UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________________
Commission file number: 1-15467
(Exact name of registrant as specified in its charter)
INDIANA 35-2086905
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(State or other jurisdiction of (IRS Employer Identification No.)
or organization)
20 N.W. Fourth Street, Evansville, Indiana 47708
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: 812-491-4000 Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
--------------------------------- ---------------------------------------------
Common - Without Par New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X|. No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |X|. No __.
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2004, was $1,891,955,967.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Common Stock - Without Par Value 76,082,316 January 31, 2005
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Class Number of Shares Date
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Documents Incorporated by Reference
Certain information in the Company's definitive Proxy Statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, is incorporated by reference in Part III of this Form 10-K.
Definitions
AFUDC: allowance for funds used MMBTU: millions of British thermal units
during construction
APB: Accounting Principles Board MW: megawatts
EITF: Emerging Issues Task Force MWh / GWh: megawatt hours / thousands of
megawatt hours (gigawatt hours)
FASB: Financial Accounting Standards NOx: nitrogen oxide
Board
FERC: Federal Energy Regulatory OUCC: Indiana Office of the Utility
Commission Consumer Counselor
IDEM: Indiana Department of PUCO: Public Utilities Commission of Ohio
Environmental Management
IURC: Indiana Utility Regulatory SFAS: Statement of Financial Accounting
Commission Standards
MCF/MMCF/BCF: thousands/millions/ USEPA: United States Environmental
billions of cubic feet Protection Agency
MDth/MMDth:thousands/millions of Throughput: combined gas sales and gas
dekatherms transportation volumes
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Table of Contents
Item Page
Number Number
Part I
1 Business .........................................................1
2 Properties .......................................................7
3 Legal Proceedings.................................................8
4 Submission of Matters to Vote of Security Holders.................8
Part II
5 Market for the Company's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities................9
6 Selected Financial Data..........................................10
7 Management's Discussion and Analysis of Results of Operations and
Financial Condition..............................................11
7A Qualitative and Quantitative Disclosures About Market Risk.......34
8 Financial Statements and Supplementary Data......................36
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................75
9A Controls and Procedures, including management's assessment of
internal controls over financial reporting.......................75
9B Other Information.......................................... .....75
Part III
10 Directors and Executive Officers of the Registrant...............75
11 Executive Compensation...........................................76
12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................76
13 Certain Relationships and Related Transactions...................77
14 Principal Accountant Fees and Services...........................77
Part IV
15 Exhibits and Financial Statement Schedules.......................77
Signatures.......................................................82
Access to Information
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Vectren Corporation makes available all SEC filings and recent annual reports free of charge through its website at www.vectren.com, or by request, directed to Investor Relations at the mailing address, phone number, or email address that follows:
Mailing Address: Phone Number: Investor Relations Contact:
P.O. Box 209 (812) 491-4000 Steven M. Schein
Evansville, Indiana 47702-0209 Vice President,
Investor Relations
sschein@vectren.com
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PART I
ITEM 1. BUSINESS
Description of the Business
Vectren Corporation (the Company or Vectren), an Indiana corporation, is an energy and applied technology holding company headquartered in Evansville, Indiana. The Company organized on June 10, 1999, to effect the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, Indiana Energy merged with SIGCORP and into Vectren. The transaction involved a tax-free exchange of shares that was accounted for as a pooling-of-interests.
The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc. (VUHI),
serves as the intermediate holding company for three operating public utilities:
Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned subsidiary of
Indiana Energy, Southern Indiana Gas and Electric Company (SIGECO), formerly a
wholly owned subsidiary of SIGCORP, and the Ohio operations. VUHI also has other
assets that provide information technology and other services to the three
utilities. VUHI's consolidated operations are collectively referred to as the
Utility Group. Both Vectren and VUHI are exempt from registration pursuant to
Section 3(a) (1) and 3(c) of the Public Utility Holding Company Act of 1935.
Indiana Gas provides energy delivery services to approximately 555,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to approximately 136,000 electric customers and approximately 110,000 natural gas customers located near Evansville in southwestern Indiana. SIGECO also owns and operates electric generation to serve its electric customers and optimizes those assets in the wholesale power market. Indiana Gas and SIGECO generally do business as Vectren Energy Delivery of Indiana.
The Ohio operations provide energy delivery services to approximately 315,000 natural gas customers located near Dayton in west central Ohio. The Ohio operations are owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc. (VEDO), a wholly owned subsidiary, (53% ownership) and Indiana Gas (47% ownership). The Ohio operations were acquired from The Dayton Power and Light Company on October 31, 2000. The Ohio operations generally do business as Vectren Energy Delivery of Ohio.
The Company is also involved in nonregulated activities in four primary business areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure Services, and Broadband. Energy Marketing and Services markets and supplies natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal and generates IRS Code Section 29 tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. Broadband has investments in broadband communication services such as analog and digital cable television, high-speed internet and data services, and advanced local and long distance phone services. In addition, there are other businesses that invest in energy-related opportunities, real estate, and leveraged leases, among other activities. These operations are collectively referred to as the Nonregulated Group. The Nonregulated Group supports the Company's regulated utilities pursuant to service contracts by providing natural gas supply services, coal, utility infrastructure services, and other services.
Indiana Energy, incorporated under Indiana law on October 24, 1985, was engaged in natural gas distribution, gas portfolio administrative services, and marketing of natural gas, electric power and related services. Prior to the merger, Indiana Energy had fourteen subsidiaries, including ten nonregulated direct or indirect subsidiaries, a not-for-profit foundation and three utility subsidiaries, as well as investments in four nonregulated joint ventures. SIGCORP, incorporated under Indiana law on October 19, 1994, was engaged in electric generation, transmission, and distribution, natural gas distribution, coal mining, and broadband communication services. Prior to the merger, SIGCORP had eleven wholly owned subsidiaries, including ten nonregulated subsidiaries.
Narrative Description of the Business
The Company segregates its operations into three groups: a Utility Group, a Nonregulated Group, and Corporate and Other. At December 31, 2004, the Company had $3.6 billion in total assets, with $3.1 billion (86%) attributed to the Utility Group, $0.5 billion (14%) attributed to the Nonregulated Group, and less than $0.1 billion attributed to Corporate and Other. Net income for the year ended December 31, 2004, was $107.9 million, or $1.43 per share of common stock, with $83.1 million attributed to the Utility Group, $26.4 million attributed to the Nonregulated Group, and a net loss of $1.6 million attributed to Corporate and Other. Net income for the year ended December 31, 2003, was $111.2 million, or $1.58 per share of common stock. For further information regarding the activities and assets of operating segments within these Groups, refer to Note 16 in the Company's consolidated financial statements included under "Item 8 Financial Statements and Supplementary Data."
Following is a more detailed description of the Utility Group and Nonregulated Group. Corporate and Other operations are not significant.
Utility Group
The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations, which consist of the Company's regulated operations and other operations that provide information technology and other support services to those regulated operations. The Company segregates its regulated operations into a Gas Utility Services operating segment and an Electric Utility Services operating segment. The Gas Utility Services segment includes the operations of Indiana Gas, the Ohio operations, and SIGECO's natural gas distribution business and provides natural gas distribution and transportation services to nearly two-thirds of Indiana and to west central Ohio. The Electric Utility Services segment includes the operations of SIGECO's electric transmission and distribution services, which provides electric distribution services primarily to southwestern Indiana, and includes the Company's power generating and marketing operations. In total, these regulated operations supply natural gas and/or electricity to nearly one million customers. The Utility Group's other operations are generally not significant.
Gas Utility Services
At December 31, 2004, the Company supplied natural gas service to approximately 980,000 Indiana and Ohio customers, including 895,000 residential, 81,000 commercial, and 4,000 contract and other customers. This represents customer base growth of 1.2% compared to 2003.
The Company's service area contains diversified manufacturing and agriculture-related enterprises. The principal industries served include automotive assembly, parts and accessories, feed, flour and grain processing, metal castings, aluminum products, appliance manufacturing, polycarbonate resin (Lexan(R)) and plastic products, gypsum products, electrical equipment, metal specialties, glass, steel finishing, pharmaceutical and nutritional products, gasoline and oil products, and coal mining. The largest Indiana communities served are Evansville, Muncie, Anderson, Lafayette, West Lafayette, Bloomington, Terre Haute, Marion, New Albany, Columbus, Jeffersonville, New Castle, and Richmond. The largest community served outside of Indiana is Dayton, Ohio.
Revenues
For the year ended December 31, 2004, gas utility revenues were approximately $1,126.2 million, of which residential customers accounted for 66%, commercial 25%, and contract and other 9%, respectively.
The Company receives gas revenues by selling gas directly to customers at approved rates or by transporting gas through its pipelines at approved rates to customers that have purchased gas directly from other producers, brokers, or marketers. Total volumes of gas provided to both sales and transportation customers (throughput) were 200,343 MDth for the year ended December 31, 2004. Gas transported or sold to residential and commercial customers was 110,666 MDth representing 55% of throughput. Gas transported or sold to industrial and other contract customers was 89,677 MDth representing 45% of throughput. Rates for transporting gas provide for the same margins generally earned by selling gas under applicable sales tariffs.
The sale of gas is seasonal and strongly affected by variations in weather conditions. To mitigate seasonal demand, the Company has storage capacity at seven active underground gas storage fields, six liquefied petroleum air-gas manufacturing plants, and a propane cavern. The Company also contracts with ProLiance Energy, LLC (ProLiance) to ensure availability of gas. ProLiance is an unconsolidated, nonregulated, energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas). (See the discussion of Energy Marketing & Services below and Note 3 in the Company's consolidated financial statements included in "Item 8 Financial Statements and Supplementary Data" regarding transactions with ProLiance). Periodically, purchased natural gas is injected into storage. The injected gas is then available to supplement contracted and manufactured volumes during periods of peak requirements. In addition, the Company prepays ProLiance for natural gas delivery services during the seven months prior to the peak heating season. The volume of gas per day that can be delivered during peak demand periods for each utility is located in "Item 2 Properties."
Gas Purchases
In 2004, the Company purchased 112,372 MDth volumes of gas at an average cost of $6.92 per Dth, all of which was purchased from ProLiance pursuant to contracts approved by the IURC. The average cost of gas per Dth purchased for the last five years was: $6.92 in 2004; $6.36 in 2003; $4.57 in 2002; $5.83 in 2001; and $5.60 in 2000.
Electric Utility Services
At December 31, 2004, the Company supplied electric service to approximately 136,000 Indiana customers, including 119,000 residential, and 17,000 commercial, industrial, and other customers. This represents customer base growth of 0.9% compared to 2003. In addition, the Company is obligated to provide for firm power commitments to four municipalities and to maintain spinning reserve margin requirements under an agreement with the East Central Area Reliability Group.
The principal industries served include polycarbonate resin (Lexan(R)) and plastic products, aluminum smelting and recycling, aluminum sheet products, automotive assembly, steel finishing, appliance manufacturing, pharmaceutical and nutritional products, automotive glass, gasoline and oil products, and coal mining.
Revenues
For the year ended December 31, 2004, retail and firm wholesale electricity sales totaled 6,186,160 MWh, resulting in revenues of approximately $347.5 million. Residential customers accounted for 34% of 2004 revenues; commercial 27%; industrial 31%; and municipal and other 8%. In addition, the Company sold 3,526,005 MWh through wholesale contracts in 2004, generating revenue, net of purchased power costs, of $23.8 million.
Generating Capacity
Installed generating capacity as of December 31, 2004, was rated at 1,351 MW. Coal-fired generating units provide 1,056 MW of capacity, and natural gas or oil-fired turbines used for peaking or emergency conditions provide 295 MW. Peaking capacity of 80 MW fueled by natural gas was added during 2002.
In addition to its generating capacity, in 2004, the Company had 32 MW available under firm contracts and 51 MW available under interruptible contracts. The Company also had a firm purchase supply contract for a maximum of 73 MW for the peak cooling season months during 2004.
The Company has interconnections with Louisville Gas and Electric Company, Cinergy Services, Inc., Indianapolis Power & Light Company, Hoosier Energy Rural Electric Cooperative, Inc., Big Rivers Electric Corporation, Wabash Valley Power Association, and the City of Jasper, Indiana, providing the historic ability to simultaneously interchange approximately 500 MW. However, the ability of the Company to effectively utilize the electric transmission grid in order to achieve import/export capability has been, and may continue to be, impacted. The Company, as a member of the Midwest Independent System Operator (MISO), has turned over operational control of the interchange facilities and its own transmission assets, like many other Midwestern electric utilities, to the MISO. See "Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition" regarding the Company's participation in MISO.
Total load for each of the years 2000 through 2004 at the time of the system summer peak, and the related reserve margin, is presented below in MW.
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Total load at peak (1) 1,222 1,272 1,258 1,234 1,212
Generating capability 1,351 1,351 1,351 1,271 1,256
Firm purchase supply 105 32 82 82 75
Interruptible contracts 51 95 95 95 95
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Total power supply capacity 1,507 1,478 1,528 1,448 1,426
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Reserve margin at peak 23% 16% 21% 17% 18%
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(1) The total load at peak is increased 25 MW in 2003, 2002, and 2001 from the total load actually experienced. The additional 25 MW represents load that would have been incurred if summer cycler programs had not been activated. The 25 MW is also included in the interruptible contract portion of the Company's total power supply capacity. On the date of peak in 2004 and 2000, summer cycler programs were not activated.
The winter peak load for the 2003-2004 season of approximately 928 MW occurred on January 20, 2004. The prior year winter peak load was approximately 948 MW, occurring on January 27, 2003.
The Company maintains a 1.5% interest in the Ohio Valley Electric Corporation (OVEC). The OVEC is comprised of several electric utility companies, including SIGECO, and supplies power requirements to the United States Department of Energy's (DOE) uranium enrichment plant near Portsmouth, Ohio. The participating companies are entitled to receive from OVEC, and are obligated to pay for, any available power in excess of the DOE contract demand. At the present time, the DOE contract demand is essentially zero. Because of this decreased demand, the Company's 1.5% interest in the OVEC makes available approximately 32 MW of capacity, in addition to its generating capacity, for use in other operations. Such generating capacity is included in firm purchase supply in the chart above.
Fuel Costs and Purchased Power
Electric generation for 2004 was fueled by coal (95.6%) and natural gas (4.4%). Oil was used only for testing of gas/oil-fired peaking units.
Year Ended December 31,
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Avg. Cost Per 2004 2003 2002 2001 2000
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Ton $ 27.06 $ 24.91 $ 23.50 $ 22.48 $ 22.49
MWh 13.06 11.93 11.00 10.53 10.39
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The Company also purchases power as needed from the wholesale market to supplement its generation capabilities in periods of peak demand; however, the majority of power purchased through the wholesale market is used to optimize and hedge the Company's sales to other wholesale customers. Volumes purchased in 2004 totaled 3,469,610 MWh.
Competition
The utility industry has undergone dramatic structural change for several years, resulting in increasing competitive pressures faced by electric and gas utility companies. Currently, several states, including Ohio, have passed legislation allowing electricity customers to choose their electricity supplier in a competitive electricity market and several other states are considering such legislation. At the present time, Indiana has not adopted such legislation. Ohio regulation allows gas customers to choose their commodity supplier. The Company implemented a choice program for its gas customers in Ohio in January 2003. At December 31, 2004, approximately 73,000 customers in Vectren's Ohio service territory purchase natural gas from a supplier other than the regulated utility. Margin earned for transporting natural gas to those customers, who have purchased natural gas from another supplier, are generally the same as those earned by selling gas under Ohio tariffs. Indiana has not adopted any regulation requiring gas choice; however, the Company operates under approved tariffs permitting large volume customers to choose their commodity supplier.
Regulatory and Environmental Matters
See "Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition" regarding the Company's regulated environment and other environmental matters.
Nonregulated Group
The Company is involved in nonregulated activities in four primary business areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure Services, and Broadband.
Energy Marketing and Services
The Energy Marketing and Services group relies heavily upon a customer focused, value added strategy in three areas: gas marketing, performance contracting, and retail gas supply.
Gas Marketing
Gas marketing operations are performed through the Company's investment in
ProLiance, a nonregulated energy marketing affiliate of Vectren and Citizens
Gas. ProLiance's primary businesses include gas marketing, gas portfolio
optimization, and other portfolio and energy management services. ProLiance
provides these services to a broad range of municipalities, utilities,
industrial operations, schools, and healthcare institutions located throughout
the Midwest and Southeast United States. ProLiance's primary customers include
Vectren's utilities and nonregulated gas supply operations as well as Citizens
Gas. The Company, including its retail gas supply operations, contracted for all
natural gas purchases through ProLiance in 2004.
In 2002, the Company integrated a wholly owned subsidiary, SIGCORP Energy Services, LLC (SES), with ProLiance. SES provided natural gas and related services to SIGECO and others prior to the transaction. In exchange for the contribution of SES' net assets totaling $19.2 million, Vectren's allocable share of ProLiance's profits and losses increased from 52.5% to 61%, consistent with Vectren's new ownership percentage. In March 2001, Vectren's allocable share of profits and losses increased from 50% to 52.5% when ProLiance began managing the Ohio operations' gas portfolio. Governance and voting rights remain at 50% for each member; and therefore, Vectren continues to account for its investment in ProLiance using the equity method of accounting.
For the year ended December 31, 2004, ProLiance's revenues, including sales to Vectren companies, exceeded $2.5 billion.
Performance Contracting
Performance-based energy contracting operations are performed through Energy
Systems Group, LLC (ESG). ESG assists schools, hospitals, governmental
facilities, and other private institutions to reduce energy and maintenance
costs by upgrading their facilities with energy-efficient equipment. ESG's
customer base is located throughout the Midwest and Southeast United States.
Prior to April 2003, ESG was a consolidated venture between the Company and
Citizens Gas with the Company owning two-thirds. In April 2003, the Company
purchased the remaining interest in ESG.
Retail Gas Supply
Vectren Retail, LLC (d/b/a Vectren Source) provides natural gas and other
related products and services in the Midwest and Southeast United States to over
100,000 residential and commercial customers opting for choice among energy
providers. Vectren Source generated approximately $81.1 million in revenues in
2004, up from $44.3 million in 2003. Gas sold in 2004 approximated 9,386 MDth.
Coal Mining
The Coal Mining group provides the mining and sale of coal to the Company's utility operations and to other third parties through its wholly owned subsidiary Vectren Fuels, Inc. The Coal Mining group also generates income tax credits through IRS Code Section 29 investment tax credits relating to the production of coal-based synthetic fuels through its 8.3% ownership in Pace Carbon Synfuels, LP (Pace Carbon). The Company's investment in Pace Carbon is accounted for using the equity method of accounting. The Company's two coal mines produced 3.6 million tons in 2004, up from 3.3 million in 2003.
Utility Infrastructure Services
Utility Infrastructure Services provides underground construction and repair of utility infrastructure services to the Company and to other gas, water, and telecommunications companies as well as facilities locating and meter reading services through its investment in Reliant Services, LLC (Reliant) and Reliant's 100% ownership in Miller Pipeline, which was purchased by Reliant in 2000. Reliant is a 50% owned strategic alliance with an affiliate of Cinergy Corp. and is accounted for using the equity method of accounting.
Broadband
The Company has an approximate 2% equity interest and a convertible subordinated debt investment in Utilicom Networks, LLC (Utilicom) that if converted would bring the Company's ownership interest up to 16%. The Company also has an approximate 19% equity interest in SIGECOM Holdings, Inc., which was formed by Utilicom to hold interests in SIGECOM, LLC (SIGECOM). SIGECOM provides broadband services, such as cable television, high-speed internet, and advanced local and long distance phone services, to the greater Evansville, Indiana area. At December 31, 2004, SIGECOM had approximately 26,000 residential customers yielding over 81,000 revenue generating units indicating multiple services being utilized by the same residential customer. At December 31, 2004, there were approximately 2,000 commercial customers. SIGECOM's operations are cash flow positive and have not required any further investment since May 2002.
Other Utilicom-related subsidiaries owned franchising agreements to provide broadband services to the greater Indianapolis, Indiana and Dayton, Ohio markets. In 2004, the build out of these markets was further evaluated, and the Company concluded that it was unlikely it would make additional investments in those markets. As a result, the Company recorded charges totaling $6.0 million, or $3.6 million after-tax, to write-off investments made in the Indianapolis and Dayton markets and to write down its investment in SIGECOM.
At December 31, 2004, convertible subordinated debt investments total $31.6 million, all of which is convertible into Utilicom ownership at the Company's option or upon the event of a public offering of stock by Utilicom. The remaining equity investment in SIGECOM, LLC approximates $11.7 million.
Other Businesses
The Other Businesses group includes a variety of wholly owned operations and investments that invest in energy-related opportunities, real estate, and leveraged leases, among other investments. Major investments at December 31, 2004, include Haddington Energy Partnerships, two partnerships both approximately 40% owned; and the wholly owned subsidiaries, Southern Indiana Properties, Inc. and Energy Realty, Inc.
Personnel
As of December 31, 2004, the Company and its consolidated subsidiaries had 1,863 employees, of which 872 are subject to collective bargaining arrangements.
In July of 2004, the Company signed a three year labor agreement with Local 702 of the International Brotherhood of Electrical Workers, ending June 2007. The agreement provides a 3% wage increase in the first two years and a 3.5% increase in the third year of the agreement. The agreement also provides for improvements in pension benefits and a multi-tiered health plan in which the employees pay 16% of the cost.
In January 2004, the Company signed a five year labor agreement, ending December 2008, with Local 1393 of the International Brotherhood of Electrical Workers and United Steelworkers of America Locals 12213 and 7441. The agreement provides for annual wage increases of 3%, a multi-tiered health care plan in which the employees pay 12% to 16% of the premium, and pension enhancements for early retirees.
The Company's contract with Local 135 of the Teamsters, Chauffeurs, Warehousemen, and Helpers will expire in September 2005. The Company's contract with Local 175, Utility Workers Union of America will expire in October 2005.
ITEM 2. PROPERTIES
Gas Utility Services
Indiana Gas owns and operates four active gas storage fields located in Indiana covering 58,130 acres of land with an estimated ready delivery from storage capability of 5.6 BCF of gas with maximum peak day delivery capabilities of 144,500 MCF per day. Indiana Gas also owns and operates three liquefied petroleum (propane) air-gas manufacturing plants located in Indiana with the ability to store 1.5 million gallons of propane and manufacture for delivery 33,000 MCF of manufactured gas per day. In addition to its company owned storage and propane capabilities, Indiana Gas has contracted for 17.8 BCF of storage with a maximum peak day delivery capability of 299,717 MMBTU per day. Indiana Gas' gas delivery system includes 12,150 miles of distribution and transmission mains, all of which are in Indiana except for pipeline facilities extending from points in northern Kentucky to points in southern Indiana so that gas may be transported to Indiana and sold or transported by Indiana Gas to ultimate customers in Indiana.
SIGECO owns and operates three underground gas storage fields located in Indiana covering 6,070 acres of land with an estimated ready delivery from storage capability of 6.3 BCF of gas with maximum peak day delivery capabilities of 108,000 MCF per day. In addition to its company owned storage delivery capabilities, SIGECO has contracted for 0.5 BCF of storage with a maximum peak day delivery capability of 19,166 MMBTU per day. SIGECO's gas delivery system includes 3,074 miles of distribution and transmission mains, all of which are located in Indiana.
The Ohio operations own and operate three liquefied petroleum (propane) air-gas manufacturing plants and a cavern for propane storage, all of which are located in Ohio. The plants and cavern can store 7.5 million gallons of propane, and the plants can manufacture for delivery 51,047 MCF of manufactured gas per day. In addition to its propane delivery capabilities, the Ohio operations have contracted for 13.4 BCF of storage with a maximum peak day delivery capability of 287,684 MMBTU per day. The Ohio operations' gas delivery system includes 5,301 miles of distribution and transmission mains, all of which are located in Ohio.
Electric Utility Services
SIGECO's installed generating capacity as of December 31, 2004, was rated at 1,351 MW. SIGECO's coal-fired generating facilities are: the Brown Station with 500 MW of capacity, located in Posey County approximately eight miles east of Mt. Vernon, Indiana; the Culley Station with 406 MW of capacity, and Warrick Unit 4 with 150 MW of capacity. Both the Culley and Warrick Stations are located in Warrick County near Yankeetown, Indiana. SIGECO's gas-fired turbine peaking units are: the 80 MW Brown 3 Gas Turbine located at the Brown Station; two Broadway Avenue Gas Turbines located in Evansville, Indiana with a combined capacity of 115 MW (Broadway Avenue Unit 1, 50 MW and Broadway Avenue Unit 2, 65 MW); two Northeast Gas Turbines located northeast of Evansville in Vanderburgh County, Indiana with a combined capacity of 20 MW; and an 80 MW turbine also located at the Brown station (Brown Unit 4) placed into service in 2002. The Brown Unit 3 and Broadway Avenue Unit 2 turbines are also equipped to burn oil. Total capacity of SIGECO's six gas turbines is 295 MW, and they are generally used only for reserve, peaking, or emergency purposes due to the higher per unit cost of generation.
SIGECO's transmission system consists of 830 circuit miles of 138,000 and 69,000 volt lines. The transmission system also includes 28 substations with an installed capacity of 4,635.9 megavolt amperes (Mva). The electric distribution system includes 3,223 pole miles of lower voltage overhead lines and 302 trench miles of conduit containing 1,688 miles of underground distribution cable. The distribution system also includes 92 distribution substations with an installed capacity of 1,901.7 Mva and 51,630 distribution transformers with an installed capacity of 2,388.8 Mva.
SIGECO owns utility property outside of Indiana approximating eight miles of 138,000 volt electric transmission line which is located in Kentucky and which interconnects with Louisville Gas and Electric Company's transmission system at Cloverport, Kentucky.
Nonregulated Properties
Subsidiaries other than the utility operations have no significant properties other than the ownership and operation of coal mining property in Indiana and investments in real estate partnerships, leveraged leases, and notes receivable. The assets of the coal mining operations comprise approximately 3% of total assets.
