second tranche are 15-year notes due August 2018 with an interest rate of 5.75% priced at 99.177% to yield 5.80% to maturity (2018 Notes). The notes are jointly and severally guaranteed by the Company's three public utilities. In addition, they have no sinking fund requirements, and interest payments are due semi-annually. The notes may be called by the Company, in whole or in part, at any time for an amount equal to accrued and unpaid interest, plus the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined in the indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the 2018 Notes. Shortly before these issues, the Company entered into several treasury locks with a total notional amount of $150.0 million. Upon issuance of the debt, the treasury locks were settled resulting in the receipt of $5.7 million in cash. The value received is being amortized as a reduction of interest expense over the life of the issues. The net proceeds from the sale of the senior notes and settlement of related hedging arrangements approximated $203 million. SIGECO and Indiana Gas Debt Call During 2003, the Company called two first mortgage bonds outstanding at SIGECO and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond had a principal amount of $45.0 million, an interest rate of 7.60%, was originally due in 2023, and was redeemed at 103.745% of its stated principal amount. The second SIGECO bond had a principal amount of $20.0 million, an interest rate of 7.625%, was originally due in 2025, and was redeemed at 103.763% of the stated principal amount. The first Indiana Gas note had a remaining principal amount of $21.3 million, an interest rate of 9.375%, was originally due in 2021, and was redeemed at 105.525% of the stated principal amount. The second Indiana Gas note had a principal amount of $13.5 million, an interest rate of 6.75%, was originally due in 2028, and was redeemed at the principal amount. Pursuant to regulatory authority, the premiums paid to retire the net carrying value of these notes totaling $3.6 million were deferred as a regulatory asset. Other Financing Transactions In January, 2003, other debt of Indiana Gas totaling $17.5 million and of SIGECO totaling $1.0 million was retired. 9. Commitments & Contingencies Legal Proceedings The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. See Note 10 regarding environmental matters. United States Securities and Exchange Commission (SEC) Informal Inquiry As more fully described in Note 3 to these consolidated condensed financial statements and in Note 3 to the 2002 consolidated financial statements filed on Form 10-K/A, the Company restated its consolidated financial statements for 2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC in an informal inquiry with respect to this previously announced restatement, has met with the staff of the SEC, and has provided information in response to their requests. IRS Section 29 Investment Tax Credit Recent Developments Vectren's Coal Mining operations are comprised of Vectren Fuels, Inc. (Fuels), which includes its coal mines and related operations and Vectren Synfuels, Inc. (Synfuels). Synfuels holds one limited partnership unit (an 8.3% interest) in Pace Carbon Synfuels Investors, LP (Pace Carbon), a Delaware limited partnership formed to develop, own, and operate four projects to produce and sell coal-based synthetic fuel utilizing Covol technology. Under Section 29 of the Internal Revenue Code, manufacturers such as Pace Carbon, receive a tax credit for every ton of synthetic fuel sold. To qualify for the credits, the synthetic fuel must meet three primary conditions: 1) there must be a significant chemical change in the coal feedstock, 2) the product must be sold to an unrelated person, and 3) the production facility must have been placed in service before July 1, 1998. In past rulings, the Internal Revenue Service (IRS) has concluded that the synthetic fuel produced at the Pace Carbon facilities should qualify for Section 29 tax credits. The IRS issued a private letter ruling with respect to the four projects on November 11, 1997, and subsequently issued an updated private letter ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected total tax credits under Section 29 in its consolidated results through September 30, 2003, of approximately $35 million. Vectren has been in a position to fully utilize the credits generated and continues to project full utilization. In addition, Fuels receives synfuel-related fees from synfuel producers unrelated to Pace Carbon for a portion of its coal production. In June 2003, the IRS, in an industry-wide announcement, stated that it would review the scientific validity of test procedures and results presented as evidence of significant chemical change. During this review, the IRS suspended the issuance of new private letter rulings on that subject. In October 2003, the IRS completed its review and determined that the test procedures and results used by taxpayers are scientifically valid if the procedures are applied in a consistent and unbiased manner. Also, the IRS will issue new private letter rulings based on revised standards. The IRS stated it has continuing concerns regarding the sampling and data/record retention practices prevalent in the synthetic fuels industry. The IRS plans to issue guidance extending new record/data retention requirements to taxpayers already holding private letter rulings on the issue of significant chemical change. During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year and later expanded the audit to include tax years 1999, 2000, and 2001. Based on conclusions reached in the industry-wide review and recently issued private letter rulings involving other other synthetic fuel facilities, Vectren believes chemical change issues from these audits may soon be resolved. However, the IRS has not directly notified Pace Carbon of any resolution. Vectren believes that it is justified in its reliance on the private letter rulings for the Pace Carbon facilities, that the test results that Pace Carbon presented to the IRS in connection with its private letter rulings are scientifically valid, and that Pace Carbon has operated its facilities in compliance with its private letter rulings and Section 29 of the Internal Revenue Code. However, at this time, Vectren cannot provide any assurance as to the outcome of these audits concerning the issue of chemical change or any other issue raised during the audits relative to its investment in Pace Carbon. Guarantees and Product Warranties Vectren Corporation issues guarantees to third parties on behalf of its unconsolidated affiliates. Such guarantees allow those affiliates to execute transactions on more favorable terms than the affiliate could obtain without such a guarantee. Guarantees may include posted letters of credit, leasing guarantees, and performance guarantees. As of September 30, 2003, guarantees issued and outstanding on behalf of unconsolidated affiliates approximated $6 million. The Company has also issued a guarantee approximating $4 million related to the residual value of an operating lease that expires in 2006. Vectren Corporation has accrued no liabilities for these guarantees as they relate to guarantees issued among related parties or were executed prior to the adoption of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). As more fully described in Note 12, FIN 45 was adopted prospectively and specifically excludes from its recognition and measurement provisions guarantees issued among related parties. Through September 30, 2003, the Company has not been called upon to satisfy any obligations pursuant to its guarantees. Liabilities accrued for, and activity related to, product warranties are not significant. 10. Environmental Matters Clean Air Act NOx SIP Call Matter The Clean Air Act (the Act) requires each state to adopt a State Implementation Plan (SIP) to attain and maintain National Ambient Air Quality Standards (NAAQS) for a number of pollutants, including ozone. If the USEPA finds a state's SIP inadequate to achieve the NAAQS, the USEPA can call upon the state to revise its SIP (a SIP Call). In October 1998, the USEPA issued a final rule "Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone," (63 Fed. Reg. 57355). This ruling found that the SIP's of certain states, including Indiana, were substantially inadequate since they allowed for nitrogen oxide (NOx) emissions in amounts that contributed to non-attainment with the ozone NAAQS in downwind states. The USEPA required each state to revise its SIP to provide for further NOx emission reductions. The NOx emissions budget, as stipulated in the USEPA's final ruling, requires a 31% reduction in total NOx emissions from Indiana. In June 2001, the Indiana Air Pollution Control Board adopted final rules to achieve the NOx emission reductions required by the NOx SIP Call. Indiana's SIP requires the Company to lower its system-wide NOx emissions to .14 lbs./MMBTU by May 31, 2004 (the compliance date). This is a 65% reduction from emission levels existing in 1999 and 1998. The Company has initiated steps toward compliance with the revised regulations. These steps include installing Selective Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in a chemical reaction. This technology is known to be the most effective method of reducing NOx emissions where high removal efficiencies are required. The IURC has issued orders that approve: o the Company's project to achieve environmental compliance by investing in clean coal technology; o a total capital cost investment for this project up to $244 million (excluding AFUDC), subject to periodic review of the actual costs incurred; o a mechanism whereby, prior to an electric base rate case, the Company may recover through a rider that is updated every six months an 8 percent return on its capital costs for the project; and o ongoing recovery of operating costs, including depreciation and purchased emission allowances through a rider mechanism, related to the clean coal technology once the facility is in service. Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated clean coal technology construction cost is consistent with amounts approved in the IURC's orders and is expected to be expended during the 2001-2006 period. Through September 30, 2003, $117.1 million has been expended. After the equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. A portion of those expenses began in October 2003 when the Culley SCR became operational. The 8 percent return on capital investment approximates the return authorized in the Company's last electric rate case in 1995 and includes a return on equity. The Company expects to achieve timely compliance as a result of the project. Construction of the first SCR at Culley was placed into service in October 2003, and construction of the Warrick 4 and Brown SCR's is proceeding on schedule. Installation of SCR technology as planned is expected to reduce the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance. Culley Generating Station Litigation In the late 1990's, the USEPA initiated an investigation under Section 114 of the Act of SIGECO's coal-fired electric generating units in commercial operation by 1977 to determine compliance with environmental permitting requirements related to repairs, maintenance, modifications, and operations changes. The focus of the investigation was to determine whether new source review permitting requirements were triggered by such plant modifications, and whether the best available control technology was, or should have been used. Numerous electric utilities were, and are currently, being investigated by the USEPA under an industry-wide review for compliance. In July 1999, SIGECO received a letter from the Office of Enforcement and Compliance Assurance of the USEPA discussing the industry-wide investigation, vaguely referring to an investigation of SIGECO and inviting SIGECO to participate in a discussion of the issues. No specifics were noted; furthermore, the letter stated that the communication was not intended to serve as a notice of violation. Subsequent meetings were conducted in September and October 1999 with the USEPA and targeted utilities, including SIGECO, regarding potential remedies to the USEPA's general allegations. On November 3, 1999, the USEPA filed a lawsuit against seven utilities, including SIGECO. SIGECO's suit was filed in the U.S. District Court for the Southern District of Indiana. The USEPA alleged that, beginning in 1992, SIGECO violated the Act by (1) making modifications to its Culley Generating Station in Yankeetown, Indiana without obtaining required permits (2) making major modifications to the Culley Generating Station without installing the best available emission control technology and (3) failing to notify the USEPA of the modifications. In addition, the lawsuit alleged that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards at its Culley Unit 3. The USEPA also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. On June 6, 2003, SIGECO, the Department of Justice (DOJ), and the USEPA announced an agreement that would resolve the lawsuit. The agreement was embodied in a consent decree filed in U.S. District Court for the Southern District of Indiana. The mandatory public comment period has expired, and no comments were received. The Court entered the consent decree on August 13, 2003. Under the terms of the agreement, the DOJ and USEPA have agreed to drop all challenges of past maintenance and repair activities at the Culley coal-fired units. In reaching the agreement, SIGECO did not admit to any allegations alleged in the government's complaint, and SIGECO continues to believe that it acted in accordance with applicable regulations and conducted only routine maintenance on the units. SIGECO has entered into this agreement to further its continued commitment to improve air quality and avoid the cost and uncertainties of litigation. Under the agreement, SIGECO has committed to: o either repower Culley Unit 1 (50 MW) with natural gas, which would significantly reduce air emissions from this unit, and equip it with SCR control technology for further reduction of nitrogen oxides, or cease operation of the unit by December 2006; o operate the existing SCR control technology recently installed on Culley Unit 3 (287 MW) year round at a lower emission rate than that currently required under the NOx SIP Call, resulting in further nitrogen oxide reductions; o enhance the efficiency of the existing scrubber at Culley Units 2 and 3 for additional removal of sulphur dioxide emissions; o install a baghouse for further particulate matter reductions at Culley Unit 3 by June 2007; o conduct a Sulphuric Acid Reduction Demonstration Project as an environmental mitigation project designed to demonstrate an advance in pollution control technology for the reduction of sulfate emissions; and o pay a $600,000 civil penalty. The Company anticipates that the settlement would result in total capital expenditures through 2007 in a range between $16 million and $28 million. Other than the $600,000 civil penalty, which was accrued in the second quarter of 2003, the implementation of the settlement, including these capital expenditures and related operating expenses, are expected to be recovered through rates. Information Request On January 23, 2001, SIGECO received an information request from the USEPA under Section 114 of the Act for historical operational information on the Warrick and A.B. Brown generating stations. SIGECO has provided all information requested, and no further action has occurred. Manufactured Gas Plants In the past, Indiana Gas and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program and is currently conducting some level of remedial activities including groundwater monitoring at certain sites where deemed appropriate and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's Voluntary Remediation Program (VRP). In response SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk. On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO is adding its four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. At this time the Company is unable to predict any outcome that may result from these SIGECO manufactured gas plant sites. 11. Rate and Regulatory Matters The following is an update on two regulatory matters in Ohio. Each of the discussed matters is currently pending before the PUCO. The first matter relates to a pending application made to the PUCO by VEDO, together with other regulated Ohio gas utilities, for authority to establish a tariff mechanism to recover expenses related to uncollectible accounts. As proposed the tariff mechanism would establish an automatic adjustment procedure to track and recover these costs instead of providing the recovery of the historic amount in base rates. If the application is approved before the end of the year, 2003 uncollectible costs in excess of the amount in base rates should be recovered. While the Company believes there is a sound basis for the PUCO to grant the application to recover actual expenses relating to uncollectible accounts, no assurance can be provided with respect to the ultimate outcome of this proceeding. The second matter related to the requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, the two-year period began in November 2000, coincident with the Company's acquisition and commencement of service in Ohio. The audit provides the initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff recently submitted an audit report wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. There are two elements of the recommendations relating to the treatment of a pipeline refund and a penalty for which a reserve of $0.7 million has been established for the Company's estimated share of a potential disallowance of these costs. For this PUCO audit period, a disallowance relating to our ProLiance arrangement will be shared by the Company's joint venture partner. Currently the matter is set for a hearing before the PUCO in mid November. VEDO has and continues to engage in efforts with the participants in the proceeding to resolve disputed issues outside of administrative litigation. If the external auditor recommendations were adopted by the PUCO, the Company believes that it would not likely have a material effect on the Company's results or financial condition. However, the Company can provide no assurance as to the ultimate outcome of this proceeding. 