SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported)
July 10, 2000
VECTREN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Indiana 1-15467 35-2086905
(State of (Commission File (I.R.S. Employer
Incorporation) Number) Identification No.)
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20 N.W. Fourth Street
Evansville, Indiana 47741
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(812) 465-5300
N/A
(Former name or address, if changed since last report.)
<PAGE> 2
INTRODUCTION
Vectren Corporation (Vectren) is an Indiana corporation organized on
June 10, 1999 solely for the purpose of effecting the merger of
Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP)
with and into Vectren. On March 31, 2000, the merger of Indiana
Energy and SIGCORP with and into Vectren was completed. The merger
was a tax-free exchange of stock and was accounted for as a pooling
of interests. Each outstanding common share, no par value, of
Indiana Energy was converted into one share of the common stock, no
par value, of Vectren and each outstanding common share of SIGCORP
was converted into 1.333 common shares of Vectren.
On May 31, 2000, Vectren filed a Current Report on Form 8-K
reporting thirty days of unaudited financial results for the period
ended April 30, 2000. Vectren has met the requirements of reporting
a minimum of one day of post-merger activity to the Securities and
Exchange Commission, and with this Form 8-K, is filing historical
consolidated financial statements, notes to the consolidated
financial statements and management's discussion and analysis of
results of operations and financial condition for each of the three
years in the period ending December 31, 1999 and selected financial
data for each of the five years in the period ending December 31,
1999.
The accompanying consolidated financial statements of Vectren
reflect the company on a historical basis as restated for the
effects of the pooling-of-interests transaction completed on March
31, 2000 between Indiana Energy and SIGCORP.
Item 5. Other Items Page
Selected Financial Data 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
Management's Responsibility for Financial
Statements 19
Report of Independent Public Accountants 20
Consolidated Financial Statements of Vectren
Corporation and Subsidiary Companies 21
Consent of Independent Public Accountants 51
Signatures 52
<PAGE> 3
Selected Financial Data
The following table sets forth selected financial data with respect
to Vectren Corporation, which has been restated for the effect of
the pooling-of-interests transaction, and should be read in
conjunction with the Consolidated Financial Statements.
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<CAPTION>
Year Ended December 31
(in thousands except per
share amounts) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating
revenue $1,068,417 $ 997,706 $ 972,081 $ 965,335 $ 805,828
Operating
income 160,772 148,537 124,556 160,146 126,650
Net income before
cumulative effect of
accounting
change 90,748 86,600 67,714 83,657 79,700
Net income 90,748 86,600 67,714 83,657 85,994
Average common shares
outstanding 61,306 61,578 61,611 61,522 61,567
Diluted common shares
outstanding 61,430 61,756 61,614 61,575 61,595
Earnings per share on common stock
Before cumulative
effect of accounting
change 1.48 1.41 1.10 1.36 1.29
Cumulative effect
of accounting
change - - - - 0.11
Basic earnings
per share 1.48 1.41 1.10 1.36 1.40
Diluted earnings
per share 1.48 1.40 1.10 1.36 1.40
Dividends per share
on common stock 0.94 0.90 0.88 0.85 0.83
Total assets 1,980,467 1,798,840 1,758,634 1,719,547 1,673,310
Redeemable preferred
stock 8,192 8,308 8,424 8,424 8,424
Long-term
obligations 486,726 388,938 475,490 409,058 460,379
</TABLE>
<PAGE> 4
Management's Discussion and Analysis of Results of
Operations and Financial Condition
The Merger Transaction
Vectren is an Indiana corporation that was organized on June
10, 1999 solely for the purpose of effecting the merger
between Indiana Energy Inc. (Indiana Energy) and SIGCORP,
Inc. (SIGCORP) with and into Vectren and carrying on the
combined business of Indiana Energy and SIGCORP. On March
31, 2000 the merger of Indiana Energy with SIGCORP and into
Vectren was consummated with a tax-free exchange of shares
and has been accounted for as a pooling of interests. The
common shareholders of SIGCORP received one and one-third
shares of Vectren common stock for each SIGCORP common share
and Indiana Energy common shareholders received one share of
common stock for each Indiana Energy common share, resulting
in the issuance of 61.3 million shares of Vectren common
stock. The merger did not affect the preferred stock and
debt rights of Indiana Energy's and SIGCORP's utility
subsidiaries.
In the first quarter of 2000, Vectren reported a charge of
$27.2 million pre-tax, $19.3 million net of tax, for merger
costs associated with the transaction. Vectren expects to
realize net merger savings of nearly $200 million over ten
years from the elimination of duplicate corporate and
administrative programs and greater efficiencies in
operations, business processes and purchasing. These costs
relate primarily to transaction costs, severance and other
merger integration activities. The continued merger
integration activities, which will contribute to the merger
savings, will be substantially complete by 2001.
Vectren is a public utility holding company with two
operating public utilities, Indiana Gas and SIGECO. Indiana
Gas and its subsidiaries provide natural gas and
transportation services to a diversified base of customers
in 311 communities in 49 of Indiana's 92 counties. SIGECO
provides generation, transmission, distribution and the sale
of electric power and the distribution and sale of natural
gas to communities and counties in Southwestern Indiana.
Vectren is also involved in non-regulated activities through
its non-regulated subsidiaries: Vectren Energy Services,
Inc. Vectren Financial Group, Inc., Vectren Generation
Services, Inc., Vectren Resources, LLC, Vectren Utility
Services, Inc., Vectren Ventures, Inc., Vectren
Communications, Inc. and Vectren Capital Corporation. These
non-regulated activities provide energy, telecommunications,
and finance services throughout the Midwest.
The merger was conditioned, among other things, upon the
approvals of the shareholders of each company and customary
regulatory approvals. On December 17, 1999, the merger was
approved by the shareholders of each company. On December
20, 1999, the Federal Energy Regulatory Commission (FERC)
issued an order, approving the proposed merger. In approving
the merger, the FERC concluded that the merger was in the
public interest and would not adversely affect competition,
rates or regulation. On January 18, 2000, the Department of
Justice informed Indiana Energy and SIGCORP that it had
concluded its review of the Hart Scott Rodino notification
filings and would take no further action. On March 8, 2000,
approval was received from the Securities and Exchange
Commission (SEC) under the Public Utility Holding Company
Act to consummate the merger. The merger was completed on
March 31, 2000.
Indiana Gas Company, Inc. and Southern Indiana Gas and
Electric Company operate as separate subsidiaries of
Vectren.
Results of Operations
Vectren Corporation (Vectren) consolidated earnings are from
the operations of its gas distribution and electric utility
subsidiaries, Indiana Gas Company, Inc. (Indiana Gas) and
Southern Indiana Gas and Electric Company (SIGECO) and from
its non-utility operations and investments through Vectren's
non-regulated subsidiaries: Vectren Enterprises, Inc.,
Vectren Generation Services, Inc., Vectren Resources, LLC
and Vectren Capital Corporation.
<PAGE> 5
The non-regulated operations of Vectren Enterprises, Inc.
include the wholly owned subsidiaries of Vectren Energy
Services, Inc., Vectren Communications, Inc., Vectren
Utility Services, Inc., Vectren Financial Group, Inc. and
Vectren Ventures, Inc. Vectren Enterprises also has
ownership interests in ProLiance Energy, LLC; Air Quality
Services, LLC; Energy Systems Group, LLC; Reliant Services,
LLC; CIGMA, LLC; Haddington Energy Partners, LP; and Pace
Carbon Synfuels Investors, LP. Vectren Generation Services,
Inc. includes the wholly-owned subsidiaries of Southern
Indiana Minerals, Inc. and Vectren Fuels, Inc.
Earnings
Consolidated net income was $90.7 million for 1999, as
compared to the consolidated net income of $86.6 million and
$67.7 million for 1998 and 1997, respectively. Basic and
diluted earnings per share amounts were $1.48 for 1999, as
compared to earnings per share amounts of $1.41 ($1.40 on a
diluted basis) and $1.10 for 1998 and 1997, respectively.
The 1997 consolidated net income and consolidated earnings
per share amounts include the Indiana Gas restructuring
costs of $24.5 million after-tax.
Utility Margin (Operating Revenues less Cost of Fuel for
Electric Generation, Purchased Power and Cost of Gas)
Gas utility margin for the twelve-month period ending
December 31, 1999 was $233.1 million, as compared to $217.3
million for the prior year, and $241.6 million for the year
ending December 31, 1997. The 1999 increase is primarily
attributable to weather being 8 percent colder than the same
period in 1998 and the addition of new residential and
commercial customers. The decrease in margin in 1998 is
primarily the result of weather being 22 percent warmer than
the year ending December 31, 1997. Total gas system
throughput (combined sales and transportation) for the
combined gas utilities increased 8.6 percent (11,905 MDth)
for 1999, as compared to the prior year. In 1998,
throughput decreased 8.9 percent (12,408 MDth) compared to
1997. Vectren's gas utilities' rates for gas transportation
generally provide for the same margins as are earned on the
sale of gas under its applicable sales tariffs.
Approximately one-half of total gas system throughput
represents gas used for space heating and is affected by the
weather.
Total cost of gas sold was $266.4 million in 1999, $270.0
million in 1998 and $372.0 million in 1997. Lower average
per unit purchased gas costs incurred during 1999 as
compared to 1998 more than offset the impact of the
increased throughput, causing the slight decline in 1999
cost of gas sold. Fewer gas sales due to the significantly
milder temperatures during 1998 was the primary reason for a
27.4 percent ($102.0 million) decrease in cost of gas sold,
as compared to 1997.
Electric utility margin for the twelve-month period ending
December 31, 1999 was $220.5 million, as compared to $211.9
million for the prior year, and $195.9 million for the year
ending December 31, 1997.
Electric utility revenues rose 3.3 percent ($9.7 million)
during 1999, reflecting a 5.5 percent increase in sales to
retail and municipal customers following a 7.3 percent rise
in sales to such customers in 1998. Although sales to other
utilities and power marketers declined 16.6 percent in 1999,
several new sales contracts produced higher average unit
sales prices to these customers and related revenues were
down only 2.5 percent. Continued economic growth in
SIGECO's service area during 1999 more than offset the
impact of milder summer temperatures (21 percent milder than
1998 in terms of cooling degree-days) on weather-sensitive
sales, raising residential and commercial electric sales 3
percent and 5 percent, respectively. Industrial sales
reflected the strength of the area's growing industrial
base, increasing 7 percent compared to 1998. The decrease
in sales to other utilities and power marketers during the
current year also reflected the milder temperatures which
eased demand in the wholesale market, compared to the prior
year when temperatures were 18 percent warmer than normal
and market supply was constrained. Total electric sales
rose 1.2 percent compared to 1998, when electric sales were
24 percent greater than the 1997 period.
<PAGE> 6
Fuel for electric generation increased 1.7 percent ($1.1
million) in 1999, tracking a 1.9 percent increase in
electric generation. Per unit fuel costs were comparable to
the year-earlier period. A 5.5 percent rise in 1998
electric generation caused a 4.1 percent rise in total fuel
costs.
Although SIGECO's sales of electric energy to non-firm
wholesale customers are provided primarily from otherwise
unutilized capacity, SIGECO's purchases of electricity from
other utilities for resale to non-firm wholesale customers
typically represent the majority of SIGECO's total purchased
electric energy costs. During 1999, total purchases of
electric energy declined 13 percent due to the 17 percent
decline in sales to other utilities and power marketers,
however higher average market prices for energy purchased
resulted in total costs remaining comparable to prior year
costs. Purchased electric energy costs incurred in 1998
increased $6.8 million over 1997 costs due to a 39 percent
rise in purchases from other utilities for resale to non-
firm electric wholesale customers and higher market prices.
Non-utility Margin (Energy Services and Other Revenues
Less the Cost of Energy Services and Other)
Non-utility margin was $13.7 million, $10.1 million and $4.2
million for the years of 1999, 1998 and 1997, respectively.
The continued growth of Vectren's Energy Services
subsidiary, SIGCORP Energy Services (Energy), which markets
natural gas and related services, during its third full year
of operation contributed an additional $41.9 million to non-
utility revenues in 1999, following a $108.0 million
increase in Energy's revenues in 1998 which reflected both
substantial growth in sales and higher market prices for
natural gas sold to Energy's customers during 1998.
Vectren's Energy Systems Group (ESG), which designs and
installs energy-efficient equipment at commercial and
industrial customers' facilities, added $6.7 million and
$18.0 million to the increased non-utility revenues in 1999
and 1998, respectively. Also contributing to the increased
1998 non-utility margin was Vectren Communication's
subsidiary SIGCORP Communications Services' (Communications)
completion of several large projects by the end of 1998, the
first full year of operations for Communications.
During 1999, the cost of energy services and other, which
was chiefly the cost of natural gas purchased for resale by
Energy and project contract costs at Communications and ESG,
rose $45.1 million compared to 1998. The total cost of
energy services and other related expenses were up $120.7
million in 1998 compared to 1997 due to the significant
growth at Energy and higher market prices paid for natural
gas sold to their customers, project costs related to the
full-year operations of Communications and increased
contract costs at ESG.
Operating Expenses (excluding Cost of Fuel for Electric
Generation and Purchased Power,
Cost of Gas and Cost of Energy Services and Other)
Other operating expenses rose 4.3 percent ($7.8 million) for
1999 as compared to 1998. This increase reflects increases
in other general operating expenses at Vectren's utility
subsidiaries, including expenses associated with the new
customer information and work management systems and rental
expense related to buildings previously owned. Higher other
operating expenses were also experienced at Energy and
Communications due to the continuing growth in their
operations. Partially offsetting these 1999 increases were
decreases in utility maintenance expenses and the favorable
adjustment to the severance accrual originally recorded as
part of the restructuring charge in 1997 (see below). Other
operation expenses rose $10.4 million in 1998 compared to
1997. Utility maintenance expenses increased due to a
scheduled major overhaul of a turbine generator at one
generating station and unscheduled repairs at two other
generating units, higher other general utility operating
expenses were incurred, and increased activity at Energy and
Communications caused higher other operating expenses at
those subsidiaries.
<PAGE> 7
During 1997, the Indiana Gas Board of Directors authorized
management to undertake the actions necessary and
appropriate to restructure Indiana Gas' operations and
recognize a resulting restructuring charge of $39.5 million
(pre-tax) which included estimated costs related to
involuntary workforce reductions. Since that time, the
anticipated actions have been taken. As a result, the
remaining severance accrual was eliminated and other
operating expenses were reduced by $1.7 million during 1999,
as previously mentioned.
Depreciation and amortization expenses increased by 6.7
percent ($5.4 million) for the twelve months ended December
31, 1999, as compared to an increase of 7.5 percent ($5.7
million) during 1998. The increases were the result of
continued additions to utility plant to serve new customers
and to maintain dependable service to existing customers.
Taxes other than income taxes rose by 9.3 percent ($2.5
million) during 1999 due to higher gross receipts and
property tax expense. For 1998, taxes other than income
taxes decreased by 10 percent ($3.0 million), as compared to
1997, due to lower gross receipts tax, primarily the result
of the lower gas utility revenues resulting from winter
temperatures 22 percent warmer than 1997.
Other Income
Equity in earnings of unconsolidated investments decreased
$0.5 million for 1999, compared to the prior year, following
a $1.8 million increase in 1998. The decrease in 1999
reflected lower pre-tax earnings recognized from ProLiance,
Vectren's energy marketing joint venture, which were $6.7
million for 1999 compared to $7.0 million for 1998, and
greater pre-tax losses from the first full-year investment
in Pace Carbon Synfuels Investors, LP (see Pace Carbon
Synfuels Investors, LP for further discussion). The rise in
1998 earnings from unconsolidated investments reflected the
gain from the liquidation of an equity position in a
leveraged lease investment held by Southern Indiana
Properties, Inc. (SIPI), a wholly-owned subsidiary of
Vectren Financial Group, Inc., which more than offset lower
1998 pre-tax earnings from ProLiance. ProLiance earnings
recognized in 1997 were $9.2 million and included $1.9
million of ProLiance's earnings from prior periods, which
had previously been reserved.
SIGECO's final $1.4 million sale in 1998 of a portion of
emission allowance credits to another utility under a five-
year agreement was the primary reason Other-net declined
$1.2 million for 1999 and rose $0.9 million in 1998 when
compared to 1998 and 1997, respectively.
Interest Expense
Interest expense increased $2.5 million to $42.9 million for
1999, as compared to 1998 due to increased average debt
outstanding required primarily to fund SIPI's increased
financial investment activities and higher average interest
rates on utility debt. Vectren's 1998 interest expense rose
slightly from 1997 levels.
