10-K405 1 sig-10k_2001.txt SOUTHERN INDIANA GAS & ELECTRIC 10K FILING FOR 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________ to____________ Commission Registrant, State of Incorporation; IRS Employer File Number Address and Telephone Number Identification No. ----------- ---------------------------- ------------------ 1-3553 Southern Indiana Gas and Electric Company 35-0672570 (An Indiana Corporation) 20 N. W. Fourth Street Evansville, Indiana 47708 (812) 491-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Registrant Title of each class on which registered ---------- ------------------- --------------------- None None None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Registrant Title of each class on which registered ---------- ------------------- --------------------- None None None 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) have been subject to such filing requirements for the past 90 days: Yes X No _ Indicate the number shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Common Stock- Without Par Value 15,754,826 March 22, 2002 ------------------------------- ---------- -------------- Class Number of Shares Date As of March 22, 2002, all shares outstanding of the Registrant's classes of common stock were held by Vectren Corporation through its wholly owned subsidiary, Vectren Utility Holdings, Inc. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X. Documents Incorporated by Reference Certain information in the Vectren Corporation's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, which was filed with the Securities and Exchange Commission on March 15, 2002, is incorporated by reference in Part III of this Form 10-K. Information in the Company's Current Report on Form 8-K, which was filed with the Securities and Exchange Commission on March 26, 2002, regarding replacement of the Company's independent auditors, is incorporated by reference in Part I of this filing. Table of Contents Item Page Number Number Part I 1 Business ............................................................ 1 2 Properties .......................................................... 5 3 Legal Proceedings.................................................... 5 4 Submission of Matters to Vote of Security Holders.................... 6 Part II 5 Market for the Company's Common Equity and Related Stockholder Matters ................................... 6 6 Selected Financial Data.............................................. 7 7 Management's Discussion and Analysis of Results of Operations and Financial Condition................... 8 7A Qualitative and Quantitative Disclosures About Market Risk........... 22 8 Financial Statements and Supplementary Data.......................... 24 9 Change in and Disagreements with Accountants on Accounting and Financial Disclosure................................ 50 Part III 10 Directors and Executive Officers of the Company........................................................ 50 11 Executive Compensation............................................... 51 12 Security Ownership of Certain Beneficial Owners and Management.............................................. 53 13 Certain Relationships and Related Transactions....................................................... 54 Part IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................ 55 Signatures........................................................... 58 Definitions As discussed in this Form 10-K, the abbreviations MMDth means millions of dekatherms, MDth means thousands of dekatherms, MW means megawatts, MMBTU means millions of British thermal units, kWh means kilowatt hours, throughput means combined gas sales and gas transportation volumes, and Mva means megavolt amperes. PART I ITEM 1. BUSINESS Description of the Business Southern Indiana Gas and Electric Company (the Company or SIGECO), an Indiana corporation, provides electric generation, transmission, and distribution services to Evansville, Indiana, and 74 other communities in 8 counties in southwestern Indiana and participates in the wholesale power market. The Company also provides natural gas distribution and transportation services to Evansville, Indiana, and 64 other communities in 10 counties in southwestern Indiana. SIGECO is a direct subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUIHI is a direct, wholly owned subsidiary of Vectren Corporation (Vectren). Vectren, an Indiana corporation, is an energy and applied technology holding company headquartered in Evansville, Indiana. Vectren was organized on June 10, 1999 solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with Accounting Principles Board (APB) Opinion No. 16 "Business Combinations." Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding company for its three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana Energy, SIGECO, formerly a wholly owned subsidiary of SIGCORP, and the Ohio operations, a utility jointly owned by Indiana Gas and Vectren Energy Delivery of Ohio, Inc. (VEDO). 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. Refer to Note 14 regarding the operating segments' activities and assets, Note 3 regarding special charges and Note 12 regarding the adoption of and current year impact of SFAS 133 in the Company's financial statements included under Part II Item 8 Financial Statements and Supplementary Data. Recent Development On March 26, 2002, the Company filed a Current Report on Form 8-K announcing its decision to replace Arthur Andersen LLP as its independent auditors effective upon the completion of a transition period which is expected to extend through the conclusion of their review of the financial results of the Company for the first quarter of 2002. This Form 8-K is included in this filing as Exhibit 99.5. Narrative Description of the Business The Company's regulated operations are comprised of its Electric Utility Services and Gas Utility Services segments. The Electric Utility Services segment includes the Company's power supply operations, power marketing operations, and electric transmission and distribution services, which operate and maintain six coal-fired electric power plants and five gas-fired peaking units with a total of 1,271 megawatts of generating capacity to provide electricity to primarily southwestern Indiana. The Gas Utility Services segment includes the Company's natural gas distribution business and provides natural gas distribution and transportation services to southwestern Indiana. Electric Utility Services Overview The Company supplied electric service to 133,294 Indiana customers (115,770 residential, 17,327 commercial, and 197 industrial) during 2001. In addition, the Company is obligated to provide for firm power commitments to several municipalities and to maintain spinning reserve margin requirements under an agreement with the East Central Area Reliability Group. The principal industries served include polycarbonate resin (Lexan) and plastic products, aluminum smelting and recycling, aluminum sheet products, automotive assembly, steel finishing, appliance manufacturing, pharmaceutical and nutritional products, automotive glass, gasoline and oil products, and coal mining. Revenues For the year ended December 31, 2001, electricity sales totaled 9,138,770 megawatt hours, resulting in revenues of approximately $378.9 million. Residential customers accounted for 25% of 2001 revenues; commercial 20%; industrial 22%; wholesale 32%; and other 1%. Generating Capacity Installed generating capacity as of December 31, 2001 was rated at 1,271 megawatts (MW). Coal-fired generating units provide 1,056 MW of capacity and gas or oil-fired turbines used for peaking or emergency conditions provide 215 MW. In addition to its generating capacity, the Company has 82 MW available under firm contracts and 95 MW available under interruptible contracts. New peaking capacity of 80 MW is under development and is planned to be available for the summer peaking season in 2002. This new generating capacity will be fueled by natural gas. The Company has interconnections with Louisville Gas and Electric Company, Cinergy Services, Inc., Indianapolis Power & Light Company, Hoosier Energy Rural Electric Cooperative, Inc., Big Rivers Electric Corporation, Wabash Valley Power Association, and the City of Jasper, Indiana, providing the ability to simultaneously interchange approximately 750 MW. Total load for each of the years 1997 through 2001 at the time of the system summer peak, and the related reserve margin, is presented below in MW. Date of Summer Peak Load 7-14-97 7-21-98 7-6-99 8-17-00 7-31-01 ----- ----- ----- ----- ----- Total Load at Peak 1,086 1,129 1,230 1,212 1,209 Generating Capability 1,236 1,256 1,256 1,256 1,271 Firm Purchase Supply - - - 75 82 Interruptible Contracts - - 95 95 95 ----- ----- ----- ----- ----- Total Power Supply Capacity 1,236 1,256 1,351 1,426 1,448 Reserve Margin at Peak 14% 11% 10% 18% 20% The winter peak load of the 2000-2001 season of approximately 925 MW occurred on December 19, 2000 and was 6% higher than the previous winter peak load of approximately 873 MW which occurred on January 25, 2000. The Company maintains a 1.5% interest in the Ohio Valley Electric Corporation (OVEC). The OVEC is comprised of several electric utility companies, including SIGECO that supplies power requirements to the United States Department of Energy's (DOE) uranium enrichment plant near Portsmouth, Ohio. The participating companies are entitled to receive from OVEC, and are obligated to pay for, any available power in excess of the DOE contract demand. At the present time, the DOE contract demand is essentially zero. Because of this decreased demand, the Company's 1.5% interest in the OVEC makes available approximately 32 MW of capacity, in addition to its generating capacity, for use in other operations. Fuel Costs Electric generation for 2001 was fueled by coal (99.6%) and natural gas (0.4%). Oil was used only for testing of gas/oil-fired peaking units. There are substantial coal reserves in the southern Indiana area, and coal for coal-fired generating stations has been supplied from operators of nearby Indiana strip mines including those owned by Vectren Fuels, Inc., a wholly owned subsidiary of Vectren. Approximately 3.2 million tons of coal was purchased for generating electricity during 2001. Of this amount, Vectren Fuels, Inc. supplied 2.6 million tons, of which 1.9 million tons was produced in its coal mines. The average cost of all coal consumed in generating electrical energy for the years 1997 through 2001 was as follows: Average Cost Average Cost Average Cost Per Kwh Year Per Ton Per MMBTU (In Mills) ---- ------------ ------------ ---------- 1997 20.75 0.91 9.80 1998 21.34 0.94 9.97 1999 21.88 0.96 10.13 2000 22.49 0.98 10.39 2001 22.48 1.00 10.53 Other Operating Matters The Company participates with 7 other utilities and 31 other affiliated groups located in 8 states comprising the east central area of the United States, in the East Central Area Reliability group, the purpose of which is to strengthen the area's electric power supply reliability. In addition, see Part II Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition regarding the Company's participation in the Midwest Independent System Operator group and regarding the change in operations at the Warrick Generating Station. Regulatory Matters See Part II Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition regarding the Company's regulated environment. Environmental Matters See Part II Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition for discussion of the Company's Clean Air Act Compliance Plan and the USEPA's lawsuit against SIGECO for alleged violations of the Clean Air Act. Gas Utility Services Overview For the year ended December 31, 2001, the Company supplied natural gas service to 110,393 Indiana customers, including 100,081 residential, 10,102 commercial, and 210 transportation customers. The Company's service area contains diversified manufacturing and agriculture-related enterprises. The principal industries served include automotive assembly, parts and accessories, feed, aluminum products, appliance manufacturing, polycarbonate resin (Lexan) and plastic products, electrical equipment, metal specialties, glass, steel finishing, pharmaceutical and nutritional products, gasoline and oil products, and coal mining. Revenues For the year ended December 31, 2001, natural gas revenues approximated $101.1 million of which residential customers accounted for 64%, commercial 26%, transportation 9%, and other 1%, respectively. The Company receives gas revenues by selling gas directly to residential, commercial, and industrial customers at approved rates or by transporting gas through its pipelines at approved rates to commercial and industrial customers that have purchased gas directly from other producers, brokers, or marketers. Total volume of gas provided to both sales and transportation customers (throughput) was 31,923 MDth for the year ended December 31, 2001. Transported gas represented 62% of total throughput. Rates for transporting gas provide for the same margins generally earned by selling gas under applicable sales tariffs. The sale of gas is seasonal and strongly affected by variations in weather conditions. To mitigate seasonal demand, the Company owns and operates three underground gas storage fields with an estimated ready delivery from storage capability of 6.2 MMDth. Natural gas purchased from suppliers is injected into storage during periods of light demand which are typically periods of lower prices. The injected gas is then available to supplement contracted volumes during periods of peak requirements. Approximately 129,000 Dth of gas per day can be withdrawn from storage during peak demand periods. Gas Purchases In 2001, the Company purchased gas from multiple suppliers. The Company purchased 14,800 MDth volumes of gas in 2001 at an average cost of $5.20 per MDth. The cost of gas purchased for the last five years is as follows: Average Cost Year of Gas Purchased ---- ---------------- 1997 $3.32 1998 $3.22 1999 $3.10 2000 $5.46 2001 $5.20 Regulatory Matters See Part II Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition regarding the Company's regulated environment. Competition See Part II Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition regarding competition within the public utility industry for the Company's regulated operations. Personnel As of December 31, 2001, the Company had 542 employees. In August 2001, Vectren signed a new four-year labor agreement, ending in September 2005 with Local 135 of the Teamsters, Chauffeurs, Warehousemen and Helpers. The new agreement provides for annual wage increases of 3.25%, a new 401(k) savings plan and improvements in the areas of health insurance and pension. In July 2000, SIGECO signed a new four-year labor agreement with Local 702 of the International Brotherhood of Electrical Workers, ending June 2004. The new agreement provides a 3% wage increase for each year in addition to improvements in health care coverage, retirement benefits and incentive pay. ITEM 2. PROPERTIES Electric Utility Services The Company's installed generating capacity as of December 31, 2001 was rated at 1,271 MW. The Company's coal-fired generating facilities are: the Brown Station with 500 MW of capacity, located in Posey County approximately eight miles east of Mt. Vernon, Indiana; the Culley Station with 406 MW of capacity, and Warrick Unit 4 with 150 MW of capacity. Both the Culley and Warrick Stations are located in Warrick County near Yankeetown, Indiana. The Company's gas-fired turbine peaking units are: the 80 MW Brown Gas Turbine located at the Brown Station; two Broadway Gas Turbines located in Evansville, Indiana, with a combined capacity of 115 MW; and two Northeast Gas Turbines located northeast of Evansville in Vanderburgh County, Indiana with a combined capacity of 20 MW. The Brown and Broadway Unit 2 turbines are also equipped to burn oil. Total capacity of the Company's five gas turbines is 215 MW, and they are generally used only for reserve, peaking or emergency purposes due to the higher per unit cost of generation. The Company's transmission system consists of 828 circuit miles of 138,000 and 69,000 volt lines. The transmission system also includes 27 substations with an installed capacity of 4,014.2 megavolt amperes (Mva). The electric distribution system includes 3,205 pole miles of lower voltage overhead lines and 255 trench miles of conduit containing 1,465 miles of underground distribution cable. The distribution system also includes 96 distribution substations with an installed capacity of 1,918.2 Mva and 50,133 distribution transformers with an installed capacity of 2,284.1 Mva. The only utility property the Company owns outside of Indiana is approximately eight miles of 138,000 volt electric transmission line which is located in Kentucky and which interconnects with Louisville Gas and Electric Company's transmission system at Cloverport, Kentucky. Gas Utility Services The Company owns and operates three underground gas storage fields with an estimated ready delivery from storage capability of 6.2 MMDth of gas with daily delivery capabilities of 129,000 Dth. SIGECO's gas delivery system includes 2,921 miles of distribution and transmission mains all of which are located in Indiana. Property Serving as Collateral The Company's properties are subject to the lien of the First Mortgage Indenture dated as of April 1, 1932 between the Company and Bankers Trust Company, as Trustee, as supplemented by various supplemental indentures. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the normal course of business. In the opinion of management, with the exception of the matters described in Note 10 of its financial statements included in Part II Item 8 Financial Statements and Supplementary Data regarding the Clean Air Act, there are no legal proceedings pending against the Company that could be material to its financial position or results of operations. ITEM 4. Submission of Matters to Vote of Security Holders No matters were submitted during the fourth quarter to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Price All of the outstanding shares of the Company's common stock are owned by VUHI at December 31, 2001. The Company's common stock is not publicly traded. As of December 31, 2001, there are no outstanding options or warrants to purchase the Company's common stock or securities convertible into the Company's common stock. Additionally, the Company has no plans to publicly offer any of its common equity. Dividends Paid to Parent (In thousands) 2001 2000 -------- -------- First Quarter $8,601 $7,194 Second Quarter 7,727 7,503 Third Quarter 7,677 6,609 Fourth Quarter 14,904 7,333 On January 23, 2002, the board of directors declared a dividend of $10.3 million, payable to VUHI on March 1, 2002. Dividends on shares of common stock are payable at the discretion of the board of directors out of legally available funds. Future payments of dividends, and the amounts of these dividends, will depend on the Company's financial condition, results of operations, capital requirements, and other factors. ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial information. The information should be read in conjunction with the Company's financial statements and notes thereto presented under Part II, Item 8 Financial Statements and Supplementary Data of this Form 10-K.