12. Impact of Recently Issued Accounting Guidance SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted this statement on January 1, 2003. The adoption was not material to the Company's results of operations or financial condition. In accordance with regulatory treatment, the Company collects an estimated net cost of removal of its utility plant in rates through normal depreciation. As of September 30, 2003 and December 31, 2002, such removal costs approximated $395 million and $385 million, respectively, of accumulated depreciation as presented in the condensed consolidated balance sheets based upon the Company's latest depreciation studies. SFAS 149 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of FASB Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS 133 to reflect decisions that were made (1) as part of the process undertaken by the Derivatives Implementation Group (DIG), which necessitated amending SFAS 133; (2) in connection with other projects dealing with financial instruments; and (3) regarding implementation issues related to the application of the definition of a derivative. SFAS 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions and (2) for hedging relationships designated after June 30. The guidance is to be applied prospectively. The adoption did not have a material effect on the Company's financial statements. SFAS 150 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150). SFAS 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: mandatorily redeemable financial instruments; obligations to repurchase the issuer's equity shares by transferring assets; and certain obligations to issue a variable number of shares. SFAS 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS 150 applies to the Company's third quarter of 2003. The Company has approximately $200,000 of outstanding preferred stock of a subsidiary that is redeemable on terms outside the Company's control. However, the preferred stock is not redeemable on a specified or determinable date or upon an event that is certain to occur. Therefore, SFAS 150's adoption did not affect the Company's results of operations or financial condition. FIN 45 In November 2002, the FASB issued FIN 45. FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Since that date, the adoption has not had a material effect on the Company's results of operations or financial condition. The incremental disclosure requirements are included in these financial statements in Note 9. FIN 46 In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses consolidation by business enterprises of variable interest entities (VIE) and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. FIN 46 currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 is to be adopted on December 31, 2003. The Company has neither created nor obtained an interest in a VIE since January 31, 2003. Certain other entities that the Company was involved with prior to that date, including limited partnership investments that operate affordable housing projects, are still being evaluated to determine if the entity is a VIE and, if so, if Vectren is the primary beneficiary. If these entities are determined to be VIE's and Vectren is determined to be the primary beneficiary, the effect on the Company's financial statements would not be material. EITF 03-11 The EITF has recently released guidance on when gross or net presentation on the income statement for derivative instruments not held for trading purposes is appropriate. The guidance is effective for the Company's fourth quarter, and the Company is currently determining the impacts, if any, that will result from implementing that guidance. 13. Segment Reporting The Company has four operating segments: 1) Gas Utility Services, (2) Electric Utility Services, (3) Nonregulated Operations, and (4) Corporate and Other. The Gas Utility Services segment provides natural gas distribution and transportation services in nearly two-thirds of Indiana and west central Ohio. The Electric Utility Services segment includes the operations of SIGECO's electric transmission and distribution services, which provides electricity primarily to southwestern Indiana, and SIGECO's power generating and power marketing operations. The Company collectively refers to its gas and electric utility services segments as its Regulated Operations. Segments within the Regulated Operations use operating income as a measure of profitability. The Nonregulated Operations segment is comprised of various subsidiaries and affiliates offering and investing in energy marketing and services, coal mining, utility infrastructure services, and broadband communications among other energy-related opportunities. The Corporate and Other segment, among other activities, provides general and administrative support and assets, including computer hardware and software, to the Company's other operating segments. The Nonregulated Operations and Corporate and Other segments use net income as a measure of profitability. The Company makes decisions on finance and dividends at the corporate level. Following is information regarding the Company's segments' operating data.
Three Months Nine Months Ended September 30, Ended September 30, ------------------- -------------------- In millions 2003 2002 2003 2002 - ----------------------------------- ------------------- -------------------- Operating Revenues Gas Utility Services $ 115.7 $ 88.5 $ 790.3 $ 586.7 Electric Utility Services 134.0 189.6 343.6 475.3 - ------------------------------------------------------------------------------------ Total Regulated 249.7 278.1 1,133.9 1,062.0 - ------------------------------------------------------------------------------------ Nonregulated Operations 50.2 44.2 151.1 300.7 Corporate & Other 6.9 4.9 20.6 16.3 Intersegment Eliminations (28.0) (22.9) (80.9) (64.2) - ------------------------------------------------------------------------------------ Total operating revenues $ 278.8 $ 304.3 $1,224.7 $1,314.8 ==================================================================================== Measure of Profitability Operating Income Gas Utility Services $ (14.9) $ (11.2) $ 54.6 $ 55.6 Electric Utility Services 32.4 39.8 71.6 74.6 - ------------------------------------------------------------------------------------ Total Regulated operating income 17.5 28.6 126.2 130.2 - ------------------------------------------------------------------------------------ Regulated other income (expense)-net (1.1) 0.7 (2.1) 4.9 Regulated interest expense (15.7) (15.4) (46.6) (47.0) Regulated income taxes 0.7 (5.1) (30.2) (31.0) - ------------------------------------------------------------------------------------ Regulated net income 1.4 8.8 47.3 57.1 - ------------------------------------------------------------------------------------ Nonregulated net income 5.7 5.8 17.6 14.6 Corporate & other net income (loss) 0.2 (1.1) 2.2 (0.1) - ------------------------------------------------------------------------------------ Net income $ 7.3 $ 13.5 $ 67.1 $ 71.6 ====================================================================================
Following is the Company's segments' identifiable assets. September 30, December 31, In millions 2003 2002 - ------------------------------------ -------------------------------- Identifiable Assets Gas Utility Services $ 1,486.9 $ 1,570.1 Electric Utility Services 896.5 869.2 - -------------------------------------------------------------------------- Total Regulated 2,383.4 2,439.3 - -------------------------------------------------------------------------- Nonregulated Operations 426.5 419.6 Corporate & Other 376.9 393.3 Intersegment Eliminations (254.8) (325.7) - -------------------------------------------------------------------------- Total identifiable assets $ 2,932.0 $ 2,926.5 ========================================================================== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Description of the Business Vectren Corporation (the Company or Vectren), an Indiana corporation, is an energy and applied technology holding company headquartered in Evansville, Indiana. The Company was organized on June 10, 1999, solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with APB Opinion No. 16 "Business Combinations" (APB 16). The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc. (VUHI), serves as the intermediate holding company for its three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana Energy, Southern Indiana Gas and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, and the Ohio operations. VUHI also has other assets that provide information technology and other services to the three utilities. Both Vectren and VUHI are exempt from registration pursuant to Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935. Indiana Gas provides natural gas distribution and transportation services to a diversified customer base in 49 of Indiana's 92 counties. SIGECO provides electric generation, transmission, and distribution services to 8 counties in southwestern Indiana, including counties surrounding Evansville, and participates in the wholesale power market. SIGECO also provides natural gas distribution and transportation services to 10 counties in southwestern Indiana, including counties surrounding Evansville. The Ohio operations, owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc.(VEDO), a wholly owned subsidiary, (53 % ownership) and Indiana Gas (47 % ownership), provide natural gas distribution and transportation services to 17 counties in west central Ohio, including counties surrounding Dayton. The Company is also involved in nonregulated activities in four primary business areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure Services, and Broadband. Energy Marketing and Services markets natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal to the Company's utility operations and to other parties and generates IRS Code Section 29 investment tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. Broadband invests in broadband communication services such as analog and digital cable television, high-speed Internet and data services, and advanced local and long distance phone services. In addition, the nonregulated group has other businesses that provide utility services, municipal broadband consulting, and retail products and services and that invest in energy-related opportunities, real estate, and leveraged leases. Consolidated Results of Operations The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto. Subsequent to the issuance of the Company's 2002 quarterly financial statements, the Company's management determined that previously issued financial statements should be restated. The restatement had the effect of decreasing net income for the three and nine months ended September 30, 2002, by $0.5 million after tax and $2.3 million after tax, respectively. Note 3 to the consolidated condensed financial statements includes a summary of the effects of the restatement. The Company's results of operations give effect to the restatement.
- ---------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------------ --------------------- In millions, except per share amounts 2003 2002 2003 2002 - -------------------------------------- ------------------------ --------------------- As Restated As Restated ----------- ----------- Net income $ 7.3 $ 13.5 $ 67.1 $ 71.6 Attributed to: Utility Group $ 2.4 $ 9.0 $ 51.1 $ 59.7 Nonregulated Group 5.7 5.8 17.6 14.6 Corporate & Other Group (0.8) (1.3) (1.6) (2.7) - ---------------------------------------------------------------------------------------- Basic earnings per share $ 0.10 $ 0.20 $ 0.97 $ 1.06 Attributed to: Utility Group $ 0.03 $ 0.13 $ 0.74 $ 0.88 Nonregulated Group 0.08 0.09 0.26 0.22 Corporate & Other Group (0.01) (0.02) (0.03) (0.04)
Net Income For the three months ended September 30, 2003, net income was $7.3 million, or $0.10 per share, compared to net income of $13.5 million, or $0.20 per share, for the same period last year. For the nine months ended September 30, 2003, reported earnings were $67.1 million, or $0.97 per share, compared to $71.6 million, or $1.06 per share, for the same period in 2002. The 2003 third quarter and year-to-date results declined $0.10 per share and $0.09 per share, respectively, reflecting principally a decrease in Utility Group earnings. Quarter over quarter, Utility Group earnings were primarily affected by a decrease in electric margin of $7.3 million ($4.3 million after-tax), or $0.06 per share. This was attributable to milder cooling weather, which reduced margin an estimated $3.6 million pre-tax, or $0.03 per share, the effects of the slowly recovering economy, and slightly lower wholesale power margins. The remaining Utility Group decrease for the quarter was due to higher depreciation and the timing of operating expenses. Year-to-date, the timing of operating expenses and higher depreciation have been offset somewhat by increased power marketing margins and favorable weather. Quarterly and year-to-date, Nonregulated Group earnings remained consistent due primarily to increased synfuel-related earnings and earnings recorded on the sale of the Company's investment in Genscape, Inc. (Genscape), a company that provides real-time power plant and transmission line status information using wireless technology. In the first and second quarters of 2003, the Company incurred charges related to a Utility Group investment in BABB International, Inc. (BABB), an entity that processes fly ash into building materials and a Nonregulated Group investment in First Mile Technologies (First Mile), a small broadband entity located in Indianapolis, Indiana. Total charges affecting year-to-date results, net of the current quarter gain recognized on the sale of Genscape, were $1.5 million ($0.9 million after tax) or $0.01 per share. In addition to the above, the Company finalized an equity offering of approximately 7.4 million shares during the third quarter. The offering netted proceeds of approximately $163 million and has reduced earnings per share as compared to the previous year by approximately $0.01 per share for the quarter and $0.02 year to date. Dividends Dividends declared for the three months ended September 30, 2003, were $0.275 per share compared to $0.265 per share for the same period in 2002. Dividends declared for the nine months ended September 30, 2003, were $0.825 per share compared to $0.795 per share for the same period in 2002. In October 2003, the Company's board of directors increased its quarterly dividend to $0.285 per share from $0.275 per share. Detailed Discussion of Results of Operations Following is a more detailed discussion of the results of operations of the Company's Utility Group and Nonregulated Group. The detailed results of operations for the Utility Group and Nonregulated Group are presented and analyzed before the reclassification and elimination of certain intersegment transactions necessary to consolidate those results into the Company's Consolidated Condensed Statements of Income. The operations of the Corporate and Other Group are not significant. Results of Operations of the Utility Group The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations, which consist of the Company's regulated operations (the Gas Utility Services and Electric Utility Services operating segments), and components of the Corporate and Other operating segment. Gas Utility Services provides natural gas distribution and transportation services in nearly two-thirds of Indiana and west central Ohio. Electric Utility Services provides electricity primarily to southwestern Indiana, and includes the Company's power generating and marketing operations. Corporate and Other Operations provides information technology and other support services to those utility operations. The results of operations of the Utility Group before certain intersegment eliminations and reclassifications for the three and nine months ended September 30, 2003 and 2002, follow. - ----------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, In millions, ------------------- -------------------- except per share amounts 2003 2002 2003 2002 - -------------------------------- ------------------- -------------------- OPERATING REVENUES Gas revenues $ 115.7 $ 88.5 $ 790.3 $ 586.7 Electric revenues 134.0 189.6 343.6 475.3 Other revenues 0.2 - 0.6 0.2 - ----------------------------------------------------------------------------- Total operating revenues 249.9 278.1 1,134.5 1,062.2 - ----------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas 72.0 45.7 541.4 358.3 Fuel for electric generation 24.9 22.8 66.3 59.7 Purchased electric energy 42.6 93.0 101.8 239.5 Other operating 51.4 49.0 161.9 149.1 Depreciation & amortization 30.4 27.8 88.8 80.9 Taxes other than income taxes 9.2 9.5 41.8 37.6 - ----------------------------------------------------------------------------- Total operating expenses 230.5 247.8 1,002.0 925.1 - ----------------------------------------------------------------------------- OPERATING INCOME 19.4 30.3 132.5 137.1 OTHER INCOME (EXPENSE) - NET Equity in losses of unconsolidated affiliates (0.1) (0.4) (0.5) (0.9) Other - net 2.3 0.7 1.0 6.5 - ----------------------------------------------------------------------------- Total other income (expense) - net 2.2 0.3 0.5 5.6 - ----------------------------------------------------------------------------- Interest expense 17.1 16.9 49.5 51.8 - ----------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 4.5 13.7 83.5 90.9 - ----------------------------------------------------------------------------- Income taxes 2.1 4.7 32.4 31.2 - ----------------------------------------------------------------------------- NET INCOME $ 2.4 $ 9.0 $ 51.1 $ 59.7 ============================================================================= BASIC EARNINGS PER SHARE $ 0.03 $ 0.13 $ 0.74 $ 0.88 ============================================================================= Utility Group earnings for the third quarter 2003 were $2.4 million as compared to $9.0 million for the same quarter last year, a decrease of $6.6 million. As noted previously, the primary contributors to the decline are mild electric cooling weather, a slowly recovering economy, and the timing of certain operating costs. Utility Group earnings for the nine months ended September 30, 2003, were $51.1 million as compared to $59.7 million for the same period in 2002, a decrease of $8.6 million. Earnings in 2003 were primarily driven by weather that on the year was favorably impacted by an estimated $3.6 million after tax compared to last year and increased wholesale power and other margins, offset by the BABB investment write-off of $2.3 million after tax and the timing of certain operating costs. Significant Fluctuations Utility Margin Gas Utility Margin Gas utility margin by customer type and separated between volumes sold and transported follows: - ------------------------------------------------------------------------------ Three Months Nine Months Ended September 30, Ended September 30, -------------------- -------------------- In millions 2003 2002 2003 2002 - -------------------------------- --------------------- -------------------- Residential $ 26.7 $ 26.8 $ 159.2 $ 146.6 Commercial 7.2 7.6 50.3 47.5 Contract 9.7 7.8 33.6 32.2 Other 0.1 0.5 5.8 2.1 - ------------------------------------------------------------------------------ Total gas utility margin $ 43.7 $ 42.7 $ 248.9 $ 228.4 ============================================================================== Volumes in MMDth - ------------------------------ Sold 7.3 7.2 85.8 74.9 Transported 17.8 19.3 63.6 65.4 - ------------------------------------------------------------------------------ Total throughput 25.1 26.5 149.4 140.3 ============================================================================== Gas margins for the third quarter, a non-heating, base load usage quarter, were $43.7 million, an increase of 2% compared to the prior year period. While margin was generally flat and reflects a $0.7 million charge associated with a PUCO GCR audit proceeding in 2003, residential and commercial usage increased slightly, offset by declining industrial usage due to the slow economic conditions. Gas margins year-to-date were $248.9 million, an increase of $20.5 million over the nine months ended September 30, 2002. It is estimated that weather, 19% colder than the prior year and 8% colder than normal, contributed $12.6 million to the increased margin. The remaining $7.9 million increase is primarily attributable to higher utility receipts and excise taxes on higher gas costs and volumes sold and recovery of Ohio customer choice implementation costs, partially offset by the negative effect of high gas prices on customer usage. The colder weather is the primary reason for the 6% increase in throughput. Higher gas costs and a slowly recovering economy have impacted customer usage. The average cost per dekatherm of gas purchased for the three months ended September 30, 2003, was $6.22 compared to $3.95 in 2002. Year-to-date the cost of gas purchased in 2003 was $6.44 compared to $4.39 in the prior year. Electric Utility Margin Electric utility margin by customer type and non-firm wholesale margin separated between realized margin and mark-to-market gains and losses follows: - ------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- In millions 2003 2002 2003 2002 - --------------------------------- ------------------- ------------------- Retail & firm wholesale $ 63.7 $ 70.0 $ 160.5 $ 169.2 Non-firm wholesale 2.8 3.8 15.0 6.9 - ------------------------------------------------------------------------------- Total electric utility margin $ 66.5 $ 73.8 $ 175.5 $ 176.1 =============================================================================== Non-firm wholesale margin: Realized margin $ 3.3 $ 4.0 $ 14.6 $ 10.0 Mark-to-market gains (losses) (0.5) (0.2) 0.4 (3.1) Electric margins were $66.5 million, a decrease of $7.3 million compared to the third quarter of 2002. The decrease in electric margin was due primarily to the effect of milder cooling weather which was 7% cooler than normal and 26% cooler than last year. The estimated quarter over quarter decrease as a result of the milder weather was approximately $3.6 million. Impacts of the slowly recovering economy on industrial sales and slightly lower non-firm wholesale power margins further decreased non-weather related electric margin compared to the prior year. As a result primarily of mild weather, volumes sold to retail and firm wholesale customers decreased 8% from 1.87 GWh in 2002 to 1.72 GWh in 2003. Electric margins were $175.5 million, a decrease of $0.6 million over the nine months ended September 30, 2002. The decrease was primarily due to lower retail sales due to milder cooling weather and the current quarter decrease in industrial sales. As a result primarily of the mild weather which was 18% cooler than normal and 33% cooler than last year, volumes sold to retail and firm wholesale customers decreased 5% from 4.76 GWh in 2002 to 4.53 GWh in 2003 with an estimated margin decrease of $6.5 million. The decrease was partially offset by increased non-firm wholesale power margins resulting from price volatility. Periodically, generation capacity is in excess of that needed to serve retail and firm wholesale customers. The Company markets this unutilized capacity to optimize the return on its owned generation assets. The contracts entered into are primarily short-term purchase and sale transactions that expose the Company to limited market risk. For the three months ended September 30, 2003, volumes sold into the wholesale market were 1.01 GWh compared to 2.66 GWh in 2002 while volumes purchased were 1.01 GWh in 2003 compared to 2.65 GWh in 2002. For the nine months ended September 30, 2003, volumes sold into the wholesale market were 3.04 GWh compared to 8.30 GWh in 2002 while volumes purchased were 3.49 GWh in 2003 compared to 8.14 GWh in 2002. A portion of volumes purchased in the wholesale market is used to serve retail and firm wholesale customers, and in 2003, greater amounts of purchased power have been required for native load due to scheduled outages, which has reduced capacity available for optimization. Additionally, both sold and purchased power were lower in 2003 due to a shorter term focus in hedging and optimization strategies combined with a more selective approach to counter-party relationships. While volumes both sold and purchased in the wholesale market have decreased during 2003, which has resulted in decreased electric revenues and purchased power, margins year-to-date have increased primarily from price volatility. In the third quarter, margins decreased because less capacity was available for optimization due to outages for NOx control equipment installation and the wholesale power market was less volatile. Utility Group Operating Expenses Other Operating For the three and nine months ended September 30, 2003, other operating expenses increased $2.4 million and $12.8 million, respectively, compared to the same periods in the prior year. The increased expenses were principally due to the timing of routine expenditures between the periods and increased employee benefit costs. Year-to-date, the timing of maintenance expenditures, Ohio customer choice program implementation costs that are recovered through margins, and increased uncollectible accounts expense have also contributed to the increase. Year-to-date uncollectible accounts expense has increased $1.7 million compared to the prior year due principally to higher gas costs. Depreciation & Amortization For the three and nine months ended September 30, 2003, depreciation and amortization increased $2.6 million and $7.9 million, respectively, due to additions to utility plant. Increased depreciation expense reflects a full nine months of depreciation on the addition of over $100 million of utility plant placed into service including a new gas-fired peaker unit, expenditures for implementing a choice program for Ohio gas customers, customer system upgrades, and other upgrades to existing transmission and distribution facilities. Taxes Other Than Income Taxes For the nine months ended September 30, 2003, taxes other than income taxes increased $4.2 million compared to the prior year. The increase results from higher utility receipts and excise taxes as a result of higher gas prices and more volumes sold. The higher utility receipts and excise taxes on gas volumes sold are recovered dollar-for-dollar through customer billings. Utility Group Other Income (Expense)-Net For the three and nine months ended September 30, 2003, other income (expense)-net increased $1.9 million and decreased $5.1 million, respectively, compared to the prior year. The year-to-date decrease is primarily the result of the write-off of the BABB investment totaling $3.9 million. The remaining decrease results principally from sales of emission allowances and other assets in the second quarter of 2002 totaling $1.8 million and current year contributions of $1.2 million made to low income heating assistance programs pursuant to a settlement previously approved by the IURC regarding transactions with ProLiance Energy LLC. These decreases were offset somewhat by the current quarter increase in other income (expense)-net which was principally the result of fluctuations in investments used to fund deferred compensation plans. Utility Group Interest Expense For the three and nine months ended September 30, 2003, interest expense increased $0.2 million and decreased $2.3 million, respectively, when compared to the same periods last year. The changes reflect the impact of the permanent financing completed in the third quarter of 2003 and lower short-term borrowing rates. Utility Group Income Tax For the three months ended September 30, 2003, federal and state income taxes decreased $2.6 million primarily due to fluctuations in pre-tax income. For the nine months ended September 30, 2003, income taxes increased $1.2 million when compared to 2002. The year-to-date change is primarily due to an increased effective tax rate, offset by less pre-tax income. Year to date, the effective tax rate increased from 34.3% in 2002 to 38.8% in 2003 principally due to an increase in the Indiana state income tax rate from 4.5 % to 8.5% that was effective January 1, 2003. Environmental Matters Clean Air Act NOx SIP Call Matter The Clean Air Act (the Act) requires each state to adopt a State Implementation Plan (SIP) to attain and maintain National Ambient Air Quality Standards (NAAQS) for a number of pollutants, including ozone. If the USEPA finds a state's SIP inadequate to achieve the NAAQS, the USEPA can call upon the state to revise its SIP (a SIP Call). In October 1998, the USEPA issued a final rule "Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone," (63 Fed. Reg. 57355). This ruling found that the SIP's of certain states, including Indiana, were substantially inadequate since they allowed for nitrogen oxide (NOx) emissions in amounts that contributed to non-attainment with the ozone NAAQS in downwind states. The USEPA required each state to revise its SIP to provide for further NOx emission reductions. The NOx emissions budget, as stipulated in the USEPA's final ruling, requires a 31% reduction in total NOx emissions from Indiana. In June 2001, the Indiana Air Pollution Control Board adopted final rules to achieve the NOx emission reductions required by the NOx SIP Call. Indiana's SIP requires the Company to lower its system-wide NOx emissions to .14 lbs./MMBTU by May 31, 2004 (the compliance date). This is a 65% reduction from emission levels existing in 1999 and 1998. The Company has initiated steps toward compliance with the revised regulations. These steps include installing Selective Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in a chemical reaction. This technology is known to be the most effective method of reducing NOx emissions where high removal efficiencies are required. The IURC has issued orders that approve: o the Company's project to achieve environmental compliance by investing in clean coal technology; o a total capital cost investment for this project up to $244 million (excluding AFUDC), subject to periodic review of the actual costs incurred; o a mechanism whereby, prior to an electric base rate case, the Company may recover through a rider that is updated every six months an 8 percent return on its capital costs for the project; and o ongoing recovery of operating costs, including depreciation and purchased emission allowances through a rider mechanism, related to the clean coal technology once the facility is placed into service. Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated clean coal technology construction cost is consistent with amounts approved in the IURC's orders and is expected to be expended during the 2001-2006 period. Through September 30, 2003, $117.1 million has been expended. After the equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. A portion of those expenses began in October 2003 when the Culley SCR became operational. The 8 percent return on capital investment approximates the return authorized in the Company's last electric rate case in 1995 and includes a return on equity. The Company expects to achieve timely compliance as a result of the project. Construction of the first SCR at Culley was placed into service in October 2003, and construction of the Warrick 4 and Brown SCR's is proceeding on schedule. Installation of SCR technology as planned is expected to reduce the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance. Culley Generating Station Litigation In the late 1990's, the USEPA initiated an investigation under Section 114 of the Act of SIGECO's coal-fired electric generating units in commercial operation by 1977 to determine compliance with environmental permitting requirements related to repairs, maintenance, modifications, and operations changes. The focus of the investigation was to determine whether new source review permitting requirements were triggered by such plant modifications, and whether the best available control technology was, or should have been used. Numerous electric utilities were, and are currently, being investigated by the USEPA under an industry-wide review for compliance. In July 1999, SIGECO received a letter from the Office of Enforcement and Compliance Assurance of the USEPA discussing the industry-wide investigation, vaguely referring to an investigation of SIGECO and inviting SIGECO to participate in a discussion of the issues. No specifics were noted; furthermore, the letter stated that the communication was not intended to serve as a notice of violation. Subsequent meetings were conducted in September and October 1999 with the USEPA and targeted utilities, including SIGECO, regarding potential remedies to the USEPA's general allegations. On November 3, 1999, the USEPA filed a lawsuit against seven utilities, including SIGECO. SIGECO's suit was filed in the U.S. District Court for the Southern District of Indiana. The USEPA alleged that, beginning in 1992, SIGECO violated the Act by (1) making modifications to its Culley Generating Station in Yankeetown, Indiana without obtaining required permits (2) making major modifications to the Culley Generating Station without installing the best available emission control technology and (3) failing to notify the USEPA of the modifications. In addition, the lawsuit alleged that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards at its Culley Unit 3. The USEPA also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. On June 6, 2003, SIGECO, the Department of Justice (DOJ), and the USEPA announced an agreement that would resolve the lawsuit. The agreement was embodied in a consent decree filed in U.S. District Court for the Southern District of Indiana. The mandatory public comment period has expired, and no comments were received. The Court entered the consent decree on August 13, 2003. Under the terms of the agreement, the DOJ and USEPA have agreed to drop all challenges of past maintenance and repair activities at the Culley coal-fired units. In reaching the agreement, SIGECO did not admit to any allegations alleged in the government's complaint, and SIGECO continues to believe that it acted in accordance with applicable regulations and conducted only routine maintenance on the units. SIGECO has entered into this agreement to further its continued commitment to improve air quality and avoid the cost and uncertainties of litigation. Under the agreement, SIGECO has committed to: o either repower Culley Unit 1 (50 MW) with natural gas, which would significantly reduce air emissions from this unit, and equip it with SCR control technology for further reduction of nitrogen oxides, or cease operation of the unit by December of 2006; o operate the existing SCR control technology recently installed on Culley Unit 3 (287 MW) year round at a lower emission rate than that currently required under the NOx SIP Call, resulting in further nitrogen oxide reductions; o enhance the efficiency of the existing scrubber at Culley Units 2 and 3 for additional removal of sulphur dioxide emissions; o install a baghouse for further particulate matter reductions at Culley Unit 3 by June of 2007; o conduct a Sulphuric Acid Reduction Demonstration Project as an environmental mitigation project designed