Property Serving as Collateral
SIGECO's properties are subject to the lien of the First Mortgage Indenture dated as of April 1, 1932, between SIGECO and Bankers Trust Company, as Trustee, and Deutsche Bank, as successor Trustee, as supplemented by various supplemental indentures.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position. See the notes to the consolidated financial statements regarding investments in unconsolidated affiliates, commitments and contingencies, environmental matters, and rate and regulatory matters. The consolidated financial statements are included in "Item 8 Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter to a vote of security holders.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Data, Dividends Paid, and Holders of Record
Cash Common Stock Price Range
Dividend High Low
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2004
First Quarter $ 0.285 $ 25.87 $ 24.11
Second Quarter 0.285 25.54 22.86
Third Quarter 0.285 25.75 24.08
Fourth Quarter 0.295 27.09 24.79
2003
First Quarter $ 0.275 $ 24.50 $ 19.70
Second Quarter 0.275 26.13 21.05
Third Quarter 0.275 25.02 22.25
Fourth Quarter 0.285 24.85 22.73
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On January 26, 2005, the board of directors declared a dividend of $0.295 per share, payable on March 1, 2005, to common shareholders of record on February 15, 2005.
As of January 31, 2005, there were 12,635 shareholders of record of the Company's common stock.
Dividends on shares of common stock are payable at the discretion of the board of directors out of legally available funds. Future payments of dividends, and the amounts of these dividends, will depend on the Company's financial condition, results of operations, capital requirements, and other factors.
Quarterly Share Purchases
Total Number
of Shares Maximum Number
Average Purchased of Shares
Number of Price as Part of That May Be
Shares Paid Per Publicly Purchased Under
Period Purchased Share Announced Plans These Plans
-------------- ------------ --------- --------------- ---------------
October 1-31 1,365 $ 26.53 - -
November 1-30 - - - -
December 1-31 - - - -
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the Company's audited consolidated financial statements and should be read in conjunction with those financial statements and notes thereto contained in this Form 10-K.
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Year Ended December 31,
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(In millions, except per share data) 2004 2003 2002 2001 (1) 2000 (2,3)
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Operating Data:
Operating revenues $ 1,689.8 $ 1,587.7 $ 1,523.8 $ 2,009.1 $ 1,607.6
Operating income $ 202.7 $ 199.4 $ 211.3 $ 127.9 $ 131.7
Income before extraordinary loss &
cumulative effect of change in
accounting principle $ 107.9 $ 111.2 $ 114.0 $ 59.3 $ 72.0
Net income $ 107.9 $ 111.2 $ 114.0 $ 52.7 $ 72.0
Average common shares outstanding 75.6 70.6 67.6 66.7 61.3
Fully diluted common shares outstanding 75.9 70.8 67.9 66.9 61.4
Basic earnings per share before
extraordinary loss & cumulative
effect of change in accounting
principle $ 1.43 $ 1.58 $ 1.69 $ 0.89 $ 1.18
Basic earnings per share
on common stock $ 1.43 $ 1.58 $ 1.69 $ 0.79 $ 1.18
Diluted earnings per share before
extraordinary loss & cumulative
effect of change in accounting
principle $ 1.42 $ 1.57 $ 1.68 $ 0.89 $ 1.17
Diluted earnings per share
on common stock $ 1.42 $ 1.57 $ 1.68 $ 0.79 $ 1.17
Dividends per share on common stock $ 1.15 $ 1.11 $ 1.07 $ 1.03 $ 0.98
Balance Sheet Data:
Total assets $ 3,586.9 $ 3,353.4 $ 3,136.5 $ 2,878.7 $ 2,943.7
Long-term debt, net $ 1,016.6 $ 1,072.8 $ 954.2 $ 1,014.0 $ 632.0
Redeemable preferred stock $ 0.1 $ 0.2 $ 0.3 $ 0.5 $ 8.1
Common shareholders' equity $ 1,094.8 $ 1,071.7 $ 869.9 $ 839.3 $ 733.4
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(1) Merger and integration related costs incurred for the year ended December 31, 2001, totaled $2.8 million. These costs relate primarily to transaction costs, severance and other merger and acquisition integration activities. As a result of merger integration activities, management retired certain information systems in 2001. Accordingly, the useful lives of these assets were shortened to reflect this decision, resulting in additional depreciation expense of approximately $9.6 million for the year ended December 31, 2001. In total, merger and integration related costs incurred for the year ended December 31, 2001, were $12.4 million ($8.0 million after tax).
The Company incurred restructuring charges of $19.0 million, ($11.8 million after tax) relating to employee severance, related benefits and other employee related costs, lease termination fees related to duplicate facilities, and consulting and other fees.
(2) Merger and integration related costs incurred for the year ended December 31, 2000, totaled $41.1 million. These costs relate primarily to transaction costs, severance and other merger and acquisition integration activities. As a result of merger integration activities, management identified certain information systems to be retired in 2001. Accordingly, the useful lives of these assets were shortened to reflect this decision, resulting in additional depreciation expense of approximately $11.4 million for the year ended December 31, 2000. In total, merger and integration related costs incurred for the year ended December 31, 2000, were $52.5 million ($36.8 million after tax).
(3) Reflects two months of results of the Ohio operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto.
Executive Summary of Consolidated Results of Operations
Year Ended December 31,
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(In millions, except per share data) 2004 2003 2002
--------------------------------------------------------------------------------
Net income $ 107.9 $ 111.2 $ 114.0
Attributed to:
Utility Group $ 83.1 $ 85.6 $ 97.1
Nonregulated Group 26.4 27.6 19.0
Corporate & other (1.6) (2.0) (2.1)
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Basic earnings per share $ 1.43 $ 1.58 $ 1.69
Attributed to:
Utility Group $ 1.10 $ 1.21 $ 1.44
Nonregulated Group 0.35 0.39 0.28
Corporate & other (0.02) (0.02) (0.03)
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Results
For the year ended December 31, 2004, reported earnings were $107.9 million, or $1.43 per share compared to $111.2 million, or $1.58 per share, in 2003 and $114.0 million, or $1.69 in 2002. The Company experienced significant earnings growth from its Energy Marketing and Services, Coal Mining, and Utility Infrastructure Services nonregulated businesses during 2004 and 2003. Earnings from utility operations were slightly lower in 2004 due largely to mild weather in 2004, offset somewhat by customer growth and the effects of gas base rate increases at two of the three utilities. Mild weather also impacted 2003 results compared to 2002, along with the write off of an investment.
While earnings have slightly decreased, earnings per share was further affected by an equity offering of 7.4 million shares in August of 2003. The additional shares diluted earnings per share in 2004 as compared to 2003 by $0.10 and in 2003 as compared to 2002 by $0.07. The equity offering netted proceeds of approximately $163 million.
The Utility Group generates revenue primarily from the delivery of natural gas and electric service to its customers. The primary source of cash flow for the Utility Group results from the collection of customer bills and the payment for goods and services procured for the delivery of gas and electric services. The results of the Utility Group are impacted by weather patterns in its service territory and general economic conditions both in its Indiana and Ohio service territories as well as nationally.
The Nonregulated Group generates revenue or earnings from the provision of services to customers. The activities of the Nonregulated Group are closely linked to the utility industry, and the results of those operations are generally impacted by factors similar to those impacting the overall utility industry.
The Company has in place a disclosure committee that consists of senior management as well as financial management. The committee is actively involved in the preparation and review of the Company's SEC filings.
Dividends
Dividends declared for the year ended December 31, 2004, were $1.15 per share compared to $1.11 per share in 2003 and $1.07 per share in 2002. In October 2004, the Company's board of directors increased its quarterly dividend to $0.295 per share from $0.285 per share.
Detailed Discussion of Results of Operations
Following is a more detailed discussion of the results of operations of the
Company's Utility Group and Nonregulated Group. The detailed results of
operations for the Utility Group and Nonregulated Group are presented and
analyzed before the reclassification and elimination of certain intersegment
transactions necessary to consolidate those results into the Company's
Consolidated Statements of Income. Corporate and Other operations are not
significant.
Results of Operations of the Utility Group
The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations, which consist of the Company's regulated operations and other operations that provide information technology and other support services to those regulated operations. The Company segregates its regulated operations into a Gas Utility Services operating segment and an Electric Utility Services operating segment. The Gas Utility Services segment provides natural gas distribution and transportation services to nearly two-thirds of Indiana and to west central Ohio. The Electric Utility Services segment provides electric distribution services primarily to southwestern Indiana, and includes the Company's power generating and marketing operations. In total, these regulated operations supply natural gas and/or electricity to nearly one million customers. The results of operations of the Utility Group before certain intersegment eliminations and reclassifications for the years ended December 31, 2004, 2003, and 2002, follow:
Year Ended December 31,
--------------------------------------------------------------------------------
(In millions, except per share data) 2004 2003 2002
--------------------------------------------------------------------------------
OPERATING REVENUES
Gas utility $1,126.2 $1,112.3 $ 908.0
Electric utility 371.3 335.7 328.6
Other 0.5 0.8 0.3
--------------------------------------------------------------------------------
Total operating revenues 1,498.0 1,448.8 1,236.9
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OPERATING EXPENSES
Cost of gas sold 778.5 762.5 570.8
Fuel for electric generation 96.1 86.5 81.6
Purchased electric energy 20.7 16.2 16.8
Other operating 218.5 210.1 198.6
Depreciation & amortization 127.8 117.9 110.7
Taxes other than income taxes 58.2 56.6 50.7
--------------------------------------------------------------------------------
Total operating expenses 1,299.8 1,249.8 1,029.2
--------------------------------------------------------------------------------
OPERATING INCOME 198.2 199.0 207.7
OTHER INCOME (EXPENSE)
Other - net 5.2 4.8 7.1
Equity in earnings (losses) of
unconsolidated affiliates 0.2 (0.5) (1.8)
--------------------------------------------------------------------------------
Total other income 5.4 4.3 5.3
--------------------------------------------------------------------------------
Interest expense 67.4 66.1 69.1
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 136.2 137.2 143.9
--------------------------------------------------------------------------------
Income taxes 53.1 51.6 46.8
--------------------------------------------------------------------------------
NET INCOME $ 83.1 $ 85.6 $ 97.1
================================================================================
--------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.10 $ 1.21 $ 1.44
================================================================================
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In 2004, Utility Group earnings were $83.1 million as compared to $85.6 million in 2003. The 2004 earnings decline is due to the impact of unfavorable weather, estimated at $5 million after tax, or $0.07 per share. Margin growth, offsetting the weather impact, results from the recovery of NOx related environmental expenditures, gas base rate increases implemented in 2004, and customer growth. The primary expense changes were higher depreciation and lower bad debt expense in 2003. Bad debt expense in 2003 associated with the Ohio service territory was reversed and deferred for later recovery under an uncollectible accounts expense rider.
The $11.5 million decrease in earnings occurring in 2003 compared to 2002 was primarily due to increased operating expenses and the write-off of an investment, partially offset by increased wholesale power margins and retail electric rate recovery related to NOx compliance expenditures. An increase in the Indiana state income tax rate to 8.5% from 4.5% also contributed to the decrease.
During 2004 and 2003, the Company initiated base rate cases in its three gas service territories. Orders in its two Indiana service territories were received in the second half of 2004. An order in the Ohio territory is expected late in the first quarter of 2005. On an annual basis, the Indiana orders will increase margins an estimated $30 million, and during 2004 provided additional margin of $4.7 million. The Company has sought and received regulatory recovery mechanisms (trackers) affecting electric margin that provide a return on utility plant constructed for environmental compliance and that allow for recovery of related operating expenses. After tax earnings associated with the NOx compliance trackers totaled $9.0 million in 2004, $4.7 million in 2003 and $1.1 million in 2002. The Company has also utilized regulatory trackers affecting gas margin that recover, on a dollar-for-dollar basis, pipeline integrity management costs in its Indiana territories and uncollectible accounts expense, operating expenses related to choice implementation costs, and other costs in its Ohio service territory.
Throughout this discussion, the terms Gas Utility margin and Electric Utility margin are used. Gas Utility margin and Electric Utility margin could be considered non-GAAP measures of income. Gas Utility margin is calculated as Gas utility revenues less the Cost of gas. Electric Utility margin is calculated as Electric utility revenues less Fuel for electric generation and Purchased electric energy. These measures exclude Other operating expenses, Depreciation and amortization, and Taxes other than income taxes, which are included in the calculation of operating income. The Company believes Gas Utility and Electric Utility margins are better indicators of relative contribution than revenues since gas prices and fuel costs can be volatile and are generally collected on a dollar-for-dollar basis from customers. Margins should not be considered an alternative to, or a more meaningful indicator of, operating performance than operating income or net income as determined in accordance with accounting principles generally accepted in the United States.
Significant Fluctuations
Utility Group Margin
Margin generated from the sale of natural gas and electricity to residential and
commercial customers is seasonal and impacted by weather patterns in the
Company's service territories. Margin generated from sales to large customers
(generally industrial, other contract, and firm wholesale customers) is
primarily impacted by overall economic conditions. Margin is also impacted by
the collection of state mandated taxes, which fluctuate with gas costs, and is
also impacted by some level of price sensitivity in volumes sold. Electric
generating asset optimization activities are primarily affected by market
conditions, the level of excess generating capacity, and electric transmission
availability. Following is a discussion and analysis of margin generated from
regulated utility operations.
Gas Utility Margin (Gas Utility Revenues less Cost of Gas Sold) Gas Utility margin and throughput by customer type follows:
Year Ended December 31,
--------------------------------------------------------------------------------
(In millions) 2004 2003 2002
--------------------------------------------------------------------------------
Residential & Commercial $ 288.3 $ 292.3 $ 282.6
Contract 53.5 51.5 50.5
Other 5.9 6.0 4.1
--------------------------------------------------------------------------------
Total gas utility margin $ 347.7 $ 349.8 $ 337.2
================================================================================
Sold & transported volumes in MMDth:
To residential & commercial customers 110.7 117.9 111.9
To contract customers 89.7 91.4 95.8
--------------------------------------------------------------------------------
Total throughput 200.4 209.3 207.7
================================================================================
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Gas utility margins were $347.7 million for the year ended December 31, 2004. This represents a decrease in gas utility margin of $2.1 million compared to 2003. Heating weather for the year ended December 31, 2004, was 8% warmer than normal and 8% warmer than the prior year. The estimated unfavorable impact on gas utility margin caused by weather was approximately $9.8 million compared to 2003. Indiana base rate increases added $4.7 million compared to the prior year. Also offsetting the effects of weather were increased late and reconnect fees, expense recovery pursuant to Ohio regulatory trackers, and higher revenue taxes collected from rate payers. Gas sold and transported volumes were 4% less in 2004, compared to the prior year. The decreased throughput was primarily attributable to weather. The average cost per dekatherm of gas purchased was $6.92 in 2004; $6.36 in 2003, and $4.57 in 2002.
Gas Utility margin for the year ended December 31, 2003, of $349.8 million increased $12.6 million, or 4%, compared to 2002. It is estimated that weather near normal for the year and 6% cooler than the prior year, contributed $8 million in increased residential and commercial margin and was the primary contributor to increased throughput compared to 2002. The remaining increase is primarily attributable to $4.5 million in higher revenue taxes on higher gas costs and volumes sold and $1.8 million in recovery of Ohio customer choice implementation costs.
Electric Utility Margin (Electric Utility Revenues less Fuel for Electric Generation and Purchased Electric Energy) Electric Utility margin by revenue type follows:
Year Ended December 31,
--------------------------------------------------------------------------------
(In millions) 2004 2003 2002
--------------------------------------------------------------------------------
Residential & commercial $ 159.7 $ 141.1 $ 145.7
Industrial 62.4 53.5 54.9
Municipalities & other 17.4 20.1 16.9
--------------------------------------------------------------------------------
Total retail & firm wholesale 239.5 214.7 217.5
Asset optimization 15.0 18.3 12.7
--------------------------------------------------------------------------------
Total electric utility margin $ 254.5 $ 233.0 $ 230.2
================================================================================
Retail & Firm Wholesale Margin
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Native load and firm wholesale margin was $239.5 million for the year ended December 31, 2004. This represents a $24.8 million increase over 2003. Additional NOx recoveries increased margin $14.6 million in 2004. Cooling weather for the year was 12% warmer than last year, increasing margin an estimated $2.0 million. The remaining increase in margin was attributable to increased small customer usage and increased sales to industrial customers. Due to the above factors, volumes sold increased 5% to 6.19 GWh for 2004, compared to 5.90 GWh in 2003. Volumes sold in 2002 were 6.19 GWh.
For the year ended December 31, 2003, margin from serving native load and firm wholesale customers was $214.7 million, a decrease of $2.8 million when compared to 2002. It is estimated that summer weather, 19% cooler than normal and 34% cooler than 2002, caused an $8 million decrease in residential and commercial margin. The effect of weather was partially offset by a $7.4 million increase in retail electric rates related to recovery of and return on NOx compliance expenditures and related operating expenses. A slowly recovering economy continued to negatively impact industrial sales which decreased $1.4 million compared to 2002. As a result of primarily mild weather and slow economic conditions, retail and firm wholesale volumes sold decreased 5%.
Margin from Asset Optimization Activities Periodically, generation capacity is in excess of that needed to serve native load and firm wholesale customers. The Company markets this unutilized capacity to optimize the return on its owned generation assets. Substantially all of the margin from these activities is generated from contracts that are integrated with portfolio requirements around power supply and delivery and are short-term purchase and sale transactions that expose the Company to limited market risk.
Following is a reconciliation of asset optimization activity:
Year Ended December 31,
--------------------------------------------------------------------------------
(In millions) 2004 2003 2002
--------------------------------------------------------------------------------
Beginning of Year Net Asset
Optimization Position $ (0.4) $ (0.7) $ 3.3
Statement of Income Activity
Mark-to-market gains (losses)
recognized (1.4) 0.7 (3.6)
Realized gains recognized 16.4 17.6 16.3
--------------------------------------------------------------------------------
Net activity in electric
utility margin 15.0 18.3 12.7
--------------------------------------------------------------------------------
Net cash received & other adjustments (15.2) (18.0) (16.7)
--------------------------------------------------------------------------------
End of Year Net Asset Optimization
Position $ (0.6) $ (0.4) $ (0.7)
================================================================================
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Net wholesale margins decreased $3.3 million compared to 2003 due to reduced available capacity. The availability of excess capacity was impacted by scheduled outages of owned generation, related to the installation of environmental compliance equipment and an increase in demand by native load customers due to both weather and increased usage. The $5.6 million increase in 2003 compared to 2002 was primarily due to price volatility and additional capacity due to weather.
Utility Group Operating Expenses
Other Operating
Other operating expenses increased $8.4 million for the year ended December 31, 2004 as compared to 2003. Expense in 2003 reflects the deferral of $4.0 million relating to the Ohio order allowing the Company to defer for future recovery its actual bad debt expense in excess of the amount provided in base rates (See Rate and Regulatory Matters below). Other factors contributing to the increase were an increase in NOx-related expenses of $2.6 million recovered in rates and planned turbine maintenance of $1.9 million.
Other operating expense increased $11.5 million in 2003 compared to 2002. The increase was principally caused by increased distribution, plant, and transmission operating expenses; power plant and other maintenance; customer service initiatives; higher insurance premiums; and prior year insurance recoveries. In addition, operating expenses reflect $1.8 million in amortization of Ohio choice implementation costs, which are recovered through increased gas utility margin. The increase in operating expenses was partially offset by the impact of an Ohio regulatory order, which resulted in the reversal and deferral of 2003 uncollectible accounts expense of $4.0 million for future recovery.
Depreciation & Amortization
For the year ended December 31, 2004, depreciation expense increased $9.9
million compared to 2003. NOx-related depreciation contributed $4.8 million of
the increase with the remaining increase due primarily to normal additions to
utility plant. The increase of $7.2 million in 2003 compared to 2002 is also due
to normal additions to utility plant. In addition to the NOx scrubbers placed
into service in 2004, other significant expenditures included upgrades of
electric facilities subjected to storm damage, construction of a new substation,
and a new transmission main. Upgrades implemented in 2002 and 2003 now included
in annual depreciation expense include a gas-fired peaker unit, expenditures for
implementing a choice program for Ohio gas customers, customer system upgrades,
and other upgrades to existing transmission and distribution facilities.
Taxes Other Than Income Taxes
Taxes other than income taxes increased $1.6 million in 2004 compared to 2003
and $5.9 million in 2003 compared to 2002. Almost all of the 2004 increase and
$4.5 million of the 2003 increase corresponds with increased collections of
utility receipts and excise taxes due to higher revenues. The remaining 2003
increase results principally from higher property taxes.
Utility Group Other Income (Expense)
Total other income (expense)-net increased $1.1 million during 2004 compared to 2003 and decreased $1.0 million during 2003 compared to 2002. Lower amounts of AFUDC were recorded in 2004 as NOx expenditures were placed in service. Fiscal year 2003 includes operating losses and the write-off of investments in an entity that processes fly ash, totaling $4.2 million. In 2002, the Company recognized losses associated with those investments totaling $1.5 million.
Utility Group Interest Expense
In the second half of 2003, the Company completed permanent financing transactions in which approximately $366 million in equity, debt, and hedging net proceeds were received and used to retire higher coupon long-term debt and other short term borrowings. The changes in interest expense in 2004 and 2003 reflect the full impact of that transaction.
Utility Group Income Taxes
For the year ended December 31, 2004, income taxes were relatively consistent with 2003 with decreased earnings offset by a slightly higher effective rate. An increase in the Indiana state income tax rate from 4.5% to 8.5% was the primary reason for increased tax expense in 2003 compared to 2002.
Environmental Matters
The Company is subject to federal, state, and local regulations with respect to environmental matters, principally air, solid waste, and water quality. Pursuant to environmental regulations, the Company is required to obtain operating permits for the electric generating plants that it owns or operates and construction permits for any new plants it might propose to build. Regulations concerning air quality establish standards with respect to both ambient air quality and emissions from electric generating facilities, including particulate matter, sulfur dioxide (SO2), and nitrogen oxide (NOx). Regulations concerning water quality establish standards relating to intake and discharge of water from electric generating facilities, including water used for cooling purposes in electric generating facilities. Because of the scope and complexity of these regulations, the Company is unable to predict the ultimate effect of such regulations on its future operations, nor is it possible to predict what other regulations may be adopted in the future. The Company intends to comply with all applicable governmental regulations, but will contest any regulation it deems to be unreasonable or impossible with which to comply.
Clean Air Act
NOx SIP Call Matter
The Company has taken steps to comply with Indiana's State Implementation Plan
(SIP) of the Clean Air Act (the Act). These steps include installing Selective
Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley),
Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and
2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water
using ammonia in a chemical reaction. This technology is known to currently be
the most effective method of reducing nitrogen oxide (NOx) emissions where high
removal efficiencies are required.
The IURC has issued orders that approve:
o the Company's project to achieve environmental compliance by investing in
clean coal technology;
o a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs incurred;
o a mechanism whereby, prior to an electric base rate case, the Company may
recover through a rider that is updated every six months, an 8% return on
its weighted capital costs for the project; and
o ongoing recovery of operating costs, including depreciation and purchased
emission allowances, related to the clean coal technology once the facility
is placed into service.
Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated construction cost is consistent with amounts approved in the IURC's orders. Through December 31, 2004, $238 million has been expended, and three of the four SCR's are operational. Once all equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. The Company is recovering the operational costs associated with the SCR's and related technology. The 8% return on capital investment approximates the return authorized in the Company's last electric rate case in 1995 and includes a return on equity.
The Company has achieved timely compliance through the reduction of the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance.
Culley Generating Station Litigation
During 2003, the U.S. District Court for the Southern District of Indiana
entered a consent decree among SIGECO, the Department of Justice (DOJ), and the
USEPA that resolved a lawsuit originally brought by the USEPA against SIGECO.
The lawsuit alleged violations of the Clean Air Act by SIGECO at its Culley
Generating Station for (1) making modifications to generating station without
obtaining required permits, (2) making major modifications to the generating
station without installing the best available emission control technology, and
(3) failing to notify the USEPA of the modifications.
Under the terms of the agreement, the DOJ and USEPA agreed to drop all challenges of past maintenance and repair activities at the Culley Generating Station. In reaching the agreement, SIGECO did not admit to any allegations in the government's complaint, and SIGECO continues to believe that it acted in accordance with applicable regulations and conducted only routine maintenance on the units. SIGECO entered into this agreement to further its continued commitment to improve air quality and avoid the cost and uncertainties of litigation.
Under the agreement, SIGECO committed to
o either repower Culley Unit 1 (50 MW) with natural gas and equip it with SCR
control technology for further reduction of nitrogen oxide, or cease
operation of the unit by December 31, 2006;
o operate the existing SCR control technology recently installed on Culley
Unit 3 (287 MW) year round at a lower emission rate than that currently
required under the NOx SIP Call, resulting in further nitrogen oxide
reductions;
o enhance the efficiency of the existing scrubber at Culley Units 2
and 3 for additional removal of sulphur dioxide emissions;
o install a baghouse for further particulate matter reductions at
Culley Unit 3 by June 30, 2007;
o conduct a Sulphuric Acid Reduction Demonstration Project as an
environmental mitigation project designed to demonstrate an advance in
pollution control technology for the reduction of sulfate emissions; and
o pay a $600,000 civil penalty.
The Company notified the USEPA of its intention to shut down Culley Unit 1 effective December 31, 2006. The Company does not believe that implementation of the settlement will have a material effect to its results from operations or financial condition. The $600,000 civil penalty was expensed and paid during 2003 and is reflected in Other-net.
Information Request
On January 23, 2001, SIGECO received an information request from the USEPA under
Section 114 of the Clean Air Act for historical operational information on the
Warrick and A.B. Brown generating stations. SIGECO has provided all information
requested with the most recent correspondence provided on March 26, 2001.
Manufactured Gas Plants
In the past, Indiana Gas, SIGECO, and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas, SIGECO, and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites.
Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program (VRP) and is currently conducting some level of remedial activities, including groundwater monitoring at certain sites, where deemed appropriate, and will continue remedial activities at the sites as appropriate and necessary.
In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million.
The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million.
Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen.
In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's VRP. In response, SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk.
On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO added those four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. That renewal was approved by the IDEM on February 24, 2004. On July 13, 2004, SIGECO filed a declaratory judgment action against its insurance carriers seeking a judgment finding its carriers liable under the policies for coverage of further investigation and any necessary remediation costs that SIGECO may accrue under the VRP program. The total investigative costs, and if necessary, costs of remediation at the four SIGECO sites, as well as the amount of any PRP or insurance recoveries, cannot be determined at this time.
Jacobsville Superfund Site
On July 22, 2004, the USEPA listed the Jacobsville Neighborhood Soil Contamination site in Evansville, Indiana, on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The USEPA has identified four sources of historic lead contamination. These four sources shut down manufacturing operations years ago. When drawing up the boundaries for the listing, the USEPA included a 250 acre block of properties surrounding the Jacobsville neighborhood, including Vectren's Wagner Operations Center. Vectren's property has not been named as a source of the lead contamination, nor does the USEPA's soil testing to date indicate that the Vectren property contains lead contaminated soils. Vectren's own soil testing, completed during the construction of the Operations Center, did not indicate that the Vectren property contains lead contaminated soils. At this time, Vectren anticipates only additional soil testing, if required by the USEPA.
