-----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, B5XVIcYFTgu2dYSLt9o9ECfcBkY/C3TiE9IC+s+BM493yUikRbr6IvDpj9vdDOmC zKrB0yxRzyZ9p5TdvyXvMg== 0001096385-03-000157.txt : 20031113 0001096385-03-000157.hdr.sgml : 20031113 20031113101135 ACCESSION NUMBER: 0001096385-03-000157 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VECTREN UTILITY HOLDINGS INC CENTRAL INDEX KEY: 0001129542 STANDARD INDUSTRIAL CLASSIFICATION: GAS & OTHER SERVICES COMBINED [4932] IRS NUMBER: 352104850 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16739 FILM NUMBER: 03996056 BUSINESS ADDRESS: STREET 1: 20 NW 4TH ST CITY: EVANSVILLE STATE: IN ZIP: 47708 BUSINESS PHONE: 8124914000 10-Q 1 vuhi_10q-sep03.txt VECTREN UTILITY HOLDINGS 10Q 3RD QTR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 1-16739 VECTREN UTILITY HOLDINGS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-2104850 - ---------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20 N.W. 4th Street, Evansville, Indiana, 47708 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) 812-491-4000 ------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock- Without Par Value 10 October 31, 2003 ------------------------------- ---------------- ---------------- Class Number of Shares Date Table of Contents Item Page Number Number PART I. FINANCIAL INFORMATION 1 Financial Statements (Unaudited) Vectren Utility Holdings, Inc. and Subsidiary Companies Consolidated Condensed Balance Sheets 1-2 Consolidated Condensed Statements of Income 3 Consolidated Condensed Statements of Cash Flows 4 Notes to Unaudited Consolidated Condensed Financial Statements 5-19 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 20-31 3 Quantitative and Qualitative Disclosures About Market Risk 32 4 Controls and Procedures 32 PART II. OTHER INFORMATION 1 Legal Proceedings 33 6 Exhibits and Reports on Form 8-K 33-34 Signatures 35 Access to Information Vectren Corporation makes available all SEC filings and recent annual reports free of charge, including those of its wholly owned subsidiaries, through its website at www.vectren.com, or by request, directed to Investor Relations at the mailing address, phone number, or email address that follows: Mailing Address: Phone Number: Investor Relations Contact: P.O. Box 209 (812) 491-4000 Steven M. Schein Evansville, Indiana Vice President, Investor Relations 47702-0209 sschein@vectren.com Definitions AFUDC: allowance for funds used MMBTU: millions of British thermal during construction units APB: Accounting Principles Board MW: megawatts EITF: Emerging Issues Task Force MWh / GWh: megawatt hours / millions of megawatt hours (gigawatt hours) FASB: Financial Accounting Standards NOx: nitrogen oxide Board FERC: Federal Energy Regulatory OUCC: Indiana Office of the Utility Commission Consumer Counselor IDEM: Indiana Department of PUCO: Public Utilities Commission of Environmental Management Ohio IURC: Indiana Utility Regulatory SFAS: Statement of Financial Commission Accounting Standards MCF / BCF: millions / billions of USEPA: United States Environmental cubic feet Protection Agency MDth / MMDth: thousands / millions Throughput: combined gas sales and of dekatherms gas transportation volumes PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited - In millions) - ----------------------------------------------------------------------------- September 30, December 31, 2003 2002 - ----------------------------------------- ------------- ------------ ASSETS As Restated, ------ See Note 3 ------------ Current Assets Cash & cash equivalents $ 4.6 $ 10.5 Accounts receivable-less reserves of $4.9 & $5.5, respectively 70.4 131.9 Receivables due from other Vectren companies 4.6 56.3 Accrued unbilled revenues 37.6 112.7 Inventories 47.7 56.0 Recoverable fuel & natural gas costs 31.5 22.1 Prepayments & other current assets 160.8 86.5 - ----------------------------------------------------------------------------- Total current assets 357.2 476.0 - ----------------------------------------------------------------------------- Utility Plant Original cost 3,178.5 3,037.2 Less: accumulated depreciation & amortization 1,456.8 1,389.0 - ----------------------------------------------------------------------------- Net utility plant 1,721.7 1,648.2 - ----------------------------------------------------------------------------- Investments in Unconsolidated Affiliates 1.8 2.4 Other Investments 19.9 21.9 Non-Utility Property-Net 134.2 139.2 Goodwill-Net 202.2 202.2 Regulatory Assets 84.7 75.2 Other Assets 3.9 5.3 - ----------------------------------------------------------------------------- TOTAL ASSETS $ 2,525.6 $ 2,570.4 ============================================================================= The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited - In millions) - ------------------------------------------------------------------------------ September 30, December 31, 2003 2002 - -------------------------------------------- -------------- ------------ LIABILITIES & SHAREHOLDER'S EQUITY As Restated, ---------------------------------- See Note 3 ------------ Current Liabilities Accounts payable $ 37.7 $ 74.8 Accounts payable to affiliated companies 48.2 85.6 Accounts payable due to other Vectren companies 15.5 69.8 Accrued liabilities 90.4 83.2 Short-term borrowings 143.5 239.1 Short-term borrowings due to other Vectren companies - 86.9 Current maturities of long-term debt - 39.8 Long-term debt subject to tender 10.0 26.6 - ------------------------------------------------------------------------------ Total current liabilities 345.3 705.8 - ------------------------------------------------------------------------------- Long-term Debt-Net of Current Maturities & Debt Subject to Tender 978.8 841.2 Deferred Income Taxes & Other Liabilities Deferred income taxes 189.2 172.3 Deferred credits & other liabilities 82.3 82.2 - ------------------------------------------------------------------------------ Total deferred credits & other liabilities 271.5 254.5 - ------------------------------------------------------------------------------ Commitments & Contingencies (Notes 8, 9, & 10) Cumulative, Redeemable Preferred Stock of a Subsidiary 0.2 0.3 Common Shareholder's Equity Common stock (no par value) 553.2 385.7 Retained earnings 376.6 382.4 Accumulated other comprehensive income - 0.5 - ------------------------------------------------------------------------------ Total common shareholder's equity 929.8 768.6 - ------------------------------------------------------------------------------ TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 2,525.6 $ 2,570.4 ============================================================================== The accompanying notes are an integral part of these consolidated condensed financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited - In millions) - ----------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 2003 2002 2003 2002 - --------------------------------------- ---------------------- ---------------------- As Restated, As Restated, See Note 3 See Note 3 ------------ ----------- OPERATING REVENUES Gas utility $ 115.7 $ 88.5 $ 790.3 $ 586.7 Electric utility 134.0 189.6 343.6 475.3 Other 0.2 - 0.6 0.2 - ----------------------------------------------------------------------------------------- Total operating revenues 249.9 278.1 1,134.5 1,062.2 - ----------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 72.0 45.7 541.4 358.3 Fuel for electric generation 24.9 22.8 66.3 59.7 Purchased electric energy 42.6 93.0 101.8 239.5 Other operating 51.4 49.0 161.9 149.1 Depreciation & amortization 30.4 27.8 88.8 80.9 Taxes other than income taxes 9.2 9.5 41.8 37.6 - ----------------------------------------------------------------------------------------- Total operating expenses 230.5 247.8 1,002.0 925.1 - ----------------------------------------------------------------------------------------- OPERATING INCOME 19.4 30.3 132.5 137.1 OTHER INCOME (EXPENSE)-NET Equity in earnings (losses) of unconsolidated affiliates (0.1) (0.4) (0.5) (0.9) Other-net 2.3 0.7 1.0 6.5 - ----------------------------------------------------------------------------------------- Total other income (expense)-net 2.2 0.3 0.5 5.6 - ----------------------------------------------------------------------------------------- Interest expense 17.1 16.9 49.5 51.8 - ----------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 4.5 13.7 83.5 90.9 - ----------------------------------------------------------------------------------------- Income taxes 2.1 4.7 32.4 31.2 - ----------------------------------------------------------------------------------------- NET INCOME $ 2.4 $ 9.0 $ 51.1 $ 59.7 =========================================================================================
The accompanying notes are an integral part of these consolidated condensed financial statements.
VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited - In millions) - -------------------------------------------------------------------------------------- Nine Months Ended September 30, ----------------------- 2003 2002 - ---------------------------------------------------------------- -------------------- As Restated, See Note 3 ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 51.1 $ 59.7 Adjustments to reconcile net income to cash from operating activities: Depreciation & amortization 88.8 80.9 Deferred income taxes & investment tax credits 17.4 (4.2) Equity in losses of unconsolidated affiliates 0.5 0.9 Net unrealized (gain) loss on derivative instruments 0.4 3.2 Pension and postretirement expense 4.4 4.8 Other non-cash charges- net 13.8 5.5 Changes in working capital accounts: Accounts receivable, including to Vectren companies & accrued unbilled revenue 178.5 105.0 Inventories 8.3 2.6 Recoverable fuel & natural gas costs (9.4) 29.5 Prepayments & other current assets (80.7) (18.7) Accounts payable, including to Vectren companies & affiliated companies (128.8) (45.8) Accrued liabilities 3.7 35.6 Changes in other noncurrent assets (3.3) 0.5 Changes in other noncurrent liabilities (3.4) (3.7) - -------------------------------------------------------------------------------------- Net cash flows from operating activities 141.3 255.8 - -------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Long-term debt issuance - net of issue costs & hedging proceeds 202.9 - Additional capital contribution 167.5 - Requirements for: Retirement of long-term debt, including premiums paid (121.9) (6.4) Dividends to parent (56.9) (51.8) Redemption of preferred stock of subsidiary (0.1) (0.2) Other financing activities (1.7) - Net change in short-term borrowings, including to other Vectren companies (182.5) (68.3) - -------------------------------------------------------------------------------------- Net cash flows from financing activities 7.3 (126.7) - -------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Unconsolidated affiliate distributions 0.1 - Notes receivable, including notes from other Vectren companies & other collections - 10.4 Requirements for: Capital expenditures, excluding AFUDC-equity (153.5) (128.2) Unconsolidated affiliate and other investments (1.1) (5.9) - -------------------------------------------------------------------------------------- Net cash flows from investing activities (154.5) (123.7) - -------------------------------------------------------------------------------------- Net increase (decrease) in cash & cash equivalents (5.9) 5.4 Cash & cash equivalents at beginning of period 10.5 5.3 - -------------------------------------------------------------------------------------- Cash & cash equivalents at end of period $ 4.6 $ 10.7 ======================================================================================
The accompanying notes are an integral part of these consolidated condensed financial statements. VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Nature of Operations Vectren Utility Holdings, Inc. (VUHI or the Company), an Indiana corporation, was formed on March 31, 2000, to serve as the intermediate holding company for Vectren Corporation's (Vectren) three operating public utilities, Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana Energy, Inc. (Indiana Energy), Southern Indiana Gas and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc. (SIGCORP), and the Ohio operations. VUHI also has other assets that provide information technology and other services to the three utilities. Indiana Gas provides natural gas distribution and transportation services to a diversified customer base in 49 of Indiana's 92 counties. SIGECO provides electric generation, transmission, and distribution services to 8 counties in southwestern Indiana, including counties surrounding Evansville, and participates in the wholesale power market. SIGECO also provides natural gas distribution and transportation services to 10 counties in southwestern Indiana, including counties surrounding Evansville. The Ohio operations, owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc.(VEDO), a wholly owned subsidiary, (53 % ownership) and Indiana Gas (47 % ownership), provide natural gas distribution and transportation services to 17 counties in west central Ohio, including counties surrounding Dayton. Vectren is an energy and applied technology holding company headquartered in Evansville, Indiana. The Company was organized on June 10, 1999, solely for the purpose of effecting the merger of Indiana Energy and SIGCORP. On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with APB Opinion No. 16 "Business Combinations" (APB 16). 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. 2. Basis of Presentation The interim consolidated condensed financial statements included in this report have been prepared by the Company, without audit, as provided in the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted as provided in such rules and regulations. The Company believes that the information in this report reflects all adjustments necessary to fairly state the results of the interim periods reported. These consolidated condensed financial statements and related notes should be read in conjunction with the Company's audited annual consolidated financial statements for the year ended December 31, 2002, filed on Form 10-K/A. Because of the seasonal nature of the Company's utility operations, the results shown on a quarterly basis are not necessarily indicative of annual results. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 3. Restatement of Previously Reported Information Subsequent to the issuance of the Company's 2002 quarterly financial statements, the Company's management determined that previously issued financial statements should be restated. The restatement had the effect of decreasing net income for the three and nine months ended September 30, 2002, by $0.4 million after tax and $2.1 million after tax, respectively. In the second quarter of 2002, the Company recorded $5.2 million ($3.2 million after tax) of carrying costs for demand side management (DSM) programs pursuant to existing IURC orders and based on an improved regulatory environment. Subsequently, management determined that the accrual of such carrying costs was more appropriate in periods prior to 2000 when DSM program expenditures were made. Therefore, such carrying costs originally reflected in 2002 quarterly results were reversed and reflected in common shareholders' equity as of January 1, 2000. The Company also identified other adjustments for various reconciliation errors and other errors related primarily to the recording of estimates. These adjustments were not significant, either individually or in the aggregate, and increased previously reported pre-tax and after tax earnings for the three months ended September 30, 2002, by approximately $0.7 million and $0.4 million, respectively, and increased previously reported pre-tax and after tax earnings for the nine months ended September 30, 2002, by approximately $1.8 million and $1.1 million, respectively. In addition, on January 1, 2003, Vectren transferred certain information technology systems and related assets and buildings from other entities within its consolidated group to VUHI. These assets primarily support the operations of VUHI's subsidiaries and VUHI's subsidiaries receive a charge for their use that is included in their other operating expenses. The transfer required restatement of VUHI's consolidated financial statements for all periods presented under accounting rules governing combinations of entities under common control. The reorganization increased previously reported earnings by $0.5 million after tax for the three months ended September 30, 2002, and $3.2 million after tax for the nine months ended September 30, 2002. Total assets, liabilities, and equity transferred to VUHI on January 1, 2003, were $133.8 million, $93.5 million, and $40.3 million, respectively. Following is a summary of the effects of the reorganization due to the transfer of assets and the restatement on previously reported results of operations for the three months ended September 30, 2002.