to demonstrate an advance in pollution control technology for the reduction of sulfate emissions; and o pay a $600,000 civil penalty. The Company anticipates that the settlement would result in total capital expenditures through 2007 in a range between $16 million and $28 million. Other than the $600,000 civil penalty, which was accrued in the second quarter of 2003, the implementation of the settlement, including these capital expenditures and related operating expenses, are expected to be recovered through rates. Information Request On January 23, 2001, SIGECO received an information request from the USEPA under Section 114 of the Act for historical operational information on the Warrick and A.B. Brown generating stations. SIGECO has provided all information requested, and no further action has occurred. Manufactured Gas Plants In the past, Indiana Gas and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program and is currently conducting some level of remedial activities including groundwater monitoring at certain sites where deemed appropriate and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's Voluntary Remediation Program (VRP). In response SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk. On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO is adding its four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. At this time the Company is unable to predict any outcome that may result from these SIGECO manufactured gas plant sites. Rate and Regulatory Matters The following is an update on two regulatory matters in Ohio. Each of the discussed matters is currently pending before the PUCO. The first matter relates to a pending application made to the PUCO by VEDO, together with other regulated Ohio gas utilities, for authority to establish a tariff mechanism to recover expenses related to uncollectible accounts. As proposed the tariff mechanism would establish an automatic adjustment procedure to track and recover these costs instead of providing the recovery of the historic amount in base rates. If the application is approved before the end of the year, 2003 uncollectible costs in excess of the amount in base rates should be recovered. While the Company believes there is a sound basis for the PUCO to grant the application to recover actual expenses relating to uncollectible accounts, no assurance can be provided with respect to the ultimate outcome of this proceeding. The second matter related to the requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, the two-year period began in November 2000, coincident with the Company's acquisition and commencement of service in Ohio. The audit provides the initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff recently submitted an audit report wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. There are two elements of the recommendations relating to the treatment of a pipeline refund and a penalty for which a reserve of $0.7 million has been established for the Company's estimated share of a potential disallowance of these costs. For this PUCO audit period, a disallowance relating to our ProLiance arrangement will be shared by the Company's joint venture partner. Currently the matter is set for a hearing before the PUCO in mid November. VEDO has and continues to engage in efforts with the participants in the proceeding to resolve disputed issues outside of administrative litigation. If the external auditor recommendations were adopted by the PUCO, the Company believes that it would not likely have a material effect on the Company's results or financial condition. However, the Company can provide no assurance as to the ultimate outcome of this proceeding. Results of Operations of the Nonregulated Group The Nonregulated Group is comprised of four primary business areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure Services, and Broadband. Energy Marketing and Services markets natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal to the Company's utility operations and to other parties and generates IRS Code Section 29 investment tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. Broadband invests in broadband communication services such as analog and digital cable television, high-speed Internet and data services, and advanced local and long distance phone services. In addition, the Nonregulated Group has other businesses that provide utility services, municipal broadband consulting, and retail products and services and that invest in energy-related opportunities, real estate, and leveraged leases. The results of operations of the Nonregulated Group before certain intersegment eliminations and reclassifications for the three and nine months ended September 30, 2003 and 2002, follow: - ----------------------------------------------------------------------------- Three Months Ended Nine Months Ended In millions, September 30, September 30, ----------------- ------------------ except per share amounts 2003 2002 2003 2002 - --------------------------------- ----------------- ------------------ Energy services & other revenues $ 50.2 $ 44.2 $ 151.1 $ 300.7 Operating expenses: Cost of energy services & other revenues 42.4 33.6 125.3 268.7 Operating expenses 8.8 8.2 27.2 26.6 - ----------------------------------------------------------------------------- Total expenses 51.2 41.8 152.5 295.3 - ----------------------------------------------------------------------------- OPERATING INCOME (LOSS) (1.0) 2.4 (1.4) 5.4 Other income (expense): Equity in earnings (losses) of unconsolidated affiliates (2.2) 2.1 6.9 9.4 Other - net 6.9 3.8 6.9 4.3 - ----------------------------------------------------------------------------- Total other income (expense) 4.7 5.9 13.8 13.7 - ----------------------------------------------------------------------------- Interest expense 2.5 2.2 7.3 6.7 - ----------------------------------------------------------------------------- INCOME BEFORE TAXES 1.2 6.1 5.1 12.4 Income taxes (4.5) - (12.6) (2.3) Minority interest in consolidated subsidiaries - 0.3 0.1 0.1 - ----------------------------------------------------------------------------- NET INCOME $ 5.7 $ 5.8 $ 17.6 $ 14.6 ============================================================================= BASIC EARNINGS PER SHARE $ 0.08 $ 0.09 $ 0.26 $ 0.22 ============================================================================= NET INCOME ATTRIBUTED TO: Energy Marketing & Services $ 4.0 $ 2.9 $ 14.5 $ 11.1 Coal Mining 3.0 4.0 10.2 8.9 Utility Infrastructure 0.2 0.1 (1.0) (0.4) Broadband - 0.1 (1.1) 0.3 Other Businesses (1.5) (1.3) (5.0) (5.3) Nonregulated earnings for both the three and nine months ended September 30, 2003, were positively impacted by the third quarter sale of the Company's investment in Genscape and increased synfuel-related fees, somewhat offset by decreased earnings from coal mining and gas marketing operations. Year-to-date results also include the loss on disposal of the First Mile investment. Energy Marketing & Services Energy Marketing & Services is comprised of the Company's gas marketing and performance contracting operations and held the Company's investment in Genscape, which was sold in the third quarter. Gas marketing operations are performed through the Company's investment in ProLiance, a nonregulated energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas). ProLiance provides natural gas and related services to Indiana Gas, the Ohio operations, and Citizens Gas and also began providing services to SIGECO and Vectren Retail, LLC (the Company's retail gas marketer) in 2002. ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. ProLiance's primary customers are utilities and other large end use customers. In June 2002, the integration of Vectren's wholly owned gas marketing subsidiary, SIGCORP Energy Services, LLC (SES), with ProLiance was completed. SES provided natural gas and related services to SIGECO and others prior to the integration. In exchange for the contribution of SES' net assets, Vectren's allocable share of ProLiance's profits and losses increased from 52.5% to 61%, consistent with Vectren's new ownership percentage. Governance and voting rights remain at 50% for each member. Since governance of ProLiance remains equal between the members, Vectren continues to account for its investment in ProLiance using the equity method of accounting. Prior to June 1, 2002, SES' operating results were consolidated. Subsequent to June 1, 2002, SES' operating results, now part of ProLiance, are reflected in equity in earnings of unconsolidated affiliates. SES' revenues and expenses were the primary component of nonregulated revenues and cost of revenues. Therefore, the integration significantly decreased revenues, cost of revenues, and operating expenses. For the nine months ended September 30, 2003, revenues, cost of revenues, and operating expenses decreased $186.3 million, $178.7 million, and $4.1 million, respectively, compared to 2002. The transfer of net assets was accounted for at book value consistent with joint venture accounting and did not result in any gain or loss. For the Company's portion of ProLiance's operations, $1.1 million and $4.2 million, respectively, is included in equity in earnings of unconsolidated affiliates for the three months ended September 30, 2003 and 2002. For the nine months ended September 30, 2003 and 2002, such amounts included in equity in earnings of unconsolidated affiliates are $18.0 million and $15.0 million, respectively. For the quarter and year-to-date, gas marketing's contribution decreased $1.9 million and $0.8 million, respectively, compared to the prior year periods primarily due to nonrecurring charges related to settlement disputes and the timing of pipeline discounts. Energy Systems Group, LLC (ESG) provides energy performance contracting and facility upgrades through its design and installation of energy-efficient equipment. Prior to April 2003, ESG was a consolidated venture between the Company and Citizens Gas with the Company owning two-thirds. In April 2003, the Company purchased the remaining interest in ESG for approximately $4 million. For the three and nine months ended September 30, 2003, earnings from ESG were $0.8 million and $1.4 million, respectively, compared to earnings for the quarter of $0.4 million and $0.1 million for the year-to-date period in 2002. The $0.4 million increase for the quarter and $1.3 million increase year to date are due primarily to success in obtaining higher margins and working from a higher construction backlog at the end of 2002. ESG's results also reflect 100% Vectren ownership during the quarter versus two-thirds Vectren ownership in 2002. For the quarter, ESG produced operating income of approximately $1.4 million on sales of $14.7 million compared to operating income of $1.1 million on sales of $13.6 million in the prior year. And for the nine months ended September 30, 2003, ESG produced operating income of approximately $2.5 million on sales of $35.9 million compared to operating income of $0.6 million on sales of $27.0 million in the prior year. In the third quarter of 2003, the Company sold its investment in Genscape for $5.3 million in proceeds ($4.1 million in cash and a $1.2 million note) to GFI Energy Ventures, LLC. Prior to the sale, the Company had reduced its investment using equity method accounting to reflect restructuring activities coincident to the sale such that the gain recognized in other-net approximated the total proceeds received. Net income, including the gain on sale, equity method losses, and related tax effects generated from the investment in Genscape totaled $2.6 million for both the three and nine months ended September 30, 2003, compared to a loss of $0.1 million for the quarter and a loss of $0.3 million for the year-to-date period in 2002. Coal Mining The Coal Mining Group mines and sells coal to the Company's utility operations and to other third parties through its wholly owned subsidiary Vectren Fuels, Inc. (Fuels). The Coal Mining Group also generates IRS Code Section 29 investment tax credits relating to the production of coal-based synthetic fuels through its 8.3% ownership interest in Pace Carbon Synfuels, LP (Pace Carbon). Pace Carbon is a Delaware limited partnership formed to develop, own, and operate four projects to produce and sell coal-based synthetic fuel (synfuel) utilizing Covol technology. Vectren accounts for is investment in Pace Carbon using the equity method. In addition, Fuels receives synfuel-related fees from synfuel producers unrelated to Pace Carbon for a portion of its coal production. For the three months ended September 30, 2003, earnings from Fuels were $0.2 million, compared to earnings of $2.6 million in 2002. For the nine months ended September 30, 2003, earnings from Fuels were $2.6 million, compared to earnings of $5.4 million in 2002. During both the quarter and year-to-date periods, net income and operating income decreased as a result of decreased yields due to poor mining conditions and increased depreciation of mine development costs, offset by increased synfuel-related fees. For the quarter, Fuels produced operating income of approximately $0.5 million on sales of $29.4 million compared to operating income of $3.9 million on sales of $27.9 million in the prior year. And for the nine months ended September 30, 2003, Fuels produced operating income of approximately $4.4 million on sales of $86.2 million compared to operating income of $9.1 million on sales of $79.3 million in the prior year. Mining conditions are expected to improve in the fourth quarter, and rate increases for a portion of the sales to SIGECO are expected in 2004. For the three months ended September 30, 2003 and 2002, the investment in Pace Carbon resulted in losses reflected in equity in earnings of unconsolidated affiliates of $2.9 million and $2.1 million, respectively. For the nine months ended September 30, 2003 and 2002, the investment in Pace Carbon resulted in losses reflected in equity in earnings of unconsolidated affiliates of $9.3 million and $5.4 million, respectively. Losses have increased as a result of increased production of synthetic fuels and resulting higher production costs. The production of synfuel generates IRS Code Section 29 investment tax credits that are reflected in income taxes. These credits have also increased consistent with increased synfuel production. Net income, including the equity method losses, tax benefits, and tax credits, generated from the investment in Pace Carbon totaled $2.8 million and $1.4 million, respectively, for the three months ended September 30, 2003 and 2002, and totaled $7.6 million and $3.5 million, respectively, for the nine months ended September 30, 2003 and 2002. For the three months ended September 30, 2003 and 2002, total synfuel-related results, which reflect earnings from the investment in Pace Carbon and Fuels' synfuel-related fees, were $3.6 million and $2.0 million, respectively. For the nine months ended September 30, 2003 and 2002, synfuel-related results were $10.2 million and $5.0 million, respectively. IRS Section 29 Investment Tax Credit Recent Developments Under Section 29 of the Internal Revenue Code, manufacturers such as Pace Carbon, receive a tax credit for every ton of synthetic fuel sold. To qualify for the credits, the synthetic fuel must meet three primary conditions: 1) there must be a significant chemical change in the coal feedstock, 2) the product must be sold to an unrelated person, and 3) the production facility must have been placed in service before July 1, 1998. In past rulings, the Internal Revenue Service (IRS) has concluded that the synthetic fuel produced at the Pace Carbon facilities should qualify for Section 29 tax credits. The IRS issued a private letter ruling with respect to the four projects on November 11, 1997, and subsequently issued an updated private letter ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected total tax credits under Section 29 in its consolidated results through September 30, 2003, of approximately $35 million. Vectren has been in a position to fully utilize the credits generated and continues to project full utilization. In June 2003, the IRS, in an industry-wide announcement, stated that it would review the scientific validity of test procedures and results presented as evidence of significant chemical change. During this review, the IRS suspended the issuance of new private letter rulings on that subject. In October 2003, the IRS completed its review and determined that the test procedures and results used by taxpayers are scientifically valid if the procedures are applied in a consistent and unbiased manner. Also, the IRS will issue new private letter rulings based on revised standards. The IRS stated it has continuing concerns regarding the sampling and data/record retention practices prevalent in the synthetic fuels industry. The IRS plans to issue guidance extending new record/data retention requirements to taxpayers already holding private letter rulings on the issue of significant chemical change. During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year and later expanded the audit to include tax years 1999, 2000, and 2001. Based on conclusions reached in the industry-wide review and recently issued private letter rulings involving other synthetic fuel facilities, Vectren believes chemical change issues from these audits may soon be resolved. However, the IRS has not directly notified Pace Carbon of any resolution. Vectren believes that it is justified in its reliance on the private letter rulings for the Pace Carbon facilities, that the test results that Pace Carbon presented to the IRS in connection with its private letter rulings are scientifically valid, and that Pace Carbon has operated its facilities in compliance with its private letter rulings and Section 29 of the Internal Revenue Code. However, at this time, Vectren cannot provide any assurance as to the outcome