Rate and Regulatory Matters
Gas and electric operations with regard to retail rates and charges, terms of service, accounting matters, issuance of securities, and certain other operational matters specific to its Indiana customers are regulated by the IURC. The retail gas operations of the Ohio operations are subject to regulation by the PUCO.
All metered gas rates in Indiana contain a gas cost adjustment (GCA) clause, and all metered gas rates in Ohio contain a gas cost recovery (GCR) clause. GCA and GCR clauses allow the Company to charge for changes in the cost of purchased gas. Metered electric rates contain a fuel adjustment clause (FAC) that allows for adjustment in charges for electric energy to reflect changes in the cost of fuel. The net energy cost of purchased power, subject to an agreed upon benchmark, is also recovered through regulatory proceedings. Rate structures in the Company's territories do not include weather normalization-type clauses that authorize the utility to recover gross margin on sales established in its last general rate case, regardless of actual weather patterns.
GCA, GCR, and FAC procedures involve periodic filings and IURC and PUCO hearings to establish the amount of price adjustments for a designated future period. The procedures also provide for inclusion in later periods of any variances between the estimated cost of gas, cost of fuel, and net energy cost of purchased power and actual costs incurred. The Company records any under-or-over-recovery resulting from gas and fuel adjustment clauses each month in margin. A corresponding asset or liability is recorded until the under-or-over-recovery is billed or refunded to utility customers.
The IURC has also applied the statute authorizing GCA and FAC procedures to reduce rates when necessary to limit net operating income to a level authorized in its last general rate order through the application of an earnings test. For the recent past, the earnings test has not affected the Company's ability to recover costs, and the Company does not anticipate the earnings test will restrict recovery in the near future.
SIGECO and Indiana Gas Base Rate Settlements On June 30, 2004, the IURC approved a $5.7 million base rate increase for SIGECO's gas distribution business, and on November 30, 2004, approved a $24 million base rate increase for Indiana Gas' gas distribution business. The new rate designs include a larger service charge, which is intended to address to some extent earnings volatility related to weather. The base rate change in SIGECO's service territory was implemented on July 1, 2004, resulting in additional 2004 revenues of $2.5 million. The base rate change in Indiana Gas' service territory was implemented on December 1, 2004, resulting in additional 2004 revenues of $2.2 million.
The orders also permit SIGECO and Indiana Gas to recover the on-going costs to comply with the federal Pipeline Safety Improvement Act of 2002. The Pipeline Safety Improvement Tracker provides for the recovery of incremental non-capital dollars, capped at $750,000 the first year and $500,000 thereafter for SIGECO and $2.5 million per year for Indiana Gas. Any costs incurred in excess of these annual caps are to be deferred for future recovery.
VEDO Pending Base Rate Increase Settlement On February 4, 2005, the Company filed with the PUCO a settlement agreement that had been entered into with several parties, including the PUCO staff, in its base rate case. The Ohio Office of the Consumer Counselor (OCC) is opposing the settlement. Earlier in 2004 VEDO had filed with the PUCO a request to adjust its base rates and charges for its gas distribution business serving more than 315,000 customers located in west central Ohio. The settlement provides for a $15.7 million increase in VEDO's base distribution rates to cover the ongoing costs of operating, maintaining, and expanding the approximately 5,200-mile distribution system. The settlement increase includes $1.1 million of funding for weatherization and conservation programs for low income customers. Evidentiary hearings were completed in the case on February 9, 2005. Review and approval by the PUCO is necessary before the settlement is effective. The proposed new rate design includes a larger service charge, which will address, to some extent, earnings volatility related to weather. The settlement also permits VEDO the annual recovery of on-going costs associated with the Pipeline Safety Improvement Act of 2002. Based upon the PUCO's actions in other proceedings, the Company would expect an order near the end of the first quarter of 2005.
Ohio Uncollectible Accounts Expense Tracker On December 17, 2003, the PUCO approved a request by VEDO and several other regulated Ohio gas utilities to establish a mechanism to recover uncollectible account expense outside of base rates. The tariff mechanism establishes an automatic adjustment procedure to track and recover these costs instead of providing the recovery of the historic amount in base rates. Through this order, VEDO received authority to defer its 2003 uncollectible accounts expense to the extent it differs from the level included in base rates. The Company estimated the difference to approximate $4 million in excess of that included in base rates, and reversed and deferred that amount for future recovery. In 2004, the Company recorded revenues of $3.3 million which is equal to the level of uncollectible accounts expense recognized for Ohio residential customers.
Gas Cost Recovery (GCR) Audit Proceedings There is an Ohio requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, a two-year audit period ended in November 2002. That audit period provided the PUCO staff its initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff submitted an audit report in the fall of 2003 wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. A hearing has been held, and the PUCO staff has recommended a $6.1 million disallowance. The Ohio Consumer Counselor has recommended an $11.5 million disallowance. For this PUCO audit period, any disallowance relating to the Company's ProLiance arrangement will be shared by the Company's joint venture partner. Based on a review of the matters, the Company has recorded $1.1 million for its estimated share of a potential disallowance. A PUCO decision on this matter is yet to be issued. The Company is also unable to determine the effects that a PUCO decision for the audit period ended in November 2002 may have on results in audit periods beginning after November 2002.
Other Operating Matters
MISO
The FERC approved the Midwest Independent System Operator (MISO) as the nation's first regional transmission organization. Regional transmission organizations place public utility transmission facilities in a region under common control. The MISO is committed to reliability, the nondiscriminatory operation of the bulk power transmission system, and to working with all stakeholders to create cost-effective and innovative solutions. The Carmel, Indiana, based MISO began operations in December 2001 and serves the electrical transmission needs of much of the Midwest. In December 2001, the IURC approved the Company's request for authority to transfer operational control over its electric transmission facilities to the MISO. That transfer occurred on February 1, 2002. Pursuant to an order from the IURC, certain MISO costs have been deferred for future recovery.
During 2004, SIGECO together with three other Indiana electric utilities filed a proceeding with the IURC seeking to recover the anticipated costs associated with MISO's implementation of the "Day 2 energy market" on April 1, 2005. A hearing considering this request occurred in February, 2005.
As a result of MISO's operational control over much of the Midwestern electric transmission grid, including SIGECO's transmission facilities, SIGECO's continued ability to import power, when necessary, and export power to the wholesale market has been, and may continue to be, impacted. Given the nature of MISO's policies regarding use of transmission facilities, as well as ongoing FERC initiatives and uncertainties around the "Day 2 energy market" operations, it is difficult to predict near term operational impacts. However, as stated above, it is believed that MISO's regional operation of the transmission system will ultimately lead to reliability improvements.
The potential need to expend capital for improvements to the transmission system, both to SIGECO's facilities as well as to those facilities of adjacent utilities, over the next several years will become more predictable as MISO completes studies related to regional transmission planning and improvements. Such expenditures may be significant.
United States Securities and Exchange Commission Inquiry into PUCHA Exemption
In July 2004, the Company received a letter from the SEC regarding its exempt
status under the Public Utility Holding Company Act of 1935 (PUHCA). The letter
asserts that Vectren's out of state electric power sales exceed the amount
previously determined by the SEC to be acceptable in order to qualify for the
exemption. There is pending a request by Vectren for an order of exemption under
Section 3(a)(1) of PUHCA. Vectren also claims the benefit of the exemption
pursuant to Rule 2 under Section 3(a)(1) of PUHCA by filing an annual statement
on SEC Form U-3A-2. The Company has responded to the SEC inquiry and filed an
amended Form U-3A-2 for the year ended December 31, 2003. The amendment changed
the method of aggregating wholesale power sales and purchases outside of Indiana
from that previously reported. The new method is to aggregate by delivery point.
The amendment also submitted clarifications as to activity outside of Indiana
related to gas utility operations.
Results of Operations of the Nonregulated Group
The Nonregulated Group is comprised of four primary business areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure Services, and Broadband. Energy Marketing and Services markets and supplies natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal and generates IRS Code Section 29 investment tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. Broadband has investments in broadband communication services such as analog and digital cable television, high-speed internet and data services, and advanced local and long distance phone services. In addition, the Nonregulated Group has other businesses that invest in energy-related opportunities, real estate, and leveraged leases, among other activities. The Nonregulated Group supports the Company's regulated utilities pursuant to service contracts by providing natural gas supply services, coal, utility infrastructure services, and other services. Corporate expenses are allocated to each business area. The results of operations of the Nonregulated Group for the years ended December 31, 2004, 2003, and 2002, follow:
Year Ended December 31,
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(In millions, except per share amounts) 2004 2003 2002
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NET INCOME $ 26.4 $ 27.6 $ 19.0
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BASIC EARNINGS PER SHARE $ 0.35 $ 0.39 $ 0.28
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NET INCOME ATTRIBUTED TO:
Energy Marketing & Services $ 16.6 $ 15.3 $ 12.1
Coal Mining 12.5 13.0 11.5
Utility Infrastructure 1.8 (0.9) (1.2)
Broadband (3.2) (1.1) 0.3
Other Businesses (1.3) 1.3 (3.7)
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Nonregulated earnings for the year ended December 31, 2004, were $26.4 million compared to $27.6 million in 2003 and $19.0 million in 2002. The Company's three core nonregulated businesses, Energy Marketing and Services, Coal Mining, and Utility Infrastructure Services, contributed $30.9 million in 2004, compared to $27.4 million in 2003 and $22.4 million in 2002. The 2004 results reflect $6.0 million in after tax charges related to the write-down of the Company's broadband businesses. Those charges were partially offset by net gains from the Company's investment in Haddington Energy Partners. Earnings in 2003 reflect after tax gains from the divesture of businesses and investments totaling $2.6 million after tax.
Energy Marketing & Services
Energy Marketing and Services is comprised of the Company's gas marketing operations, performance contracting operations, and retail gas supply operations.
Gas marketing operations are performed through the Company's investment in ProLiance Energy LLC (ProLiance), a nonregulated energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas). ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. ProLiance's primary customers include Vectren's utilities and nonregulated gas supply operations as well as Citizen's Gas and other large end-use customers. As part of a settlement agreement approved by the IURC during July 2002, the gas supply agreements with Indiana Gas and SIGECO, were approved and extended through March 31, 2007. The utilities may decide to conduct a "request for proposal" (RFP) for a new supply administrator, or they may decide to make an alternative proposal for procurement of gas supply. That decision will be made by December 2005. To the extent an RFP is conducted, ProLiance has the opportunity, if it so elects, to participate in the RFP process for service to the utilities after March 31, 2007.
In June 2002, the integration of Vectren's wholly owned gas marketing subsidiary, SIGCORP Energy Services, LLC (SES), with ProLiance was completed. SES provided natural gas and related services to SIGECO and others prior to the integration. In exchange for the contribution of SES' net assets totaling $19.2 million, Vectren's allocable share of ProLiance's profits and losses increased to 61%, consistent with Vectren's new ownership percentage. The transfer of net assets was accounted for at book value, consistent with joint venture accounting, and did not result in any gain or loss. Governance and voting rights remain at 50% for each member; and therefore, Vectren continues to account for its investment in ProLiance using the equity method of accounting.
Energy Systems Group, LLC (ESG) provides energy performance contracting and facility upgrades through its design and installation of energy-efficient equipment throughout the Midwest. ESG acquired Progress Energy Solutions during 2004, expanding its operations throughout the Southeast and Mid-Atlantic United States. Prior to April 2003, ESG was a consolidated venture between the Company and Citizens Gas with the Company owning two-thirds. In April 2003, the Company purchased the remaining interest in ESG.
Vectren Retail, LLC (d/b/a Vectren Source) provides natural gas and other related products and services in Ohio and Indiana, serving just over 100,000 customers opting for choice among energy providers. In 2004, Vectren Source was certified by the Georgia Public Service Commission and has begun initial marketing efforts in the Atlanta Gas Light Company service territory.
Net income generated by Energy Marketing and Services for the year ended December 31, 2004, was $16.6 million compared to $15.3 million in 2003 and $12.1 million in 2002. Throughout the periods presented, gas marketing operations, performed through ProLiance, provided the primary earnings contribution, totaling $15.4 million in 2004 and in 2003 and $14.6 million in 2002. While earnings remained relatively consistent in 2004 compared to 2003, ProLiance experienced increased earnings primarily related to asset optimization from storage activities as a result of significant price volatility. However, those increases were offset by the reserve established for the contingency described below. The 2003 increase over 2002 was principally attributable to increased storage capacity coupled with more volatile gas prices.
Earnings growth has also been impacted by Vectren Source's operations. Vectren Source, a start up operation, operated at a planned loss of $0.4 million, in 2004, as compared to a loss of $1.9 million in 2003 and $2.6 million in 2002. Vectren Source has expanded its customer base and has increased margins per unit of throughput.
Earnings from performance contracting operations, performed through ESG, contributed earnings of $2.8 million in 2004 nearly matching last year's contribution of $3.0 million. Earnings in 2002 were $0.7 million. The $2.3 million increase in 2003 compared to 2002 is due primarily to higher margins and working from a higher construction backlog at the end of 2002 as well as increased ownership as of April 2003.
ProLiance Contingency
In 2002, a lawsuit was filed in the United States District Court for the Northern District of Alabama filed by the City of Huntsville, Alabama d/b/a Huntsville Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville Utilities asserted claims based on alleged breach of contract with respect to provision of portfolio services and/or pricing advice, fraud, fraudulent inducement, and other theories, including conversion and violations under Racketeering, Influenced and Corrupt Organizations Act (RICO). These claims related generally to: (1) alleged breach of contract in providing advice and/or administering portfolio arrangements; (2) alleged promises to provide gas at a below-market rate; (3) the creation and repayment of a "winter levelizing program" instituted by ProLiance in conjunction with the Manager of Huntsville's Gas Utility, to allow Huntsville Utilities to pay its gas bills from the winter of 2000-2001 over an extended period of time coupled with the alleged ignorance about the program on the part of Huntsville Utilities' Gas Board and other management, and; (4) the sale of Huntsville Utilities' gas storage supplies to repay the balance owed on the winter levelizing program and the alleged lack of authority of Huntsville Utilities' gas manager to approve those sales.
In early 2005, a jury trial was commenced and on February 10, 2005, the jury returned a verdict largely in favor of Huntsville Utilities and awarded Huntsville Utilities compensatory damages of $8.2 million and punitive damages of $25.0 million. The jury rejected Huntsville Utilities' claim of conversion. The jury also rejected ProLiance's counter claim for payment. The amounts due from Huntsville Utilities were fully reserved by ProLiance in 2003. Huntsville Utilities claims that all or a portion of the compensatory damages may be subject to trebling under applicable Federal statutes. The court may also assess attorney's fees and costs in favor of Huntsville Utilities. If the Court applies trebling and awards attorney fees, the entire award could approach $55 million. Several matters are still pending at the trial court, including efforts by ProLiance to reduce the amount of the verdict. ProLiance will file post judgment motions to reduce and to set aside the verdict. The court may issue its final rulings on the verdict and related motions by April or May. Depending on the outcome, ProLiance would appeal the judgment of the trial court. ProLiance management believes that there are reasonable grounds to set aside or reduce the verdict and reasonable grounds for appeal which offer a basis for reversal of the entire verdict. While it is reasonably possible that a liability has been incurred by ProLiance, it is not possible to predict the ultimate outcome of an appeal of the verdict. ProLiance has recorded a reserve of $3.9 million as of December 31, 2004, reflective of their assessment of the lower end of the range of possible outcomes in the case and inclusive of estimated ongoing litigation costs.
As an equity investor in ProLiance, the Company has reflected its share of the charge, or $1.4 million after tax, in its 2004 results. It is not expected that an unfavorable outcome on appeal will have a material adverse effect on the Company's consolidated financial position or its liquidity, but an unfavorable outcome could be material to the Company's earnings.
Coal Mining
The Coal Mining group mines and sells coal to the Company's utility operations and to third parties through its wholly owned subsidiary Vectren Fuels, Inc. (Fuels). The Coal Mining Group also generates IRS Code Section 29 tax credits relating to the production of coal-based synthetic fuels through its 8.3% ownership interest in Pace Carbon Synfuels, LP (Pace Carbon). Pace Carbon developed, owns, and operates four projects to produce and sell coal-based synthetic fuel (synfuel) utilizing Covol technology. Vectren accounts for its investment in Pace Carbon using the equity method. In addition, Fuels receives synfuel-related fees from synfuel producers unrelated to Pace Carbon for a portion of its coal production.
Coal Mining net income for the year ended December 31, 2004, was $12.5 million, as compared to $13.0 million in 2003, and $11.5 million in 2002. Synfuel-related results, which include earnings from Pace Carbon and synfuel processing fees earned by Fuels, were $12.1 million in 2004, $13.3 million in 2003, and $8.5 million in 2002. The 2004 decrease reflects lower production of synthetic fuel produced by Pace Carbon due to feedstock problems at one of their four plants. The underperforming plant was relocated and began production in January 2005. The 2003 increase is due to greater production of synthetic fuel by Pace Carbon. The production of synthetic fuel generates Section 29 tax credits that are utilized by the Company, reducing income tax expense in those years. Earnings from Mining operations were $0.4 million in 2004 compared to a loss of $0.3 million in 2003 and earnings of $3.0 million in 2002. Increased earnings in 2004 were due primarily to improved production and market pricing which were partially offset by weather conditions and increased commodity costs, such as steel, explosives and diesel fuel. In 2003, mining operations experienced decreased yields due to poor mining conditions and increased mine development cost amortization compared to 2002.
IRS Section 29 Tax Credit Recent Developments
Under Section 29 of the Internal Revenue Code, manufacturers of synthetic fuel such as Pace Carbon receive a tax credit for every ton of synthetic fuel sold. To qualify for the credits, the synthetic fuel must meet three primary conditions: 1) there must be a significant chemical change in the coal feedstock, 2) the product must be sold to an unrelated person, and 3) the production facility must have been placed in service before July 1, 1998.
In past rulings, the Internal Revenue Service (IRS) has concluded that the
synthetic fuel produced at the Pace Carbon facilities should qualify for Section
29 tax credits. The IRS issued a private letter ruling with respect to the four
projects on November 11, 1997, and subsequently issued an updated private letter
ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected
Section 29 tax credits in its consolidated results through December 31, 2004, of
approximately $56.2 million. To date, Vectren has been in a position to fully
recognize the credits generated.
During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year and later expanded the audit to include tax years 1999, 2000, and 2001. In May 2004, the IRS completed its audit of the 1998 to 2001 tax returns of Pace Carbon requesting only minor modifications to previously filed returns. There were no changes to any of the filed Section 29 tax credit calculations. The Permanent Subcommittee on Investigations of the U.S. Senate's Committee on Governmental Affairs, however, has an ongoing investigation related to Section 29 tax credits.
Vectren believes it is justified in its reliance on the private letter rulings and recent IRS audit results for the Pace Carbon facilities. Therefore, the Company will continue to recognize Section 29 tax credits as they are earned until there is either a change in the tax code or the IRS' interpretation of that tax code.
Further, Section 29 tax credits are only available when the price of oil is less than a base price specified by the tax code, as adjusted for inflation. The Company does not believe that credits realized in 2004 and prior years will be affected by the limitation, but an average annual price in excess of the mid $50 per barrel range, as priced at the wellhead, could limit Section 29 tax credits in 2005 and beyond. In January 2005, the Company executed an insurance arrangement that partially limits the Company's exposure if a limitation on the availability of tax credits were to occur in 2005 and/or 2006 due to oil prices.
Utility Infrastructure Services
Utility Infrastructure Services provides underground construction and repair to gas, water, and telecommunications companies primarily through its investment in Reliant Services, LLC (Reliant) and Reliant's 100% ownership in Miller Pipeline. Reliant is a 50% owned strategic alliance with an affiliate of Cinergy Corp. and is accounted for using the equity method of accounting. Infrastructure's operations achieved annual earnings in 2004 totaling $1.8 million, compared to a loss of $0.9 million in 2003 and $1.2 million in 2002. The $2.7 million improvement in 2004 was primarily driven by better pricing and increases in utility and municipal waste water construction and repair spending during 2004, along with productivity improvements. In the first half of 2003 and throughout all 2002, results were affected by cutbacks of underground construction and repair projects by gas distribution customers. In the second half of 2003, Miller returned to profitability due to an increase in construction and repair projects as utilities began to return to historical expenditure levels.
Broadband and Other Businesses
The Company has an approximate 2% equity interest and a convertible subordinated debt investment in Utilicom Networks, LLC (Utilicom) that if converted bring the Company's ownership interest up to 16%. The Company also has an approximate 19% equity interest in SIGECOM Holdings, Inc., which was formed by Utilicom to hold interests in SIGECOM, LLC (SIGECOM). SIGECOM provides broadband services, such as cable television, high-speed internet, and advanced local and long distance phone services, to over 28,000 customers, averaging over 3 revenue generating units per customer, in the greater Evansville, Indiana. SIGECOM's operations are cash flow positive and have not required any further investment since May 2002.
Other Utilicom-related subsidiaries also owned franchising agreements to provide broadband services to the greater Indianapolis, Indiana and Dayton, Ohio markets. In 2004, the build out of these markets was further evaluated, and the Company concluded that it was unlikely it would make additional investments in those markets. As a result, the Company recorded charges totaling $6.0 million, or $3.6 million after-tax, to write-off investments made in the Indianapolis and Dayton markets and to write down its investment in SIGECOM. The year ended December 31, 2003, also includes a $1.2 million after tax loss resulting from the sale of a small broadband operation located in Indianapolis.
The Other Businesses group includes a variety of wholly owned operations and investments that invest in energy-related opportunities, real estate, and leveraged leases, among other investments. For the year ended December 31, 2004, the Other Businesses Group reported $1.3 million in losses, as compared to earnings of $1.3 million in 2003 and losses of $3.7 million in 2002.
As part of the Company's decision to no longer expand its broadband-related operations, the Company ceased operations of Vectren Communications Services, Inc. (VCS), a municipal broadband consulting business, during the second quarter of 2004. This decision resulted in losses of $2.4 million after tax due primarily to inventory write downs, cessation charges, and other costs. VCS' total loss for 2004 was $2.6 million, as compared to losses of $1.8 million in 2003 and $2.8 million in 2002.
The Haddington Energy Partnerships are equity method investments that invest in energy-related ventures. During 2004, these partnerships sold their investments in SAGO Energy, LP, (SAGO) for cash. The Company recognized its portion of the after tax gain totaling $5.3 million. These earnings were partially offset by Haddington's write-down of Nations Energy Holdings, of which Vectren's portion was $3.5 million after tax. In total, earnings from Haddington for the year ended December 31, 2004, are $2.0 million compared to a loss of $0.6 million in 2003, and break even results in 2002.
The Other Businesses group 2003 results include $3.8 million in after tax gains from the sale of debt collection and supply chain management subsidiaries and the sale of an investment in a company that provides real-time power plant and transmission line status information.
In total, Broadband and Other Businesses reported combined charges of $6.0 million after tax in 2004 to write down its broadband-related investments. Net increases in 2004 from Haddington's results of $2.6 million were comparable to net gains recognized in 2003 from the sale of various subsidiaries and investments.
Impact of Recently Issued Accounting Guidance
SFAS 123 (revised 2004)
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based
Payments" (SFAS 123R) that will require compensation costs related to
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments issued. In
addition, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. SFAS 123R replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The effective date of SFAS 123R for
the Company is July 1, 2005. SFAS 123R provides for multiple transition methods,
and the Company is still evaluating potential methods for adoption. The adoption
of this standard is not expected to have any material effect on the Company's
operating results or financial condition.
EITF 03-01
In March 2004, the EITF issued a consensus on Issue No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
(EITF 03-01). In EITF 03-01, the Task Force developed a basic model for
evaluating whether investments within the scope of EITF 03-01, which includes
cost method and equity method investments, have other-than-temporary impairment.
The basic model includes three steps: 1) determine if there is impairment; 2) if
there is impairment, decide whether it is temporary or other than temporary; and
3) if it is other than temporary, recognize it in earnings. EITF 03-01 also
requires certain qualitative and quantitative disclosure of material impairments
judged to be temporary. The EITF has yet to finalize Steps 2 and 3. Step 1 and
the disclosure requirements are currently effective, and the adoption of those
portions of the EITF did not have a material effect on the Company.
As noted in the Broadband discussion above, the Company incurred an other-than-temporary impairment charge associated with its cost method investment in SIGECOM, LLC, during 2004. While the Company currently believes that the book value of that investment approximates fair value, further changes in estimated fair value may occur.
Critical Accounting Policies
Management is required to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and the related disclosures that conform to accounting principles generally accepted in the United States. Note 2 to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Certain estimates used in the financial statements are subjective and use variables that require judgment. These include the estimates to perform goodwill and other asset impairments tests and to determine pension and postretirement benefit obligations. The Company makes other estimates in the course of accounting for unbilled revenue and the effects of regulation that are critical to the Company's financial results but that are less likely to be impacted by near term changes. Other estimates that significantly affect the Company's results, but are not necessarily critical to operations, include depreciating utility and non-utility plant, valuating of derivative contracts, and estimating uncollectible accounts, among others. Actual results could differ from these estimates.
Impairment Review of Investments
The Company has investments in notes receivable, entities accounted for using the cost method of accounting, and entities accounted for using the equity method of accounting. When events occur that may cause one of these investments to be impaired, the Company performs an impairment analysis. An impairment analysis of notes receivable usually involves the comparison of the investment's estimated free cash flows to the stated terms of the note, or for notes that are collateral dependent, a comparison of the collateral's fair value to the carrying amount of the note. An impairment analysis of cost method and equity method investments involves comparison of the investment's estimated fair value to its carrying amount. Fair value is estimated using market comparisons, appraisals, and/or discounted cash flow analyses. Calculating free cash flows and fair value using the above methods is subjective and requires judgment concerning growth assumptions, longevity of cash flows, and discount rates (for fair value calculations).
During 2004, the Company performed an impairment analysis on its Utilicom-related investments. The Company used free cash flow analyses to estimate fair value for the cost method portion of the Utilicom investment and recoverability of the related notes receivable. An impairment charge totaling $6.0 million was recorded as a result of the analysis. A 10% increase in the discount rate assumption utilized to calculate Utilicom's fair value would have resulted in an estimated additional $2 million impairment charge to the cost method investment and no additional impairment charge to the notes receivable.