Year Ended December 31 ---------------------- (In thousands) 1997 1998 1999 2000 (2) 2001 (1) -------- -------- -------- -------- -------- Operating Data: Operating revenues $358,106 $364,666 $375,781 $445,693 $479,984 Operating income 62,912 62,002 63,425 56,268 55,667 Income before cumulative effect of change in accounting principle 45,363 43,542 46,768 41,048 40,452 Net income applicable to common shareholder 44,266 42,447 45,690 40,031 42,462 Balance Sheet Data: Total assets 864,463 881,912 894,759 958,496 973,222 Long-term debt, net of debt subject to tender 238,707 169,762 238,282 237,799 291,702 Long-term debt to VUHI - - - - 49,460 Redeemable preferred stock 8,424 8,308 8,192 8,076 460 Common shareholder's equity 306,828 320,182 334,570 337,135 333,816
1. Merger and integration related costs incurred for the year ended December 31, 2001 totaled $0.6 million ($0.4 million after tax). These costs relate primarily to transaction costs, severance and other merger and acquisition integration activities. The Company incurred restructuring charges of $5.8 million, ($3.6 million after tax) relating to employee severance, related benefits and other employee related costs and consulting and other fees. 2. Merger and integration related costs incurred for the year ended December 31, 2000 totaled $14.1 million ($11.0 million after tax). These costs relate primarily to transaction costs, severance and other merger and acquisition integration activities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the financial statements and notes thereto: Overview Description of the Business Southern Indiana Gas and Electric Company (the Company or SIGECO), an Indiana corporation, provides electric generation, transmission, and distribution services to Evansville, Indiana, and 74 other communities in 8 counties in southwestern Indiana and participates in the wholesale power market. The Company also provides natural gas distribution and transportation services to Evansville, Indiana, and 64 other communities in 10 counties in southwestern Indiana. SIGECO is a direct subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct, wholly owned subsidiary of Vectren Corporation (Vectren). Vectren was organized on June 10, 1999 solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with Accounting Principles Board (APB) Opinion No. 16 "Business Combinations." Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding company for its three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana Energy, SIGECO, formerly a wholly owned subsidiary of SIGCORP, and the Ohio operations, a utility jointly owned by Indiana Gas and Vectren Energy Delivery of Ohio, Inc. (VEDO). VEDO is also a wholly owned subsidiary of VUHI. 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. Results of Operations The Company's operations are comprised of its Electric Utility Services and Gas Utility Services segments. The Electric Utility Services segment includes the Company's power supply operations, power marketing operations, and electric transmission and distribution services, which operate and maintain six coal-fired electric power plants and five gas-fired peaking units with a total of 1,271 megawatts of generating capacity to provide electricity to primarily southwestern Indiana. The Gas Utility Services segment includes the operations of the Company's natural gas distribution business and provides natural gas distribution and transportation services in southwestern Indiana. The results of operations for the years ended December 31, 2001, 2000, and 1999 are as follows:
In thousands 2001 2000 1999 -------- -------- -------- Net income applicable to common shareholder, as reported $ 42,462 $ 40,031 $ 45,690 Merger and integration costs-net of tax 365 11,012 - Restructuring costs-net of tax 3,616 - - Impact of SFAS 133, including cumulative effect of change in accounting principle- net of tax (1,951) - - Loss on extinguishment of preferred stock 1,170 - - -------- -------- -------- Net income applicable to common shareholder before nonrecurring items $ 45,662 $ 51,043 $ 45,690 ======== ======== ========
For 2001 compared to the prior year, net income before the impact of nonrecurring items decreased $5.4 million due to extraordinarily high gas costs early in the year that unfavorably impacted margins and operating costs, including uncollectible accounts expense, interest, and excise taxes. Also, heating weather was 10% warmer than the prior year and lower margins on wholesale power marketing sales. For 2000 compared to 1999, net income before the impact of nonrecurring items increased $5.4 million primarily due to cooler temperatures and higher margins on wholesale power marketing sales. Special Charges Merger and Integration Costs Merger and integration costs incurred for the years ended December 31, 2001 and 2000 were $0.6 million ($0.4 million after tax) and $14.1 million ($11.0 million after tax), respectively. Vectren expects to realize net merger savings of nearly $200.0 million over ten years from the elimination of duplicate corporate and administrative programs and greater efficiencies in operations, business processes and purchasing encompassed in operations. Merger and integration activities resulting from the 2000 merger were completed in 2001. Merger costs are reflected in the financial statements of the operating subsidiaries in which merger savings are expected to be realized. Since March 31, 2000, $14.7 million has been expensed associated with merger and integration activities. Accruals were established at March 31, 2000 totaling $7.4 million. Of this amount, $0.7 million related to employee and executive severance costs and $6.7 million related to transaction costs and regulatory filing fees incurred prior to the closing of the merger. At December 31, 2001, no accrual remains. The remaining $7.3 million was expensed ($6.7 million in 2000 and $0.6 million in 2001) for accounting fees resulting from merger related filing requirements, consulting fees related to integration activities such as organization structure, employee travel between company locations, internal labor of employees assigned to integration teams, investor relations communication activities, and certain benefit costs. During the merger planning process, approximately 54 positions were identified for elimination. As of December 31, 2001, all such identified positions have been vacated. The integration activities experienced by the Company included such things as information system consolidation, process review and definition, organization design and consolidation, and knowledge sharing. Restructuring Costs As part of continued cost saving efforts, in June 2001, Vectren's management and board of directors approved a plan to restructure, primarily, its regulated operations. The restructuring plan involves the elimination of certain administrative and supervisory positions in its utility operations and corporate office. Charges of $4.3 million were expensed in June 2001 as a direct result of the restructuring plan. Additional charges of $1.5 million were incurred during the remainder of 2001 primarily related to consulting fees and employee relocation costs. In total, the Company has incurred restructuring charges of $5.8 million, ($3.6 million after tax). These charges were comprised of $4.4 million for employee severance, related benefits and other employee related costs and $1.4 million for consulting and other fees incurred through December 31, 2001. The restructuring program was completed during 2001, except for the departure of certain employees impacted by the restructuring. The $4.4 million expensed for employee severance and related costs is associated with approximately 40 employees. Employee separation benefits include severance, healthcare, and outplacement services. As of December 31, 2001, 37 employees have exited the business. The restructuring program was completed during 2001, except for the departure of the remaining employees impacted by the restructuring. Impact of SFAS 133 Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The cumulative impact of adoption of SFAS 133 on January 1, 2001 was a gain of approximately $6.3 million ($3.9 million after tax.) Unrealized losses totaling $3.2 million ($2.0 million after tax) arising from the change in market value since the date of adoption is reflected in purchased electric energy. The net impact of SFAS 133 for the year ended December 31, 2001 is a gain of $3.1 million ($1.9 million after tax). (See below for a complete discussion of the new accounting principle.) Loss on extinguishment of preferred stock In September 2001, the Company notified holders of its 4.80%, 4.75%, and 6.50% preferred stock of its intention to redeem the shares. The 4.80% preferred stock was redeemed at $110.00 per share, plus $1.35 per share in accrued and unpaid dividends. Prior to the redemption, there were 85,519 shares outstanding. The 4.75% preferred stock was redeemed at $101.00 per share, plus $0.97 per share in accrued and unpaid dividends. Prior to the redemption, there were 3,000 shares outstanding. The 6.50% preferred stock was redeemed at $104.23 per share, plus $0.73 per share in accrued and unpaid dividends. Prior to the redemption, there were 75,000 shares outstanding. The total redemption price was $17.7 million and the loss on redemption totaled $1.2 million. New Accounting Principle In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, which requires that every derivative instrument be recorded on the balance sheet as an asset or liability measured at its market value and that changes in the derivative's market value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, as amended, requires that as of the date of initial adoption, the difference between the market value of derivative instruments recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." Resulting from the adoption of SFAS 133, certain contracts in the Company's power marketing operations that are periodically settled net were required to be recorded at market value. Previously, the Company accounted for these contracts on settlement. The cumulative impact of the adoption of SFAS 133 resulting from marking these contracts to market on January 1, 2001 was an earnings gain of approximately $6.3 million ($3.9 million after tax.) recorded as a cumulative effect of accounting change in the Statements of Income. SFAS 133 did not impact other commodity contracts because they were normal purchases and sales specifically excluded from the provisions of SFAS 133. Unrealized losses totaling $3.2 million ($2.0 million after tax) arising from the difference between the current market value and the market value on the date of adoption is included in purchased electric energy in the Statements of Income for the year ended December 31, 2001. Utility Margin (Operating Revenues Less Cost of Gas, Cost of Fuel for Electric Generation, & Purchased Electric Energy) Electric Utility Margin Electric Utility margin for the year ended December 31, 2001 of $212.8 decreased $11.5 million, or 5%, compared to 2000 primarily from decreased margin on sales to wholesale energy markets and firm wholesale customers, reflecting the weakened national economy, and a $3.2 million reduction in margin recorded to reflect certain wholesale power marketing purchase and sale contracts at current market values as required by SFAS 133. The decreases were partially offset by a 3% increase in residential and commercial sales due to cooling weather 7% warmer than the prior year and a 3% increase in residential and commercial customer bases. Electric Utility margin for the year ended December 31, 2000 of $224.3 million increased $9.8 million, or 5%, compared to 1999 primarily due to a $4.4 million increase in margins resulting from wholesale energy market activity. The remaining increase results from increased sales caused by the impact of much colder fourth quarter temperatures on electric heating sales and a 5% growth in commercial customers during the year. Retail and firm wholesale electric sales for 2000 increased 2% and total electric sales increased 8%. The cost of fuel and purchased power increased $54.0 million, or 48%, in 2001 compared to 2000 and increased $19.1 million, or 20%, in 2000 compared to 1999. The increases result primarily from more wholesale energy sales. Megawatt hours sold to the wholesale market increased 106% in 2001 compared to 2000 and increased 39% in 2000 compared to 1999. The 2001 increase was also affected by the reductions in margin recorded as a result of SFAS 133. Gas Utility Margin Gas Utility margin for the year ended December 31, 2001 of $28.3 million decreased $2.1 million, compared to 2000. The decrease is due to a 10% decrease in throughput resulting primarily from weather 10% warmer than the previous year and the unfavorable impact on margin resulting from extraordinarily high gas costs early in 2001, coupled with the effects of a weakening economy. The Company's total throughput was 31.9 MMDth in 2001, 35.6 MMDth in 2000, and 31.6 MMDth in 1999. Gas Utility margin increased $1.8 million to $30.4 million, or 6%, compared to the twelve-month period in 1999. The increase reflects 12% greater throughput due to much colder temperatures during 2000 than in 1999. Although temperatures were 7% warmer than normal for the year, temperatures during 2000 were 13% colder than in 1999 causing residential and commercial sales to rise 11% and 14%, respectively. Cost of gas sold was $72.8 million in 2001, $78.9 million in 2000, and $39.6 million in 1999. Cost of gas sold decreased $6.1 million, or 8% in 2001 and increased $39.3 million, or 99%, in 2000. The changes are primarily due to fluctuations in average per unit purchased gas costs and the volume of dekatherms sold. The total average cost per dekatherm of gas purchased by SIGECO was $5.20 in 2001, $5.46 in 2000, and $3.10 in 1999. The price changes are due primarily to changing commodity costs in the marketplace. Operating Expenses (excluding Cost of Gas Sold, Fuel for Electric Generation & Purchased Electric Energy) Other Operating Other operating expenses for the year ended December 31, 2001 decreased $1.2 million, or 1% compared to 2000. The 2001 decrease results, primarily, from reduced maintenance expenditures and merger synergies in the current year, offset by increased uncollectible accounts expense resulting from increased gas costs. Other operating expenses increased $7.4 million, or 8%, for the year ended December 31, 2000, compared to the same period in 1999. The increase is primarily attributable to higher general and administrative costs. Depreciation & Amortization Utility depreciation and amortization in 2001 was comparable to 2000 and decreased $1.7 million, or 4%, for the year ended December 31, 2000 compared to 1999. The decrease in 2000 is primarily attributable to the contribution of certain information systems and equipment to a wholly owned subsidiary of Vectren. Income Tax Federal and state income taxes decreased $4.1 million in 2001. The decrease results from a lower effective rate which decreased from 38% to 34% during 2001. This decrease in the effective tax rate is due to the nondeductibility of certain merger and integration costs in 2000. Federal and state income taxes declined $1.6 million in 2000, compared to 1999 due primarily to $7.3 million lower pre-tax earnings, partially offset by a higher effective tax rate resulting from the nondeductibility of certain merger costs. Interest Expense Interest expense increased $1.1 million for the year ended December 31, 2001. The increase was due primarily to increased working capital requirements resulting from higher natural gas prices. Interest expense in 2000 was comparable to the prior year period. Competition The utility industry has been undergoing dramatic structural change for several years, resulting in increasing competitive pressures faced by electric and gas utility companies. Increased competition may create greater risks to the stability of utility earnings generally and may in the future reduce earnings from retail electric and gas sales. Currently, several states, including Ohio, have passed legislation allowing electricity customers to choose their electricity supplier in a competitive electricity market and several other states are considering such legislation. At the present time, Indiana has not adopted such legislation. Ohio regulation provides for choice of commodity for all gas customers. Indiana has not adopted any regulation requiring gas choice; however, the Company has approved tariffs permitting large volume customers choice among commodity suppliers. Other Operating Matters Midwest Independent System Operator The Federal Energy Regulatory Commission (FERC) approved the Midwest Independent System Operator (MISO) as the nation's first regional transmission organization. The Carmel, Indiana-based MISO began some operations in December 2001 with control of 73,000 miles of transmission lines carrying up to 81,000 megawatts of power. More than 20 states are included in the MISO from the Midwest and Plains states, to Texas, Arkansas, and part of the Southeast. In December 2001, the IURC approved the Company's request for authority to transfer operational control over its electric transmission facilities to the MISO. The FERC has made regional transmission organizations a top priority since the California power crisis last winter. Regional transmission organizations place public utility transmission facilities in a region under common control to boost competition and to provide more reliable power at lower rates. Issues pertaining to certain of MISO's tariff charges for its services remain to be determined by the FERC. Given the outstanding tariff issues, as well as the potential for additional growth in participation in MISO, the Company is unable to determine the impact MISO participation may have on its operations. Operation of Warrick Station In March 2001, Alcoa Power Generating, Inc., a subsidiary of ALCOA, INC. (ALCOA) began operating the Warrick Generating Station. Prior to March 2001 and since 1956, the Company operated the Warrick Generating Station as an agent for ALCOA. Three generating units at the station are owned by ALCOA, and the Company owns a fourth unit equally with ALCOA. The operating change has no impact on the Company's entitlement to the generating capacity. Under the new arrangement, the Company reimburses ALCOA for operating costs pertaining to the Company's share of the fourth unit and pays ALCOA a fee for agency services. The reimbursed operating costs and the related agency fee are expected to be comparable to the costs the Company would have incurred to operate and administer its generating facilities under the previous operating arrangement. Therefore, this change is not expected to negatively impact the Company's financial results. Additionally, SIGECO has retained ALCOA as a wholesale power and transmission services customer. Environmental Matters The Company is subject to federal, state, and local regulations with respect to environmental matters, principally air, solid waste, and water quality. Pursuant to environmental regulations, the Company is required to obtain operating permits for the electric generating plants that it owns or operates and construction permits for any new plants it might propose to build. Regulations concerning air quality establish standards with respect to both ambient air quality and emissions from electric generating facilities, including particulate matter, sulfur dioxide (SO2), and nitrogen oxides (NOx). Regulations concerning water quality establish standards relating to intake and discharge of water from electric generating facilities, including water used for cooling purposes in electric generating facilities. Because of the scope and complexity of these regulations, the Company is unable to predict the ultimate effect of such regulations on its future operations, nor is it possible to predict what other regulations may be adopted in the future. The Company intends to comply with all applicable governmental regulations, but will contest any regulation it deems to be unreasonable or impossible. 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 United States Environmental Protection Agency (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 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 1998 and 1999. 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 (Warrick), and A.B. Brown Generating Station Unit 2 (A.B. Brown). SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in chemical reaction. This technology is known to be the most effective method of reducing NOx emissions where high removal efficiencies are required. The IURC issued an order that (1) approves the Company's proposed project to achieve environmental compliance by investing in clean coal technology, (2) approves the Company's cost estimate for the construction, subject to periodic review of the actual costs incurred, and (3) approves a mechanism whereby, prior to an electric base rate case, the Company may recover a return on its capital costs for the project, at its overall cost of capital, including a return on equity. Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated construction cost ranges from $175.0 million to $195.0 million and is expected to be expended during the 2001-2004 period. Through December 31, 2001, approximately $22.5 million has been expended. After the equipment is installed and operational, related additional annual operation and maintenance expenses are estimated to be between $8.0 million and $10.0 million. The Company expects the Culley, Warrick and A.B. Brown SCR systems to be operational by the compliance date. Installation of SCR technology at these stations 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 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. The USEPA alleges 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 alleges that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards at its Culley Unit 3. SIGECO believes it performed only maintenance, repair, and replacement activities at the Culley Generating Station, as allowed under the Act. Because proper maintenance does not require permits, application of the best available emission control technology, notice to the USEPA, or compliance with new source review standards, SIGECO believes that the lawsuit is without merit and intends to vigorously defend itself. The lawsuit seeks fines against SIGECO in the amount of $27,500 per day per violation. The lawsuit does not specify the number of days or violations the USEPA believes occurred. The lawsuit also seeks a court order requiring SIGECO to install the best available control technology at the Culley Generating Station. If the USEPA were successful in obtaining an order, SIGECO estimates that it would incur capital costs of approximately $40.0 million to $50.0 million to comply with the order. As a result of the NOx SIP call issue, the majority of the $40.0 million to $50.0 million for best available emissions technology at Culley Generating Station is included in the $175.0 million to $195.0 million cost range previously discussed. The USEPA has also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. While it is possible that SIGECO could be subjected to criminal penalties if the Culley Generating Station continues to operate without complying with the permitting requirements of new source review and the allegations are determined by a court to be valid, SIGECO believes such penalties are unlikely as the USEPA and the electric utility industry have a bonafide dispute over the proper interpretation of the Act. Accordingly, the Company has recorded no accrual, and the plant continues to operate while the matter is being decided. 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. Rate and Regulatory Matters Gas and electric operations with regard to retail rates and charges, terms of service, accounting matters, issuance of securities, and certain other operational matters specific to its Indiana customers are regulated by the Indiana Utility Regulatory Commission (IURC). Changes in prices for fuel for electric generation and purchased power are determined primarily by energy markets. Wholesale energy sales are subject to regulation by the Federal Energy Regulatory Commission (FERC). Gas Costs Proceedings Adjustments to rates and charges related to the cost of gas charged to Indiana customers are made through gas cost adjustment (GCA) procedures established by Indiana law and administered by the IURC. GCA procedures involve scheduled quarterly filings and IURC hearings to establish the amount of price adjustments for a designated future quarter. The procedures also provide for inclusion in later quarters any variances between estimated and actual costs of gas sold in a given quarter. This reconciliation process with regard to changes in the cost of gas sold closely matches revenues to expenses. The IURC has also applied the statute authorizing GCA procedures to reduce rates when necessary to limit net operating income to a level authorized in its last general rate order through the application of an earnings test. Recovery of gas costs is not allowed to the extent that net operating income for the longer of (1) a 60-month period, including the twelve-month period provided in the gas cost adjustment filing, or (2) the date of the last order establishing base rates and charges exceeds the total net operating income authorized by the IURC. For the recent past, the earnings test has not affected the Company's ability to recover gas costs, and the Company does not anticipate the earnings test will restrict the recovery of gas costs in the near future. Rate structures for gas delivery operations do not include weather normalization-type clauses that authorize the utility to recover gross margin on sales established in its last general rate case, regardless of actual weather patterns. Commodity prices for natural gas purchases were significantly higher during the 2000 - 2001 heating season, primarily due to colder temperatures, increased demand and tighter supplies. Subject to compliance with applicable state laws, the Company is allowed full recovery of such changes in purchased gas costs from their retail customers through these commission-approved gas cost adjustment mechanisms, and margin on gas sales should not be impacted. However, in 2001, the Company experienced higher working capital requirements, increased expenses including unrecoverable interest costs, uncollectible accounts expense, and unaccounted for gas and some level of price sensitive reduction in volumes sold. Fuel & Purchased Power Costs Adjustments to rates and charges related to the cost of fuel and the net energy cost of purchased power charged to Indiana customers are made through fuel cost adjustment procedures established by Indiana law and administered by the IURC. Fuel cost adjustment procedures involve scheduled quarterly filings and IURC hearings to establish the amount of price adjustments for future quarters. The procedures also provide for inclusion in a later quarter of any variances between estimated and actual costs of fuel and purchased power in a given quarter. The order provides that any over-or-under-recovery caused by variances between estimated and actual cost in a given quarter will be included in the second succeeding quarter's adjustment factor. This continuous reconciliation of estimated incremental fuel costs billed with actual incremental fuel costs incurred closely matches revenues to expenses. An earnings test similar to the test restricting gas cost recovery is the principal restriction to recovery of fuel cost increases. This earnings test has not affected the Company's ability to recover fuel costs, and the Company does not anticipate the earnings test will restrict the recovery of fuel costs in the near future. As a result of an appeal of a generic order issued by the IURC in August 1999 regarding guidelines for the recovery of purchased power costs, SIGECO entered into a settlement agreement with the OUCC that provides certain terms with respect to the recoverability of such costs. The settlement, originally approved by the IURC in August 2000, has been extended by agreement through March 2002 and additional settlement discussions are expected in 2002. Under the settlement, SIGECO can recover the entire cost of purchased power up to an established benchmark, and during forced outages, SIGECO will bear a limited share of its purchased power costs regardless of the market costs at that time. Based on this agreement, SIGECO believes it has limited its exposure to unrecoverable purchased power costs. Significant Accounting Policies As described in Note 2 to the consolidated financial statements, significant accounting policies include the following: Use of Estimates 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Utility Plant & Depreciation Utility plant is stated at historical cost, including an allowance for the cost of funds used during construction (AFUDC). Depreciation of utility property is provided using the straight-line method over the estimated service lives of the depreciable assets. AFUDC represents the cost of borrowed and equity funds used for construction purposes and is charged to construction work in progress during the construction period and is included in other - net in the Consolidated Statements of Income. Maintenance and repairs, including the cost of removal of minor items of property and planned major maintenance projects, are charged to expense as incurred. When property that represents a retirement unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to accumulated depreciation. Impairment Review of Long-Lived Assets Long-lived assets are reviewed for impairment in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" as facts and circumstances indicate that the carrying amount may be impaired. Specifically, the evaluation for impairment involves the comparison of an asset's carrying value to the estimated future cash flows the asset is expected to generate over its remaining life. If this evaluation were to conclude that the carrying value of the asset is impaired, an impairment charge would be recorded as a charge to operations based on the difference between the asset's carrying amount and its fair value. Regulation Retail public utility operations affecting Indiana customers are subject to regulation by the Indiana Utility Regulatory Commission (IURC), and retail public utility operations affecting Ohio customers are subject to regulation by the Public Utilities Commission of Ohio (PUCO). The Company's wholesale energy transactions are subject to regulation by the Federal Energy Regulatory Commission (FERC). SFAS 71 The Company's accounting policies give recognition to the rate-making and accounting practices of these agencies and to accounting principles generally accepted in the United States, including the provisions of SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). Regulatory assets represent probable future revenues associated with certain incurred costs, which will be recovered from customers through the rate-making process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the rate-making process. The Company continually assesses the recoverability of costs recognized as regulatory assets and the ability to continue to account for its activities in accordance with SFAS 71, based on the criteria set forth in SFAS 71. Based on current regulation, the Company believes such accounting is appropriate. If all or part of the Company's operations cease to meet the criteria of SFAS 71, a write-off of related regulatory assets and liabilities could be required. In addition, the Company would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. Refundable or Recoverable Gas Costs, Fuel for Electric Production & Purchased Power All metered gas rates contain a gas cost adjustment clause that allows the Company to charge for changes in the cost of purchased gas. Metered electric rates typically contain a fuel adjustment clause that allows for adjustment in charges for electric energy to reflect changes in the cost of fuel and the net energy cost of purchased power. Metered electric rates also allow recovery, through a quarterly rate adjustment mechanism, for the margin on electric sales lost due to the implementation of demand side management programs. The Company records any under-or-over-recovery resulting from gas and fuel adjustment clauses each month in revenues. A corresponding asset or liability is recorded until the under-or-over-recovery is billed or refunded to utility customers. The cost of gas sold is charged to operating expense as delivered to customers, and the cost of fuel for electric generation is charged to operating expense when consumed. Revenues Revenues are recorded as products and services are delivered to customers. To more closely match revenues and expenses, the Company records revenues for all gas and electricity delivered to customers but not billed at the end of the accounting period. Impact of Recently Issued Accounting Guidance on Future Operations SFAS 141 & 142 The FASB issued two new statements of financial accounting standards in July 2001: SFAS No. 141, "Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). These interrelated standards change the accounting for business combinations and goodwill in two significant ways: SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. This change does not affect the pooling-of-interest transaction forming Vectren. SFAS 142 changes the accounting for goodwill from an amortization approach to an impairment-only approach. Thus, amortization of goodwill that is not included as an allowable cost for rate-making purposes will cease upon adoption of the statement. This includes goodwill recorded in past business combinations, such as the Company's acquisition of the Ohio operations. Goodwill is to be tested for impairment at a reporting unit level at least annually. SFAS 142 also requires the initial impairment review of all goodwill and other intangible assets within six months of the adoption date, which is January 1, 2002 for the Company. The impairment review consists of a comparison of the fair value of a reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying amount, an impairment loss would be recognized. Results of the initial impairment review are to be treated as a change in accounting principle in accordance with APB Opinion No. 20 "Accounting Changes." An impairment loss recognized as a result of an impairment test occurring after the initial impairment review is to be reported as a part of operations. SFAS 142 also changes certain aspects of accounting for intangible assets; however, the Company does not have any significant intangible assets. The adoption of SFAS 141 and SFAS 142 will not materially impact operations. 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. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the impact that SFAS 143 will have on its operations. SFAS 144 In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 develops one accounting model for all impaired long-lived assets and long-lived assets to be disposed of. SFAS 144 replaces the existing authoritative guidance in FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain aspects of APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." This new accounting model retains the framework of SFAS 121 and requires that those impaired long-lived assets and long-lived assets to be disposed of be measured at the lower of carrying amount or fair value (less cost to sell for assets to be disposed of), whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company is evaluating the impact SFAS 144 will have on its operations. Financial Condition The Company's equity capitalization objective is 40-55% of total capitalization. This objective may have varied, and will vary, depending on particular business opportunities and seasonal factors that affect the Company's operation. The Company's equity component was 49% and 52% of total capitalization, including long-term debt subject to tender, at December 31, 2001 and 2000, respectively. Short-term cash working capital is required primarily to finance customer accounts receivable, unbilled utility revenues resulting from cycle billing, gas in underground storage, and capital expenditures. Short-term borrowings tend to be greatest during the summer when accounts receivable and unbilled utility revenues related to electricity are highest and gas storage facilities are being refilled. However, working capital requirements have been higher throughout 2001 due to the extraordinarily high natural gas costs early in 2001. The Company expects the majority of its capital expenditures and debt security redemptions to be provided by internally generated funds; however, additional financing may be required due to significant capital expenditures for NOx compliance equipment. SIGECO's credit ratings on outstanding secured debt at December 31, 2001 are A-/A1. Cash Flow From Operations The Company's primary source of liquidity to fund working capital requirements has been cash generated from operations, which totaled approximately $44.1 million, $66.3 million, and $110.1 million, for the years ended December 31, 2001, 2000, and 1999, respectively. Cash flow from operations decreased during the year ended December 31, 2001 compared to 2000 by $22.2 million due to less income after considering non-cash charges, coupled with unfavorable changes in working capital accounts. Cash provided by operations decreased during 2000 as compared to 1999 by $43.8 million. The decrease is primarily attributable to merger and integration costs causing lower net income, increased recoverable fuel and natural gas costs and increased working capital requirements resulting from higher natural gas costs. Financing Activities Sources & Uses of Liquidity SIGECO mainly relies on the short-term borrowing arrangements of VUHI for its short-term working capital needs. The intercompany credit line totals $150.0 million, but is limited to VUHI's available capacity ($76.7 million at December 31, 2001) and is subject to the same terms and conditions as VUHI's commercial paper program. Borrowings outstanding at December 31, 2001 were $80.7 million. At December 31, 2001, the Company has approximately $10.0 million of short-term borrowing capacity with third parties to supplement its intercompany borrowing arrangements, of which $9.1 million is available. During the five-year period 2002-2006, maturities and sinking fund requirements on long-term debt subject to mandatory redemption are $1.0 million in 2003. Also during the five-year period 2002-2006, exercisable put provisions on long-term debt are $53.7 million in 2006. Vectren's three operating utility companies, SIGECO, VEDO, and Indiana Gas are guarantors of VUHI's $350.0 million commercial paper program, of which approximately $273.3 million is outstanding at December 31, 2001 and VUHI's $350.0 million unsecured senior notes outstanding at December 31, 2001. VUHI has no significant independent assets or operations other than the assets and operations of these operating utility companies. These guarantees are full and unconditional and joint and several. Under the terms of VUHI's commercial paper program, it must maintain a rating of better than BB+/Ba1. Financing Cash Flow. Cash flow provided by financing activities of $33.5 million for the year ended December 31, 2001 includes $90.8 million of additional net borrowings, offset by $38.9 million in common stock dividends and $17.7 million paid for the redemption of preferred stock. During 2001, $49.5 million of proceeds from long-term debt issuances to VUHI was utilized to fund the construction of NOx equipment. Cash flow requirements for financing activities of $12.4 million for the year ended December 31, 2000 includes $17.3 million of additional net borrowings offset by $28.6 million in common stock dividends. This is a decrease in cash requirements of $36.1 million over prior year due primarily to $80.0 million of debt issued in 1999. Other Financing Transactions. In December 2001, the Company issued $49.5 million of long-term debt to VUHI. The note bears interest at 6.69%. VUHI generated the proceeds through the issuance of the $350.0 million unsecured senior notes subject to the guarantees by Indiana Gas, SIGECO, and VEDO discussed above. In September 2001, the Company notified holders of its 4.80%, 4.75%, and 6.50% preferred stock of its intention to redeem the shares. The 4.80% preferred stock was redeemed at $110.00 per share, plus $1.35 per share in accrued and unpaid dividends. Prior to the redemption, there were 85,519 shares outstanding. The 4.75% preferred stock was redeemed at $101.00 per share, plus $0.97 per share in accrued and unpaid dividends. Prior to the redemption, there were 3,000 shares outstanding. The 6.50% preferred stock was redeemed at $104.23 per share, plus $0.73 per share in accrued and unpaid dividends. Prior to the redemption, there were 75,000 shares outstanding. The total redemption price was $17.7 million. The loss on redemption, which is included in the reconciliation of net income to net income applicable to common shareholder, approximated $1.2 million. The Company has $31.5 million of adjustable rate pollution control series first mortgage bonds and $22.2 million of adjustable rate pollution control series unsecured senior notes which could, at the election of the bondholder, be tendered to the Company when interest rates are reset. Prior to the latest reset on March 1, 2001, the interest rates were reset annually, and the bonds were presented as current liabilities. Effective March 1, 2001, the bonds were reset for a five-year period and have been classified as long-term debt. Capital Expenditures & Other Investment Activities Cash required for investing activities of $76.8 million for the year ended December 31, 2001 is entirely for capital expenditures. Investing activities for the years ended December 31, 2000 and 1999 were $52.7 million and $61.7 million, respectively. The increase in 2001 is attributable NOx compliance expenditures and expenditures for the construction of an 80 megawatt peaking unit. The decrease in 2000 is principally the result of increased expenditures in 1999 for the design and implementation of several comprehensive information systems necessary to meet expanding customer needs and to better manage resources. Planned Capital Expenditures New construction, normal system maintenance and improvements, and information technology investments needed to provide service to a growing customer base will continue to require substantial expenditures. Additionally, during the three-year period 2002-2004, construction costs for NOx emissions control equipment are estimated to total between $150.0 million and $170.0 million and additional generation is planned. Planned capital expenditures for the five year period 2002 - 2006 are estimated as follows: $105.8 million in 2002, $167.4 million in 2003, $69.3 million in 2004, $52.4 million in 2005, and $83.2 million in 2006. These amounts include expenditures for NOx compliance of approximately $35.9 million in 2002, $101.3 million in 2003 and $15.1 million in 2004. 