Income Taxes
Federal and state income taxes increased 8.0 percent ($3.4
million) due primarily to higher pre-tax income in 1999 and
the favorable impact on the 1998 effective tax rate of the
liquidation of SIPI's leveraged lease investment. Federal
and state income taxes increased 19.3 percent ($6.8 million)
for the twelve months ended December 31, 1998 as compared to
the same period for 1997, primarily due to increased taxable
income and the recognition of the pre-tax restructuring
costs of $39.5 million in 1997.
<PAGE> 8
Other Operating Matters
Acquisition of the Gas Distribution Assets of
The Dayton Power and Light Company
On December 15, 1999, Indiana Energy (now Vectren) announced
that its Board of Directors had approved a definitive
agreement under which Vectren, through one or more
subsidiaries, would acquire certain of the natural gas
distribution assets of the Dayton Power and Light Company.
The acquisition, with a purchase price of $425 million, is
expected to be funded with commercial paper (back-stopped by
a committed bank credit facility) which will be replaced
over time with permanent financing. This transaction is
conditioned upon the approval of several regulatory bodies.
Management hopes to complete the transaction by mid-year
2000.
Indiana Gas Restructuring
During 1997, the Indiana Gas Board of Directors authorized
management to undertake the actions necessary and
appropriate to restructure Indiana Gas' operations and
recognize a resulting restructuring charge of $39.5 million
($24.5 million after-tax) for 1997 as described below.
Indiana Gas recorded restructuring costs of $5.4 million
during 1997 related to the involuntary terminations planned
under the company's specific near-term employee reduction
plan, which was scheduled for completion by the end of
1999. These costs included separation pay in accordance with
Indiana Gas' severance policy of $3.9 million, and net
curtailment losses related to these employees'
postretirement and pension benefits. As a result of initial
work force reductions during September 1997 and primarily
attrition thereafter, most of the reductions contemplated
during the two year period and accrued originally had been
achieved. During 1999, Indiana Gas reviewed its remaining
accruals for costs associated with the involuntary work
force reductions. Taking into consideration an unexpectedly
high level of voluntary terminations, the company determined
that no additional significant involuntary work force
reductions were likely to occur. In 1998, $2.2 million of
involuntary termination benefits had been paid. As a
result, the severance accrual and other operating expenses
were reduced by $1.7 million during 1999.
Indiana Gas' management also committed to sell, abandon or
otherwise dispose of certain assets, including buildings,
gas storage fields and intangible plant. Indiana Gas
recorded restructuring costs of $34.1 million during 1997 to
adjust the carrying value of those assets to estimated fair
value. These assets have been sold or are no longer in use.
ProLiance Energy, LLC
ProLiance Energy, LLC. (ProLiance), a 50 percent owned non-
regulated marketing affiliate of Vectren Energy Services,
began providing natural gas and related services to Indiana
Gas and Citizens Gas and Coke Utility (Citizens Gas)
effective April 1, 1996.
The sale of gas and provision of other services to Indiana
Gas by ProLiance is subject to regulatory review through the
quarterly gas cost adjustment (GCA) process administered by
the Indiana Utility Regulatory Commission (IURC).
<PAGE> 9
On September 12, 1997, the IURC issued a decision finding
the gas supply and portfolio administration agreements
between ProLiance and Indiana Gas and ProLiance and Citizens
Gas (the gas supply agreements) to be consistent with the
public interest. The IURC's decision recognized the
significant gas cost savings to customers resulting from
ProLiance's services and suggested that all material
provisions of the agreements between ProLiance and the
utilities are reasonable. Nevertheless, with respect to the
pricing of gas commodity purchased from ProLiance and two
other pricing terms, the IURC concluded that additional
review in the GCA process would be appropriate and directed
that these matters be considered further in the pending,
consolidated GCA proceeding involving Indiana Gas and
Citizens Gas. The IURC has not yet established a schedule
for conducting these additional proceedings.
The IURC's September 12, 1997, decision was appealed to the
Indiana Court of Appeals by certain Petitioners, including
the Indiana Office of Utility Consumer Counselor, the
Citizens Action Coalition of Indiana and a small group of
large-volume customers. On October 8, 1998, the Indiana
Court of Appeals issued a decision which reversed and
remanded the case to the IURC with instructions that the gas
supply agreements be disapproved. The basis for the decision
was that because the gas supply agreements provide for index
based pricing of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have been the
subject of an application for approval of an alternative
regulatory plan under Indiana statutory law.
On April 22, 1999, the Indiana Supreme Court granted a
petition for transfer of the case and will now consider the
appeal of the IURC's decision and issue its own decision on
the merits of the appeal at a later date. By granting
transfer, the Supreme Court has vacated the Court of
Appeals' decision.
If the Supreme Court reverses the IURC's decision, the case
will be remanded to the IURC for further proceedings
regarding the public interest in the gas supply agreements.
If the Supreme Court affirms the IURC's decision, as
described above, the reasonableness of certain of the gas
costs incurred by Indiana Gas under the gas supply
agreements will be further reviewed by the IURC in the
consolidated GCA proceeding. The existence of significant
benefits to the utilities and their customers resulting from
ProLiance's services has not been challenged on appeal.
Indiana Gas and Citizens Gas are continuing to utilize
ProLiance for their gas supplies.
On or about August 11, 1998, Indiana Gas, Citizens Gas and
ProLiance each received a Civil Investigative Demand ("CID")
from the United States Department of Justice requesting
information relating to Indiana Gas' and Citizens Gas'
relationship with and the activities of ProLiance. The
Department of Justice issued the CID to gather information
regarding ProLiance's formation and operations, and to
determine if trade or commerce has been restrained. Indiana
Gas has provided all information requested and management
continues to believe that there are no significant issues in
this matter.
Indiana Gas continues to record gas costs in accordance with
the terms of the ProLiance contract and Indiana Energy
continues to record its proportional share of ProLiance's
earnings. Pretax earnings recognized from ProLiance for the
twelve months ended December 31, 1999, totaled $6.7 million
compared to $7.0 million for the same period last year.
Earnings recognized from ProLiance are included in Equity in
Earnings of Unconsolidated Affiliates on the Consolidated
Statements of Income.
At December 31, 1999, Indiana Energy has reserved
approximately $1.7 million of ProLiance earnings after tax.
Total after-tax ProLiance earnings recognized to date,
through December 31, 1999, approximates $15.1 million. This
amount includes earnings from all of ProLiance's business
activities, and therefore is believed to be a conservative
estimate of the upper risk limit. Resolution of the above
proceedings may also impact future operations and earnings
contributions from ProLiance. Based on the IURC's findings
described above, management believes the ProLiance issues
may be resolved near the levels that are already being
reserved, and therefore, while these proceedings are
pending, does not anticipate changing the level at which it
reserves ProLiance earnings. However, no assurance of this
outcome can be provided.
Pace Carbon Synfuels Investors, LP
On February 5, 1998, Vectren Synfuels, Inc. (Vectren
Synfuels), a wholly-owned subsidiary of Vectren Financial
Group, purchased one limited partnership unit in Pace Carbon
Synfuels Investors, LP (Pace Carbon), a Delaware limited
partnership formed to develop, own and operate four projects
to produce and sell coal-based synthetic fuel. Pace Carbon
converts coal fines (small coal particles) into
<PAGE> 10
briquettes that are sold to major coal users such as
utilities and steel companies. This process is eligible for
federal tax credits under Section 29 of the Internal Revenue
Code (Code) and the Internal Revenue Service has issued a
private letter ruling with respect to the four projects.
Vectren Synfuels has made an initial investment of $7.5
million in Pace Carbon (of which $7.3 million was paid
through December 31, 1999) for an 8.3 percent ownership
interest in the partnership. Vectren Synfuels has also
agreed to advance up to $1.8 million against future cash
flows from the partnership for capital improvements and
financing capital needs. In addition to its initial
investment, Vectren Synfuels has a continuing obligation to
invest approximately $40 million, with any such additional
investments to be funded solely from a portion of the
federal tax credits that are earned from the production and
sale of briquettes by the projects.
The realization of the tax credits from this investment is
dependent upon a number of factors including among others
(1) the production facilities must have been in operation by
June 30, 1998, (2) adequate coal fines must be available to
produce the briquettes, and (3) the briquettes must be
produced and sold. All four of Pace Carbon's coal-based
synthetic fuel production facilities were placed into
service by June 30, 1998, and are currently producing and
selling briquettes in an extended ramp up mode. Further
enhancements to the production process and project upgrades
are expected to be completed and in full production in early
calendar year 2000.
Generally, all briquettes produced through December 31, 1999
have been sold. However, due to a deterioration in both the
domestic and export coal markets, domestic companies' coal
supplies are up, which in turn has reduced the demand and
created some price pressure for Pace Carbon's coal-based
synthetic product. Management does not believe that the
extended time required to make necessary production process
enhancements or the current coal market conditions will
significantly affect the long-term success of the projects.
Accordingly, management continues to believe that
significant project benefits, primarily in the form of tax
savings and tax credits realized, will be achieved in the
future, however, no assurance can be given.
Haddington Energy Partners, LP
On October 9, 1998, IEI Investments, now Vectren Ventures,
committed to invest $10 million in Haddington Energy
Partners, LP (Haddington). Haddington, a Delaware limited
partnership, raised $77 million to invest in projects that
represent a portfolio of development opportunities,
including high deliverability gas storage, compressed air
energy storage, thermally-balanced cogeneration, fuel cells,
hydrogen generators, and gathering and processing in the
Powder River Basin. Haddington's investment opportunities
will focus on acquiring and completing mid-stream energy
projects under development rather than start-up ventures.
Through December 31, 1999, Vectren Ventures had paid
approximately $2.5 million of its commitment in Haddington,
with the remainder to be paid in calendar 2000.
Vectren Advanced Communications
In May 1998, Vectren Advanced Communications, Inc. (formerly
SIGCORP Advanced Communications, Inc.) was formed to hold
Vectren's investment in SIGECOM, LLC and Utilicom Networks,
Inc. (Utilicom). Also on May 7, 1998 a joint venture between
Vectren Advanced Communications and Utilicom was formed to
provide enhanced communication services over a high capacity
fiber optic based network in the greater Evansville, Indiana
area and potentially other areas within SIGECO's service
territory. Vectren Advanced Communications' investment was
in the form of a preferred interest in SIGECOM, which had a
100 percent liquidation preference. In addition, SIGCORP
contributed its wholly owned subsidiary, ComSource, Inc. to
SIGECOM on July 1, 1998. As of December 31, 1999, Vectren
Advanced Communications had invested $15.1 million,
including the value of ComSource, Inc., in SIGECOM.
On January 28, 2000, affiliates of Blackstone Capital
Partners III, a private equity fund of The Blackstone Group
invested in class B equity units of Utilicom Holdings LLC,
the newly formed holding company for Utilicom. The
<PAGE> 11
investment was the first part of a commitment by Blackstone
to invest up to $100 million to fund future growth
opportunities in the fiber optic networks. At the same
time, Vectren Advanced Communications exchanged 35 percent
of its 49 percent equity interest in SIGECOM for $16.5
million of convertible debt of Utilicom Holdings. The debt
is convertible into class A equity units at a future date or
in the event of a public offering of stock by Utilicom.
Vectren Advanced Communications' remaining 14 percent
preferred equity interest in SIGECOM was converted to a 14
percent indirect common equity interest in SIGECOM. The
investment restructuring resulted in a pretax gain of $8.0
million to Vectren in the first quarter of 2000.
Environmental Matters
Manufactured Gas Plants
In the past, Indiana Gas and others, including former
affiliates, and/or previous landowners, operated facilities
for the manufacturing of gas and storage of manufactured
gas. These facilities are no longer in operation and have
not been operated for many years. Under currently
applicable environmental laws and regulations, Indiana Gas,
and the others, may now be required to take remedial action
if certain byproducts are found above a regulatory threshold
at these sites.
Indiana Gas has identified the existence, location and
certain general characteristics of 26 gas manufacturing and
storage sites. Based upon the site work completed to date,
Indiana Gas believes that a level of contamination that may
require some level of remedial activity may be present at a
number of the sites. Removal activities have been conducted
at several sites and a remedial investigation/feasibility
study (RI/FS) has been completed at one of the sites under
an agreed order between Indiana Gas and the Indiana
Department of Environmental Management (IDEM), with a Record
of Decision (ROD) expected to be issued by IDEM in 2000.
Although Indiana Gas has not begun an RI/FS at additional
sites, Indiana Gas has submitted several of the sites to
IDEM's Voluntary Remediation Program (VRP) and is currently
conducting some level of remedial activities including
groundwater monitoring at certain sites where deemed
appropriate and will continue remedial activities at the
sites as appropriate and necessary.
Based upon the work performed to date, Indiana Gas has
accrued investigation, remediation, groundwater monitoring
and related costs for the sites. Estimated costs of certain
remedial actions that may likely be required have also been
accrued. Costs associated with environmental remedial
activities are accrued when such costs are probable and
reasonably estimable. Indiana Gas does not believe it can
provide an estimate of the reasonably possible total
remediation costs for any site prior to completion of an
RI/FS and the development of some sense of the timing for
implementation of the site specific remedial alternative, to
the extent such remediation is required. Accordingly, the
total costs which may be incurred in connection with the
remediation of all sites, to the extent remediation is
necessary, cannot be determined at this time.
Indiana Gas has been recovering the costs of the
investigations and work from insurance carriers and other
potentially responsible parties (PRPs). The IURC has
determined that these costs are not recoverable from utility
customers.
Indiana Gas has PRP agreements in place covering 19 of the
26 sites. The agreements provide for coordination of
efforts and sharing of investigation and clean-up costs
incurred and to be incurred at the sites. These agreements
limit Indiana Gas' share of past and future response costs
at these 19 sites to between 20 and 50 percent. Based on
the agreements, Indiana Gas has accrued its proportionate
share of the estimated cost related to work not yet
performed.
In early 1999, Indiana Gas filed a complaint in Indiana
state court to continue its pursuit of insurance coverage
from four insurance carriers. As of March 31, 2000,
settlement agreements were reached with each of these
insurers and the litigation was dismissed. As of December
31, 1999, Indiana Gas has recorded settlements from other
insurance carriers in an aggregate amount of approximately
$15.5 million.
These environmental matters have had no material impact on
earnings since costs recorded to date approximate PRP
recoveries and insurance settlements received. While Indiana
Gas has recorded all costs which it presently expects to
incur in connection with remediation activities, it is
possible that future events may require some level of
additional remedial activities which are not presently
foreseen.
Clean Air Act
In October, 1997, the United States Environmental Protection
Agency (USEPA) proposed a rulemaking that could require
uniform NOx emissions reductions of 85 percent by utilities
and other large sources in a 22-state region spanning areas
in the Northeast, Midwest, Great Lakes, Mid-Atlantic and
South. This rule is referred to as the "NOx SIP call". The
USEPA provided each state a proposed budget of allowed NOx
emissions, a key ingredient of ozone, which requires a
significant reduction of such emissions. Under that budget,
utilities may be required to reduce NOx emissions to a rate
of 0.15 lb./mmBtu from levels already imposed by Phase I and
Phase II of the Clean Air Act Amendments of 1990.
Midwestern states (the alliance) have been working together
to determine the most appropriate compliance strategy as an
alternative to the USEPA proposal. The alliance submitted
its proposal, which calls for a smaller, phased in reduction
of NOx levels, to the USEPA and the Indiana Department of
Environmental Management in June 1998.
<PAGE> 12
In July 1998, Indiana submitted its proposed plan to the
USEPA in response to the USEPA's proposed new NOx rule and
the emissions budget proposed for Indiana. The Indiana
plan, which calls for a reduction of NOx emissions to a rate
of 0.25 lb./mmBtu by 2003, is less stringent than the USEPA
proposal but more stringent than the alliance proposal.
In October 27, 1998 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). The final rule requires that 23 states and
jurisdictions must file revised state implementation plans
("SIPs") with EPA by no later than September 30, 1999, which
was essentially unchanged from its October 1997, proposed
rule. The USEPA has encouraged states to target utility
coal-fired boilers for the majority of the reductions
required, especially NOx emissions. Northeastern states
have claimed that ozone transport from midwestern states
(including Indiana) is the primary reason for their ozone
concentration problems. Although this premise is challenged
by others based on various air quality modeling studies,
including studies commissioned by the USEPA, the USEPA
intends to incorporate a regional control strategy to reduce
ozone transport. The USEPA's final ruling is being
litigated in the federal courts by approximately ten
midwestern states, including Indiana.