In millions - -------------------------------------------------------------------------------------------------- Adjustments for --------------------------- OPERATING REVENUES As reported Reorganization Restatement As Restated ----------- -------------- ----------- ----------- Gas utility $ 88.1 $ - $ 0.4 $ 88.5 Electric utility 190.0 - (0.4) 189.6 Energy services & other - - - - - -------------------------------------------------------------------------------------------------- Total operating revenues 278.1 - - 278.1 - -------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 45.6 - 0.1 45.7 Fuel for electric generation 22.9 - (0.1) 22.8 Purchased electric energy 92.5 - 0.5 93.0 Other operating 53.3 (4.7) 0.4 49.0 Depreciation & amortization 24.2 3.6 - 27.8 Taxes other than income taxes 9.7 (0.3) 0.1 9.5 - -------------------------------------------------------------------------------------------------- Total operating expenses 248.2 (1.4) 1.0 247.8 - -------------------------------------------------------------------------------------------------- OPERATING INCOME 29.9 1.4 (1.0) 30.3 OTHER INCOME (EXPENSE) - NET Equity in losses of unconsolidated affiliates (0.4) - - (0.4) Other - net 0.6 0.1 - 0.7 - -------------------------------------------------------------------------------------------------- Total other income (expense) - net 0.2 0.1 - 0.3 - -------------------------------------------------------------------------------------------------- Interest expense 16.5 0.7 (0.3) 16.9 - -------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 13.6 0.8 (0.7) 13.7 - -------------------------------------------------------------------------------------------------- Income taxes 4.7 0.3 (0.3) 4.7 - -------------------------------------------------------------------------------------------------- NET INCOME $ 8.9 $ 0.5 $(0.4) $ 9.0 ==================================================================================================
Following is a summary of the effects of the reorganization due to the transfer of assets and the restatement on previously reported results of operations for the nine months ended September 30, 2002.
In millions - -------------------------------------------------------------------------------------------------- Adjustments for --------------------------- OPERATING REVENUES As reported Reorganization Restatement As Restated ----------- -------------- ----------- ----------- Gas utility $ 585.0 $ - $ 1.7 $ 586.7 Electric utility 475.7 - (0.4) 475.3 Energy services & other 0.2 - 0.2 - -------------------------------------------------------------------------------------------------- Total operating revenues 1,060.7 0.2 1.3 1,062.2 - -------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 358.2 - 0.1 358.3 Fuel for electric generation 59.7 - - 59.7 Purchased electric energy 239.3 - 0.2 239.5 Other operating 164.4 (15.8) 0.5 149.1 Depreciation & amortization 71.7 9.2 - 80.9 Taxes other than income taxes 37.8 (0.3) 0.1 37.6 - -------------------------------------------------------------------------------------------------- Total operating expenses 931.1 (6.9) 0.9 925.1 - -------------------------------------------------------------------------------------------------- OPERATING INCOME 129.6 7.1 0.4 137.1 OTHER INCOME (EXPENSE) - NET Equity in losses of unconsolidated affiliates (1.4) - 0.5 (0.9) Other - net 10.7 0.1 (4.3) 6.5 - -------------------------------------------------------------------------------------------------- Total other income (expense) - net 9.3 0.1 (3.8) 5.6 - -------------------------------------------------------------------------------------------------- Interest expense 49.7 2.1 - 51.8 - -------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 89.2 5.1 (3.4) 90.9 - -------------------------------------------------------------------------------------------------- Income taxes 30.6 1.9 (1.3) 31.2 - -------------------------------------------------------------------------------------------------- NET INCOME $ 58.6 $ 3.2 $(2.1) $ 59.7 ==================================================================================================
4. Transactions with ProLiance Energy, LLC ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides natural gas and related services to Indiana Gas, the Ohio operations, Citizens Gas and others. ProLiance also began providing service to SIGECO and Vectren Retail, LLC (Vectren's retail gas marketer) in 2002. ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. Purchases from ProLiance for resale and for injections into storage for the three months ended September 30, 2003 and 2002, totaled $148.3 million and $93.3 million, respectively, and for the nine months ended September 30, 2003 and 2002, totaled $575.8 million and $329.9 million, respectively. Amounts owed to ProLiance at September 30, 2003, and December 31, 2002, for those purchases were $47.7 million and $83.7 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. 5. Subsidiary Guarantor and Consolidating Information The Company's three operating utility companies, SIGECO, Indiana Gas, and VEDO are guarantors of VUHI's $346 million in short-term credit facilities, of which $142.5 million is outstanding at September 30, 2003, and VUHI's $550.0 million unsecured senior notes outstanding at September 30, 2003. As a result of the reorganization described in Note 3, VUHI has operations other than those of the subsidiary guarantors. Pursuant to Article 3-10 of Regulation S-X, disclosure of the results of operations and balance sheets of the subsidiary guarantors separate from the parent company's operations is required. Following are consolidating financial statements including information on the combined operations of the subsidiary guarantors separate from the other operations of the parent company. Consolidating Balance Sheet as of September 30, 2003 (in millions):
- --------------------------------------------------------------------------------------------- ASSETS Subsidiary Parent ------ Guarantors Company Eliminations Consolidated ---------- ------- ------------ ------------ Current Assets Cash & cash equivalents $ 6.0 $ (1.4) $ - $ 4.6 Accounts receivable-less reserves 70.2 0.2 - 70.4 Receivables due from other Vectren companies 0.1 11.1 (6.6) 4.6 Accrued unbilled revenues 37.6 - - 37.6 Inventories 47.7 - - 47.7 Recoverable fuel & natural gas costs 31.5 - - 31.5 Prepayments & other current assets 156.5 4.3 - 160.8 - --------------------------------------------------------------------------------------------- Total current assets 349.6 14.2 (6.6) 357.2 - --------------------------------------------------------------------------------------------- Utility Plant Original cost 3,178.5 - - 3,178.5 Less: accumulated depreciation & amortization 1,456.8 - - 1,456.8 - --------------------------------------------------------------------------------------------- Net utility plant 1,721.7 - - 1,721.7 - --------------------------------------------------------------------------------------------- Investments in Consolidated Subsidiaries - 935.3 (935.3) - Notes Receivable from Consolidated Subsidiaries - 553.6 (553.6) - Investments in Unconsolidated Affiliates 0.2 1.6 - 1.8 Other Investments 13.7 6.2 - 19.9 Non-Utility Property-Net 5.6 128.6 - 134.2 Goodwill-Net 202.2 - - 202.2 Regulatory Assets 84.8 (0.1) - 84.7 Other Assets 3.9 - - 3.9 - --------------------------------------------------------------------------------------------- TOTAL ASSETS $ 2,381.7 $ 1,639.4 $(1,495.5) $ 2,525.6 ============================================================================================= LIABILITIES & SHAREHOLDER'S EQUITY - ---------------------------------- Current Liabilities Accounts payable $ 36.0 $ 1.7 $ - $ 37.7 Accounts payable to affiliated companies 48.2 - - 48.2 Accounts payable due to other Vectren companies 22.1 - (6.6) 15.5 Accrued liabilities 83.1 9.9 (2.6) 90.4 Short-term borrowings 1.0 142.5 - 143.5 Short-term borrowings due from other Vectren companies 107.9 - (107.9) - Long-term debt subject to tender 10.0 - - 10.0 - --------------------------------------------------------------------------------------------- Total current liabilities 308.3 154.1 (117.1) 345.3 - --------------------------------------------------------------------------------------------- Long-Term Debt Long-term debt-net of current maturities & debt subject to tender 431.3 547.5 - 978.8 Long-term debt due to VUHI 443.1 - (443.1) - - --------------------------------------------------------------------------------------------- Total long-term debt-net 874.4 547.5 (443.1) 978.8 - --------------------------------------------------------------------------------------------- Deferred Income Taxes & Other Liabilities Deferred income taxes 183.9 5.3 - 189.2 Deferred credits & other liabilities 79.6 2.7 - 82.3 - --------------------------------------------------------------------------------------------- Total deferred credits & other liabilities 263.5 8.0 - 271.5 - --------------------------------------------------------------------------------------------- Cumulative, Redeemable Preferred Stock of a Subsidiary 0.2 - - 0.2 Common Shareholder's Equity Common stock (no par value) 601.3 553.2 (601.3) 553.2 Retained earnings 334.0 376.6 (334.0) 376.6 Accumulated other comprehensive income - - - - - --------------------------------------------------------------------------------------------- Total common shareholder's equity 935.3 929.8 (935.3) 929.8 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 2,381.7 $ 1,639.4 $(1,495.5) $ 2,525.6 =============================================================================================
Consolidating Balance Sheet as of December 31, 2002 (in millions):
- ---------------------------------------------------------------------------------------------------- ASSETS Subsidiary Parent ------ Guarantors Company Eliminations Consolidated ---------- ------- ------------ ------------ Current Assets Cash & cash equivalents $ 10.2 $ 0.3 $ - $ 10.5 Accounts receivable-less reserves 130.8 1.1 - 131.9 Receivables due from other Vectren companies 39.3 19.7 (2.7) 56.3 Accrued unbilled revenues 112.7 - - 112.7 Inventories 56.0 - - 56.0 Recoverable fuel & natural gas costs 22.1 - - 22.1 Prepayments & other current assets 86.2 0.3 - 86.5 - ---------------------------------------------------------------------------------------------------- Total current assets 457.3 21.4 (2.7) 476.0 - ---------------------------------------------------------------------------------------------------- Utility Plant Original cost 3,037.2 - - 3,037.2 Less: accumulated depreciation & amortization 1,389.0 - - 1,389.0 - ---------------------------------------------------------------------------------------------------- Net utility plant 1,648.2 - - 1,648.2 - ---------------------------------------------------------------------------------------------------- Investments in Consolidated Subsidiaries - 802.4 (802.4) - Notes Receivable from Consolidated Subsidiaries 8.5 493.9 (502.4) - Investments in Unconsolidated Affiliates 0.1 2.3 - 2.4 Other Investments 13.1 8.8 - 21.9 Non-Utility Property-Net 5.4 133.8 - 139.2 Goodwill-Net 202.2 - - 202.2 Regulatory Assets 70.3 4.9 - 75.2 Other Assets 4.9 0.4 - 5.3 - ---------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 2,410.0 $ 1,467.9 $(1,307.5) $ 2,570.4 ==================================================================================================== LIABILITIES & SHAREHOLDER'S EQUITY - ----------------------------------- Current Liabilities Accounts payable $ 71.3 $ 3.5 $ - $ 74.8 Accounts payable to affiliated companies 85.2 0.4 - 85.6 Accounts payable due to other Vectren companies 61.3 11.2 (2.7) 69.8 Accrued liabilities 83.8 1.7 (2.3) 83.2 Short-term borrowings - 239.1 - 239.1 Short-term borrowings due from other Vectren companies 147.6 95.4 (156.1) 86.9 Current maturities of long-term debt 39.8 - - 39.8 Long-term debt subject to tender 26.6 - - 26.6 - ---------------------------------------------------------------------------------------------------- Total current liabilities 515.6 351.3 (161.1) 705.8 - ---------------------------------------------------------------------------------------------------- Long-Term Debt Long-term debt-net of current maturities & debt subject to tender 492.8 348.4 - 841.2 Long-term debt due to VUHI 344.0 - (344.0) - - ---------------------------------------------------------------------------------------------------- Total long-term debt-net 836.8 348.4 (344.0) 841.2 - ---------------------------------------------------------------------------------------------------- Deferred Income Taxes & Other Liabilities Deferred income taxes 174.6 (2.3) - 172.3 Deferred credits & other liabilities 80.3 1.9 - 82.2 - ---------------------------------------------------------------------------------------------------- Total deferred credits & other liabilities 254.9 (0.4) - 254.5 - ---------------------------------------------------------------------------------------------------- Cumulative, Redeemable Preferred Stock of a Subsidiary 0.3 - - 0.3 Common Shareholder's Equity Common stock (no par value) 461.3 385.7 (461.3) 385.7 Retained earnings 341.1 382.4 (341.1) 382.4 Accumulated other comprehensive income - 0.5 - 0.5 - ---------------------------------------------------------------------------------------------------- Total common shareholder's equity 802.4 768.6 (802.4) 768.6 - ---------------------------------------------------------------------------------------------------- TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 2,410.0 $ 1,467.9 $(1,307.5) $ 2,570.4 ====================================================================================================
