-----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, EOEKqeNrl8ROaZBwFfWgBIvF3uIE/Epa7kZcnYot6qe7fCU7+ZuatgH5YuB0ioDN M2RmIWnN8Bkky0eySPy9lw== 0001096385-05-000065.txt : 20050503 0001096385-05-000065.hdr.sgml : 20050503 20050503163406 ACCESSION NUMBER: 0001096385-05-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050503 DATE AS OF CHANGE: 20050503 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: 05795533 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-mar05b.txt VECTREN CORP 1ST QUARTER 10Q REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 1-15467 VECTREN CORPORATION --------------------------------------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-2086905 - --------------------------------------------------- --------------------- (State or other jurisdiction of incorporation or (IRS Employer 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 76,082,813 April 30, 2005 - --------------------------------- ---------- -------------- Class Number of Shares Date Table of Contents Item Page Number Number PART I. FINANCIAL INFORMATION 1 Financial Statements (Unaudited) Vectren Corporation and Subsidiary Companies Consolidated Condensed Balance Sheets 1-2 Consolidated Condensed Statements of Income 3 Consolidated Condensed Statements of Cash Flows 4 Notes to Unaudited Consolidated Condensed Financial Statements 5 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 16 3 Quantitative and Qualitative Disclosures About Market Risk 32 4 Controls and Procedures 32 PART II. OTHER INFORMATION 1 Legal Proceedings 32 2 Unregistered Sales of Equity Securities and Use of Proceeds 32 6 Exhibits 33 Signatures 33 Definitions AFUDC: allowance for funds used during MMBTU: millions of British thermal construction units APB: Accounting Principles Board MW: megawatts EITF: Emerging Issues Task Force MWh/GWh: megawatt hours/thousands of megawatt hours(gigawatt hours) FASB: Financial Accounting Standards Board NOx: nitrogen oxide FERC: Federal Energy Regulatory Commission OUCC: Indiana Office of the Utility Consumer Counselor IDEM: Indiana Department of Environmental PUCO: Public Utilities Commission Management of Ohio IURC: Indiana Utility Regulatory Commission SFAS: Statement of Financial Accounting Standards MCF/BCF: millions / billions of cubic feet USEPA: United States Environmental Protection Agency MDth/MMDth: thousands / millions of Throughput: combined gas sales and dekatherms gas transportation volumes PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited - In millions) March 31, December 31, - ------------------------------------------------------------------------------- 2005 2004 - ------------------------------------------------------------------------------- ASSETS ------ Current Assets Cash & cash equivalents $ 11.0 $ 9.6 Accounts receivable - less reserves of $2.4 & $2.0, respectively 192.9 173.5 Accrued unbilled revenues 121.4 176.6 Inventories 46.5 67.6 Recoverable fuel & natural gas costs - 17.7 Prepayments & other current assets 49.1 141.3 - ------------------------------------------------------------------------------- Total current assets 420.9 586.3 - ------------------------------------------------------------------------------- Utility Plant Original cost 3,482.6 3,465.2 Less: accumulated depreciation & amortization 1,321.1 1,309.0 - ------------------------------------------------------------------------------- Net utility plant 2,161.5 2,156.2 - ------------------------------------------------------------------------------- Investments in unconsolidated affiliates 196.1 180.0 Other investments 115.8 115.1 Non-utility property - net 235.9 229.2 Goodwill - net 207.1 207.1 Regulatory assets 79.5 82.5 Other assets 30.5 30.5 - ------------------------------------------------------------------------------- TOTAL ASSETS $3,447.3 $3,586.9 =============================================================================== The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited - In millions) March 31, December 31, - ------------------------------------------------------------------------------- 2005 2004 - ------------------------------------------------------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY ---------------------------------- Current Liabilities Accounts payable $ 56.5 $ 123.8 Accounts payable to affiliated companies 78.3 109.3 Refundable fuel & natural gas costs 24.0 6.3 Accrued liabilities 190.4 125.8 Short-term borrowings 235.3 412.4 Current maturities of long-term debt 38.5 38.5 Long-term debt subject to tender 10.0 10.0 - ------------------------------------------------------------------------------- Total current liabilities 633.0 826.1 - ------------------------------------------------------------------------------- Long-term Debt - Net of Current Maturities & Debt Subject to Tender 1,016.2 1,016.6 Deferred Income Taxes & Other Liabilities Deferred income taxes 240.4 234.0 Regulatory liabilities 256.4 251.7 Deferred credits & other liabilities 166.7 163.2 - ------------------------------------------------------------------------------- Total deferred credits & other liabilities 663.5 648.9 - ------------------------------------------------------------------------------- Minority Interest in Subsidiary 0.4 0.4 Commitments & Contingencies (Notes 7-10) Cumulative, Redeemable Preferred Stock of a Subsidiary - 0.1 Common Shareholders' Equity Common stock (no par value) - issued & outstanding 75.9 and 75.6, respectively 527.5 526.8 Retained earnings 616.6 583.0 Accumulated other comprehensive loss (9.9) (15.0) - ------------------------------------------------------------------------------- Total common shareholders' equity 1,134.2 1,094.8 - ------------------------------------------------------------------------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,447.3 $3,586.9 =============================================================================== The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited - In millions, except per share data) Three Months Ended March 31, - ---------------------------------------------------------------------------- 2005 2004 - ---------------------------------------------------------------------------- OPERATING REVENUES Gas utility $ 516.7 $ 505.1 Electric utility 94.7 88.8 Energy services & other 65.8 51.4 - ---------------------------------------------------------------------------- Total operating revenues 677.2 645.3 - ---------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 370.9 365.6 Fuel for electric generation 26.9 22.9 Purchased electric energy 2.3 4.4 Cost of energy services & other 51.6 40.0 Other operating 71.1 71.2 Depreciation & amortization 37.1 32.5 Taxes other than income taxes 22.1 22.7 - ---------------------------------------------------------------------------- Total operating expenses 582.0 559.3 - ---------------------------------------------------------------------------- OPERATING INCOME 95.2 86.0 OTHER INCOME (EXPENSE) Equity in earnings of unconsolidated affiliates 6.4 16.9 Other income (expense) - net 2.4 (3.1) - ---------------------------------------------------------------------------- Total other income 8.8 13.8 - ---------------------------------------------------------------------------- INTEREST EXPENSE 20.1 19.3 - ---------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 83.9 80.5 - ---------------------------------------------------------------------------- INCOME TAXES 27.8 25.7 - ---------------------------------------------------------------------------- NET INCOME $ 56.1 $ 54.8 ============================================================================ AVERAGE COMMON SHARES OUTSTANDING 75.6 75.5 DILUTED COMMON SHARES OUTSTANDING 76.1 75.8 EARNINGS PER SHARE OF COMMON STOCK: BASIC $ 0.74 $ 0.73 DILUTED $ 0.74 $ 0.72 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.30 $ 0.29 The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited - In millions) Three Months Ended March 31, - ----------------------------------------------------------------------------------- 2005 2004 - ----------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 56.1 $ 54.8 Adjustments to reconcile net income to cash from operating activities: Depreciation & amortization 37.1 32.5 Deferred income taxes & investment tax credits (0.2) (2.3) Equity in earnings of unconsolidated affiliates (6.4) (16.9) Net unrealized gain on derivative instruments (2.5) (2.8) Pension & postretirement periodic benefit cost 4.5 4.3 Other non-cash charges - net 6.0 11.2 Changes in working capital accounts: Accounts receivable & accrued unbilled revenue 30.2 (5.6) Inventories 21.1 21.6 Recoverable/refundable fuel & natural gas costs 35.4 11.4 Prepayments & other current assets 94.7 107.9 Accounts payable, including to affiliated companies (98.3) (55.3) Accrued liabilities 67.0 60.6 Changes in noncurrent assets 2.5 (1.0) Changes in noncurrent liabilities (1.8) (2.8) - ----------------------------------------------------------------------------------- Net cash flows from operating activities 245.4 217.6 - ----------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from stock option exercises & other stock plans - 2.3 Requirements for: Dividends on common stock (22.5) (21.5) Retirement of long-term debt (0.1) - Redemption of preferred stock of subsidiary (0.1) (0.1) Net change in short-term borrowings (177.1) (143.9) - ----------------------------------------------------------------------------------- Net cash flows from financing activities (199.8) (163.2) - ----------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Unconsolidated affiliate distributions 1.4 2.0 Notes receivable & other collections 0.5 0.6 Requirements for: Capital expenditures, excluding AFUDC equity (43.4) (44.5) Unconsolidated affiliate investments (2.7) (3.2) - ----------------------------------------------------------------------------------- Net cash flows from investing activities (44.2) (45.1) - ----------------------------------------------------------------------------------- Net increase in cash & cash equivalents 1.4 9.3 Cash & cash equivalents at beginning of period 9.6 15.3 - ----------------------------------------------------------------------------------- Cash & cash equivalents at end of period $ 11.0 $ 24.6 ===================================================================================
The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Nature of Operations Vectren Corporation (the Company or Vectren), an Indiana corporation, is an energy and applied technology holding company headquartered in Evansville, Indiana. The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc. (VUHI), serves as the intermediate holding company for three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas), Southern Indiana Gas and Electric Company (SIGECO), and the Ohio operations. VUHI also has other assets that provide information technology and other services to the three utilities. VUHI's consolidated operations are collectively referred to as the Utility Group. Both Vectren and VUHI are exempt from registration pursuant to Section 3(a) (1) and 3(c) of the Public Utility Holding Company Act of 1935. Indiana Gas provides energy delivery services to approximately 555,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to approximately 136,000 electric customers and approximately 110,000 gas customers located near Evansville in southwestern Indiana. SIGECO also owns and operates electric generation to serve its electric customers and optimizes those assets in the wholesale power market. Indiana Gas and SIGECO generally do business as Vectren Energy Delivery of Indiana. The Ohio operations provide energy delivery services to approximately 315,000 natural gas customers located near Dayton in west central Ohio. The Ohio operations are owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc. (VEDO), a wholly owned subsidiary, (53% ownership) and Indiana Gas (47% ownership). The Ohio operations generally do business as Vectren Energy Delivery of Ohio. The Company is also involved in nonregulated activities in three primary business areas: Energy Marketing and Services, Coal Mining, and Utility Infrastructure Services. Energy Marketing and Services markets natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal and generates IRS Code Section 29 tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. In addition, there are other businesses that invest in broadband communication services, energy-related opportunities, real estate, and leveraged leases, among other activities. These operations are collectively referred to as the Nonregulated Group. The Nonregulated Group supports the Company's regulated utilities pursuant to service contracts by providing natural gas supply services, coal, utility infrastructure services, and other services. 2. Basis of Presentation The interim consolidated condensed financial statements included in this report have been prepared by the Company, without audit, as provided in the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted as provided in such rules and regulations. The Company believes that the information in this report reflects all adjustments necessary to fairly state the results of the interim periods reported. These consolidated condensed financial statements and related notes should be read in conjunction with the Company's audited annual consolidated financial statements for the year ended December 31, 2004, filed March 2, 2005, on Form 10-K. Because of the seasonal nature of the Company's utility operations, the results shown on a quarterly basis are not necessarily indicative of annual results. Certain amounts from the prior period reported in this Quarterly Report on Form 10-Q have been reclassified to conform to the 2005 financial statement presentation. These reclassifications had no impact on reported net income. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 3. Share-Based Compensation The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations when measuring compensation expense for its share-based compensation plans. Stock Option Plans The exercise price of stock options awarded under the Company's stock option plans is equal to the fair market value of the underlying common stock on the date of grant. Accordingly, no compensation expense has been recognized for stock option plans. In January 2005, 286,400 options to purchase shares of common stock at an exercise price of $26.63 were issued to management. The grant vests over three years. Other Plans In addition to its stock option plans, the Company also maintains restricted stock and phantom stock plans for executives, strategic employees, and non-employee directors. In January 2005, 138,900 restricted shares at a fair value of $26.63 per share were issued to management. The shares vest over four years. Compensation expense associated with these restricted stock and phantom stock plans for the three months ended March 31, 2005 and 2004, was $1.3 million ($0.7 million after tax) and $0.8 million ($0.5 million after tax), respectively. The amount of expense is consistent with the amount of expense that would have been recognized if the Company used the fair value based method described in SFAS No. 123 "Accounting for Stock Based Compensation" (SFAS 123), as amended, to value these awards. Pro forma Information Following is the effect on net income and earnings per share as if the fair value based method described in SFAS 123 had been applied to all share-based compensation plans: Three Months Ended March 31, - -------------------------------------------------------------------------------- (In millions, except per share amounts) 2005 2004 - -------------------------------------------------------------------------------- Net Income: As reported $ 56.1 $ 54.8 Add: Share-based employee compensation included in reported net income - net of tax 0.7 0.5 Deduct: Total share-based employee compensation expense determined under fair value based method for all awards - net of tax 1.0 0.7 - -------------------------------------------------------------------------------- Pro forma net income $ 55.8 $ 54.6 ================================================================================ Basic Earnings Per Share: As reported $ 0.74 $ 0.73 Pro forma 0.74 0.72 Diluted Earnings Per Share: As reported $ 0.74 $ 0.72 Pro forma 0.73 0.72 SFAS 123 (revised 2004) In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based Payments" (SFAS 123R) that will require compensation costs related to all share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS 123R replaces SFAS 123 and supersedes APB 25. In April 2005, the SEC extended the effective date of SFAS 123R to January 1, 2006 for calendar year companies like the Company. SFAS 123R provides for multiple transition methods, and the Company is still evaluating potential methods for adoption. The adoption of this standard is not expected to have a material effect on the Company's operating results or financial condition. 4. Comprehensive Income Comprehensive income consists of the following: Three Months Ended March 31, - ------------------------------------------------------------------------------ (In millions) 2005 2004 - ------------------------------------------------------------------------------ Net income $ 56.1 $ 54.8 Comprehensive income of unconsolidated affiliates - net of tax 5.1 2.2 - ------------------------------------------------------------------------------ Total comprehensive income $ 61.2 $ 57.0 ============================================================================== Other comprehensive income arising from unconsolidated affiliates is the Company's portion of ProLiance Energy, LLC's and Reliant Services, LLC's accumulated other comprehensive income related to their use of cash flow hedges, including commodity contracts and interest rate swaps, and the Company's portion of Haddington Energy Partners, LP's accumulated other comprehensive income related to its unrealized gains and losses of "available for sale securities," as defined by SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." 5. Earnings Per Share Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share assumes the conversion of stock options into common shares and the lifting of restrictions on issued restricted shares using the treasury stock method to the extent the effect would be dilutive. The following table sets forth the computation of basic and diluted earnings per share. Three Months Ended March 31, - -------------------------------------------------------------------------------- (In millions, except per share data) 2005 2004 - -------------------------------------------------------------------------------- Numerator: Numerator for basic and diluted EPS - Net income $ 56.1 $ 54.8 ================================================================================ Denominator: Denominator for basic EPS - Weighted average common shares outstanding 75.6 75.5 Conversion of stock options and lifting of restrictions on issued restricted stock 0.5 0.3 - -------------------------------------------------------------------------------- Denominator for diluted EPS - Adjusted weighted average shares outstanding and assumed conversions outstanding 76.1 75.8 ================================================================================ Basic earnings per share $ 0.74 $ 0.73 Diluted earnings per share $ 0.74 $ 0.72 For the three months ended March 31, 2004, options to purchase an additional 22,274 shares of the Company's common stock were outstanding, but were not included in the computation of diluted earnings per share because their effect would have been antidilutive. Exercise prices for options excluded from the computation ranged from $24.90 to $25.59. For the three months ended March 31, 2005, no antidilutive shares were outstanding. 6. Retirement Plans & Other Postretirement Benefits The Company maintains three qualified defined benefit pension plans, a nonqualified supplemental executive retirement plan (SERP), and three other postretirement benefit plans. The qualified pension plans and the SERP are aggregated under the heading "Pension Benefits." Other postretirement benefit plans are aggregated under the heading "Other Benefits." Net Periodic Benefit Cost A summary of the components of net periodic benefit cost follows: Three Months Ended March 31, - ---------------------------------------------------------------------------------- Pension Benefits Other Benefits ---------------------- --------------------- (In millions) 2005 2004 2005 2004 - ---------------------------------------------------------------------------------- Service cost $ 1.4 $ 1.6 $ 0.3 $ 0.3 Interest cost 3.5 3.3 1.3 1.5 Expected return on plan assets (3.3) (3.3) (0.1) (0.2) Amortization of prior service cost 0.4 0.2 - - Amortization of transitional obligation - - 0.7 0.7 Amortization of actuarial loss (gain) 0.4 0.2 (0.1) - - ---------------------------------------------------------------------------------- Net periodic benefit cost $ 2.4 $ 2.0 $ 2.1 $ 2.3 ==================================================================================
Employer Contributions to Qualified Pension Plans Currently, the Company expects to contribute approximately $3.7 million to its pension plan trusts for 2005. Through March 31, 2005, no contributions to the pension plan trusts have been made. Amendment to Plans Pension and postretirement periodic cost has increased from approximately $13 million in 2002 to over $16 million in 2004. Preliminary estimates of 2005 periodic cost approximated $18 million. In January 2005, the Company announced the amendment of certain postretirement benefit plans, effective January 1, 2006. The amendment will result in an estimated $3 million decrease in 2005 periodic cost. Two of the unions that represent bargaining employees at the Company's regulated subsidiaries have advised the Company that it is their position that these changes are not permitted under the existing collective bargaining agreements which govern the relationship between the employees and the affected subsidiaries. With assistance from legal counsel, management has analyzed the unions' position and continues to believe that the Company has reserved the right to amend the affected plans and that changing these benefits for retirees is not a mandatory subject of bargaining. Future changes in health care costs, work force demographics, interest rates, or plan changes could significantly affect the estimated cost of these future benefits. 7. Transactions with ProLiance Energy, LLC ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides services to a broad range of municipalities, utilities, industrial operations, schools, and healthcare institutions located throughout the Midwest and Southeast United States. ProLiance's primary customers include Vectren's utilities and nonregulated gas supply operations as well as Citizens Gas. ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. The Company, including its retail gas supply operations, contracted for all natural gas purchases through ProLiance in all periods presented. The Company accounts for its investment in ProLiance using the equity method of accounting. As part of a settlement agreement approved by the IURC during July 2002, the gas supply agreements with Indiana Gas and SIGECO, were approved and extended through March 31, 2007. The utilities may decide to conduct a "request for proposal" (RFP) for a new supply administrator, or they may decide to make an alternative proposal for procurement of gas supply. That decision will be made by December 2005. To the extent an RFP is conducted, ProLiance is fully expected to participate in the RFP process for service to the utilities after March 31, 2007. Transactions with ProLiance Purchases from ProLiance for resale and for injections into storage for the three months ended March 31, 2005 and 2004, totaled $253.4 million and $247.9 million, respectively. Amounts owed to ProLiance at March 31, 2005, and December 31, 2004, for those purchases were $77.8 million and $108.2 million, respectively, and are included in Accounts payable to affiliated companies. Amounts charged by ProLiance for gas supply services are established by supply agreements with each utility. ProLiance Contingency In 2002, a civil lawsuit was filed in the United States District Court for the Northern District of Alabama by the City of Huntsville, Alabama d/b/a Huntsville Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville Utilities asserted claims based on alleged breach of contract with respect to the provision of portfolio services and/or pricing advice, fraud, fraudulent inducement, and other theories, including conversion and violations under the Racketeering, Influenced and Corrupt Organizations Act (RICO). These claims related generally to: (1) alleged breach of contract in providing advice and/or administering portfolio arrangements; (2) alleged promises to provide gas at a below-market rate; (3) the creation and repayment of a "winter levelizing program" instituted by ProLiance in conjunction with the Manager of Huntsville's Gas Utility to allow Huntsville Utilities to pay its gas bills from the winter of 2000-2001 over an extended period of time coupled with the alleged ignorance about the program on the part of Huntsville Utilities' Gas Board and other management, and; (4) conversion of Huntsville Utilities' gas storage supplies to repay the balance owed on the winter levelizing program and the alleged lack of authority of Huntsville Utilities' gas manager to approve those sales. In early 2005, a jury trial commenced and on February 10, 2005, the jury returned a verdict largely in favor of Huntsville Utilities and awarded Huntsville Utilities compensatory damages of $8.2 million and punitive damages of $25.0 million. The jury rejected Huntsville Utilities' claim of conversion. The jury also rejected a counter claim by ProLiance for payment of amounts due from Huntsville Utilities. Following that verdict, there were a number of issues presented to the judge for resolution. Huntsville made a claim under federal law that it was entitled to have the compensatory damage award trebled. The judge has rejected that request. ProLiance made a claim against Huntsville for unjust enrichment, which was also rejected by the judge. Still pending before the judge is a request by Huntsville's lawyers for $2.7 million in attorneys' fees. ProLiance has contested that request. It is anticipated that post-judgment motions will be filed with the judge. Absent a substantial reduction to the judgment, ProLiance would expect to initiate the appeal process as ProLiance's management believes there are reasonable grounds for appeal which offer a basis for reversal of the entire verdict. While it is reasonably possible that a liability has been incurred by ProLiance, it is not possible to predict the ultimate outcome of an appeal of the verdict. ProLiance recorded a reserve of $3.9 million as of December 31, 2004, reflective of their assessment of the lower end of the range of potential exposure on certain issues identified in the case and inclusive of estimated ongoing litigation costs. Amounts due from Huntsville Utilities were fully reserved by ProLiance in 2003. As an equity investor in ProLiance, the Company reflected its share of the charge, or $1.4 million after tax, in its 2004 results. It is not expected that an unfavorable outcome on appeal will have a material adverse effect on the Company's consolidated financial position or its liquidity, but an unfavorable outcome could be material to the Company's earnings. 