During the second quarter of 1999, the USEPA lost two
federal court challenges to key air-pollution control
requirements. In the first ruling by the U.S. Circuit Court
of Appeals for the District of Columbia on May 14, 1999, the
Court struck down the USEPA's attempt to tighten the one-
hour ozone standard to an eight-hour standard and the
attempt to tighten the standard for particulate emissions,
finding the actions unconstitutional. In the second ruling
by the same Court on May 25, 1999, the Court placed an
indefinite stay on the USEPA's attempts to reduce the
allowed NOx emissions rate from levels required by the Clean
Air Act Amendments of 1990. The USEPA appealed both court
rulings. On October 29, 1999, the Court refused to
reconsider its May 14, 1999 ruling.
On March 3, 2000, the D.C. Circuit Court of Appeals upheld
the USEPA's October 27, 1998 final rule requiring 23 states
and the District of Columbia to file revised SIPs with EPA
by no later than September 30, 1999. Numerous petitioners,
including several states, filed a petition for rehearing
with the U.S. Court of Appeals for the District of Columbia
in Michigan v. EPA. On June 22, 2000, the D.C. Circuit
Court of Appeals denied petition for rehearing en banc and
lifted its May 25, 1999 stay.
The proposed NOx emissions budget for Indiana stipulated in
the USEPA's final ruling requires a 36 percent reduction in
total NOx emissions from Indiana. The ruling could require
SIGECO to lower its system-wide emissions by approximately
70 percent. Depending on the level of system-wide emissions
reductions ultimately required, and the control technology
utilized to achieve the reductions, the estimated
construction costs of the control equipment could reach $100
million, and related additional operation and maintenance
expenses could be an estimated $8 million to $10 million,
annually. Under the USEPA implementation schedule, the
emissions reductions and required control equipment must be
implemented and in place by May 15, 2003.
Approximately 12 months ago, the USEPA initiated an
investigation under Section 114 of the Clean Air Act (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 performance standards should be applied to the
modifications and whether the best available control
technology was, or should have been, used. Numerous other
electric utilities were, and are currently, being
investigated by the USEPA under an industry-wide review for
similar compliance. SIGECO responded to all of the USEPA's
data requests during the investigation. 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 the 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 with the USEPA and
targeted utilities, including SIGECO, regarding potential
remedies to the USEPA's general allegations.
<PAGE> 13
On November 3, 1999, the USEPA filed a lawsuit against seven
utilities, including SIGECO. The USEPA alleges that,
beginning in 1992, SIGECO violated the Clean Air Act by: (i)
making modifications to its Culley Generating Station in
Yankeetown, Indiana without obtaining required permits; (ii)
making major modifications to the Culley Generating Station
without installing the best available emission control
technology; and (iii) 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.
SIGECO believes it performed only maintenance, repair and
replacement activities at the Culley Generating Station, as
allowed under the Clean Air 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 performance standards, SIGECO
believes that the lawsuit is without merit, and intends to
vigorously defend the lawsuit.
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 is successful in
obtaining an order, SIGECO estimates that it would incur
capital costs of approximately $40 million to $50 million
complying with the order. In the event that SIGECO is
required to install system-wide NOx emission control
equipment, as a result of the NOx SIP call issue, the
majority of the $40 million to $50 million for best
available emissions technology at Culley Generating Station
would be included in the $100 million expenditure,
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 new source
performance standards and the allegations are determined by
a court to be valid, SIGECO believes such penalties are
unlikely as EPA and the electric utility industry have a
bonafide dispute over the proper interpretation of the Clean
Air Act. Consequently, SIGECO anticipates at this time that
the plant will continue to operate while the matter is being
decided.
Rate and Regulatory Matters
SIGECO and Indiana Gas comply with the provisions of
Statement of Financial Accounting Standard (SFAS) 71,
"Accounting for the Effects of Certain Types of Regulation"
that allows certain costs incurred by SIGECO and Indiana Gas
that have been, or are expected to be, approved by
regulatory authorities for recovery through rates, to be
deferred as regulatory assets until recovered by SIGECO and
Indiana Gas. Criteria that could give rise to the
discontinuance of SFAS 71 include (1) increasing competition
that restricts SIGECO's and Indiana Gas' ability to
establish prices to recover specific costs, and (2) a
significant change in the manner in which rates are set by
regulators from cost-based regulation to another form of
regulation. SIGECO and Indiana Gas periodically review
these criteria to ensure the continuing application of SFAS
71 is appropriate. In the event SIGECO or Indiana Gas
determine that they no longer meet the criteria for
following SFAS 71, the accounting impact could be an
extraordinary noncash charge to earnings of an amount that
could be material. SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", imposes a stricter criterion for these
regulatory assets by requiring that such assets be probable
of future recovery at each balance sheet date. Under
SIGECO's and Indiana Gas' present regulatory environment and
given its current competitive position in the industry,
Vectren believes its use of regulatory accounting is
appropriate.
For further information regarding Rate and Regulatory
Matters, see Note 1L of the Notes to the Consolidated
Financial Statements.
<PAGE> 14
Competition
SIGECO is presently a fully integrated provider of retail
gas and electric utility service and Indiana Gas is a fully
integrated provider of retail gas utility service within a
franchised retail monopoly service area. The production of
electricity is a significant functional component of the
integrated SIGECO operations, representing approximately 60
percent of regulated assets and, as a result of wholesale
sales of electricity, a greater portion of the net income of
SIGECO.
A fundamental change with respect to the regulated structure
of the electric utility industry is occurring in the United
States, brought about by the National Energy Policy Act of
1992 (NEPA). The primary purpose of the electric provisions
of NEPA is to increase competition in electric generation,
and under authority granted by NEPA, the Federal Energy
Regulatory Commission (FERC) has aggressively undertaken the
introduction of competition into the wholesale electric
business.
The results of the changes in the wholesale electric
business on SIGECO have been generally favorable. Because
SIGECO has below average fuel for electric generation costs,
it has been a seller of electricity to power marketers and
other providers seeking electricity to fulfill wholesale
sales contracts. The results of the increased wholesale
sales are discussed further in "Results of Operations."
Conversely, SIGECO has reduced prices to firm wholesale
customers, or offered to do so, to retain their business.
These discounts in pricing terms, when fully effective,
result in gross margins which are several million dollars
below margins attainable from such customers prior to NEPA.
SIGECO cannot predict the long-term consequences of these
changes on its results of operations or financial condition.
FERC does not have jurisdiction over the retail sales of
electricity. States retain jurisdiction over the permitting
of retail competition, the terms of such competition and the
recovery of any costs or other transition charges resulting
from retail competition.
To date, numerous state legislatures and regulatory agencies
have adopted laws or regulations to introduce retail
electricity competition. However, most states are
continuing to evaluate the issue. In Indiana, the state
legislature must adopt appropriate legislation to amend the
Indiana law to provide for retail competition. In each of
the past four years, such legislation was introduced in the
Indiana Senate, but failed to pass. In January 2000, an
association of Indiana's large manufacturers introduced an
electric deregulation bill in the Indiana Senate but the
bill was not voted out of the Senate Commerce Committee, and
the legislative session terminated before further review
could be taken.
Since 1998, Indiana's five largest investor-owned utilities
have attempted to develop the framework for a comprehensive
retail competition bill. However, no comprehensive proposal
has been finalized.
Demand Side Management (DSM)
In the November 1997 update of its Integrated Resource Plan
(IRP), SIGECO determined that certain of its DSM programs
were not cost effective and those programs have been
discontinued. The remaining DSM programs are residential
and commercial direct load control programs, which have been
very effective. In the latest update of the IRP, filed in
November 1999, the IRP evaluation determined that through
1998 approximately 71 megawatts of required capacity are
estimated to have been postponed or eliminated by these
programs. Projected DSM program expenditures for the 2000-
2015 period are expected to total less than $10 million.
SIGECO will continue to monitor the benefits of its DSM
programs and additional changes are possible.
The Year 2000 Issue
Vectren uses various software, systems and technology that
could have been affected by the date change in 2000. All
identification, testing and replacement or remediation of
such software, systems and technology at Vectren was
completed by December 31, 1999. No significant noncompliance
issues have been encountered in 2000 and
<PAGE> 15
Vectren anticipates that no such issues will be encountered.
Vectren estimates the expense of Year 2000-readiness
modifications to existing systems or replacements treated as
expense incurred totaled approximately $3.2 million.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards requiring
that every derivative instrument, including certain
derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and
requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive
hedge accounting. Based on the deferral of the effective
date of SFAS 133 as provided for in SFAS 137, Vectren is
required to adopt the provisions of SFAS 133 no later than
January 1, 2001. Vectren utilizes derivative instruments to
manage pricing decisions, minimize the risk of price
volatility, and minimize price risk exposure in the energy
markets. Vectren has not yet quantified the impact of
adopting this statement on its financial position or results
of operations.
Quantitative and Qualitative Disclosures about Market Risk
Vectren attempts to mitigate its exposure to interest rate
fluctuations through management of its short-term borrowings
and the use of interest rate hedging instruments. An
internal guideline to manage short-term interest rate
exposure has been established. This guideline targets a
maximum of 25 percent of the company's total debt portfolio
to consist of adjustable rate bonds with a maturity of less
than one year, short-term notes and commercial paper.
However, it is acknowledged that there may be times during
the business cycle that the guideline may be exceeded.
ProLiance engages in energy hedging activities to manage
pricing decisions, minimize the risk of price volatility,
and minimize price risk exposure in the energy markets.
ProLiance's market exposure arises from storage inventory,
imbalances and fixed-price purchase and sale commitments,
which are entered into to support ProLiance's operating
activities. Currently ProLiance buys and sells physical
commodities and utilizes financial instruments to hedge its
market exposure. However, net open positions in terms of
price, volume and specified delivery point do occur.
ProLiance manages open positions with policies which limit
its exposure to market risk and require reporting potential
financial exposure to its management and its members. As a
result of ProLiance's risk management policies, Vectren does
not believe that ProLiance's exposure to market risk will
result in material earnings or cash flow loss to the
company.
SIGECO utilizes contracts for the forward sale of
electricity to effectively manage the utilization of its
available generating capability. Such contracts include
forward physical contracts for wholesale sales of its
generating capability, during periods when SIGECO's
available generating capability is expected to exceed the
demands of its retail, or native load, customers. To
minimize the risk related to these forward contracts, SIGECO
may utilize call option contracts to hedge against the
unexpected loss of its generating capability during periods
of heavy demand. SIGECO also utilizes forward physical
contracts for the wholesale purchase of generating
capability to resell to other utilities and power marketers
through non-firm "buy-resell" transactions where the sale
and purchase prices of power are concurrently set.
Exposure to electricity market price risk relates to the
forward contracts to effectively manage the supply of, and
demand for, the generation capability of SIGECO's generating
plants related to its wholesale power marketing activities.
SIGECO is not currently exposed to market risks for
purchases of electric energy power and natural gas for its
retail customers due to current Indiana regulations which
allow for full recovery of such purchases through SIGECO's
fuel and natural gas cost adjustment mechanisms. A 1999
generic order issued by the IURC
<PAGE> 16
established new guidelines for the recovery of purchased
electric power costs through the fuel adjustment clauses,
however, SIGECO does not anticipate any limitation of
recoverability of its purchased electric power costs under
the generic order. This order has been appealed by the
Office of the Utility Consumer Counselor, and if the appeal
is upheld, non-recovery of some future purchased electric
energy costs could be possible.
SIGCORP Energy Services, Inc., a Vectren subsidiary,
utilizes forward physical contracts for both the purchase
and sale of natural gas to its customers, primarily through
"back-to-back" transactions where the sale and purchase
prices of natural gas are concurrently set. As of December
31, 1999, approximately 4 percent of SIGCORP Energy
Services, Inc.'s forward sales contracts were not covered by
forward purchase contracts. Management believes that
exposure from these positions was not material. SIGCORP
Energy Services, Inc. sells fixed-price and capped-price
products, and reduces its market price risk through the use
of fixed-price supplier contracts and storage assets. As of
December 31, 1999, the estimated fair market value of
Energy's forward sales contracts was approximately $10.5
million; and the estimated fair market value of its forward
purchase contracts was approximately $10.1 million.
Vectren is also exposed to counterparty credit risk when a
supplier defaults upon a contract to pay or deliver the
commodity. To mitigate risk, procedures to determine and
monitor the creditworthiness of counterparties have been
established.
At December 31, 1999, Vectren was not engaged in other
contracts which would cause exposure to the risk of material
earnings or cash flow loss due to changes in market
commodity prices, foreign currency exchange rates, or
interest rates.
Liquidity and Capital Resources
Vectren's capitalization objectives, which are 45-60 percent
common and preferred equity, and 40-55 percent long-term
debt. These objectives may have varied, and will vary, from
time to time, depending on particular business opportunities
and seasonal factors that affect the company's operation.
Vectren's common equity component was 58.4 percent of its
total capitalization at December 31, 1999.
On December 15, 1999, Indiana Energy, now Vectren, announced
that the Board of Directors had approved a definitive
agreement under which the company will acquire certain of
the natural gas distribution assets of The Dayton Power and
Light Company. The acquisition, with a purchase price of
$425 million, is expected to be funded with commercial paper
(back-stopped by a committed bank credit facility) which
will be replaced over time with permanent financing. This
transaction is conditioned upon the approval of several
regulatory bodies. Management hopes to complete the
transaction by mid-year 2000.
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. Capital expenditures
for fiscal 2000 are estimated at $135 million. For the
twelve months ended December 31, 1999, capital expenditures
totaled $132.2 million and $124.8 million for the same
period in 1998.
Short-term cash working capital is required primarily to
finance customer accounts receivable, unbilled utility
revenues resulting from cycle billing, gas in underground
storage, prepaid gas delivery services, capital expenditures
and investments until permanently financed. Short-term
borrowings tend to be greatest during the heating season
when accounts receivable and unbilled utility revenues are
at their highest. Effective in March 1999, Indiana Gas
implemented a $100 million commercial paper program.
Indiana Gas' commercial paper is rated P-1 by Moody's and A-
1+ by Standard & Poor's. Prior to March 1999, bank lines of
credit were the primary source of short-term financing.
During April 1999, SIGECO temporarily refunded its $45
million 6 percent series first mortgage bonds due in 1999
with short-term debt. In July 1999, $80 million in short-
term borrowings, including the above amount, were refunded
with the issue of $80 million of 6.72 percent Senior Notes
due August 1, 2029. In November 1999, SIGECO refunded $10
million of its $25 million 8-7/8 percent series first
<PAGE> 17
mortgage bonds due 2016 with short-term notes payable.
During 1998, SIGECO refunded four tax-exempt bond issues
totaling $80.3 million with an equal amount of tax-exempt
bonds which will reduce total interest expense on a present
value basis by $8.5 million over the remaining lives of the
bond issues. SIGECO also refunded $14 million of its first
mortgage bonds with short-term notes payable.
In July 1999, Indiana Gas retired $10 million of 8.9% Notes.
In July 1999, Indiana Gas filed a registration statement
with the Securities and Exchange Commission, which has
become effective with respect to $100 million in debt
securities. Indiana Gas expects to issue this debt pursuant
to a medium-term note program, denominated as Series G. The
net proceeds from the sale of these new debt securities will
be used for general corporate purposes, including repayment
of long-term debt and financing of Indiana Gas' continuing
construction program. On October 5, 1999, Indiana Gas
issued $30 million in principal amount of Series G Medium-
term Notes bearing interest at the per annum rate of 7.08
percent with a maturity date of October 5, 2029.
On December 23, 1999, SIGCORP Capital, Inc. (now Vectren
Capital Corporation) established a $100 Million Committed
Bank Credit Facility. This facility, syndicated among five
banks, replaced several uncommitted lines of credit and is
used to fund non-regulated operations. At December 31,
1999, there was $85.7 million drawn against this facility.
On March 1, 2000, the fixed rate 7.25 percent $22.5 million
Pollution Control Series A Bonds of SIGECO, due March 1,
2014, were converted to a Municipal Auction Rates Series.
The interest rate, currently 4.35 percent, will be set every
32 days through the municipal bond auction process.
On March 1, 2000, the interest rate on $31.5 million of
Adjustable Rate Pollution Control bonds of SIGECO, due March
1, 2025, was changed from 3.00 percent to 4.30 percent. The
new interest rate will be fixed through February 29, 2001.