Consolidating Statement of Income for the three months ended September 30, 2003 (in millions):
- --------------------------------------------------------------------------------------------- Subsidiary Parent Guarantors Company Eliminations Consolidated - ----------------------------------------- ---------- ------- ------------ ------------ OPERATING REVENUES Gas utility $ 115.7 $ - $ - $ 115.7 Electric utility 134.0 - - 134.0 Other - 6.6 (6.4) 0.2 - --------------------------------------------------------------------------------------------- Total operating revenues 249.7 6.6 (6.4) 249.9 - --------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 72.0 - - 72.0 Fuel for electric generation 24.9 - - 24.9 Purchased electric energy 42.6 - - 42.6 Other operating 57.6 0.2 (6.4) 51.4 Depreciation & amortization 26.1 4.3 - 30.4 Taxes other than income taxes 9.0 0.2 - 9.2 - --------------------------------------------------------------------------------------------- Total operating expenses 232.2 4.7 (6.4) 230.5 - --------------------------------------------------------------------------------------------- OPERATING INCOME 17.5 1.9 - 19.4 OTHER INCOME (EXPENSE)-NET Equity in earnings of consolidated companies - 1.4 (1.4) - Equity in losses of unconsolidated affiliates - (0.1) - (0.1) Other-net 1.8 7.4 (6.9) 2.3 - --------------------------------------------------------------------------------------------- Total other income (expense)-net 1.8 8.7 (8.3) 2.2 - --------------------------------------------------------------------------------------------- Interest expense 15.7 8.3 (6.9) 17.1 - --------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 3.6 2.3 (1.4) 4.5 - --------------------------------------------------------------------------------------------- Income taxes 2.2 (0.1) - 2.1 - --------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 1.4 $ 2.4 $(1.4) $ 2.4 =============================================================================================
Consolidating Statement of Income for the three months ended September 30, 2002 (in millions):
- --------------------------------------------------------------------------------------------- Subsidiary Parent Guarantors Company Eliminations Consolidated - ---------------------------------------- ---------- ------- ------------ ------------ OPERATING REVENUES Gas utility $ 88.5 $ - $ - $ 88.5 Electric utility 189.6 - - 189.6 Other - 4.8 (4.8) - - ---------------------------------------------------------------------------------------------- Total operating revenues 278.1 4.8 (4.8) 278.1 - --------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas sold 45.7 - - 45.7 Fuel for electric generation 22.8 - - 22.8 Purchased electric energy 93.0 - - 93.0 Other operating 54.0 (0.2) (4.8) 49.0 Depreciation & amortization 24.2 3.6 - 27.8 Taxes other than income taxes 9.7 (0.2) - 9.5 - --------------------------------------------------------------------------------------------- Total operating expenses 249.4 3.2 (4.8) 247.8 - --------------------------------------------------------------------------------------------- OPERATING INCOME 28.7 1.6 - 30.3 OTHER INCOME (EXPENSE)-NET Equity in earnings of consolidated companies - 9.2 (9.2) - Equity in losses of unconsolidated affiliates - (0.4) - (0.4) Other-net 0.8 6.1 (6.2) 0.7 - --------------------------------------------------------------------------------------------- Total other income (expense)-net 0.8 14.9 (15.4) 0.3 - --------------------------------------------------------------------------------------------- Interest expense 15.5 7.6 (6.2) 16.9 - --------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 14.0 8.9 (9.2) 13.7 - --------------------------------------------------------------------------------------------- Income taxes 4.8 (0.1) - 4.7 - --------------------------------------------------------------------------------------------- NET INCOME $ 9.2 $ 9.0 $ (9.2) $ 9.0 =============================================================================================
Consolidating Statement of Income for the nine months ended September 30, 2003 (in millions):
- ------------------------------------------------------------------------------------------ Subsidiary Parent Guarantors Company Eliminations Consolidated - ---------------------------------------- ---------- ------- ------------ ------------ OPERATING REVENUES Gas utility $ 790.3 $ - $ - $ 790.3 Electric utility 343.6 - - 343.6 Other - 19.8 (19.2) 0.6 - ------------------------------------------------------------------------------------------ Total operating revenues 1,133.9 19.8 (19.2) 1,134.5 - ------------------------------------------------------------------------------------------ OPERATING EXPENSES Cost of gas sold 541.4 - - 541.4 Fuel for electric generation 66.3 - - 66.3 Purchased electric energy 101.8 - - 101.8 Other operating 180.1 1.0 (19.2) 161.9 Depreciation & amortization 76.9 11.9 - 88.8 Taxes other than income taxes 41.1 0.7 - 41.8 - ------------------------------------------------------------------------------------------ Total operating expenses 1,007.6 13.6 (19.2) 1,002.0 - ------------------------------------------------------------------------------------------ OPERATING INCOME 126.3 6.2 - 132.5 OTHER INCOME (EXPENSE)-NET Equity in earnings of consolidated companies - 49.8 (49.8) - Equity in losses of unconsolidated affiliates - (0.5) - (0.5) Other-net 2.0 19.2 (20.2) 1.0 - ------------------------------------------------------------------------------------------ Total other income (expense)-net 2.0 68.5 (70.0) 0.5 - ------------------------------------------------------------------------------------------ Interest expense 46.6 23.1 (20.2) 49.5 - ------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 81.7 51.6 (49.8) 83.5 - ------------------------------------------------------------------------------------------ Income taxes 31.9 0.5 - 32.4 - ------------------------------------------------------------------------------------------ NET INCOME $ 49.8 $ 51.1 $(49.8) $ 51.1 ==========================================================================================
Consolidating Statement of Income for the nine months ended September 30, 2002 (in millions):
- ------------------------------------------------------------------------------------------ Subsidiary Parent Guarantors Company Eliminations Consolidated - -------------------------------------- ---------- ------- ------------ ------------ OPERATING REVENUES Gas utility $ 586.7 $ - $ - $ 586.7 Electric utility 475.3 - - 475.3 Other - 16.0 (15.8) 0.2 - ------------------------------------------------------------------------------------------ Total operating revenues 1,062.0 16.0 (15.8) 1,062.2 - ------------------------------------------------------------------------------------------ OPERATING EXPENSES Cost of gas sold 358.3 - - 358.3 Fuel for electric generation 59.7 - - 59.7 Purchased electric energy 239.5 - - 239.5 Other operating 164.6 0.3 (15.8) 149.1 Depreciation & amortization 71.7 9.2 - 80.9 Taxes other than income taxes 37.9 (0.3) - 37.6 - ------------------------------------------------------------------------------------------ Total operating expenses 931.7 9.2 (15.8) 925.1 - ------------------------------------------------------------------------------------------ OPERATING INCOME 130.3 6.8 - 137.1 OTHER INCOME (EXPENSE)-NET Equity in earnings of consolidated companies - 57.8 (57.8) - Equity in losses of unconsolidated affiliates - (0.9) - (0.9) Other-net 4.8 20.2 (18.5) 6.5 - ------------------------------------------------------------------------------------------ Total other income (expense)-net 4.8 77.1 (76.3) 5.6 - ------------------------------------------------------------------------------------------ Interest expense 47.2 23.1 (18.5) 51.8 - ------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 87.9 60.8 (57.8) 90.9 - ------------------------------------------------------------------------------------------ Income taxes 30.1 1.1 - 31.2 - ------------------------------------------------------------------------------------------ NET INCOME $ 57.8 $ 59.7 $ (57.8) $ 59.7 ==========================================================================================
Consolidating Statement of Cash Flows for the nine months ended September 30, 2003 (in millions):
- ----------------------------------------------------------------------------------------------- Subsidiary Parent Guarantors Company Eliminations Consolidated ---------- ------- ------------ ------------ NET CASH FLOWS FROM OPERATING ACTIVITIES $ 114.2 $ 27.1 $ - $ 141.3 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Long-term debt issuance - net of issue costs & hedging proceeds 99.0 202.9 (99.0) 202.9 Additional capital contribution 140.0 167.5 (140.0) 167.5 Requirements for: Retirement of long-term debt, includingpremiums paid (121.9) - - (121.9) Dividends to parent (56.9) (56.9) 56.9 (56.9) Redemption of preferred stock of subsidiary (0.1) - - (0.1) Other financing activities (1.7) - - (1.7) Net change in short-term borrowings, including to other Vectren companies (38.7) (192.0) 48.2 (182.5) - ----------------------------------------------------------------------------------------------- Net cash flows from financing activities 19.7 121.5 (133.9) 7.3 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Consolidated subsidiary distributions - 56.9 (56.9) - Unconsolidated affiliate distributions - 0.1 - 0.1 Requirements for: Capital expenditures, excluding AFUDC-equity (146.6) (6.9) - (153.5) Consolidated subsidiary investments - (140.0) 140.0 - Unconsolidated affiliate and other investments - (1.1) - (1.1) Net change in intercompany notes receivable 8.5 (59.3) 50.8 - - ----------------------------------------------------------------------------------------------- Net cash flows from investing activities (138.1) (150.3) 133.9 (154.5) - ----------------------------------------------------------------------------------------------- Net decrease in cash & cash equivalents (4.2) (1.7) - (5.9) Cash & cash equivalents at beginning of period 10.2 0.3 - 10.5 - ----------------------------------------------------------------------------------------------- Cash & cash equivalents at end of period $ 6.0 $ (1.4) $ - $ 4.6 ===============================================================================================
Consolidating Statement of Cash Flows for the nine months ended September 30, 2002 (in millions):
- ----------------------------------------------------------------------------------------------- Subsidiary Parent Guarantors Company Eliminations Consolidated - ----------------------------------------------------------------------------------------------- NET CASH FLOWS FROM OPERATING ACTIVITIES $ 249.9 $ 5.9 $ - $ 255.8 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Requirements for: Retirement of long-term debt, including premiums paid (6.4) - - (6.4) Dividends to parent (55.8) (51.8) 55.8 (51.8) Redemption of preferred stock of subsidiary (0.2) - - (0.2) Net change in short-term borrowings, including to other Vectren companies (52.4) (31.8) 15.9 (68.3) - ----------------------------------------------------------------------------------------------- Net cash flows from financing activities (114.8) (83.6) 71.7 (126.7) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Consolidated subsidiary distributions - 55.8 (55.8) - Notes receivable & other collections 1.4 9.0 - 10.4 Requirements for: Capital expenditures, excluding AFUDC-equity (94.1) (34.1) - (128.2) Unconsolidated affiliate & other investments (3.8) (2.1) - (5.9) Net change in intercompany notes receivable (38.7) 54.6 (15.9) - - ----------------------------------------------------------------------------------------------- Net cash flows from investing activities (135.2) 83.2 (71.7) (123.7) - ----------------------------------------------------------------------------------------------- Net (decrease) increase in cash & cash equivalents (0.1) 5.5 - 5.4 Cash & cash equivalents at beginning of period 7.0 (1.7) - 5.3 - ----------------------------------------------------------------------------------------------- Cash & cash equivalents at end of period $ 6.9 $ 3.8 $ - $ 10.7 ===============================================================================================