Impairment tests on other investments were also conducted using appraisals and discounted cash flow models to estimate fair value. No impairment charges resulted from these analyses in 2002 and a $3.9 million write-off of investments in an entity that processes fly ash resulted in 2003. For the other impairment tests performed during 2002, a 10% adverse change in the calculated or appraised fair value of collateral or a 100 basis point adverse change in the discount rate used to estimate fair value would have resulted in an approximate $3 million impairment charge. A 10% adverse change of such factors would not have affected the 2003 write-off.
Goodwill
Pursuant to SFAS No. 142, the Company performs an impairment analysis of its goodwill, almost all of which resides in the Gas Utility Services operating segment, annually, at the beginning of each year, and more frequently if events or circumstances indicate that an impairment loss may have been incurred. Impairment tests are performed at the reporting unit level which the Company has determined to be consistent with its Gas Utility Services operating segment as identified in Note 16 to the consolidated financial statements. An impairment test performed in accordance with SFAS 142 requires that a reporting unit's fair value be estimated. The Company used a discounted cash flow model to estimate the fair value of its Gas Utility Services operating segment, and that estimated fair value was compared to its carrying amount, including goodwill. The estimated fair value was in excess of the carrying amount in 2004, 2003, and 2002 and therefore resulted in no impairment.
Estimating fair value using a discounted cash flow model is subjective and requires significant judgment in applying a discount rate, growth assumptions, company expense allocations, and longevity of cash flows. A 100 basis point increase in the discount rate utilized to calculate the Gas Utility Services segment's fair value also would have resulted in no impairment charge.
Pension and Other Postretirement Obligations
The Company estimates the expected return on plan assets, discount rate, rate of compensation increase, and future health care costs, among other things, and relies on actuarial estimates to assess the future potential liability and funding requirements of the Company's pension and postretirement plans. The Company annually measures its obligations on September 30. The Company used the following weighted average assumptions to develop 2004 periodic benefit cost: a discount rate of 6.0%, an expected return on plan assets of 8.5%, a rate of compensation increase of 3.5%, and a health care cost trend rate of 10% in 2004 declining to 5% in 2009. During 2004, the Company reduced the discount rate by 25 basis points to value 2004 ending pension and postretirement obligations due to a decline in benchmark interest rates. In addition, the Company reduced its 2005 expected return on plan assets 25 basis points from that used to estimate 2004 expense due to lower investment returns and changes in the economic outlook for equity returns. Pension and postretirement periodic cost has increased from approximately $13 million in 2002 to over $16 million in 2004. Preliminary estimates of 2005 periodic cost approximated $18 million. In January 2005, the Company announced the amendment of certain postretirement benefit plans, effective January 1, 2006. The amendment will result in an estimated $3 million annual decrease in periodic cost, a portion of which will be recognized in 2005, reducing those preliminary estimates. Two of the unions that represent bargaining employees at the Company's regulated subsidiaries have advised the Company that it is their position that these changes are not permitted under the existing collective bargaining agreements which govern the relationship between the employees and the affected subsidiaries. With assistance from legal counsel, management has analyzed the unions' position and continues to believe that the Company has reserved the right to amend the affected plans and that changing these benefits for retirees is not a mandatory subject of bargaining. Future changes in health care costs, work force demographics, interest rates, or plan changes could significantly affect the estimated cost of these future benefits.
For the year ended December 31, 2004, a one percentage point adverse change in the assumed health care cost trend rate for the postretirement health care plans would have decreased pre-tax income by approximately $0.6 million and would have increased the postretirement liability by approximately $7.6 million. Management estimates that a 50 basis point reduction in the expected return on plan assets would have increased 2004 periodic benefit cost by approximately $0.8 million.
Unbilled Revenues
To more closely match revenues and expenses, the Company records revenues for all gas and electricity delivered to customers but not billed at the end of the accounting period. The Company uses actual units billed during the month to allocate unbilled units. Those allocated units are multiplied by rates in effect during the month to calculate unbilled revenue at balance sheet dates. While certain estimates are used in the calculation of unbilled revenue, the method these estimates are derived from is not subject to near-term changes.
Regulation
At each reporting date, the Company reviews current regulatory trends in the markets in which it operates. This review involves judgment and is critical in assessing the recoverability of regulatory assets as well as the ability to continue to account for its activities based on the criteria set forth in SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). Based on the Company's current review, it believes its regulatory assets are probable of recovery. If all or part of the Company's operations cease to meet the criteria of SFAS 71, a write-off of related regulatory assets and liabilities could be required. In addition, the Company would be required to determine any impairment to the carrying value of its utility plant and other regulated assets. In the unlikely event of a change in the current regulatory environment, such write-offs and impairment charges could be significant.
Financial Condition
Within Vectren's consolidated group, VUHI funds the short-term and long-term financing needs of the Utility Group operations, and Vectren Capital Corp (Vectren Capital) funds short-term and long-term financing needs of the Nonregulated Group and corporate operations. Vectren Corporation guarantees Vectren Capital's debt, but does not guarantee VUHI's debt. Vectren Capital's long-term and short-term obligations outstanding at December 31, 2004, totaled $113.0 million and $104.0 million, respectively. VUHI's outstanding long-term and short-term borrowing arrangements are jointly and severally guaranteed by Indiana Gas, SIGECO, and VEDO. VUHI's long-term and short-term obligations outstanding at December 31, 2004, totaled $550.0 million and $308.0 million, respectively. Additionally, prior to VUHI's formation, Indiana Gas and SIGECO funded their operations separately, and therefore, have long-term debt outstanding funded solely by their operations.
The Company's common stock dividends are primarily funded by utility operations. Nonregulated operations have demonstrated sustained profitability, and the ability to generate cash flows. These cash flows are primarily reinvested in other nonregulated ventures, but are also used to fund a portion of the Company's dividends, and from time to time may be reinvested in utility operations or used for corporate expenses.
VUHI's and Indiana Gas' credit ratings on outstanding senior unsecured debt at December 31, 2004, are A-/Baa1 as rated by Standard and Poor's Ratings Services (Standard and Poor's) and Moody's Investors Service (Moody's), respectively. SIGECO's credit ratings on outstanding senior unsecured debt are BBB+/Baa1. SIGECO's credit ratings on outstanding secured debt are A-/A3. VUHI's commercial paper has a credit rating of A-2/P-2. Vectren Capital's senior unsecured debt is rated BBB+/Baa2. The ratings of Moody's and Standard and Poor's are categorized as investment grade and are unchanged from December 31, 2003. Moody's current outlook is stable. During January 2005, Standard and Poor's changed its current outlook to stable from negative. A security rating is not a recommendation to buy, sell, or hold securities. The rating is subject to revision or withdrawal at any time, and each rating should be evaluated independently of any other rating. Standard and Poor's and Moody's lowest level investment grade rating is BBB- and Baa3, respectively.
The Company's consolidated equity capitalization objective is 45-55% of permanent capitalization. This objective may have varied, and will vary, depending on particular business opportunities, capital spending requirements, and seasonal factors that affect the Company's operations. The Company's equity component was 51% and 49% of permanent capitalization at December 31, 2004, and 2003, respectively. Permanent capitalization includes long-term debt, including current maturities and debt subject to tender, as well as common shareholders' equity and any outstanding preferred stock.
The Company expects the majority of its capital expenditures, investments, and debt security redemptions to be provided by internally generated funds. However, due to significant capital expenditures and expected growth in nonregulated operations, the Company may require additional permanent financing.
Sources & Uses of Liquidity
Operating Cash Flow
The Company's primary historical source of liquidity to fund working capital requirements has been cash generated from operations. Cash flow from operating activities increased $64.0 million during the year ended December 31, 2004, compared to 2003 primarily as a result of favorable changes in working capital accounts offset by decreased earnings before non-cash charges. The decreased earnings before non-cash charges result principally from lower deferred tax expense due to approximately $31.9 million in alternative minimum taxes recognized in 2004, which has reduced deferred tax expense. Operating cash flow in 2003 decreased $115.2 million compared to 2002. The primary reason for the decrease was the negative effect of higher gas prices on working capital, offset by increased earnings before non-cash charges.
Financing Cash Flow
Although working capital requirements are generally funded by cash flow from operations, the Company uses short-term borrowings to supplement working capital needs when accounts receivable balances are at their highest and gas storage is refilled. Additionally, short-term borrowings are required for capital projects and investments until they are permanently financed.
Cash flow required for financing activities of $18.3 million for the year ended December 31, 2004, includes a net increase of short-term borrowings of $139.5 million and the net retirement of $38.3 million of long-term debt. Cash flow provided by financing activities of $45.8 million for the year ended December 31, 2003, includes the effects of the permanent financing executed during the current year in which approximately $366 million in equity, debt, and hedging net proceeds were received and used to retire higher coupon long-term debt and other short term borrowings. Common stock dividends have increased over the periods presented due to the issuance of new securities and board authorized increases in the dividend rate.
Equity Issuance
In March 2003, the Company filed a registration statement with the Securities
and Exchange Commission with respect to a public offering of authorized but
previously unissued shares of common stock as well as the senior unsecured notes
of VUHI described below. In August 2003, the registration became effective, and
an agreement was reached to sell approximately 7.4 million shares to a group of
underwriters. The net proceeds totaled $163.2 million and were utilized entirely
by VUHI and VUHI's subsidiaries to repay short-term borrowings and to retire
long-term debt with higher interest rates.
VUHI Debt Issuance
In July 2003, VUHI issued senior unsecured notes with an aggregate principal
amount of $200 million in two $100 million tranches. The first tranche was
10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746%
to yield 5.28% to maturity (2013 Notes). The second tranche was 15-year notes
due August 2018 with an interest rate of 5.75% priced at 99.177% to yield 5.80%
to maturity (2018 Notes).
The notes are guaranteed by the VUHI's three public utilities: SIGECO, Indiana Gas, and VEDO. These guarantees are full and unconditional and joint and several. In addition, they have no sinking fund requirements, and interest payments are due semi-annually. The notes may be called by VUHI, in whole or in part, at any time for an amount equal to accrued and unpaid interest, plus the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined in the indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the 2018 Notes.
Shortly before these issues, VUHI entered into several treasury locks with a total notional amount of $150.0 million. Upon issuance of the debt, the treasury locks were settled resulting in the receipt of $5.7 million in cash, which was recorded as a regulatory liability pursuant to existing regulatory orders. The value received is being amortized as a reduction of interest expense over the life of the issues.
The net proceeds from the sale of the senior notes and settlement of related hedging arrangements approximated $203 million and were used to repay short-term borrowing and to retire long-term debt with higher interest rates.
Long-Term Debt Put & Call Provisions
Certain long-term debt issues contain put and call provisions that can be
exercised on various dates before maturity. Other than those described below
related to ratings triggers, the put or call provisions are not triggered by
specific events, but are based upon dates stated in the note agreements, such as
when notes are re-marketed. During 2004, 2003, and 2002, debt totaling $2.5
million, $0.1 million, and $5.2 million, respectively, was put to the Company.
Debt that may be put to the Company within one year is classified as Long-term
debt subject to tender in current liabilities.
SIGECO and Indiana Gas Debt Call
During 2004, the Company called $20.0 million of insured quarterly senior
unsecured notes outstanding at Indiana Gas. The notes, originally due in 2015,
were called at par.
During 2003, the Company called two first mortgage bonds outstanding at SIGECO and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond had a principal amount of $45.0 million, an interest rate of 7.60%, was originally due in 2023, and was redeemed at 103.745% of its stated principal amount. The second SIGECO bond had a principal amount of $20.0 million, an interest rate of 7.625%, was originally due in 2025, and was redeemed at 103.763% of the stated principal amount.
The first Indiana Gas note had a remaining principal amount of $21.3 million, an interest rate of 9.375%, was originally due in 2021, and was redeemed at 105.525% of the stated principal amount. The second Indiana Gas note had a principal amount of $13.5 million, an interest rate of 6.75%, was originally due in 2028, and was redeemed at the principal amount.
Pursuant to regulatory authority, the premiums paid to retire these notes totaling $3.6 million were deferred as a regulatory asset.
Other Financing Transactions
During 2004, the Company remarketed two first mortgage bonds outstanding at SIGECO. The remarketing effort converted $32.8 million of outstanding fixed rate debt into variable rate debt where interest rates reset weekly. One bond, due in 2023, had a principal amount of $22.8 million and an interest rate of 6%. The other bond, due in 2015, had a principal amount of $10.0 million and an interest rate of 4.3%. These remarketing efforts resulted in the extinguishment and reissuance of debt at generally the same par value.
At December 31, 2002, the Company had $26.6 million of adjustable rate senior unsecured bonds which could, at the election of the bondholder, be tendered to the Company when interest rates are reset. Such bonds were classified as Long-term debt subject to tender. During 2003, the Company re-marketed $4.6 million of the bonds through 2020 at a 4.5% fixed interest rate and remarketed $22.0 million of the bonds through 2030 at a 5.0% fixed interest rate.
Additionally, during 2003, the Company re-marketed $22.5 million of first mortgage bonds subject to interest rate exposure on a long term basis. The $22.5 million of mortgage bonds were remarketed through 2024 at a 4.65% fixed interest rate.
Other Company debt totaling $15.0 million in 2004, $18.5 million in 2003, and $6.5 million in 2002 was retired as scheduled.
Investing Cash Flow
Cash flow required for investing activities was $265.1 million in 2004, $232.7 million in 2003, and $234.6 million in 2002. Capital expenditures are the primary component of investing activities. Capital expenditures were $277.9 million in 2004 compared to $236.2 million in 2003 and $218.7 million in 2002. The increases are primarily driven by expenditures for environmental compliance. In 2004 and 2003, the increase in capital expenditures was offset by collections of notes receivable and distributions by unconsolidated affiliates.
Available Sources of Liquidity
At December, 31, 2004, the Company has $615 million of short-term borrowing capacity, including $355 million for the Utility Group and $260 million for the wholly owned Nonregulated Group and corporate operations, of which approximately $47 million is available for the Utility Group operations and approximately $156 million is available for the wholly owned Nonregulated Group and corporate operations.
VUHI's short-term credit facility was renewed on June 24, 2004 at $350 million, a slight increase from the previous year's renewal level of $346 million. Instead of the traditional 364-day facility, the facility was renewed for a 5-year period ending June 2009.
Vectren Capital renewed its existing $200 million credit facility early, increased the committed capacity, and obtained a multi-year commitment on that facility as well, rather than the traditional 364-day facility. On September 30, 2004 the new Vectren Capital credit facility was closed at the $255 million level for a 5-year period ending September 2009.
The Company periodically issues new shares to satisfy dividend reinvestment plan and stock option plan requirements. During 2004 and 2003, these new issuances added additional liquidity of $4.5 million and $7.1 million, respectively.
Potential & Future Uses of Liquidity
Contractual Obligations
The following is a summary of contractual obligations at December 31, 2004:
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(In millions) 2005 2006 2007 2008 2009 Thereafter
-----------------------------------------------------------------------------------------------------
Long-term debt (1) $ 38.5 $ - $24.0 $ - $ - $1,007.7
Short-term debt 412.4 - - - -
Commodity firm purchase commitments 152.1 1.4 - - - -
Utility & nonutility plant purchase
commitments(2) 20.5 - - - -
Operating leases 5.6 4.5 3.6 1.5 0.5 1.8
Unconsolidated affiliate
investments (2) (3) 5.5 - - - -
-------------------------------------------------------------------------------------------------------
Total $634.6 $ 5.9 $27.6 $ 1.5 $0.5 $1,009.5
=======================================================================================================
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(1) Certain long-term debt issues contain put and call provisions that can be
exercised on various dates before maturity. These provisions allow holders
to put debt back to the Company at face value or the Company to call debt
at face value or at a premium. Long-term debt subject to tender during the
years following 2004 (in millions) is $10.0 in 2005, zero in 2006, $20.0 in
2007, zero in 2008, $80.0 in 2009, and $40.0 thereafter.
(2) The settlement period of these obligations is estimated.
(3) Future investments in Pace Carbon will be made to the extent Pace Carbon
generates federal tax credits, with any such additional investments
to be funded by these credits.
Planned Capital Expenditures & Investments
(In millions) 2005 2006 2007 2008 2009
--------------------------------------------------------------------------------
Capital expenditures
Utility Group $205.2 $219.4 $259.2 $251.9 $206.4
Nonregulated Group 17.8 20.8 18.7 35.5 22.2
--------------------------------------------------------------------------------
Total capital expenditures $223.0 $240.2 $277.9 $287.4 $228.6
================================================================================
Investments in unconsolidated
affiliates $ 74.9 $ 44.6 $ 41.2 $ 11.1 $ 6.6
================================================================================
Off Balance Sheet Arrangements
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Ratings Triggers
At December 31, 2004, $113.0 million of Vectren Capital's senior unsecured notes
were subject to cross-default and ratings trigger provisions that would provide
that the full balance outstanding is subject to prepayment if the ratings of
Indiana Gas or SIGECO declined to BBB/Baa2. In addition, accrued interest and a
make whole amount based on the discounted value of the remaining payments due on
the notes would also become payable. The credit rating of Indiana Gas' senior
unsecured debt and SIGECO's secured debt remains one level and two levels,
respectively, above the ratings trigger.
Guarantees and Letters of Credit
In the normal course of business, Vectren issues guarantees to third parties on
behalf of its consolidated subsidiaries and unconsolidated affiliates. Such
guarantees allow those subsidiaries and affiliates to execute transactions on
more favorable terms than the subsidiary or affiliate could obtain without such
a guarantee. Guarantees may include posted letters of credit, leasing
guarantees, and performance guarantees. As of December 31, 2004, guarantees
issued and outstanding on behalf of unconsolidated affiliates approximated $5
million. In addition, the Company has also issued a guarantee approximating $4
million related to the residual value of an operating lease that expires in
2006. Through December 31, 2004, the Company has not been called upon to satisfy
any obligations pursuant to its guarantees.
Pension and Postretirement Funding Obligations
The Company believes making contributions to its qualified pension plans in the coming years will be necessary. Management currently estimates that the qualified pension plans will require Company contributions in the range of $5 million to $10 million in both 2005 and 2006. During 2004, $7.7 million in contributions were made.
Forward-Looking Information
A "safe harbor" for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Certain matters described in Management's Discussion and Analysis of Results of Operations and Financial Condition are forward-looking statements. Such statements are based on management's beliefs, as well as assumptions made by and information currently available to management. When used in this filing, the words "believe," "anticipate," "endeavor," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following:
o Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; unusual maintenance or repairs;
unanticipated changes to fossil fuel costs; unanticipated changes to gas
supply costs, or availability due to higher demand, shortages,
transportation problems or other developments; environmental or pipeline
incidents; transmission or distribution incidents; unanticipated changes to
electric energy supply costs, or availability due to demand, shortages,
transmission problems or other developments; or electric transmission or
gas pipeline system constraints.
o Increased competition in the energy environment including effects of
industry restructuring and unbundling.
o Regulatory factors such as unanticipated changes in rate-setting policies
or procedures, recovery of investments and costs made under traditional
regulation, and the frequency and timing of rate increases.
o Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board; the Securities and Exchange
Commission; the Federal Energy Regulatory Commission; state public utility
commissions; state entities which regulate electric and natural gas
transmission and distribution, natural gas gathering and processing,
electric power supply; and similar entities with regulatory oversight.
o Economic conditions including the effects of an economic downturn,
inflation rates, commodity prices, and monetary fluctuations.
o Changing market conditions and a variety of other factors associated with
physical energy and financial trading activities including, but not limited
to, price, basis, credit, liquidity, volatility, capacity, interest rate,
and warranty risks.
o The performance of projects undertaken by the Company's nonregulated
businesses and the success of efforts to invest in and develop new
opportunities, including but not limited to, the realization of Section 29
income tax credits and the Company's coal mining, gas marketing, and
broadband strategies.
o Direct or indirect effects on our business, financial condition or
liquidity resulting from a change in credit ratings, changes in interest
rates, and/or changes in market perceptions of the utility industry and
other energy-related industries.
o Employee or contractor workforce factors including changes in key
executives, collective bargaining agreements with union employees, or work
stoppages.
o Legal and regulatory delays and other obstacles associated with mergers,
acquisitions, and investments in joint ventures.
o Costs and other effects of legal and administrative proceedings,
settlements, investigations, claims, and other matters, including, but not
limited to, those described in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
o Changes in Federal, state or local legislature requirements, such as
changes in tax laws or rates, environmental laws and regulations.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions, or other factors affecting such statements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various business risks associated with commodity prices, interest rates, and counter-party credit. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company's risk management program includes, among other things, the use of derivatives. The Company also executes derivative contracts in the normal course of operations while buying and selling commodities to be used in operations and optimizing its generation assets.
The Company has in place a risk management committee that consists of senior management as well as financial and operational management. The committee is actively involved in identifying risks as well as reviewing and authorizing risk mitigation strategies.
Commodity Price Risk
The Company's regulated operations have limited exposure to commodity price risk for purchases and sales of natural gas and electricity for retail customers due to current Indiana and Ohio regulations, which subject to compliance with those regulations, allow for recovery of the cost of such purchases through natural gas and fuel cost adjustment mechanisms.
Electric sales and purchases in the wholesale power market and other commodity-related operations are exposed to commodity price risk associated with fluctuating commodity prices including electricity, natural gas, and coal. Other commodity-related operations include regulated sales of electricity to certain municipalities and large industrial customers and nonregulated retail gas marketing and coal mining operations. Open positions in terms of price, volume, and specified delivery points may occur and are managed using methods described below with frequent management reporting.
The Company's wholesale power marketing activities include asset optimization strategies that manage the utilization of available electric generating capacity. Execution of asset optimization strategies require entering into energy contracts that commit the Company to purchase and sell electricity in the future. Commodity price risk results from forward positions that commit the Company to deliver electricity. The Company mitigates price risk exposure with planned unutilized generation capability and offsetting forward purchase contracts. The Company accounts for asset optimization contracts that are derivatives at fair value with the offset marked to market through earnings.
The Company's other commodity-related operations involve the purchase and sale of commodities, including electricity, natural gas, and coal to meet customer demands and operational needs. These operations also enter into forward and option contracts that commit the Company to purchase and sell commodities in the future. Price risk from forward positions obligating the Company to deliver commodities is mitigated using stored inventory, generating capability, and offsetting forward purchase contracts. Price risk also results from forward contracts obligating the Company to purchase commodities to fulfill forecasted nonregulated sales of natural gas and coal that may, or may not, occur. With the exception of a small portion of contracts that are derivatives that qualify as hedges of forecasted transactions under SFAS 133, these contracts are expected to be settled by physical receipt or delivery of the commodity.
Nonregulated gas retail operations will from time-to-time purchase weather derivatives to mitigate extreme weather affecting unregulated retail gas sales, and the Company may purchase other tailored products that mitigate unique risks involving emission allowances and the effect oil prices may have on the availability of Section 29 tax credits.
Market risk resulting from commodity contracts is measured by management using the potential impact on pre-tax earnings caused by the effect a 10% adverse change in forward commodity prices might have on market sensitive derivative positions outstanding on specific dates. For the years ended December 31, 2004, and 2003, a 10% adverse change in forward commodity prices would have decreased earnings by $0.7 million and $3.0 million, respectively, based upon open positions existing on the last day of those years.
Commodity Price Risk from Unconsolidated Affiliate
ProLiance, a nonregulated energy marketing affiliate, 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 forward purchase and sale contracts, which are entered into to support its 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.
Interest Rate Risk
The Company is exposed to interest rate risk associated with its borrowing arrangements. Its risk management program seeks to reduce the potentially adverse effects that market volatility may have on interest expense. The Company manages this risk by allowing 20% and 30% of its total debt to be exposed to short-term interest rate volatility. However, there are times when this targeted range of interest rate exposure may not be attained. To manage this exposure, the Company may use derivative financial instruments. At December 31, 2004, such debt obligations, as affected by designated interest rate swaps and seasonal increases in short-term debt outstanding, represented 34% of the Company's total debt portfolio.
Market risk is estimated as the potential impact resulting from fluctuations in interest rates on adjustable rate borrowing arrangements exposed to short-term interest rate volatility. During 2004 and 2003, the weighted average combined borrowings under these arrangements were $276.4 million and $316.1 million, respectively. At December 31, 2004, and 2003, combined borrowings under these arrangements were $500.2 million and $328.3 million, respectively. Based upon average borrowing rates under these facilities during the years ended December 31, 2004 and 2003, an increase of 100 basis points (one percentage point) in the rates would have increased interest expense by $2.8 million and $3.2 million, respectively.
Other Risks
By using forward purchase contracts and derivative financial instruments to manage risk, the Company exposes itself to counter-party credit risk and market risk. The Company manages exposure to counter-party credit risk by entering into contracts with companies that can be reasonably expected to fully perform under the terms of the contract. Counter-party credit risk is monitored regularly and positions are adjusted appropriately to manage risk. Further, tools such as netting arrangements and requests for collateral are also used to manage credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in commodity prices or interest rates. The Company attempts to manage exposure to market risk associated with commodity contracts and interest rates by establishing parameters and monitoring those parameters that limit the types and degree of market risk that may be undertaken.
The Company's customer receivables from gas and electric sales and gas transportation services are primarily derived from a diversified base of residential, commercial, and industrial customers located in Indiana and west central Ohio. The Company manages credit risk associated with its receivables by continually reviewing creditworthiness and requests cash deposits or refunds cash deposits based on that review. Credit risk associated with certain investments is also managed by a review of creditworthiness and receipt of collateral.
Although the Company's regulated operations are exposed to limited commodity price risk, volatile natural gas prices can result in higher working capital requirements; increased expenses including unrecoverable interest costs, uncollectible accounts expense, and unaccounted for gas; and some level of price sensitive reduction in volumes sold. The Company mitigates these risks by executing derivative contracts that manage the price of forecasted natural gas purchases. These contracts are subject to regulation, which allows for reasonable and prudent hedging costs to be recovered through rates. When regulation is involved, SFAS 71 controls when the offset to mark-to-market accounting is recognized in earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSBILITY FOR THE FINANCIAL STATEMENTS
Vectren Corporation's management is responsible for establishing and maintaining adequate internal controls over financial reporting. Those control procedures underlie the preparation of the consolidated balance sheets, statements of income, cash flows, and common shareholders' equity, and related footnotes contained herein.
These consolidated financial statements were 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 these consolidated financial statements, including required estimates and judgments, is the responsibility of management.