8. Commitments & Contingencies Legal Proceedings The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. IRS Section 29 Investment Tax Credit Recent Developments Vectren's Coal Mining operations are comprised of Vectren Fuels, Inc. (Fuels), which includes its coal mines and related operations and Vectren Synfuels, Inc. (Synfuels). Synfuels holds one limited partnership unit (an 8.3% interest) in Pace Carbon Synfuels Investors, LP (Pace Carbon), a Delaware limited partnership formed to develop, own, and operate four projects to produce and sell coal-based synthetic fuel utilizing Covol technology. Under Section 29 of the Internal Revenue Code, manufacturers such as Pace Carbon receive a tax credit for every ton of synthetic fuel sold. To qualify for the credits, the synthetic fuel must meet three primary conditions: 1) there must be a significant chemical change in the coal feedstock, 2) the product must be sold to an unrelated person, and 3) the production facility must have been placed in service before July 1, 1998. In past rulings, the Internal Revenue Service (IRS) has concluded that the synthetic fuel produced at the Pace Carbon facilities should qualify for Section 29 tax credits. The IRS issued a private letter ruling with respect to the four projects on November 11, 1997, and subsequently issued an updated private letter ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected total tax credits under Section 29 in its consolidated results through March 31, 2005, of approximately $61 million. To date, Vectren has been in a position to fully recognize the credits generated. Primarily from the use of these credits, the Company was in an Alternative Minimum Tax (AMT) position in 2004 and expects to be in that position in 2005. As a result, the Company has an AMT credit carryforward of approximately $34 million at March 31, 2005. During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year and later expanded the audit to include tax years 1999, 2000, and 2001. In May 2004, the IRS completed its audit of the 1998 to 2001 tax returns of Pace Carbon requesting only minor modifications to previously filed returns. There were no changes to any of the filed Section 29 tax credit calculations. The Permanent Subcommittee on Investigations of the U.S. Senate's Committee on Governmental Affairs, however, has an ongoing investigation related to Section 29 tax credits. Further, Section 29 tax credits are only available when the price of oil is less than a base price specified by the tax code, as adjusted for inflation. The Company does not believe that credits realized in prior years will be affected by the limitation, but an average NYMEX price in excess of approximately $60 per barrel for the remainder of 2005, could limit Section 29 tax credits in 2005 and beyond. In January 2005, the Company executed an insurance arrangement that partially limits the Company's exposure if a limitation on the availability of tax credits were to occur in 2005 and/or 2006 due to oil prices. The insurance policy protects approximately two-thirds of the expected 2005 and one-third of the expected 2006 tax credits. Vectren believes it is justified in its reliance on the private letter rulings and recent IRS audit results for the Pace Carbon facilities. Additionally, the Company does not currently expect oil price limitations on the credits. Therefore, the Company will continue to recognize Section 29 tax credits as they are earned until there is either a change in the tax code or the IRS' interpretation of that tax code. United States Securities and Exchange Commission Inquiry into PUHCA Exemption In July 2004, the Company received a letter from the SEC regarding its exempt status under the Public Utility Holding Company Act of 1935 (PUHCA). The letter asserts that Vectren's out of state electric power sales exceed the amount previously determined by the SEC to be acceptable in order to qualify for the exemption. There is pending a request by Vectren for an order of exemption under Section 3(a)(1) of PUHCA. Vectren also claims the benefit of the exemption pursuant to Rule 2 under Section 3(a)(1) of PUHCA by filing an annual statement on SEC Form U-3A-2. The Company has responded to the SEC inquiry and filed an amended Form U-3A-2 for the year ended December 31, 2003. The amendment changed the method of aggregating wholesale power sales and purchases outside of Indiana from that previously reported. The new method is to aggregate by delivery point. The amendment also submitted clarifications as to activity outside of Indiana related to gas utility operations. Guarantees & Product Warranties Vectren Corporation issues guarantees to third parties on behalf of its unconsolidated affiliates. Such guarantees allow those affiliates to execute transactions on more favorable terms than the affiliate could obtain without such a guarantee. Guarantees may include posted letters of credit, leasing guarantees, and performance guarantees. As of March 31, 2005, guarantees issued and outstanding on behalf of unconsolidated affiliates approximated $6 million. The Company has also issued a guarantee approximating $4 million related to the residual value of an operating lease that expires in 2006. Vectren Corporation has accrued no liabilities for these guarantees as they relate to guarantees issued among related parties or were executed prior to the adoption of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Liabilities accrued for, and activity related to, product warranties are not significant. 9. Environmental Matters Clean Air Act NOx SIP Call Matter The Company has taken steps to comply with Indiana's State Implementation Plan (SIP) of the Clean Air Act (the Act). These steps include installing Selective Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in a chemical reaction. This technology is known to currently be the most effective method of reducing nitrogen oxide (NOx) emissions where high removal efficiencies are required. The IURC has issued orders that approve: o the Company's project to achieve environmental compliance by investing in clean coal technology; o a total capital cost investment for this project up to $244 million (excluding AFUDC), subject to periodic review of the actual costs incurred; o a mechanism whereby, prior to an electric base rate case, the Company may recover through a rider that is updated every six months, an 8% return on its weighted capital costs for the project; and o ongoing recovery of operating costs, including depreciation and purchased emission allowances, related to the clean coal technology once the facility is placed into service. Through March 31, 2005, approximately $238 million (excluding AFUDC) has been expended, and three of the four SCR's are operational. Once all equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. The Company has achieved timely compliance through the reduction of the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance. Information Request On January 23, 2001, SIGECO received an information request from the USEPA under Section 114 of the Clean Air Act for historical operational information on the Warrick and A.B. Brown generating stations. SIGECO has provided all information requested with the most recent correspondence provided on March 26, 2001. Manufactured Gas Plants In the past, Indiana Gas, SIGECO, and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas, SIGECO, and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program (VRP) and is currently conducting some level of remedial activities, including groundwater monitoring at certain sites, where deemed appropriate, and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's VRP. In response, SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk. On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO added those four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. That renewal was approved by the IDEM on February 24, 2004. On July 13, 2004, SIGECO filed a declaratory judgment action against its insurance carriers seeking a judgment finding its carriers liable under the policies for coverage of further investigation and any necessary remediation costs that SIGECO may accrue under the VRP program. The total investigative costs, and if necessary, costs of remediation at the four SIGECO sites, as well as the amount of any PRP or insurance recoveries, cannot be determined at this time. Jacobsville Superfund Site On July 22, 2004, the USEPA listed the Jacobsville Neighborhood Soil Contamination site in Evansville, Indiana, on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The USEPA has identified four sources of historic lead contamination. These four sources shut down manufacturing operations years ago. When drawing up the boundaries for the listing, the USEPA included a 250 acre block of properties surrounding the Jacobsville neighborhood, including Vectren's Wagner Operations Center. Vectren's property has not been named as a source of the lead contamination, nor does the USEPA's soil testing to date indicate that the Vectren property contains lead contaminated soils. Vectren's own soil testing, completed during the construction of the Operations Center, did not indicate that the Vectren property contains lead contaminated soils. At this time, Vectren anticipates only additional soil testing, if required by the USEPA. Clean Air Interstate Rule & Clean Air Mercury Rule In March of 2005 USEPA finalized two new air emission reduction regulations. The Clean Air Interstate Rule (CAIR) is an allowance cap and trade program requiring further reductions in Nitrogen Oxides (NOx) and Sulfur Dioxide (SO2) emissions from coal-burning power plants. The Clean Air Mercury Rule (CAMR) is an allowance cap and trade program requiring further reductions in mercury emissions from coal-burning power plants. Both sets of regulations require emission reductions in two phases. The first phase deadline for both rules is 2010, and the second phase deadline for compliance with the emission reductions required under CAIR is 2015, while the second phase deadline for compliance with the emission reduction requirements of CAMR is 2018. The Company is evaluating compliance options and fully expects to be in compliance by the required deadlines. 10.Rate & Regulatory Matters SIGECO and Indiana Gas Base Rate Settlements On June 30, 2004, the IURC approved a $5.7 million base rate increase for SIGECO's gas distribution business, and on November 30, 2004, approved a $24 million base rate increase for Indiana Gas' gas distribution business. The new rate designs include a larger service charge, which is intended to address to some extent earnings volatility related to weather. The base rate change in SIGECO's service territory was implemented on July 1, 2004, resulting in additional revenues in the first quarter of 2005 of $1.6 million. The base rate change in Indiana Gas' service territory was implemented on December 1, 2004, resulting in additional revenues in the first quarter of 2005 of $6.3 million. VEDO Base Rate Increase Settlement On April 13, 2005, the PUCO approved a $15.7 million base rate increase for VEDO's gas distribution business. The new rate design includes a larger service charge, which is intended to address to some extent earnings volatility related to weather. The new rates also provide for funding of conservation programs and the recovery of on-going costs to comply with the Pipeline Safety Improvement Act of 2002. The base rate change was implemented on April 14, 2005. Accordingly, no impact of the VEDO base rate change has been reflected in the interim financial statements for the first quarter of 2005. Gas Cost Recovery (GCR) Audit Proceedings There is an Ohio requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, a two-year audit period ended in November 2002. That audit period provided the PUCO staff its initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff submitted an audit report in the fall of 2003 wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. A hearing has been held, and the PUCO staff has recommended a $6.1 million disallowance. The Ohio Consumer Counselor has recommended an $11.5 million disallowance. For this PUCO audit period, any disallowance relating to the Company's ProLiance arrangement will be shared by the Company's joint venture partner. Based on a review of the matters, the Company has recorded $1.1 million for its estimated pretax share of a potential disallowance. A PUCO decision on this matter is yet to be issued. The Company is also unable to determine the effects that a PUCO decision for the audit period ended in November 2002 may have on results in audit periods beginning after November 2002. 