6. Transactions with Other Vectren Companies Support Services and Purchases Vectren and certain subsidiaries of Vectren provided corporate and general and administrative services to the Company including legal, finance, tax, risk management, human resources, which includes charges for restricted stock compensation and for pension and other postretirement benefits not directly charged to subsidiaries. These costs have been allocated using various allocators, primarily number of employees, number of customers and/or revenues. Allocations are based on cost. VUHI received corporate allocations totaling $18.0 million and $15.1 million, respectively, for the three months ended September 30, 2003 and 2002, and $52.6 million and $48.7 million, respectively, for the nine months ended September 30, 2003 and 2002. Vectren Fuels, Inc., a wholly owned subsidiary of Vectren, owns and operates coal mines from which SIGECO purchases fuel used for electric generation. Amounts paid for such purchases for the three months ended September 30, 2003 and 2002, totaled $20.5 million and $17.3 million, respectively, and $58.7 million and $45.6 million, respectively, for the nine months ended September 30, 2003 and 2002. Stock-Based Incentive Plans VUHI does not have stock-based compensation plans separate from Vectren. An insignificant number of VUHI's employees participate in Vectren's stock-based compensation plans. 7. Financing Transactions VUHI Debt Issuance In July 2003, VUHI issued senior unsecured notes with an aggregate principal amount of $200 million in two $100 million tranches. The first tranche are 10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746% to yield 5.28% to maturity (2013 Notes). The second tranche are 15-year notes due August 2018, with an interest rate of 5.75% priced at 99.177% to yield 5.80% to maturity (2018 Notes). The notes are jointly and severally guaranteed by the Company's three public utilities. In addition, they have no sinking fund requirements, and interest payments are due semi-annually. The notes may be called by the Company, in whole or in part, at any time for an amount equal to accrued and unpaid interest, plus the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined in the indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the 2018 Notes. Shortly before these issues, the Company entered into several treasury locks with a total notional amount of $150.0 million. Upon issuance of the debt, the treasury locks were settled resulting in the receipt of $5.7 million in cash. The value received is being amortized as a reduction of interest expense over the life of the issues. The net proceeds from the sale of the senior notes and settlement of related hedging arrangements approximated $203 million. Additional Capital Contributions In March 2003, Vectren filed a registration statement with the Securities and Exchange Commission with respect to a public offering of 6.5 million shares of new common stock. In August 2003, the registration became effective, and an agreement was reached to sell approximately 7.4 million shares (the original 6.5 million shares, plus an over-allotment option of 941,400 shares) to a group of underwriters. The net proceeds totaled $163.2 million and was contributed to VUHI. In addition, a portion of current year proceeds of $4.3 million generated from the issuance of new shares of Vectren's common stock to fund its dividend reinvestment plan was contributed to VUHI. SIGECO and Indiana Gas Debt Call During 2003, the Company called two first mortgage bonds outstanding at SIGECO and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond had a principal amount of $45.0 million, an interest rate of 7.60%, was originally due in 2023, and was redeemed at 103.745% of its stated principal amount. The second SIGECO bond had a principal amount of $20.0 million, an interest rate of 7.625%, was originally due in 2025, and was redeemed at 103.763% of the stated principal amount. The first Indiana Gas note had a remaining principal amount of $21.3 million, an interest rate of 9.375%, was originally due in 2021, and was redeemed at 105.525% of the stated principal amount. The second Indiana Gas note had a principal amount of $13.5 million, an interest rate of 6.75%, was originally due in 2028, and was redeemed at the principal amount. Pursuant to regulatory authority, the premiums paid to retire the net carrying value of these notes totaling $3.6 million were deferred as a regulatory asset. Other Financing Transactions In January, 2003, other debt of Indiana Gas totaling $17.5 million and of SIGECO totaling $1.0 million was retired. 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. See Note 9 regarding environmental matters. United States Securities and Exchange Commission (SEC) Informal Inquiry As more fully described in Note 3 to these consolidated condensed financial statements and in Note 3 to the 2002 consolidated financial statements filed on Form 10-K/A, the Company restated its consolidated financial statements for 2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC in an informal inquiry with respect to this previously announced restatement, has met with the staff of the SEC, and has provided information in response to their requests. 9. Environmental Matters NOx SIP Call Matter The Clean Air Act (the Act) requires each state to adopt a State Implementation Plan (SIP) to attain and maintain National Ambient Air Quality Standards (NAAQS) for a number of pollutants, including ozone. If the USEPA finds a state's SIP inadequate to achieve the NAAQS, the USEPA can call upon the state to revise its SIP (a SIP Call). In October 1998, the USEPA issued a final rule "Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone," (63 Fed. Reg. 57355). This ruling found that the SIP's of certain states, including Indiana, were substantially inadequate since they allowed for nitrogen oxide (NOx) emissions in amounts that contributed to non-attainment with the ozone NAAQS in downwind states. The USEPA required each state to revise its SIP to provide for further NOx emission reductions. The NOx emissions budget, as stipulated in the USEPA's final ruling, requires a 31% reduction in total NOx emissions from Indiana. In June 2001, the Indiana Air Pollution Control Board adopted final rules to achieve the NOx emission reductions required by the NOx SIP Call. Indiana's SIP requires the Company to lower its system-wide NOx emissions to .14 lbs./MMBTU by May 31, 2004 (the compliance date). This is a 65% reduction from emission levels existing in 1999 and 1998. The Company has initiated steps toward compliance with the revised regulations. These steps include installing Selective Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in a chemical reaction. This technology is known to be the most effective method of reducing NOx emissions where high removal efficiencies are required. The IURC has issued orders that approve: o the Company's project to achieve environmental compliance by investing in clean coal technology; o a total capital cost investment for this project up to $244 million (excluding AFUDC), subject to periodic review of the actual costs incurred; o a mechanism whereby, prior to an electric base rate case, the Company may recover through a rider that is updated every six months an 8 percent return on its capital costs for the project; and o ongoing recovery of operating costs, including depreciation and purchased emission allowances through a rider mechanism, related to the clean coal technology once the facility is in service. Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated clean coal technology construction cost is consistent with amounts approved in the IURC's orders and is expected to be expended during the 2001-2006 period. Through September 30, 2003, $117.1 million has been expended. After the equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. A portion of those expenses began in October 2003 when the Culley SCR became operational. The 8 percent return on capital investment approximates the return authorized in the Company's last electric rate case in 1995 and includes a return on equity. The Company expects to achieve timely compliance as a result of the project. Construction of the first SCR at Culley was placed into service in October 2003, and construction of the Warrick 4 and Brown SCR's is proceeding on schedule. Installation of SCR technology as planned is expected to reduce the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance. Culley Generating Station Litigation In the late 1990's, the USEPA initiated an investigation under Section 114 of the Act of SIGECO's coal-fired electric generating units in commercial operation by 1977 to determine compliance with environmental permitting requirements related to repairs, maintenance, modifications, and operations changes. The focus of the investigation was to determine whether new source review permitting requirements were triggered by such plant modifications, and whether the best available control technology was, or should have been used. Numerous electric utilities were, and are currently, being investigated by the USEPA under an industry-wide review for compliance. In July 1999, SIGECO received a letter from the Office of Enforcement and Compliance Assurance of the USEPA discussing the industry-wide investigation, vaguely referring to an investigation of SIGECO and inviting SIGECO to participate in a discussion of the issues. No specifics were noted; furthermore, the letter stated that the communication was not intended to serve as a notice of violation. Subsequent meetings were conducted in September and October 1999 with the USEPA and targeted utilities, including SIGECO, regarding potential remedies to the USEPA's general allegations. On November 3, 1999, the USEPA filed a lawsuit against seven utilities, including SIGECO. SIGECO's suit was filed in the U.S. District Court for the Southern District of Indiana. The USEPA alleged that, beginning in 1992, SIGECO violated the Act by (1) making modifications to its Culley Generating Station in Yankeetown, Indiana without obtaining required permits (2) making major modifications to the Culley Generating Station without installing the best available emission control technology and (3) failing to notify the USEPA of the modifications. In addition, the lawsuit alleged that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards at its Culley Unit 3. The USEPA also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. On June 6, 2003, SIGECO, the Department of Justice (DOJ), and the USEPA announced an agreement that would resolve the lawsuit. The agreement was embodied in a consent decree filed in U.S. District Court for the Southern District of Indiana. The mandatory public comment period has expired, and no comments were received. The Court entered the consent decree on August 13, 2003. Under the terms of the agreement, the DOJ and USEPA have agreed to drop all challenges of past maintenance and repair activities at the Culley coal-fired units. In reaching the agreement, SIGECO did not admit to any allegations alleged in the government's complaint, and SIGECO continues to believe that it acted in accordance with applicable regulations and conducted only routine maintenance on the units. SIGECO has entered into this agreement to further its continued commitment to improve air quality and avoid the cost and uncertainties of litigation. Under the agreement, SIGECO has committed to: o either repower Culley Unit 1 (50 MW) with natural gas, which would significantly reduce air emissions from this unit, and equip it with SCR control technology for further reduction of nitrogen oxides, or cease operation of the unit by December 2006; o operate the existing SCR control technology recently installed on Culley Unit 3 (287 MW) year round at a lower emission rate than that currently required under the NOx SIP Call, resulting in further nitrogen oxide reductions; o enhance the efficiency of the existing scrubber at Culley Units 2 and 3 for additional removal of sulphur dioxide emissions; o install a baghouse for further particulate matter reductions at Culley Unit 3 by June 2007; o conduct a Sulphuric Acid Reduction Demonstration Project as an environmental mitigation project designed to demonstrate an advance in pollution control technology for the reduction of sulfate emissions; and o pay a $600,000 civil penalty. The Company anticipates that the settlement would result in total capital expenditures through 2007 in a range between $16 million and $28 million. Other than the $600,000 civil penalty, which was accrued in the second quarter of 2003, the implementation of the settlement, including these capital expenditures and related operating expenses, are expected to be recovered through rates. Information Request On January 23, 2001, SIGECO received an information request from the USEPA under Section 114 of the Act for historical operational information on the Warrick and A.B. Brown generating stations. SIGECO has provided all information requested, and no further action has occurred. Manufactured Gas Plants In the past, Indiana Gas and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program and is currently conducting some level of remedial activities including groundwater monitoring at certain sites where deemed appropriate and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $24.4 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 $24.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's Voluntary Remediation Program (VRP). In response SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk. On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO is adding its four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. At this time the Company is unable to predict any outcome that may result from these SIGECO manufactured gas plant sites. 