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, including, but not limited to Vectren's realization of net merger savings, 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 included, among others, the following: |X| 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. |X| Increased competition in the energy environment including effects of industry restructuring and unbundling. |X| 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. |X| 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 natural gas transmission, gathering and processing, and similar entities with regulatory oversight. |X| Economic conditions including the effects of an economic downturn, inflation rates, and monetary fluctuations. |X| 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. |X| Availability or cost of capital, resulting from changes in the Company, including its security ratings, changes in interest rates, and/or changes in market perceptions of the utility industry and other energy-related industries. |X| Employee workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages. |X| Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures. |X| 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. |X| 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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market 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. Commodity Price Risk. The Company's regulated operations have limited exposure to commodity price risk for purchases and sales of natural gas and electric energy for its retail customers due to current Indiana regulations, which subject to compliance with applicable state regulations, allow for recovery of such purchases through natural gas and fuel cost adjustment mechanisms. The Company does engage in limited, wholesale power marketing activities that may expose the Company to commodity price risk associated with fluctuating electric power prices. These power marketing activities manage the utilization of its available electric generating capacity. Power marketing operations enter into forward contracts that commit the Company to purchase and sell electric power in the future. Commodity price risk results from forward sales contracts that commit the Company to deliver commodities on specified future dates. Power marketing uses planned unutilized generation capability and forward purchase contracts to protect certain sales transactions from unanticipated fluctuations in the price of electric power, and periodically, will use derivative financial instruments to protect its interests from unplanned outages and shifts in demand. Open positions in terms of price, volume and specified delivery points may occur to a limited extent and are managed using methods described above and frequent management reporting. Market risk is measured by management as the potential impact on pre-tax earnings resulting from a 10% adverse change in the forward price of commodity prices on market sensitive financial instruments (all contracts not expected to be settled by physical receipt or delivery). For the year ended December 31, 2001, a 10% adverse change in the forward prices of electricity and natural gas on market sensitive financial instruments would have decreased pre-tax earnings by approximately $2.0 million. Interest Rate Risk. The Company is exposed to interest rate risk associated with its adjustable rate borrowing arrangements. Its risk management program seeks to reduce the potentially adverse effects that market volatility may have on operations. Under normal circumstances, the Company tries to limit the amount of adjustable rate borrowing arrangements exposed to short-term interest rate volatility to a maximum of 25% of total debt. However, there are times when this targeted level of interest rate exposure may be exceeded. To manage this exposure, the Company may periodically use derivative financial instruments to reduce earnings fluctuations caused by interest rate volatility. At December 31, 2001, such obligations represented 25% of the Company's total debt portfolio. Market risk is estimated as the potential impact resulting from fluctuations in interest rates on adjustable rate borrowing arrangements exposed to short-term interest rate volatility including bank notes, lines of credit, commercial paper, and certain adjustable rate long-term debt instruments. At December 31, 2001 and 2000, the combined borrowings under these facilities totaled $104.0 million and $62.7 million, respectively. Based upon average borrowing rates under these facilities during the years ended December 31, 2001 and 2000, an increase of 100 basis points (1%) in the rates would have increased interest expense by $0.7 million and $0.4 million, respectively. Other Risks. By using forward purchase contracts and derivative financial instruments to manage risk, the Company exposes itself to counter-party credit risk and market risk. The Company manages this exposure to counter-party credit risk by entering into contracts with financially sound companies that can be expected to fully perform under the terms of the contract. The Company attempts to manage exposure to market risk associated with commodity contracts and interest rates by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. As of December 31, 2001, the Company has a net receivable from Enron Corp. of approximately $1.0 million, which has been fully reserved. The Company's customer receivables from gas and electric sales and gas transportation services are primarily derived from a diversified base of residential, commercial, and industrial customers located in Indiana. The Company manages credit risk associated with its receivables by continually reviewing creditworthiness and requests cash deposits or refunds cash deposits based on that review. ITEM 8. Financial Statements and Supplementary Data MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Southern Indiana Gas and Electric Company (SIGECO) is responsible for the preparation of the financial statements and the related financial data contained in this report. The financial statements are prepared in conformity with accounting principles generally accepted in the United States and follow accounting policies and principles applicable to regulated public utilities. The integrity and objectivity of the data in this report, including required estimates and judgments, are the responsibilities of management. Management maintains a system of internal control and utilizes an internal auditing program to provide reasonable assurance of compliance with company policies and procedures and the safeguard of assets. The board of directors of Vectren Corporation (Vectren), the parent company of SIGECO, pursues its responsibility for these financial statements through its audit committee, which meets periodically with management, the internal auditors and the independent auditors, to assure that each is carrying out its responsibilities. Both the internal auditors and the independent auditors meet with the audit committee of Vectren's board of directors, with and without management representatives present, to discuss the scope and results of their audits, their comments on the adequacy of internal accounting control and the quality of financial reporting. /S/ Niel C. Ellerbrook Niel C. Ellerbrook Chairman and Chief Executive Officer January 24, 2002. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholder and Board of Directors of Southern Indiana Gas and Electric Company: We have audited the accompanying balance sheets of Southern Indiana Gas and Electric Company (an Indiana corporation) as of December 31, 2001 and 2000, and the related statements of income, common shareholder's equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern Indiana Gas and Electric Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note 12 to the financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Part IV Item 14 (a) (2) is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /S/ Arthur Andersen LLP Arthur Andersen LLP Indianapolis, Indiana, January 24, 2002. SOUTHERN INDIANA GAS AND ELECTRIC COMPANY BALANCE SHEETS (In thousands) At December 31, ----------------------- 2001 2000 ---------- ---------- ASSETS Utility Plant Original cost $1,455,826 $1,389,007 Less: Accumulated depreciation & amortization 690,344 650,499 ---------- ---------- Net utility plant 765,482 738,508 ---------- ---------- Current Assets Cash & cash equivalents 2,451 1,613 Accounts receivable-less reserves of $3,241 & $2,639, respectively 41,227 49,543 Receivables from other Vectren companies - 26,865 Accrued unbilled revenues 17,013 24,414 Inventories 38,322 31,055 Recoverable fuel & natural gas costs 22,132 28,703 Prepayments & other current assets 24,118 312 ---------- ---------- Total current assets 145,263 162,505 ---------- ---------- Investments in unconsolidated affiliates 160 964 Other investments 9,254 7,358 Non-utility property-net 4,386 1,960 Regulatory assets 41,525 40,625 Other assets 7,152 6,576 ---------- ---------- TOTAL ASSETS $ 973,222 $ 958,496 ========== ========== The accompanying notes are an integral part of these financial statements. SOUTHERN INDIANA GAS AND ELECTRIC COMPANY BALANCE SHEETS (In thousands) At December 31, ------------------- 2001 2000 -------- -------- LIABILITIES & SHAREHOLDER'S EQUITY Capitalization Common shareholder's equity Common stock (no par value) $ 78,258 $ 78,258 Retained earnings 255,464 258,877 Accumulated other comprehensive income 94 - -------- -------- Total common shareholder's equity 333,816 337,135 -------- -------- Cumulative preferred stock of subsidiary Redeemable 460 8,076 Nonredeemable - 8,890 -------- -------- Total preferred stock 460 16,966 -------- -------- Long-term debt-net of debt subject to tender 291,702 237,799 Long-term debt to VUHI 49,460 - -------- -------- Total capitalization 675,438 591,900 -------- -------- Commitments & Contingencies (Notes 4, 9-11) Current Liabilities Accounts payable 27,135 60,085 Payables to other Vectren companies 3,390 11,486 Accrued liabilities 33,545 45,256 Short-term borrowings 874 40,154 Short-term borrowings to VUHI 80,664 - Long-term debt subject to tender - 53,700 -------- -------- Total current liabilities 145,608 210,681 -------- -------- Deferred Credits & Other Liabilities Deferred income taxes 112,746 119,303 Deferred credits & other liabilities 39,430 36,612 -------- -------- Total deferred credits & other liabilities 152,176 155,915 -------- -------- TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $973,222 $958,496 ======== ======== The accompanying notes are an integral part of these financial statements. SOUTHERN INDIANA GAS AND ELECTRIC COMPANY STATEMENTS OF INCOME (In thousands) Year Ended December 31, ------------------------------ 2001 2000 1999 -------- -------- -------- OPERATING REVENUES Electric revenues $378,867 $336,409 $307,569 Gas revenues 101,117 109,284 68,212 -------- -------- -------- Total operating revenues 479,984 445,693 375,781 -------- -------- -------- COST OF OPERATING REVENUES Fuel for electric generation 74,402 75,699 72,155 Purchased electric energy 91,666 36,394 20,791 Cost of gas sold 72,829 78,903 39,612 -------- -------- -------- Total cost of operating revenues 238,897 190,996 132,558 -------- -------- -------- TOTAL OPERATING MARGIN 241,087 254,697 243,223 OPERATING EXPENSES Other operating 101,868 103,053 95,658 Merger & integration costs 588 14,072 - Restructuring costs 5,825 - - Depreciation & amortization 43,287 43,214 44,868 Income taxes 20,762 24,832 26,428 Taxes other than income taxes 13,090 13,258 12,844 -------- -------- -------- Total operating expenses 185,420 198,429 179,798 -------- -------- -------- OPERATING INCOME 55,667 56,268 63,425 Other - net 5,778 4,674 3,109 Interest expense 20,993 19,894 19,766 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 40,452 41,048 46,768 -------- -------- -------- Cumulative effect of change in accounting principle-net of tax 3,938 - - -------- -------- -------- NET INCOME 44,390 41,048 46,768 Preferred stock dividends 758 1,017 1,078 Loss on extinguishment of preferred stock 1,170 - - -------- -------- -------- NET INCOME APPLICABLE TO COMMON SHAREHOLDER $ 42,462 $ 40,031 $ 45,690 ======== ======== ======== The accompanying notes are an integral part of these financial statements.
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 44,390 $ 41,048 $ 46,768 Adjustments to reconcile net income to cash from operating activities: Depreciation & amortization 43,287 43,214 44,868 Deferred income taxes & investment tax credits (9,934) 13 3,396 Net unrealized gain on derivative instruments, including cumulative effect of change in accounting principle (3,143) - - Other non-cash charges- net 639 2,579 4,167 Changes in assets & liabilities- Accounts receivable, including to Vectren companies & accrued unbilled revenue 46,504 (47,378) (5,787) Inventories (7,267) 10,404 5,201 Recoverable fuel & natural gas costs 6,571 (23,118) 346 Prepayments & other current assets (18,559) 4,994 - Regulatory assets 1,124 (9,286) 1,435 Accounts payable, including to Vectren companies (47,374) 43,011 433 Accrued liabilities (15,119) 8,571 6,856 Other noncurrent assets & liabilities 2,999 (7,731) 2,453 --------- --------- --------- Total adjustments (272) 25,273 63,368 --------- --------- --------- Net cash flows from operating activities 44,118 66,321 110,136 --------- --------- --------- CASH FLOWS FROM (REQUIRED FOR) FINANCING ACTIVITIES Proceeds from: Long-term debt to VUHI 49,460 - - Long-term debt - - 80,000 Requirements for: Dividends on common stock (38,909) (28,639) (31,302) Redemption of preferred stock (17,676) (2,000) (116) Dividends on preferred stock (758) (1,017) (1,078) Retirement of long-term debt - - (55,000) Net change in short-term borrowings, including to VUHI 41,384 17,274 (44,379) Proceeds (payments) from other financing activities - 1,974 3,393 --------- --------- --------- Net cash flows from (required for) financing activities 33,501 (12,408) (48,482) --------- --------- --------- CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES Requirements for: Capital expenditures (76,781) (51,119) (60,677) Other investments - (1,630) (1,040) --------- --------- --------- Net cash flows (required for) investing activities (76,781) (52,749) (61,717) --------- --------- --------- Net increase (decrease) in cash & cash equivalents 838 1,164 (63) Cash & cash equivalents at beginning of period 1,613 449 512 --------- --------- --------- Cash & cash equivalents at end of period $ 2,451 $ 1,613 $ 449 ========= ========= =========
The accompanying notes are an integral part of these financial statements.
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY STATEMENTS OF COMMON SHAREHOLDER'S EQUITY (In thousands) Accumulated Other Common Retained Comprehensive Stock Earnings Income Total -------- --------- ------------- --------- Balance at December 31, 1998 $ 78,258 $ 241,924 $ - $ 320,182 Net income & comprehensive income 46,768 46,768 Common stock dividends (31,302) (31,302) Preferred stock dividends (1,078) (1,078) -------- --------- --------- --------- Balance at December 31, 1999 78,258 256,312 - 334,570 Net income & comprehensive income 41,048 41,048 Common stock dividends (28,639) (28,639) Preferred stock dividends (1,017) (1,017) Contribution of assets to parent (9,144) (9,144) Other 317 317 -------- --------- --------- --------- Balance at December 31, 2000 78,258 258,877 - 337,135 Comprehensive income: Net income 44,390 44,390 Other comprehensive income-net of tax 94 94 -------- --------- --------- --------- Total comprehensive income 44,484 -------- --------- --------- --------- Common stock dividends (38,909) (38,909) Preferred stock dividends (758) (758) Contribution of assets to parent (6,963) (6,963) Loss on redemption of preferred stock (1,173) (1,173) -------- --------- --------- --------- Balance at December 31, 2001 $ 78,258 $ 255,464 $ 94 $ 333,816 ======== ========= ========= =========
The accompanying notes are an integral part of these financial statements. SOUTHERN INDIANA GAS AND ELECTRIC COMPANY NOTES TO THE FINANCIAL STATEMENTS 1. Organization and Nature of Operations Overview Southern Indiana Gas and Electric Company (the Company or SIGECO), an Indiana corporation, provides electric generation, transmission, and distribution services to Evansville, Indiana, and 74 other communities in 8 counties in southwestern Indiana and participates in the wholesale power market. The Company also provides natural gas distribution and transportation services to Evansville, Indiana, and 64 other communities in 10 counties in southwestern Indiana. SIGECO is a direct subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct, wholly owned subsidiary of Vectren Corporation (Vectren). Vectren was organized on June 10, 1999 solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with Accounting Principles Board (APB) Opinion No. 16 "Business Combinations." Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding company for its three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of Indiana Energy, SIGECO, formerly a wholly owned subsidiary of SIGCORP, and the Ohio operations, a utility jointly owned by Indiana Gas and Vectren Energy Delivery of Ohio, Inc. (VEDO). 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. Summary of Significant Accounting Policies A. Use of Estimates 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. B. Cash & Cash Equivalents All highly liquid investments with an original maturity of three months or less at the date of purchase are considered cash equivalents. Cash paid during the periods reported for interest and income taxes is as follows: Year Ended December 31, --------------------------- In thousands 2001 2000 1999 ------- ------- ------- Cash paid during the year for Interest (net of amount capitalized) $19,517 $17,506 $15,437 Income taxes 47,960 21,627 25,476 ------- ------- ------- C. Inventories Inventories consist of the following: At December 31, ----------------- In thousands 2001 2000 ------- ------- Materials & supplies $17,008 $15,022 Gas in storage - at LIFO cost 10,425 8,062 Fuel (coal and oil) for electric generation 9,513 4,111 Emission allowances 1,376 3,860 ------- ------- Total inventories $38,322 $31,055 ======= ======= Based on the average cost of gas purchased during December, the cost of replacing the current portion of gas in storage carried at LIFO cost exceeded LIFO cost at December 31, 2001 and 2000 by approximately $15.8 million and $17.9 million, respectively. All other inventories are carried at average cost. D. Utility Plant & Depreciation Utility plant is stated at historical cost, including an allowance for the cost of funds used during construction (AFUDC). Depreciation of utility plant is provided using the straight-line method over the estimated service lives of the depreciable assets. The original cost of utility plant, together with depreciation rates expressed as a percentage of original cost, is as follows:
At & For the Year Ended December 31, ------------------------------------------------- In thousands 2001 2000 ------------------------ ------------------------ Depreciation Depreciation Rates as a Rates as a Percent of Percent of Original Original Original Original Cost Cost Cost Cost ----------- ------------ ----------- ------------ Electric utility plant $ 1,148,887 3.3% $ 1,136,760 3.3% Gas utility plant 155,051 3.0% 152,357 3.2% Common utility plant 41,197 2.6% 47,308 3.9% Construction work in progress 110,691 - 52,582 - ----------- ------------ ----------- ------------ Total original cost $ 1,455,826 $ 1,389,007 =========== ============ =========== ============