These consolidated financial statements are also subject to an evaluation of internal control over financial reporting conducted under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, conducted under the framework in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, the Company concluded that its internal control over financial reporting was effective as of December 31, 2004. Management certified this fact in its Sarbanes Oxley Section 302 certifications, which are attached as exhibits to this 2004 Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Vectren Corporation:
We have audited the accompanying consolidated balance sheets of Vectren Corporation and subsidiaries (the "Company") as of December 31, 2004 and 2003, 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, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, included at Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule, an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
February 23, 2005
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions)
Current Assets
Cash & cash equivalents $ 9.6 $ 15.3
Accounts receivable - less reserves
of $2.0 & $3.2, respectively 173.5 137.3
Accrued unbilled revenues 176.6 137.8
Inventories 67.6 70.4
Recoverable fuel & natural gas costs 17.7 20.3
Prepayments & other current assets 141.3 131.1
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Total current assets 586.3 512.2
--------------------------------------------------------------------------------
Utility Plant
Original cost 3,465.2 3,250.7
Less: accumulated depreciation
& amortization 1,309.0 1,247.0
--------------------------------------------------------------------------------
Net utility plant 2,156.2 2,003.7
--------------------------------------------------------------------------------
Investments in unconsolidated affiliates 180.0 176.1
Other investments 115.1 122.9
Non-utility property - net 229.2 222.3
Goodwill - net 207.1 205.0
Regulatory assets 82.5 89.6
Other assets 30.5 21.6
--------------------------------------------------------------------------------
TOTAL ASSETS $ 3,586.9 $ 3,353.4
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The accompanying notes are an integral part of these consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In millions)
At December 31,
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 123.8 $ 85.3
Accounts payable to affiliated companies 109.3 86.4
Accrued liabilities 132.1 109.3
Short-term borrowings 412.4 274.9
Current maturities of long-term debt 38.5 15.0
Long-term debt subject to tender 10.0 13.5
--------------------------------------------------------------------------------
Total current liabilities 826.1 584.4
--------------------------------------------------------------------------------
Long-term Debt - Net of Current Maturities &
Debt Subject to Tender 1,016.6 1,072.8
Deferred Income Taxes & Other Liabilities
Deferred income taxes 234.0 235.4
Regulatory liabilities 251.7 235.0
Deferred credits & other liabilities 163.2 153.6
--------------------------------------------------------------------------------
Total deferred credits & other liabilities 648.9 624.0
--------------------------------------------------------------------------------
Minority Interest in Subsidiary 0.4 0.3
Commitments & Contingencies (Notes 3, 12-14)
Cumulative, Redeemable Preferred Stock of a Subsidiary 0.1 0.2
Common Shareholders' Equity
Common stock (no par value) - issued & outstanding
75.9 and 75.6, respectively 526.8 520.4
Retained earnings 583.0 562.4
Accumulated other comprehensive loss (15.0) (11.1)
--------------------------------------------------------------------------------
Total common shareholders' equity 1,094.8 1,071.7
--------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 3,586.9 $ 3,353.4
================================================================================
|
The accompanying notes are an integral part of these consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Year Ended December 31,
--------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------------
OPERATING REVENUES
Gas utility $1,126.2 $ 1,112.3 $ 908.0
Electric utility 371.3 335.7 328.6
Energy services & other 192.3 139.7 287.2
--------------------------------------------------------------------------------
Total operating revenues 1,689.8 1,587.7 1,523.8
--------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas sold 778.5 762.5 570.2
Fuel for electric generation 96.1 86.5 81.6
Purchased electric energy 20.7 16.2 16.8
Cost of energy services & other 143.5 103.7 249.4
Other operating 248.8 233.7 223.0
Depreciation & amortization 140.1 128.7 119.6
Taxes other than income taxes 59.4 57.0 51.9
--------------------------------------------------------------------------------
Total operating expenses 1,487.1 1,388.3 1,312.5
--------------------------------------------------------------------------------
OPERATING INCOME 202.7 199.4 211.3
OTHER INCOME
Equity in earnings of
unconsolidated affiliates 20.6 12.2 9.1
Other - net 1.4 13.0 11.5
--------------------------------------------------------------------------------
Total other income 22.0 25.2 20.6
--------------------------------------------------------------------------------
Interest expense 77.7 75.6 78.5
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 147.0 149.0 153.4
--------------------------------------------------------------------------------
Income taxes 39.0 37.7 38.9
Minority interest 0.1 0.1 0.5
--------------------------------------------------------------------------------
NET INCOME $ 107.9 $ 111.2 $ 114.0
================================================================================
AVERAGE COMMON SHARES OUTSTANDING 75.6 70.6 67.6
DILUTED COMMON SHARES OUTSTANDING 75.9 70.8 67.9
EARNINGS PER SHARE OF COMMON STOCK:
BASIC $ 1.43 $ 1.58 $ 1.69
DILUTED $ 1.42 $ 1.57 $ 1.68
|
The accompanying notes are an integral part of these consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
--------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 107.9 $ 111.2 $ 114.0
Adjustments to reconcile net income to cash
from operating activities:
Depreciation & amortization 140.1 128.7 119.6
Deferred income taxes & investment tax credits 5.9 35.1 (28.5)
Equity in earnings of unconsolidated affiliates (20.6) (12.2) (9.1)
Net unrealized (gain) loss on derivative
instruments 1.4 (0.7) 3.6
Pension & postretirement periodic benefit cost 16.4 13.8 13.2
Other non-cash charges - net 19.8 (0.1) 7.5
Changes in working capital accounts:
Accounts receivable & accrued unbilled
revenue (84.0) (16.1) (42.0)
Inventories 0.4 (7.6) 0.4
Recoverable fuel & natural gas costs 2.6 (1.0) 48.1
Prepayments & other current assets (10.2) (42.5) 31.2
Accounts payable, including to affiliated
companies 59.9 (16.4) 40.7
Accrued liabilities 19.9 (8.4) 11.7
Changes in noncurrent assets (3.5) (3.9) (6.0)
Changes in noncurrent liabilities (14.9) (2.8) (12.1)
--------------------------------------------------------------------------------
Net cash flows from operating activities 241.1 177.1 292.3
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Stock option exercises & other stock plans 4.5 7.1 1.3
Long-term debt - net of issuance costs 32.4 202.9 -
Common stock - net of issuance costs - 163.2 -
Requirements for:
Dividends on common stock (87.3) (79.2) (72.3)
Retirement of long-term debt (70.7) (121.9) (6.5)
Redemption of preferred stock of subsidiary (0.1) (0.1) (0.2)
Net change in short-term borrowings 139.5 (124.6) 20.3
Other activity - (1.6) (0.2)
--------------------------------------------------------------------------------
Net cash flows from financing activities 18.3 45.8 (57.6)
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Unconsolidated affiliate distributions 25.5 14.1 7.4
Notes receivable & other collections 9.3 14.4 3.9
Requirements for:
Capital expenditures, excluding AFUDC equity (277.9) (236.2) (218.7)
Unconsolidated affiliate investments (18.2) (16.6) (12.5)
Notes receivable & other investments (3.8) (8.4) (14.7)
--------------------------------------------------------------------------------
Net cash flows from investing activities (265.1) (232.7) (234.6)
--------------------------------------------------------------------------------
Net (decrease) increase in cash & cash equivalents (5.7) (9.8) 0.1
Cash & cash equivalents at beginning of period 15.3 25.1 25.0
--------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 9.6 $ 15.3 $ 25.1
================================================================================
--------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 75.3 $ 70.9 $ 67.1
Income taxes 26.6 33.9 16.5
|
The accompanying notes are an integral part of these consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(In millions, except per share amounts)
Common Stock
----------------------------
Accumulated
Restricted Other
Stock Retained Comprehensive
Shares Amount Grants Earnings Income (Loss) Total
------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 67.7 $ 348.6 $ (2.5) $ 489.1 $ 4.1 $ 839.3
------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 114.0 114.0
Minimum pension liability adjustments &
other - net of tax (9.3) (9.3)
Comprehensive loss of unconsolidated
affiliates - net of tax (5.3) (5.3)
------------------------------------------------------------------------------------------------------
Total comprehensive income 99.4
------------------------------------------------------------------------------------------------------
Common stock:
Stock option exercises & other
stock plans 0.1 1.3 1.3
Dividends ($1.07 per share) (72.3) (72.3)
Other 0.1 2.4 0.2 (0.4) 2.2
------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 67.9 352.3 (2.3) 530.4 (10.5) 869.9
------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 111.2 111.2
Minimum pension liability adjustments &
other - net of tax (6.3) (6.3)
Comprehensive income of unconsolidated
affiliates - net of tax 5.7 5.7
------------------------------------------------------------------------------------------------------
Total comprehensive income 110.6
------------------------------------------------------------------------------------------------------
Common stock:
Public issuance - net of
$6.2 million of issuance costs 7.4 163.2 163.2
Stock option exercises & other
stock plans 0.3 7.1 7.1
Dividends ($1.11 per share) (79.2) (79.2)
Other 0.3 (0.2) 0.1
------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 75.6 522.9 (2.5) 562.4 (11.1) 1,071.7
======================================================================================================
Comprehensive income:
Net income 107.9 107.9
Minimum pension liability adjustments &
other - net of tax (0.1) (0.1)
Comprehensive income of unconsolidated
affiliates - net of tax (3.8) (3.8)
------------------------------------------------------------------------------------------------------
Total comprehensive income 104.0
------------------------------------------------------------------------------------------------------
Common stock:
Stock option exercises & other
stock plans 0.2 4.5 4.5
Dividends ($1.15 per share) (87.3) (87.3)
Other 0.1 3.8 (1.9) 1.9
------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 75.9 $ 531.2 $ (4.4) $ 583.0 $(15.0) $ 1,094.8
======================================================================================================
|
The accompanying notes are an integral part of these consolidated financial statements.
VECTREN CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Vectren Corporation (the Company or Vectren), an Indiana corporation, is an
energy and applied technology holding company headquartered in Evansville,
Indiana. The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc.
(VUHI), serves as the intermediate holding company for three operating public
utilities: Indiana Gas Company, Inc. (Indiana Gas), Southern Indiana Gas and
Electric Company (SIGECO), and the Ohio operations. VUHI also has other assets
that provide information technology and other services to the three utilities.
VUHI's consolidated operations are collectively referred to as the Utility
Group. Both Vectren and VUHI are exempt from registration pursuant to Section
3(a) (1) and 3(c) of the Public Utility Holding Company Act of 1935.
Indiana Gas provides energy delivery services to approximately 555,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to approximately 136 ,000 electric customers and approximately 110,000 gas customers located near Evansville in southwestern Indiana. SIGECO also owns and operates electric generation to serve its electric customers and optimizes those assets in the wholesale power market. Indiana Gas and SIGECO generally do business as Vectren Energy Delivery of Indiana. The Ohio operations provide energy delivery services to approximately 315,000 natural gas customers located near Dayton in west central Ohio. The Ohio operations are owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc. (VEDO), a wholly owned subsidiary, (53% ownership) and Indiana Gas (47% ownership). The Ohio operations generally do business as Vectren Energy Delivery of Ohio.
The Company is also involved in nonregulated activities in four primary business areas: Energy Marketing and Services, Coal Mining, Utility Infrastructure Services, and Broadband. Energy Marketing and Services markets natural gas and provides energy management services, including energy performance contracting services. Coal Mining mines and sells coal and generates IRS Code Section 29 tax credits relating to the production of coal-based synthetic fuels. Utility Infrastructure Services provides underground construction and repair, facilities locating, and meter reading services. Broadband has investments in broadband communication services such as analog and digital cable television, high-speed internet and data services, and advanced local and long distance phone services. In addition, there are other businesses that invest in energy-related opportunities, real estate, and leveraged leases, among other activities. These operations are collectively referred to as the Nonregulated Group. The Nonregulated Group supports the Company's regulated utilities pursuant to service contracts by providing natural gas supply services, coal, utility infrastructure services, and other services.
2. Summary of Significant Accounting Policies
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned and majority owned subsidiaries, after elimination of
significant intercompany transactions.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46) and in December 2003, the FASB codified modifications and other decisions previously issued through certain FASB Staff Positions related to FIN 46 into one document that was issued as a revision to the original Interpretation (FIN 46R). FIN 46R addresses consolidation by business enterprises of variable interest entities. The Company adopted the provisions within FIN 46R during 2004. The Company has investments in partnership-like structures as a limited partner or as a subordinated lender. The activities of these entities are to purchase or construct as well as operate multifamily housing and office properties. The Company's exposure to loss is limited to its investment which as of December 31, 2004, and 2003, totaled $16.2 million and $17.1 million, respectively, of Investments in unconsolidated affiliates, and $16.7 million and $20.9 million, respectively, of Other investments. The Company is also the equity owner in three leveraged leases where its exposure to loss is limited to its net investment, which as of December 31, 2004, and 2003, totaled $7.0 million and $6.0 million, respectively. The Company did not consolidate any of these entities upon adoption of FIN 46R.
B. Cash & Cash Equivalents
All highly liquid investments with an original maturity of three months or less
at the date of purchase are considered cash equivalents.
C. Inventories Inventories consist of the following:
At December 31,
----------------------------------------------------------------------------
(In millions) 2004 2003
----------------------------------------------------------------------------
Materials & supplies $ 22.5 $ 22.6
Gas in storage - at LIFO cost 18.8 21.9
Fuel (coal & oil) for electric generation 13.9 14.0
Gas in storage - at average cost 7.9 7.2
Other 4.5 4.7
----------------------------------------------------------------------------
Total inventories $ 67.6 $ 70.4
============================================================================
|
Based on the average cost of gas purchased during December, the cost of replacing gas in storage carried at LIFO cost exceeded LIFO cost at December 31, 2004, and 2003, by approximately $56.4 million and $52.2 million, respectively. Gas in storage of the Indiana regulated operations is stated at LIFO. All other inventories are carried at average cost.
D. Utility Plant & Depreciation
Utility plant is stated at historical cost, including AFUDC. Depreciation rates,
which include a cost of removal component, are established through regulatory
proceedings and are applied to all in-service utility plant. The original cost
of utility plant, together with depreciation rates expressed as a percentage of
original cost, follows:
At December 31,
-------------------------------------------------------------------------------------------
(In millions) 2004 2003
-------------------------------------------------------------------------------------------
Depreciation Depreciation
Rates as a Rates as a
Percent of percent of
Original Cost Original Cost Original Cost Original Cost
-------------------------------------------------------------------------------------------
Gas utility plant $ 1,793.6 3.5% $ 1,721.9 3.6%
Electric utility plant 1,458.1 3.6% 1,322.4 3.4%
Common utility plant 44.2 2.7% 44.3 2.7%
Construction work in progress 169.3 - 162.1 -
-------------------------------------------------------------------------------------------
Total original cost $ 3,465.2 $ 3,250.7
===========================================================================================
|
AFUDC represents the cost of borrowed and equity funds used for construction purposes and is charged to construction work in progress during the construction period. AFUDC is included in Other - net in the Consolidated Statements of Income. The total AFUDC capitalized into utility plant and the portion of which was computed on borrowed and equity funds for all periods reported follows:
Year Ended December 31,
-----------------------------------------------------------------------
(In millions) 2004 2003 2002
-----------------------------------------------------------------------
AFUDC - borrowed funds $ 1.6 $ 2.1 $ 3.1
AFUDC - equity funds 1.6 2.9 2.2
-----------------------------------------------------------------------
Total AFUDC $ 3.2 $ 5.0 $ 5.3
=======================================================================
|
Maintenance and repairs, including the cost of removal of minor items of property and planned major maintenance projects, are charged to expense as incurred. When property that represents a retirement unit is replaced or removed, the remaining historical value of such property is charged to Utility plant, with an offsetting charge to Accumulated depreciation. Costs to dismantle and remove retired property are charged against Regulatory liabilities, where the cost of removal obligation is classified in these financial statements.
E. Non-utility Property
Non-utility property, net of accumulated depreciation and amortization, by
operating segment follows:
At December 31,
----------------------------------------------------------------------------
(In millions) 2004 2003
----------------------------------------------------------------------------
Utility Group
Other Operations $ 144.3 $ 135.7
Gas & Electric Utility Services 5.3 5.6
Nonregulated Group 78.7 79.9
Corporate & Other 0.9 1.1
----------------------------------------------------------------------------
Non-utility property - net $ 229.2 $ 222.3
============================================================================
|
The depreciation of non-utility property is charged against income over its estimated useful life (ranging from 5 to 40 years), using the straight-line method of depreciation or units-of-production method of amortization. Repairs and maintenance, which are not considered improvements and do not extend the useful life of the non-utility property, are charged to expense as incurred. When non-utility property is retired, or otherwise disposed of, the asset and accumulated depreciation are removed, and the resulting gain or loss is reflected in income. Non-utility property is presented net of accumulated depreciation and amortization totaling $111.1 million and $84.5 million as of December 31, 2004, and 2003, respectively. For the years ended December 31, 2004, 2003, and 2002, the Company capitalized interest totaling $1.4 million, $0.5 million, and $0.4 million, respectively, on non-utility plant construction projects.
F. Impairment Review of Long-Lived Assets Long-lived assets are reviewed as facts and circumstances indicate that the carrying amount may be impaired. This review is performed in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), which the Company adopted on January 1, 2002. SFAS 144 establishes one accounting model for all impaired long-lived assets and long-lived assets to be disposed of by sale or otherwise. SFAS 144 requires the evaluation for impairment involve the comparison of an asset's carrying value to the estimated future cash flows the asset is expected to generate over its remaining life. If this evaluation were to conclude that the carrying value of the asset is impaired, an impairment charge would be recorded based on the difference between the asset's carrying amount and its fair value (less costs to sell for assets to be disposed of by sale) as a charge to operations or discontinued operations.
G. Goodwill
Goodwill arising from business combinations is accounted for in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company
adopted SFAS 142 on January 1, 2002. SFAS 142 requires a portion of goodwill be
charged to expense only when it is impaired. The Company tests its goodwill for
impairment at a reporting unit level at least annually and that test is
performed at the beginning of each year. Impairment reviews consist of a
comparison of the fair value of a reporting unit to its carrying amount. If the
fair value of a reporting unit is less than its carrying amount, an impairment
loss is recognized in operations. Through December 31, 2004, no goodwill
impairments have been recorded. Approximately $205 million of the Company's
goodwill is included in the Gas Utility Services operating segment. The
remaining $2.1 million is attributable to the Nonregulated Group.
H. Regulation
Retail public utility operations affecting Indiana customers are subject to
regulation by the IURC, and retail public utility operations affecting Ohio
customers are subject to regulation by the PUCO.
SFAS 71
The Company's accounting policies give recognition to the rate-making and
accounting practices of these agencies and to accounting principles generally
accepted in the United States, including the provisions of SFAS No. 71
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71).
Regulatory assets represent probable future revenues associated with certain
incurred costs, which will be recovered from customers through the rate-making
process. Regulatory liabilities represent probable expenditures by the Company
for removal costs or future reductions in revenues associated with amounts that
are to be credited to customers through the rate-making process.
The Company assesses the recoverability of costs recognized as regulatory assets and the ability to continue to account for its activities based on the criteria set forth in SFAS 71. Based on current regulation, the Company believes such accounting is appropriate. If all or part of the Company's operations cease to meet the criteria of SFAS 71, a write-off of related regulatory assets and liabilities could be required. In addition, the Company would be required to determine any impairment to the carrying value of its utility plant and other regulated assets. Regulatory assets consist of the following:
At December 31,
-------------------------------------------------------------------------
(In millions) 2004 2003
-------------------------------------------------------------------------
Future amounts recoverable from ratepayers:
Income taxes $ 11.5 $ 18.1
Other 1.0 1.0
-------------------------------------------------------------------------
12.5 19.1
Amounts deferred for future recovery:
Demand side management programs 25.9 25.0
Other 7.3 5.3
-------------------------------------------------------------------------
33.2 30.3
Amounts currently recovered through base rates:
Unamortized debt issue costs 20.4 21.4
Premiums paid to reacquire debt 7.0 7.4
Demand side management programs 2.3 2.7
Rate case expenses 1.2 -
-------------------------------------------------------------------------
30.9 31.5
Amounts currently recovered through
tracking mechanisms:
Ohio authorized trackers 6.3 7.5
Indiana authorized trackers (0.4) 1.2
-------------------------------------------------------------------------
5.9 8.7
-------------------------------------------------------------------------
Total regulatory assets $ 82.5 $ 89.6
=========================================================================
|
Of the $30.9 million currently being recovered through base rates charged to customers, $29.7 million is earning a return. The weighted average recovery period of regulatory assets currently being recovered is 13.9 years. The Company has rate orders for all deferred costs not yet in rates and therefore believes that future recovery is probable.
Regulatory liabilities consist of the following:
At December 31,
-------------------------------------------------------------------------
(In millions) 2004 2003
-------------------------------------------------------------------------
Cost of removal $ 246.2 $ 228.8
Interest rate hedging proceeds (See Note 15) 5.5 6.2
-------------------------------------------------------------------------
Total regulatory liabilities $ 251.7 $ 235.0
=========================================================================
|
Cost of Removal and SFAS 143
The Company collects an estimated cost of removal of its utility plant through
depreciation rates established by regulatory proceedings. The Company records
amounts expensed in advance of payments as a regulatory liability because the
liability does not meet the threshold of a legal asset retirement obligation
(ARO) as defined by SFAS No. 143, "Accounting for Asset Retirement Obligations"
(SFAS 143). SFAS 143 requires entities to record the fair value of a liability
for a legal ARO in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. To the extent
regulation is involved, such gain or loss may be deferred. The Company adopted
this statement on January 1, 2003. The adoption was not material to the
Company's results of operations.
Refundable or Recoverable Gas Costs, Fuel for Electric Production & Purchased
Power
All metered gas rates contain a gas cost adjustment clause that allows the
Company to charge for changes in the cost of purchased gas. Metered electric
rates contain a fuel adjustment clause that allows for adjustment in charges for
electric energy to reflect changes in the cost of fuel. The net energy cost of
purchased power, subject to an agreed upon benchmark, is also recovered through
regulatory proceedings. The Company records any under-or-over-recovery resulting
from gas and fuel adjustment clauses each month in revenues. A corresponding
asset or liability is recorded until the under-or-over-recovery is billed or
refunded to utility customers. The cost of gas sold is charged to operating
expense as delivered to customers, and the cost of fuel for electric generation
is charged to operating expense when consumed.
I. Comprehensive Income
Comprehensive income is a measure of all changes in equity that result from the
non-shareholder transactions. This information is reported in the Consolidated
Statements of Common Shareholders' Equity. A summary of the after tax components
of and changes in Accumulated other comprehensive income for the past three
years follows:
2002 2003 2004
------------------------ -------------------------- --------------- ----------------
Beginning Changes End Changes End Changes End
of Year During of Year During of Year During of Year
(In millions) Balance Year Balance Year Balance Year Balance
------------------------ --------- ------- ------- ------- ------- ------- -------
Unconsolidated affiliates $ 5.9 $ (5.3) $ 0.6 $ 5.7 $ 6.3 $ (3.8) $ 2.5
Minimum pension liability (2.4) (9.2) (11.6) (5.8) (17.4) (0.1) (17.5)
Other 0.6 (0.1) 0.5 (0.5) - - -
---------------------------------------------------------------------------------------
Accumulated other
comprehenive income (loss) $ 4.1 $(14.6) $(10.5) $(0.6 $(11.1) $ (3.9) $(15.0)
=======================================================================================
|
Accumulated other comprehensive income arising from unconsolidated affiliates is the Company's portion of ProLiance Energy, LLC's and Reliant Services, LLC's accumulated comprehensive income related to use of cash flow hedges, including commodity contracts and interest rate swaps, and the Company's portion of Haddington Energy Partners, LP's accumulated comprehensive income related to unrealized gains and losses on marketable securities. (See Note 3 for more information on unconsolidated affiliates.)
J. Revenues
Revenues are recorded as products and services are delivered to customers. To
more closely match revenues and expenses, the Company records revenues for all
gas and electricity delivered to customers but not billed at the end of the
accounting period.
K. Excise and Utility Receipts Taxes
Excise taxes and a portion of utility receipts taxes are included in rates
charged to customers. Accordingly, the Company records these taxes received as a
component of operating revenues, which totaled $38.3 million in 2004, $37.1
million in 2003, and $32.4 million in 2002. Excise and utility receipts taxes
paid are recorded as a component of Taxes other than income taxes.
L. Other Significant Policies
Included elsewhere in these Notes are significant accounting policies related to
investments in unconsolidated affiliates (Note 3), income taxes (Note 5),
earnings per share (Note 9), and derivatives (Note 15).
As more fully described in Note 10, the Company applies the intrinsic method prescribed in APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations when measuring compensation expense for its share-based compensation plans. The exercise price of stock options awarded under the Company's stock option plans is equal to the fair market value of the underlying common stock on the date of grant. Accordingly, no compensation expense has been recognized related to stock option plans. The Company also maintains restricted stock and phantom stock plans for executives, employees, and non-employee directors that result in share-based compensation expense recognized in reported net income consistent with expense that would have been recognized if the Company used the fair value based method prescribed in SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). Following is the effect on net income and earnings per share as if the fair value based method prescribed in SFAS 123 had been applied to all of the Company's share-based compensation plans:
Year Ended December 31,
-----------------------------------------------------------------------------------------
(In millions, except per share amounts) 2004 2003 2002
-----------------------------------------------------------------------------------------
Net Income:
As reported $ 107.9 $ 111.2 $ 114.0
Add: Equity-based employee compensation included
in reported net income- net of tax 1.7 2.1 1.3
Deduct:Total equity-based employee compensation
expense determined under fair value based
method for all awards- net of tax 2.6 3.4 2.1
-----------------------------------------------------------------------------------------
Pro forma $ 107.0 $ 109.9 $ 113.2
=========================================================================================
Basic Earnings Per Share:
As reported $ 1.43 $ 1.58 $ 1.69
Pro forma 1.42 1.56 1.68
Diluted Earnings Per Share:
As reported $ 1.42 $ 1.57 $ 1.68
Pro forma 1.41 1.55 1.67
|
SFAS 123 (revised 2004)
In December 2004, the FASB issued Statement 123 (revised 2004), "Share-Based
Payments" (SFAS 123R) that will require compensation costs related to all
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments issued.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. SFAS 123R replaces SFAS 123 and supersedes
APB 25. The effective date of SFAS 123R for Vectren is July 1, 2005. SFAS 123R
provides for multiple transition methods, and the Company is still evaluating
potential methods for adoption. The adoption of this standard is not expected to
have a material effect on the Company's operating results or financial
condition.
M. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
3. Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates where the Company has significant influence are accounted for using the equity method of accounting. The Company's share of net income or loss from these investments is recorded in Equity in earnings of unconsolidated affiliates. Dividends are recorded as a reduction of the carrying value of the investment when received. Investments in unconsolidated affiliates where the Company does not have significant influence are accounted for using the cost method of accounting less write-downs for declines in value judged to be other than temporary. Dividends are recorded as Other - net when received.
Investments in unconsolidated affiliates consist of the following:
At December 31,
-------------------------------------------------------------------------------
(In millions) 2004 2003
-------------------------------------------------------------------------------
ProLiance Energy, LLC $ 93.2 $ 84.7
Reliant Services, LLC 26.5 19.2
Haddington Energy Partnerships 20.3 26.3
Utilicom Networks, LLC & related entities 11.7 15.4
Pace Carbon Synfuels, LP 9.4 8.7
Other partnerships & corporations 18.9 21.8
-------------------------------------------------------------------------------
Total investments in unconsolidated affiliates $ 180.0 $ 176.1
===============================================================================
|
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides services to a
broad range of municipalities, utilities, industrial operations, schools, and
healthcare institutions located throughout the Midwest and Southeast United
States. ProLiance's primary customers include Vectren's utilities and
nonregulated gas supply operations as well as Citizens Gas. ProLiance's primary
businesses include gas marketing, gas portfolio optimization, and other
portfolio and energy management services. The Company, including its retail gas
supply operations, contracted for all natural gas purchases through ProLiance in
2004. Pre-tax income of $25.9 million, $25.9 million, and $19.1 million was
recognized as ProLiance's contribution to earnings for the years ended December
31, 2004, 2003, and 2002, respectively.
Integration of SIGCORP Energy Services, LLC and ProLiance Energy, LLC In June 2002, the integration of Vectren's wholly owned gas marketing subsidiary, SIGCORP Energy Services, LLC (SES), with ProLiance was completed. SES provided natural gas and related services to SIGECO and others prior to the integration. In exchange for the contribution of SES' net assets totaling $19.2 million, including cash of $2.0 million, Vectren's allocable share of ProLiance's profits and losses increased to 61%, consistent with Vectren's new ownership percentage. Governance and voting rights remain at 50% for each member; and therefore, Vectren continues to account for its investment in ProLiance using the equity method of accounting.
Prior to June 1, 2002, SES' operating results were consolidated. Subsequent to June 1, 2002, SES' operating results, now part of ProLiance, are reflected in Equity in earnings of unconsolidated affiliates. The transfer of net assets was accounted for at book value consistent with joint venture accounting and did not result in any gain or loss. Additionally, the non-cash component of the transfer totaling $17.2 million is excluded from the Consolidated Statement of Cash Flows.
Transactions with ProLiance
Purchases from ProLiance for resale and for injections into storage for the
years ended December 31, 2004, 2003, and 2002, totaled $875.9 million, $797.7
million, and $544.1 million, respectively. Amounts owed to ProLiance at December
31, 2004, and 2003, for those purchases were $108.2 million and $86.0 million,
respectively, and are included in Accounts payable to affiliated companies in
the Consolidated Balance Sheets. Amounts charged by ProLiance for gas supply
services are established by supply agreements with each utility. As part of a
settlement agreement approved by the IURC during July 2002, the gas supply
agreements with Indiana Gas and SIGECO, were approved and extended through March
31, 2007. The utilities may decide to conduct a "request for proposal" (RFP) for
a new supply administrator, or they may decide to make an alternative proposal
for procurement of gas supply. That decision will be made by December 2005. To
the extent an RFP is conducted, ProLiance has the opportunity, if it so elects,
to participate in the RFP process for service to the utilities after March 31,
2007.
Summarized Financial Information
For the year ended December 31, 2004, ProLiance's revenues, margin, operating
income, and net income were (in millions) $2,573.8, $74.0, $43.2, and $42.6,
respectively. For the year ended December 31, 2003, ProLiance's revenues,
margin, operating income, and net income were (in millions) $2,269.7, $71.5,
$43.3, and $42.5, respectively. For the year ended December 31, 2002, revenues,
margin, operating income, and net income were (in millions) $1,534.5, $61.1,
$36.5, and $37.4, respectively. As of December 31, 2004, current assets,
noncurrent assets, current liabilities, and noncurrent liabilities were (in
millions) $595.6, $0.4, $462.2, and $6.6, respectively. As of December 31, 2003,
current assets, noncurrent assets, current liabilities, and noncurrent
liabilities were (in millions) $467.7, $22.2, $346.0, and $7.8, respectively.
ProLiance Contingency
In 2002, a lawsuit was filed in the United States District Court for the
Northern District of Alabama filed by the City of Huntsville, Alabama d/b/a
Huntsville Utilities, Inc. (Huntsville Utilities) against ProLiance. Huntsville
Utilities asserted claims based on alleged breach of contract with respect to
provision of portfolio services and/or pricing advice, fraud, fraudulent
inducement, and other theories, including conversion and violations under
Racketeering, Influenced and Corrupt Organizations Act (RICO). These claims
related generally to: (1) alleged breach of contract in providing advice and/or
administering portfolio arrangements; (2) alleged promises to provide gas at a
below-market rate; (3) the creation and repayment of a "winter levelizing
program" instituted by ProLiance in conjunction with the Manager of Huntsville's
Gas Utility, to allow Huntsville Utilities to pay its gas bills from the winter
of 2000-2001 over an extended period of time coupled with the alleged ignorance
about the program on the part of Huntsville Utilities' Gas Board and other
management, and; (4) the sale of Huntsville Utilities' gas storage supplies to
repay the balance owed on the winter levelizing program and the alleged lack of
authority of Huntsville Utilities' gas manager to approve those sales.
In early 2005, a jury trial was commenced and on February 10, 2005, the jury returned a verdict largely in favor of Huntsville Utilities and awarded Huntsville Utilities compensatory damages of $8.2 million and punitive damages of $25.0 million. The jury rejected Huntsville Utilities' claim of conversion. The jury also rejected ProLiance's counter claim for payment. The amounts due from Huntsville Utilities were fully reserved by ProLiance in 2003. Huntsville Utilities claims that all or a portion of the compensatory damages may be subject to trebling under applicable Federal statutes. The court may also assess attorney's fees and costs in favor of Huntsville Utilities. If the Court applies trebling and awards attorney fees, the entire award could approach $55 million. Several matters are still pending at the trial court, including efforts by ProLiance to reduce the amount of the verdict. ProLiance will file post judgment motions to reduce and to set aside the verdict. The court may issue its final rulings on the verdict and related motions by April or May. Depending on the outcome, ProLiance would appeal the judgment of the trial court. ProLiance management believes that there are reasonable grounds to set aside or reduce the verdict and reasonable grounds for appeal which offer a basis for reversal of the entire verdict. While it is reasonably possible that a liability has been incurred by ProLiance, it is not possible to predict the ultimate outcome of an appeal of the verdict. ProLiance has recorded a reserve of $3.9 million as of December 31, 2004, reflective of their assessment of the lower end of the range of possible outcomes in the case and inclusive of estimated ongoing litigation costs.
As an equity investor in ProLiance, the Company has reflected its share of the charge, or $1.4 million after tax, in its 2004 results. It is not expected that an unfavorable outcome on appeal will have a material adverse effect on the Company's consolidated financial position or its liquidity, but an unfavorable outcome could be material to the Company's earnings.
Haddington Energy Partnerships
The Company has an approximate 40% ownership interest in Haddington Energy
Partners, LP (Haddington I). Haddington I raised $27.0 million to invest in
energy projects. In July 2000, the Company made a commitment to fund an
additional $20.0 million in Haddington Energy Partners II, LP (Haddington II),
which raised a total of $47.0 million in firm commitments. Haddington II
provides additional capital for Haddington I portfolio companies and made
investments in new areas, such as distributed generation, power backup, quality
devices, and other emerging technologies. At December 31, 2004, $5.0 million of
the additional $20.0 million commitment remains. The Company has an approximate
40% ownership interest in Haddington II. Both Haddington ventures are investment
companies accounted for using the equity method of accounting. For the year
ended December 31, 2004, the partnerships' contribution to the Company's pre-tax
earnings was $4.5 million. In 2003 and 2002, the earnings contribution was not
significant.
The following is summarized financial information as to the assets, liabilities, and results of operations of the Haddington Partnerships. For the year ended December 31, 2004, revenues, operating income, and net income were (in millions) $3.3, $2.5, and $9.6, respectively. For the year ended December 31, 2003, revenues, operating income, and net income were (in millions) $0.6, ($0.3), and ($0.3), respectively. For the year ended December 31, 2002, revenues, operating income, and net income were (in millions) zero, ($0.9), and ($0.9), respectively. As of December 31, 2004, investments, other assets, and liabilities were (in millions) $50.7, $0.2, and zero, respectively. As of December 31, 2003, investments, other assets, and liabilities were (in millions) $64.4, $1.0, and zero, respectively.
Pace Carbon Synfuels, LP
Pace Carbon Synfuels, LP (Pace Carbon) is a Delaware limited partnership formed
to develop, own, and operate four projects to produce and sell coal-based
synthetic fuel (synfuel) utilizing Covol technology. The Company has an 8.3%
interest in Pace Carbon which is accounted for using the equity method of
accounting. Additional investments in Pace Carbon will be made to the extent
Pace Carbon generates federal tax credits, with any such additional investments
to be funded by these credits. The investment in Pace Carbon resulted in losses
reflected in Equity in earnings of unconsolidated affiliates totaling $12.0
million in 2004, $11.4 million in 2003, and $6.8 million in 2002. The production
of synthetic fuel generates IRS Code Section 29 tax credits that are reflected
in Income taxes. Net income, including the losses, tax benefits, and tax
credits, generated from the investment in Pace Carbon totaled $9.0 million in
2004, $10.3 million in 2003, and $6.0 million in 2002.
The following is summarized financial information as to the assets, liabilities, and results of operations of Pace Carbon. For the year ended December 31, 2004, revenues, margin, operating loss, and net loss were (in millions) $243.0, ($99.8), ($128.6), and ($141.1), respectively. For the year ended December 31, 2003, revenues, margin, operating loss, and net loss were (in millions) $254.2, ($90.7), ($121.3), and ($134.4), respectively. For the year ended December 31, 2002, revenues, margin, operating loss, and net loss were (in millions) $125.6, ($53.1), ($72.6), and ($73.4), respectively. As of December 31, 2004, current assets, noncurrent assets, current liabilities, and noncurrent liabilities were (in millions) $44.1, $57.0, $25.3, and $19.8, respectively. As of December 31, 2003, current assets, noncurrent assets, current liabilities, and noncurrent liabilities were (in millions) $37.0, $105.2, $25.9, and $58.4, respectively.
IRS Section 29 Tax Credit Recent Developments Under Section 29 of the Internal Revenue Code, manufacturers of synthetic fuel such as Pace Carbon receive a tax credit for every ton of synthetic fuel sold. To qualify for the credits, the synthetic fuel must meet three primary conditions: 1) there must be a significant chemical change in the coal feedstock, 2) the product must be sold to an unrelated person, and 3) the production facility must have been placed in service before July 1, 1998.
In past rulings, the Internal Revenue Service (IRS) has concluded that the
synthetic fuel produced at the Pace Carbon facilities should qualify for Section
29 tax credits. The IRS issued a private letter ruling with respect to the four
projects on November 11, 1997, and subsequently issued an updated private letter
ruling on September 23, 2002. As a partner in Pace Carbon, Vectren has reflected
Section 29 tax credits in its consolidated results through December 31, 2004, of
approximately $56.2 million. To date, Vectren has been in a position to fully
recognize the credits generated.
During June 2001, the IRS began a tax audit of Pace Carbon for the 1998 tax year and later expanded the audit to include tax years 1999, 2000, and 2001. In May 2004, the IRS completed its audit of the 1998 to 2001 tax returns of Pace Carbon requesting only minor modifications to previously filed returns. There were no changes to any of the filed Section 29 tax credit calculations. The Permanent Subcommittee on Investigations of the U.S. Senate's Committee on Governmental Affairs, however, has an ongoing investigation related to Section 29 tax credits.
Vectren believes it is justified in its reliance on the private letter rulings and recent IRS audit results for the Pace Carbon facilities. Therefore, the Company will continue to recognize Section 29 tax credits as they are earned until there is either a change in the tax code or the IRS' interpretation of that tax code.
Further, Section 29 tax credits are only available when the price of oil is less than a base price specified by the tax code, as adjusted for inflation. The Company does not believe that credits realized in 2004 and prior years will be affected by the limitation, but an average annual price in excess of the mid $50 per barrel range, as priced at the wellhead, could limit Section 29 tax credits in 2005 and beyond. In January 2005, the Company executed an insurance arrangement that partially limits the Company's exposure if a limitation on the availability of tax credits were to occur in 2005 and/or 2006 due to oil prices.
Utilicom Networks, LLC & Related Entities The Company has an approximate 2% equity interest and a convertible subordinated debt investment in Utilicom Networks, LLC (Utilicom) that if converted bring the Company's ownership interest up to 16%. The Company also has an approximate 19% equity interest in SIGECOM Holdings, Inc. (Holdings), which was formed by Utilicom to hold interests in SIGECOM, LLC (SIGECOM). SIGECOM provides broadband services, such as cable television, high-speed internet, and advanced local and long distance phone services, to the greater Evansville, Indiana area. The Company accounts for its investments in Utilicom and Holdings using the cost method of accounting.
Other Utilicom-related subsidiaries owned franchising agreements to provide broadband services to the greater Indianapolis, Indiana and Dayton, Ohio markets. In 2004, the build out of these markets was further evaluated, and the Company concluded that it was unlikely it would make additional investments in those markets. As a result, the Company recorded charges totaling $6.0 million, or $3.6 million after-tax, to write-off investments made in the Indianapolis and Dayton markets and to write down its investment in SIGECOM.
At December 31, 2004, convertible subordinated debt investments total $31.6 million, all of which is convertible into Utilicom ownership at the Company's option or upon the event of a public offering of stock by Utilicom. Investments in the convertible notes are included in Other investments. At December 31, 2004, and 2003, the Company's combined investment in equity and debt securities of Utilicom-related entities totaled $43.3 million and $47.7 million, respectively.
Other Affiliate Transactions
The Company has ownership interests in other affiliated companies accounted for
using the equity method of accounting that perform underground construction and
repair, facilities locating, and meter reading services to the Company. For the
years ended December 31, 2004, 2003, and 2002, fees for these services and
construction-related expenditures paid by the Company to its affiliates totaled
$31.2 million, $37.2 million, and $38.3 million, respectively. Amounts charged
by these affiliates are market based. Amounts owed to unconsolidated affiliates
other than ProLiance totaled $1.1 million and $0.4 million at December 31, 2004,
and 2003, respectively, and are included in Accounts payable to affiliated
companies in the Consolidated Balance Sheets. Amounts due from unconsolidated
affiliates included in Accounts receivable totaled $0.6 million and $0.4
million, respectively, at December 31, 2004, and 2003.
EITF 03-01
In March 2004, the EITF issued a consensus on Issue No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
(EITF 03-01). In EITF 03-01, the Task Force developed a basic model for
evaluating whether investments within the scope of EITF 03-01, which includes
cost method and equity method investments, have other-than-temporary impairment.
The basic model includes three steps: 1) determine if there is impairment; 2) if
there is impairment, decide whether it is temporary or other than temporary; and
3) if it is other than temporary, recognize it in earnings. EITF 03-01 also
requires certain qualitative and quantitative disclosure of material impairments
judged to be temporary. The EITF has yet to finalize Steps 2 and 3. Step 1 and
the disclosure requirements are currently effective, and the adoption of those
portions of the EITF did not have a material effect on the Company.
As noted above, the Company incurred an other-than-temporary impairment charge associated with its cost method investment in SIGECOM, LLC, during 2004. While the Company currently believes that the book value of that investment approximates fair value, further changes in estimated fair value may occur.
4. Other Investments
Other investments consist of the following:
At December 31,
------------------------------------------------------------------------------
(In millions) 2004 2003
------------------------------------------------------------------------------
Leveraged leases $ 33.2 $ 32.2
Convertible notes receivable from Utilicom-related
entities (See Note 3) 31.6 32.3
Other investments 50.3 58.4
------------------------------------------------------------------------------
Total other investments $ 115.1 $ 122.9
==============================================================================
|
Leveraged Leases
The Company is a lessor in three leveraged lease agreements under which real
estate or equipment is leased to third parties. The total equipment and
facilities cost was approximately $76.2 million at both December 31, 2004, and
2003, respectively. The cost of the equipment and facilities was partially
financed by non-recourse 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 $48.3 million and $51.8 million
at December 31, 2004, and 2003, respectively. At December 31, 2004 and 2003, the
Company's leveraged lease investment, net of related deferred tax liabilities,
was $7.0 million and $6.0 million, respectively.
Other Investments
Other investments include other notes receivable, the cash surrender value of
life insurance policies, restricted cash, and a municipal bond, among other
items.
5. Income Taxes
The components of income tax expense and utilization of investment tax credits
follow:
Year Ended December 31,
------------------------------------------------------------------------------
(In millions) 2004 2003 2002
------------------------------------------------------------------------------
Current:
Federal $ 24.1 $ (11.9) $ 62.2
State 9.0 14.5 5.2
------------------------------------------------------------------------------
Total current taxes 33.1 2.6 67.4
------------------------------------------------------------------------------
Deferred:
Federal 3.8 39.1 (26.2)
State 4.3 (1.8) -
------------------------------------------------------------------------------
Total deferred taxes 8.1 37.3 (26.2)
------------------------------------------------------------------------------
Amortization of investment tax credits (2.2) (2.2) (2.3)
------------------------------------------------------------------------------
Total income tax expense $ 39.0 $ 37.7 $ 38.9
==============================================================================
|
A reconciliation of the federal statutory rate to the effective income tax rate follows:
Year Ended December 31,
------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------
Statutory rate 35.0 % 35.0 % 35.0 %
State and local taxes-net of federal benefit 5.9 5.5 2.4
Section 29 tax credits (11.6) (11.7) (7.0)
Amortization of investment tax credit (1.5) (1.5) (1.5)
Other tax credits (0.6) (0.9) (1.1)
All other-net (0.7) (1.1) (2.4)
------------------------------------------------------------------------------
Effective tax rate 26.5 % 25.3 % 25.4 %
==============================================================================
|
The liability method of accounting is used for income taxes under which deferred income taxes are recognized to reflect the tax effect of temporary differences between the book and tax bases of assets and liabilities at currently enacted income tax rates.
Significant components of the net deferred tax liability follow:
At December 31,
------------------------------------------------------------------------------
(In millions) 2004 2003
------------------------------------------------------------------------------
Noncurrent deferred tax liabilities (assets):
Depreciation & cost recovery timing differences $ 265.5 $ 225.4
Leveraged leases 26.2 26.2
Regulatory assets recoverable through future rates 19.2 26.9
Regulatory liabilities to be settled through
future rates (7.7) (8.8)
Employee benefit obligations (29.2) (29.8)
Alternative minimum tax carryforward (31.9) -
Other - net (8.1) (4.5)
------------------------------------------------------------------------------
Net noncurrent deferred tax liability 234.0 235.4
------------------------------------------------------------------------------
Current deferred tax liabilities:
Deferred fuel costs-net 4.5 6.9
------------------------------------------------------------------------------
Net current deferred tax liability 4.5 6.9
------------------------------------------------------------------------------
Net deferred tax liability $ 238.5 $ 242.3
==============================================================================
|
At December 31, 2004, and 2003, investment tax credits totaling $14.2 million and $16.4 million, respectively, are included in Deferred credits and other liabilities. These investment tax credits are amortized over the lives of the related investments. At December 31, 2004, the Company has alternative minimum tax carryforwards of $31.9 million, which do not expire.
6. Retirement Plans & Other Postretirement Benefits
At December 31, 2004, the Company maintains three qualified defined benefit pension plans, a nonqualified supplemental executive retirement plan (SERP), and three other postretirement benefit plans. The defined benefit pension and other postretirement benefit plans, which cover eligible full-time regular employees, are primarily noncontributory. The postretirement health care and life insurance plans are a combination of self-insured and fully insured plans. The Company has Voluntary Employee Beneficiary Association (VEBA) Trust Agreements for the partial funding of postretirement health benefits for retirees and their eligible dependents and beneficiaries. Annual VEBA 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 are not liabilities in these consolidated financial statements. The detailed disclosures of benefit components that follow are based on an actuarial valuation using a measurement date as of September 30. The qualified pension plans and the SERP are aggregated under the heading "Pension Benefits." Other postretirement benefit plans are aggregated under the heading "Other Benefits."
FSP 106-2
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare Act") was enacted. The Medicare Act
introduces a Medicare prescription drug benefit, as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least "actuarially equivalent" to the Medicare benefit. In May 2004, FASB issued
FASB Staff Position ("FSP") 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," which supercedes FSP 106-1 of the same title issued in January 2004. FSP
106-2 provides guidance on the accounting and required disclosures for the
effects of the Medicare Act for employers that sponsor postretirement health
care plans that provide prescription drug benefits. FSP 106-2 was effective for
the first interim or annual period beginning after June 15, 2004, with earlier
adoption permitted.
The Company elected to early adopt the accounting for the federal subsidy under the Medicare Act on April 1, 2004, and remeasured its obligation as of January 1, 2004, to incorporate the impact of the Medicare Act which resulted in a reduction to the accumulated benefit obligation of $10.4 million. For the year ended December 31, 2004, the remeasurement resulted in a reduction in net periodic postretirement benefit cost of $0.8 million. The reduction is a component of amortization of actuarial loss (gain) in the information that follows.
The underlying determination of whether an employer's plan qualifies for the federal subsidy is still subject to clarifying federal regulations related to the Medicare Act. When this guidance is issued, the Company will reassess if its plans continue to qualify for the subsidy.
Benefit Obligations
A reconciliation of the Company's benefit obligations at December 31, 2004, and
2003, follows:
-------------------------------------------------------------------------------------
Pension Benefits Other Benefits
--------------------- ------------------
(In millions) 2004 2003 2004 2003
--------------------------------------- --------------------- ------------------
Benefit obligation, beginning of period $ 222.7 $ 201.9 $ 97.3 $ 81.5
Service cost - benefits earned during
the period 6.6 5.8 0.9 0.9
Interest cost on projected benefit
obligation 13.4 13.6 5.3 5.4
Plan amendments 4.5 - - -
Benefits paid (11.4) (12.7) (5.3) (5.4)
Actuarial loss (gain) 5.3 14.1 (5.3) 14.9
-------------------------------------------------------------------------------------
Benefit obligation, end of period $ 241.1 $ 222.7 $ 92.9 $ 97.3
=====================================================================================
|
The accumulated benefit obligation for all defined benefit pension plans was $219.5 million and $202.7 million at December 31, 2004, and 2003, respectively.
The benefit obligation as of December 31, 2004, and 2003, was calculated using the following weighted average assumptions:
-----------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------- ------------------
2004 2003 2004 2003
--------------------------------------- ------------------- ------------------
Discount rate 5.75% 6.00% 5.75% 6.00%
Rate of compensation increase 3.50% 3.50% 3.50% 3.50%
|
To calculate the 2004 ending postretirement benefit obligation, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005. The rate was assumed to decrease gradually to 5% for 2009 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point increase in assumed health care cost trend rates would have increased the benefit obligation by $7.6 million. A one percentage point decrease would have decreased the obligation by $6.3 million. To calculate the 2003 ending postretirement benefit obligation, a 10% rate was assumed for 2004, declining to 5% in 2009 and remaining at that level thereafter.
Plan Assets
A reconciliation of the Company's plan assets at December 31, 2004, and 2003,
follows:
-------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------- -----------------
(In millions) 2004 2003 2004 2003
-------------------------------------------------------------------------------
Plan assets at fair value,
beginning of period $ 147.8 $ 138.6 $ 9.2 $ 7.4
Actual return on plan assets 16.3 20.8 0.7 1.4
Employer contributions 8.5 1.1 3.8 5.8
Benefits paid (11.4) (12.7) (5.3) (5.4)
-------------------------------------------------------------------------------
Fair value of plan assets,
end of period $ 161.2 $ 147.8 $ 8.4 $ 9.2
===============================================================================
|
The asset allocation for the Company's pension and postretirement plans at the measurement date for 2004, 2003 and 2002, by asset category, follows:
------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------------ ----------------------
2004 2003 2002 2004 2003 2002
------------------------------------------------------------------------------
Equity securities 60% 59% 57% 60% 54% 49%
Debt securities 33% 35% 43% 36% 32% 47%
Real estate 6% 6% - - - -
Short term investments
& other 1% - - 4% 14% 4%
------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100%
==============================================================================
|
The Company invests in a master trust that benefits its qualified defined benefit pension plans. The general investment objectives are to invest in a diversified portfolio, comprised of both equity and fixed income investments, which are further diversified among various asset classes. The diversification is designed to minimize the risk of large losses while maximizing total return within reasonable and prudent levels of risk. The investment objectives specify a targeted investment allocation for the pension plans of 60% equities, 35% debt, and 5% real estate for 2005, and for postretirement plans of 55% equities, 35% debt, and 10% short-term investments and other for 2005. Objectives do not target a specific return by asset class. The portfolio's return is monitored in total and is designed to outperform inflation. These investment objectives are long-term in nature.
Funded Status
The funded status of the plans, reconciled to amounts reflected in the balance
sheets as of December 31, 2004, and 2003, follows:
-----------------------------------------------------------------------------------------
Pension Benefits Other Benefits
-------------------- ------------------
(In millions) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------
Fair value of plan assets, end of period $ 161.2 $ 147.8 $ 8.4 $ 9.2
Benefit obligation, end of period (241.1) (222.7) (92.9) (97.3)
-----------------------------------------------------------------------------------------
Funded status, end of period (79.9) (74.9) (84.5) (88.1)
-----------------------------------------------------------------------------------------
Unrecognized net loss (gain) 50.9 49.4 (3.5) 1.7
Unrecognized transitional (asset) obligation - (0.2) 26.2 29.1
Unrecognized prior service cost 14.2 10.5 - -
Post measurement date adjustments 0.2 0.2 1.3 0.8
-----------------------------------------------------------------------------------------
Net amount recognized, end of year $ (14.6) $ (15.0) $(60.5) $ (56.5)
=========================================================================================
Net amount recognized included in:
Deferred credits & other liabilities $ (18.4) $ (18.9) $(60.5) $ (56.5)
Other assets 3.8 3.9 - -
|
As of December 31, 2004, and 2003, the funded status of the SERP, which is included in Pension Benefits in the chart above, was an unfunded amount of $13.8 million and $12.7 million, respectively, and the net amount recognized in the balance sheet related to the SERP as of December 31, 2004, and 2003 was a liability of $8.4 million and $7.8 million, respectively.