Also on March 1, 2000, the interest rate on $22.2 million of
Adjustable Rate Pollution Control bonds of SIGECO, due March
1, 2020, was changed from 3.05 percent to 4.45 percent. The
new interest rate will also be fixed through February 29,
2001. For financial statement presentation, the $53.7
million of Adjustable Rate Pollution Control bonds are shown
as a current liability.
Vectren expects the majority of the utility construction
requirements and debt security redemptions to be provided by
internally generated funds.
Indiana Gas' and SIGECO's credit ratings on outstanding debt
at December 31, 1999 were AA-/Aa2 and AA/Aa2, respectively.
Forward-Looking Information
A "safe harbor" for forwarding-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 Position, including but
not limited to, Vectren Corporation's earnings growth
strategy, ProLiance, the acquisition of gas distribution
assets of Dayton Power and Light Company, Inc. and Year 2000
issues, are forward-looking statements. Such statements are
based on management's belief, 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 Vectren Corporation and its subsidiaries'
actual results to differ materially from those contemplated
in any forward-looking statements include, among others, the
following:
<PAGE> 18
* 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.
* Increased competition in the energy environment
including effects of industry restructuring and
unbundling.
* 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.
* Financial or regulatory accounting principles or
policies imposed by the Financial Accounting
Standards Board, the Securities and Exchange
Commission (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.
* Economic conditions including inflation rates
and monetary fluctuations.
* 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.
* Availability or cost of capital, resulting from
changes in Vectren Corporation and its
subsidiaries, interest rates, and securities
ratings or market perceptions of the utility
industry and energy-related industries.
* Employee workforce factors including changes in
key executives, collective bargaining agreements
with union employees, or work stoppages.
* Legal and regulatory delays and other obstacles
associated with mergers, acquisitions, and
investments in joint ventures.
* Costs and other effects of legal and
administrative proceedings, settlements,
investigations, claims, and other matters,
including, but not limited to, those described
in the Other Operating Matters section of
Management's Discussion and Analysis of Results
of Operations and Financial Condition.
* Changes in federal, state or local legislature
requirements, such as changes in tax laws or
rates, environmental laws and regulations.
Vectren Corporation and its subsidiaries undertake 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.
<PAGE> 19
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Vectren Corporation is responsible for the
preparation of the consolidated 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 judgements, are the
responsibility of management. Management maintains a system
of internal controls 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 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 Corporation'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 controls and the quality of
financial reporting.
/s/ Niel C. Ellerbrook
Niel C. Ellerbrook
Chairman and Chief Executive Officer
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Vectren
Corporation:
We have audited the accompanying consolidated balance sheets
of Vectren Corporation (an Indiana corporation) and
subsidiary companies as of December 31, 1999 and 1998, and
the related consolidated statements of income, common
shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial
statements are the responsibility of the company's
management. Our responsibility is to express an opinion on
these financial statements 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 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Vectren Corporation and subsidiary
companies as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Indianapolis, Indiana,
June 30, 2000.
<PAGE> 21
<TABLE>
<CAPTION>
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
As of December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 17,351 $ 7,391
Temporary investments 903 793
Accounts receivable, less reserves of
$3,949 and $3,953, respectively 123,612 97,832
Accrued unbilled revenues 55,370 61,172
Inventories 58,863 66,686
Prepaid gas delivery service 20,937 -
Prepayments and other current assets 28,676 21,217
---------- ----------
Total current assets 305,712 255,091
---------- ----------
Utility Plant:
Original cost 2,367,831 2,262,914
Less: accumulated depreciation and
amortization 1,031,498 970,034
---------- ----------
Net utility plant 1,336,333 1,292,880
---------- ----------
Other Investments:
Investments in leveraged leases 85,737 36,003
Investments in partnerships and
other corporations 74,644 61,742
Notes receivable 32,271 20,372
Other 996 4,300
---------- ----------
Total other investments 193,648 122,417
---------- ----------
Nonutility property, net of accumulated
depreciation 64,474 59,533
Other Assets:
Deferred charges 23,623 16,536
Unamortized debt costs 15,843 16,879
Demand side management programs 25,298 25,046
Other 15,536 10,458
---------- ----------
Total other assets 80,300 68,919
---------- ----------
TOTAL ASSETS $1,980,467 $1,798,840
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 22
<TABLE>
<CAPTION>
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
As of December 31,
1999 1998
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of adjustable rate bonds
subject to tender $ 53,700 $ 53,700
Current maturities of long-term debt and
other obligations 776 56,751
Short-term borrowings 207,638 125,983
Accounts payable 95,827 84,078
Refunds to customers and customer deposits 27,396 38,915
Accrued taxes 26,602 14,990
Accrued interest 12,097 10,124
Other current liabilities 49,467 48,183
---------- ----------
Total current liabilities 473,503 432,724
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 215,520 204,612
Accrued postretirement benefits other
than pensions 40,942 37,487
Unamortized investment tax credit 25,524 27,884
Other 8,297 9,187
---------- ----------
Total deferred credits and other
liabilities 290,283 279,170
---------- ----------
Minority interest in subsidiary 916 696
---------- ----------
Commitments and contingencies
Capitalization:
Long-term debt and other obligations 486,726 388,938
Preferred stock of subsidiary:
Redeemable 8,192 8,308
Nonredeemable 11,090 11,090
---------- ----------
Total preferred stock 19,282 19,398
Common stock (no par value) - issued and ---------- ----------
outstanding 61,305 and
61,420, respectively 215,917 217,266
Retained earnings 493,918 460,660
Accumulated other comprehensive income (78) (12)
---------- ----------
Total common shareholders' equity 709,757 677,914
---------- ----------
Total capitalization 1,215,765 1,086,250
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,980,467 $1,798,840
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 23
<TABLE>
<CAPTION>
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share amounts)
Year Ended December 31,
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
OPERATING REVENUE
Gas utility $ 499,573 $487,260 $613,619
Electric utility 307,569 297,865 272,545
Energy services and other 261,275 212,581 85,917
---------- -------- --------
Total operating revenue 1,068,417 997,706 972,081
---------- -------- --------
OPERATING EXPENSES
Cost of gas sold 266,429 269,999 372,001
Fuel for electric generation 66,305 65,222 62,630
Purchased power 20,791 20,762 13,985
Cost of energy services and other 247,590 202,441 81,713
Other operating 189,622 181,818 171,418
Restructuring costs - - 39,531
Depreciation and amortization 86,998 81,558 75,837
Taxes other than income taxes 29,910 27,369 30,410
---------- -------- --------
Total operating expenses 907,645 849,169 847,525
---------- -------- --------
OPERATING INCOME 160,772 148,537 124,556
OTHER INCOME
Equity in earnings of unconsolidated 11,642 12,104 10,258
investments
Other - net 8,902 10,105 9,223
---------- -------- --------
Total other income 20,544 22,209 19,481
---------- -------- --------
INTEREST EXPENSE 42,862 40,301 39,403
---------- -------- --------
INCOME BEFORE PREFERRED DIVIDENDS
AND INCOME TAXES 138,454 130,445 104,634
PREFERRED DIVIDEND REQUIREMENT OF
SUBSIDIARY 1,078 1,095 1,097
---------- -------- --------
INCOME BEFORE INCOME TAXES 137,376 129,350 103,537
INCOME TAXES 45,708 42,328 35,482
---------- -------- --------
NET INCOME BEFORE MINORITY INTEREST 91,668 87,022 68,055
MINORITY INTEREST IN SUBSIDIARY 920 422 341
---------- -------- --------
NET INCOME $ 90,748 $ 86,600 $ 67,714
========== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 61,306 61,578 61,611
DILUTED COMMON SHARES OUTSTANDING 61,430 61,756 61,614
BASIC EARNINGS PER AVERAGE SHARE OF
COMMON STOCK $ 1.48 $ 1.41 $ 1.10
DILUTED EARNINGS PER AVERAGE SHARE OF
COMMON STOCK $ 1.48 $ 1.40 $ 1.10
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 24
<TABLE>
<CAPTION>
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 90,748 $ 86,600 $ 67,714
Adjustments to reconcile net income to cash
provided from operating activities -
Noncash restructuring costs - - 32,838
Depreciation and amortization 86,998 81,558 75,837
Preferred dividend requirement 1,078 1,095 1,097
Deferred income taxes and
investment tax credits 8,548 (1,644) (17,447)
(Gain) on sale or retirement
of assets - (2,102) (2,923)
Undistributed earnings of
unconsolidated affiliates (11,642) (12,104) (10,258)
Changes in assets and liabilities -
Receivables - net (19,978) 18,052 (22,997)
Inventories 7,823 (13,086) 16,916
Accounts payable, refunds to
customers, customer deposits
and other current liabilities 1,514 7,208 34,584
Accrued taxes and interest 13,585 (9,522) 3,361
Prepayments and other
current assets (7,459) (5,044) (3,988)
Prepaid gas delivery (20,937) - -
Accrued postretirement
benefits and other pensions 3,455 2,472 7,916
Other 1,612 3,683 (5,721)
--------- --------- ---------
Total adjustments 64,597 70,566 109,215
Net cash flows from operating --------- --------- ---------
activities 155,345 157,166 176,929
--------- --------- ---------
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES
Change in common stock (1,349) (6,075) 808
Retirement of preferred stock (116) (116) -
Proceeds from long-term debt 110,000 60,052 50,062
Retirement of long-term debt
and other obligations (67,067) (50,828) (62,640)
Net change in short-term
borrowings 81,655 12,253 32,980
Dividends on common stock (57,365) (55,727) (53,960)
Other (3,614) (675) (775)
Net cash flows from (required ---------- ---------- ----------
for) financing activities 62,144 (41,116) (33,525)
--------- ---------- ----------
CASH FLOWS FROM (REQUIRED FOR) INVESTING
ACTIVITIES
Capital expenditures (132,159) (124,838) (139,547)
Demand side management program
expenditures (252) (579) (2,340)
Investment in leveraged leases (49,734) 5,194 3,007
Investments in partnerships
and other corporations (3,340) (4,477) -
Non-regulated investments in
unconsolidated affiliates - net (7,371) (7,035) -
Change in notes receivable (11,899) 1,032 (5,592)
Change in non-utility property (4,941) (10,231) (6,922)
Cash distributions from
unconsolidated affiliates 4,550 7,806 -
Proceeds from sale of assets - 13,317 3,000
Other (2,383) 3,074 3,692
Net cash flows (required for) ---------- --------- ---------
investing activities (207,529) (116,737) (144,702)
---------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 9,960 (687) (1,298)
Cash and cash equivalents at
beginning of period 7,391 8,078 9,376
---------- --------- ---------
Cash and cash equivalents at end
of period $ 17,351 $ 7,391 $ 8,078
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 25
<TABLE>
<CAPTION>
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
( in thousands)
Common Stock
Restricted
Stock
Shares Amount Grants
------ -------- -------
<S> <C> <C> <C>
Balance at December 31, 1996 61,596 $224,703 $(2,170)
Net income
Unrealized gain on securities
(net of tax)
Common stock dividends
($0.88 per share)
Common stock issuances for
Executives' and Directors'
stock plans, net of amortization 25 346 462
------- --------- -------
Balance at December 31, 1997 61,621 $225,049 $(1,708)
Net income
Unrealized loss on securities
(net of tax)
Common stock dividends
($0.90 per share)
Common stock repurchases (215) (4,834)
Common stock issuances for
Executives' and Directors'
Stock plans, net of amortization 14 (1,572) 331
Common stock issuance expense
Other
------- -------- --------
Balance at December 31, 1998 61,420 $218,643 $ (1,377)
Net income
Unrealized loss on securities
(net of tax)
Common stock dividends
($0.94 per share)
Common stock repurchases (113) (2,331)
Common stock issuances for
Executives' and Directors'
stock plans, net of amortization (2) 1,150 (168)
Other
Balance at December 31, 1999 61,305 $217,462 $ (1,545)
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<TABLE>
<CAPTION>
Other
Retained Comprehensive
Earnings Income (Loss) Total
-------- ---------- --------
<S> <C> <C> <C>
Balance at December 31, 1996 $416,494 $ 40 $639,067
Net income 67,714 67,714
Unrealized gain on securities
(net of tax) 37 37
Common stock dividends
($0.88 per share) (53,960) (53,960)
Common stock issuances for
Executives' and Directors'
stock plans, net of
amortization 808
-------- ------ --------
Balance at December 31, 1997 $430,248 $ 77 $653,666
Net income 86,600 86,600
Unrealized loss on securities
(net of tax) (89) (89)
Common stock dividends
($0.90 per share) (55,727) (55,727)
Common stock repurchases (4,834)
Common stock issuances for
Executives' and Directors'
Stock plans, net of
amortization (1,241)
Common stock issuance expense (33) (33)
Other (428) (428)
-------- ------ --------
Balance at December 31, 1998 $460,660 $ (12) $677,914
Net income 90,748 90,748
Unrealized loss on securities
(net of tax) (66) (66)
Common stock dividends
($0.94 per share) (57,365) (57,365)
Common stock repurchases (2,331)
Common stock issuances for
Executives' and Directors'
stock plans, net of
amortization 982
Other (125) (125)
-------- ------ --------
Balance at December 31, 1999 $493,918 $ (78) $709,757
======== ====== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 26
VECTREN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Vectren Corporation (Vectren) is an Indiana corporation that
was organized on June 10, 1999 solely for the purpose of
effecting the merger of Indiana Energy, Inc. (Indiana
Energy) and SIGCORP, Inc. (SIGCORP) with and into Vectren
and carrying on the combined business of Indiana Energy and
SIGCORP. On March 31, 2000, the merger of Indiana Energy
with SIGCORP and into Vectren was consummated with a tax-
free exchange of shares and has been accounted for as a
pooling of interests. The common shareholders of SIGCORP
received one and one-third shares of Vectren common stock
for each SIGCORP common share and Indiana Energy common
shareholders received one share of Vectren common stock for
each Indiana Energy common share, resulting in the issuance
of 61.3 million shares of Vectren common stock. The
preferred stock and debt securities of Indiana Energy's and
SIGCORP's utility subsidiaries were not affected by the
merger.
Vectren is public utility holding company with two operating
public utilities, Indiana Gas Company, Inc. (Indiana Gas)
and Southern Indiana Gas and Electric Company (SIGECO).
Indiana Gas and its subsidiaries provide natural gas and
transportation services to a diversified base of customers
in 311 communities in 49 of Indiana's 92 counties. SIGECO
provides generation, transmission, distribution and the sale
of electric power to Evansville, Indiana, and 74 other
communities and the distribution and sale of natural gas to
Evansville, Indiana, and 64 other communities in 7 counties
in southwestern Indiana.
Vectren is also involved in non-regulated activities through
its non-regulated subsidiaries: Vectren Energy Services,
Inc., Vectren Financial Group, Inc., Vectren Generation
Services, Inc., Vectren Resources, LLC, Vectren Utility
Services, Inc., Vectren Ventures, Inc., Vectren Capital
Corporation and Vectren Communications, Inc. These non-
regulated activities provide energy, telecommunications and
finance services throughout the Midwest.
2. Summary of Significant Accounting Policies
A. Consolidation
The accompanying consolidated financial statements of
Vectren reflect the company on a historical basis as
restated for the effects of the pooling-of-interests
transaction completed on March 31, 2000 between Indiana
Energy and SIGCORP. The consolidated financial statements
include the accounts of Vectren and its wholly owned and
majority owned subsidiaries, after elimination of
intercompany transactions. Investments in limited
partnerships and less than majority-owned affiliates are
accounted for on the equity method. The financial
statements also reflect the consolidation of a majority-
owned affiliate, Energy Systems Group, LLC, which was an
equity method investment of Indiana Energy and SIGCORP prior
to the merger.
B. Basic and Diluted Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share, requires dual presentation of basic and
diluted earnings per share on the face of the statement of
income. Basic earnings per share is computed by dividing
net income available to common shareholders by the weighted-
average number of shares outstanding for the period.
Diluted earnings per share is computed based upon the
weighted average shares that would have been outstanding if
all dilutive potential shares would have been converted into
shares at the earliest date possible. In determining
diluted earnings per share, stock options were included in
the calculation as their effect was dilutive.
C. Utility Plant and Depreciation
Utility plant is stated at historical cost, including an
allowance for the cost of funds used during construction.