10. Rate and Regulatory Matters The following is an update on two regulatory matters in Ohio. Each of the discussed matters is currently pending before the PUCO. The first matter relates to a pending application made to the PUCO by VEDO, together with other regulated Ohio gas utilities, for authority to establish a tariff mechanism to recover expenses related to uncollectible accounts. As proposed the tariff mechanism would establish an automatic adjustment procedure to track and recover these costs instead of providing the recovery of the historical amount in base rates. If the application is approved before the end of the year, 2003 uncollectible costs in excess of the amount in base rates should be recovered. While the Company believes there is a sound basis for the PUCO to grant the application to recover actual expenses relating to uncollectible accounts, no assurance can be provided with respect to the ultimate outcome of this proceeding. The second matter related to the requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, the two-year period began in November 2000, coincident with the Company's acquisition and commencement of service in Ohio. The audit provides the initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff recently submitted an audit report wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. There are two elements of the recommendations relating to the treatment of a pipeline refund and a penalty for which a reserve of $0.7 million has been established for the Company's estimated share of a potential disallowance of these costs. For this PUCO audit period, a disallowance relating to our ProLiance arrangement will be shared by the Company's joint venture partner. Currently the matter is set for a hearing before the PUCO in mid November. VEDO has and continues to engage in efforts with the participants in the proceeding to resolve disputed issues outside of administrative litigation. If the external auditor recommendations were adopted by the PUCO, the Company believes that it would not likely have a material effect on the Company's results or financial condition. However, the Company can provide no assurance as to the ultimate outcome of this proceeding. 11. Impact of Recently Issued Accounting Guidance SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted this statement on January 1, 2003. The adoption was not material to the Company's results of operations or financial condition. In accordance with regulatory treatment, the Company collects an estimated net cost of removal of its utility plant in rates through normal depreciation. As of September 30, 2003, and December 31, 2002, such removal costs approximated $395 million and $385 million, respectively, of accumulated depreciation as presented in the condensed consolidated balance sheets based upon the Company's latest depreciation studies. SFAS 149 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of FASB Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS 133 to reflect decisions that were made (1) as part of the process undertaken by the Derivatives Implementation Group (DIG), which necessitated amending SFAS 133; (2) in connection with other projects dealing with financial instruments; and (3) regarding implementation issues related to the application of the definition of a derivative. SFAS 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions and (2) for hedging relationships designated after June 30. The guidance is to be applied prospectively. The adoption did not have a material effect on the Company's financial statements. SFAS 150 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150). SFAS 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: mandatorily redeemable financial instruments; obligations to repurchase the issuer's equity shares by transferring assets; and certain obligations to issue a variable number of shares. SFAS 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS 150 applies to the Company's third quarter of 2003. The Company has approximately $200,000 of outstanding preferred stock of a subsidiary that is redeemable on terms outside the Company's control. However, the preferred stock is not redeemable on a specified or determinable date or upon an event that is certain to occur. Therefore, SFAS 150's adoption did not affect the Company's results of operations or financial condition. FASB Interpretation (FIN) 45 In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Since that date, the adoption has not had a material effect on the Company's results of operations or financial condition. FIN 46 In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses consolidation by business enterprises of variable interest entities (VIE) and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. FIN 46 currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 is to be adopted on December 31, 2003. Although management is still evaluating the impact of FIN 46 on its financial position and results of operations, the adoption is not expected to have a material effect. EITF 03-11 The EITF has recently released guidance on when gross or net presentation on the income statement for derivative instruments not held for trading purposes is appropriate. The guidance is effective for the Company's fourth quarter, and the Company is currently determining the impacts, if any, that will result from implementing that guidance. 12. Segment Reporting As discussed in Note 3, on January 1, 2003, Vectren transferred certain information technology systems and related assets and buildings from other entities within its consolidated group to VUHI. These assets primarily support the operations of VUHI's subsidiaries. The operations of these assets comprise the Corporate and Other operating segment. The Company separates its operations into three operating segments: Gas Utility Services, Electric Utility Services, and Corporate and Other. The Company uses operating income as the measure of profitability for its segments. Gas Utility Services provides natural gas distribution and transportation services in nearly two-thirds of Indiana and west central Ohio. Electric Utility Services provides electricity primarily to southwestern Indiana, and includes the Company's power generating and marketing operations. Corporate and Other Operations provide information technology and other support services to those utility operations. Following is information regarding the Company's segments' operating data. - ------------------------------------------------------------------------------ Three Months Nine Months Ended September 30, Ended September 30, ------------------- --------------------- In millions 2003 2002 2003 2002 - ------------------------------ ------- ------- -------- --------- Operating Revenues Gas Utility Services $ 115.7 $ 88.5 $ 790.3 $ 586.7 Electric Utility Services 134.0 189.6 343.6 475.3 Corporate & Other 6.6 4.8 19.8 16.0 Intersegment Eliminations (6.4) (4.8) (19.2) (15.8) - ------------------------------------------------------------------------------ Total operating revenues $ 249.9 $ 278.1 $1,134.5 $ 1,062.2 ============================================================================== Operating Income (Loss) Gas Utility Services $ (14.9) $ (11.2) $ 54.6 $ 55.6 Electric Utility Services 32.4 39.8 71.6 74.6 Corporate & other 1.9 1.7 6.3 6.9 - ------------------------------------------------------------------------------ Total operating income $ 19.4 $ 30.3 $ 132.5 $ 137.1 ============================================================================== Following is the Company's segments' identifiable assets. - --------------------------------------------------------------------- September 30, December 31, In millions 2003 2002 - --------------------------------------------------------------------- Identifiable Assets Gas Utility Services $ 1,486.9 $ 1,555.1 Electric Utility Services 896.5 860.9 Corporate & Other 148.9 171.6 Eliminations (6.7) (17.2) - --------------------------------------------------------------------- Total identifiable assets $ 2,525.6 $ 2,570.4 ===================================================================== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Description of the Business Vectren Utility Holdings, Inc. (VUHI or the Company), an Indiana corporation, was formed on March 31, 2000, to serve as the intermediate holding company for Vectren Corporation's (Vectren) three operating public utilities, Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana Energy, Inc. (Indiana Energy), Southern Indiana Gas and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc. (SIGCORP), and the Ohio operations. VUHI also has other assets that provide information technology and other services to the three utilities. Indiana Gas provides natural gas distribution and transportation services to a diversified customer base in 49 of Indiana's 92 counties. SIGECO provides electric generation, transmission, and distribution services to 8 counties in southwestern Indiana, including counties surrounding Evansville, and participates in the wholesale power market. SIGECO also provides natural gas distribution and transportation services to 10 counties in southwestern Indiana, including counties surrounding Evansville. The Ohio operations, owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc.(VEDO), a wholly owned subsidiary, (53 % ownership) and Indiana Gas (47 % ownership), provide natural gas distribution and transportation services to 17 counties in west central Ohio, including counties surrounding Dayton. Vectren is an energy and applied technology holding company headquartered in Evansville, Indiana. The Company was organized on June 10, 1999, solely for the purpose of effecting the merger of Indiana Energy and SIGCORP. On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with APB Opinion No. 16 "Business Combinations" (APB 16). 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. Consolidated Results of Operations The following discussion and analysis should be read in conjunction with the unaudited consolidated condensed financial statements and notes thereto. Subsequent to the issuance of the Company's 2002 quarterly financial statements, the Company's management determined that previously issued financial statements should be restated. The restatement had the effect of decreasing net income for the three and nine months ended September 30, 2002, by $0.4 million after tax and $2.1 million after tax, respectively. In addition, on January 1, 2003, Vectren transferred certain information technology systems and related assets and buildings from other entities within its consolidated group to VUHI. These assets primarily support the operations of VUHI's subsidiaries and VUHI's subsidiaries receive a charge for their use that is included in their other operating expenses. The transfer required restatement of VUHI's consolidated financial statements for all periods presented under accounting rules governing combinations of entities under common control. The reorganization increased previously reported earnings by $0.5 million after tax for the three months ended September 30, 2002, and $3.2 million after tax for the nine months ended September 30, 2002. Note 3 to the consolidated condensed financial statements includes a summary of the effects of the reorganization due to the transfer of assets and restatement on previously reported results of operations. The results of operations give effect to these restatements. Net Income For the three months ended September 30, 2003, net income was $2.4 million compared to net income of $9.0 million for the same period last year. For the nine months ended September 30, 2003, reported earnings were $51.1 million compared to $59.7 million for the same period in 2002. Quarter over quarter, earnings were primarily affected by a decrease in electric margin of $7.3 million ($4.3 million after-tax). This was attributable to milder cooling weather, which reduced margin an estimated $3.6 million pre-tax, the effects of the slowly recovering economy, and slightly lower wholesale power margins. The remaining decrease for the quarter was due to higher depreciation and the timing of certain operating expenses. Year-to-date, the timing of certain operating expenses and higher depreciation have been offset somewhat by increased power marketing margins and favorable weather. In addition, the year-to-date 2003 results include impairment charges related to an investment in BABB International, Inc. (BABB), an entity that processes fly ash into building materials. Charges affecting year-to-date results were $3.9 million ($2.3 million after tax). Utility Margin Gas Utility Margin Gas utility margin by customer type and separated between volumes sold and transported follows: - ----------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------ ------------------- In millions 2003 2002 2003 2002 - --------------------------------------- ---------------------------- ------ Residential $ 26.7 $ 26.8 $ 159.2 $ 146.6 Commercial 7.2 7.6 50.3 47.5 Contract 9.7 7.8 33.6 32.2 Other 0.1 0.5 5.8 2.1 - ----------------------------------------------------------------------------- Total gas utility margin $ 43.7 $ 42.7 $ 248.9 $ 228.4 ============================================================================= Volumes in MMDth - -------------------------------- Sold 7.3 7.2 85.8 74.9 Transported 17.8 19.3 63.6 65.4 - ----------------------------------------------------------------------------- Total throughput 25.1 26.5 149.4 140.3 ============================================================================= Gas margins for the third quarter, a non-heating, base load usage quarter, were $43.7 million, an increase of 2% compared to the prior year period. While margin was generally flat and reflects a $0.7 million charge associated with a PUCO GCR audit proceeding in 2003, residential and commercial usage increased slightly, offset by declining industrial usage due to the slow economic conditions. Gas margins year-to-date were $248.9 million, an increase of $20.5 million over the nine months ended September 30, 2002. It is estimated that weather, 19% colder than the prior year and 8% colder than normal, contributed $12.6 million to the increased margin. The remaining $7.9 million increase is primarily attributable to higher utility receipts and excise taxes on higher gas costs and volumes sold and recovery of Ohio customer choice implementation costs, partially offset by the negative effect of high gas prices on customer usage. The colder weather is the primary reason for the 6% increase in throughput. Higher gas costs and a slowly recovering economy have