of these audits concerning the issue of chemical change or any other issue raised during the audits relative to its investment in Pace Carbon. Utility Infrastructure Services Utility Infrastructure Services provides underground construction and repair of utility infrastructure services to the Company and to other gas, water, electric, and telecommunications companies as well as facilities locating and meter reading services through its investment in Reliant Services, LLC (Reliant). Reliant is a 50% owned strategic alliance with an affiliate of Cinergy Corp. and is accounted for using the equity method of accounting. Reliant's losses have increased in 2003 primarily due to cutbacks of underground construction and repair projects from gas distribution utility customers, which began in the later part of 2002. In the current quarter, Reliant returned to profitability due to an increase in construction and repair projects as utilities are beginning to return to historical expenditure levels. Broadband Broadband invests in broadband communication services such as cable television, high-speed Internet, and advanced local and long distance phone services. The Company has an approximate 1% equity interest and a convertible subordinated debt investment in Utilicom Networks, LLC (Utilicom) that if converted bring the Company's ownership interest up to 12%. Utilicom is a provider of bundled communication services focusing on last mile delivery to residential and commercial customers. The Company also has an 18.9% equity interest in SIGECOM Holdings, Inc. (Holdings), which was formed by Utilicom to hold interests in SIGECOM, LLC (SIGECOM). SIGECOM provides broadband services to the greater Evansville, Indiana area. The equity investments in Utilicom and Holdings are accounted for using the cost method of accounting. As a result, for the three and nine months ended September 30, 2003 and 2002, these investments had no significant impact on the Company's operating results. Utilicom also plans to provide broadband services to the greater Indianapolis, Indiana, and Dayton, Ohio, markets. However, the funding of these projects has been delayed due to the continued difficult environment within the telecommunication capital markets, which has prevented Utilicom from obtaining debt financing on terms it considers acceptable. While the existing investors remain interested in the Indianapolis and Dayton projects, the Company is not required to make further investments and does not intend to proceed unless commitments are obtained to fully fund these projects. Franchising agreements have been extended in both locations. In addition to its Utilicom-related investment, the Company also had an investment in First Mile, a small broadband entity located in Indianapolis, Indiana. During the nine months ended September 30, 2003, the Company disposed of its First Mile investment at a loss recorded in other-net totaling $2.0 million ($1.2 after tax). Other Businesses The Other Businesses Group includes a variety of wholly owned operations and investments. The significant activities that affected the nonregulated results of operations during the three and nine months ended September 30, 2003 compared to 2002 are the wholly owned operations of Vectren Retail, LLC (Vectren Retail) and Vectren Communication Services, Inc. (VCS), and the Company's investment in CIGMA, LLC (CIGMA). Vectren Retail provides natural gas and other related products and services primarily in Ohio, serving customers opting for choice among energy providers. Vectren Retail began operations in 2001 and continues to incur startup costs. During the three and nine months ended September 30, 2003, these start up costs have increased operating expenses approximately $0.7 million and $2.5 million, respectively, compared to the same periods in 2002. For the three months ended September 30, 2003, Vectren Retail incurred an operating loss of approximately $1.5 million on sales of $4.5 million compared to an operating loss of $0.9 million on sales of $0.8 million in the prior year. For the nine months ended September 30, 2003, Vectren Retail incurred an operating loss of approximately $3.0 million on sales of $25.1 million compared to an operating loss of $2.7 million on sales of $2.9 million in the prior year. To date, these operations have operated at a planned loss, consistent with expectations. The net loss for the quarter was $1.0 million in 2003 and $0.6 million in 2002. Year to date, the net loss was $2.0 million in 2003 and $1.7 million in 2002. Losses during non-heating periods are expected due to the seasonal nature of Vectren Retail's operations. VCS is a wholly owned broadband consulting company. For the three and nine months ended September 30, 2003, operating income contributed by VCS increased $0.2 million and $1.0 million, respectively, when compared to the prior year. The increase is primarily due to charges incurred in 2002 related to the settlement of construction contracts and the reorganization of its operations, allowing it to focus on consulting services. For the three months ended September 30, 2003 and 2002, net loss incurred by VCS was $0.4 million and $0.5 million, respectively. For the nine months ended September 30, 2003 and 2002, net loss incurred by VCS was $1.4 million and $2.2 million, respectively. In the third quarter 2003, the Company sold its investment in CIGMA, LLC (CIGMA), a joint venture between the Company and a subsidiary of Citizens Gas. In that transaction, substantially all of CIGMA's assets were sold to McJunkin Corporation. CIGMA had been engaged in utility materials management for the Company's utility subsidiaries, Citizens Gas & Coke Utility, and others. As a result of the transaction, the Company realized a small after-tax gain, and year-to-date has received cash distributions from CIGMA of $4.9 million. United States Securities and Exchange Commission (SEC) Informal Inquiry As more fully described in Note 3 to these consolidated condensed financial statements and in Note 3 to the 2002 consolidated financial statements filed on Form 10-K/A, the Company restated its consolidated financial statements for 2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC in an informal inquiry with respect to this previously announced restatement, has met with the staff of the SEC, and has provided information in response to their requests. Impact of Recently Issued Accounting Guidance SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted this statement on January 1, 2003. The adoption was not material to the Company's results of operations or financial condition. SFAS 149 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of FASB Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS 133 to reflect decisions that were made (1) as part of the process undertaken by the Derivatives Implementation Group (DIG), which necessitated amending SFAS 133; (2) in connection with other projects dealing with financial instruments; and (3) regarding implementation issues related to the application of the definition of a derivative. SFAS 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions and (2) for hedging relationships designated after June 30. The guidance is to be applied prospectively. The adoption did not have a material effect on the Company's financial statements. SFAS 150 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150). SFAS 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: mandatorily redeemable financial instruments; obligations to repurchase the issuer's equity shares by transferring assets; and certain obligations to issue a variable number of shares. SFAS 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS 150 applies to the Company's third quarter of 2003. The Company has approximately $200,000 of outstanding preferred stock of a subsidiary that is redeemable on terms outside the Company's control. However, the preferred stock is not redeemable on a specified or determinable date or upon an event that is certain to occur. Therefore, SFAS 150's adoption did not affect the Company's results of operations or financial condition. FASB Interpretation (FIN) 45 In November 2002, the FASB issued FIN 45. FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Since that date, the adoption has not had a material effect on the Company's results of operations or financial condition. The incremental disclosure requirements are included in these financial statements in Note 9. FIN 46 In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses consolidation by business enterprises of variable interest entities (VIE) and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. FIN 46 currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 is to be adopted on December 31, 2003. The Company has neither created nor obtained an interest in a VIE since January 31, 2003. Certain other entities that the Company was involved with prior to that date, including limited partnership investments that operate affordable housing projects, are still being evaluated to determine if the entity is a VIE and, if so, if Vectren is the primary beneficiary. If these entities are determined to be VIE's and Vectren is determined to be the primary beneficiary, the effect to the Company's financial statements would not be material. EITF 03-11 The EITF has recently released guidance on when gross or net presentation on the income statement for derivative instruments not held for trading purposes is appropriate. The guidance is effective for the Company's fourth quarter, and the Company is currently determining the impacts, if any, that will result from implementing that guidance. Financial Condition Within Vectren's consolidated group, VUHI funds short-term and long-term financing needs of the utility group operations, and Vectren Capital Corp (Vectren Capital) funds short-term and long-term financing needs of the nonregulated and corporate operations. Vectren Corporation guarantees Vectren Capital's debt, but does not guarantee VUHI's debt. Vectren Capital's long-term and short-term obligations outstanding at September 30, 2003, totaled $113.0 million and $55.3 million, respectively. VUHI's outstanding long-term and short-term borrowing arrangements are jointly and severally guaranteed by Indiana Gas, SIGECO, and VEDO. VUHI's long-term and short-term obligations outstanding at September 30, 2003, totaled $547.5 million and $142.5 million, respectively. Additionally, prior to VUHI's formation, Indiana Gas and SIGECO funded their operations separately, and therefore, have long-term debt outstanding funded solely by their operations. The Company's common stock dividends are primarily funded by utility operations. Nonregulated operations have demonstrated sustained profitability, and the ability to generate cash flows. These cash flows are used to fund a portion of the Company's dividends, are reinvested in other nonregulated ventures and from time to time may be reinvested in utility operations or used for corporate expenses. VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at September 30, 2003, are A-/Baa1 as rated by Standard and Poor's Ratings Services (Standard and Poor's) and Moody's Investors Service (Moody's), respectively. SIGECO's credit ratings on outstanding senior unsecured debt are BBB+/Baa1. SIGECO's credit ratings on outstanding secured debt are A-/A3. VUHI's commercial paper has a credit rating of A-2/P-2. Vectren Capital's senior unsecured debt is rated BBB+/Baa2. Moody's current outlook is stable while Standard and Poor's current outlook is negative. The ratings of Moody's and Standard and Poor's are categorized as investment grade and are unchanged from December 31, 2002. In July 2003, Standard and Poor's reaffirmed its ratings, and Moody's reaffirmed its ratings on VUHI's senior unsecured debt. A security rating is not a recommendation to buy, sell, or hold securities. The rating is subject to revision or withdrawal at any time, and each rating should be evaluated independently of any other rating. Standard and Poor's and Moody's lowest level investment grade rating is BBB- and Baa3, respectively. The Company's consolidated equity capitalization objective is 45-55% of total capitalization. This objective may have varied, and will vary, depending on particular business opportunities, capital spending requirements, and seasonal factors that affect the Company's operation. The Company's equity component was 49% and 46% of total capitalization, including current maturities of long-term debt and long-term debt subject to tender, at September 30, 2003, and December 31, 2002, respectively. The Company expects the majority of its capital expenditures, investments, and debt security redemptions to be provided by internally generated funds. However, due to significant capital expenditures for NOx compliance equipment at SIGECO and to further strengthen the Company's capital structure and the capital structures of VUHI and its utility subsidiaries, the Company has completed certain financing transactions as more fully described below. Sources & Uses of Liquidity Operating Cash Flow The Company's primary and historical source of liquidity to fund working capital requirements has been cash generated from operations, which for the nine months ended September 30, 2003 and 2002, was $136.0 million and $263.1 million, respectively. The decrease of $127.1 million is primarily the result of favorable changes in working capital accounts occurring in 2002 due to a return to lower gas prices in that year and higher gas prices in the current year, offset by increased earnings before non-cash charges in 2003. Financing Cash Flow Although working capital requirements are generally funded by cash flow from operations, the Company uses short-term borrowings to supplement working capital needs when accounts receivable balances are at their highest and gas storage is refilled. Additionally, short-term borrowings are required for capital projects and investments until they are permanently financed. Cash flow required for financing activities of $8.8 million for the nine months ended September 30, 2003, includes the effects of the permanent financing executed during the third quarter in which approximately $366 million in equity, debt, and hedging net proceeds were received and used to retire higher coupon long-term debt and other short term borrowings. In 2002, higher operating cash flow was used to repay short-term borrowings. Common stock dividends have increased in 2003 compared to 2002. Financing Transactions Equity Issuance In March 2003, the Company filed a registration statement with the Securities and Exchange Commission with respect to a public offering of authorized but previously unissued shares of common stock. In August 2003, the registration became effective, and an agreement was reached to sell approximately 7.4 million shares to a group of underwriters. The net proceeds totaled $163.2 million and were utilized entirely by VUHI and VUHI's subsidiaries to repay short-term borrowings and to retire long-term debt with higher interest rates. VUHI Debt Issuance In July 2003, VUHI issued senior unsecured notes with an aggregate principal amount of $200 million in two $100 million tranches. The first tranche are 10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746% to yield 5.28% to maturity (2013 Notes). The second tranche are 15-year notes due August 2018 with an interest rate of 5.75% priced at 99.177% to yield 5.80% to maturity (2018 Notes). The notes are jointly and severally guaranteed by the Company's three public utilities. In addition, they have no sinking fund requirements, and interest payments are due semi-annually. The notes may be called by the Company, in whole or in part, at any time for an amount equal to accrued and unpaid interest, plus the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined in the indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the 2018 Notes. Shortly before these issues, the Company entered into several treasury locks with a total notional amount of $150.0 million. Upon issuance of the debt, the treasury locks were settled resulting in the receipt of $5.7 million in cash. The value received is being amortized as a reduction of interest expense over the life of the issues. The net proceeds from the sale of the senior notes and settlement of related hedging arrangements approximated $203 million and was used to repay short-term borrowing and to retire long-term debt with higher interest rates. SIGECO and Indiana Gas Debt Call During 2003, the Company called two first mortgage bonds outstanding at SIGECO and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond had a principal amount of $45.0 million, an interest rate of 7.60%, was originally due in 2023, and was redeemed at 103.745% of its stated principal amount. The second SIGECO bond had a principal amount of $20.0 million, an interest rate of 7.625%, was originally due in 2025, and was redeemed at 103.763% of the stated principal amount. The first Indiana Gas note had a remaining principal amount of $21.3 million, an interest rate of 9.375%, was originally due in 2021, and was redeemed at 105.525% of the stated principal amount. The second Indiana Gas note had a principal amount of $13.5 million, an interest rate of 6.75%, was originally due in 2028, and was redeemed at the principal amount. Pursuant to regulatory authority, the premiums paid to retire these notes totaling $3.6 million were deferred as a regulatory asset. Other Financing Transactions In January, 2003, other debt of Indiana Gas totaling $17.5 million and of SIGECO totaling $1.0 million was retired. At December 31, 2002, the Company had $26.6 million of adjustable rate senior unsecured bonds which could, at the election of the bondholder, be tendered to the Company when interest rates are reset. Such bonds were classified as long-term debt subject to tender. During the second quarter, the Company re-marketed those bonds on a long-term