11.Impact of Recently Issued Accounting Guidance FIN 47 In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), an interpretation of SFAS 143. The interpretation is effective for the Company no later than December 31, 2005. FIN 47 clarifies that a legal obligation to perform an asset retirement activity that is conditional on a future event is within SFAS 143's scope. It also clarifies the meaning of the term "conditional asset retirement obligation" as a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of an asset retirement obligation that is conditional on a future event if the liability's fair value can be estimated reasonably. The interpretation provides examples of conditional asset retirement obligations that may need to be recognized under the provisions of FIN 47, including asbestos and utility pole removal and dismantling plant. The interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 requires the reassessment of whether a portion of accrued removal costs should be recharacterized as a liability under generally accepted accounting principles. FIN 47 may also require the accrual of additional liabilities and could result in increased near-term expense. The Company is currently assessing the impact this interpretation will have on its financial statements. EITF 04-06 At its March 2005 meeting, the EITF Task Force reached a consensus on EITF 04-06 "Accounting for Stripping Costs Incurred during Production in the Mining Industry"(EITF 04-06) that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the cost of the inventory produced during the period that the stripping costs are incurred. EITF 04-06 is effective for the first reporting period in fiscal years beginning after December 15, 2005, with early adoption permitted. It has been the Company's policy to account for such costs as mine development costs. If material, any unamortized costs that cannot be reclassified to inventory must be charged to earnings as a cumulative effect of change in accounting principle. The Company is in the process of determining if the impact of this standard will be material to its operating results. 12.Segment Reporting The Company segregates its operations into three groups: 1) Utility Group, 2) Nonregulated Group, and 3) Corporate and Other Group. The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations, which consist of the Company's regulated operations (the Gas Utility Services and Electric Utility Services operating segments), and other operations that provide information technology and other support services to those regulated operations. In total, there are three operating segments of the Utility Group as defined by SFAS 131 "Disclosure About Segments of an Enterprise and Related Information" (SFAS 131). Gas Utility Services provides natural gas distribution and transportation services in nearly two-thirds of Indiana and to west central Ohio. Electric Utility Services provides electricity primarily to southwestern Indiana, and includes the Company's power generating and marketing operations. For these regulated operations the Company uses after tax operating income as a measure of profitability, consistent with regulatory reporting requirements. The Company cross manages its regulated operations as separated between Energy Delivery, which includes the gas and electric transmission and distribution functions, and Power Supply, which includes the power generating and marketing operations. For the Utility Group's other operations, net income is used as the measure of profitability. The Nonregulated Group is comprised of one operating segment as defined by SFAS 131 that includes various subsidiaries and affiliates offering and investing in energy marketing and services, coal mining and utility infrastructure services, among other broadband and energy-related opportunities. The Corporate and Other Group is comprised of one operating segment as defined by SFAS 131 that includes unallocated corporate expenses such as branding and charitable contributions, among other activities, that benefit the Company's other operating segments. Information related to the Company's business segments is summarized below: Three Months Ended March 31, - ------------------------------------------------------------------------------- (In millions) 2005 2004 - ------------------------------------------------------------------------------- Revenues Utility Group Gas Utility Services $ 516.7 $ 505.1 Electric Utility Services 94.7 88.8 Other Operations 9.1 9.4 Eliminations (8.9) (9.1) - ------------------------------------------------------------------------------- Total Utility Group 611.6 594.2 - ------------------------------------------------------------------------------- Nonregulated Group 89.5 70.4 Corporate & Other Group - - Eliminations (23.9) (19.3) - ------------------------------------------------------------------------------- Consolidated Revenues $ 677.2 $ 645.3 =============================================================================== Profitability Measure Utility Group: Regulated Operating Income (Operating Income Less Applicable Income Taxes) Gas Utility Services $ 45.1 $ 46.1 Electric Utility Services 17.3 13.4 - ------------------------------------------------------------------------------- Total Regulated Operating Income 62.4 59.5 - ------------------------------------------------------------------------------- Regulated other income (expense) - net (0.1) (0.6) Regulated interest expense & preferred dividends (15.9) (15.8) - ------------------------------------------------------------------------------- Regulated Net Income 46.4 43.1 - ------------------------------------------------------------------------------- Other Operations Net Income 1.7 1.6 - ------------------------------------------------------------------------------- Utility Group Net Income 48.1 44.7 - ------------------------------------------------------------------------------- Nonregulated Group Net Income 8.9 10.6 Corporate & Other Group Net Loss (0.9) (0.5) - ------------------------------------------------------------------------------- Consolidated Net Income $ 56.1 $ 54.8 =============================================================================== 2004 Gas Utility Services regulated operating income was favorably impacted by a $3.2 million adjustment to utility plant depreciation expense. 2004 Electric Utility Services regulated operating income was unfavorably impacted by a $2.2 million adjustment to regulatory asset amortization. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Description of the Business Vectren Corporation (the Company or Vectren), an Indiana corporation, is an energy and applied technology holding company headquartered in Evansville, Indiana. The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc. (VUHI), serves as the intermediate holding company for three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas), Southern Indiana Gas and Electric Company (SIGECO), and the Ohio operations. VUHI also has other assets that provide information technology and other services to the three utilities. VUHI's consolidated operations are collectively referred to as the Utility Group. Both Vectren and VUHI are exempt from registration pursuant to Section 3(a) (1) and 3(c) of the Public Utility Holding Company Act of 1935. Indiana Gas provides energy delivery services to approximately 555,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to approximately 136,000 electric customers and approximately 110,000 gas customers located near Evansville in southwestern Indiana. SIGECO also owns and operates electric generation to serve its electric customers and optimizes those assets in the wholesale power market. Indiana Gas and SIGECO generally do business as Vectren Energy Delivery of Indiana. The Ohio operations provide energy delivery services to approximately 315,000 natural gas customers located near Dayton in west central Ohio. The Ohio operations are owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc. (VEDO), a wholly owned subsidiary, (53% ownership) and Indiana Gas (47% ownership). The Ohio operations generally do business as Vectren Energy Delivery of Ohio. The Utility Group generates revenue primarily from the delivery of natural gas and electric service to its customers. The primary source of cash flow for the Utility Group results from the collection of customer bills and the payment for goods and services procured for the delivery of gas and electric services. The results of the Utility Group are impacted by weather patterns in its service territory and general economic conditions both in its Indiana and Ohio service territories as well as nationally. The Company is also involved in nonregulated activities in three primary business areas: Energy Marketing and Services, Coal Mining, and Utility Infrastructure Services. Energy Marketing and Services markets natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal and generates IRS Code Section 29 tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. In addition, there are other businesses that invest in broadband communication services, energy-related opportunities, real estate, and leveraged leases among other activities. These operations are collectively referred to as the Nonregulated Group. The Nonregulated Group supports the Company's regulated utilities pursuant to service contracts by providing natural gas supply services, coal, utility infrastructure services, and other services. The Nonregulated Group generates revenue or earnings from the provision of services to customers. The activities of the Nonregulated Group are closely linked to the utility industry, and the results of those operations are generally impacted by factors similar to those impacting the overall utility industry. The Company has in place a disclosure committee that consists of senior management as well as financial management. The committee is actively involved in the preparation and review of the Company's SEC filings. Executive Summary of Consolidated Results of Operations The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto. Three Months Ended March 31, - ------------------------------------------------------------------------------- (In millions, except per share data) 2005 2004 - ------------------------------------------------------------------------------- Net income $ 56.1 $ 54.8 Attributed to: Utility Group $ 48.1 $ 44.7 Nonregulated Group 8.9 10.6 Corporate & other (0.9) (0.5) - ------------------------------------------------------------------------------- Basic earnings per share $ 0.74 $ 0.73 Attributed to: Utility Group $ 0.63 $ 0.60 Nonregulated Group 0.12 0.14 Corporate & other (0.01) (0.01) Results For the three months ended March 31, 2005, net income was $56.1 million, or $.74 per share, compared to $54.8 million, or $0.73 per share for the three months ended March 31, 2004. Utility Group earnings were $48.1 million for the three months ended March 31, 2005, compared to $44.7 million in the prior year. The $3.4 million increase in Utility Group earnings is due to the implementation of new gas base rates in the Company's Indiana service territories, higher electric revenues associated with recovery of pollution control investments, and increased wholesale electric margins. Gas base rate increases added margin of $7.9 million, or $4.7 million after tax. These increases were partially offset by the impact of warmer weather on customer usage during this high consumption quarter and increased depreciation expense and income taxes. For the quarter ended March 31, 2005, heating weather 7 percent warmer than normal and 3 percent warmer than the prior year reduced first quarter 2005 margins by an estimated $4.8 million ($2.9 million after tax) and by an estimated $3.0 million ($1.7 million after tax) when compared to the same period last year. Nonregulated Group earnings were $8.9 million for the three months ended March 31, 2005, compared to $10.6 million in the prior year. The Company's primary nonregulated business groups, Energy Marketing and Services, Coal Mining, and Utility Infrastructure Services, contributed $9.4 million to 2005 earnings, down slightly from the $10.0 million contributed in 2004. The slight decrease is attributable to lower earnings from gas marketing and performance contracting operations, offset by increased earnings from mining operations. The 2004 contribution from Other Businesses reflects an after tax gain of $5.3 million recognized on the sale of an investment held by Haddington Energy Partners which was largely offset by a $4.5 million after tax charge related to the write down of the Company's broadband investments. Dividends Dividends declared for the three months ended March 31, 2005, were $0.295 per share compared to $0.285 per share for the same period in 2004. Detailed Discussion of Results of Operations Following is a more detailed discussion of the results of operations of the Company's Utility Group and Nonregulated Group. The detailed results of operations for the Utility Group and Nonregulated Group are presented and analyzed before the reclassification and elimination of certain intersegment transactions necessary to consolidate those results into the Company's Consolidated Statements of Income. Corporate and Other operations are not significant. Results