impacted customer usage. The average cost per dekatherm of gas purchased for the three months ended September 30, 2003, was $6.22 compared to $3.95 in 2002. Year-to-date the cost of gas purchased in 2003 was $6.44 compared to $4.39 in the prior year. Electric Utility Margin Electric utility margin by customer type and non-firm wholesale margin separated between realized margin and mark-to-market gains and losses follows: - ------------------------------------------------------------------------------ Three Months Nine Months Ended September 30, Ended September 30, ------------------ ------------------ In millions 2003 2002 2003 2002 - --------------------------------- ------------------ ------------------ Retail & firm wholesale $ 63.7 $ 70.0 $ 160.5 $ 169.2 Non-firm wholesale 2.8 3.8 15.0 6.9 - ------------------------------------------------------------------------------ Total electric utility margin $ 66.5 $ 73.8 $ 175.5 $ 176.1 ============================================================================== Non-firm wholesale margin: Realized margin $ 3.3 $ 4.0 $ 14.6 $ 10.0 Mark-to-market gains (losses) (0.5) (0.2) 0.4 (3.1) Electric margins were $66.5 million, a decrease of $7.3 million compared to the third quarter of 2002. The decrease in electric margin was due primarily to the effect of milder cooling weather which was 7% cooler than normal and 26% cooler than last year. The estimated quarter over quarter decrease as a result of the milder weather was approximately $3.6 million. Impacts of the slowly recovering economy on industrial sales and slightly lower non-firm wholesale power margins further decreased non-weather related electric margin compared to the prior year. As a result primarily of mild weather, volumes sold to retail and firm wholesale customers decreased 8% from 1.87 GWh in 2002 to 1.72 GWh in 2003. Electric margins were $175.5 million, a decrease of $0.6 million over the nine months ended September 30, 2002. The decrease was primarily due to lower retail sales due to milder cooling weather and the current quarter decrease in industrial sales. As a result primarily of the mild weather which was 18% cooler than normal and 33% cooler than last year, volumes sold to retail and firm wholesale customers decreased 5% from 4.76 GWh in 2002 to 4.53 GWh in 2003 with an estimated margin decrease of $6.5 million. The decrease was partially offset by increased non-firm wholesale power margins resulting from price volatility. Periodically, generation capacity is in excess of that needed to serve retail and firm wholesale customers. The Company markets this unutilized capacity to optimize the return on its owned generation assets. The contracts entered into are primarily short-term purchase and sale transactions that expose the Company to limited market risk. For the three months ended September 30, 2003, volumes sold into the wholesale market were 1.01 GWh compared to 2.66 GWh in 2002 while volumes purchased were 1.01 GWh in 2003 compared to 2.65 GWh in 2002. For the nine months ended September 30, 2003, volumes sold into the wholesale market were 3.04 GWh compared to 8.30 GWh in 2002 while volumes purchased were 3.49 GWh in 2003 compared to 8.14 GWh in 2002. A portion of volumes purchased in the wholesale market is used to serve retail and firm wholesale customers, and in 2003, greater amounts of purchased power have been required for native load due to scheduled outages, which has reduced capacity available for optimization. Additionally, both sold and purchased power were lower in 2003 due to a shorter term focus in hedging and optimization strategies combined with a more selective approach to counter-party relationships. While volumes both sold and purchased in the wholesale market have decreased during 2003, which has resulted in decreased electric revenues and purchased power, margins year-to-date have increased primarily from price volatility. In the third quarter, margins decreased because less capacity was available for optimization due to outages for NOx control equipment installation and the wholesale power market was less volatile. Utility Group Operating Expenses Other Operating For the three and nine months ended September 30, 2003, other operating expenses increased $2.4 million and $12.8 million, respectively, compared to the same periods in the prior year. The increased expenses were principally due to the timing of routine expenditures between the periods and increased employee benefit costs. Year-to-date, the timing of maintenance expenditures, Ohio customer choice program implementation costs that are recovered through margins, and increased uncollectible accounts expense have also contributed to the increase. Year-to-date uncollectible accounts expense has increased $1.7 million compared to the prior year due principally to higher gas costs. Depreciation & Amortization For the three and nine months ended September 30, 2003, depreciation and amortization increased $2.6 million and $7.9 million, respectively, due to additions to utility plant. Increased depreciation expense reflects a full nine months of depreciation on the addition of over $100 million of utility plant placed into service including a new gas-fired peaker unit, expenditures for implementing a choice program for Ohio gas customers, customer system upgrades, and other upgrades to existing transmission and distribution facilities. Taxes Other Than Income Taxes For the nine months ended September 30, 2003, taxes other than income taxes increased $4.2 million compared to the prior year. The increase results from higher utility receipts and excise taxes as a result of higher gas prices and more volumes sold. The higher utility receipts and excise taxes on gas volumes sold are recovered dollar-for-dollar through customer billings. Utility Group Other Income (Expense)-Net For the three and nine months ended September 30, 2003, other income (expense)-net increased $1.9 million and decreased $5.1 million, respectively, compared to the prior year. The year-to-date decrease is primarily the result of the write-off of the BABB investment totaling $3.9 million. The remaining decrease results principally from sales of emission allowances and other assets in the second quarter of 2002 totaling $1.8 million and current year contributions of $1.2 million made to low income heating assistance programs pursuant to a settlement previously approved by the IURC regarding transactions with ProLiance Energy LLC. These decreases were offset somewhat by the current quarter increase in other income (expense)-net which was principally the result of fluctuations in investments used to fund deferred compensation plans. Utility Group Interest Expense For the three and nine months ended September 30, 2003, interest expense increased $0.2 million and decreased $2.3 million, respectively, when compared to the same periods last year. The changes reflect the impact of the permanent financing completed in the third quarter of 2003 and lower short-term borrowing rates. Utility Group Income Tax For the three months ended September 30, 2003, federal and state income taxes decreased $2.6 million primarily due to fluctuations in pre-tax income. For the nine months ended September 30, 2003, income taxes increased $1.2 million when compared to 2002. The year-to-date change is primarily due to an increased effective tax rate, offset by less pre-tax income. Year to date, the effective tax rate increased from 34.3% in 2002 to 38.8% in 2003 principally due to an increase in the Indiana state income tax rate from 4.5 % to 8.5% that was effective January 1, 2003. Environmental Matters Clean Air Act NOx SIP Call Matter The Clean Air Act (the Act) requires each state to adopt a State Implementation Plan (SIP) to attain and maintain National Ambient Air Quality Standards (NAAQS) for a number of pollutants, including ozone. If the USEPA finds a state's SIP inadequate to achieve the NAAQS, the USEPA can call upon the state to revise its SIP (a SIP Call). In October 1998, the USEPA issued a final rule "Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone," (63 Fed. Reg. 57355). This ruling found that the SIP's of certain states, including Indiana, were substantially inadequate since they allowed for nitrogen oxide (NOx) emissions in amounts that contributed to non-attainment with the ozone NAAQS in downwind states. The USEPA required each state to revise its SIP to provide for further NOx emission reductions. The NOx emissions budget, as stipulated in the USEPA's final ruling, requires a 31% reduction in total NOx emissions from Indiana. In June 2001, the Indiana Air Pollution Control Board adopted final rules to achieve the NOx emission reductions required by the NOx SIP Call. Indiana's SIP requires the Company to lower its system-wide NOx emissions to .14 lbs./MMBTU by May 31, 2004 (the compliance date). This is a 65% reduction from emission levels existing in 1999 and 1998. The Company has initiated steps toward compliance with the revised regulations. These steps include installing Selective Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley), Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and 2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in a chemical reaction. This technology is known to be the most effective method of reducing NOx emissions where high removal efficiencies are required. The IURC has issued orders that approve: o the Company's project to achieve environmental compliance by investing in clean coal technology; o a total capital cost investment for this project up to $244 million (excluding AFUDC), subject to periodic review of the actual costs incurred; o a mechanism whereby, prior to an electric base rate case, the Company may recover through a rider that is updated every six months an 8 percent return on its capital costs for the project; and o ongoing recovery of operating costs, including depreciation and purchased emission allowances through a rider mechanism, related to the clean coal technology once the facility is placed into service. Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated clean coal technology construction cost is consistent with amounts approved in the IURC's orders and is expected to be expended during the 2001-2006 period. Through September 30, 2003, $117.1 million has been expended. After the equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. A portion of those expenses began in October 2003 when the Culley SCR became operational. The 8 percent return on capital investment approximates the return authorized in the Company's last electric rate case in 1995 and includes a return on equity. The Company expects to achieve timely compliance as a result of the project. Construction of the first SCR at Culley was placed into service in October 2003, and construction of the Warrick 4 and Brown SCR's is proceeding on schedule. Installation of SCR technology as planned is expected to reduce the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance. Culley Generating Station Litigation In the late 1990's, the USEPA initiated an investigation under Section 114 of the Act of SIGECO's coal-fired electric generating units in commercial operation by 1977 to determine compliance with environmental permitting requirements related to repairs, maintenance, modifications, and operations changes. The focus of the investigation was to determine whether new source review permitting requirements were triggered by such plant modifications, and whether the best available control technology was, or should have been used. Numerous electric utilities were, and are currently, being investigated by the USEPA under an industry-wide review for compliance. In July 1999, SIGECO received a letter from the Office of Enforcement and Compliance Assurance of the USEPA discussing the industry-wide investigation, vaguely referring to an investigation of SIGECO and inviting SIGECO to participate in a discussion of the issues. No specifics were noted; furthermore, the letter stated that the communication was not intended to serve as a notice of violation. Subsequent meetings were conducted in September and October 1999 with the USEPA and targeted utilities, including SIGECO, regarding potential remedies to the USEPA's general allegations. On November 3, 1999, the USEPA filed a lawsuit against seven utilities, including SIGECO. SIGECO's suit was filed in the U.S. District Court for the Southern District of Indiana. The USEPA alleged that, beginning in 1992, SIGECO violated the Act by (1) making modifications to its Culley Generating Station in Yankeetown, Indiana without obtaining required permits (2) making major modifications to the Culley Generating Station without installing the best available emission control technology and (3) failing to notify the USEPA of the modifications. In addition, the lawsuit alleged that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards at its Culley Unit 3. The USEPA also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. On June 6, 2003, SIGECO, the Department of Justice (DOJ), and the USEPA announced an agreement that would resolve the lawsuit. The agreement was embodied in a consent decree filed in U.S. District Court for the Southern District of Indiana. The mandatory public comment period has expired, and no comments were received. The Court entered the consent decree on August 13, 2003. Under the terms of the agreement, the DOJ and USEPA have agreed to drop all challenges of past maintenance and repair activities at the Culley coal-fired units. In reaching the agreement, SIGECO did not admit to any allegations alleged in the government's complaint, and