Depreciation of utility property is provided using the
straight-line method over the estimated service lives of the
depreciable assets. The approximate weighted average
remaining lives for major components of electric and gas
plant are as follows:
Gas:
Gas storage plant 11 years
Transmission plant 23
Distribution plant 16
Other gas plant 13
Electric:
Electric generation plant 14
Transmission plant 17
Distribution plant 19
Other electric plant 11
The average depreciation rates, expressed as an annual
percentage, are as follows:
Year Ended December 31 1999 1998 1997
---- ---- ----
SIGECO:
Electric 3.5% 3.4% 3.4%
Gas 3.3 3.3 3.2
Indiana Gas:
Gas 4.3 3.9 4.1
Vectren follows the practice of charging maintenance and
repairs, including the cost of removal of minor items of
property, 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 provision for depreciation.
Cost in excess of underlying book value of acquired gas
distribution companies is reflected as a component of
utility plant and is being amortized over 40 years.
D. Unamortized Debt Discount and Expense
Indiana Gas was authorized as part of an August 17, 1994
financing order from the Indiana Utility Regulatory
Commission (IURC) to amortize over a 15-year period the debt
discount and expense related to new debt issues and future
debt issues and future premiums paid for debt reacquired in
connection with refinancing. Debt discount and expense for
issues in place prior to this order are being amortized over
the lives of the related issues. Premiums paid prior to
this order for debt reacquired in connection with
refinancing are being amortized over the life of the
refunding issue.
E. Cash Flow Information
For purposes of the Consolidated Statement of Cash Flows,
Vectren considers cash investments with an original maturity
of three months or less to be cash equivalents. Cash paid
during the periods reported for interest and income taxes
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest (net of amount capitalized) $34,826 $35,798 $35,939
Income taxes 36,909 53,311 51,473
</TABLE>
F. Revenues
Revenues are recorded as products and services are delivered
to customers. To more closely match revenues and expenses,
Indiana Gas and SIGECO record revenues for all gas and
electricity delivered to customers but not billed at the end
of the accounting period.
G. Inventories
Inventories primarily consist of gas in underground storage,
fuel for electric generation and materials and supplies.
Gas in underground storage is valued using last-in, first-
out (LIFO) method, while other inventories are valued using
the average cost method. Based on the average cost of gas
purchased during December, the cost of replacing the current
portion of gas in underground storage exceeded LIFO cost at
December 31, 1999 and 1998 by approximately $23.2 million
and $18.7 million, respectively. Inventories consist of the
following:
At December 31 (in thousands) 1999 1998
------- -------
Fuel (coal and oil) for electric
generation $12,824 $15,701
Materials and supplies 15,224 15,380
Emission allowances 4,437 5,133
Gas in underground storage -
at LIFO cost 23,068 28,912
Other 3,310 1,560
------- -------
Total inventories $58,863 $66,686
======= =======
H. Refundable or Recoverable Gas Costs, Fuel for Electric
Production and Purchased Power
All metered gas rates contain a gas cost adjustment clause
which allows for adjustment in charges for changes in the
cost of purchased gas. Metered electric rates typically
contain a fuel adjustment clause which allows for adjustment
in charges for electric energy to reflect changes in the
cost of fuel and the net energy cost of purchased power.
SIGECO also collects through a quarterly rate adjustment
mechanism, the margin on electric sales lost due to the
implementation of demand side management programs.
Indiana Gas and SIGECO record any adjustment clause under-or
overrecovery each month in revenues. A corresponding asset
or liability is recorded until such time as the under-or
overrecovery 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.
On August 18, 1999 the IURC issued a generic order which
established new guidelines for the recovery of purchased
power costs. Those guidelines provide that SIGECO is able to
recover through rates the total cost incurred for purchased
power if over a period of seven days the average cost of
purchased power is below the highest cost of internal
generation at SIGECO or the higher costs can be justified in
a fuel adjustment clause filings. The generic order issued
by the IURC is being appealed by the Office of Utility
Consumer Counselor.
I. Allowance for Funds used During Construction
An allowance for funds used during construction (AFUDC),
which represents the cost of borrowed and equity funds used
for construction purposes, is charged to construction work
in progress during the period of construction and included
in "Other - net" on the Consolidated Statements of Income.
An annual AFUDC rate of approximately 6 percent was used for
1999 and 1998, while an annual rate of approximately 8
percent was used in 1997.
The table below reflects the total AFUDC capitalized and the
portion of which was computed on borrowed and equity funds
for all periods reported.
Year Ended December 31
(in thousands) 1999 1998 1997
------ ------ ------
AFUDC - borrowed funds $3,090 $2,394 $1,283
AFUDC - equity funds 739 230 1,174
------ ------ -----
Total AFUDC capitalized $3,829 $2,624 $2,457
====== ====== ======
J. Income Taxes
The liability method of accounting is used for income taxes
under which deferred income taxes are recognized, at
currently enacted income tax rates, to reflect the tax
effect of temporary differences between the book and tax
<PAGE> 29
bases of assets and liabilities. Deferred investment tax
credits are being amortized over the life of the related
asset.
K. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
L. Regulation
The business operations of Indiana Gas and SIGECO are
subject to regulation by the IURC. The Federal Energy
Regulatory Commission (FERC) has jurisdiction over those
investor-owned utilities that make wholesale energy sales
which includes SIGECO. The accounting policies of Vectren
and its utility subsidiaries give recognition to the
ratemaking and accounting practices of these agencies and to
generally accepted accounting principles, including the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 71 "Accounting for the Effects of Certain Types
of Regulation." Regulatory assets represent probable future
revenues associated with certain incurred costs, which will
be recovered from customers through the ratemaking process.
Regulatory liabilities represent probable future reductions
in revenues associated with amounts that are to be credited
to customers through the ratemaking process.
The following regulatory assets and liabilities are
reflected in the financial statements:
<TABLE>
<CAPTION>
At December 31 (in thousands) 1999 1998
------- -------
<S> <C> <C>
Regulatory Assets:
Demand side management programs $25,900 $25,648
Postretirement benefits other than pensions 1,676 5,502
Unamortized premium on reacquired debt 4,416 4,705
Unamortized debt discount and expenses 11,906 12,653
Amounts due from customers -
income taxes, net 2,741 1,778
Regulatory study costs 21 107
Fuel and gas costs 5,585 5,931
Deferred acquisition costs 650 671
------- -------
Total Regulatory Assets $52,895 $56,995
======= =======
At December 31 (in thousands) 1999 1998
------- -------
Regulatory Liabilities:
Refundable gas costs $10,204 $14,343
======= =======
</TABLE>
As of December 31, 1999, the recovery of $31.5 million of
Vectren's $52.9 million of total regulatory assets is
reflected in rates charged to customers. The remaining
$21.4 million of regulatory assets, which are not yet
included in rates, represent SIGECO's demand side management
(DSM) costs incurred after 1993. At the time of SIGECO's
next electric base rate case, these costs should be
includable in rate base and SIGECO will be provided an
opportunity to earn a return on that amount; amortization of
these costs over a period anticipated to be 15 years should
be recovered through rates as a cost of operations. Of the
$31.5 million of regulatory assets currently reflected in
utility rates, a total of $12.3 million is earning a return
consisting primarily of $4.5 million of pre-1994 DSM costs
and $4.4 million of unamortized premium on reacquired debt.
The remaining recovery periods for the regulatory assets
range from 6 years to 31 years. The remaining $19.2 million
of regulatory assets included in rates but not earning a
return are being recovered over varying periods: $1.7
million of deferred postretirement benefit costs, over 1
year; $3.9 million of fuel costs, over 3 months; $1.7
million of gas costs, over 12 months; and $11.9 million of
unamortized debt discount and expense to be recovered as
discussed in Note 1D.
It is the policy of Indiana Gas and SIGECO to continually
assess the recoverability of costs recognized as regulatory
assets and the ability to continue to account for their
activities in accordance with SFAS 71, based on the criteria
set forth in SFAS 71. Based on current regulation, Indiana
Gas and SIGECO believe such accounting is appropriate. If
all or part of Vectren's utility
operations cease to meet the criteria of SFAS 71, a write-
off of related regulatory assets and liabilities would be
required. In addition, Vectren would be required to
determine any impairment to the carrying costs of
deregulated plant and inventory assets.
M. Comprehensive Income
Comprehensive Income is a measure of all changes in equity
of an enterprise which result from the transactions or other
economic events during the period other than transactions
with shareholders. This information is reported in the
Consolidated Statements of Common Shareholders' Equity.
Vectren's components of accumulated other comprehensive
income (loss) includes unrealized gains and (losses) on
available for sale securities.
N. New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards requiring
that every derivative instrument, including certain
derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and
requires that a company must formally document, designate,
and assess the effectiveness of transactions that receive
hedge accounting. Based on the deferral of the effective
date of SFAS 133 as provided for in SFAS 137, Vectren is
required to adopt the provisions of SFAS 133 no later than
January 1, 2001. Vectren utilizes derivative instruments to
manage pricing decisions, minimize the risk of price
volatility, and minimize price risk exposure in the energy
markets. Vectren has not quantified the impact of adopting
this statement on its financial position or results or
operations.
3. Merger Costs - Subsequent Event
In the first quarter of 2000, Vectren expensed merger costs
totaling $27.2 million. These costs relate primarily to
transaction costs, severance and other merger integration
activities and the accrual remaining for such costs at March
31, 2000 is approximately $14 million. The merger
integration activities will be substantially complete by
2001.
4. Corporate Restructuring
During 1997, the Indiana Gas Board of Directors authorized
management to undertake the actions necessary and
appropriate to restructure Indiana Gas' operations to
support the company's transition into a more competitive
environment and recognize a resulting restructuring charge
of $39.5 million ($24.5 million after-tax) for fiscal 1997
as described below.
Indiana Gas recorded restructuring costs of $5.4 million
during the fourth quarter of fiscal 1997 related to the
involuntary terminations planned under Indiana Gas' specific
near-term employee reduction plan, which was scheduled for
completion by the end of fiscal 1999. These costs include
separation pay in accordance with Indiana Gas' severance
policy of $3.9 million, and net curtailment losses related
to these employees' postretirement and pension benefits. As
a result of initial work force reductions during September
1997 and primarily attrition thereafter, most of the
reductions contemplated during the two-year period and
accrued originally have been achieved. During the second
quarter of fiscal 1999, Indiana Gas reviewed its remaining
accruals for costs associated with the involuntary work
force reductions. Taking into consideration an unexpectedly
high level of voluntary terminations, Indiana Gas determined
that no additional significant involuntary work force
reductions were likely to occur. Prior to September 30,
1998, $2.2 million of involuntary termination benefits had
been paid. As a result, the severance accrual and other
operating expenses were reduced by $1.7 million during 1999.
Indiana Gas' management also committed to sell, abandon or
otherwise dispose of certain assets, including buildings,
gas storage fields and intangible plant. Indiana Gas
recorded restructuring costs of $34.1 million during 1997 to
adjust the carrying value of those assets to estimated fair
value. These assets have been sold or are no longer in use.
5. Acquisition of the Gas Distribution Assets of The Dayton
Power and Light Company
On December 15, 1999, Indiana Energy, now Vectren, announced
that the Board of Directors had approved a definitive
agreement under which the company will acquire certain of
the natural gas distribution assets of The Dayton Power and
Light Company. The acquisition, with a purchase price of
$425 million, is expected to be funded with commercial paper
(back-stopped by a committed bank credit facility) which
will be replaced over time with permanent financing. This
transaction is conditioned upon the approval of several
regulatory bodies. Management hopes to complete the
transaction by mid-year 2000.
6. Short-Term Borrowings
Effective in March 1999, Indiana Gas implemented a $100
million commercial paper program. Indiana Gas' commercial
paper is priced to the public at a rate determined by
current money market conditions. At December 31, 1999
Indiana Gas had approximately $83.0 million outstanding.
SIGECO has trust demand note arrangements totaling $17.0
million with several banks, of which none was utilized at
December 31, 1999. Funds are also borrowed periodically
from banks on a short-term basis, made available through
lines of credit totaling $49 million at December 31, 1999,
of which $22.9 million was utilized at that date.
Vectren Capital Corporation (formerly SIGCORP Capital, Inc.)
provides financing for Vectren's non-regulated subsidiaries'
operations and investments. Vectren Capital Corporation has
aggregate lines of credit of $140 million, of which $101.7
million was outstanding at December 31, 1999.
Indiana Gas, SIGECO and Vectren Capital Corporation
compensate the participating banks with arrangements that
vary from no commitment fees to a combination of fees that
are mutually agreeable. Notes payable to banks bore
interest at rates negotiated with the banks at the time of
borrowing. Bank loans and commercial paper outstanding
during the reported periods were as follows:
<TABLE>
<CAPTION>
At December 31 (in thousands) 1999 1998
--------- --------
<S> <C> <C>
Outstanding:
Bank Loans $124,638 $ 77,308
Commercial paper 83,000 48,675
-------- --------
Total short term borrowings $207,638 $125,983
======== ========
Weighted average interest rates:
Bank Loans 8.08% 5.89%
Commercial paper 6.30 5.80
Weighted average interest rates during the year:
Bank Loans 5.76 6.01
Commercial paper 5.40 5.80
Weighted average total outstanding
during the year $163,762 $ 75,038
</TABLE>
7. Long - Term Debt and Other Obligations
First mortgage bonds, notes payable and partnership
obligations outstanding and classified as long-term are as
follows:
<TABLE>
<CAPTION>
At December 31 (in thousands) 1999 1998
------- -------
<S> <C> <C>
Southern Indiana Gas and Electric Company
First Mortgage Bonds due:
1999, 6% $ - $ 45,000
2020, 4.40% Pollution Control Series B 4,640 4,640
2030, 4.40% Pollution Control Series B 22,000 22,000
2014, 7.25% Pollution Control Series A 22,500 22,500
2016, 8.875% 13,000 23,000
2023, 7.60% 45,000 45,000
2025, 7.625% 20,000 20,000
Adjustable Rate Pollution Control:
2015, Series A, presently 4.55% 9,975 9,975
Adjustable Rate Environmental Improvement:
2023, Series B, presently 6% 22,800 22,800
2029, 6.72% 80,000 -
------- -------
Total first mortgage bonds 239,915 214,915
------- -------
Notes Payable:
Tax Exempt, due 2003, 6.25% 1,000 1,000
-------- -------
Indiana Gas Company
Notes Payable due:
1999, 8.9% - 10,000
2003, Series F, 5.75% 15,000 15,000
2004, Series F, 6.36% 15,000 15,000
2007, Series E, 6.54% 6,500 6,500
2013, Series E, 6.69% 5,000 5,000
2015, Series E, 7.15% 5,000 5,000
2015, Series E, 6.69% 5,000 5,000
2015, Series E, 6.69% 10,000 10,000
2021, Private Placement, 9.375% 25,000 25,000
2021, Series A, 9.125% 7,000 7,000
2025, Series E, 6.31% 5,000 5,000
2025, Series E, 6.53% 10,000 10,000
2027, Series E, 6.42% 5,000 5,000
2027, Series E, 6.68% 3,500 3,500
2027, Series F, 6.34% 20,000 20,000
2028, Series F, 6.75% 14,849 14,964
2028, Series F, 6.36% 10,000 10,000
2028, Series F, 6.55% 20,000 20,000
2029, Series G, 7.08% 30,000 -
------- -------
Total notes payable 211,849 191,964
------- -------
Non-Regulated
Notes Payable:
Bank, due 2000, 2.90% - 9
Noninterest bearing note due 2005 576 646
Variable rate note, due 2007 950 950
Insurance Company, due 2012, 7.43% 35,000 35,000
------- -------
Total notes payable 36,526 6,605
------- -------
Partnership Obligations, due 2001 through 2005, 845 2,358
Without interest
Total long-term debt outstanding 490,135 446,842
Less: Maturities and sinking fund requirements (776) (56,751)
Unamortized debt premium and discount, net (2,633) (1,153)
-------- --------
Total long-term debt, excluding amounts due
within one year $ 486,726 $ 388,938
======= ========
</TABLE>
Consolidated maturities and sinking fund requirements on
long-term debt subject to mandatory redemption during the
five years following 1999 (in millions) are $0.60 in 2000,
$0.25 in 2001, $3.25 in 2002, $19.25 in 2003 and $3.25 in
2004.
In addition to the obligations presented in the table above,
SIGECO has $53.7 million of adjustable rate pollution
control series first mortgage bonds which could, at the
election of the bondholder, be tendered to SIGECO annually
in March. If SIGECO's agent is unable to remarket any bonds
tendered at that time, SIGECO would be required to obtain
additional funds for payment to bondholders. For financial
statement presentation purposes those bonds subject to
tender in 2000 are shown as current liabilities. In March
2000, all $53.7 million of the bonds were remarketed.