of Operations of the Utility Group The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations, which consist of the Company's regulated operations and other operations that provide information technology and other support services to those regulated operations. The Company segregates its regulated operations into a Gas Utility Services operating segment and an Electric Utility Services operating segment. The Gas Utility Services segment provides natural gas distribution and transportation services to nearly two-thirds of Indiana and to west central Ohio. The Electric Utility Services segment provides electric distribution services primarily to southwestern Indiana, and includes the Company's power generating and marketing operations. In total, these regulated operations supply natural gas and/or electricity to nearly one million customers. The results of operations of the Utility Group before certain intersegment eliminations and reclassifications for the three months ended March 31, 2005 and 2004, follow: Three Months Ended March 31, - ------------------------------------------------------------------------------- (In millions, except per share data) 2005 2004 - ------------------------------------------------------------------------------- OPERATING REVENUES Gas utility $ 516.7 $ 505.1 Electric utility 94.7 88.8 Other 0.2 0.3 - ------------------------------------------------------------------------------- Total operating revenues 611.6 594.2 - ------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 370.9 365.6 Fuel for electric generation 26.9 22.9 Purchased electric energy 2.3 4.4 Other operating 61.6 62.1 Depreciation & amortization 33.4 29.6 Taxes other than income taxes 21.8 22.3 - ------------------------------------------------------------------------------- Total operating expenses 516.9 506.9 - ------------------------------------------------------------------------------- OPERATING INCOME 94.7 87.3 OTHER INCOME (EXPENSE) Other income (expense) - net 2.2 1.9 Equity in earnings (losses) of unconsolidated affiliates - 0.2 - ------------------------------------------------------------------------------- Total other income (expense) 2.2 2.1 - ------------------------------------------------------------------------------- INTEREST EXPENSE 16.9 17.0 - ------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 80.0 72.4 - ------------------------------------------------------------------------------- INCOME TAXES 31.9 27.7 - ------------------------------------------------------------------------------- NET INCOME $ 48.1 $ 44.7 =============================================================================== CONTRIBUTION TO VECTREN BASIC EPS $ 0.63 $ 0.60 =============================================================================== Utility Group earnings were $48.1 million for the three months ended March 31, 2005, compared to $44.7 million in the prior year. The $3.4 million increase in Utility Group earnings is due to the implementation of new gas base rates in the company's Indiana service territories, higher electric revenues associated with pollution control investments, and increased wholesale electric margins. Gas base rate increases added margin of $7.9 million, or $4.7 million after tax. These increases were partially offset by the impact of warmer weather on customer usage during this high consumption quarter and increased depreciation expense and income taxes. For the quarter ended March 31, 2005, heating weather 7 percent warmer than normal and 3 percent warmer than the prior year reduced first quarter 2005 margins by an estimated $4.8 million ($2.9 million after tax) and by an estimated $3.0 million ($1.7 million after tax) when compared to the same period last year. Throughout this discussion, the terms Gas Utility margin and Electric Utility margin are used. Gas Utility margin and Electric Utility margin could be considered non-GAAP measures of income. Gas Utility margin is calculated as Gas utility revenues less the Cost of gas. Electric Utility margin is calculated as Electric utility revenues less Fuel for electric generation and Purchased electric energy. These measures exclude Other operating expenses, Depreciation and amortization, and Taxes other than income taxes, which are included in the calculation of operating income. The Company believes Gas Utility and Electric Utility margins are better indicators of relative contribution than revenues since gas prices and fuel costs can be volatile and are generally collected on a dollar-for-dollar basis from customers. Margins should not be considered an alternative to, or a more meaningful indicator of, operating performance than operating income or net income as determined in accordance with accounting principles generally accepted in the United States. Significant Fluctuations Utility Group Margin Margin generated from the sale of natural gas and electricity to residential and commercial customers is seasonal and impacted by weather patterns in the Company's service territories. Margin generated from sales to large customers (generally industrial, other contract, and firm wholesale customers) is primarily impacted by overall economic conditions. Margin is also impacted by the collection of state mandated taxes, which fluctuate with gas costs, and is also impacted by some level of price sensitivity in volumes sold. Electric generating asset optimization activities are primarily affected by market conditions, the level of excess generating capacity, and electric transmission availability. Following is a discussion and analysis of margin generated from regulated utility operations. Gas Utility Margin (Gas Utility Revenues less Cost of Gas Sold) Gas Utility margin and throughput by customer type follows: Three Months Ended March 31, - ------------------------------------------------------------------------------- (In millions) 2005 2004 - ------------------------------------------------------------------------------- Residential $ 94.8 $ 91.7 Commercial 32.9 31.5 Industrial 15.6 14.9 Miscellaneous 2.5 1.4 - ------------------------------------------------------------------------------- Total gas utility margin $ 145.8 $ 139.5 =============================================================================== Sold & transported volumes in MMDth: To residential & commercial customers 55.0 59.1 To industrial customers 26.8 27.4 - ------------------------------------------------------------------------------- Total throughput 81.8 86.5 =============================================================================== Gas Utility margins for the three months ended March 31, 2005, were $145.8 million, an increase of $6.3 million, or 4 percent, compared to the prior year period. The rate case orders implemented in the second half of 2004 added margin of $7.9 million. This increase in revenues reflects new gas rates designed to recover the majority of the authorized increase evenly through higher customer charges and non-weather sensitive usage rates. It is estimated that weather 7 percent warmer than normal and 3 percent warmer than prior year decreased margins $2.6 million and was the primary contributor to the decreased throughput. The remaining change is primarily attributable to expense recovery pursuant to Ohio regulatory trackers. The average cost per dekatherm of gas purchased for the three months ended March 31, 2005, was $7.29 compared to $6.60 in 2004. Electric Utility Margin (Electric Utility Revenues less Fuel for Electric Generation and Purchased Electric Energy) Electric Utility margin by revenue type follows: Three Months Ended March 31, - ------------------------------------------------------------------------------- (In millions) 2005 2004 - ------------------------------------------------------------------------------- Residential & commercial $ 37.1 $ 35.2 Industrial 15.3 14.5 Municipalities & other 4.1 4.8 - ------------------------------------------------------------------------------- Total retail & firm wholesale 56.5 54.5 Asset optimization 9.0 7.0 - ------------------------------------------------------------------------------- Total electric utility margin $ 65.5 $ 61.5 =============================================================================== Retail & Firm Wholesale Margin For the three months ended March 31, 2005, margin from serving native load and firm wholesale customers was $56.5 million, an increase of $2.0 million when compared to 2004. Margin increased $2.6 million due to the increase in retail electric rates related to recovery of environmental compliance expenditures and related operating expenses. The effects of weather partially offset the increase by approximately $0.4 million. Resulting primarily from weather, total retail and firm wholesale volumes sold decreased 4% to 1,439.2 GWh in 2005, compared to 1,499.7 GWh in 2004. Margin from Asset Optimization Activities Periodically, generation capacity is in excess of that needed to serve native load and firm wholesale customers. The Company markets this unutilized capacity to optimize the return on its owned generation assets. Substantially the entire margin from these activities is generated from contracts that are integrated with portfolio requirements around power supply and delivery and are short-term purchase and sale transactions that expose the Company to limited market risk. Following is a reconciliation of asset optimization activity: Three Months Ended March 31, - ------------------------------------------------------------------------------- (In millions) 2005 2004 - ------------------------------------------------------------------------------- Beginning of Period Net Balance Sheet Position $ (0.6) $ (0.4) Statement of Income Activity Net mark-to-market gains 2.5 2.8 Net realized gains recognized 6.5 4.2 - ------------------------------------------------------------------------------- Net activity in electric utility margin 9.0 7.0 - ------------------------------------------------------------------------------- Net cash received & other adjustments (6.0) (3.2) - ------------------------------------------------------------------------------- End of Period Net Balance Sheet Position $ 2.4 $ 3.4 =============================================================================== Net asset optimization margins increased $2.0 million compared to 2004 due to an increase in available capacity. The availability of excess capacity was reduced in 2004 by scheduled outages of owned generation related to the installation of environmental compliance equipment. Utility Group Operating Expenses Other Operating For the three months ended March 31, 2005, other operating expenses decreased $0.5 million, compared to the same period in 2004. The decrease was primarily due to $1.1 million in lower NOx operating expenses, offset somewhat by increased costs for scrubber chemicals, gasoline, and other costs. Depreciation & Amortization Depreciation expense increased $3.8 million in 2005, compared to 2004. Installation of environmental compliance equipment accounted for $1.4 million of the increase. In addition, the first quarter of 2004 was $1.8 million lower due to an adjustment of Ohio depreciation rates and amortization of Indiana regulatory assets. Utility Group Income Taxes For the three months ended March 31, 2005, Federal and state income taxes increased $4.2 million primarily due to higher pre-tax income. Environmental Matters Clean Air Act NOx SIP Call Matter The Company has taken steps to comply with Indiana's State Implementation Plan (SIP) of the Clean Air Act (the Act). These steps include installing Selective Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in a chemical reaction. This technology is known to currently be the most effective method of reducing nitrogen oxide (NOx) emissions where high removal efficiencies are required. The IURC has issued orders that approve: o the Company's project to achieve environmental compliance by investing in clean coal technology; o a total capital cost investment for this project up to $244 million (excluding AFUDC), subject to periodic review of the actual costs incurred; o a mechanism whereby, prior to an electric base rate case, the Company may recover through a rider that is updated every six months, an 8% return on its weighted capital costs for the project; and o ongoing recovery of operating costs, including depreciation and purchased emission allowances, related to the clean coal technology once the facility is placed into service. Through March 31, 2005, $238 million has been expended, and three of the four SCR's are operational. Once all equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. The Company has achieved timely compliance through the reduction of the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance. Information Request On January 23, 2001, SIGECO received an information request from the USEPA under Section 114 of the Clean Air Act for historical operational information on the Warrick and A.B. Brown generating stations. SIGECO has provided all information requested with the most recent correspondence provided on March 26, 2001. Manufactured Gas Plants In the past, Indiana Gas, SIGECO, and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas, SIGECO, and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program (VRP) and is currently conducting some level of remedial activities, including groundwater monitoring