AFUDC represents the cost of borrowed and equity funds used for construction purposes and is charged to construction work in progress during the construction period and is included in other - net in the Statements of Income. The total AFUDC capitalized into utility plant and the portion of which was computed on borrowed and equity funds for all periods reported is as follows: Year Ended December 31, ------------------------ In thousands 2001 2000 1999 ------ ------ ------ AFUDC - equity funds $1,653 $2,051 $ 296 AFUDC - borrowed funds 1,371 1,817 2,508 ------ ------ ------ Total AFUDC capitalized $3,024 $3,868 $2,804 ====== ====== ====== Maintenance and repairs, including the cost of removal of minor items of property and planned major maintenance projects, are charged to expense as incurred. When property that represents a retirement unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to accumulated depreciation. E. Impairment Review of Long-Lived Assets Long-lived assets are reviewed for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" as facts and circumstances indicate that the carrying amount may be impaired. Specifically, the evaluation for impairment involves the comparison of an asset's carrying value to the estimated future cash flows the asset is expected to generate over its remaining life. If this evaluation were to conclude that the carrying value of the asset is impaired, an impairment charge would be recorded as a charge to operations based on the difference between the asset's carrying amount and its fair value. (See Note 15 for further information on the adoption of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets.") F. Regulation Retail public utility operations affecting Indiana customers are subject to regulation by the Indiana Utility Regulatory Commission (IURC). The Company's wholesale energy transactions are subject to regulation by the Federal Energy Regulatory Commission (FERC). SFAS 71 The Company's accounting policies give recognition to the rate-making and accounting practices of these agencies and to accounting principles generally accepted in the United States, including the provisions of SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). Regulatory assets represent probable future revenues associated with certain incurred costs, which will be recovered from customers through the rate-making process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the rate-making process. The Company continually assesses the recoverability of costs recognized as regulatory assets and the ability to continue to account for its activities in accordance with SFAS 71, based on the criteria set forth in SFAS 71. Based on current regulation, the Company believes such accounting is appropriate. If all or part of the Company's operations cease to meet the criteria of SFAS 71, a write-off of related regulatory assets and liabilities could be required. In addition, the Company would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. Regulatory assets consist of the following: At December 31, ------------------- In thousands 2001 2000 -------- -------- Demand side management programs $ 26,158 $ 26,243 Unamortized debt discount & expenses 3,155 2,886 Other 12,212 11,496 -------- -------- Total regulatory assets $ 41,525 $ 40,625 ======== ======== As of December 31, 2001, $18.9 million of regulatory assets is reflected in rates charged to customers. The remaining $22.6 million, which is not yet included in rates, represents electric demand side management (DSM) costs incurred after 1993. The Company is currently recovering $3.6 million of DSM costs in rates. Based upon this prior regulatory authority, management believes that future recovery of DSM costs not currently included in rates is probable. At December 31, 2001 and 2000, DSM costs have a remaining recovery period of 10.5 years and 11.5 years, respectively, other regulatory assets have a recovery period of 27.0 years and 26.9 years, respectively, and unamortized debt discounts and expense are being recovered over the lives of the related issues. Refundable or Recoverable Gas Costs, Fuel for Electric Production & Purchased Power All metered gas rates contain a gas cost adjustment clause that allows the Company to charge for changes in the cost of purchased gas. Metered electric rates typically contain a fuel adjustment clause that allows for adjustment in charges for electric energy to reflect changes in the cost of fuel and the net energy cost of purchased power. Metered electric rates also allow recovery, through a quarterly rate adjustment mechanism, for the margin on electric sales lost due to the implementation of demand side management programs. The Company records any under-or-over-recovery resulting from gas and fuel adjustment clauses each month in revenues. A corresponding asset or liability is recorded until the under-or-over-recovery is billed or refunded to utility customers. The cost of gas sold is charged to operating expense as delivered to customers, and the cost of fuel for electric generation is charged to operating expense when consumed. G. Comprehensive Income Comprehensive income is a measure of all changes in equity that result from the transactions or other economic events during the period from non-shareholder transactions. This information is reported in the Statements of Common Shareholders' Equity. H. Revenues Revenues are recorded as products and services are delivered to customers. To more closely match revenues and expenses, the Company records revenues for all gas and electricity delivered to customers but not billed at the end of the accounting period. I. Excise Taxes Excise taxes are included in rates charged to customers. Accordingly, the Company records excise tax received as a component of operating revenues. Excise taxes paid are recorded as a component of taxes other than income taxes. J. Earnings Per Share Earnings per share are not presented as the Company's common stock is wholly owned by Vectren Utility Holdings, Inc. K. Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. These reclassifications have no impact on net income previously reported. 3. Special Charges Merger & Integration Costs Merger and integration costs incurred for the years ended December 31, 2001 and 2000 were $0.6 million and $14.1 million, respectively. Merger and integration activities resulting from the 2000 merger were completed in 2001. Merger costs are reflected in the financial statements of the operating subsidiaries in which merger savings are expected to be realized. Since March 31, 2000, $14.7 million has been expensed associated with merger and integration activities. Accruals were established at March 31, 2000 totaling $7.4 million. Of this amount, $0.7 million related to employee and executive severance costs and $6.7 million related to transaction costs and regulatory filing fees incurred prior to the closing of the merger. At December 31, 2001, no accrual remains. The remaining $7.3 million was expensed ($6.7 million in 2000 and $0.6 million in 2001) for accounting fees resulting from merger related filing requirements, consulting fees related to integration activities such as organization structure, employee travel between company locations, internal labor of employees assigned to integration teams, investor relations communication activities, and certain benefit costs. During the merger planning process, approximately 54 positions were identified for elimination. As of December 31, 2001, all such identified positions have been vacated. The integration activities experienced by the Company included such things as information system consolidation, process review and definition, organization design and consolidation, and knowledge sharing. Restructuring & Related Charges As part of continued cost saving efforts, in June 2001, Vectren's management and board of directors approved a plan to restructure, primarily, its regulated operations. The restructuring plan included the elimination of certain administrative and supervisory positions in its utility operations and corporate office. Charges of $4.3 million were expensed in June 2001 as a direct result of the restructuring plan. Additional charges of $1.5 million were incurred during the remainder of 2001 primarily for consulting fees and employee relocation costs. In total, the Company has incurred restructuring charges of $5.8 million. These charges were comprised of $4.4 million for employee severance, related benefits and other employee related costs, and $1.4 million for consulting and other fees incurred through December 31, 2001. Components of restructuring expense incurred through December 31, 2001 are as follows: Accrual for Incurred Expenses Expected ---------------------- Total In thousands Cash Payments Paid in Cash Non-Cash Expense ------------- ------------ -------- ------- Severance & related costs $ 180 $3,435 $ 822 $4,437 Consulting fees & other - 1,388 - 1,388 ------ ------ ------ ------ Total $ 180 $4,823 $ 822 $5,825 ====== ====== ====== ====== The $4.4 million expensed for employee severance and related costs is associated with approximately 40 employees. Employee separation benefits include severance, healthcare, and outplacement services. As of December 31, 2001, 37 employees have exited the business. The restructuring program was completed during 2001, except for the departure of the remaining employees impacted by the restructuring. Components of the accrual for expected cash payments, which is included in accrued liabilities, as of December 31, 2001 is as follows: Accrual at Accrual at June 30, Cash December 31, In thousands 2001 Payments Additions 2001 ------------------------------------------------------------------------------- Severance & related costs $ 2,759 $ 3,141 $ 562 $ 180 4. Transactions With Other Vectren Companies Contribution of Assets The Company contributed computer software and hardware with a book value of approximately $6.2 million and $9.1 million to a wholly owned subsidiary of Vectren (Vectren Resources, LLC) as a special dividend in 2001 and 2000, respectively. Additionally in 2001, the Company contributed certain assets totaling $0.8 million to VUHI. These contributions of assets are reflected as a reduction of common shareholder's equity and resulted in no gain or loss, therefore, these transactions are omitted from the Statement of Cash Flows. Support Services & Purchases Vectren and certain subsidiaries of Vectren have provided corporate, general and administrative services to the Company including legal, finance, tax, risk management and human resources. The costs have been allocated to the Company using various allocators, primarily number of employees, number of customers and/or revenues. Allocations are based on cost. Management believes that the allocation methodology is reasonable and approximates the costs that would have been incurred had the Company secured those services on a stand-alone basis. For the year ended December 31, 2001 and 2000, amounts billed by other wholly owned subsidiaries of Vectren to the Company were $43.5 million and $30.2 million, respectively. Prior to April 1, 2000, these costs were incurred by the Company directly. Vectren Fuels, Inc., a wholly owned subsidiary of Vectren, owns and operates coal mines from which the Company purchases fuel used for electric generation. Amounts paid for such purchases for the year ended December 31, 2001, 2000, and 1999 were $35.6 million, $25.7 million, and $20.5 million, respectively. Amounts owed to other Vectren companies totaled $3.4 million and $11.5 million at December 31, 2001 and 2000, respectively. Amounts due from other Vectren companies totaled $26.9 million at December 31, 2000. Cash Management and Borrowing Arrangements The Company participates in a centralized cash management program with Vectren, other wholly owned subsidiaries, and banks which permits funding of checks as they are presented. See Note 6 regarding long and short-term intercompany borrowing arrangements. Guarantees of Parent Company Debt Vectren's three operating utility companies, SIGECO, VEDO, and Indiana Gas are guarantors of VUHI's $350.0 million commercial paper program, of which approximately $273.3 million is outstanding at December 31, 2001 and VUHI's $350.0 million unsecured senior notes outstanding at December 31, 2001. VUHI has no significant independent assets or operations other than the assets and operations of these operating utility companies. These guarantees are full and unconditional and joint and several. Stock Based Incentive Plans The Company does not have stock-based compensation plans separate from Vectren. The Company's employees participate in Vectren's stock-based compensation plans that provide for awards of restricted stock and stock options to purchase Vectren common stock at prices equal to the fair value of the underlying shares at the date of grant. Consistent with Vectren, the Company accounts for participation in these plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in measuring compensation costs for its stock options. Had compensation cost for stock options been determined consistent with SFAS No. 123, "Accounting for Stock-based Compensation," a fair value based model, net income would not have been materially different than reported net income. 5. Cumulative Preferred Stock Nonredeemable Nonredeemable preferred stock contains call options that were exercised during September 2001 for a total redemption price of $9.8 million. The 4.80%, $100 par value preferred stock was redeemed at its stated call price of $110 per share, plus accrued and unpaid dividends totaling $1.35 per share. The 4.75%, $100 par value preferred stock was redeemed at its stated call price of $101 per share, plus accrued and unpaid dividends totaling $0.97 per share. Prior to the redemptions and as of December 31, 2000, there were 85,519 shares of the 4.80% Series outstanding and 3,000 shares of the 4.75% Series outstanding. Redeemable In September 2001, the 6.50%, $100 par value preferred stock was redeemed for a total redemption price of $7.9 million at $104.23 per share, plus $0.73 per share in accrued and unpaid dividends. Prior to the redemption and as of December 31, 2000, there were 75,000 shares outstanding. The loss on redemption of $1.2 million is reflected as a reduction to reconcile net income to net income applicable to common shareholder. The total redemption price was $17.7 million. Redeemable, Special This series of redeemable preferred stock has a dividend rate of 8.50% and in the event of involuntary liquidation the amount payable is $100 per share, plus accrued dividends. This Series may be redeemed at $100 per share, plus accrued dividends on any of its dividend payment dates and is also callable at the Company's option at a rate of 1,160 shares per year. As of December 31, 2001 and 2000, there were 4,597 shares and 5,757 shares outstanding, respectively. 6. Borrowing Arrangements Long-Term Debt Senior unsecured obligations and first mortgage bonds outstanding and classified as long-term are as follows.
At December 31, ---------------------- In thousands 2001 2000 --------- --------- Fixed Rate Senior Unsecured Note Payable to VUHI: 2011, 6.625% $ 49,460 $ - --------- --------- Total long-term debt to VUHI $ 49,460 $ - ========= ========= First Mortgage Bonds to Third Parties: Fixed-Rate: 2003, 1978 Series B, 6.25%, tax exempt $ 1,000 $ 1,000 2016, 1986 Series, 8.875% 13,000 13,000 2023, 1993 Series, 7.60% 45,000 45,000 2023, 1993 Series B, 6.00% 22,800 22,800 2025, 1993 Series, 7.625% 20,000 20,000 2029, 1999 Senior Notes, 6.72% 80,000 80,000 Adjustable Rate: 2015, 1985 Pollution Control Series A, presently 4.30%, tax exempt, next rate adjustment: 2004 9,975 9,975 2025, 1998 Pollution Control Series A, presently 4.75%, tax exempt, next rate adjustment: 2006 31,500 31,500 2024, 2000 Environmental Improvement Series A, presently 2.05%, tax exempt, adjusts every 35 days, weighted average for year: 3.13% 22,500 22,500 --------- --------- Total First Mortgage Bonds 245,775 245,775 --------- --------- Adjustable Rate Senior Unsecured Bonds to Third Parties: 2020, 1998 Pollution Control Series B, presently 4.40%, tax exempt, next rate adjustment: 2003 4,640 4,640 2030, 1998 Pollution Control Series B, presently 4.40%, tax exempt, next rate adjustment: 2003 22,000 22,000 2030, 1998 Pollution Control Series C, presently 5.00%, tax exempt, next rate adjustment: 2006 22,200 22,200 --------- --------- Total Adjustable Rate Senior Unsecured Bonds 48,840 48,840 --------- --------- Total long-term debt outstanding 294,615 294,615 Less: Debt subject to tender - (53,700) Unamortized debt premium & discount, net (2,913) (3,116) --------- --------- Total long-term debt-net $ 291,702 $ 237,799 ========= =========
Issuance Payable to VUHI At December 31, 2001, the Company has $49.5 million of long-term debt outstanding with VUHI. The terms of this note are identical to the terms of notes issued by VUHI in December 2001 through a public offering (December Notes). The December Notes have an aggregate principal amount of $250.0 million and an interest rate of 6.625%, priced at 99.302% to yield 6.69% to maturity. The December Notes have no sinking fund requirements, and interest payments are due semi-annually. The December Notes are due December 2011, but may be called by VUHI, 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 of the notes to be redeemed 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 VUHI's indenture, plus 25 basis points. Long-Term Debt Sinking Fund Requirements & Maturities The annual sinking fund requirement of the Company's first mortgage bonds is 1% of the greatest amount of bonds outstanding under the Mortgage Indenture. This requirement may be satisfied by certification to the Trustee of unfunded property additions in the prescribed amount as provided in the Mortgage Indenture. The Company intends to meet the 2002 sinking fund requirement by this means and, accordingly, the sinking fund requirement for 2002 is excluded from current liabilities in the Balance Sheets. At December 31, 2001, $279.3 million of the Company's utility plant remained unfunded under the Company's Mortgage Indenture. Consolidated maturities and sinking fund requirements on long-term debt subject to mandatory redemption during the five years following 2001 are $0 in 2002, $1.0 million in 2003, $0 in 2004, $0 in 2005, and $0 in 2006. Long-Term Debt Put & Call Provisions Certain long-term debt issues contain put and call provisions that can be exercised on various dates before maturity. These provisions allow holders to put debt back to the Company at face value or the Company to call debt at face value or at a premium. Long-term debt subject to tender during the years following 2001 (in millions) is $0 in 2002, $0 in 2003, $0 in 2004, $0 in 2005, $53.7 in 2006 and $80.0 thereafter. Of these debt instruments containing put options, the Company has $31.5 million of adjustable rate pollution control series first mortgage bonds and $22.2 million of adjustable rate pollution control series unsecured senior notes which could, at the election of the bondholder, be tendered to the Company when interest rates are reset. Prior to the latest reset on March 1, 2001, the interest rates were reset annually, and the bonds were presented as current liabilities. Effective March 1, 2001, the bonds were reset for a five-year period and have been classified as long-term debt. Short-Term Borrowings SIGECO mainly relies on the short-term borrowing arrangements of VUHI for its short-term working capital needs. Borrowings outstanding at December 31, 2001 were $80.7 million. The intercompany credit line totals $150.0 million, but is limited to VUHI's available capacity ($76.7 million at December 31, 2001) and is subject to the same terms and conditions as VUHI's commercial paper program. At December 31, 2001, the Company has approximately $10.0 million of short-term borrowing capacity with third parties to supplement its intercompany borrowing arrangements, of which approximately $9.1 million is available. Year ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- Weighted average total outstanding during the year payable to third parties (in thousands) $ 12,930 $ 20,026 $ 54,576 Weighted average total outstanding during the year payable to VUHI (in thousands) $ 34,791 - - Weighted average interest rates during the year: Bank loans 5.77% 6.24% 5.74% VUHI 5.24% N/A N/A Covenants Both long-term and short-term borrowing arrangements contain customary default provisions, restrictions on liens, sale leaseback transactions, mergers or consolidations, and sales of assets; and restrictions on leverage and interest coverage, among other restrictions. As of December 31, 2001, the Company was in compliance with all financial covenants. 