basis and has therefore reclassified them as long-term debt at September 30, 2003. Investing Cash Flow Cash required for investing activities of $140.6 million for the nine months ended September 30, 2003, includes $150.7 million of requirements for capital expenditures. Investing activities for 2002 were $148.9 million. The decrease occurring in 2003 principally results from collections of notes receivable and distributions by unconsolidated affiliates offset by slightly higher capital expenditures. Available Sources of Liquidity At September 30, 2003, the Company has $531 million of short-term borrowing capacity, including $351 million for the Utility Group and $180 million for the wholly owned Nonregulated Group and corporate operations, of which approximately $208 million is available for the Utility Group operations and approximately $125 million is available for the wholly owned Nonregulated Group and corporate operations. Effective January 1, 2003, the Company transferred assets which primarily supported the Utility Group's operations to VUHI which made available approximately $90 million of additional nonregulated and corporate capacity. Beginning in 2003, the Company began issuing new shares to satisfy dividend reinvestment plan requirements. During the nine months ended September 30, 2003, new issues from stock plans added additional liquidity of approximately of $4 million, compared to 2002. Potential Uses of Liquidity Planned Capital Expenditures & Investments Investments in nonregulated unconsolidated affiliates and total company capital expenditures for the remainder of 2003 and for the year ended December 31, 2004 are estimated to be approximately $85 million and $280 million, respectively. Ratings Triggers At September 30, 2003, $113.0 million of Vectren Capital's senior unsecured notes were subject to cross-default and ratings trigger provisions that would provide that the full balance outstanding is subject to prepayment if the ratings of Indiana Gas' or SIGECO's most senior securities declined to BBB/Baa2. In addition, accrued interest and a make whole amount based on the discounted value of the remaining payments due on the notes would also become payable. The credit rating of Indiana Gas' senior unsecured debt and SIGECO's secured debt remain one level and two levels, respectively, above the ratings trigger. Other Guarantees and Letters of Credit In the normal course of business, Vectren Corporation issues guarantees to third parties on behalf of its consolidated subsidiaries and unconsolidated affiliates. Such guarantees allow those subsidiaries and affiliates to execute transactions on more favorable terms than the subsidiary or affiliate could obtain without such a guarantee. Guarantees may include posted letters of credit, leasing guarantees, and performance guarantees. As of September 30, 2003, guarantees issued and outstanding on behalf of unconsolidated affiliates approximated $6 million. In addition, the Company has also issued a guarantee approximating $4 million related to the residual value of an operating lease that expires in 2006. Through September 30, 2003, the Company has not been called upon to satisfy any obligations pursuant to its guarantees. Forward-Looking Information A "safe harbor" for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Certain matters described in Management's Discussion and Analysis of Results of Operations and Financial Condition are forward-looking statements. Such statements are based on management's beliefs, as well as assumptions made by and information currently available to management. When used in this filing, the words "believe," "anticipate," "endeavor," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: o Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unusual maintenance or repairs; unanticipated changes to fossil fuel costs; unanticipated changes to gas supply costs, or availability due to higher demand, shortages, transportation problems or other developments; environmental or pipeline incidents; transmission or distribution incidents; unanticipated changes to electric energy supply costs, or availability due to demand, shortages, transmission problems or other developments; or electric transmission or gas pipeline system constraints. o Increased competition in the energy environment including effects of industry restructuring and unbundling. o Regulatory factors such as unanticipated changes in rate-setting policies or procedures, recovery of investments and costs made under traditional regulation, and the frequency and timing of rate increases. o Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board; the Securities and Exchange Commission; the Federal Energy Regulatory Commission; state public utility commissions; state entities which regulate electric and natural gas transmission and distribution, natural gas gathering and processing, electric power supply; and similar entities with regulatory oversight. o Economic conditions including the effects of an economic downturn, inflation rates, and monetary fluctuations. o Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, interest rate, and warranty risks. o The performance of projects undertaken by the Company's nonregulated businesses and the success of efforts to invest in and develop new opportunities, including but not limited to, the realization of Section 29 income tax credits and the Company's coal mining, gas marketing, and broadband strategies. o Direct or indirect effects on our business, financial condition or liquidity resulting from a change in our credit rating, changes in interest rates, and/or changes in market perceptions of the utility industry and other energy-related industries. o Employee or contractor workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages. o Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures. o Costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters, including, but not limited to, those described in Management's Discussion and Analysis of Results of Operations and Financial Condition. o Changes in federal, state or local legislature requirements, such as changes in tax laws or rates, environmental laws and regulations. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions, or other factors affecting such statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various business risks associated with commodity prices, interest rates, and counter-party credit. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company's risk management program includes, among other things, the use of derivatives to mitigate risk. The Company also executes derivative contracts in the normal course of operations while buying and selling commodities and other fungible goods to be used in operations and while optimizing generation assets. The Company does not execute derivative contracts it designates as trading. These risks are not significantly different from the information set forth in Item 7A Quantitative and Qualitative Disclosures About Market Risk included in the Vectren 2002 Form 10-K/A and is therefore not presented herein. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of September 30, 2003, the Company carried out an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness and the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective at providing reasonable assurance that material information relating to the Company required to be disclosed by the Company in its filings under the Securities Exchange Act of 1934 (Exchange Act) is brought to their attention on a timely basis. Disclosure controls and procedures, as defined by the Exchange Act in Rules 13a-15(e) and 15d-15(e), are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. "Disclosure controls and procedures" include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting During the quarter ended September 30, 2003, there have been no significant changes to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Internal control over financial reporting is defined by the SEC in Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports. The final rule defines internal control over financial reporting as a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. See Note 10 of its unaudited consolidated condensed financial statements included in Part 1 Item 1 Financial Statements regarding the Clean Air Act and related legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Certifications 31.1 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002- Chief Executive Officer 31.2 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002- Chief Financial Officer 32 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Other Exhibits 3.1 Amended and Restated Code of By-Laws of Vectren Corporation as of October 29, 2003. (b) Reports On Form 8-K During The Last Calendar Quarter On July 11, 2003, Vectren Corporation filed a Current Report on Form 8-K with respect to adjusting 2003 earnings guidance and to address recent announcements related to the production of synthetic fuel. Portions of this information were furnished to the SEC Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Press Release - Vectren Corporation adjusts 2003 earnings guidance and addresses recent announcements related to the production of synthetic fuel 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition On July 22, 2003, Vectren Corporation filed a Current Report on Form 8-K with respect to the release of financial information to the investment community regarding the Company's results of operations, for the three, six, and twelve month periods ended June 30, 2003. The financial information was released to the public through this filing. Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Vectren Corporation Consolidated Statement of Income for the three and six months ended June 30, 2003 and 2002 99.2 - Vectren Utility Holdings, Inc. Consolidated Statement of Income for the three and six months ended June 30, 2003 and 2002 99.3 - Vectren Corporation Operating Highlights 99.4 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 On July 23, 2003, Vectren Corporation furnished information to the SEC on a Current Report on Form 8-K with respect to the release of financial information to the investment community regarding the Company's results of operations, for the three, six, and twelve month periods ended June 30, 2003. The financial information was released to the public through this filing. Item 7. Exhibits 99.1 - Press Release - Vectren Corporation Reports 2nd Quarter 2003 Results 99.2 - Press Release - Vectren Corporation Declares Regular Quarterly Dividend 99.3 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition On July 25, 2003, Vectren Corporation furnished information to the SEC on a Current Report on Form 8-K to announce the pricing of $200 million in senior unsecured notes in two tranches of $100 million each through its wholly-owned subsidiary, Vectren Utility Holdings, Inc. Item 7. Exhibits 99.1 - Press Release- Vectren Corporation Sells $200 Million in Debt 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition On August 1, 2003, Vectren Corporation furnished information to the SEC on a Current Report on Form 8-K to announce it plans to issue 6.5 million new shares of the Company's common stock. Also attached is income statement, cash flow statement, and balance sheet data as of and for the six months ended June 30, 2003 and 2002. Item 7. Exhibits 99.1 - Press Release- Vectren Corporation Announces Equity Offering of 6.5 Million Shares 99.2 - Selected Financial Data 99.3 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure On August 4, 2003, Vectren Corporation filed a Current Report on Form 8-K with respect to updates on various matters incident to the Company's equity offering. Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Selected Financial Data 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 On August 11, 2003, Vectren Corporation filed a Current Report on Form 8-K with respect to certain underwriting agreements related to an equity offering. Item 5. Other Events Item 7. Exhibits Exhibit 1 - Underwriting Agreement dated as of August 7, 2003 Exhibit 5 - Opinion of Barnes & Thornburg On August 18, 2003, Vectren Corporation filed a Current Report on Form 8-K with respect to updates on various regulatory matters in Ohio. Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 On August 29, 2003, Vectren Corporation filed a Current Report on Form 8-K to announce that $163.2 million of net proceeds had been generated from the sale of 7,441,400 shares of common stock. Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Press Release- Vectren Corporation Completes Equity Offering 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VECTREN CORPORATION ------------------- Registrant November 12, 2003 /s/Jerome A. Benkert, Jr. ------------------------- Jerome A. Benkert, Jr. Executive Vice President & Chief Financial Officer (Principal Financial Officer) /s/M. Susan Hardwick ---------------------------- M. Susan Hardwick Vice President & Controller (Principal Accounting Officer) EX-3.1 3 vvc10q_bylawsex3-1.txt BY-LAWS Exh. 3.1 CODE OF BY-LAWS OF VECTREN CORPORATION AS AMENDED AND RESTATED AS OF APRIL 24, 2002 AS AMENDED AND RESTATED AS OF FEBRUARY 26, 2003 AS AMENDED AND RESTATED AS OF MAY 1, 2003 AS AMENDED AND RESTATED AS OF OCTOBER 29, 2003 ARTICLE 1 Identification Section 1.1. Name. The name of the Corporation is Vectren Corporation (the "Corporation"). Section 1.2. Fiscal Year. The fiscal year of the Corporation shall begin at the beginning of the first day of January in each year and end at the close of the last day of December next succeeding. ARTICLE 2 Shares Section 2.1. Certificates for Shares. Pursuant to Ind. Code ss. 23-1-26-7, the board of directors (the "Board") is authorized to issue shares without certificates. If the Board issues share certificates, such certificates shall be in such form as the Board may prescribe from time to time signed (either manually or in facsimile) by the Chief Executive Officer of the Corporation and either the Secretary or an Assistant Secretary of the Corporation. Section 2.2. Transfer of Shares. The shares of the Corporation shall be transferable on the books of the Corporation. If certificates are issued, the transfer of the shares shall occur upon surrender of the certificate or certificates representing the same, properly endorsed by the registered holder or by his duly authorized attorney, such endorsement or endorsements to be witnessed by one witness. The requirement for such witnessing may be waived in writing upon the form of endorsement by the President of the Corporation. Section 2.3. Record Ownership of Shares or Rights. The Corporation, to the extent permitted by law, shall be entitled to treat the person in whose name any share or right of the Corporation (a "Right") is registered on the books of the Corporation as the owner thereof, for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or Right on the part of any other person, whether or not the Corporation shall have notice thereof. ARTICLE 3 Meetings of Shareholders Section 3.1. Place of Meetings. All meetings of shareholders of the Corporation shall be held at such place, within or without the State of Indiana, as may be specified in the respective notices or waivers of notice thereof. Section 3.2. Annual Meeting. An annual meeting of the shareholders shall be held at such hour and on such date as the Board may select in each year for the purpose of electing directors for the terms hereinafter provided and for the transaction of such other business as may properly come before the meeting. The Board may postpone an annual meeting for which notice has been given in accordance with Section 3.4 of this Article 3. Failure to hold the annual meeting shall not work any forfeiture or a dissolution of the Corporation or affect the validity of any corporate action. Section 3.3. Special Meetings. Special meetings of the shareholders may be called by the Chief Executive Officer or the Board. Only business within the purpose or purposes described in the meeting notice may be conducted at a special shareholders meeting. The Board may postpone a special meeting for which notice has been given in accordance with Section 3.4 of this Article 3. Section 3.4. Notice and Waiver. A written or printed notice, stating the place, day and hour of the annual meeting, and additionally, in case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered or mailed by the Secretary or by the officers or persons calling the meeting, to each shareholder of the Corporation at the time entitled to vote, at such address as appears upon the records of the Corporation, no fewer than ten nor more than sixty days before the date of the meeting. Notice of any such meeting may be waived in writing by any shareholder, before or after the date and time stated in the notice, if the waiver is delivered to the Corporation for inclusion in the minutes for filing with the corporate records. Attendance at a meeting, in person or by proxy, waives objection to lack of notice or defective notice of the meeting unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting the business at the meeting. Further, a shareholder's attendance at a meeting waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice unless the shareholder objects to considering the matter when it is presented. Section 3.5. Notice of Shareholder Business. At any meeting of the shareholders, only such business may be conducted as shall have been properly brought before the meeting, and as shall have been determined to be lawful and appropriate for consideration by shareholders at the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting given in accordance with Section 3.4 of this Article 3, (b) otherwise properly brought before the meeting by or at the direction of the Board or the Chief Executive Officer, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder pursuant to clause (c) above, the shareholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal office of the Corporation, not less than ninety days nor more than one hundred twenty days prior to the first anniversary date of the annual meeting for the preceding year; provided, however, if and only if the annual meeting is not scheduled to be held within a period that commences thirty days before such anniversary date and ends thirty days after such anniversary date (an annual meeting date outside such period being referred to herein as an "Other Annual Meeting Date"), such shareholder notice shall be given in the manner provided herein by the close of business on the later of (i) the date ninety days prior to such Other Annual Meeting Date or (ii) the tenth day following the date such Other Annual Meeting Date is first publicly announced or disclosed. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting, including the text of any proposal to be presented, (b) the name and address, as they appear on the corporation's stock records, of the shareholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the shareholder, and (d) any interest of the shareholder in such business. Only such business shall be brought before a special meeting of shareholders as shall have been specified in the notice of meeting given in accordance with Section 3.4 of this Article 3. In no event shall the adjournment of an annual meeting or special meeting, or any announcement thereof, commence a new period for the giving of a shareholder's notice as provided in this Section 3.5. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 3.5. The person presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the By-Laws, or that business was not lawful or appropriate for consideration by shareholders at the meeting, and if he should so determine, he shall so declare to the meeting and any such business shall not be transacted. Section 3.6. Notice of Shareholder Nominees. Nominations of persons for election to the Board of the corporation may be made at any annual meeting of shareholders by or at the direction of the Board or by any shareholder of the corporation entitled to vote for the election of directors at the meeting. Such shareholder nominations shall be made pursuant to timely notice given in writing to the secretary of the corporation in accordance with Section 3.5 of this Article 3. Such shareholder's notice shall set forth, in addition to the information required by Section 3.5 as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitation of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (v) the qualifications of the nominee to serve as a director of the corporation. In the event the Board or Chief Executive Officer calls a special meeting of shareholders for the purpose of electing one or more directors to the Board, any shareholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the notice of meeting, if the shareholder's notice of such nomination contains the information specified in this Section 3.6 and shall be delivered to the secretary of the Corporation not later than the close of business on the tenth day following the day on which the date of the special meeting and either the names of the nominees proposed by the Board to be elected at such meeting or the number of directors to be elected are publicly announced or disclosed. In no event shall the adjournment of an annual meeting or special meeting, or any announcement thereof, commence a new period for the giving of a shareholder's notice as provided in this Section 3.6. No shareholder nomination shall be effective unless made in accordance with the procedures set forth in this Section 3.6. The person presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that a shareholder nomination was not made in accordance with the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 3.7. Voting at Meetings. (a) Voting Rights. Except as otherwise provided by law or by the provisions of the Articles of Incorporation, every holder of the Common Stock of the Corporation shall have the right at all meetings of the shareholders of the Corporation to one vote for each share of stock standing in his name on the books of the Corporation. (b) Proxies. A shareholder may vote, either in person or by proxy executed as provided by the Indiana Business Corporation Law (the "Act") by the shareholder or a duly authorized attorney-in-fact. No proxy shall be valid after eleven (11) months, unless a shorter or longer time is expressly provided in the appointment form. (c) Quorum. Unless otherwise provided by the Articles of Incorporation or these By-Laws, at any meeting of shareholders the majority of the outstanding shares entitled to vote at such meeting, represented in person or by proxy, shall constitute a quorum. If less than a majority of such shares are represented at a meeting, the person presiding at the meeting may adjourn the meeting from time to time. At any meeting at which a quorum is present, the person presiding at the meeting may adjourn the meeting from time to time. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 3.8. Action By Shareholders Without Meeting. Any action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting if the action is taken by all shareholders entitled to vote on the action and is evidenced by one or more written consents describing the action taken, signed by all shareholders entitled to vote on the action and delivered to the Corporation for inclusion in the minutes for filing with the Corporation's records. Section 3.9. Participation in Meetings by Means of Conference or Other Similar Communications Equipment. Any shareholder may participate in an annual or special meeting of the shareholders by, or through the use of, any means of communication by which all shareholders participating may simultaneously hear each other during the meeting. A shareholder participating in such a meeting by this means is deemed to be present in person at the meeting. ARTICLE 4 Board of Directors Section 4.1. Number and Election. The Board shall consist of a minimum of one (1) and a maximum of sixteen (16) members. The actual number of directors shall be fixed from time to time by amendment to the By-Laws adopted by a majority vote of the directors then in office. The Board shall consist of thirteen (13) members, who shall be divided into three (3) classes as provided below and shall serve until the respective shareholder's meetings at which such classes of directors are elected. Each director shall hold office until his successor is elected and qualified. Directors need not be shareholders. The Board may elect or appoint, from among its members, a Chairman of the Board (the "Chairman"), who need not be an officer or employee of the Corporation. The Chairman shall preside at all shareholder meetings and Board meetings and shall have such other powers and perform such other duties as are incident to such position and as may be assigned by the Board. The Board shall be divided into three (3) classes, each class to consist, as nearly as may be, of one-third of the number of directors then constituting the whole Board, with one class to be elected annually by shareholders for a term of three years, to hold office until their respective successors are elected and qualified; except that: (a) the terms of directors in the first group will expire at the first annual meeting of shareholders' after their election, the terms of the second group will expire at the second annual meeting of shareholders after their election and the terms of the third class, if any, will expire at the third annual meeting of shareholders after their election; (b) the term of office of a director who is elected by either the directors or shareholders to fill a vacancy in the Board shall expire at the end of the term of office of the succeeded director's class or at the end of the term of office of such other class as determined by the Board to be necessary or desirable to equalize the number of directors among the classes; (c) the Board may adopt a policy limiting the time beyond which certain directors are not to continue to serve, the effect of which may be to produce classes of unequal size or to cause certain directors either to be nominated for election for a term of less than three years or to cease to be a director before expiration of the term of the director's class. In case of any increase in the number of directors, the additional directors shall be distributed among the several classes to make the size of the classes as equal as possible. A decrease in the number of directors shall not shorten an incumbent director's term. Section 4.2. Annual Meeting. The Board shall meet each year immediately after the annual meeting of the shareholders at the place established by resolution of the Board, for the purpose of organization, election of officers, and consideration of any other business that may be brought before the meeting. If the Board does not establish a place for such meeting by resolution, the meeting will be held at the place where the shareholders meeting was held. No notice shall be necessary for the holding of this annual meeting. If such meeting is not held as above provided, the election of officers may be had at any subsequent meeting of the Board specifically called in the manner provided in Section 4.3 of this Article. Section 4.3. Other Meetings. Regular meetings of the Board may be held as provided for in a Board resolution, without notice of the date, time, place or purpose of the meeting. Special meetings of the Board may be held upon the call of the Chief Executive Officer, or of any member of the Board, at any place within or without the State of Indiana, upon forty-eight hours' notice, specifying the time, place and general purposes of the meeting, given to each director, either personally, by mailing, or by facsimile. Such notice may be waived in writing by any director, before or after the date stated in the notice, if the waiver is signed by the director and filed with the Corporation's minutes or records. In addition, a director's attendance at or participation in a meeting waives any required notice of the meeting unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 4.4. Quorum. At any meeting of the Board, the presence of a majority of the members of the Board shall constitute a quorum for the transaction of any business except the filling of vacancies in the Board. In the filling of vacancies, if the directors remaining in office constitute fewer than a quorum of the Board, they may fill a vacancy by the affirmative vote of a majority of all directors remaining in office. Section 4.5. Action By Directors Without Meeting. Any action required or permitted to be taken at any meeting of the Board, or any committee thereof, may be taken without a meeting if the action is taken by all members of the Board and is evidenced by one or more written consents describing the action taken, signed by each director, and is included in the minutes or filed with the corporate records reflecting the action taken. Section 4.6. Compensation of Directors. The Board is empowered and authorized to fix and determine the compensation of directors for attendance at meetings of the Board, and additional compensation for any additional services that the directors may perform for the Corporation. Section 4.7. Participation in Meetings by Means of Conference or Other Similar Communications Equipment. A member of the Board or of a committee designated by the Board may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in such a meeting by this means is deemed to be present in person at the meeting. Section 4.8. Executive Committee. The Executive Committee of the Board ("Executive Committee") shall have as its standing members the Chairman of the Board and Chief Executive Officer, who shall be the chair of the Executive Committee, and the President and Chief Operating Officer. The Board, shall, by resolution adopted by a majority of the full Board, designate four other members of the Executive Committee from other Board members on a rotating basis with terms of two years, except for the initial membership which had two members with three-year terms. On and after May 1, 2003, the only standing member of the Executive Committee will be the Chairman, President and Chief Executive Officer. Meetings of the Executive Committee shall be held at such times as may be requested by the Chairman of the Board and Chief Executive Officer and are intended to be held when, in the reasonable judgment of the Chairman and Chief Executive Officer, it is necessary or desirable to have Board involvement in actions of the Corporation, but it is either impracticable to convene a meeting of the full Board, or action by the Executive Committee has been authorized pursuant to specific delegation by the full Board. The Executive Committee shall have all of the authority of the full Board allowed by the Act. Reasonable notice of all meetings shall be given by the secretary. A majority shall constitute a quorum of the Executive Committee. A majority of the Executive Committee in attendance shall decide any question brought before any meeting of the Executive Committee. Section 4.9. Nominating and Corporate Governance Committee. The Board shall, by resolution adopted by a majority of the full Board, designate a chair and the membership of the Nominating and Corporate Governance Committee of the Board ("Governance Committee"), which shall consist of not less than three members, including the chair. A director who is an employee (including non-employee executive officers) of the Company or any of its affiliates may not serve on the Governance Committee until three years following the termination of his or her employment or executive officer status, and, in the event the employment relationship or executive officer status is with a predecessor of the Company, the director cannot serve on the Governance Committee until three years following the termination of that employment relationship or executive officer status with the predecessor; The Governance Committee shall have responsibility for the following matters: (a) searching for qualified nominees for election to the Board, and evaluating and making recommendations to the Board as to the qualifications of nominees to be submitted to the shareholders for election to the Board or considered to fill vacancies occurring from time to time on the Board; (b) receiving communications submitted to the Company from shareholders relating to nominees for director, and evaluating and making recommendations to the Board as to the qualifications of such nominees; (c) making recommendations concerning the composition, organization and functions of the Board; (d) making recommendations concerning the compensation for non-employee members of the Board; (e) monitoring and considering the Company's corporate governance practices; (f) reviewing periodically the performance of the full Board; (g) reviewing periodically the Company's Shareholder Rights Agreement; (h) reviewing periodically the Company's By-Laws and Articles of Incorporation; (i) performing succession planning with respect to the Chairman and Chief Executive Officer; and (j) providing guidance with respect to the development of members of the Board. Meetings of the Governance Committee shall be held at such times as may be requested by the Chairman and Chief Executive Officer or by the chair of the Governance Committee. Reasonable notice of all meetings shall be given by the secretary. A majority shall constitute a quorum of the Governance Committee. A majority of the Governance Committee in attendance shall decide any question brought before any meeting of the Governance Committee. Section 4.10. Corporate Affairs Committee. The Board shall, by resolution adopted by a majority of the full Board, designate a chair and the membership of the Corporate Affairs Committee of the Board ("Corporate Affairs Committee"), which shall consist of not less than three members, including the chair. Any director of the Company may serve on the Corporate Affairs Committee. The Corporate Affairs Committee shall oversee the Company's policies, practices and procedures, as a responsible corporate citizen, including, but not limited to, the following areas: (a) business practices, including compliance with applicable laws and regulations; (b) public communications with key stakeholders, other than the financial community; (c) community relations, including charitable contributions and community affairs; (d) customer relations, including customer satisfaction and quality of customer service; (e) employment practices and procedures, including employer of choice, workforce diversity and compliance with employment related laws, regulations and policies; and (f) environmental compliance and stewardship, including adherence to environmental related laws and regulations. Meetings of the Corporate Affairs Committee shall be held at such times as may be requested by the Chairman and Chief Executive Officer or by the chair of the Corporate Affairs Committee. Reasonable notice of all meetings shall be given by the secretary. A majority shall constitute a quorum of the Corporate Affairs Committee. A majority of the Corporate Affairs Committee in attendance shall decide any question brought before any meeting of the Corporate Affairs Committee. Section 4.11. Compensation and Benefits Committee. The Board shall, by resolution adopted by a majority of the full Board, designate a chair and the membership of the Compensation and Benefits Committee of the Board ("Compensation Committee"). The Compensation Committee shall consist of not less than three members, including the chair, all of whom are to be "non-employee directors" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as the same may be in effect from time to time. The Compensation Committee shall have responsibility for the following matters: (a) reviewing annually