Provisions under which certain of Indiana Gas' Series E,
Series F and Series G Medium Term Notes were issued entitle
the holders of $137 million of these notes to put the debt
back to Indiana Gas at face value at certain specified dates
before maturity beginning in 2000. Long-term debt (in
millions) subject to the put provisions during the five
years following 1999 totals $5.0 in 2000, $11.5 in 2002 and
$3.5 in 2004.
The annual sinking fund requirement of SIGECO's first
mortgage bonds is 1 percent 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. SIGECO intends to meet the 2000
sinking fund requirement by this means and, accordingly, the
sinking fund requirement for 2000 is excluded from current
liabilities on the balance sheet. At December 31, 1999,
$200.0 million of SIGECO's utility plant remained unfunded
under SIGECO's Mortgage Indenture.
The above debt balances contain certain financial covenants
and other restrictions with which Vectren must comply. At
December 31, 1999, Vectren is in compliance with all of
these convenants.
In July 1999, Indiana Gas filed a registration statement
with the Securities and Exchange Commission with respect to
$100 million in debt securities. Indiana Gas expects to
issue this debt pursuant to a medium term note program,
denominated as Series G. The net proceeds from the sale of
these new debt securities will be used for general corporate
purposes, including repayment of long term debt and
financing of Indiana Gas' continuing construction program.
On October 5, 1999, Indiana Gas issued $30 million in
principal amount of Series G Medium-term Notes bearing
interest at the per annum rate of 7.08 percent with a
maturity date of October 5, 2029.
8. Fair Value of Financial Instruments
The estimated fair value of Vectren's financial instruments
were as follows:
<TABLE>
<CAPTION>
At December 31
(in thousands) 1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 17,351 $ 17,351 $ 7,391 $ 7,391
Short-term borrowings 207,638 207,638 125,983 125,983
Partnership Obligations
(includes amounts due
within one year) 845 905 2,358 3,446
Redeemable preferred stock of
subsidiary 7,500 7,538 7,500 9,044
Long term debt (includes
amounts due within one 541,202 544,928 499,389 540,026
year)
</TABLE>
Certain methods and assumptions must be used to estimate the
fair value of financial instruments. Because of the short
maturity of cash and cash equivalents and notes payable, the
carrying amounts approximate fair values for these financial
instruments. The fair value of Vectren's long-term debt was
estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to Vectren
for debt of the same remaining maturities. The fair value
of partnership obligations were estimated based on current
quoted market rate of comparable debt. The fair value of
redeemable preferred stock of SIGECO was based on the
current quoted market rate of long-term debt with similar
characteristics.
Under current regulatory treatment, call premiums on
reacquisition of long-term debt are generally recovered in
customer rates over the life of the refunding issue or over
a 15-year period (see Note 2D and 2L). Accordingly, any
reacquisition would not be expected to have a material
effect on Vectren's financial position or results of
operations.
9. Capital Stock
On March 31, 2000, the merger of Indiana Energy and SIGCORP
with and into Vectren was consummated with a tax-free
exchange of shares and has been accounted for as a pooling
of interests. The common shareholders of SIGCORP received
one and one-third shares of Vectren common stock for each
SIGCORP common share and Indiana Energy common shareholders
received one share of Vectren common stock for each Indiana
Energy common share, resulting in the issuance of 61.3
million shares of Vectren common stock.
The holders of outstanding Vectren common stock are entitled
to receive dividends out of the assets legally available and
in amounts as the Vectren Board of Directors may from time
to time determine. The Vectren common shares are not
convertible and the holders of Vectren common shares have no
preemptive or subscriptions rights to purchase any
securities of Vectren. Upon liquidation, dissolution or
winding up of Vectren, the holders of Vectren common shares
are entitled to receive pro rata the assets of Vectren which
are legally available for distribution, after payment of all
debts and liabilities and subject to the prior rights of any
holders of preferred shares then outstanding. Each
outstanding Vectren common share is entitled to one vote on
all matters submitted to a vote of Vectren's shareholders.
Except as otherwise required by law or the Vectren Articles
of Incorporation, the holders of Vectren common shares vote
together on all matters submitted to a vote of the
shareholders, including the election of directors.
The Vectren Board of Directors has adopted a Shareholder
Rights Agreement, which is generally designed to deter
coercive takeover tactics and to encourage all persons
interested in potentially acquiring control of Vectren to
treat each shareholder on a fair and equal basis. Under the
Shareholder Rights Agreement, the Vectren Board of Directors
has declared a dividend distribution of one right for each
outstanding Vectren common share. A right will attach to
each Vectren common share Vectren issues. Each right
entitles the holder to purchase from Vectren one share at a
price of $65.00 per share (subject to adjustment to prevent
dilution). Initially, the rights will not be exercisable.
The rights only become exercisable 10 days following a
public announcement that a person or group of affiliated or
associated persons (Vectren Acquiring Person) has acquired
beneficial ownership of 15 percent or more of the
outstanding Vectren common shares (or a 10 percent acquirer
who is determined by the Vectren Board of Directors to be an
adverse person), or 10 days following the announcement of an
intention to make a tender offer or exchange offer the
consummation of which would result in any person or group
becoming a Vectren Acquiring Person. The Vectren
Shareholder Rights Agreement expires October 21, 2009.
Conversion of Options
Certain SIGCORP and SIGECO employees held options to
purchase SIGCORP common shares granted under the 1994 SIGECO
Stock Option Plan and other employee compensation benefits
arrangements. When the merger was consummated, each
unexpired and unexercised option to purchase SIGCORP common
shares was automatically converted into an option to
purchase the number of Vectren common shares that could have
been purchased under the original option multiplied by
1.333. The exercise price per Vectren common share under
the new option is equal to the original per share price
divided by 1.333. The new Vectren options will otherwise be
subject to the same terms and conditions as the original
SIGCORP options. The expiration dates for options
outstanding as of December 31, 1999, ranged from July 13,
2005 to July 14, 2008. This stock option activity for the
past three years, converted to Vectren shares, was as
follows:
<TABLE>
<CAPTION>
At December 31 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Outstanding at January 1 671,389 610,742 437,096
Granted 272,783 99,973 185,750
Exercised (13,168) (39,326) (12,104)
-------- -------- --------
Outstanding at December 31 931,004 671,389 610,742
======== ======== ========
Exercisable at December 31 658,221 508,892 424,992
Reserved for future grants at
end of year - 272,783 372,756
Weighted Average Option Price:
Exercisable $ 17.53 $ 15.88 $ 14.60
Outstanding at end of year 18.33 17.46 16.19
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
Options Outstanding Options Exercisable
Weighted Weighted
Number of Average Average Number of Weighted
Range of Options Remaining Exercise Options Average
Exercise Outstanding Contrac- Price Exercis- Exercise
Prices tual Life able Price
------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$12.03-$14.43 252,697 4.5 $ 13.82 252,697 $ 13.82
$14.43-$16.84 62,460 5.1 15.32 62,460 15.32
$16.84-$19.24 57,341 6.5 17.44 57,341 17.44
$19.24-$21.65 458,533 8.7 20.08 185,750 19.83
$24.05 99,973 8.5 24.05 99,973 24.05
$12.03-$24.05 931,004 7.2 $ 18.33 658,221 $ 17.53
</TABLE>
Vectren accounts for stock compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Under Accounting Principles
Board Opinion No. 25, no compensation cost has been
recognized for stock options. Had compensation cost for
stock options been determined consistent with SFAS No. 123
"Accounting for Stock-based Compensation," net income would
have been reduced to the following pro forma amounts:
<PAGE> 36
<TABLE>
<CAPTION>
At December 31 (in thousands, 1999 1998 1997
except earnings per share)
-------- ------- -------
<S> <C> <C> <C>
Net Income:
As reported $90,748 $86,600 $67,714
Pro forma 90,077 86,085 67,422
Basic Earnings Per Share:
As reported 1.48 1.41 1.10
Pro forma 1.47 1.40 1.09
Diluted Earnings Per Share:
As reported 1.48 1.40 1.10
Pro forma 1.47 1.39 1.09
</TABLE>
The fair value of each option granted used to determine pro
forma net income is estimated as of the date of grant using
the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in the twelve
month periods December 31, 1999, 1998 and 1997: risk-free
interest rate of 6.46 percent, 4.44 percent and 5.75
percent, respectively; expected option term of five years;
expected volatilities of 34.00 percent, 33.16 percent and
36.62 percent, respectively; and dividend rates of 4.46
percent, 3.77 percent and 4.46 percent, respectively.
Conversion of Restricted Stock
Indiana Energy had an Executive Restricted Stock Plan for
the principal officers of the company and participating
subsidiary companies. Grants under the plan were made
annually and shares issued were original issue shares of
Indiana Energy, carry transferability restrictions and are
subject to performance and forfeiture provisions according
to the terms of the plan. The original vesting period for
the shares was four years from the date of grant. Indiana
Energy also had a Directors' Restricted Stock Plan through
which non-employee directors receive one-third of their
combined compensation (exclusive of attendance fees) as
directors of Indiana Energy, Indiana Gas or IEI Investments,
Inc. in shares of Indiana Energy's common stock subject to
certain restrictions on transferability. Vesting in the
shares occurs over the directors' terms, which generally are
three years. They may also elect to receive the remaining
two-thirds of their combined compensation (exclusive of
attendance fees) in cash or in shares of Indiana Energy's
common stock which are not subject to restrictions on
transferability other than those imposed by federal and
state laws. The value of shares under both the Executive
and Directors' Restricted Stock Plans can also be
transferred to Vectren's Nonqualified Deferred Compensation
Plan once the restrictions on those shares have lifted
Upon consummation of the merger, the restrictions on each
outstanding share of restricted stock of Indiana Energy
lapsed and all shares of Indiana Energy that were issued as
restricted stock were treated as unrestricted shares of
Indiana Energy in the merger exchange. At December 31, 1999
and 1998, respectively, the shares of Indiana Energy common
stock reserved for issuance were as follows:
At December 31 1999 1998
--------- --------
Dividend Reinvestment and Stock
Purchase Plan 417,836 339,935
Executive Restricted Stock Plan 346,319 291,549
Directors' Restricted Stock Plan 54,994 58,987
Retirement Savings Plan 964,208 224,772
--------- -------
Total 1,783,357 915,243
========= =======
Common stock dividends of Vectren may be reinvested under a
Dividend Reinvestment and Stock Purchase Plan. Common shares
purchased in connection with the plan are currently being
acquired through the open market.
10. Retirement Plans and Other Postretirement Benefits
Prior to July 1, 2000, SIGCORP and Indiana Energy had
separate retirement and other postretirement benefit plans.
The activities in these plans are described below by
company. Effective July 1, 2000, the SIGECO and Indiana
Energy pension plans were merged. Also effective July 1,
2000, the SIGECO and Indiana Energy retirement savings plans
were merged, as were their postretirement health care and
life insurance plans.
SIGCORP
SIGECO has multiple noncontributory defined benefit pension
and other postretirement benefit plans which cover eligible
full-time regular employees. The pension plans provide
retirement benefits based on years of service and the
employee's highest 60 consecutive months' compensation
during the last 120 months of employment. The nonpension
plans include plans for health care and life insurance
through a combination of self-insured and fully insured
plans. The IURC has authorized SIGECO to recover the costs
related to postretirement benefits other than pensions under
the accrual method of accounting consistent with Statement
of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions.
Amounts accrued prior to that authorization were deferred as
allowed by the IURC and are currently being amortized over a
60-month period.
<TABLE>
<CAPTION>
Net periodic
benefit cost Pension Benefits Other Benefits
consisted
of the
following
components:
Year Ended 1999 1998 1997 1999 1998 1997
December 31 (in
thousands)
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 3,020 $ 2,639 $ 2,166 $ 620 $ 578 $ 890
Interest cost 5,637 5,020 4,661 1,707 1,664 2,056
Expected return
on plan assets (6,517) (5,985) (5,182) (751) (577) (399)
Amortization of
prior service
cost 307 178 147 - - -
Amortization of
transitional
(asset) obligation (418) (418) (418) 1,311 1,311 1,472
Recognized
actuarial gain (300) (47) (4) (757) (743) (499)
-------- -------- -------- ------- ------- -------
Net periodic
benefit cost $ 1,729 $ 1,387 $ 1,370 $ 2,130 $2,233 $3,520
======= ======= ======= ======= ======= ======
</TABLE>
A reconciliation of the plan's benefit obligations, fair
value of plan assets, funded status and amounts recognized
in the Consolidated Balance Sheets follows:
<TABLE>
<CAPTION>
Benefit obligation consisted
of the following components: Pension Benefits Other Benefits
At December 31 (in thousands) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $79,743 $72,914 $25,529 $30,924
Service cost - benefits
earned during the year 3,020 2,639 620 578
Interest cost on projected
benefit obligation 5,637 5,020 1,707 1,664
Plan amendments 33 2,220 - (2,412)
Benefits paid (3,286) (3,176) (661) (1,024)
Actuarial (gain) loss (3,445) 126 (2,287) (4,201)
------- ------- -------- -------
Benefit obligation at end
of year $81,702 $79,743 $24,908 $25,529
======= ======= ======== =======
Fair value of Plan Assets Pension Benefits Other Benefits
At December 31 (in thousands) 1999 1998 1999 1998
------- ------- ------- -------
Plan assets at fair value at
beginning of year $83,337 $76,587 $ 9,511 $ 7,336
Actual return on plan assets 6,000 9,926 1,434 1,031
Employer contributions - - 1,425 2,168
Benefits paid net of
participant contributions (3,286) (3,176) ( 661) (1,024)
-------- -------- -------- -------
Fair value of plan assets
at end of year $86,051 $83,337 $11,709 $ 9,511
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Funded Status Pension Benefits Other Benefits
At December 31
(in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Funded status $ 4,349 $ 3,594 $(13,199) $(16,018)
Unrecognized transitional
obligation (asset) (1,398) (1,815) 17,043 18,353
Unrecognized service cost 3,180 3,455 - -
Unrecognized net (gain)
loss and other (14,490) (11,864) (15,885) (13,671)
-------- -------- -------- --------
Net amount recognized $ (8,359) $ (6,630) $(12,041) $(11,336)
======== ======== ======== ========
</TABLE>
Weighted-average assumptions used in the accounting for
these plans were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
Year Ended December 31 1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Discount rate 7.50% 7.00% 7.50% 7.00%
Expected return
on plan assets 8.00% 8.00% N/A N/A
Rate of compensation
increase 5.00% 5.00% N/A N/A
</TABLE>
The transitional pension benefit is being amortized over
approximately 14 to 18 years for the plans. The net periodic
cost determined under the standard includes the amortization
of the discounted present value of the obligation at the
adoption date over a 20-year period.
As of December 31, 1999 the health care cost trend is 8.0
percent declining to 4.5 percent in 2006. The accrued
health care cost trend rate for 2000 is 7.0 percent. The
estimated cost of these future benefits could be
significantly affected by future changes in health care
costs, work force demographics, interest rates or plan
changes.
A 1.0 percent change in the assumed health care cost trend
for SIGECO's postretirement health care plan would have the
following effects:
(in thousands) 1% Increase 1% Decrease
----------- -----------
Effect on the aggregate
of the service
and interest cost
components $ 382 $ (307)
Effect on the
postretirement benefit
obligation 3,606 (2,952)
In addition to the trusteed pension plans discussed above,
SIGECO provides supplemental pension benefits to certain
current and former officers under nonqualified and nonfunded
plans. The accrued pension liability for these plans at
December 31, 1999 and 1998 was $4.6 million and $3.8
million, respectively. Service cost related to these
benefits for the year ended December 31, 1999 was
approximately $1.0 million.
SIGECO has adopted Voluntary Employee Beneficiary
Association (VEBA) Trust Agreements 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 covered persons consistent
with acceptable actuarial methods. To the extent these
postretirement benefits are funded, the benefits will not be
shown as a liability on SIGECO's financial statements.
SIGECO also has a defined contribution retirement savings
plan which is qualified under sections 401(a) and 401(k) of
the Internal Revenue Code. During 1999, 1998 and 1997,
SIGECO made contributions, in thousands, to this plan of
$551, $188 and $-0-, respectively.
Indiana Energy
Indiana Energy has multiple defined benefit pension and
other postretirement benefit plans. The nonpension plans
include plans for health care and life insurance. All of the
plans are non-contributory with the exception of the health
care plan which contains cost-sharing provisions whereby
employees retiring after January 1, 1996, are required to
make contributions to the plan when increases in Indiana
Energy's health care costs exceed the general rate of
inflation, as measured by the Consumer Price Index (CPI).