At December 31, 2004, and 2003, all pension and postretirement plans had accumulated benefit obligations in excess of plan assets. As required by SFAS 87, the Company has recorded additional minimum pension liability adjustments to reflect the total unfunded accumulated liability arising from its pension plans. This additional minimum pension liability adjustment is included in Deferred credits & other liabilities. The offset to this additional liability is recorded to an intangible asset included in Other assets to the extent pension plans have unrecognized prior service cost. Any unfunded or unaccrued amount in excess of prior service cost is recorded in net of tax amounts to Accumulated other comprehensive income in shareholders' equity.
The effects of additional minimum pension liability adjustments at December 31, 2004, and 2003, follow:
--------------------------------------------------------------------------
(In millions) 2004 2003
--------------------------------------------------------------------------
Minimum pension liability adjustment,
beginning of year $ 39.7 $ 30.0
Change in minimum pension liability
adjustment included in:
Other comprehensive income
before effect of taxes 0.1 9.7
Other assets 3.7 -
--------------------------------------------------------------------------
Minimum pension liability adjustment,
end of year $ 43.5 $ 39.7
==========================================================================
Offset included in:
Accumulated other comprehensive
income $ 17.5 $ 17.4
Other assets 14.2 10.5
Deferred income taxes 11.8 11.8
|
Expected Cash Flows
In 2005, the Company expects to make contributions of approximately $3.6 million
to its pension plan trusts. In addition, the Company expects to make payments
totaling $0.8 million directly to SERP participants and $5.4 million directly to
those participating in other postretirement plans.
Expected retiree pension benefit payments, including the SERP, projected to be required during the years following 2004 (in millions) are $11.8 in 2005, $12.2 in 2006, $13.0 in 2007, $13.4 in 2008 $14.2 in 2009, and $82.3 in years 2010-2014. Expected benefit payments projected to be required for postretirement benefits during the years following 2004 (in millions) are $5.4 in 2005, $5.3 in 2006, $5.5 in 2007, $5.7 in 2008, $6.0 in 2009, and $31.5 in years 2010-2014.
Net Periodic Benefit Costs
A summary of the components of net periodic benefit cost for the three years
ended December 31, 2004, follows:
----------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------------- -------------------------
(In millions) 2004 2003 2002 2004 2003 2002
----------------------------------------------------------------------------------------------
Service cost $ 6.6 $ 5.8 $ 5.9 $ 0.9 $ 0.9 $ 1.0
Interest cost 13.4 13.6 13.9 5.3 5.4 6.0
Expected return on plan assets (13.5) (14.8) (15.7) (0.7) (0.7) (0.7)
Amortization of prior service cost 0.9 0.8 0.8 - - -
Amortization of transitional (asset)
obligation (0.2) (0.2) (0.5) 2.9 2.9 2.9
Amortization of actuarial loss (gain) 1.0 0.5 0.1 (0.2) (0.5) (0.5)
----------------------------------------------------------------------------------------------
Net periodic benefit cost $ 8.2 $ 5.7 $ 4.5 $ 8.2 $ 8.0 $ 8.7
==============================================================================================
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To calculate the expected return on plan assets, the Company uses the plan assets' market-related value and an expected long-term rate of return. The fair market value of the assets at the measurement date is adjusted to a market-related value by recognizing the change in fair value experienced in a given year ratably over a five-year period.
Based on a targeted 60% equity, 35% debt, and 5% real estate allocation for the pension plans, the Company has used a long-term expected rate of return of 8.5% to calculate 2004 periodic benefit cost. For fiscal 2005, the expected long-term rate of return will be 8.25%.
In January 2005, the Company announced the amendment of certain postretirement benefit plans, effective January 1, 2006. The amendment will result in an estimated $3 million annual decrease in periodic cost, a portion of which will begin to be recognized in 2005, reducing those preliminary estimates. Two of the unions that represent bargaining employees at the Company's regulated subsidiaries have advised the Company that it is their position that these changes are not permitted under the existing collective bargaining agreements which govern the relationship between the employees and the affected subsidiaries. With assistance from legal counsel, management has analyzed the unions' position and continues to believe that the Company has reserved the right to amend the affected plans and that changing these benefits for retirees is not a mandatory subject of bargaining.
The weighted averages of significant assumptions used to determine net periodic benefit costs follow:
--------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------- ----------------------
(In millions) 2004 2003 2002 2004 2003 2002
--------------------------------------------------------------------------------
Discount rate 6.00% 6.75% 7.25% 6.00% 6.75% 7.25%
Rate of compensation increase 3.50% 4.25% 4.75% 3.50% 4.25% 4.75%
Expected return on plan assets 8.50% 9.00% 9.00% 8.50% 9.00% 9.00%
|
To measure 2004 postretirement expense, the Company used a 10% healthcare cost trend rate for 2004, declining to 5% in 2009 and remaining level thereafter. A one percentage point increase in assumed health care cost trend rates would have increased the 2004 service and interest cost components of pension costs by $0.6 million. A one percentage point decrease would have decreased the 2004 benefit costs by $0.5 million. To measure 2003 postretirement expense, the Company used a 10% healthcare cost trend rate for 2003, declining to 5% in 2007 and remaining level thereafter.
Defined Contribution Plan
The Company also has defined contribution retirement savings plans that are
qualified under sections 401(a) and 401(k) of the Internal Revenue Code. During
2004, 2003, and 2002, the Company made contributions to these plans of $3.5
million, $3.6 million, and $3.0 million, respectively.
7. Borrowing Arrangements
Short-Term Borrowings
At December 31, 2004, the Company has $615 million of short-term borrowing
capacity, including $355 million for the Utility Group operations and $260
million for the wholly owned Nonregulated Group and corporate operations, of
which approximately $47 million is available for the Utility Group operations
and approximately $156 million is available for wholly owned Nonregulated Group
and corporate operations. These short-term borrowing arrangements expire in
2009. See the table below for interest rates and outstanding balances.
Year Ended December 31,
------------------------------------------------------------------------------
(In millions) 2004 2003 2002
------------------------------------------------------------------------------
Weighted average commercial paper
and bank loans outstanding
during the year $ 211.4 $ 296.9 $ 288.8
Weighted average interest rates
during the year
Commercial paper 1.78% 1.36% 2.02%
Bank loans 2.12% 1.94% 2.52%
At December 31,
---------------------------------------------------------------
(In millions) 2004 2003
---------------------------------------------------------------
Commercial paper $ 308.0 $ 184.4
Bank loans 104.3 88.4
Other 0.1 2.1
---------------------------------------------------------------
Total short-term borrowings $ 412.4 $ 274.9
===============================================================
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Long-Term Debt
Senior unsecured obligations and first mortgage bonds outstanding and classified
as long-term by subsidiary follow:
At December 31,
------------------------------------------------------------------------------
(In millions) 2004 2003
------------------------------------------------------------------------------
VUHI
Fixed Rate Senior Unsecured Notes
2011, 6.625% $ 250.0 $ 250.0
2013, 5.25% 100.0 100.0
2018, 5.75% 100.0 100.0
2031, 7.25% 100.0 100.0
------------------------------------------------------------------------------
Total VUHI 550.0 550.0
------------------------------------------------------------------------------
SIGECO
First Mortgage Bonds
2016, 1986 Series, 8.875% 13.0 13.0
2023, Series B, adjustable rate
presently 2.08%, tax exempt, auction
rate mode, weighted average for 2004: 4.44% 22.6 22.8
2029, 1999 Senior Notes, 6.72% 80.0 80.0
2015, 1985 Pollution Control Series A,
adjustable rate presently 2.03%, tax
exempt, auction rate mode, weighted
average for 2004: 3.09% 9.8 10.0
2025, 1998 Pollution Control Series A,
adjustable rate presently 4.75%, tax
exempt, next rate adjustment: 2006 31.5 31.5
2024, 2000 Environmental Improvement
Series A, 4.65%, tax exempt 22.5 22.5
------------------------------------------------------------------------------
Total first mortgage bonds 179.4 179.8
------------------------------------------------------------------------------
Senior Unsecured Bonds to Third Parties:
2020, 1998 Pollution Control Series B, 4.50%,
tax exempt 4.6 4.6
2030, 1998 Pollution Control Series B, 5.00%,
tax exempt 22.0 22.0
2030, 1998 Pollution Control Series C,
adjustable rate presently 5.00%, tax
exempt, next rate adjustment: 2006 22.2 22.2
------------------------------------------------------------------------------
Total senior unsecured bonds 48.8 48.8
------------------------------------------------------------------------------
Total SIGECO 228.2 228.6
------------------------------------------------------------------------------
Indiana Gas
Senior Unsecured Notes
2004, Series F, 6.36% - 15.0
2007, Series E, 6.54% 6.5 6.5
2013, Series E, 6.69% 5.0 5.0
2015, Series E, 7.15% 5.0 5.0
2015, Insured Quarterly, 7.15% - 20.0
2015, Series E, 6.69% 5.0 5.0
2015, Series E, 6.69% 10.0 10.0
2025, Series E, 6.53% 10.0 10.0
2027, Series E, 6.42% 5.0 5.0
2027, Series E, 6.68% 1.0 3.5
2027, Series F, 6.34% 20.0 20.0
2028, Series F, 6.36% 10.0 10.0
2028, Series F, 6.55% 20.0 20.0
2029, Series G, 7.08% 30.0 30.0
2030, Insured Quarterly, 7.45% 49.9 49.9
------------------------------------------------------------------------------
Total Indiana Gas 177.4 214.9
------------------------------------------------------------------------------
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------------------------------------------------------------------------------
(in millions) 2004 2003
------------------------------------------------------------------------------
Vectren Capital Corp
Fixed Rate Senior Unsecured Notes
2005, 7.67% 38.0 38.0
2007, 7.83% 17.5 17.5
2010, 7.98% 22.5 22.5
2012, 7.43% 35.0 35.0
------------------------------------------------------------------------------
Total Vectren Capital Corp. 113.0 113.0
------------------------------------------------------------------------------
Other Long-Term Notes Payable 1.6 -
Total long-term debt outstanding 1,070.2 1,106.5
Current maturities of long-term debt (38.5) (15.0)
Debt subject to tender (10.0) (13.5)
Unamortized debt premium & discount - net (4.6) (4.9)
Fair value of hedging arrangements (0.5) (0.3)
------------------------------------------------------------------------------
Total long-term debt-net $1,016.6 $1,072.8
==============================================================================
|
VUHI 2003 Issuance
In July 2003, VUHI issued senior unsecured notes with an aggregate principal
amount of $200 million in two $100 million tranches. The first tranche was
10-year notes due August 2013, with an interest rate of 5.25% priced at 99.746%
to yield 5.28% to maturity (2013 Notes). The second tranche was 15-year notes
due August 2018 with an interest rate of 5.75% priced at 99.177% to yield 5.80%
to maturity (2018 Notes).
The notes have no sinking fund requirements, and interest payments are due semi-annually. The notes may be called by VUHI, in whole or in part, at any time for an amount equal to accrued and unpaid interest, plus the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined in the indenture, plus 20 basis points for the 2013 Notes and 25 basis points for the 2018 Notes.
Shortly before these issues, VUHI entered into several treasury locks with a total notional amount of $150.0 million. Upon issuance of the debt, the treasury locks were settled resulting in the receipt of $5.7 million in cash, which was recorded as a regulatory liability pursuant to existing regulatory orders. The value received is being amortized as a reduction of interest expense over the life of the issues.
The net proceeds from the sale of the senior notes and settlement of related hedging arrangements approximated $203 million.
Long-Term Debt Put & Call Provisions
Certain long-term debt issues contain put and call provisions that can be
exercised on various dates before maturity. Other than those described below
related to ratings triggers, the put or call provisions are not triggered by
specific events, but are based upon dates stated in the note agreements, such as
when notes are re-marketed. During 2004, 2003, and 2002, debt totaling $2.5
million, $0.1 million, and $5.2 million, respectively, was put to the Company.
Debt which may be put to the Company during the years following 2004 (in
millions) is $10.0 in 2005, zero in 2006, $20.0 in 2007, zero in 2008, $80.0 in
2009, and $40.0 thereafter. Debt that may be put to the Company within one year
is classified as Long-term debt subject to tender in current liabilities.
SIGECO and Indiana Gas Debt Call
During 2004, the Company called $20.0 million of insured quarterly senior
unsecured notes outstanding at Indiana Gas. The notes, originally due in 2015,
were called at par.
During 2003, the Company called two first mortgage bonds outstanding at SIGECO and two senior unsecured notes outstanding at Indiana Gas. The first SIGECO bond had a principal amount of $45.0 million, an interest rate of 7.60%, was originally due in 2023, and was redeemed at 103.745% of its stated principal amount. The second SIGECO bond had a principal amount of $20.0 million, an interest rate of 7.625%, was originally due in 2025, and was redeemed at 103.763% of the stated principal amount.
The first Indiana Gas note had a remaining principal amount of $21.3 million, an interest rate of 9.375%, was originally due in 2021, and was redeemed at 105.525% of the stated principal amount. The second Indiana Gas note had a principal amount of $13.5 million, an interest rate of 6.75%, was originally due in 2028, and was redeemed at the principal amount.
Pursuant to regulatory authority, the premiums paid to retire the net carrying value of these notes totaling $3.6 million were deferred in Regulatory assets.
Other Financing Transactions
During 2004, the Company remarketed two first mortgage bonds outstanding at SIGECO. The remarketing effort converted $32.8 million of outstanding fixed rate debt into variable rate debt where interest rates reset weekly. One bond, due in 2023, had a principal amount of $22.8 million and an interest rate of 6%. The other bond, due in 2015, had a principal amount of $10.0 million and an interest rate of 4.3%. These remarketing efforts resulted in the extinguishment of debt and the reissuance of new debt at generally the same par value. These bonds are classified in Long-term debt.
During 2003, the Company remarketed $26.6 million of adjustable rate senior unsecured bonds and $22.5 million of adjustable rate first mortgage bonds. Of the remarketed unsecured bonds, $4.6 million were placed through 2020 at a 4.5% fixed interest rate, $22.0 million were placed through 2030 at a 5.0% fixed interest rate, and the $22.5 million first mortgage bonds were placed through 2024 at a 4.65% fixed interest rate. These bonds are classified in Long-term debt.
Other Company debt totaling $15.0 million in 2004, $18.5 million in 2003, and $6.5 million in 2002 was retired as scheduled.
Future Long-Term Debt Sinking Fund Requirements & Maturities The annual sinking fund requirement of SIGECO's first mortgage bonds is 1% of the greatest amount of bonds outstanding under the Mortgage Indenture. This requirement may be satisfied by certification to the Trustee of unfunded property additions in the prescribed amount as provided in the Mortgage Indenture. SIGECO intends to meet the 2005 sinking fund requirement by this means and, accordingly, the sinking fund requirement for 2005 is excluded from Current liabilities in the Consolidated Balance Sheets. At December 31, 2004, $563.9 million of SIGECO's utility plant remained unfunded under SIGECO's Mortgage Indenture. SIGECO's gross utility plant balance subject to the Mortgage Indenture approximated $1.8 billion at December 31, 2004.
Consolidated maturities and sinking fund requirements on long-term debt during the five years following 2004 (in millions) are $38.5 in 2005, zero in 2006, $24.0 in 2007, zero in 2008 and in 2009.
Covenants
Both long-term and short-term borrowing arrangements contain customary default
provisions; restrictions on liens, sale leaseback transactions, mergers or
consolidations, and sales of assets; and restrictions on leverage and interest
coverage, among other restrictions. As of December 31, 2004, the Company was in
compliance with all financial covenants.
Ratings Triggers
At December 31, 2004, $113.0 million of Vectren Capital's senior unsecured notes
were subject to cross-default and ratings trigger provisions that would provide
that the full balance outstanding is subject to prepayment if the ratings of
Indiana Gas or SIGECO declined to BBB/Baa2. In addition, accrued interest and a
make whole amount based on the discounted value of the remaining payments due on
the notes would also become payable. The credit rating of Indiana Gas' senior
unsecured debt and SIGECO's secured debt remains one level and two levels,
respectively, above the ratings trigger.
Debt Guarantees
Vectren Corporation guarantees Vectren Capital's long-term and short-term debt,
which totaled $113.0 million and $104.0 million, respectively, at December 31,
2004. VUHI's currently outstanding long-term and short-term debt is jointly and
severally guaranteed by Indiana Gas, SIGECO, and VEDO. VUHI's long-term and
short-term debt outstanding at December 31, 2004, totaled $550.0 million and
$308.0 million, respectively.
8. Cumulative Preferred Stock of Subsidiary
Currently outstanding redeemable preferred stock has a dividend rate of 8.50% and in the event of involuntary liquidation the amount payable is $100 per share, plus accrued dividends. This series may be redeemed at $100 per share, plus accrued dividends on any of its dividend payment dates, and is also callable at the Company's option at a rate of 1,160 shares per year. As of December 31, 2004, and 2003, there were 1,177 shares and 2,277 shares outstanding, respectively.
9. Earnings Per Share
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share assumes the conversion of stock options into common shares and the lifting of restrictions on issued restricted shares using the treasury stock method to the extent the effect would be dilutive. The following table illustrates the basic and dilutive earnings per share calculations for the three years ended December 31, 2004:
Year Ended December 31,
------------------------------------------------------------------------------------
(In millions, except per share data) 2004 2003 2002
------------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted EPS - Net income $ 107.9 $ 111.2 $ 114.0
====================================================================================
Denominator:
Denominator for basic EPS - Weighted average
common shares outstanding 75.6 70.6 67.6
Conversion of stock options and lifting of
restrictions on issued restricted stock 0.3 0.2 0.3
------------------------------------------------------------------------------------
Denominator for diluted EPS - Adjusted weighted
average shares outstanding and assumed
conversions outstanding 75.9 70.8 67.9
====================================================================================
Basic earnings per share $ 1.43 $ 1.58 $ 1.69
Diluted earnings per share $ 1.42 $ 1.57 $ 1.68
|
Options to purchase 4,200 shares of common stock for the year ended December 31, 2004, 530,663 shares of common stock for the year ended December 31, 2003, and 87,963 shares of common stock for the year ended December 31, 2002, were excluded in the computation of dilutive earnings per share because the options' exercise price was greater than the average market price of a share of common stock during the period. Exercise prices for options excluded from the computation were $25.59 in 2004; $23.19 to $25.59 in 2003; and $24.05 to $25.59 in 2002.
10. Share-Based Incentive Plans
The Company has various share-based incentive plans to encourage executives, strategic employees, and non-employee directors to remain with the Company and to more closely align their interest with those of the Company's shareholders.
Stock Option Plans
Stock options granted to employees in 2004 and 2003 become fully vested and
exercisable at the end of three years. Stock options granted to employees in
2001 and 2002 become fully vested and exercisable at the end of five years.
Stock options granted to non-employee directors since 2001 become fully vested
and exercisable at the end of one year. All options granted prior to 2001 are
fully vested and exercisable. Options granted both before and after 2001
generally expire ten years from the date of grant. Options generally vest on a
straight-line graded basis over their terms.
A summary of activity within the Company's stock option plans for the past three years follows:
Wtd. Avg.
Exercise
Options Price
---------------------------------------------------------------------------
Outstanding at January 1, 2002 1,427,778 $ 20.67
Granted 71,374 23.51
Cancelled (3,000) 22.54
Exercised (146,890) 14.51
---------------------------------------------------------------------------
Outstanding at December 31, 2002 1,349,262 21.48
Granted 521,200 23.07
Cancelled (5,800) 22.56
Exercised (61,766) 17.30
---------------------------------------------------------------------------
Outstanding at December 31, 2003 1,802,896 22.08
Granted 219,000 24.74
Cancelled (6,043) 19.66
Exercised (90,400) 18.27
---------------------------------------------------------------------------
Outstanding at December 31, 2004 1,925,453 $ 22.57
===========================================================================
|
In January 2005, 286,400 options to purchase shares of common stock at an exercise price of $26.63 were issued to management. The grant vests over three years.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2004:
Outstanding Exercisable
----------------------------------------- ---------------------------
Wtd. Avg.
Remaining
Range of Contractual Wtd. Avg. Wtd. Avg.
Exercise Prices # of Options Life Exercise Price # of Options Exercise Price
---------------- ----------------------------------------- ---------------------------
$13.82 - $17.44 40,985 1.3 $ 16.88 40,985 $ 16.88
$19.83 - $20.26 261,383 3.4 20.08 261,383 20.08
$22.37 - $22.57 873,422 6.6 22.54 589,424 22.54
$23.19 - $25.59 749,663 7.8 23.78 262,718 23.54
--------------------------------------------------------------------------------------
Total 1,925,453 6.5 $ 22.57 1,154,510 $ 22.01
======================================================================================
|
Stock options that were exercisable and those options' weighted average exercise prices were 924,849 and $21.34, respectively at December 31, 2003, and 692,288 and $20.37, respectively, at December 31, 2002.
The fair value of each option granted used to determine pro forma net income as disclosed in Note 2, 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 years ended December 31, 2004, 2003, and 2002: risk-free rate of return of 4.37%, 4.00%, and 4.61%, respectively; expected option term of 8 years for all 3 years presented; expected volatility of 24.01%, 26.98%, and 26.42%, respectively; and dividend yield of 4.65%, 4.81%, and 4.56%, respectively. The weighted average fair value of options granted in 2004, 2003, and 2002 were $4.39, $4.31, and $4.81, respectively.
Restricted Stock & Phantom Stock Plans
The Company maintains a performance-based restricted stock plan for its
executives and employees and a non-performance based restricted stock plan
through which non-employee directors receive a portion of their director fees.
A summary of restricted stock activity during the three years ended December 31, 2004, follows:
Restricted Stock
--------------------------------------------------------------------------
Outstanding at January 1, 2002 178,113
Grants 66,831
Vested (4,257)
--------------------------------------------------------------------------
Outstanding at December 31, 2002 240,687
Grants 120,228
Forfeitures (14,136)
Vested (137,777)
--------------------------------------------------------------------------
Outstanding at December 31, 2003 209,002
Grants 168,680
Forfeitures (150)
Vested (76,980)
--------------------------------------------------------------------------
Outstanding at December 31, 2004 300,552
==========================================================================
|
For the years ended December 31, 2004, 2003, and 2002, the weighted average fair value per share of restricted stock granted was $24.87, $23.33, and $23.10, respectively. In January 2005, 138,900 restricted shares were issued. The share price on the date of grant was $26.63. The restrictions lift over a four year period subject to adjustments for performance.
Executives and non-employee directors may defer certain portions of their salary, annual bonus, incentive compensation, and earned restricted stock into phantom stock units. Such units are vested when granted.
Compensation expense associated with the restricted stock and phantom stock plans for the years ended December 31, 2004, 2003, and 2002, was $2.9 million, $3.6 million, and $2.1 million, respectively.
11. Common Shareholders' Equity
Equity Issuance
In March 2003, the Company filed a registration statement with the Securities
and Exchange Commission with respect to a public offering of authorized but
previously unissued shares of common stock as well as the senior unsecured notes
of VUHI described above in Note 7. In August 2003, the registration became
effective, and an agreement was reached to sell approximately 7.4 million shares
to a group of underwriters. The net proceeds totaled $163.2 million.
Authorized, Reserved Common and Preferred Shares At December 31, 2004, and 2003, the Company was authorized to issue 480.0 million shares of common stock and 20.0 million shares of preferred stock. Of the authorized common shares, approximately 9.4 million shares at December 31, 2004, and 7.0 million shares at December 31, 2003, were reserved by the board of directors for issuance through the Company's share-based compensation plans, benefit plans, and dividend reinvestment plan. At December 31, 2004, and 2003, there were 394.6 million and 397.4 million, respectively, of authorized shares of common stock and all authorized shares of preferred stock available for a variety of general corporate purposes, including future public offerings to raise additional capital and for facilitating acquisitions.
Shareholder Rights Agreement
The Company's board of directors adopted a Shareholder Rights Agreement (Rights
Agreement). As part of the Rights Agreement, the board of directors declared a
dividend distribution of one right for each outstanding Vectren common share.
Each right entitles the holder to purchase from Vectren one share of common
stock at a price of $65.00 per share (subject to adjustment to prevent
dilution). The rights 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% or more of the outstanding
Vectren common shares (or a 10% acquirer who is determined by the 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.
12. Commitments & Contingencies
Commitments
Future minimum lease payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year during the five
years following 2004 and thereafter (in millions) are $5.6 in 2005, $4.5 in
2006, $3.6 in 2007, $1.5 in 2008, $0.5 in 2009 and $1.8 thereafter. Total lease
expense (in millions) was $6.7 in 2004, $7.2 in 2003, and $7.3 in 2002.
Firm purchase commitments for commodities total (in millions) $152.1 million in 2005 and $1.4 million in 2006. Firm purchase commitment for utility and non-utility plant total $20.5 million.
Other Guarantees
Vectren issues guarantees to third parties on behalf of its unconsolidated
affiliates. Such guarantees allow those affiliates to execute transactions on
more favorable terms than the affiliate could obtain without such a guarantee.
Guarantees may include posted letters of credit, leasing guarantees, and
performance guarantees. As of December 31, 2004, guarantees issued and
outstanding on behalf of unconsolidated affiliates approximated $5 million. The
Company has also issued a guarantee approximating $4 million related to the
residual value of an operating lease that expires in 2006.
Vectren has accrued no liabilities for these guarantees as they relate to guarantees issued among related parties, are not material, or such guarantees were executed prior to the adoption of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Liabilities accrued for, and activity related to, product warranties are not significant.
Securities & Exchange Commission Inquiry into PUCHA Exemption
In July 2004, the Company received a letter from the SEC regarding its exempt
status under the Public Utility Holding Company Act of 1935 (PUHCA). The letter
asserts that Vectren's out of state electric power sales exceed the amount
previously determined by the SEC to be acceptable in order to qualify for the
exemption. There is pending a request by Vectren for an order of exemption under
Section 3(a)(1) of PUHCA. Vectren also claims the benefit of the exemption
pursuant to Rule 2 under Section 3(a)(1) of PUHCA by filing an annual statement
on SEC Form U-3A-2. The Company has responded to the SEC inquiry and filed an
amended Form U-3A-2 for the year ended December 31, 2003. The amendment changed
the method of aggregating wholesale power sales and purchases outside of Indiana
from that previously reported. The new method is to aggregate by delivery point.