at certain sites, where deemed appropriate, and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's VRP. In response, SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk. On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO added those four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. That renewal was approved by the IDEM on February 24, 2004. On July 13, 2004, SIGECO filed a declaratory judgment action against its insurance carriers seeking a judgment finding its carriers liable under the policies for coverage of further investigation and any necessary remediation costs that SIGECO may accrue under the VRP program. The total investigative costs, and if necessary, costs of remediation at the four SIGECO sites, as well as the amount of any PRP or insurance recoveries, cannot be determined at this time. Jacobsville Superfund Site On July 22, 2004, the USEPA listed the Jacobsville Neighborhood Soil Contamination site in Evansville, Indiana, on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The USEPA has identified four sources of historic lead contamination. These four sources shut down manufacturing operations years ago. When drawing up the boundaries for the listing, the USEPA included a 250 acre block of properties surrounding the Jacobsville neighborhood, including Vectren's Wagner Operations Center. Vectren's property has not been named as a source of the lead contamination, nor does the USEPA's soil testing to date indicate that the Vectren property contains lead contaminated soils. Vectren's own soil testing, completed during the construction of the Operations Center, did not indicate that the Vectren property contains lead contaminated soils. At this time, Vectren anticipates only additional soil testing, if required by the USEPA. Clean Air Interstate Rule & Clean Air Mercury Rule In March of 2005 USEPA finalized two new air emission reduction regulations. The Clean Air Interstate Rule (CAIR) is an allowance cap and trade program requiring further reductions in Nitrogen Oxides (NOx) and Sulfur Dioxide (SO2) emissions from coal-burning power plants. The Clean Air Mercury Rule (CAMR) is an allowance cap and trade program requiring further reductions in mercury emissions from coal-burning power plants. Both sets of regulations require emission reductions in two phases. The first phase deadline for both rules is 2010, and the second phase deadline for compliance with the emission reductions required under CAIR is 2015, while the second phase deadline for compliance with the emission reduction requirements of CAMR is 2018. The Company is evaluating compliance options and fully expects to be in compliance by the required deadlines. Rate and Regulatory Matters SIGECO and Indiana Gas Base Rate Settlements On June 30, 2004, the IURC approved a $5.7 million base rate increase for SIGECO's gas distribution business, and on November 30, 2004, approved a $24 million base rate increase for Indiana Gas' gas distribution business. The new rate designs include a larger service charge, which is intended to address to some extent earnings volatility related to weather. The base rate change in SIGECO's service territory was implemented on July 1, 2004, resulting in additional revenues in the first quarter of 2005 of $1.6 million. The base rate change in Indiana Gas' service territory was implemented on December 1, 2004, resulting in additional revenues in the first quarter of 2005 of $6.3 million. VEDO Gas Base Rate Settlement On April 13, 2005, the PUCO approved a $15.7 million base rate increase for VEDO's gas distribution business. The new rate design includes a larger service charge, which is intended to address to some extent earnings volatility related to weather. The new rates also provide for funding of conservation programs and the recovery of on-going costs to comply with the Pipeline Safety Improvement Act of 2002. The base rate change was implemented on April 14, 2005. Accordingly, no impact of the VEDO base rate change has been reflected in the interim financial statements for the first quarter of 2005. Incremental 2005 revenues resulting from the rate increase are expected to approximate $12 million. Gas Cost Recovery (GCR) Audit Proceedings There is an Ohio requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, a two-year audit period ended in November 2002. That audit period provided the PUCO staff its initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff submitted an audit report in the fall of 2003 wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. A hearing has been held, and the PUCO staff has recommended a $6.1 million disallowance. The Ohio Consumer Counselor has recommended an $11.5 million disallowance. For this PUCO audit period, any disallowance relating to the Company's ProLiance arrangement will be shared by the Company's joint venture partner. Based on a review of the matters, the Company has recorded $1.1 million for its estimated pretax share of a potential disallowance. A PUCO decision on this matter is yet to be issued. The Company is also unable to determine the effects that a PUCO decision for the audit period ended in November 2002 may have on results in audit periods beginning after November 2002. Other Operating Matters MISO On April 1, 2005, the MISO Day Two energy markets commenced operation. As a result of being a market participant, the Company now bids its own generation into the Day Ahead and Real Time markets and procures power for its retail customers at Locational Marginal Pricing (LMP) as determined by the MISO market. Vectren, together with three other Indiana electric utilities, has sought authority from the IURC to recover the costs associated with MISO's implementation of the "Day 2 energy market." A hearing considering this request occurred in February, 2005, and Vectren is awaiting an order at this time. Pursuant to the pending proposal, LMP costs will be passed through to customers in Vectren's existing fuel cost recovery proceedings, and other MISO related costs are to be tracked and eventually recovered. The inception of these markets has had no impact on the Company's ability to reliably serve its customers. United States Securities and Exchange Commission Inquiry into PUHCA Exemption In July 2004, the Company received a letter from the SEC regarding its exempt status under the Public Utility Holding Company Act of 1935 (PUHCA). The letter asserts that Vectren's out of state electric power sales exceed the amount previously determined by the SEC to be acceptable in order to qualify for the exemption. There is pending a request by Vectren for an order of exemption under Section 3(a)(1) of PUHCA. Vectren also claims the benefit of the exemption pursuant to Rule 2 under Section 3(a)(1) of PUHCA by filing an annual statement on SEC Form U-3A-2. The Company has responded to the SEC inquiry and filed an amended Form U-3A-2 for the year ended December 31, 2003. The amendment changed the method of aggregating wholesale power sales and purchases outside of Indiana from that previously reported. The new method is to aggregate by delivery point. The amendment also submitted clarifications as to activity outside of Indiana related to gas utility operations. Results of Operations of the Nonregulated Group The Nonregulated Group is comprised of three primary business areas: Energy Marketing and Services, Coal Mining, and Utility Infrastructure Services. Energy Marketing and Services markets natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal and generates IRS Code Section 29 investment tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. In addition, there are other businesses that invest in broadband communication services, energy-related opportunities, real estate, and leveraged leases, among other activities. The Nonregulated Group supports the Company's regulated utilities pursuant to service contracts by providing natural gas supply services, coal, utility infrastructure services, and other services. Nonregulated Group earnings for the three months ended March 31, 2005 and 2004, follow: Three Months Ended March 31, - ------------------------------------------------------------------------------- (In millions, except per share amounts) 2005 2004 - ------------------------------------------------------------------------------- NET INCOME $ 8.9 $ 10.6 =============================================================================== CONTRIBUTION TO VECTREN BASIC EPS $ 0.12 $ 0.14 =============================================================================== NET INCOME ATTRIBUTED TO: Energy Marketing & Services $ 6.0 $ 7.0 Coal Mining 4.4 3.6 Utility Infrastructure (1.0) (0.6) Other Businesses (0.5) 0.6 Nonregulated Group earnings were $8.9 million for the three months ended March 31, 2005, compared to $10.6 million in the prior year. The Company's primary nonregulated business groups, Energy Marketing and Services, Coal Mining, and Utility Infrastructure Services, contributed $9.4 million to 2005 earnings, down slightly from the $10.0 million contributed in 2004. The slight decrease is attributable to lower earnings from gas marketing and performance contracting operations, offset by increased earnings from mining operations. The 2004 contribution from Other Businesses reflects an after tax gain of $5.3 million recognized on the sale of an investment held by Haddington Energy Partners which was largely offset by a $4.5 million after tax charge related to the write down of the Company's broadband-related investments. Energy Marketing & Services Energy Marketing and Services is comprised of the Company's gas marketing operations, performance contracting operations, and retail gas supply operations. Gas marketing operations are performed through the Company's investment in ProLiance Energy LLC (ProLiance), a nonregulated energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas). ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. ProLiance's primary customers include Vectren's utilities and nonregulated gas supply operations as well as Citizen's Gas and other large end-use customers. The Company accounts for its investment in ProLiance using the equity method of accounting. As part of a settlement agreement approved by the IURC during July 2002, the gas supply agreements with Indiana Gas and SIGECO, were approved and extended through March 31, 2007. The utilities may decide to conduct a "request for proposal" (RFP) for a new supply administrator, or they may decide to make an alternative proposal for procurement of gas supply. That decision will be made by December 2005. To the extent an RFP is conducted, ProLiance is fully expected to participate in the RFP process for service to the utilities after March 31, 2007. Energy Systems Group, LLC (ESG), a wholly owned subsidiary, provides energy performance contracting and facility upgrades through its design and installation of energy-efficient equipment throughout the Midwest and Southeast United States. Vectren Retail, LLC (d/b/a Vectren Source), a wholly owned subsidiary, provides natural gas and other related products and services in Ohio and Indiana, serving nearly 120,000 customers opting for choice among energy providers. Net income generated by Energy Marketing and Services for the quarter ended March 31, 2005, was $6.0 million compared to $7.0 million in 2004. In both periods presented, gas marketing operations, performed through ProLiance, provided the primary earnings contribution, totaling $6.4 million in 2005, a slight decrease from the $6.9 million contributed in 2004. The decrease is attributable to pre-verdict legal fees associated with litigation between ProLiance and the City of Huntsville, Alabama (Huntsville Utilities). The remaining decrease in earnings contribution is primarily attributable to the timing of performance contracting operations. For the quarter, Vectren Source's retail gas supply operations earned $0.8 million, compared to $0.6 million in the prior period. Source's earnings contribution was also impacted by warmer than normal weather. ProLiance Contingency In 2002, a civil lawsuit was filed in the United States District Court for the Northern District of Alabama by the City of Huntsville, Alabama d/b/a Huntsville Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville Utilities asserted claims based on alleged breach of contract with respect to the provision of portfolio services and/or pricing advice, fraud, fraudulent inducement, and other theories, including conversion and violations under the Racketeering, Influenced and Corrupt Organizations Act (RICO). These claims related generally to: (1) alleged breach of contract in providing advice and/or administering portfolio arrangements; (2) alleged promises to provide gas at a below-market rate; (3) the creation and repayment of a "winter levelizing program" instituted by ProLiance in conjunction with the Manager of Huntsville's Gas Utility to allow Huntsville Utilities to pay its gas bills from the winter of 2000-2001 over an extended period of time coupled with the alleged ignorance about the program on the part of Huntsville Utilities' Gas Board and other management, and; (4) conversion of Huntsville Utilities' gas storage supplies to repay the balance owed on the winter levelizing program and the alleged lack of authority of Huntsville Utilities' gas manager to approve those sales. In early 2005, a jury trial commenced and