The IURC has authorized Indiana Gas to recover the costs
related to postretirement benefits other than pensions under
the accrual method of accounting consistent with Statement
of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions.
Amounts accrued prior to that authorization were deferred as
allowed by the IURC and are currently being amortized over a
60-month period.
The detailed disclosures of benefit components that follow
are based on an actuarial valuation performed for the
September 30, 1999, 1998 and 1997 financial statements using
a measurement date as of June 30 for each respective year.
In management's opinion, the disclosures required as of and
for the years ended December 31, 1999, 1998 and 1997 would
not differ materially from those presented below.
Net periodic benefit cost, excluding the 1997 curtailment
loss related to the postretirement health care and life
insurance plans, consisted of the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
Year Ended September 30
(in thousands) 1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 2,033 $ 1,417 $ 1,268 $ 882 $ 721 $ 770
Interest cost 4,913 4,966 4,847 3,136 3,199 3,311
Expected return
on plan assets (7,310) (6,757) (6,606) - - -
Amortization of
transition obli-
gation (asset) (316) (316) (309) 1,955 1,955 2,280
Amortization of
loss (gain) and
other 115 78 884 (132) 1,337 1,397
Net period -------- ------- ------- ------- ------- ------
benefit cost $ (565) $ (612) $ 84 $5,841 $7,212 $7,758
======= ======== ======= ======= ====== ======
</TABLE>
A reconciliation of the plans' benefit obligations, fair
value of plan assets, funded status and amounts recognized
in the Consolidated Balance Sheets follows:
<TABLE>
<CAPTION>
Benefit obligation consisted
of the following components: Pension Benefits Other Benefits
At September 30 (in thousands) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Benefit obligation at beginning $77,097 $65,977 $48,069 $42,883
of year
Service cost - benefits earned 2,033 1,417 882 721
during the year
Interest cost on projected 4,913 4,966 3,136 3,199
benefit obligation
Benefits paid (4,715) (4,460) (2,944) (3,064)
Actuarial (gain) loss (9,525) 9,197 (5,772) 4,330
------- ------- -------- -------
Benefit obligation at end
of year $69,803 $77,097 $43,371 $48,069
======= ======= ======= =======
Fair value of Plan Assets Pension Benefits Other Benefits
At September 30 (in thousands) 1999 1998 1999 1998
------- ------- ------ -------
Plan assets at fair value at $ 97,628 $87,801 $ - $ -
beginning of year
Actual return on plan assets 8,179 14,194 - -
Employer contributions 119 93 2,944 3,064
Benefits paid net
of participant contributions (4,715) (4,460) (2,944) (3,064)
-------- ------- ------ ------
Fair value of plan
assets at end of year $101,211 $97,628 $ - $ -
</TABLE>
<TABLE>
<CAPTION>
Funded Status Pension Benefits Other Benefits
At September 30 (in thousands) 1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Funded status $ 31,408 $ 20,531 $(43,371) $(48,069)
Unrecognized transitional
obligation (asset) (882) (1,198) 27,375 29,330
Unrecognized service cost 459 3,693 - -
Unrecognized net (gain) loss
and other (26,192) (19,173) (12,290) (6,649)
-------- -------- -------- --------
Net amount recognized $ 4,793 $ 3,853 $(28,286) $(25,388)
======== ======== ======== ========
</TABLE>
The aggregate benefit obligation and aggregate fair value of
the plan assets for pension plans with benefit obligations
in excess of plan assets were $5.5 million and $0,
respectively, as of September 30, 1999, and $5.6 million and
$0, respectively, as of September 30, 1998.
<TABLE>
<CAPTION>
Weighted-average assumptions used in
the accounting for these plans
were as follows: Pension Benefits Other Benefits
Year Ended September 30 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return
on plan assets 9.00% 9.00% N/A N/A
Rate of compensation
increase 5.00% 5% to 5.5% N/A N/A
CPI rate N/A N/A 3.50% 3.50%
</TABLE>
The assumed health care cost trend rate for medical gross
eligible charges used in measuring the postretirement
benefit obligation for the health care plan as of September
30, 1999, was 6.5 percent for fiscal 2000. This rate is
assumed to decrease gradually through fiscal 2004 to 5.0
percent and remain at that level thereafter.
A one- percent change in the assumed health care cost trend
rates for Indiana Energy's postretirement health care plan
would have the following effects:
(in thousands) 1% Increase 1% Decrease
--------- ----------
Effect on the aggregate of the
service and interest
cost components $ 70 $ (63)
Effect on the postretirement
benefit
Benefit obligation 775 (701)
Indiana Energy also has a defined contribution retirement
savings plan which is qualified under sections 401(a) and
401(k) of the Internal Revenue Code. During 1999, 1998 and
1997, Indiana Energy made contributions, in thousands, to
this plan of $1,356, $2,156 and $2,275, respectively.
11. Leveraged Leases
Southern Indiana Properties, Inc. (SIPI), a wholly-owned
subsidiary of Vectren Financial Group, Inc., is a lessor in
several leveraged lease agreements under which an office
building, a part of a reservoir, a gas turbine electric
generating peaking unit, two heat and power generating
facilities and passenger railroad cars are leased to third
parties. In early 1998, SIPI sold its leveraged lease in a
paper mill. In 1999 SIPI entered into two new leveraged
leases in the Netherlands and Belgium. The economic lives
and lease terms vary with the leases. The total equipment
and facilities cost was approximately $409.7 million and
$86.7 million at December 31, 1999 and 1998, respectively.
The cost of the equipment and facilities was partially
financed by nonrecourse debt provided by lenders, who have
been granted an assignment of rentals due under the leases
and a security interest in the leased property, which they
accepted as their sole remedy in the event of default by the
lessee. Such debt amounted to approximately $373.5 million
and $66.7 million at December 31, 1999 and 1998,
respectively. SIPI's net investment in leveraged leases at
December 31, 1999 and 1998, respectively, were as follows:
<TABLE>
<CAPTION>
At December 31 (in thousands) 1999 1998
-------- -------
<S> <C> <C>
Minimum lease payments receivable $161,551 $51,443
Estimated residual value 29,073 29,073
Less unearned income 104,887 44,513
-------- -------
Investment in lease financing receivables and loan 85,737 36,003
Less deferred taxes arising from leveraged leases 30,700 25,330
-------- -------
Net investment in leveraged leases $ 55,037 $10,673
======== =======
</TABLE>
12. Commitments and Contingencies
Vectren's estimated capital expenditures for 2000 are $135
million.
Future minimum lease payments required under operating
leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 1999, are as
follows:
Year Ended December 31 (in millions) 1999
-----
2000 $ 4.7
2001 3.8
2002 3.8
2003 3.5
2004 2.9
Thereafter 10.6
-----
Total $29.3
=====
Total lease expense, in millions, was $2.7 in 1999, $2.2 in
1998 and $2.8 in 1997.
Vectren 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 Vectren that
are likely to have a material adverse effect on the
financial position or results of operations. Refer to Note
14 for litigation matters concerning the Clean Air Act and
Note 16 for litigation matters related to ProLiance, LLC.
13. Income Taxes
The components of consolidated income tax expense were as
follows:<TABLE>
<CREDIT>
Year Ended December 31 (in thousands) 1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Current:
Federal $33,028 $34,449 $ 45,309
State 5,379 5,450 8,235
------- ------- --------
Total current taxes 38,407 39,899 53,544
------- ------- --------
Deferred:
Federal 8,238 4,625 (14,561)
State 1,423 181 (1,114)
------- ------- ---------
Total deferred taxes 9,661 4,806 (15,675)
------- ------- --------
Amortization of investment tax credit (2,360) (2,377) (2,387)
------- ------- --------
Consolidated income tax expense $45,708 $42,328 $ 35,482
======= ======= ========
</TABLE>
The recording of restructuring costs of $39.5 million in
1997 had the effect of decreasing deferred income tax
expense by approximately $15.0 million.
Effective income tax rates were 33.3 percent, 32.7 percent
and 34.3 percent of pretax income for 1999, 1998 and 1997,
respectively. This compares with a combined federal and
state income tax statutory rate of 37.9 percent for all
years reported. Individual components of the rate difference
for 1999 were not significant except for investment tax
credits which amounted to (1.7) percent and other tax
credits which amounted to (3.2) percent. Investment tax
credits were (1.8) and (2.3) percent for 1998 and 1997,
respectively. Other tax credits were (2.9) and (2.7)
percent for 1998 and 1997, respectively.
As required by the IURC, Indiana Gas and SIGECO use a
normalized method of accounting for deferred income taxes.
Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred income taxes
are provided for taxes not currently payable due to, among
other things, the use of various accelerated depreciation
methods, shorter depreciable lives and the deduction of
certain construction costs for tax purposes. Taxes deferred
in prior years are being charged and income credited as
these tax effects reverse over the lives of the related
assets.
Significant components of Vectren's net deferred tax
liability as of December 31, 1999, and 1998, are as follows:
<TABLE>
<CAPTION>
At December 31 (in thousands) 1999 1998
------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and cost recovery
timing differences $181,468 $177,903
Deferred fuel costs, net 2,427 3,446
Leveraged leases 30,700 25,330
Regulatory assets recoverable through
future rates 26,128 26,048
Deferred tax assets:
Unbilled revenue - -
Regulatory liabilities to be settled
through future rates (26,138) (27,754)
Other - net 935 (361)
-------- --------
Net deferred tax liability $215,520 $204,612
======== ========
</TABLE>
Investment tax credits have been deferred and are being
credited to income over the life of the property giving rise
to the credit. The Tax Reform Act of 1986 eliminated
investment tax credits for property acquired after January
1, 1986.
SIPI and Energy Realty, a subsidiary of Vectren Financial
Group, have several investments in affordable housing and
historical rehabilitation projects from which federal tax
credits are being realized. Also, see Note 17 for a
discussion of federal tax credits associated with Vectren
Synfuels' investment in Pace Carbon.
14. Environmental
Manufactured Gas Plants
In the past, Indiana Gas and others, including former
affiliates, and/or previous landowners, operated facilities
for the manufacturing of gas and storage of manufactured
gas. These facilities are no longer in operation and have
not been operated for many years. Under currently
applicable environmental laws and regulations, Indiana Gas,
and the others, may now be required to take remedial action
if certain byproducts are found above a regulatory threshold
at these sites.
Indiana Gas has identified the existence, location and
certain general characteristics of 26 gas manufacturing and
storage sites. Based upon the site work completed to date,
Indiana Gas believes that a level of contamination that may
require some level of remedial activity may be present at a
number of the sites. Removal activities have been conducted
at several sites and a remedial investigation/feasibility
study (RI/FS) has been completed at one of the sites under
an agreed order between Indiana Gas and the Indiana
Department of Environmental Management (IDEM), with a Record
of Decision (ROD) expected to be issued by IDEM in 2000.
Although Indiana Gas has not begun an RI/FS at additional
sites, Indiana Gas has submitted several of the sites to
IDEM's Voluntary Remediation Program (VRP) and is currently
conducting some level of remedial activities including
groundwater monitoring at certain sites where deemed
appropriate and will continue remedial activities at the
sites as appropriate and necessary.
Based upon the work performed to date, Indiana Gas has
accrued investigation, remediation, groundwater monitoring
and related costs for the sites. Estimated costs of certain
remedial actions that may likely be required have also been
accrued. Costs associated with environmental remedial
activities are accrued when such costs are probable and
reasonably estimable. Indiana Gas does not believe it can
provide an estimate of the reasonably possible total
remediation costs for any site prior to completion of an
RI/FS and the development of some sense of the timing for
implementation of the site specific remedial alternative, to
the extent such remediation is required. Accordingly, the
total costs which may be incurred in connection with the
remediation of all sites, to the extent remediation is
necessary, cannot be determined at this time.
Indiana Gas has been recovering the costs of the
investigations and work from insurance carriers and other
potentially responsible parties (PRPs). The IURC has
determined that these costs are not recoverable from utility
customers.
Indiana Gas has PRP agreements in place covering 19 of the
26 sites. The agreements provide for coordination of
efforts and sharing of investigation and clean-up costs
incurred and to be incurred at the sites. These agreements
limit Indiana Gas' share of past and future response costs
at these 19 sites to between 20 and 50 percent. Based on
the agreements, Indiana Gas has accrued its proportionate
share of the estimated cost related to work not yet
performed.
In early 1999, Indiana Gas filed a complaint in Indiana
state court to continue its pursuit of insurance coverage
from four insurance carriers. In the first quarter of 2000,
settlement agreements were reached with each of these
insurers and the litigation was dismissed. As of December
31, 1999, Indiana Gas has recorded settlements from other
insurance carriers in an aggregate amount of approximately
$15.5 million.
These environmental matters have had no material impact on
earnings since costs recorded to date approximate PRP
recoveries and insurance settlements received. While Indiana
Gas has recorded all costs which it presently expects to
incur in connection with remediation activities, it is
possible that future events may require some level of
additional remedial activities which are not presently
foreseen.
Clean Air Act
In October 1997, the United States Environmental Protection
Agency (USEPA) proposed a rulemaking that could require
uniform NOx emissions reductions of 85 percent by utilities
and other large sources in a 22-state region spanning areas
in the Northeast, Midwest, Great Lakes, Mid-Atlantic and
South. This rule is referred to as the "NOx SIP call". The
USEPA provided each state a proposed budget of allowed NOx
emissions, a key ingredient of ozone, which requires a
significant reduction of such emissions. Under that budget,
utilities may be required to reduce NOx emissions to a rate
of 0.15 lb./mmBtu from levels already imposed by Phase I and
Phase II of the Clean Air Act Amendments of 1990.
Midwestern states (the alliance) have been working together
to determine the most appropriate compliance strategy as an
alternative to the USEPA proposal. The alliance submitted
its proposal, which calls for a smaller, phased in reduction
of NOx levels, to the USEPA and the Indiana Department of
Environmental Management in June 1998.
In July 1998, Indiana submitted its proposed plan to the
USEPA in response to the USEPA's proposed new NOx rule and
the emissions budget proposed for Indiana. The Indiana
plan, which calls for a reduction of NOx emissions to a rate
of 0.25 lb./mmBtu by 2003, is less stringent than the USEPA
proposal but more stringent than the alliance proposal.
In October 27, 1998 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). The final rule requires that 23 states and
jurisdictions must file revised state implementation plans
("SIPs") with EPA by no later than September 30, 1999, which
was essentially unchanged from its October 1997, proposed
rule. The USEPA has encouraged states to target utility
coal-fired boilers for the majority of the reductions
required, especially NOx emissions. Northeastern states
have claimed that ozone transport from midwestern states
(including Indiana) is the primary reason for their ozone
concentration problems. Although this premise is challenged
by others based on various air quality modeling studies,
including studies commissioned by the USEPA, the USEPA
intends to incorporate a regional control strategy to reduce
ozone transport. The USEPA's final ruling is being
litigated in the federal courts by approximately ten
midwestern states, including Indiana.
During the second quarter of 1999, the USEPA lost two
federal court challenges to key air-pollution control
requirements. In the first ruling by the U.S. Circuit Court
of Appeals for the District of Columbia on May 14, 1999, the
Court struck down the USEPA's attempt to tighten the one-
hour ozone standard to an eight-hour standard and the
attempt to tighten the standard for particulate emissions,
finding the actions unconstitutional. In the second ruling
by the same Court on May 25, 1999, the Court placed an
indefinite stay on the USEPA's attempts to reduce the
allowed NOx emissions rate from levels required by the Clean
Air Act Amendments of 1990. The USEPA appealed both court
rulings. On October 29, 1999, the Court refused to
reconsider its May 14, 1999 ruling.
On March 3, 2000, the D.C. Circuit Court of Appeals upheld
the USEPA's October 27, 1998 final rule requiring 23 states
and the District of Columbia to file revised SIPs with EPA
by no later than September 30, 1999. Numerous petitioners,
including several states, filed a petition for rehearing
with the U.S. Court of Appeals for the District of Columbia
in Michigan v. EPA. On June 22, 2000, the D.C. Circuit
Court of Appeals denied petition for rehearing en banc and
lifted its May 25, 1999 stay.