7. Income Taxes Vectren and subsidiary companies file a consolidated federal income tax return. SIGECO's current and deferred tax expense is computed on a separate company basis. The components of income tax expense and utilization of investment tax credits are as follows: Year Ended December 31, -------------------------------- In thousands 2001 2000 1999 -------- -------- -------- Current: Federal $ 27,237 $ 21,754 $ 19,837 State 3,459 3,065 3,195 -------- -------- -------- Total current taxes 30,696 24,819 23,032 -------- -------- -------- Deferred: Federal (7,959) 1,030 4,080 State (622) 411 746 -------- -------- -------- Total deferred taxes (8,581) 1,441 4,826 -------- -------- -------- Amortization of investment tax credits (1,353) (1,428) (1,430) -------- -------- -------- Total income tax expense $ 20,762 $ 24,832 $ 26,428 ======== ======== ======== A reconciliation of the Federal statutory rate to the effective income tax rate is as follows: Year Ended December 31, -------------------------- 2001 2000 1999 ------ ------ ------ Statutory rate 35.0% 35.0% 35.0% State & local taxes, net of Federal benefit 3.1 3.5 3.6 Nondeductible merger costs - 3.5 - Amortization of investment tax credit (2.2) (2.2) (2.0) All other-net (1.6) (1.5) - ------ ------ ------ Effective tax rate 34.3% 38.3% 36.6% ====== ====== ====== The liability method of accounting is used for income taxes under which deferred income taxes are recognized to reflect the tax effect of temporary differences between the book and tax bases of assets and liabilities at currently enacted income tax rates. Deferred investment tax credits are amortized over the life of the related asset. Significant components of the net deferred tax liability are as follows: At December 31, ---------------------- In thousands 2001 2000 --------- --------- Deferred tax liabilities: Depreciation & cost recovery timing differences $ 114,773 $ 113,075 Deferred fuel costs, net 7,264 8,168 Regulatory assets recoverable through future rates 24,647 24,836 Deferred tax asset: Regulatory liabilities to be settled through future rates (16,403) (17,654) Other - net (10,271) (954) --------- --------- Net deferred tax liability $ 120,010 $ 127,471 ========= ========= Included in prepayments and other current assets is approximately $10.1 million of taxes prepaid to Vectren. 8. Retirement Plans & Other Postretirement Benefits Effective July 1, 2000, the SIGCORP and Indiana Energy defined benefit pension plans, retirement savings plans, and postretirement health care plans and life insurance plans for employees not covered by a collective bargaining unit were merged. The merged plans became Vectren plans, and as a result, the respective plan assets and plan obligations were transferred to Vectren through cash payment for assets and cash receipt for obligations. The transfers resulted in no gain or loss. The Company continues to maintain defined benefit pension and other postretirement benefit plans which cover eligible full-time hourly and salaried employees covered by collective bargaining arrangements. All of the plans are non-contributory. The non-pension plans include plans for health care and life insurance through a combination of self-insured and fully insured plans. During 2000 and as a result of the merger, the Company changed its measurement date. The detailed disclosures of benefit components as of and for the years ended December 31, 2001 and 2000 are based on an actuarial valuations with a measurement date of September 30. The disclosures required for the year ended December 31, 1999 are based on an actuarial valuation with a measurement date of December 31. In management's opinion, had a measurement date of September 30 been used for the year ended December 31, 1999, it would not have produced results materially different from that disclosed below. Net periodic benefit cost consists of the following components:
Year Ended December 31, --------------------------------------------------------- Pension Benefits Other Benefits ---------------------------- --------------------------- In thousands 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------- ------- ------- Service cost $ 1,527 $ 1,907 $ 3,020 $ 540 $ 542 $ 620 Interest cost 3,115 4,346 5,637 2,000 1,914 1,707 Expected return on plan assets (3,354) (4,891) (6,517) (840) (921) (751) Amortization of prior service cost 130 210 307 - - - Amortization of transitional obligation (asset) (242) (330) (418) 1,177 1,294 1,311 Amortization of actuarial gain (229) (464) (300) (945) (816) (757) Settlement, curtailment, & other charges (credits) (1,364) 711 - (117) - - ------- ------- ------- ------- ------- ------- Net periodic benefit cost (417) 1,489 1,729 1,815 2,013 2,130 Less: Allocations to other Vectren companies - - - 375 - - ------- ------- ------- ------- ------- ------- Net periodic benefit cost $ (417) $ 1,489 $ 1,729 $ 1,440 $ 2,013 $ 2,130 ======= ======= ======= ======= ======= =======
A reconciliation of the plans' benefit obligations, fair value of plan assets, funded status, and amounts recognized in the Balance Sheets at December 31, 2001 and 2000 follows:
Pension Benefits Other Benefits ------------------- ------------------- In thousands 2001 2000 2001 2000 -------- -------- -------- -------- Benefit Obligation: Benefit obligation at beginning of year $ 38,949 $ 81,702 $ 25,682 $ 24,908 Service cost - benefits earned during the year 1,527 1,907 540 542 Interest cost on projected benefit obligation 3,115 4,346 2,000 1,914 Plan amendments 37 - - (711) Transfers - (46,989) - - Settlements & (curtailments) (1,522) 711 (620) - Benefits paid (1,724) (2,118) (792) (1,082) Actuarial loss 1,822 (610) 3,036 111 -------- -------- -------- -------- Benefit obligation at end of year $ 42,204 $ 38,949 $ 29,846 $ 25,682 ======== ======== ======== ======== Fair Value of Plan Assets: Plan assets at fair value at beginning of year $ 40,895 $ 86,051 $ 11,222 $ 11,709 Actual return on plan assets (7,664) 5,020 (1,636) 595 Transfers - (48,058) - - Benefits paid (1,724) (2,118) (792) (1,082) -------- -------- -------- -------- Fair value of plan assets at end of year $ 31,507 $ 40,895 $ 8,794 $ 11,222 ======== ======== ======== ======== Funded Status: $(10,697) $ 1,946 $(21,052) $(14,460) Unrecognized transitional obligation (asset) (562) (804) 11,751 15,037 Unrecognized service cost 874 1,125 - - Unrecognized net (gain) loss & other 4,492 (8,577) (7,780) (14,631) -------- -------- -------- -------- Net amount recognized $ (5,893) $ (6,310) $(17,081) $(14,054) ======== ======== ======== ========
At December 31, 2001, all pension plans had accumulated benefit obligations in excess of plan assets. The accumulated benefit obligation of pension plans approximated $32.5 million at December 31, 2001. At December 31, 2000, all pension plans had plan assets in excess of their accumulated benefit obligation. At both December 31, 2001 and 2000 the net amount recognized for both pension and postretirement obligations is included in deferred credits and other liabilities. Weighted-average assumptions used to develop annual costs and the benefit obligation for these plans are as follows: Pension Benefits Other Benefits ---------------- -------------- 2001 2000 2001 2000 ----- ----- ----- ----- Discount rate 7.25% 7.75% 7.25% 7.75% Expected return on plan assets 9.00% 8.50% 9.00% 9.00% Rate of compensation increase 4.75% 5.25% 4.75% 5.25% ---- ---- ---- ---- As of December 31, 2001, the health care cost trend is 12.0% declining to 5.0% in 2006 and remaining level thereafter. Future changes in health care costs, work force demographics, interest rates, or plan changes could be significantly affect the estimated cost of these future benefits. A 1.0% change in the assumed health care cost trend for the postretirement health care plan would have the following effects as of and for the year ended December 31, 2001: In thousands 1% Increase 1% Decrease ----------- ----------- Effect on the aggregate of the service & interest cost components $ 483 $ 389 Effect on the postretirement benefit obligation 4,514 3,694 ------ ------ The Company has adopted Voluntary Employee Beneficiary Association (VEBA) Trust Agreements for the benefit of employees for the funding of postretirement health benefits for retirees and their eligible dependents and beneficiaries. Annual funding is discretionary and is based on the projected cost over time of benefits to be provided to cover persons consistent with acceptable actuarial methods. To the extent these postretirement benefits are funded, the benefits will not be shown as a liability in these financial statements. 9. Commitments & Contingencies Construction Commitments The Company has entered into a contract to purchase and construct an 80-megawatt combustion gas turbine generator. The total cost of the project is estimated to be $33.0 million and is expected to be completed by the summer of 2002. Through December 31, 2001, $23.2 million has been expended. Legal Proceedings The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. See Note 10 regarding the Culley Generating Station Litigation. 10. Environmental Matters Clean Air Act NOx SIP Call Matter The Clean Air Act (the Act) requires each state to adopt a State Implementation Plan (SIP) to attain and maintain National Ambient Air Quality Standards (NAAQS) for a number of pollutants, including ozone. If the United States Environmental Protection Agency (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 1998 and 1999. 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 (Warrick), and A.B. Brown Generating Station Unit 2 (A.B. Brown). SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water using ammonia in chemical reaction. This technology is known to be the most effective method of reducing NOx emissions where high removal efficiencies are required. The IURC issued an order that (1) approves the Company's proposed project to achieve environmental compliance by investing in clean coal technology, (2) approves the Company's cost estimate for the construction, subject to periodic review of the actual costs incurred, and (3) approves a mechanism whereby, prior to an electric base rate case, the Company may recover a return on its capital costs for the project, at its overall cost of capital, including a return on equity. Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated construction cost ranges from $175.0 million to $195.0 million and is expected to be expended during the 2001-2004 period. Through December 31, 2001, $22.5 million has been expended. After the equipment is installed and operational, related additional annual operation and maintenance expenses are estimated to be between $8.0 million and $10.0 million. The Company expects the Culley, Warrick and A.B. Brown SCR systems to be operational by the compliance date. Installation of SCR technology at these stations 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. The USEPA alleges 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 alleges that the modifications to the Culley Generating Station required SIGECO to begin complying with federal new source performance standards at its Culley Unit 3. SIGECO believes it performed only maintenance, repair and replacement activities at the Culley Generating Station, as allowed under the Act. Because proper maintenance does not require permits, application of the best available control technology, notice to the USEPA, or compliance with new source performance standards, SIGECO believes that the lawsuit is without merit, and intends to vigorously defend itself. The lawsuit seeks fines against SIGECO in the amount of $27,500 per day per violation. The lawsuit does not specify the number of days or violations the USEPA believes occurred. The lawsuit also seeks a court order requiring SIGECO to install the best available emissions technology at the Culley Generating Station. If the USEPA were successful in obtaining an order, SIGECO estimates that it would incur capital costs of approximately $40.0 million to $50.0 million to comply with the order. As a result of the NOx SIP call issue, the majority of the $40.0 million to $50.0 million for best available emissions technology at Culley Generating Station is included in the $175.0 million to $195.0 million cost range previously discussed. The USEPA has also issued an administrative notice of violation to SIGECO making the same allegations, but alleging that violations began in 1977. While it is possible that SIGECO could be subjected to criminal penalties if the Culley Generating Station continues to operate without complying with the permitting requirements of new source review and the allegations are determined by a court to be valid, SIGECO believes such penalties are unlikely as the USEPA and the electric utility industry have a bonafide dispute over the proper interpretation of the Act. Accordingly, the Company has recorded no accrual and the plant continues to operate while the matter is being decided. 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. 11. Rate & Regulatory Matters Gas Costs Proceedings Commodity prices for natural gas purchases were significantly higher during the 2000 - 2001 heating season, primarily due to colder temperatures, increased demand and tighter supplies. Subject to compliance with applicable state laws, the Company is allowed full recovery of such changes in purchased gas costs from their retail customers through commission-approved gas cost adjustment mechanisms. Purchased Power Costs As a result of an appeal of a generic order issued by the IURC in August 1999 regarding guidelines for the recovery of purchased power costs, the Company entered into a settlement agreement with the OUCC that provides certain terms with respect to the recoverability of such costs. The settlement, originally approved by the IURC in August 2000, has been extended by agreement through March 2002 and additional settlement discussions are expected in 2002. Under the settlement, the Company can recover the entire cost of purchased power up to an established benchmark, and during forced outages, the Company will bear a limited share of its purchased power costs regardless of the market costs at that time. Based on this agreement, the Company believes it has limited its exposure to unrecoverable purchased power costs. 12. Risk Management, Derivatives & Other Financial Instruments Risk Management The Company is exposed to market 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. Commodity Price Risk The Company's regulated operations have limited exposure to commodity price risk for purchases and sales of natural gas and electric energy for its retail customers due to current Indiana regulations, which subject to compliance with applicable state regulations, allow for recovery of such purchases through natural gas and fuel cost adjustment mechanisms. The Company does engage in limited wholesale power marketing that may expose it to commodity price risk associated with fluctuating electric power prices. The Company's wholesale power marketing activities manage the utilization of its available electric generating capacity. These operations enter into forward contracts that commit the Company to purchase and sell power in the future. Commodity price risk results from forward sales contracts that commit the Company to deliver electric power on specified future dates. Power marketing uses planned unutilized generation capability and forward purchase contracts to protect certain sales transactions from unanticipated fluctuations in the price of electric power, and periodically, will use derivative financial instruments to protect its interests from unplanned outages and shifts in demand. Open positions in terms of price, volume and specified delivery points may occur to a limited extent and are managed using methods described above and frequent management reporting. Interest Rate Risk The Company is exposed to interest rate risk associated with its adjustable rate borrowing arrangements. Its risk management program seeks to reduce the potentially adverse effects that market volatility may have on operations. Under normal circumstances, the Company tries to limit the amount of adjustable rate borrowing arrangements exposed to short-term interest rate volatility to a maximum of 25% of total debt. However, there are times when this targeted level of interest rate exposure may be exceeded. Other Risks By using forward purchase contracts and derivative financial instruments to manage risk, the Company exposes itself to counter-party credit risk and market risk. The Company manages this exposure to counter-party credit risk by entering into contracts with financially sound companies that can be expected to fully perform under the terms of the contract. The Company attempts to manage exposure to market risk associated with commodity contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. As of December 31, 2001, the Company has a net receivable from Enron Corp. of approximately $1.0 million, which has been fully reserved. The Company's customer receivables from gas and electric sales and gas transportation services are primarily derived from a diversified base of residential, commercial, and industrial customers located in Indiana. The Company manages credit risk associated with its receivables by continually reviewing creditworthiness and requests cash deposits or refunds cash deposits based on that review. Accounting for Forward Contracts & Other Financial Instruments Commodity Contracts At origination, all contracts to buy and sell electric power are designated as "physical" or "other-than-trading." The Company does not have any contracts designated as "trading" as defined by EITF 98-10. Power marketing contracts are designated as "physical" when there is intent and ability to physically deliver power from the Company's unutilized generating capacity. Power marketing contracts are designated as "other-than-trading" when there is intent to receive power to manage base and peak load capacity. Both contract designations generally require settlement by physical delivery of electricity. However, certain of these contracts may be net settled in accordance with industry standards when unplanned outages, favorable pricing movements, and shifts in demand occur. Prior to the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," contracts in the "physical" and "other-than-trading" portfolios received accounting recognition on settlement with revenues recorded in electric utility revenues and costs recorded in fuel for electric generation for those contracts fulfilled through generation and in purchased electric energy for contracts purchased in the wholesale energy market. Subsequent to the adoption of SFAS 133, certain contracts that are periodically settled net are recorded at market value. Contracts recorded at market value are recorded as current or noncurrent assets or liabilities in the Balance Sheets depending on their value and on when the contracts are expected to be settled. Changes in market value are recorded in the Statements of Income as purchased electric energy. Market value is determined using quoted market prices from independent sources. Impact of New Accounting Principle In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, which requires that every derivative instrument be recorded on the balance sheet as an asset or liability measured at its market value and that changes in the derivative's market value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, as amended, requires that as of the date of initial adoption, the difference between the market value of derivative instruments recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." Resulting from the adoption of SFAS 133, certain contracts in the power marketing operations that are periodically settled net were required to be recorded at market value. Previously, the Company accounted for these contracts on settlement. The cumulative impact of the adoption of SFAS 133 resulting from marking these contracts to market on January 1, 2001 was an earnings gain of approximately $6.3 million ($3.9 million after tax) recorded as a cumulative effect of accounting change in the Statements of Income. SFAS 133 did not impact other commodity contracts because they were normal purchases and sales specifically excluded from the provisions of SFAS 133. As of December 31, 2001, the Company has derivative assets resulting from its power marketing operations of $5.2 million classified in other current assets as well as derivative liabilities of $2.0 million classified in accrued liabilities. Unrealized losses totaling $3.2 million arising from the difference between the current market value and the market value on the date of adoption is included in purchased electric energy in the Statements of Income for the year ended December 31, 2001. Fair Value of Other Financial Instruments The carrying values and estimated fair values of the Company's other financial instruments are as follows:
At December 31, ----------------------------------------- 2001 2000 ------------------- ------------------- Carrying Est. Fair Carrying Est. Fair In thousands Amount Value Amount Value -------- -------- -------- -------- Long term debt $294,615 $289,179 $294,615 $285,941 Long term debt to VUHI 49,460 49,460 - - Short-term borrowings & notes payable 874 874 40,154 40,154 Short-term debt to VUHI 80,664 80,664 - - Redeemable preferred stock of subsidiary - - 7,500 7,700 -------- -------- -------- --------
Certain methods and assumptions must be used to estimate the fair value of financial instruments. The fair value of the Company's other financial instruments was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for instruments with similar characteristics. Because of the maturity dates and variable interest rates of short-term borrowings, its carrying amount approximates its fair value. 13. Additional Operational & Balance Sheet Information Other-net in the Statements of Income consists of the following: Year ended December 31, ----------------------------- In thousands 2001 2000 1999 ------- ------- ------- Other income $ 3,569 $ 1,415 $ 409 AFUDC 3,024 3,868 2,804 Other expense (571) (609) (104) ------- ------- ------- Total other - net $ 6,022 $ 4,674 $ 3,109 ======= ======= ======= Accrued liabilities in the Balance Sheets consists of the following: At December 31, ----------------------- In thousands 2001 2000 ----------------------- Accrued taxes $ 9,670 $ 13,084 Deferred income taxes 7,264 8,168 Accrued interest 5,582 6,047 Refunds to customers & customer deposits 3,470 3,543 Other 7,559 14,414 ------- -------- Total accrued liabilities $33,545 $ 45,256 ======= ======== 14. Segment Reporting The Company had two operating segments during 2001: (1) Gas Utility Services and (2) Electric Utility Services. The Gas Utility Services segment includes the operations of the Company's natural gas distribution business and provides natural gas distribution and transportation services in southwest Indiana. The Electric Utility Services segment includes the operations of the Company's power generating and marketing operations, and electric transmission and distribution services, which provides electricity to primarily southwestern Indiana. The following tables provide information about business segments. The Company makes decisions on finance and dividends at the corporate level. Year ended December 31, ------------------------------ In thousands 2001 2000 1999 -------- -------- -------- Operating Revenues Electric Utility Services $378,867 $336,409 $307,569 Gas Utility Services 101,117 109,284 68,212 -------- -------- -------- Total operating revenues $479,984 $445,693 $375,781 ======== ======== ======== Interest Expense Electric Utility Services $ 19,104 $ 18,103 $ 18,031 Gas Utility Services 1,889 1,791 1,735 -------- -------- -------- Total interest expense $ 20,993 $ 19,894 $ 19,766 ======== ======== ======== Income Taxes Electric Utility Services $ 20,258 $ 23,386 $ 24,331 Gas Utility Services 748 1,446 2,097 -------- -------- -------- Total income taxes $ 21,006 $ 24,832 $ 26,428 ======== ======== ======== Net Income applicable to common shareholder Electric Utility Services $ 40,793 $ 36,811 $ 41,820 Gas Utility Services 1,669 3,220 3,870 -------- -------- -------- Net income $ 42,462 $ 40,031 $ 45,690 ======== ======== ======== Year ended December 31, ------------------------------ In thousands 2001 2000 1999 -------- -------- -------- Depreciation & Amortization Electric Utility Services $ 38,691 $ 38,639 $ 40,829 Gas Utility Services 4,596 4,575 4,039 -------- -------- -------- Total depreciation & amortization $ 43,287 $ 43,214 $ 44,868 ======== ======== ======== Capital Expenditures Electric Utility Services $ 69,683 $ 43,520 $ 51,080 Gas Utility Services 7,098 7,599 9,597 -------- -------- -------- Total capital expenditures $ 76,781 $ 51,119 $ 60,677 ======== ======== ======== At December 31, ------------------- In thousands 2001 2000 -------- -------- Identifiable Assets Electric Utility Services $811,248 $806,296 Gas Utility Services 161,974 152,200 -------- -------- Total identifiable assets $973,222 $958,496 ======== ======== 15. Impact of Recently Issued Accounting Guidance SFAS 141 & 142 The FASB issued two new statements of financial accounting standards in July 2001: SFAS No. 141, "Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). These interrelated standards change the accounting for business combinations and goodwill in two significant ways: SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. This change does not affect the pooling-of-interest transaction forming Vectren. SFAS 142 changes the accounting for goodwill from an amortization approach to an impairment-only approach. Thus, amortization of goodwill that is not included as an allowable cost for rate-making purposes will cease upon adoption of the statement. This includes goodwill recorded in past business combinations, such as the Company's acquisition of the Ohio operations. Goodwill is to be tested for impairment at a reporting unit level at least annually. SFAS 142 also requires the initial impairment review of all goodwill and other intangible assets within six months of the adoption date, which is January 1, 2002 for the Company. The impairment review consists of a comparison of the fair value of a reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying amount, an impairment loss would be recognized. Results of the initial impairment review are to be treated as a change in accounting principle in accordance with APB Opinion No. 20 "Accounting Changes." An impairment loss recognized as a result of an impairment test occurring after the initial impairment review is to be reported as a part of operations. SFAS 142 also changes certain aspects of accounting for intangible assets; however, the Company does not have any significant intangible assets. The adoption of SFAS 141 and SFAS 142 will not materially impact operations. 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. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the impact that SFAS 143 will have on its operations. SFAS 144 In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 develops one accounting model for all impaired long-lived assets and long-lived assets to be disposed of. SFAS 144 replaces the existing authoritative guidance in FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain aspects of APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." This new accounting model retains the framework of SFAS 121 and requires that those impaired long-lived assets and long-lived assets to be disposed of be measured at the lower of carrying amount or fair value (less cost to sell for assets to be disposed of), whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company is evaluating the impact SFAS 144 will have on its operations. 16. Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 2001 and 2000 is as follows: In thousands Q1 Q2 Q3 Q4 -------- -------- -------- -------- 2001 Operating revenues $140,159 $106,371 $115,367 $118,087 Operating income 19,984 5,669 18,973 10,797 Net income 19,287 1,238 13,248 8,689 -------- -------- -------- -------- 2000 Operating revenues $102,217 $ 92,471 $112,675 $138,330 Operating income 8,350 10,700 20,867 16,351 Net income 3,998 6,459 16,782 12,792 -------- -------- -------- -------- 1. Information in any one quarterly period is not indicative of annual results due to the seasonal variations common to the Company's utility operations. 2. Q1 of 2001 includes charges for cumulative effect of changes in accounting principle as described in Note 12. 3. Q2 of 2001 includes restructuring charges as described in Note 3. 4. 2001 & 2000 include merger and integration charges as described in Note 3. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required to be shown for Item 10, Directors and Executive Officers of the Registrant, is incorporated by reference, with the exception of the Compensation Committee Report and Performance Graph, from the Proxy Statement of the registrant's parent company, Vectren Corporation. That report was prepared and filed electronically with the Securities and Exchange Commission on March 15, 2002, and is attached to this filing as Exhibit 99.1. Directors Niel C. Ellerbrook, age 53, has been a director of SIGECO since March 2000. Mr. Ellerbrook has been a director of Indiana Energy or Vectren since 1991. Mr. Ellerbrook has served as Chairman of the Board and Chief Executive Officer of the Company since June 2001 and Vectren since March 2000. Mr. Ellerbrook served as President and Chief Executive Officer of Indiana Energy from June 1999 to March 2000. Mr. Ellerbrook served as President and Chief Operating Officer of Indiana Energy from October 1997 to March 2000. From January through October 1997, Mr. Ellerbrook served as Executive Vice President, Treasurer, and Chief Financial Officer of Indiana Energy; and from 1986 to January 1997 as Vice President, Treasurer, and Chief Financial Officer of Indiana Energy. Mr. Ellerbrook is a director of Vectren Utility Holdings, Inc. and Indiana Gas Company, Inc. He is also a director of Fifth Third Bank, Indiana, and Deaconess Hospital of Evansville, Indiana. Andrew E. Goebel, age 54, has been a director of SIGECO since 1984. Mr. Goebel has been a director of SIGCORP or Vectren since 1997. Mr. Goebel is President of the Company, having served in that capacity since June 2001. Mr. Goebel is President and Chief Operating Officer of Vectren, having served in that capacity since March 2000. Mr. Goebel was President and Chief Operating Officer of SIGCORP from April 1999 to March 2000. From September 1997 through April 1999, Mr. Goebel served as Executive Vice President of SIGCORP; and from 1996 to September 1997, he served as Secretary and Treasurer of SIGCORP. Mr. Goebel is a director of Vectren Utility Holdings, Inc. and Indiana Gas Company, Inc. Mr. Goebel is also a director of Old National Bancorp and Old National Bank. Jerome A. Benkert, Jr., age 43, has been a director of the Company since June 2001. Mr. Benkert has served as Executive Vice President and Chief Financial Officer of the Company and Vectren since March 2000 and as Treasurer of the Company and Vectren since October 2001. He was Executive Vice President and Chief Operating Officer of Indiana Energy's administrative services company from October 1997 to March 2000. Mr. Benkert has served as Controller and Vice President of Indiana Gas. Mr. Benkert is a director of Vectren Utility Holdings, Inc. and Indiana Gas Company, Inc. Ronald E. Christian, age 43, has served as a director since June 2001. Mr. Christian has also served as Senior Vice President, General Counsel, and Secretary of the Company and Vectren since March 2000. Mr. Christian served as Vice President and General Counsel of Indiana Energy from July 1999 to March 2000. From June 1998 to July 1999, Mr. Christian was the Vice President, General Counsel and Secretary of Michigan Gas Company in Detroit, Michigan. He served as the General Counsel and Secretary of Indiana Energy, Indiana Gas and Indiana Energy Investments, Inc. from 1993 to June 1998. Mr. Christian is a director of Vectren Utility Holdings, Inc. and Indiana Gas Company, Inc. William S. Doty, age 51, has served as a director since June 2001. Mr. Doty has also served as Senior Vice President-Energy Delivery of the Company since April 2001. Mr. Doty served as Senior Vice President of Customer Relationship Management from January 2001 to April 2001. From January 1999 to January 2001, Mr. Doty was Vice President of Energy Delivery for the Company and previous to January 1999, he was Director of Gas Operations. Mr. Doty is a director of Vectren Utility Holdings, Inc. M. Susan Hardwick, age 39, has served as a director since June 2001 and has served as Vice President and Controller of the Company and Vectren since March 2000. Ms. Hardwick served as Assistant Controller of Indiana Energy from January 2000 to March 2000. Prior to joining the Company, she served in various capacities, including Assistant Controller, of Cinergy Corp. from October 1992. Other Executive Officer Richard G. Lynch, age 50, has served as Senior Vice President-Human Resources and Administration of the Company and Vectren since March 2000. Mr. Lynch was Vice President of Human Resources for SIGCORP from March 1999 to March 2000. Prior to joining the Company, Mr. Lynch was the Director of Human Resources for the Mead Johnson Division of Bristol Myers-Squibb in Evansville, Indiana. ITEM 11. EXECUTIVE COMPENSATION Certain information required to be shown for Item 11, Executive Compensation, is incorporated by reference, with the exception of the Compensation Committee Report and Performance Graph, from the Proxy Statement of the registrant's parent company, Vectren Corporation. That report was prepared and filed electronically with the Securities and Exchange Commission on March 15, 2002, and is attached to this filing as Exhibit 99.1. The compensation of Niel C. Ellerbrook, Andrew E. Goebel, Jerome A Benkert, Jr., and Ronald E. Christian is included in Exhibit 99.1 attached to this filing. In addition to these named executive officers, the compensation of William S. Doty and J. Gordon Hurst is presented below. Mr. Hurst served a President of SIGECO until his retirement in June 2001. The compensation presented below and the compensation included in Exhibit 99.1 represents each executive's Vectren-wide compensation, not just the portion allocated to SIGECO. The tables include a Summary Compensation Table (Table I), a Summary of Option Grants in Last Fiscal year (Table II), a table showing Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values (Table III) and a table showing the Long-Term Incentive Plan Awards in Last Fiscal Year (Table IV).
TABLE I SUMMARY COMPENSATION TABLE (a) (b) (c) (d) (e) (g) (h) (i) ------------------------------------------------------------- Annual Compensation Long-term Compensation Payouts Other Options Other Compen- (# LTIP Compen- Name and Principal Bonus sation shares) Payouts sation Position at VUHI Year Salary ($) ($) (1) ($) (2) (3) ($) (4) ($) (5) ---------------- ---- --------- ------ ------- ------ ------ ------- William S. Doty 2001 174,608 10,500 5,709 22,000 - 12,836 Senior Vice President - 2000 141,464 96,125 1,413 - - 18,079 Energy Delivery 1999 117,528 15,900 - 5,224 - 10,700 J. Gordon Hurst 2001 239,227 - 8,042 - - 139,037 President (Retired 2000 259,118 250,089 3,148 - - 12,333 June 2001) 1999 217,048 62,500 - 33,390 - 8,762
Earnings are shown on a calendar year basis. (1) The amounts shown in this column for 2001 are payments under Vectren's At-Risk Compensation Plan, which is discussed in Part B relating to "Annual Incentive Compensation," and Part C of the Compensation Committee Report, in Exhibit 99.1 The amounts shown for 2000 are payments under the SIGCORP Corporate Performance Plan. The amounts paid in 1999 are attributable to SIGCORP's performance in the previous year. The amounts shown for 2001 are attributable to Vectren's At-Risk Compensation Plan for the performance period of January 1 to December 31, 2001. Included in year 2000 of the table are payments attributable to Vectren's Executive Annual Incentive Plan for the performance period of April 1 to December 1, 2000 (Mr. Doty, $64,000; Mr. Hurst, $151,000). As of the time of the preparation of Vectren's proxy statement for last year's meeting, these payments were not yet calculable and were not determined by the Compensation Committee until after the finalization and mailing of the proxy statement. At the close of the merger of Indiana Energy and SIGCORP into the Company on March 31, 2000, the existing annual incentive programs of the two companies were terminated and a "stub year" payout was made based on the portion of the performance cycle that had passed. For the SIGCORP Performance Plan, a prorated payout for three months, January 1, 2000 to March 31, 2000 was made. For Mr. Doty, this stub year bonus was $6,250, and for Mr. Hurst, was $19,688. Also included in 2000 (for Mr. Doty, $25,875 and for Mr. Hurst $79,401) is the payment attributable to SIGCORP's performance for the period January 1 to December 31, 1999. (2) The amounts shown in this column are dividends paid on restricted shares issued under the Vectren Corporation Executive Restricted Stock Plan (formerly the Indiana Energy Executive Restricted Stock Plan), which was adopted by Vectren on March 31, 2000. No restricted shares were issued to executives in 2001. Mr. Doty and Mr. Hurst did not participate in the Stock Plan prior to March 31, 2000. (3) For 1999, the options shown in this column were restated to reflect the conversion ratio of 1.333 described in the Section titled "Voting Securities" in Exhibit 99.1. The options shown for year 2001 were issued under Vectren's At-Risk Compensation Plan. For further information, see the discussion above in Part B relating to "Long-term Incentive Compensation," and Part C of the Compensation Committee Report in Exhibit 99.1. (4) The amounts shown in this column represent the value of shares issued under the Vectren Corporation Restricted Stock Plan and for which restrictions were lifted in each year. At the time of the merger, Indiana Energy executives had restricted stock performance grants relating to open performance measurement periods. (Under normal circumstances, at the close of each performance cycle, Indiana Energy's Total Shareholder Return would have been compared to a peer group and the number of restricted shares granted would have been adjusted in accordance with the plan.) The Board concluded that it would be difficult, if not inappropriate, to use Vectren's performance to make adjustments to the prior grants. Based upon the frequency of past performance grants, the Board awarded 75% of the present value of the potential performance grants. Mr. Doty and Mr. Hurst did not participate in the plan prior to March 31, 2000. (5) The amount shown in this column represents several compensation elements. This column contains payment made in 2001 to Mr. Hurst under the terms of a retirement agreement in which Vectren agreed to make the following severance payments to him: 2001 -- $116,746; 2002 -- $1,067,316; 2003 -- $584,752; 2004 -- $526,817. For Mr. Doty and Mr. Hurst, this column also contains income related to reimbursement for club dues and other executive benefits (Mr. Doty: 2001 -- $5,680, 2000 -- $2,520, 1999 -- $1,050; Mr. Hurst: 2001 -- $2,230, 2000 -- $1,074, 1999 -- $1,190), imputed earnings from automobile usage (Mr. Doty: 2000 -- $1,167, 1999 -- $4,850; Mr. Hurst: 2000 -- $621, 1999 -- $2,772), company contributions to the retirement savings plan (Mr. Doty: 2001 -- $5,100 2000 -- $5,100, 1999 -- $4,800; Mr. Hurst: 2001 -- $3,043, 2000 -- $5,100, 1999 -- $4,800), deferred compensation contributions to restore contributions to the company Retirement Savings Plan (Mr. Doty: 2001 -- $2,056, 2000 -- $900), and contributions to the non qualified retirement plan (Mr. Hurst: 2001 -- $17,018). At the close of the merger, officers coming from SIGCORP were no longer furnished with company automobiles (Indiana Energy executives were not furnished with company automobiles). As a result of the termination of this perquisite, officers with company cars were given a one-time automobile buyout of (Mr. Doty -- $8,392; Mr. Hurst -- $5,538) in 2000.
TABLE II OPTION GRANTS IN LAST FISCAL YEAR Number of % of Total Shares Options Underlying Granted to Exercise or Options/ SARs Employees in Base Price Expiration Grant Date Name Granted Fiscal Year (Per Share)($) Date Present Value --------- ------------- ------------ -------------- ---------- ------------- (#) (1) ($) (2) W.S. Doty 22,000/0 2.8 22.54 5/1/2011 121,440 J.G. Hurst 0/0 0 0 N/A 0
(1) In 2001 a total of 783,999 options were awarded to all plan participants under the Vectren Corporation At-Risk Compensation Plan. Stock options are exercisable in whole or in part from the date of the grant for a period of ten years. This grant has a vesting schedule pursuant to which 20 percent vests each year for the first five years. (2) The assumptions used for the Model are as follows: Volatility -- 25.79 percent based on monthly stock prices for the period of March 1, 1998 to February 28, 2001; Risk-free rate of return -- 5.75 percent; Dividend Yield -- 4.30 percent over the period of March 1, 1998 to February 28, 2001; and, a ten-year exercise term. Discount of .9159 applied to reflect 5-year graduated vesting schedule. (Per binomial model as certified by an independent consultant.)