on February 10, 2005, the jury returned a verdict largely in favor of Huntsville Utilities and awarded Huntsville Utilities compensatory damages of $8.2 million and punitive damages of $25.0 million. The jury rejected Huntsville Utilities' claim of conversion. The jury also rejected a counter claim by ProLiance for payment of amounts due from Huntsville Utilities. Following that verdict, there were a number of issues presented to the judge for resolution. First, Huntsville made a claim under federal law that it was entitled to have the compensatory damage award trebled. The judge has rejected that request. Second, ProLiance made a claim against Huntsville for unjust enrichment, which was also rejected by the judge. Still pending before the judge is a request by Huntsville's lawyers for $2.7 million in attorneys' fees. ProLiance has contested that request. It is anticipated that post-judgment motions will be filed with the judge. Absent a substantial reduction to the judgment, ProLiance would expect to initiate the appeal process as ProLiance's management believes there are reasonable grounds for appeal which offer a basis for reversal of the entire verdict. While it is reasonably possible that a liability has been incurred by ProLiance, it is not possible to predict the ultimate outcome of an appeal of the verdict. ProLiance recorded a reserve of $3.9 million as of December 31, 2004, reflective of their assessment of the lower end of the range of potential exposure on certain issues identified in the case and inclusive of estimated ongoing litigation costs. Amounts due from Huntsville Utilities were fully reserved by ProLiance in 2003. As an equity investor in ProLiance, the Company reflected its share of the charge, or $1.4 million after tax, in its 2004 results. It is not expected that an unfavorable outcome on appeal will have a material adverse effect on the Company's consolidated financial position or its liquidity, but an unfavorable outcome could be material to the Company's earnings. Coal Mining The Coal Mining group mines and sells coal to the Company's utility operations and to third parties through its wholly owned subsidiary Vectren Fuels, Inc. (Fuels). The Coal Mining Group also generates IRS Code Section 29 tax credits resulting from the production of coal-based synthetic fuels through its 8.3% ownership interest in Pace Carbon Synfuels, LP (Pace Carbon). In addition, Fuels receives synfuel-related fees from synfuel producers unrelated to Pace Carbon for a portion of its coal production. Coal Mining net income for the three months ended March 31, 2005, was $4.4 million, as compared to $3.6 million in 2004. Earnings from the Mining operations were $1.3 million in 2005 compared to $0.7 million in 2004. The contribution from Mining operations increased despite rising commodity operations costs, primarily due to greater production and higher revenue per ton. Synfuel-related results for the quarter, which include earnings from Pace Carbon and synfuel processing fees earned by Fuels, increased $0.2 million. This increase reflects higher production of synthetic fuel produced by Pace Carbon as the result of the relocation of a previously underperforming plant. IRS Section 29 Tax Credit Recent Developments Under Section 29 of the Internal Revenue Code, manufacturers of synthetic fuel such as Pace Carbon receive a tax credit for every ton of synthetic fuel sold. To qualify for the credits, the synthetic fuel must meet three primary conditions: 1) there must be a significant chemical change in the coal feedstock, 2) the product must be sold to an unrelated person, and 3) the production facility must have been placed in service before July 1, 1998. In past rulings, the Internal Revenue Service (IRS) has concluded that the synthetic fuel produced at the Pace Carbon facilities should qualify for Section 29 tax credits. The IRS issued a private letter ruling with respect to the four projects on November 11, 1997, and subsequently issued an updated private letter ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected Section 29 tax credits in its consolidated results through March 31, 2005, of approximately $61 million. To date, Vectren has been in a position to fully recognize the credits generated. Primarily from the use of these credits, the Company was in an Alternative Minimum Tax (AMT) position in 2004 and expects to be in that position in 2005. As a result, the Company has an AMT credit carryforward of $33.7 million at March 31, 2005. During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year and later expanded the audit to include tax years 1999, 2000, and 2001. In May 2004, the IRS completed its audit of the 1998 to 2001 tax returns of Pace Carbon requesting only minor modifications to previously filed returns. There were no changes to any of the filed Section 29 tax credit calculations. The Permanent Subcommittee on Investigations of the U.S. Senate's Committee on Governmental Affairs, however, has an ongoing investigation related to Section 29 tax credits. Further, Section 29 tax credits are only available when the price of oil is less than a base price specified by the tax code, as adjusted for inflation. The Company does not believe that credits realized in prior years will be affected by the limitation, but an average NYMEX price in excess of $60 per barrel for the remainder of 2005, could limit Section 29 tax credits in 2005 and beyond. In January 2005, the Company executed an insurance arrangement that partially limits the Company's exposure if a limitation on the availability of tax credits were to occur in 2005 and/or 2006 due to oil prices. The insurance policy protects approximately two-thirds of the expected 2005 and one-third of the expected 2006 tax credits. The insurance was purchased with no significant impact to 2005 expected results. Vectren believes it is justified in its reliance on the private letter rulings and recent IRS audit results for the Pace Carbon facilities. Additionally, the Company does not currently expect oil price limitations on the credits. Therefore, the Company will continue to recognize Section 29 tax credits as they are earned until there is either a change in the tax code or the IRS' interpretation of that tax code. Utility Infrastructure Services Utility Infrastructure Services provides underground construction and repair to gas, water, and telecommunications companies primarily through its investment in Reliant Services, LLC (Reliant) and Reliant's 100 percent ownership in Miller Pipeline. Reliant is a 50 percent owned strategic alliance with an affiliate of Cinergy Corp. and is accounted for using the equity method of accounting. For the three months ended March 31, 2005, Infrastructure's operations operated at a seasonal loss of $1.0 million, compared to a loss of $0.6 million in 2004. Other Businesses Other Businesses reported a loss of $0.5 million in 2005 compared to earnings of $0.6 million in 2004. The cause of the earnings decrease results primarily from a net gain of $$0.8 million in 2004 resulting from transactions that involved the Company's investment in the Haddington Energy Partnerships, offset by write downs of the Company's broadband-related businesses and investments. The Haddington Energy Partnerships are equity method investments that invest in energy-related ventures. During 2004, these partnerships sold their investments in SAGO Energy, LP, (SAGO) for cash. The Company recognized its portion of the after tax gain totaling $5.3 million, or $0.07 per share. During 2004, the Company evaluated its broadband investments and strategy and determined that it was unlikely it would make additional investments in these operations. As a result, the Company recognized impairment charges associated with its broadband-related investments totaling $7.5 million ($4.5 million after tax), or $0.06 per share. Approximately $6.0 million of the charge relates to the write-off of investments made in companies that were to provide broadband services to the Indianapolis, Indiana and Dayton, Ohio markets and to write down the Company's cost method investment in SIGECOM, LLC, which provides broadband services to the Evansville, Indiana area. The remaining portion of the charge is associated with the write down of broadband-related inventory held by a wholly owned subsidiary that performed municipal broadband consulting services. Impact of Recently Issued Accounting Guidance SFAS 123 (revised 2004) In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based Payments" (SFAS 123R) that will require compensation costs related to all share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS 123R replaces SFAS 123 and supersedes APB 25. In April 2005, the SEC extended the effective date of SFAS 123R to January 1, 2006 for calendar year companies like the Company. SFAS 123R provides for multiple transition methods, and the Company is still evaluating potential methods for adoption. The adoption of this standard is not expected to have a material effect on the Company's operating results or financial condition. FIN 47 In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), an interpretation of SFAS 143. The interpretation is effective for the Company no later than December 31, 2005. FIN 47 clarifies that a legal obligation to perform an asset retirement activity that is conditional on a future event is within SFAS 143's scope. It also clarifies the meaning of the term "conditional asset retirement obligation" as a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of an asset retirement obligation that is conditional on a future event if the liability's fair value can be estimated reasonably. The interpretation provides examples of conditional asset retirement obligations that may need to be recognized under the provisions of FIN 47, including asbestos and utility pole removal and dismantling plant. The interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 requires the reassessment of whether a portion of accrued removal costs should be recharacterized as a liability under generally accepted accounting principles. FIN 47 may also require the accrual of additional liabilities and could result in increased near-term expense. The Company is currently assessing the impact this interpretation will have on its financial statements. EITF 04-06 At its March 2005 meeting, the EITF Task Force reached a consensus on EITF 04-06 "Accounting for Stripping Costs Incurred during Production in the Mining Industry"(EITF 04-06) that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the cost of the inventory produced during the period that the stripping costs are incurred. EITF 04-06 is effective for the first reporting period in fiscal years beginning after December 15, 2005, with early adoption permitted. It has been the Company's policy to account for such costs as mine development costs. If material, any unamortized costs that cannot be reclassified to inventory must be charged to earnings as a cumulative effect of change in accounting principle. The Company is in the process of determining if the impact of this standard will be material to its operating results. Financial Condition Within Vectren's consolidated group, VUHI funds the short-term and long-term financing needs of the Utility Group operations, and Vectren Capital Corp (Vectren Capital) funds short-term and long-term financing needs of the Nonregulated Group and corporate operations. Vectren Corporation guarantees Vectren Capital's debt, but does not guarantee VUHI's debt. Vectren Capital's long-term and short-term obligations outstanding at March 31, 2005, totaled $113.0 million and $118.3 million, respectively. VUHI's outstanding long-term and short-term borrowing arrangements are jointly and severally guaranteed by Indiana Gas, SIGECO, and VEDO. VUHI's long-term and short-term obligations outstanding at March 31, 2005, totaled $550.0 million and $117.0 million, respectively. Additionally, prior to VUHI's formation, Indiana Gas and SIGECO funded their operations separately, and therefore, have long-term debt outstanding funded solely by their operations. The Company's common stock dividends are primarily funded by utility operations. Nonregulated operations have demonstrated sustained profitability, and the ability to generate cash flows. These cash flows are primarily reinvested in other nonregulated ventures, but are also used to fund a portion of the Company's dividends, and from time to time may be reinvested in utility operations or used for corporate expenses. VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at March 31, 2005, are A-/Baa1 as rated by Standard and Poor's Ratings Services (Standard and Poor's) and Moody's Investors Service (Moody's), respectively. SIGECO's credit ratings on outstanding senior unsecured debt are A-/Baa1. SIGECO's credit ratings on outstanding secured debt are A/A3. VUHI's commercial paper has a credit rating of A-2/P-2. Vectren Capital's senior unsecured debt is rated BBB+/Baa2. The ratings of Moody's and Standard and Poor's are categorized as investment grade. Moody's current outlook is stable. During January 2005, Standard and Poor's changed its current outlook to stable from negative. In March 2005, Standard and Poor's also revised the SIGECO credit rating on secured debt to A from A- and on unsecured debt to A- from BBB+. All other ratings are unchanged from December 31, 2004. A security