SIGECO continues to believe that it acted in accordance with applicable regulations and conducted only routine maintenance on the units. SIGECO has entered into this agreement to further its continued commitment to improve air quality and avoid the cost and uncertainties of litigation. Under the agreement, SIGECO has committed to: o either repower Culley Unit 1 (50 MW) with natural gas, which would significantly reduce air emissions from this unit, and equip it with SCR control technology for further reduction of nitrogen oxides, or cease operation of the unit by December of 2006; o operate the existing SCR control technology recently installed on Culley Unit 3 (287 MW) year round at a lower emission rate than that currently required under the NOx SIP Call, resulting in further nitrogen oxide reductions; o enhance the efficiency of the existing scrubber at Culley Units 2 and 3 for additional removal of sulphur dioxide emissions; o install a baghouse for further particulate matter reductions at Culley Unit 3 by June of 2007; o conduct a Sulphuric Acid Reduction Demonstration Project as an environmental mitigation project designed to demonstrate an advance in pollution control technology for the reduction of sulfate emissions; and o pay a $600,000 civil penalty. The Company anticipates that the settlement would result in total capital expenditures through 2007 in a range between $16 million and $28 million. Other than the $600,000 civil penalty, which was accrued in the second quarter of 2003, the implementation of the settlement, including these capital expenditures and related operating expenses, are expected to be recovered through rates. Information Request On January 23, 2001, SIGECO received an information request from the USEPA under Section 114 of the Act for historical operational information on the Warrick and A.B. Brown generating stations. SIGECO has provided all information requested, and no further action has occurred. Manufactured Gas Plants In the past, Indiana Gas and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program and is currently conducting some level of remedial activities including groundwater monitoring at certain sites where deemed appropriate and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's Voluntary Remediation Program (VRP). In response SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk. On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO is adding its four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. At this time the Company is unable to predict any outcome that may result from these SIGECO manufactured gas plant sites. Rate and Regulatory Matters The following is an update on two regulatory matters in Ohio. Each of the discussed matters is currently pending before the PUCO. The first matter relates to a pending application made to the PUCO by VEDO, together with other regulated Ohio gas utilities, for authority to establish a tariff mechanism to recover expenses related to uncollectible accounts. As proposed the tariff mechanism would establish an automatic adjustment procedure to track and recover these costs instead of providing the recovery of the historical amount in base rates. If the application is approved before the end of the year, 2003 uncollectible costs in excess of the amount in base rates should be recovered. While the Company believes there is a sound basis for the PUCO to grant the application to recover actual expenses relating to uncollectible accounts, no assurance can be provided with respect to the ultimate outcome of this proceeding. The second matter related to the requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, the two-year period began in November 2000, coincident with the Company's acquisition and commencement of service in Ohio. The audit provides the initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff recently submitted an audit report wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. There are two elements of the recommendations relating to the treatment of a pipeline refund and a penalty for which a reserve of $0.7 million has been established for the Company's estimated share of a potential disallowance of these costs. For this PUCO audit period, a disallowance relating to our ProLiance arrangement will be shared by the Company's joint venture partner. Currently the matter is set for a hearing before the PUCO in mid November. Throughout this process VEDO has and continues to engage in efforts with the participants in the proceeding to resolve disputed issues outside of administrative litigation. If the external auditor recommendations were adopted by the PUCO, the Company believes that it would not likely have a material effect on the Company's results or financial condition. However, the Company can provide no assurance as to the ultimate outcome of this proceeding. United States Securities and Exchange Commission (SEC) Informal Inquiry As more fully described in Note 3 to these consolidated condensed financial statements and in Note 3 to the 2002 consolidated financial statements filed on Form 10-K/A, the Company restated its consolidated financial statements for 2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC in an informal inquiry with respect to this previously announced restatement, has met with the staff of the SEC, and has provided information in response to their requests. Impact of Recently Issued Accounting Guidance SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted this statement on January 1, 2003. The adoption was not material to the Company's results of operations or financial condition. SFAS 149 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies the accounting guidance on (1) derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of FASB Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 149 amends SFAS 133 to reflect decisions that were made (1) as part of the process undertaken by the Derivatives Implementation Group (DIG), which necessitated amending SFAS 133; (2) in connection with other projects dealing with financial instruments; and (3) regarding implementation issues related to the application of the definition of a derivative. SFAS 149 also amends certain other existing pronouncements, which will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions and (2) for hedging relationships designated after June 30. The guidance is to be applied prospectively. The adoption did not have a material effect on the Company's financial statements. SFAS 150 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150). SFAS 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: mandatorily redeemable financial instruments; obligations to repurchase the issuer's equity shares by transferring assets; and certain obligations to issue a variable number of shares. SFAS 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS 150 applies to the Company's third quarter of 2003. The Company has approximately $200,000 of outstanding preferred stock of a subsidiary that is redeemable on terms outside the Company's control. However, the preferred stock is not redeemable on a specified or determinable date or upon an event that is certain to occur. Therefore, SFAS 150's adoption did not affect the Company's results of operations or financial condition. FASB Interpretation (FIN) 45 In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Since that date, the adoption has not had a material effect on the Company's results of operations or financial condition. FIN 46 In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses consolidation by business enterprises of variable interest entities (VIE) and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. FIN 46 currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 is to be adopted on December 31, 2003. Although management is still evaluating the impact of FIN 46 on its financial position and results of operations, the adoption is not expected to have a material effect. EITF 03-11 The EITF has recently released guidance on when gross or net presentation on the income statement for derivative instruments not held for trading purposes is appropriate. The guidance is effective for the Company's fourth quarter, and the Company is currently determining the impacts, if any, that will result from implementing that guidance. Financial Condition Within Vectren's consolidated group, VUHI funds short-term and long-term financing needs of the utility group operations. Vectren does not guarantee VUHI's debt. VUHI's currently outstanding long-term and short-term borrowing arrangements are jointly and severally guaranteed by Indiana Gas, SIGECO, and VEDO. The guarantees are full and unconditional and joint and several, and VUHI has no subsidiaries other than the subsidiary guarantors. Information about the subsidiary guarantors as a group is included in Note 5 to the condensed consolidated financial statements. VUHI's long-term and short-term obligations outstanding at September 30, 2003, totaled $550.0 million and $142.5 million, respectively. Additionally, prior to VUHI's formation, Indiana Gas and SIGECO funded their operations separately, and therefore, have long-term debt outstanding funded solely by their operations. VUHI's operations have historically funded almost all of Vectren's common stock dividends. VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at September 30, 2003, are A-/Baa1 as rated by Standard and Poor's Ratings Services (Standard and Poor's) and Moody's Investors Service (Moody's), respectively. SIGECO's credit ratings on outstanding senior unsecured debt are BBB+/Baa1. SIGECO's credit ratings on outstanding secured debt are A-/A3. VUHI's commercial paper has a credit rating of A-2/P-2. Moody's current outlook is stable while Standard and Poor's current outlook is negative. The ratings of Moody's and Standard and Poor's are categorized as investment grade and are unchanged from December 31, 2002. In July 2003, Standard and Poor's reaffirmed its ratings, and Moody's reaffirmed its ratings on VUHI's senior unsecured debt. A security rating is not a recommendation to buy, sell, or hold securities. The rating is subject to revision or withdrawal at any time, and each rating should be evaluated independently of any other rating. Standard and Poor's and Moody's lowest level investment grade rating is BBB- and Baa3, respectively. The Company's consolidated equity capitalization objective is 45-55% of total capitalization. This objective may have varied, and will vary, depending on particular business opportunities, capital spending requirements, and seasonal factors that affect the Company's operation. The Company's equity component was 48% and 46% of total capitalization, including current maturities of long-term debt and long-term debt subject to tender, at September 30, 2003, and December 31, 2002, respectively. The Company expects the majority of its capital expenditures, investments, and debt security redemptions to be provided by internally generated funds. However, due to significant capital expenditures for NOx compliance equipment at SIGECO and to further strengthen the Company's capital structure and the capital structures of the Company's utility subsidiaries, the Company has completed certain financing transactions as more fully described below. Sources & Uses of Liquidity Operating Cash Flow The Company's primary and historical source of liquidity to fund working capital requirements has been cash generated from operations, which for the nine months ended September 30, 2003 and 2002, was $141.3 million and $255.8 million, respectively. The decrease of $114.5 million is primarily the result of more favorable changes in working capital accounts occurring in 2002 due to a return to lower gas prices in that year and higher gas prices in the current year, offset by increased earnings before non-cash charges in 2003. Financing Cash Flow Although working capital requirements are generally funded by cash flow from operations, the Company uses short-term borrowings to supplement working capital needs when accounts receivable balances are at their highest and gas storage is refilled. Additionally, short-term borrowings are required for capital projects and investments until they are permanently financed. Cash flow required for financing activities of $7.3 million for the nine months ended September 30, 2003, includes the effects of the permanent financing executed during the third quarter in which approximately $370 million in capital contributions from Vectren and third party debt proceeds were received and used to retire higher coupon long-term debt and other short term borrowings. In 2002, higher operating cash flow was used to repay short-term borrowings. Common stock dividends have increased in 2003 compared to 2002. Financing Transactions VUHI Debt Issuance In July 2003, VUHI issued senior unsecured notes with an aggregate principal amount of $200 million in two $100 million tranches. The first tranche are 10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746% to yield 5.28% to maturity (2013 Notes). The second tranche are 15-year notes due August 2018, with an interest rate of 5.75% priced at 99.177% to yield 5.80% to maturity (2018 Notes). The notes are jointly and severally guaranteed by the Company's three public utilities. In addition, they have no sinking fund requirements, and interest payments are due semi-annually. The notes may be called by the Company, in whole or in part, at any time for an amount equal to accrued and unpaid interest, plus the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined in the indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the 