TABLE III AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES FROM 1/1/2001 TO 12/31/2001 Underlying Shares Unexercised Number of Securities Value of Unexercised Acquired On Value Underlying Unexercised In-the-Money Name Exercise(#) Realized($) Options at Year-End (#) Options as of 12/31/01 ($) ---- ------------ ----------- ----------------------- -------------------------- Exercisable Unexercisable Exercisable Unexercisable W.S. Doty 1,000 8,044 23,488 22,000 130,797 31,680 J.G. Hurst 31,792 192,797 56,626 - 374,482 -
TABLE IV LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR Estimated Future Payouts Under Non-Stock Price-Based Plans --------------------------------- (a) (b) (c) (d) (e) (f) Performance Number of or Other Shares; Periods Until Threshold Target Maximum Units or Maturation Number of Number Number of Other Rights(1) or Payout Shares of Shares Shares -------------- ------------- --------- --------- --------- W.S. Doty 0 0 0 0 0 J.G. Hurst 0 0 0 0 0
(1) No restricted shares were awarded to Executives during fiscal year 2001 under the Vectren Corporation Restricted Stock Plan or the Vectren's At-Risk Compensation Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners As of December 31, 2001, the following stockholder was known to the management to be the beneficial owner of more than five percent of the outstanding shares of any class of voting securities as set forth below. Amount and Nature of Name and Address of Beneficial Percent Title of Class Beneficial Owner Ownership of Class -------------- ------------------------- ----------------- -------- Common Stock Vectren Utility Holdings, Inc. 15,754,826 Shares 100% 20 N.W. Fourth Street Registered Owner Evansville, IN 47708 Security ownership of management The following table sets forth the beneficial ownership, as of December 31, 2001, of Vectren common stock, by each director and executive officer named in Item 11 Executive Compensation. Also shown is the total ownership for such persons as a group. Except as otherwise indicated, each individual has sole voting and investment power with respect to the shares listed below. Shares Owned Name of Beneficial Owner Beneficially (1) ------------------------ ---------------- Niel C. Ellerbrook 118,038 (2) (3) (4) (5) Andrew E. Goebel 188,518 (2) (3) (4) (5) Jerome A. Benkert, Jr. 25,787 (2) (4) (5) Ronald E. Christian 26,687 (2) (4) (5) M. Susan Hardwick 7,749 (2) (4) (5) J. Gordon Hurst 62,858 (2) (3) (4) (5) William S. Doty 34,431 (2) (4) (5) All Directors and Executive Officers as a Group (7 Persons): 464,068 (1) (1) No individual director, executive officer, or directors and executive officers as a group owned beneficially as of December 31, 2001, more than 1 percent of Vectren's common stock. (2) Does not include derivative securities held under Vectren's Non-Qualified Deferred Compensation Plan. These derivative securities are in the form of phantom stock units which are valued as if they were Vectren common stock, but will be distributed in cash (not Vectren common stock) when paid. The amounts shown for the following individuals include the following amounts of phantom units: Name of Individuals or Identity of Group Phantom Stock Units ---------------------------------------- ------------------- Niel C. Ellerbrook 50,854 Andrew E. Goebel 10,019 Jerome A. Benkert, Jr. 15,525 Ronald E. Christian 25,987 M. Susan Hardwick 12 J. Gordon Hurst 1,055 William S. Doty 457 All Directors and Executive Officers as a Group (7 Persons) 103,909 (3) Includes shares held by spouse or jointly with spouse. (4) Includes shares granted to executives under the Company's Executive Restricted Stock Plan, which are subject to certain transferability restrictions and forfeiture provisions. (5) Includes shares which the named individual has the right to acquire as of December 31, 2001, or within sixty (60) days thereafter, under the Vectren Stock Option Plan (formerly the SIGCORP, Inc. Stock Option Plan) or Vectren's At-Risk Compensation Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Vectren and Vectren affiliates Refer to Notes 4 and 5 in the Company's financial statements included in Part II Item 8 Financial Statements and Supplementary Data for transactions with other Vectren companies and Vectren affiliates. Transactions with directors and officers Andrew E. Goebel is a director and President of the Company and a director and President and Chief Operating Officer of Vectren. During 2000 and 2001, Hasgoe Cleaning Systems, a cleaning company owned by Mr. Goebel's brother, performed certain cleaning services for the Company and is expected to perform such services in 2002. During 2001 and 2000, the cost of such serves was $140,023 and $170,588, respectively, which the Company believes to be a fair and reasonable price for the services rendered. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List Of Documents Filed As Part Of This Report (1) Financial Statements The financial statements and related notes, together with the report of Arthur Andersen LLP, appear in Part II Item 8 Financial Statements and Supplementary Data of this Form 10-K. (2) Financial Statement Schedules PAGE IN FORM 10-K ----------------- For the years ended December 31, 2001, 2000, and 1999: Schedule II -- Valuation and Qualifying Accounts 57 All other schedules are omitted as the required information is inapplicable or the information is presented in the Financial Statements or related notes. (3) List of Exhibits The Company has incorporated by reference herein certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act. Exhibits for the Company are listed in the Index to Exhibits beginning on page 59. Exhibits for the Company attached to this filing are listed on page 64 (b) Reports On Form 8-K During The Last Calendar Quarter On October 19, 2001, the Company filed a Current Report on Form 8-K with respect to an Underwriting Agreement, Indenture and First Supplemental Indenture that were issued by the Company's parent corporation, Vectren Utility Holdings, Inc. Item 5. Other Events Item 7. Exhibits 1.0 -Press Release - Underwriting Agreement, dated October 12, 2001, between Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. 4.1 -Indenture, dated October 19, 2001, between Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc. and U.S. Bank Trust National Association. 4.2 -First Supplemental Indenture, dated October 19, 2001, between Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc. and U.S. Bank Trust National Association. On October 24, 2001, Vectren Corporation filed a Current Report on Form 8-K with respect to the release of financial information to the investment community regarding the Company's results of operations, financial position and cash flows for the three, nine, and twelve month periods ended September 30, 2001. The financial information was released to the public through this filing. Item 5. Other Events Item 7. Exhibits 99.1 - Press Release - Third Quarter 2001 Vectren Corporation Earnings 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
SCHEDULE II Southern Indiana Gas and Electric Company VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Column A Column B Column C Column D Column E ----------------------------------------------------------------------------------------------- Additions ----------------- Balance at Charged Charged Deductions Balance at Beginning to to Other from End of Description Of Year Expenses Accounts Reserves, Net Year ----------------------------------------------------------------------------------------------- (In thousands) VALUATION AND QUALIFYING ACCOUNTS: Year 2001 - Accumulated provision for uncollectible accounts $ 2,639 $ 2,387 $ - $ 1,785 $ 3,241 Year 2000 - Accumulated provision for uncollectible accounts $ 2,138 $ 1,189 $ - $ 688 $ 2,639 Year 1999 - Accumulated provision for uncollectible accounts $ 2,156 $ 604 $ - $ 622 $ 2,138 OTHER RESERVES: Year 2001 - Reserve for merger and integration charges $ 526 $ - $ - $ 526 $ - Year 2000 - Reserve for merger and integration charges $ - $ 7,400 $ - $ 6,874 $ 526 Year 2001 - Reserve for restructuring costs $ - $ 3,321 $ - $ 3,141 $ 180 Year 2001 - Reserve for injuries and damages $ 1,024 $ 240 $ - $ 764 $ 500 Year 2000 - Reserve for injuries and damages $ 1,047 $ 351 $ - $ 374 $ 1,024 Year 1999 - Reserve for injuries and damages $ 782 $ 661 $ - $ 396 $ 1,047
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. SOUTHERN INDIANA GAS AND ELETRIC COMPANY Dated March 28, 2002 /S/ Niel C. Ellerbrook ------------------------------- Niel C. Ellerbrook, Chairman and Chief Executive Officer, Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in capacities and on the dates indicated. Signature Title Date /S/ Niel C. Ellerbrook Chairman & Chief Executive March 28, 2002 ---------------------------- Officer, Director (Principal -------------- Niel C. Ellerbrook Executive Officer) /S/ Jerome A. Benkert, Jr. Executive Vice President, March 28, 2002 ---------------------------- Chief Financial Officer, & -------------- Jerome A. Benkert, Jr. Treasurer, Director (Principal Financial Officer) /S/ M. Susan Hardwick Vice President & Controller, March 28, 2002 ---------------------------- Director (Principal Accounting -------------- M. Susan Hardwick Officer) /S/ Andrew E. Goebel Director March 28, 2002 ---------------------------- -------------- Andrew E. Goebel /S/ Ronald E. Christian Director March 28, 2002 ---------------------------- -------------- Ronald E. Christian /S/ William S. Doty Director March 28, 2002 ---------------------------- -------------- William S. Doty INDEX TO EXHIBITS 2. Plan Of Acquisition, Reorganization, Arrangement, Liquidation Or Succession Not applicable. 3. Articles Of Incorporation And By-Laws 3.1 Amended Articles of Incorporation as amended March 26, 1985. (Filed and designated in Form 10-K, for the fiscal year 1985, File No. 1-3553, as Exhibit 3-A.) Articles of Amendment of the Amended Articles of Incorporation, dated March 24, 1987. (Filed and designated in Form 10-K for the fiscal year 1987, File No. 1-3553, as Exhibit 3-A.) Articles of Amendment of the Amended Articles of Incorporation, dated November 27, 1992. (Filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 3-A). 3.2 By-Laws as amended through December 18, 1990. (Filed in Form 10-K for the fiscal year 1990, File No. 1-3553, as Exhibit 3-B.) By-Laws as amended through September 22, 1993. (Filed and designated in Form 10-K for the fiscal year 1993, File No. 1-3553, as EX-3 (b).) By-Laws as amended through January 1, 1995. (Filed and designated in Form 10-K for the fiscal year 1995, File No. 1-3553, as EX-3(b).) 4. Instruments Defining The Rights Of Security Holders, Including Indentures 4.1 Mortgage and Deed of Trust dated as of April 1, 1932 between Southern Indiana Gas and Electric Company and Bankers Trust Company, as Trustee, and Supplemental Indentures thereto dated August 31, 1936, October 1, 1937, March 22, 1939, July 1, 1948, June 1, 1949, October 1, 1949, January 1, 1951, April 1, 1954, March 1, 1957, October 1, 1965, September 1, 1966, August 1, 1968, May 1, 1970, August 1, 1971, April 1, 1972, October 1, 1973, April 1, 1975, January 15, 1977, April 1, 1978, June 4, 1981, January 20, 1983, November 1, 1983, March 1, 1984, June 1, 1984, November 1, 1984, July 1, 1985, November 1, 1985, June 1, 1986. (Filed and designated in Registration No. 2-2536 as Exhibits B-1 and B-2; in Post-effective Amendment No. 1 to Registration No. 2-62032 as Exhibit (b)(4)(ii), in Registration No. 2-88923 as Exhibit 4(b)(2), in Form 8-K, File No. 1-3553, dated June 1, 1984 as Exhibit (4), File No. 1-3553, dated March 24, 1986 as Exhibit 4-A, in Form 8-K, File No. 1-3553, dated June 3, 1986 as Exhibit (4).) July 1, 1985 and November 1, 1985 (Filed and designated in Form 10-K, for the fiscal year 1985, File No. 1-3553, as Exhibit 4-A.) November 15, 1986 and January 15, 1987. (Filed and designated in Form 10-K, for the fiscal year 1986, File No. 1-3553, as Exhibit 4-A.) December 15, 1987. (Filed and designated in Form 10-K, for the fiscal year 1987, File No. 1-3553, as Exhibit 4-A.) December 13, 1990. (Filed and designated in Form 10-K, for the fiscal year 1990, File No. 1-3553, as Exhibit 4-A.) April 1, 1993. (Filed and designated in Form 8-K, dated April 13, 1993, File No. 1-3553, as Exhibit 4.) June 1, 1993 (Filed and designated in Form 8-K, dated June 14, 1993, File No. 1-3553, as Exhibit 4.) May 1, 1993. (Filed and designated in Form 10-K, for the fiscal year 1993, File No. 1-3553, as Exhibit 4(a).) July 1, 1999. (Filed and designated in Form 10-Q, dated August 16, 1999, File No. 1-3553, as Exhibit 4(a).) March 1, 2000. (Filed and designated in Form 10-K for the year ended December 31, 2001, File No. 1-15467, as Exhibit 4.1.) 4.2 $350.0 million Credit Agreement arranged by Banc One Capital Markets, Inc. dated as of June 28, 2001 among Vectren Utility Holdings, Inc., as borrower; Indiana Gas Company, Inc. as guarantor; Southern Indiana Gas and Electric Company, as guarantor; Vectren Energy Delivery of Ohio, Inc., as guarantor; and Lenders: Banc One, NA, as Agent; Firstar Bank, N.A., as Co-Syndication Agent; ABN AMRO Bank, N.V., as Co-Syndication Agent; The Bank of New York, as Co-Documentation Agent; The Industrial Bank of Japan, Limited, as Co-Documentation Agent; the Fuji Bank, Limited, as Co-Documentation Agent; and National City Bank of Indiana, as Co-Agent. (Filed and designated on Form 10-K for the year ended December 31, 2001, File No. 1-16739, as Exhibit 4.8.) 4.3 Indenture dated October 19, 2001, between Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed and designated in Form 8-K, dated October 19, 2001, File No. 1-16739, as Exhibit 4.1); First Supplemental Indenture, dated October 19, 2001, between Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed and designated in Form 8-K, dated October 19, 2001, File No. 1-16739, as Exhibit 4.2); Second Supplemental Indenture, between Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed and designated in Form 8-K, dated November 29, 2001, File No. 1-16739, as Exhibit 4.1). 4.4 Promissory Note for Long-Term Loans dated November 30, 2001, between Southern Indiana Gas and Electric Company and Vectren Utility Holdings, Inc. (Filed herewith.) 9. Voting Trust Agreement Not applicable. 10. Material Contracts 10.1 Agreement, dated, January 30, 1968, for Unit No. 4 at the Warrick Power Plant of Alcoa Generating Corporation ("Alcoa"), between Alcoa and Southern Indiana Gas and Electric Company. (Filed and designated in Registration No. 2-29653 as Exhibit 4(d)-A.) 10.2 Letter of Agreement, dated June 1, 1971, and Letter Agreement, dated June 26, 1969, between Alcoa and Southern Indiana Gas and Electric Company. (Filed and designated in Registration No. 2-41209 as Exhibit 4(e)-2.) 10.3 Letter Agreement, dated April 9, 1973, and Agreement dated April 30, 1973, between Alcoa and Southern Indiana Gas and Electric Company. (Filed and designated in Registration No. 2-53005 as Exhibit 4(e)-4.) 10.4 Electric Power Agreement (the "Power Agreement"), dated May 28, 1971, between Alcoa and Southern Indiana Gas and Electric Company. (Filed and designated in Registration No. 2-41209 as Exhibit 4(e)-1.) 10.5 Second Supplement, dated as of July 10, 1975, to the Power Agreement and Letter Agreement dated April 30, 1973 - First Supplement. (Filed and designated in Form 10-K for the fiscal year 1975, File No. 1-3553, as Exhibit 1(e).) 10.6 Third Supplement, dated as of May 26, 1978, to the Power Agreement. (Filed and designated in Form 10-K for the fiscal year 1978 as Exhibit A-1.) 10.7 Letter Agreement dated August 22, 1978 between Southern Indiana Gas and Electric Company and Alcoa, which amends Agreement for Sale in an Emergency of Electrical Power and Energy Generation by Alcoa and Southern Indiana Gas and Electric Company dated June 26, 1979. (Filed and designated in Form 10-K for the fiscal year 1978, File No. 1-3553, as Exhibit A-2.) 10.8 Fifth Supplement, dated as of December 13, 1978, to the Power Agreement. (Filed and designated in Form 10-K for the fiscal year 1979, File No. 1-3553, as Exhibit A-3.) 10.9 Sixth Supplement, dated as of July 1, 1979, to the Power Agreement. (Filed and designated in Form 10-K for the fiscal year 1979, File No. 1-3553, as Exhibit A-5.) 10.10 Seventh Supplement, dated as of October 1, 1979, to the Power Agreement. (Filed and designated in Form 10-K for the fiscal year 1979, File No. 1-3553, as Exhibit A-6.) 10.11 Eighth Supplement, dated as of June 1, 1980 to the Electric Power Agreement, dated May 28, 1971, between Alcoa and Southern Indiana Gas and Electric Company. (Filed and designated in Form 10-K for the fiscal year 1980, File No. 1-3553, as Exhibit (20)-1.) 10.12 Amendment Agreement, dated March 3, 2001, between Alcoa Power Generating Inc. and Southern Indiana Gas and Electric Company. (Filed and designated in Form 10-K for the year ended December 31, 2001, File No. 1-15467, as Exhibit 10.12.) 10.13 Summary description of Southern Indiana Gas and Electric Company's nonqualified Supplemental Retirement Plan (Filed and designated in Form 10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-17.) 10.14 Southern Indiana Gas and Electric Company 1994 Stock Option Plan (Filed and designated in Southern Indiana Gas and Electric Company's Proxy Statement dated February 22, 1994, File No. 1-3553, as Exhibit A.) 10.15 Southern Indiana Gas and Electric Company's nonqualified Supplemental Retirement Plan as amended, effective April 16, 1997. (Filed and designated in Form 10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.29.) 10.16 Vectren Corporation Retirement Savings Plan. (Filed and designated in Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15467, as Exhibit 99.1.) 10.17 Vectren Corporation Combined Non-Bargaining Retirement Plan. (Filed and designated in Form 10-Q for the quarterly period ended September 30, 2000, File No. 1-15467, as Exhibit 99.2.) 10.18 Vectren Corporation Non-Qualified Deferred Compensation Plan, as amended and restated effective January 1, 2001. (Filed and designated in Form 10-K for the year ended December 31, 2001, File No. 1-15467, as Exhibit 10.32.) 10.18 Vectren Corporation Employment Agreement between Vectren Corporation and Niel C. Ellerbrook dated as of March 31, 2000. (Filed and designated in Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as Exhibit 99.1.) 10.19 Vectren Corporation Employment Agreement between Vectren Corporation and Andrew E. Goebel dated as of March 31, 2000(Filed and designated in Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as Exhibit 99.2.) 10.20 Vectren Corporation Employment Agreement between Vectren Corporation and Jerome A. Benkert, Jr. dated as of March 31, 2000. (Filed and designated in Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as Exhibit 99.3.) 10.21 Vectren Corporation Employment Agreement between Vectren Corporation and Ronald E. Christian dated as of March 31, 2000. (Filed and designated in Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as Exhibit 99.5.) 10.22 Vectren Corporation Employment Agreement between Vectren Corporation and Timothy M. Hewitt dated as of March 31, 2000. (Filed and designated in Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as Exhibit 99.6.) 10.23 Vectren Corporation Retirement Agreement between Vectren Corporation and Timothy M. Hewitt dated as of May 31, 2001. (Filed and designated in Form 10-K for the year ended December 31, 2001, File No. 1-15467, as Exhibit 10.39.) 10.24 Vectren Corporation Employment Agreement between Vectren Corporation and J. Gordon Hurst dated as of March 31, 2000. (Filed and designated in Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as Exhibit 99.7.) 10.25 Vectren Corporation Retirement Agreement between Vectren Corporation and J. Gordon Hurst dated as of May 31, 2001. (Filed and designated in Form 10-K for the year ended December 31, 2001, File No. 1-15467, as Exhibit 10.41.) 10.26 Vectren Corporation Employment Agreement between Vectren Corporation and Richard G. Lynch dated as of March 31, 2000. (Filed and designated in Form 10-Q for the quarterly period ended June 30, 2000, File No. 1-15467, as Exhibit 99.8.) 10.27 Vectren Corporation Employment Agreement between Vectren Corporation and William S. Doty dated as of April 30, 2001. (Filed and designated in Form 10-K for the year ended December 31, 2001, File No. 1-15467, as Exhibit 10.43.) 10.28 Vectren Corporation Retirement Agreement between Vectren Corporation and Tom J. Zabor dated as of May 31, 2001. (Filed and designated in Form 10-K for the year ended December 31, 2001, File No. 1-15467, as Exhibit 10.44.) 11. Statement Re Computation Of Per Share Earnings Not applicable. 12. Statements Re Computation Of Ratios Not applicable. 13. Annual Report To Security Holders, Form 10-Q Or Quarterly Report To Security Holders Not applicable. 16. Letter Re Change In Certifying Accountant Not applicable. 18. Letter Re Change In Accounting Principles Not applicable. 21. Subsidiaries Of The Company Not applicable. 22. Published Report Regarding Matters Submitted To Vote Of Security Holders Not applicable. 23. Consents Of Experts And Counsel Not applicable. 24. Power Of Attorney Not applicable. 99. Additional Exhibits 99.1 Vectren Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, but not including the Compensation Committee Report and Performance Graph. (Filed herewith.) 99.2 Agreement and Plan of Merger dated as of June 11,1999 among Indiana Energy, Inc., SIGCORP, Inc. and Vectren Corporation (the "Merger Agreement "). (Filed and designated in Form S-4 to (No. 333-90763) filed on November 12, 1999, File No. 1-15467, as Exhibit 2.) 99.3 Amendment No.1 to the Merger Agreement dated December 14,1999 (Filed and designated in Current Report on Form 8-K filed December 16, 1999, File No. 1-09091, as Exhibit 2.) 99.4 Amended and Restated Articles of Incorporation of Vectren Corporation effective March 31,2000. (Filed and designated in Current Report on Form 8-K filed April 14, 2000, File No. 1-15467, as Exhibit 4.1.) 99.5 Current Report on Form 8-K, regarding replacement of the Company's independent auditors, dated March 22, 2002 (Filed herewith.) 99.6 Letter regarding audit quality representation of Arthur Andersen LLP (Filed herewith.) Southern Indiana Gas and Electric Company 2001 Form 10-K Attached Exhibits The following Exhibits are attached hereto. See page 59 of this Annual Report on Form 10-K for a complete list of exhibits. Exhibit Number Document 4.4 Promissory Note for Long-Term Loans dated November 30, 2001, between Southern Indiana Gas and Electric Company and Vectren Utility Holdings, Inc. 99.1 Vectren Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, but not including the Compensation Committee Report and Performance Graph. 99.5 Current Report on Form 8-K, regarding the replacement of the Company's independent auditors, dated March 22, 2002. 99.6 Letter regarding audit quality representation of Arthur Andersen LLP