rating is not a recommendation to buy, sell, or hold securities. The rating is subject to revision or withdrawal at any time, and each rating should be evaluated independently of any other rating. Standard and Poor's and Moody's lowest level investment grade rating is BBB- and Baa3, respectively. The Company's consolidated equity capitalization objective is 45-55% of permanent capitalization. This objective may have varied, and will vary, depending on particular business opportunities, capital spending requirements, and seasonal factors that affect the Company's operations. The Company's equity component was 52% and 51% of permanent capitalization at March 31, 2005 and December 31, 2004, respectively. Permanent capitalization includes long-term debt, including current maturities and debt subject to tender, as well as common shareholders' equity and any outstanding preferred stock. The Company expects the majority of its capital expenditures, investments, and debt security redemptions to be provided by internally generated funds. However, due to significant capital expenditures and expected growth in nonregulated operations, the Company may require additional permanent financing. Sources & Uses of Liquidity Operating Cash Flow The Company's primary historical source of liquidity to fund working capital requirements has been cash generated from operations. Cash flow from operating activities increased $27.8 million during the three months ended March 31, 2005, compared to 2004 primarily as a result of increased earnings before non-cash charges and also as a result of favorable changes in working capital accounts. Increased earnings before non-cash charges results from lower amounts of earnings from unconsolidated affiliates and higher amounts of depreciation expense. Favorable working capital changes are partially attributed to recovery of gas and fuel costs. Financing Cash Flow Although working capital requirements are generally funded by cash flow from operations, the Company uses short-term borrowings to supplement working capital needs when accounts receivable balances are at their highest and gas storage is refilled. Additionally, short-term borrowings are required for capital projects and investments until they are permanently financed. Cash flow required for financing activities of $199.8 million for the three months ended March 31, 2005, includes a net decrease of short-term borrowings of $177.1 million, $33.2 million more than was repaid during the three months ended March 31, 2004. The additional debt repayments were principally the result of increased cash flow from operations. Common stock dividends have increased over the prior period due to board authorized increases in the dividend rate. Investing Cash Flow Cash flow required for investing activities was $44.2 million for the three months ended March 31, 2005, and was comparable to 2004. For the three months ended March 31, 2005 and 2004, requirements for capital expenditures were $43.4 million and $44.5 million, respectively. Available Sources of Liquidity At March, 31, 2005, the Company has $615 million of short-term borrowing capacity, including $355 million for the Utility Group and $260 million for the wholly owned Nonregulated Group and corporate operations, of which approximately $238 million is available for the Utility Group operations and approximately $142 million is available for the wholly owned Nonregulated Group and corporate operations. On January 14, 2005, the Company added $24 million of additional short-term borrowing capacity for the Utility Group to provide incremental seasonal borrowing capacity, raising total capacity to $379 million. This seasonal credit line expired March 31, 2005. The Company periodically issues new shares to satisfy dividend reinvestment plan and stock option plan requirements. These new issuances added additional liquidity of $2.3 million in 2004. Potential Uses of Liquidity Planned Capital Expenditures & Investments Investments in total company capital expenditures and nonregulated unconsolidated affiliates for the remainder of 2005 are estimated to approximate $250 million. Ratings Triggers At March 31, 2005, $113.0 million of Vectren Capital's senior unsecured notes were subject to cross-default and ratings trigger provisions that would provide that the full balance outstanding is subject to prepayment if the ratings of Indiana Gas or SIGECO declined to BBB/Baa2. In addition, accrued interest and a make whole amount based on the discounted value of the remaining payments due on the notes would also become payable. The credit rating of Indiana Gas' senior unsecured debt and SIGECO's secured debt remains one level and three levels, respectively, above the ratings trigger. Other Guarantees and Letters of Credit In the normal course of business, Vectren issues guarantees to third parties on behalf of its consolidated subsidiaries and unconsolidated affiliates. Such guarantees allow those subsidiaries and affiliates to execute transactions on more favorable terms than the subsidiary or affiliate could obtain without such a guarantee. Guarantees may include posted letters of credit, leasing guarantees, and performance guarantees. As of March 31, 2005, guarantees issued and outstanding on behalf of unconsolidated affiliates approximated $6 million. In addition, the Company has also issued a guarantee approximating $4 million related to the residual value of an operating lease that expires in 2006. Through March 31, 2005, the Company has not been called upon to satisfy any obligations pursuant to its guarantees. Forward-Looking Information A "safe harbor" for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Certain matters described in Management's Discussion and Analysis of Results of Operations and Financial Condition are forward-looking statements. Such statements are based on management's beliefs, as well as assumptions made by and information currently available to management. When used in this filing, the words "believe," "anticipate," "endeavor," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: o Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unusual maintenance or repairs; unanticipated changes to fossil fuel costs; unanticipated changes to gas supply costs, or availability due to higher demand, shortages, transportation problems or other developments; environmental or pipeline incidents; transmission or distribution incidents; unanticipated changes to electric energy supply costs, or availability due to demand, shortages, transmission problems or other developments; or electric transmission or gas pipeline system constraints. o Increased competition in the energy environment including effects of industry restructuring and unbundling. o Regulatory factors such as unanticipated changes in rate-setting policies or procedures, recovery of investments and costs made under traditional regulation, and the frequency and timing of rate increases. o Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board; the Securities and Exchange Commission; the Federal Energy Regulatory Commission; state public utility commissions; state entities which regulate electric and natural gas transmission and distribution, natural gas gathering and processing, electric power supply; and similar entities with regulatory oversight. o Economic conditions including the effects of an economic downturn, inflation rates, commodity prices, and monetary fluctuations. o Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, interest rate, and warranty risks. o The performance of projects undertaken by the Company's nonregulated businesses and the success of efforts to invest in and develop new opportunities, including but not limited to, the realization of Section 29 income tax credits and the Company's coal mining, gas marketing, and broadband strategies. o Direct or indirect effects on our business, financial condition or liquidity resulting from a change in credit ratings, changes in interest rates, and/or changes in market perceptions of the utility industry and other energy-related industries. o Employee or contractor workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages. o Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures. o Costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters, including, but not limited to, those described in Management's Discussion and Analysis of Results of Operations and Financial Condition. o Changes in Federal, state or local legislature requirements, such as changes in tax laws or rates, environmental laws and regulations. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions, or other factors affecting such statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various business risks associated with commodity prices, interest rates, and counter-party credit. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company's risk management program includes, among other things, the use of derivatives. The Company also executes derivative contracts in the normal course of operations while buying and selling commodities to be used in operations and optimizing its generation assets. The Company has in place a risk management committee that consists of senior management as well as financial and operational management. The committee is actively involved in identifying risks as well as reviewing and authorizing risk mitigation strategies. These risks are not significantly different from the information set forth in Item 7A Quantitative and Qualitative Disclosures About Market Risk included in the Vectren 2004 Form 10-K and is therefore not presented herein. ITEM 4. CONTROLS AND PROCEDURES Changes in Internal Controls over Financial Reporting During the quarter ended March 31, 2005, there have been no changes to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures As of March 31, 2005, the Company conducted an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness and the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective at providing reasonable assurance that material information relating to the Company required to be disclosed by the Company in its filings under the Securities Exchange Act of 1934 (Exchange Act) is brought to their attention on a timely basis. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position. See the notes to the consolidated financial statements regarding investments in unconsolidated affiliates, commitments and contingencies, environmental matters, and rate and regulatory matters. The consolidated condensed financial statements are included in Part 1 Item 1. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Periodically, the Company purchases shares from the open market to satisfy share requirements associated with the Company's share-based compensation plans. The following chart contains information regarding open market purchases made by the Company to satisfy share-based compensation requirements during the three months ended March 31, 2005. - ----------------------------------------------------------------------------------- Total Number of Maximum Number Number of Shares Purchased as of Shares That May Shares Average Price Part of Publicly Be Purchased Under Period Purchased Paid Per Share Announced Plans These Plans - -------------- --------- -------------- ------------------- ------------------ January 1-31 - - - - February 1-28 9,429 $27.76 - - March 1-31 - - - -
ITEM 6. EXHIBITS Exhibits and Certifications 31.1 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002- Chief Executive Officer 31.2 Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002- Chief Financial Officer 32 Certification Pursuant To Section 906 of The Sarbanes-Oxley Act Of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VECTREN CORPORATION Registrant May 3, 2005 /s/Jerome A. Benkert, Jr. ------------------------- Jerome A. Benkert, Jr. Executive Vice President & Chief Financial Officer (Principal Financial Officer) /s/M. Susan Hardwick --------------------------- M. Susan Hardwick Vice President & Controller (Principal Accounting Officer) EX-31.1 2 vvc10q_mar05ex31-1.txt CERTIFICATION Exhibit 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 Quarterly Report on 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) 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 (d) 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 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: May 3, 2005 /s/ Niel C. Ellerbrook ---------------------------------------------- Niel C. Ellerbrook Chairman, President, & Chief Executive Officer EX-31.2 3 vvc10q_mar05ex31-2.txt CERTIFICATION Exhibit 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 Quarterly Report on 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) 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 (d) 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 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: May 3, 2005 /s/ Jerome A. Benkert, Jr. -------------------------------------------------- Jerome A. Benkert, Jr. Executive Vice President & Chief Financial Officer EX-32 4 vvc10q_mar05ex32.txt CERTIFICATION Exhibit 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 3rd day of May, 2005. /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 Chief Financial Officer Executive Officer - -------------------------------------- -------------------------------- (Title) (Title) -----END PRIVACY-ENHANCED MESSAGE-----