2018 Notes. Shortly before these issues, the Company entered into several treasury locks with a total notional amount of $150.0 million. Upon issuance of the debt, the treasury locks were settled resulting in the receipt of $5.7 million in cash. The value received is being amortized as a reduction of interest expense over the life of the issues. The net proceeds from the sale of the senior notes and settlement of related hedging arrangements approximated $203 million and was used to repay short-term borrowing and to retire long-term debt with higher interest rates. Additional Capital Contributions In March 2003, Vectren filed a registration statement with the Securities and Exchange Commission with respect to a public offering of authorized but previously unissued shares of common stock. In August 2003, the registration became effective, and an agreement was reached to sell approximately 7.4 million shares to a group of underwriters. The net proceeds totaled $163.2 million and was contributed to VUHI. In addition, a portion of current year proceeds generated from Vectren's stock plans totaling $4.3 million was contributed to VUHI. SIGECO and Indiana Gas Debt Call During 2003, the Company called two first mortgage bonds outstanding at SIGECO and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond had a principal amount of $45.0 million, an interest rate of 7.60%, was originally due in 2023, and was redeemed at 103.745% of its stated principal amount. The second SIGECO bond had a principal amount of $20.0 million, an interest rate of 7.625%, was originally due in 2025, and was redeemed at 103.763% of the stated principal amount. The first Indiana Gas note had a remaining principal amount of $21.3 million, an interest rate of 9.375%, was originally due in 2021, and was redeemed at 105.525% of the stated principal amount. The second Indiana Gas note had a principal amount of $13.5 million, an interest rate of 6.75%, was originally due in 2028, and was redeemed at the principal amount. Pursuant to regulatory authority, the premiums paid to retire these notes totaling $3.6 million were deferred as a regulatory asset. Other Financing Transactions In January, 2003, other debt of Indiana Gas totaling $17.5 million and of SIGECO totaling $1.0 million was retired. At December 31, 2002, the Company had $26.6 million of adjustable rate senior unsecured bonds which could, at the election of the bondholder, be tendered to the Company when interest rates are reset. Such bonds were classified as long-term debt subject to tender. During the second quarter, the Company re-marketed those bonds on a long-term basis and has therefore reclassified them as long-term debt at September 30, 2003. Investing Cash Flow Cash required for investing activities of $154.5 million for the nine months ended September 30, 2003, includes $153.5 million of requirements for capital expenditures. Investing activities for 2002 were $123.7 million. The increase occurring in 2003 is principally the result of additional capital expenditures, principally for the NOx project and implementation of choice programs in Ohio, and payments to other Vectren subsidiaries for the transfer of assets. In addition, in 2002 proceeds were received from the sale of assets and from the collection of notes receivable from other Vectren companies. Available Sources of Liquidity At September 30, 2003, the Company has $351 million of short-term borrowing capacity, of which approximately $208 million is available. Planned Capital Expenditures & Investments Capital expenditures for the remainder of 2003 and for the year ended December 31, 2004, are estimated to be approximately $75 million and $250 million, respectively. Forward-Looking Information A "safe harbor" for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Certain matters described in Management's Discussion and Analysis of Results of Operations and Financial Condition are forward-looking statements. Such statements are based on management's beliefs, as well as assumptions made by and information currently available to management. When used in this filing, the words "believe," "anticipate," "endeavor," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: o Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unusual maintenance or repairs; unanticipated changes to fossil fuel costs; unanticipated changes to gas supply costs, or availability due to higher demand, shortages, transportation problems or other developments; environmental or pipeline incidents; transmission or distribution incidents; unanticipated changes to electric energy supply costs, or availability due to demand, shortages, transmission problems or other developments; or electric transmission or gas pipeline system constraints. o Increased competition in the energy environment including effects of industry restructuring and unbundling. o Regulatory factors such as unanticipated changes in rate-setting policies or procedures, recovery of investments and costs made under traditional regulation, and the frequency and timing of rate increases. o Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board; the Securities and Exchange Commission; the Federal Energy Regulatory Commission; state public utility commissions; state entities which regulate electric and natural gas transmission and distribution, natural gas gathering and processing, electric power supply; and similar entities with regulatory oversight. o Economic conditions including the effects of an economic downturn, inflation rates, and monetary fluctuations. o Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, interest rate, and warranty risks. o 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 to mitigate risk. The Company also executes derivative contracts in the normal course of operations while buying and selling commodities and other fungible goods to be used in operations and while optimizing generation assets. The Company does not execute derivative contracts it designates as trading. These risks are not significantly different from the information set forth in Item 7A Quantitative and Qualitative Disclosures About Market Risk included in the VUHI 2002 Form 10-K/A and is therefore not presented herein. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of September 30, 2003, the Company carried out an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness and the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective at providing reasonable assurance that material information relating to the Company required to be disclosed by the Company in its filings under the Securities Exchange Act of 1934 (Exchange Act) is brought to their attention on a timely basis. Disclosure controls and procedures, as defined by the Exchange Act in Rules 13a-15(e) and 15d-15(e), are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. "Disclosure controls and procedures" include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting During the quarter ended September 30, 2003, there have been no significant changes to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Internal control over financial reporting is defined by the SEC in Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports. The final rule defines internal control over financial reporting as a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. See Note 9 of its unaudited consolidated condensed financial statements included in Part 1 Item 1 Financial Statements regarding the Clean Air Act and related legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Certifications 31.1 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002- Chief Executive Officer 31.2 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002- Chief Financial Officer 32 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Other Exhibits None (b) Reports On Form 8-K During The Last Calendar Quarter On July 11, 2003, the Company filed a Current Report on Form 8-K with respect to Vectren Corporation's adjustment of 2003 earnings guidance and to address recent announcements related to the production of synthetic fuel. Portions of this information were furnished to the SEC Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Press Release - Vectren Corporation adjusts 2003 earnings guidance and addresses recent announcements related to the production of synthetic fuel 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition On July 23, 2003, the Company filed a Current Report on Form 8-K with respect to the release of the Company's and Vectren Corporation's financial information to the investment community regarding the Company's results of operations, for the three, six, and twelve month periods ended June 30, 2003. The financial information was released to the public through this filing. Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Vectren Corporation Consolidated Statement of Income for the three and six months ended June 30, 2003 and 2002 99.2 - Vectren Utility Holdings, Inc. Consolidated Statement of Income for the three and six months ended June 30, 2003 and 2002 99.3 - Vectren Corporation Operating Highlights 99.4 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 On July 23, 2003, the Company furnished information to the SEC on a Current Report on Form 8-K with respect to the release of the Company's and Vectren Corporation's financial information to the investment community regarding the Company's results of operations, for the three, six, and twelve month periods ended June 30, 2003. The financial information was released to the public through this filing. Item 7. Exhibits 99.1 - Press Release - Vectren Corporation Reports 2nd Quarter 2003 Results 99.2 - Press Release - Vectren Corporation Declares Regular Quarterly Dividend 99.3 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition On July 25, 2003, the Company furnished information to the SEC on a Current Report on Form 8-K to announce the pricing of $200 million in senior unsecured notes in two tranches of $100 million each. Item 7. Exhibits 99.1 - Press Release- Vectren Corporation Sells $200 Million in Debt 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition On July 29, 2003, the Company filed a Current Report on Form 8-K to disclose the underwriting agreement and terms agreement associated with a debt issuance. Item 5. Other Events Item 7. Financial Statements and Exhibits Exhibit 1.1 - Underwriting Agreement, dated July 24, 2003, among Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company and Vectren Energy Delivery of Ohio, Inc., and ABN AMRO Incorporated and Banc One Capital Markets, Inc., in their respective capacities of the underwriters named therein. Exhibit 1.2 - Terms Agreement, dated July 24, 2003, among Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company and Vectren Energy Delivery of Ohio, Inc., and ABN AMRO Incorporated and Banc One Capital Markets, Inc., in their respective capacities of the underwriters named therein. Exhibit 4.1 - Form of Third Supplemental Indenture, among Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc. and U.S. Bank National Association. Exhibit 5.1 - Opinion of Barnes & Thornburg Exhibit 5.2 - Opinion of Kegler, Brown, Hill & Ritter On August 4, 2003, the Company filed a Current Report on Form 8-K with respect to updates on various matters incident to Vectren Corporation's equity offering. Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Selected Financial Data 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 On August 18, 2003, the Company filed a Current Report on Form 8-K with respect to updates on various regulatory matters in Ohio. Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 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 UTILITY HOLDINGS, INC. ------------------------------ Registrant November 12, 2003 /s/Jerome A. Benkert, Jr. ------------------------- Jerome A. Benkert, Jr. Executive Vice President & Chief Financial Officer (Principal Financial Officer) /s/M. Susan Hardwick --------------------------- M. Susan Hardwick Vice President & Controller (Principal Accounting Officer) EX-31.1 3 vuhi10q_31-1.txt CERTIFICATION SARBANES-OXLEY ACT EX: 31-1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Niel C. Ellerbrook, certify that: 1. I have reviewed this Form 10-Q of Vectren Utility Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Niel C. Ellerbrook - ----------------------------------------------- Niel C. Ellerbrook Chairman, & Chief Executive Officer EX-31.2 4 vuhi10q_ex31-2.txt CERTIFICATION SARBANES-OXLEY ACT EX 31-2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CHIEF FINANCIAL OFFICER CERTIFICATION I, Jerome A. Benkert, Jr., certify that: 1. I have reviewed this Form 10-Q of Vectren Utility Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Jerome A. Benkert, Jr. - ----------------------------------------------- Jerome A. Benkert, Jr. Executive Vice President & Chief Financial Officer EX-32 5 vuhi10q_ex32.txt CERTIFICATION SARBANES-OXLEY ACT EX 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Vectren Utility Holdings, Inc. Signed this 12th day of November, 2003. /s/ Jerome A. Benkert, Jr. /s/ Niel C. Ellerbrook - ----------------------------------- ----------------------------------- (Signature of Authorized Officer) (Signature of Authorized Officer) Jerome A. Benkert, Jr. Niel C. Ellerbrook - ----------------------------------- ----------------------------------- (Typed Name) (Typed Name) Executive Vice President & Chief Financial Officer Chairman & Chief Executive Officer - ----------------------------------- ------------------------------------ (Title) (Title) -----END PRIVACY-ENHANCED MESSAGE-----