The proposed NOx emissions budget for Indiana stipulated in
the USEPA's final ruling requires a 36 percent reduction in
total NOx emissions from Indiana. The ruling could require
SIGECO to lower its system-wide emissions by approximately
70 percent. Depending on the level of system-wide emissions
reductions ultimately required, and the control technology
utilized to achieve the reductions, the estimated
construction costs of the control equipment could reach $100
million, and related additional operation and maintenance
expenses could be an estimated $8 million to $10 million,
annually. Under the USEPA implementation schedule, the
emissions reductions and required control equipment must be
implemented and in place by May 15, 2003.
Approximately 12 months ago, the USEPA initiated an
investigation under Section 114 of the Clean Air Act (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 performance standards should be applied to the
modifications and whether the best available control
technology was, or should have been, used. Numerous other
electric utilities were, and are currently, being
investigated by the USEPA under an industry-wide review for
similar compliance. SIGECO responded to all of the USEPA's
data requests during the investigation. 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 the 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 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 Clean Air Act by: (i)
making modifications to its Culley Generating Station in
Yankeetown, Indiana without obtaining required permits; (ii)
making major modifications to the Culley Generating Station
without installing the best available emission control
technology; and (iii) 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.
SIGECO believes it performed only maintenance, repair and
replacement activities at the Culley Generating Station, as
allowed under the Clean Air 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 performance standards, SIGECO
believes that the lawsuit is without merit, and intends to
vigorously defend the lawsuit.
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 is successful in
obtaining an order, SIGECO estimates that it would incur
capital costs of approximately $40 million to $50 million
complying with the order. In the event that SIGECO is
required to install system-wide NOx emission control
equipment, as a result of the NOx SIP call issue, the
majority of the $40 million to $50 million for best
available emissions technology at Culley Generating Station
would be included in the $100 million expenditure,
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 new source
performance standards and the allegations are determined by
a court to be valid, SIGECO believes such penalties are
unlikely as EPA and the electric utility industry have a
bonafide dispute over the proper interpretation of the Clean
Air Act. Consequently, SIGECO anticipates at this time that
the plant will continue to operate while the matter is being
decided.
15. Ownership of Warrick Unit 4
SIGECO and Alcoa Generating Corporation (AGC), a subsidiary
of Aluminum Company of America, own the 270 MW Unit 4 at the
Warrick Power Plant as tenants in common. SIGECO's share of
the cost of this unit at December 31, 1999 is $37.5 million
with accumulated depreciation totaling $27.3 million. AGC
and SIGECO also share equally in the cost of operation and
output of the unit. SIGECO's share of operating costs is
included in operating expenses in the Consolidated
Statements of Income.
16. ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a 50 percent owned non-
regulated marketing affiliate of Vectren Energy Services,
began providing natural gas and related services to Indiana
Gas and Citizens Gas and Coke Utility (Citizens Gas)
effective April 1, 1996. The sale of gas and provision of
other services to Indiana Gas by ProLiance is subject to
regulatory review through the quarterly gas cost adjustment
(GCA) process administered by the Indiana Utility Regulatory
Commission (IURC).
On September 12, 1997, the IURC issued a decision finding
the gas supply and portfolio administration agreements
between ProLiance and Indiana Gas and ProLiance and Citizens
Gas and Coke Utility (the gas supply agreements) to be
consistent with the public interest. The IURC's decision
recognized the significant gas cost savings to customers
resulting from ProLiance's services and suggested that all
material provisions of the agreements between ProLiance and
the utilities are reasonable. Nevertheless, with respect to
the pricing of gas commodity purchased from ProLiance and
two other pricing terms, the IURC concluded that additional
review in the GCA process would be appropriate and directed
that these matters be considered further in the pending,
consolidated GCA proceeding involving Indiana Gas and
Citizens Gas. The IURC has not yet established a schedule
for conducting these additional proceedings.
The IURC's September 12, 1997, decision was appealed to the
Indiana Court of Appeals by certain Petitioners, including
the Indiana Office of Utility Consumer Counselor, the
Citizens Action Coalition of Indiana and a small group of
large-volume customers. On October 8, 1998, the Indiana
Court of Appeals issued a decision which reversed and
remanded the case to the IURC with instructions that the gas
supply agreements be disapproved. The basis for the decision
was that because the gas supply agreements provide for index
based pricing of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have been the
subject of an application for approval of an alternative
regulatory plan under Indiana statutory law.
On April 22, 1999, the Indiana Supreme Court granted a
petition for transfer of the case and will now consider the
appeal of the IURC's decision and issue its own decision on
the merits of the appeal at a later date. By granting
transfer, the Supreme Court has vacated the Court of
Appeals' decision.
If the Supreme Court reverses the IURC's decision, the case
will be remanded to the IURC for further proceedings
regarding the public interest in the gas supply agreements.
If the Supreme Court affirms the IURC's decision, as
described above, the reasonableness of certain of the gas
costs incurred by Indiana Gas under the gas supply
agreements will be further reviewed by the IURC in the
consolidated GCA proceeding. The existence of significant
benefits to the utilities and their customers resulting from
ProLiance's services has not been challenged on appeal.
Indiana Gas and Citizens Gas are continuing to utilize
ProLiance for their gas supplies.
On or about August 11, 1998, Indiana Gas, Citizens Gas and
ProLiance each received a Civil Investigative Demand ("CID")
from the United States Department of Justice requesting
information relating to Indiana
Gas' and Citizens Gas' relationship with and the activities
of ProLiance. The Department of Justice issued the CID to
gather information regarding ProLiance's formation and
operations, and to determine if trade or commerce has been
restrained. Indiana Gas has provided all information
requested and management continues to believe that there are
no significant issues in this matter.
Indiana Gas continues to record gas costs in accordance with
the terms of the ProLiance contract and Vectren continues to
record its proportional share of ProLiance's earnings.
Pretax earnings recognized from ProLiance for 1999 totaled
$6.7 million compared to $7.0 million for 1998. Earnings
recognized from ProLiance are included in Equity in Earnings
of Unconsolidated Affiliates in the Consolidated Statements
of Income.
At December 31, 1999, Vectren had reserved approximately
$1.7 million of ProLiance earnings after tax. Total after-
tax ProLiance earnings recognized to date approximate $15.1
million. This amount includes earnings from all of
ProLiance's business activities, and therefore is believed
to be a conservative estimate of the upper risk limit.
Resolution of the above proceedings may also impact future
operations and earnings contributions from ProLiance. Based
on the IURC's findings described above, management believes
the ProLiance issues may be resolved near the levels that
are already being reserved, and therefore, while these
proceedings are pending, does not anticipate changing the
level at which it reserves ProLiance earnings. However, no
assurance of this outcome can be provided.
17. Pace Carbon Synfuels Investors, LP
Vectren Synfuels, Inc. (Vectren Synfuels), formerly IEI
Synfuels, Inc., a wholly-owned subsidiary of Vectren
Financial Group, holds one limited partnership unit in Pace
Carbon Synfuels Investors, LP (Pace Carbon), a Delaware
limited partnership formed to develop, own and operate four
projects to produce and sell coal-based synthetic fuel. Pace
Carbon converts coal fines (small coal particles) into
briquettes that are sold to major coal users such as
utilities and steel companies. This process is eligible for
federal tax credits under Section 29 of the Internal Revenue
Code (Code) and the Internal Revenue Service has issued a
private letter ruling with respect to the four projects.
Vectren Synfuels has made an initial investment of $7.5
million in Pace Carbon (of which $7.3 million was paid
through December 31, 1999) for an 8.3 percent ownership
interest in the partnership. Vectren Synfuels has agreed to
advance up to $1.8 million, of which $0.4 million was paid
in January 2000, against future cash flows of the
partnership for capital improvements and financing capital
needs. In addition to its initial investment, Vectren
Synfuels has a continuing obligation to invest in Pace
Carbon approximately $40 million, with any such additional
investments to be funded solely from a portion of the
federal tax credits that are earned from the production and
sale of briquettes by the projects.
The realization of the tax credits from this investment is
dependent upon a number of factors including among others
(1) the production facilities must have been in operation by
June 30, 1998, (2) adequate coal fines must be available to
produce the briquettes, and (3) the briquettes must be
produced and sold. All four of Pace Carbon's coal-based
synthetic fuel production facilities were placed into
service by June 30, 1998, and are currently producing and
selling briquettes in an extended ramp up mode. Further
enhancements to the production process and project upgrades
are expected to be completed and in full production in mid
calendar year 2000.
Generally, all briquettes produced through December 31, 1999
have been sold. However, due to a deterioration in both the
domestic and export coal markets, domestic companies' coal
supplies are up, which in turn has reduced the demand and
created some price pressure for Pace Carbon's coal-based
synthetic product. Management does not believe that the
extended time required to make necessary production process
enhancements or the current coal market conditions will
significantly affect the long-term success of the projects.
Accordingly, management continues to believe that
significant project benefits, primarily in the form of tax
savings and tax credits realized, will be achieved in the
future, however, no assurance can be given.
18. Haddington Energy Partners, LP
On October 9, 1998, IEI Investments, now Vectren Ventures,
committed to invest $10 million in Haddington Energy
Partners, LP (Haddington). Haddington, a Delaware limited
partnership, raised $77 million to invest in projects that
represent a portfolio of development opportunities,
including high deliverability gas storage, compressed air
energy storage, thermally-balanced cogeneration, fuel cells,
hydrogen generators, and gathering and processing in the
Powder River Basin. Haddington's investment opportunities
will focus on acquiring and completing mid-stream energy
projects under development rather than start-up ventures.
Through December 31, 1999, Vectren Ventures had paid
approximately $2.5 million of its commitment in Haddington,
with the remainder to be paid in calendar 2000.
19. Vectren Advanced Communications
In May 1998, Vectren Advanced Communications, Inc. (formerly
SIGCORP Advanced Communications, Inc) was formed to hold
Vectren's investment in SIGECOM, LLC and Utilicom Networks,
Inc. (Utilicom). Also on May 7, 1998 a joint venture between
Vectren Advanced Communications and Utilicom was formed to
provide enhanced communication services over a high capacity
fiber optic based network in the greater Evansville, Indiana
area and potentially other areas within SIGECO's service
territory. Vectren Advanced Communications' investment was
in the form of a preferred interest in SIGECOM, which had a
100 percent liquidation preference. In addition, SIGCORP
contributed its wholly owned subsidiary, ComSource, Inc. to
SIGECOM on July 1, 1998. As of December 31, 1999, Vectren
Advanced Communications had invested $15.1 million,
including the value of ComSource, Inc. in SIGECOM.
On January 28, 2000, affiliates of Blackstone Capital
Partners III, a private equity fund of The Blackstone Group
invested in class B equity units of Utilicom Holdings LLC,
the newly formed holding company for Utilicom. The
investment was the first part of a commitment by Blackstone
to invest up to $100 million to fund future growth
opportunities in the fiber optic networks. At the same
time, Vectren Advanced Communications exchanged 35 percent
of its 49 percent equity interest in SIGECOM for $16.5
million of convertible debt of Utilicom Holdings. The debt
is convertible into class A equity units at a future date or
in the event of a public offering of stock by Utilicom.
Vectren Advanced Communications remaining 14 percent
preferred equity interest in SIGECOM was converted to a 14
percent indirect common equity interest in SIGECOM. The
investment restructuring resulted in a pre-tax gain of $8.0
million to Vectren in the first quarter of 2000.
20. Affiliate Transactions
The obligations of Vectren Capital Corp. (Capital), which
provides financing for Vectren's non-utility subsidiaries,
are subject to a support agreement between Vectren and
Capital, under which Vectren has agreed to make payments of
interest and principal on Capital's securities in the event
of default. At December 31, 1999, Capital had $101.7 million
in notes payable. Under the terms of the support agreement,
in addition to the cash flow of cash dividends paid to
Vectren by any of its consolidated subsidiaries, the non-
utility assets of Vectren are available as recourse to
holders of Capital securities. The carrying value of such
non-regulated assets that are contained in the consolidated
financial statements of Vectren is approximately $900
million as of December 31, 1999.
ProLiance provides natural gas supply and related services
to Indiana Gas. Indiana Gas' purchases from ProLiance for
resale and for injections into storage for 1999, 1998 and
1997 totaled $240.7 million, $232.2 million and $311.7
million, respectively. As of December 31, 1999, ProLiance
had a standby letter of credit facility with a bank for
letters up to $30 million. This facility is secured in part
by a support agreement from Vectren. Letters of credit
outstanding at December 31, 1999 totaled $12.4 million.
CIGMA, LLC provides materials acquisition and related
services that are used by Vectren. Indiana Gas' purchases of
these services during 1999, 1998 and 1997 totaled $17.3
million, $20.3 million and $16.2 million, respectively.
Vectren is a two-thirds guarantor of certain surety bond
obligations of Energy Systems Group, LLC. Vectren's share
of these bond obligations totaled $11.4 million at December
31, 1999.
Amounts owed to affiliates totaled $29.8 million and $26.4
million at December 31, 1999 and 1998, respectively, and are
included in Accounts Payable on the Consolidated Balance
Sheets.
21. Segment Reporting
Vectren adopted SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information" through its
consolidation of Indiana Energy and SIGCORP. SFAS No. 131
establishes standards for the reporting of information about
operating segments in financial statements and disclosures
about products, services and geographical areas. Operating
segments are defined as components of an enterprise for
which separate financial information is available and
evaluated regularly by the chief operating decision-makers
in deciding how to allocate resources and in the assessment
of performance.
The operating segments of Vectren are defined as (1) Gas
Utility Services, (2) Electric Utility Services, and (3) Non-
regulated Operations.
<TABLE>
<CAPTION>
At and Year Ended December 31
(in thousands) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating Revenues:
Gas Utility Services $ 499,573 $ 487,260 $ 613,619
Electric Utility Services 307,569 297,865 272,545
Non-regulated Operations 315,367 256,220 91,859
Intersegment Eliminations (54,092) (43,639) (5,942)
---------- ---------- ----------
Total operating revenues $1,068,417 $ 997,706 $ 972,081
========== ========== ==========
Interest Expense:
Gas Utility Services $ 18,704 $ 17,601 $ 18,830
Electric Utility Services 17,544 18,191 18,009
Non-regulated Operations 12,535 8,046 4,675
Intersegment Eliminations (5,921) (3,537) (2,111)
---------- ---------- ----------
Total interest expense $ 42,862 $ 40,301 $ 39,403
========== ========== ==========
Income Taxes:
Gas Utility Services $ 18,830 $ 16,211 $ 11,358
Electric Utility Services 24,331 22,881 23,714
Non-regulated Operations 2,575 3,148 381
Intersegment Eliminations (28) 88 29
---------- ---------- ----------
Total income taxes $ 45,708 $ 42,328 $ 35,482
========== ========== ==========
Net Income:
Gas Utility Services $ 33,612 $ 30,931 $ 20,052
Electric Utility Services 41,820 38,342 37,861
Non-regulated Operations 15,316 17,327 9,801
Intersegment Eliminations - - -
---------- ---------- ----------
Net income $ 90,748 $ 86,600 $ 67,714
========== ========== ==========
Depreciation and amortization:
Gas Utility Services $ 38,623 $ 37,082 $ 38,314
Electric Utility Services 40,829 38,077 36,217
Non-regulated Operations 7,546 6,399 1,306
Intersegment Eliminations - - -
---------- ---------- ----------
Total depreciation and
amortization $ 86,998 $ 81,558 $ 75,837
========== ========== ==========
Capital expenditures:
Gas Utility Services $ 72,773 $ 64,701 $ 80,958
Electric Utility Services 51,080 47,114 55,735
Non-regulated Operations 8,306 13,023 2,854
Intersegment Eliminations - - -
---------- ---------- ----------
Total capital expenditures $ 132,159 $ 124,838 $ 139,547
========== ========== ==========
Identifiable assets:
Gas Utility Services $ 882,948 $ 827,931 $ 836,845
Electric Utility Services 751,159 740,746 726,507
Non-regulated Operations 893,155 677,981 585,387
Intersegment Eliminations (546,795) (447,818) (390,105)
---------- ---------- ----------
Total identifiable assets $1,980,467 $1,798,840 $1,758,634
========== ========== ==========
</TABLE>
<PAGE> 51
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our report included in this Form 8-K,
into Vectren Corporation's previously filed Registration
Statements Nos. 333-33608, 333-31326 and 333-33684.
/s/Arthur Andersen LLP
Arthur Andersen LLP
Indianapolis, Indiana.
July 10, 2000
<PAGE> 52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
VECTREN CORPORATION
July 10, 2000
By: /s/ Jerome A. Benkert
Jerome A. Benkert
Executive Vice President
and Chief Financial Officer
By: /s/ M. Susan Hardwick
M. Susan Hardwick
Vice President and Controller