the overall compensation program for the corporate officers of the Company and certain of its subsidiaries, including the executive officers; (b) approving the compensation of the executive officers, including, but not limited to, regular or periodic compensation and additional or year-end compensation; (c) reviewing and approving all consulting or employment contracts of the Company or of any subsidiary with any corporate officer, including any executive officer, or with any director, provided, that any such contract with any director must also be approved by the full Board; (d) serving as the granting and administrative committee for the Company's At-Risk Compensation Plan and, to the extent provided in such plans, all other executive and director compensation plans; (e) overseeing the administration of employee benefits and benefit plans for the Company and its subsidiaries; reviewing new benefits or changes in existing benefits; appointing from among the management of the Company committees to administer such employee benefits and benefit plans; and (f) performing such other duties as may from time to time be assigned by the full Board with respect to executive compensation. Meetings of the Compensation Committee shall be held at such times as may be requested by the Chairman and Chief Executive Officer or by the chair of the Compensation Committee. Reasonable notice of all meetings shall be given by the secretary. A majority shall constitute a quorum of the Compensation Committee. A majority of the Compensation Committee in attendance shall decide any question brought before any meeting of the Compensation Committee. Section 4.12. Audit Committee. The Board shall, by resolution adopted by a majority of the full Board, designate a chair and the membership of the Audit Committee of the Board ("Audit Committee"). The Audit Committee shall consist of not less than three members, none of whom are current officers or employees of the Company or any subsidiary of the Company and each of whom is appointed by the Board. The members of the Audit Committee shall meet the independence and expertise requirements of the New York Stock Exchange, as the same may be in effect from time to time. The Audit Committee shall assist the Board in monitoring the integrity of the financial statements of the Company, and the independence and performance of the Company's internal auditors and independent accountants. The Audit Committee shall have the authority, following notice to the Chairman and Chief Executive Officer of the Company, to retain special legal, accounting or other consultants to advise the Committee. The Audit Committee may request any officer or employee of the Company, or the Company's outside counsel or independent accountant, to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee. The Audit Committee shall have the responsibilities and powers set forth in its Charter. The Audit Committee shall review and reassess the adequacy of its Charter annually and recommend any proposed changes to the full Board for approval. It is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management, as audited by the independent accountant. Meetings of the Audit Committee shall be held at such times as may be requested by the Chairman and Chief Executive Officer or by the chair of the Audit Committee. Reasonable notice of all meetings shall be given by the secretary. A majority shall constitute a quorum of the Audit Committee. A majority of the Audit Committee in attendance shall decide any question brought before any meeting of the Audit Committee. Section 4.13. Other Committees of the Board. The Board may, by resolution adopted by a majority of the full Board, also designate other regular or special committees of the Board, with such powers and duties as shall be provided by resolution of the full Board. Section 4.14. Resignations. A director may resign at any time by delivering notice to the Board or the Secretary of the Corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. If a resignation is made effective at a later date and the Corporation accepts the future effective date, the Board may fill the pending vacancy before the effective date if the Board provides that the successor does not take office until the effective date. Section 4.15. Retirement Policy. Unless otherwise waived or directed by the Board, each director shall retire at the end of the month during which he or she reaches the age of seventy (70) years. ARTICLE 5 Officers Section 5.1. Number. The officers of the Corporation shall consist of a Chairman and Chief Executive Officer, Chief Operating Officer and President, Chief Financial Officer, Secretary, and such other officers as may be chosen by the Board at such time and in such manner and for such terms as the Board may prescribe. The Chairman and Chief Executive Officer may appoint one or more officers as he may deem necessary or advisable to carry on the operations of the Corporation. The Board may appoint one or more assistant officers as it may deem necessary or advisable to carry on the operations of the Corporation. Such appointed officer(s) or assistant officer(s) shall hold office until the next annual meeting of the Board unless removed by resolution of the Board prior to such meeting date. Any two or more offices may be held by the same person. Section 5.2. Election and Term of Office. The officers shall be chosen annually by the Board. Each officer shall hold office until his successor is chosen, or until his death, or until he shall have resigned or shall have been removed in the manner hereinafter provided. Section 5.3. Removal. Any officer may be removed, either with or without cause, at any time, by a majority vote of the Board. Section 5.4. Resignations. An officer may resign at any time by delivering notice to the Board or the Secretary of the Corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. If a resignation is made effective at a later date and the Corporation accepts the future effective date, the Board may fill the pending vacancy before the effective date if the Board provides that the successor does not take office until the effective date. Section 5.5. Chairman and Chief Executive Officer. The Chairman and Chief Executive Officer shall be, subject to the control of the Board, in general charge of the affairs of the Corporation and perform such other duties as the Code of By-Laws or the Board may prescribe. He shall also preside at all meetings of shareholders and directors, discharge all the duties which devolve upon a presiding officer, and shall perform such other duties as the Code of By-Laws or Board may prescribe. Section 5.6. Chief Operating Officer and President. The Chief Operating Officer and President shall be, subject to the control of the Board, in charge of the daily affairs of the Corporation and shall have such powers and duties as may be determined by the Board. If no Chairman of the Board is elected or appointed, the Chief Operating Officer shall preside at all meetings of shareholders, discharge all the duties which devolve upon a presiding officer, and shall perform such other duties as the Code of By-Laws or Board may prescribe. Section 5.7. Chief Financial Officer. The Chief Financial Officer shall be the financial officer of the Corporation; shall have charge and custody of, and be responsible for, all funds of the Corporation, and deposit all such funds in the name of the Corporation in such banks, trust companies or other depositories as shall be selected by the Board; shall receive, and give receipts for, monies due and payable to the Corporation from any source whatsoever; and, in general, shall perform all the duties incident to the office of Treasurer and such other duties as this Code of By-Laws provides or as may, from time to time, be assigned by the Board. Section 5.8. The Vice-Presidents. Each Vice-President (if one or more Vice-Presidents be elected or appointed) shall have such powers and perform such duties as this Code of By-Laws provides or as the Chairman and Chief Executive Officer, from time to time, prescribe or delegate to him or her. Section 5.9. The Secretary. The Secretary shall prepare or cause to be prepared the minutes of the meetings of the shareholders and of the Board; shall see that all notices are duly given in accordance with the provisions of the Code of By-Laws and as required by law; shall be custodian and responsible for the authentication of the records; and, in general, shall perform all duties incident to the office of Secretary and such other duties as this Code of By-Laws provides or as may, from time to time, be assigned by the Board. Section 5.10. Delegation of Authority. In case of the absence of any officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board may delegate the powers or duties of such officer to any other officer, for the time being, provided a majority of the entire Board concurs therein. Section 5.11. Salaries. The salaries of the officers shall be fixed, from time to time, by the Board. No officer shall be prevented from receiving such salary by reason of the fact he is also a director of the Corporation. ARTICLE 6 Negotiable Instruments, Deeds, Contracts and Shares Section 6.1. Execution of Negotiable Instruments. All checks, drafts, notes, bonds, bills of exchange and orders for the payment of money of the Corporation shall, unless otherwise directed by the Board, or unless otherwise required by law, be signed by the Treasurer and one other officer, or such other officers or employees as may be directed by the Chief Executive Officer. Section 6.2. Execution of Deeds, Contracts, Etc. All deeds and mortgages made by the Corporation and other material written contracts and agreements into which the Corporation enters other than transactions in the ordinary course of business shall, unless otherwise directed by the Board or required by law, be executed in its name by any authorized officer of the Corporation, signing singly, and, when necessary or required, shall be duly attested by the Secretary or Assistant Secretary. Written contracts and agreements in the ordinary course of business operations may be executed by any officer or employee of the Corporation designated by the Chief Financial Officer to execute such contracts and agreements. Section 6.3. Endorsement of Stock Certificates. Subject always to the further orders and directions of the Board, any share or shares of stock issued by any other corporation and owned by the Corporation (including retired shares of stock of the Corporation) may, for sale or transfer, be endorsed in the name of the Corporation by the Chief Operating Officer and President and the Secretary. Section 6.4. Voting of Stock Owned by Corporation. Subject always to the further orders and directions of the Board, any share or shares of stock issued by any other corporation and owned or controlled by the Corporation may be voted at any shareholder's meeting of such other corporation by the Chief Operating Officer of the Corporation or, in his absence, by the Secretary of the Corporation. Whenever, in the judgment of the Chief Operating Officer, it is desirable for the Corporation to execute a proxy or give a shareholder's consent in respect to any share or shares of stock issued by any other corporation and owned by the Corporation, such proxy or consent shall be executed in the name of the Corporation and shall be attested by the Secretary of the Corporation. Any person or persons designated in the manner above stated as the proxy or proxies of the Corporation shall have the full right, power, and authority to vote the share or shares of stock issued by such other corporation and owned by the Corporation the same as such share or shares might be voted by the Corporation. ARTICLE 7 Provisions for Regulation of Business and Conduct of Affairs of Corporation Section 7.1. Contracts. Any contract or other transaction between the Corporation and one or more of its directors, or between the Corporation and any firm of which one or more of its directors are members or employees, or in which they are interested, or between the Corporation and any corporation or association of which one or more of its directors are shareholders, members, directors, officers, or employees, or in which they are interested, shall be valid for all purposes, notwithstanding the presence of such director or directors at the meeting of the Board of the Corporation which acts upon, or in reference to, such contract or transaction, and notwithstanding his or their participation in such action, if the fact of such interest shall be disclosed or known to the Board and the Board shall, nevertheless, authorize, approve, and ratify such contract or transaction by a vote of a majority of the directors on the Board who have no direct or indirect interest in the contract or transaction or, if all directors have such an interest, then by a vote of a majority of the directors. If a majority of such directors vote to authorize, approve or ratify such contract or transaction, a quorum is deemed to be present for purposes of taking such action. This Section shall not be construed to invalidate any contract or other transaction which would otherwise be valid under the common and statutory law applicable thereto. Section 7.2. Indemnification. (a) Definitions. Terms defined in Chapter 37 of the Act (IND. CODE ss.ss. 23-1-37, et seq.) which are used in this Article 7 shall have the same definitions for purposes of this Article 7 as they have in such chapter of the Act. (b) Indemnification of Directors and Officers. The Corporation shall indemnify any individual who is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner or trustee of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise whether or not for profit, against liability and expenses, including attorneys fees, incurred by him in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and whether formal or informal, in which he is made or threatened to be made a party by reason of being or having been in any such capacity, or arising out of his status as such, except (i) in the case of any action, suit, or proceeding terminated by judgment, order, or conviction, in relation to matters as to which he is adjudged to have breached or failed to perform the duties of his office and the breach or failure to perform constituted willful misconduct or recklessness; and (ii) in any other situation, in relation to matters as to which it is found by a majority of a committee composed of all directors not involved in the matter in controversy (whether or not a quorum) that the person breached or failed to perform the duties of his office and the breach or failure to perform constituted willful misconduct or recklessness. The Corporation may pay for or reimburse reasonable expenses incurred by a director or officer in defending any action, suit, or proceeding in advance of the final disposition thereof upon receipt of (i) a written affirmation of the director's or officer's good faith belief that such director or officer has met the standard of conduct prescribed by Indiana law; and (ii) an undertaking of the director or officer to repay the amount paid by the Corporation if it is ultimately determined that the director or officer is not entitled to indemnification by the Corporation. (c) Other Employees or Agents of the Corporation. The Corporation may, in the discretion of the Board, fully or partially provide the same rights of indemnification and reimbursement as herein above provided for directors and officers of the Corporation to other individuals who are or were employees or agents of the Corporation or who are or were serving at the request of the Corporation as employees or agents of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise whether or not for profit. (d) Non-exclusive Provision. The indemnification authorized under this Section 7.2 is in addition to all rights to indemnification granted by Chapter 37 of the Act (IND. CODE ss.ss. 23-1-37, et seq.) and in no way limits the indemnification provisions of such Chapter. ARTICLE 8 Amendments Section 8.1. In General. The powers to make, alter, amend or repeal this Code of Bylaws is vested exclusively in the Board, but an affirmative vote of a majority of the number of directors in office at the time of such vote shall be necessary to effect any alteration, amendment or repeal of this Code of Bylaws. EX-31.1 4 vvc10q_ex31-1.txt CERTIFICATION SARBANES-OXLEY ACT EX: 31-1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Niel C. Ellerbrook, certify that: 1. I have reviewed this Form 10-Q of Vectren Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Niel C. Ellerbrook - ----------------------------------------------- Niel C. Ellerbrook Chairman, President, & Chief Executive Officer EX-31.2 5 vvc10q_31-2.txt CERTIFICATION SARBANES-OXLEY ACT EX 31-2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CHIEF FINANCIAL OFFICER CERTIFICATION I, Jerome A. Benkert, Jr., certify that: 1. I have reviewed this Form 10-Q of Vectren Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Jerome A. Benkert, Jr. - ----------------------------------------------- Jerome A. Benkert, Jr. Executive Vice President & Chief Financial Officer EX-32 6 vvc10q_ex32.txt CERTIFICATION SARBANES-OXLEY ACT EX 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Vectren Corporation. Signed this 12th day of November, 2003. /s/ Jerome A. Benkert, Jr. /s/ Niel C. Ellerbrook - ----------------------------------- -------------------------------------- (Signature of Authorized Officer) (Signature of Authorized Officer) Jerome A. Benkert, Jr. Niel C. Ellerbrook - ----------------------------------- -------------------------------------- (Typed Name) (Typed Name) Executive Vice President & Chairman, President, Chief Financial Officer & Chief Executive Officer - ----------------------------------- -------------------------------------- (Title) (Title) -----END PRIVACY-ENHANCED MESSAGE-----