The amendment also submitted clarifications as to activity outside of Indiana
related to gas utility operations.
Legal Proceedings
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position. See the ProLiance discussion in Note 3.
13. Environmental Matters
Clean Air Act
NOx SIP Call Matter
The Company has taken steps to comply with Indiana's State Implementation Plan
(SIP) of the Clean Air Act (the Act). These steps include installing Selective
Catalytic Reduction (SCR) systems at Culley Generating Station Unit 3 (Culley),
Warrick Generating Station Unit 4, and A.B. Brown Generating Station Units 1 and
2. SCR systems reduce flue gas NOx emissions to atmospheric nitrogen and water
using ammonia in a chemical reaction. This technology is known to currently be
the most effective method of reducing nitrogen oxide (NOx) emissions where high
removal efficiencies are required.
The IURC has issued orders that approve:
o the Company's project to achieve environmental compliance by investing in
clean coal technology;
o a total capital cost investment for this project up to $244 million
(excluding AFUDC), subject to periodic review of the actual costs incurred;
o a mechanism whereby, prior to an electric base rate case, the Company may
recover through a rider that is updated every six months, an 8% return on
its weighted capital costs for the project; and
o ongoing recovery of operating costs, including depreciation and purchased
emission allowances, related to the clean coal technology once the facility
is placed into service.
Based on the level of system-wide emissions reductions required and the control technology utilized to achieve the reductions, the current estimated construction cost is consistent with amounts approved in the IURC's orders. Through December 31, 2004, $238 million has been expended, and three of the four SCR's are operational. Once all equipment is installed and operational, related annual operating expenses, including depreciation expense, are estimated to be between $24 million and $27 million. The Company is recovering the operational costs associated with the SCR's and related technology. The 8% return on capital investment approximates the return authorized in the Company's last electric rate case in 1995 and includes a return on equity.
The Company has achieved timely compliance through the reduction of the Company's overall NOx emissions to levels compliant with Indiana's NOx emissions budget allotted by the USEPA. Therefore, the Company has recorded no accrual for potential penalties that may result from noncompliance.
Culley Generating Station Litigation
During 2003, the U.S. District Court for the Southern District of Indiana
entered a consent decree among SIGECO, the Department of Justice (DOJ), and the
USEPA that resolved a lawsuit originally brought by the USEPA against SIGECO.
The lawsuit alleged violations of the Clean Air Act by SIGECO at its Culley
Generating Station for (1) making modifications to generating station without
obtaining required permits, (2) making major modifications to the generating
station without installing the best available emission control technology, and
(3) failing to notify the USEPA of the modifications.
Under the terms of the agreement, the DOJ and USEPA agreed to drop all challenges of past maintenance and repair activities at the Culley Generating Station. In reaching the agreement, SIGECO did not admit to any allegations in the government's complaint, and SIGECO continues to believe that it acted in accordance with applicable regulations and conducted only routine maintenance on the units. SIGECO entered into this agreement to further its continued commitment to improve air quality and avoid the cost and uncertainties of litigation.
Under the agreement, SIGECO committed to
o either repower Culley Unit 1 (50 MW) with natural gas and equip it with SCR
control technology for further reduction of nitrogen oxide, or cease
operation of the unit by December 31, 2006;
o operate the existing SCR control technology recently installed on Culley
Unit 3 (287 MW) year round at a lower emission rate than that currently
required under the NOx SIP Call, resulting in further nitrogen oxide
reductions;
o enhance the efficiency of the existing scrubber at Culley Units 2 and 3 for
additional removal of sulphur dioxide emissions;
o install a baghouse for further particulate matter reductions at Culley Unit
3 by June 30, 2007;
o conduct a Sulphuric Acid Reduction Demonstration Project as an
environmental mitigation project designed to demonstrate an advance in
pollution control technology for the reduction of sulfate emissions; and
o pay a $600,000 civil penalty.
The Company notified the USEPA of its intention to shut down Culley Unit 1 effective December 31, 2006. The Company does not believe that implementation of the settlement will have a material effect to its results from operations or financial condition. The $600,000 civil penalty was accrued during 2003 and is reflected in Other-net.
Information Request
On January 23, 2001, SIGECO received an information request from the USEPA under
Section 114 of the Clean Air Act for historical operational information on the
Warrick and A.B. Brown generating stations. SIGECO has provided all information
requested with the most recent correspondence provided on March 26, 2001.
Manufactured Gas Plants
In the past, Indiana Gas, SIGECO, and others operated facilities for the
manufacture of gas. Given the availability of natural gas transported by
pipelines, these facilities have not been operated for many years. Under
currently applicable environmental laws and regulations, Indiana Gas, SIGECO,
and others may now be required to take remedial action if certain byproducts are
found above the regulatory thresholds at these sites.
Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program (VRP) and is currently conducting some level of remedial activities, including groundwater monitoring at certain sites, where deemed appropriate, and will continue remedial activities at the sites as appropriate and necessary.
In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million.
The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million.
Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen.
In October 2002, the Company received a formal information request letter from the IDEM regarding five manufactured gas plants owned and/or operated by SIGECO and not currently enrolled in the IDEM's VRP. In response, SIGECO submitted to the IDEM the results of preliminary site investigations conducted in the mid-1990's. These site investigations confirmed that based upon the conditions known at the time, the sites posed no risk to human health or the environment. Follow up reviews have been initiated by the Company to confirm that the sites continue to pose no such risk.
On October 6, 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP. The remaining site is currently being addressed in the VRP by another Indiana utility. SIGECO added those four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites. That renewal was approved by the IDEM on February 24, 2004. On July 13, 2004, SIGECO filed a declaratory judgment action against its insurance carriers seeking a judgment finding its carriers liable under the policies for coverage of further investigation and any necessary remediation costs that SIGECO may accrue under the VRP program. The total investigative costs, and if necessary, costs of remediation at the four SIGECO sites, as well as the amount of any PRP or insurance recoveries, cannot be determined at this time.
Jacobsville Superfund Site
On July 22, 2004, the USEPA listed the Jacobsville Neighborhood Soil
Contamination site in Evansville, Indiana, on the National Priorities List under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The USEPA has identified four sources of historic lead contamination.
These four sources shut down manufacturing operations years ago. When drawing up
the boundaries for the listing, the USEPA included a 250 acre block of
properties surrounding the Jacobsville neighborhood, including Vectren's Wagner
Operations Center. Vectren's property has not been named as a source of the lead
contamination, nor does the USEPA's soil testing to date indicate that the
Vectren property contains lead contaminated soils. Vectren's own soil testing,
completed during the construction of the Operations Center, did not indicate
that the Vectren property contains lead contaminated soils. At this time,
Vectren anticipates only additional soil testing, if required by the USEPA.
14. Rate & Regulatory Matters
SIGECO and Indiana Gas Base Rate Settlements On June 30, 2004, the IURC approved a $5.7 million base rate increase for SIGECO's gas distribution business, and on November 30, 2004, approved a $24 million base rate increase for Indiana Gas' gas distribution business. The new rate designs include a larger service charge, which is intended to address to some extent earnings volatility related to weather. The base rate change in SIGECO's service territory was implemented on July 1, 2004, resulting in additional 2004 revenues of $2.5 million. The base rate change in Indiana Gas' service territory was implemented on December 1, 2004, resulting in additional 2004 revenues of $2.2 million.
The orders also permit SIGECO and Indiana Gas to recover the on-going costs to comply with the federal Pipeline Safety Improvement Act of 2002. The Pipeline Safety Improvement Tracker provides for the recovery of incremental non-capital dollars, capped at $750,000 the first year and $500,000 thereafter for SIGECO and $2.5 million per year for Indiana Gas. Any costs incurred in excess of these annual caps are to be deferred for future recovery.
VEDO Pending Base Rate Increase Settlement On February 4, 2005, the Company filed with the PUCO a settlement agreement that had been entered into with several parties, including the PUCO staff, in its base rate case. The Ohio Office of the Consumer Counselor (OCC) is opposing the settlement. Earlier in 2004 VEDO had filed with the PUCO a request to adjust its base rates and charges for its gas distribution business serving more than 315,000 customers located in west central Ohio. The settlement provides for a $15.7 million increase in VEDO's base distribution rates to cover the ongoing costs of operating, maintaining, and expanding the approximately 5,200-mile distribution system. The settlement increase includes $1.1 million of funding for weatherization and conservation programs for low income customers. Evidentiary hearings were completed in the case on February 9, 2005. Review and approval by the PUCO is necessary before the settlement is effective. The proposed new rate design includes a larger service charge, which will address, to some extent, earnings volatility related to weather. The settlement also permits VEDO the annual recovery of on-going costs associated with the Pipeline Safety Improvement Act of 2002. Based upon the PUCO's actions in other proceedings, the Company would expect an order near the end of the first quarter of 2005.
Ohio Uncollectible Accounts Expense Tracker On December 17, 2003, the PUCO approved a request by VEDO and several other regulated Ohio gas utilities to establish a mechanism to recover uncollectible account expense outside of base rates. The tariff mechanism establishes an automatic adjustment procedure to track and recover these costs instead of providing the recovery of the historic amount in base rates. Through this order, VEDO received authority to defer its 2003 uncollectible accounts expense to the extent it differs from the level included in base rates. The Company estimated the difference to approximate $4 million in excess of that included in base rates, and reversed and deferred that amount for future recovery. In 2004, the Company recorded revenues of $3.3 million which is equal to the level of uncollectible accounts expense recognized for Ohio residential customers.
Gas Cost Recovery (GCR) Audit Proceedings There is an Ohio requirement that Ohio gas utilities undergo a biannual audit of their gas acquisition practices in connection with the gas cost recovery (GCR) mechanism. In the case of VEDO, a two-year audit period ended in November 2002. That audit period provided the PUCO staff its initial review of the portfolio administration arrangement between VEDO and ProLiance. The external auditor retained by the PUCO staff submitted an audit report in the fall of 2003 wherein it recommended a disallowance of approximately $7 million of previously recovered gas costs. The Company believes a large portion of the third party auditor recommendations is without merit. A hearing has been held, and the PUCO staff has recommended a $6.1 million disallowance. The Ohio Consumer Counselor has recommended an $11.5 million disallowance. For this PUCO audit period, any disallowance relating to the Company's ProLiance arrangement will be shared by the Company's joint venture partner. Based on a review of the matters, the Company has recorded $1.1 million for its estimated share of a potential disallowance. A PUCO decision on this matter is yet to be issued. The Company is also unable to determine the effects that a PUCO decision for the audit period ended in November 2002 may have on results in audit periods beginning after November 2002.
15. Derivatives & Other Financial Instruments
Accounting Policy for Derivatives
The Company executes derivative contracts in the normal course of operations
while buying and selling commodities to be used in operations, optimizing its
generation assets, and managing risk. The Company accounts for its derivative
contracts in accordance with SFAS 133, "Accounting for Derivatives" and its
related amendments and interpretations. In most cases, SFAS 133 requires a
derivative to be recorded on the balance sheet as an asset or liability measured
at its market value and that a change in the derivative's market value be
recognized currently in earnings unless specific hedge criteria are met.
When an energy contract that is a derivative is designated and documented as a normal purchase or normal sale, it is exempted from mark-to-market accounting. Otherwise, energy contracts and financial contracts that are derivatives are recorded at market value as current or noncurrent assets or liabilities depending on their value and on when the contracts are expected to be settled. The offset resulting from carrying the derivative at fair value on the balance sheet is charged to earnings unless it qualifies as a hedge or is subject to SFAS 71. When hedge accounting is appropriate, the Company assesses and documents hedging relationships between the derivative contract and underlying risks as well as its risk management objectives and anticipated effectiveness. When the hedging relationship is highly effective, derivatives are designated as hedges. The market value of the effective portion of the hedge is marked to market in accumulated other comprehensive income for cash flow hedges or as an adjustment to the underlying's basis for fair value hedges. The ineffective portion of hedging arrangements is marked-to-market through earnings. The offset to contracts affected by SFAS 71 are marked-to-market as a regulatory asset or liability. Market value for derivative contracts is determined using quoted market prices from independent sources. Following is a more detailed discussion of the Company's use of mark-to-market accounting in three primary areas: asset optimization, natural gas procurement, and interest rate management.
Asset Optimization
Periodically, generation capacity is in excess of that needed to serve native
load and firm wholesale customers. The Company markets this unutilized capacity
to optimize the return on its owned generation assets. Substantially all of the
margin from these activities is generated from contracts that are integrated
with portfolio requirements around power supply and delivery and are short-term
purchase and sale transactions that expose the Company to limited market risk.
Contracts with counter-parties subject to master netting arrangements are
presented net in the Consolidated Balance Sheets. Asset optimization contracts
are recorded at market value.
Asset optimization contracts recorded at market value at December 31, 2004, totaled $2.5 million of Prepayments & other current assets and $3.1 million of Accrued liabilities, compared to $2.4 million of Prepayments & other current assets and $2.8 million of Accrued liabilities at December 31, 2003.
The proceeds received and paid upon settlement of both purchase and sale contracts along with changes in market value of open contracts are recorded in Electric utility revenues. The change in market value is a function of the normal decline in market value as earnings are realized and the fluctuation in market value resulting from price volatility. Net revenues from asset optimization activities totaled $23.8 million in 2004, $26.5 million in 2003, and $23.3 million in 2002.
Natural Gas Procurement Activity
The Company's regulated operations have limited exposure to commodity price risk
for purchases and sales of natural gas and electricity for retail customers due
to current Indiana and Ohio regulations which, subject to compliance with those
regulations, allow for recovery of such purchases through natural gas and fuel
cost adjustment mechanisms. Although Vectren's regulated operations are exposed
to limited commodity price risk, volatile natural gas prices can result in
higher working capital requirements, increased expenses including unrecoverable
interest costs, uncollectible accounts expense, and unaccounted for gas, and
some level of price- sensitive reduction in volumes sold. The Company mitigates
these risks by executing derivative contracts that manage the price of
forecasted natural gas purchases. These contracts are subject to regulation
which allows for reasonable and prudent hedging costs to be recovered through
rates. When regulation is involved, SFAS 71 controls when the offset to
mark-to-market accounting is recognized in earnings.
The Company's wholly owned gas retail operations also mitigate price risk associated with forecasted natural gas purchases by using derivatives. Such contracts are ordinarily designated and documented as cash flow hedges. These nonregulated gas retail operations may also from time-to-time execute weather derivatives to mitigate extreme weather affecting unregulated gas retail sales. At December 31, 2004 and 2003, the market values of these contracts and the book value of weather contracts were not significant.
Interest Rate Management
The Company is exposed to interest rate risk associated with its borrowing
arrangements. Its risk management program seeks to reduce the potentially
adverse effects that market volatility may have on interest expense. The Company
has used interest rate swaps and treasury locks to hedge forecasted debt
issuances and other interest rate swaps to manage interest rate exposure.
Hedging instruments are recorded at market value. Changes in market value, when
effective, are recorded in Accumulated other comprehensive income for cash flow
hedges, as an adjustment to the outstanding debt balance for fair value hedges,
or as regulatory asset/liability when regulation is involved. Amounts are
recorded to interest expense as settled.
Interest rate swaps hedging the fair value of fixed-rate debt with a total notional amount of $55.5 million are outstanding. The fair value liability associated with those swaps was $0.5 million and $0.3 million, respectively, at December 31, 2004 and 2003. At December 31, 2004, approximately $5.5 million remains in Regulatory liabilities related to future interest payments. Of the existing regulatory liability, $0.6 million will be reclassified to earnings in 2005, $0.6 million was reclassified to earnings in 2004, and $0.3 million was reclassified to earnings during 2003.
Fair Value of Other Financial Instruments The carrying values and estimated fair values of the Company's other financial instruments follow:
At December 31,
------------------------------------------------------------------------------
2004 2003
----------------------- ------------------------
Carrying Est. Fair Carrying Est. Fair
(In millions) Amount Value Amount Value
--------------------------- ----------------------- ------------------------
Long-term debt $ 1,070.2 $ 1,146.2 $ 1,106.5 $ 1,184.8
Short-term borrowings &
notes payable 412.4 412.4 274.9 274.9
|
Certain methods and assumptions must be used to estimate the fair value of financial instruments. The fair value of the Company'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 the Company for instruments with similar characteristics. Because of the maturity dates and variable interest rates of short-term borrowings, its carrying amount approximates its fair value.
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. Accordingly, any reacquisition would not be expected to have a material effect on the Company's results of operations.
Periodically, the Company tests its cost method investments and notes receivable for impairment which may require their fair value to be estimated. Because of the customized nature of these investments and lack of a readily available market, it is not practicable to estimate the fair value of these financial instruments at specific dates without considerable effort and costs. At December 31, 2004, and 2003, fair value for these financial instruments was not estimated.
16. Segment Reporting
The Company segregates its operations into three groups: 1) Utility Group,
2) Nonregulated Group, and 3) Corporate and Other.
The Utility Group is comprised of Vectren Utility Holdings, Inc.'s operations, which consist of the Company's regulated operations and other operations that provide information technology and other support services to those regulated operations. The Company segregates its regulated operations into a Gas Utility Services operating segment and an Electric Utility Services operating segment. The Gas Utility Services segment provides natural gas distribution and transportation services to nearly two-thirds of Indiana and to west central Ohio. The Electric Utility Services segment provides electric distribution services primarily to southwestern Indiana, and includes the Company's power generating and marketing operations. The Company cross manages its regulated operations as separated between Energy Delivery, which includes the gas and electric transmission and distribution functions, and Power Supply, which includes the power generating and marketing operations. For these regulated operations the Company uses after tax operating income as a measure of profitability, consistent with regulatory reporting requirements. For the Utility Group's other operations, net income is used as the measure of profitability.
In total, there are three operating segments of the Utility Group as defined by SFAS 131 "Disclosure About Segments of an Enterprise and Related Information" (SFAS 131).
The Nonregulated Group is comprised of one operating segment as defined by SFAS 131 that includes various subsidiaries and affiliates offering and investing in energy marketing and services, coal mining, utility infrastructure services, and broadband communications, among other energy-related opportunities.
Corporate and Other includes unallocated corporate expenses such as branding and charitable contributions, among other activities, that benefit the Company's other operating segments. Net income is the measure of profitability used by management for both the Nonregulated Group and Corporate and Other. Information related to the Company's business segments is summarized below:
Year Ended December 31,
---------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------
Revenues
Utility Group
Gas Utility Services $ 1,126.2 $ 1,112.3 $ 908.0
Electric Utility Services 371.3 335.7 328.6
Other Operations 32.9 26.5 22.4
Eliminations (32.4) (25.7) (22.1)
---------------------------------------------------------------------------------------
Total Utility Group 1,498.0 1,448.8 1,236.9
---------------------------------------------------------------------------------------
Nonregulated Group 272.1 219.2 352.3
Corporate & Other - 1.0 1.0
Eliminations (80.3) (81.3) (66.4)
---------------------------------------------------------------------------------------
Consolidated Revenues $ 1,689.8 $ 1,587.7 $ 1,523.8
=======================================================================================
|
Year Ended December 31,
---------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------
Profitability Measure
Utility Group: Regulated Operating Income
(Operating Income Less Applicable Income Taxes)
Gas Utility Services $ 70.9 $ 74.9 $ 80.7
Electric Utility Services 65.6 63.8 73.2
---------------------------------------------------------------------------------------
Total Regulated Operating Income 136.5 138.7 153.9
---------------------------------------------------------------------------------------
Regulated other income - net 2.1 5.1 5.1
Regulated interest expense & preferred dividends (62.7) (62.0) (63.7)
---------------------------------------------------------------------------------------
Regulated Net Income 75.9 81.8 95.3
---------------------------------------------------------------------------------------
Other Operations Net Income 7.2 3.8 1.8
---------------------------------------------------------------------------------------
Utility Group Net Income 83.1 85.6 97.1
---------------------------------------------------------------------------------------
Nonregulated Group Net Income 26.4 27.6 19.0
Corporate & Other Net Loss (1.6) (2.0) (2.1)
---------------------------------------------------------------------------------------
Consolidated Net Income $ 107.9 $ 111.2 $ 114.0
=======================================================================================
Amounts Included in Profitability Measures
Depreciation & Amortization
Utility Group
Gas Utility Services $ 57.0 $ 61.1 $ 56.8
Electric Utility Services 53.3 42.6 40.0
Other Operations 17.5 14.2 13.9
---------------------------------------------------------------------------------------
Total Utility Group 127.8 117.9 110.7
---------------------------------------------------------------------------------------
Nonregulated Group 12.0 10.5 8.6
Corporate & Other 0.3 0.3 0.3
---------------------------------------------------------------------------------------
Consolidated Depreciation & Amortization $ 140.1 $ 128.7 $ 119.6
=======================================================================================
Interest Expense
Utility Group
Regulated Operations $ 62.7 $ 62.0 $ 63.7
Other Operations 4.7 4.1 5.4
---------------------------------------------------------------------------------------
Total Utility Group 67.4 66.1 69.1
---------------------------------------------------------------------------------------
Nonregulated Group 11.3 9.7 9.1
Corporate & Other (1.0) (0.2) 0.3
---------------------------------------------------------------------------------------
Consolidated Interest Expense $ 77.7 $ 75.6 78.5
=======================================================================================
Equity in Earnings of Unconsolidated
Affiliates
Utility Group: Other Operations $ 0.2 $ (0.5) $ (1.8)
Nonregulated Group 20.4 12.7 10.9
---------------------------------------------------------------------------------------
Consolidated Equity in Earnings
of Unconsolidated Affiliates $ 20.6 $ 12.2 $ 9.1
=======================================================================================
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Year Ended December 31,
---------------------------------------------------------------------------------------
(In millions) 2004 2003 2002
---------------------------------------------------------------------------------------
Income Taxes
Utility Group
Gas Utility Services $ 17.5 $ 19.5 $ 18.2
Electric Utility Services 30.8 29.8 27.5
Other Operations 4.8 2.3 1.1
---------------------------------------------------------------------------------------
Total Utility Group 53.1 51.6 46.8
---------------------------------------------------------------------------------------
Nonregulated Group (13.6) (13.2) (6.9)
Corporate & Other (0.5) (0.7) (1.0)
---------------------------------------------------------------------------------------
Consolidated Income Taxes $ 39.0 $ 37.7 $ 38.9
=======================================================================================
Capital Expenditures
Utility Group
Gas Utility Services $ 89.1 $ 95.0 $ 63.0
Electric Utility Services 150.6 124.1 88.8
Other Operations 27.9 15.9 65.5
---------------------------------------------------------------------------------------
Total Utility Group 267.6 235.0 217.3
---------------------------------------------------------------------------------------
Nonregulated Group 10.3 13.2 28.0
Corporate & Other 0.1 2.3 2.2
Transfers of Assets (0.1) (14.3) (28.8)
---------------------------------------------------------------------------------------
Consolidated Capital Expenditures $ 277.9 $ 236.2 $ 218.7
=======================================================================================
Investments in Equity Method Investees
Utility Group: Other Operations $ - $ - $ 0.3
Nonregulated Group 18.2 16.6 12.2
---------------------------------------------------------------------------------------
Consolidated Investments in Equity
Method Investees $ 18.2 $ 16.6 $ 12.5
=======================================================================================
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At December 31,
---------------------------------------------------------------------------
(In millions) 2004 2003
---------------------------------------------------------------------------
Assets
Utility Group
Gas Utility Services $ 1,892.8 $ 1,805.0
Electric Utility Services 1,090.1 974.6
Other Operations 175.0 162.4
Eliminations (10.2) (16.9)
---------------------------------------------------------------------------
Total Utility Group 3,147.7 2,925.1
---------------------------------------------------------------------------
Nonregulated Group 447.9 454.0
Corporate & Other 292.8 287.5
Eliminations (301.5) (313.2)
---------------------------------------------------------------------------
Consolidated Assets $ 3,586.9 $ 3,353.4
===========================================================================
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17. Additional Operational & Balance Sheet Information
Prepayments and other current assets in the Consolidated Balance Sheets consist of the following:
At December 31,
---------------------------------------------------------------------------
(In millions) 2004 2003
---------------------------------------------------------------------------
Prepaid gas delivery service $ 116.9 $ 97.7
Prepaid taxes 9.8 20.1
Other prepayments & current assets 14.6 13.3
---------------------------------------------------------------------------
Total prepayments & other current assets $ 141.3 $ 131.1
===========================================================================
Accrued liabilities in the Consolidated Balance Sheets consist of the following:
At December 31,
---------------------------------------------------------------------------
(In millions) 2004 2003
---------------------------------------------------------------------------
Accrued taxes $ 32.1 $ 33.2
Refunds to customers & customer deposits 31.0 24.5
Accrued interest 15.9 16.5
Refundable gas costs 6.3 -
Deferred income taxes 4.5 6.9
Accrued salaries & other 42.3 28.2
---------------------------------------------------------------------------
Total accrued liabilities $ 132.1 $ 109.3
===========================================================================
|
Other - net in the Consolidated Statements of Income consists of the following:
Year Ended December 31,
-------------------------------------------------------------------------------
(In millions) 2004 2003 2002
-------------------------------------------------------------------------------
AFUDC & capitalized interest $ 4.6 $ 5.9 $ 5.7
Interest income 3.0 3.2 4.7
Gains on sale of investments & assets 0.6 7.5 1.8
Leveraged lease investment income 1.5 1.9 1.1
Other income 1.0 3.2 2.7
Other expense (9.3) (8.7) (4.5)
-------------------------------------------------------------------------------
Total other - net $ 1.4 $ 13.0 $ 11.5
===============================================================================
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18. Quarterly Financial Data (Unaudited)
Information in any one quarterly period is not indicative of annual results due to the seasonal variations common to the Company's utility operations. Summarized quarterly financial data for 2004 and 2003 follows:
-------------------------------------------------------------------------------
(In millions, except per share amounts) Q1 Q2 Q3 Q4
-------------------------------------------------------------------------------
2004
Operating revenues $ 645.3 $ 276.7 $ 254.4 $ 513.4
Operating income 88.6 20.4 23.8 69.9
Net income 54.8 3.3 9.7 40.1
Earnings per share:
Basic $ 0.73 $ 0.04 $ 0.13 $ 0.53
Diluted 0.72 0.04 0.13 0.53
-------------------------------------------------------------------------------
2003
Operating revenues $ 626.7 $ 268.4 $ 240.3 $ 452.3
Operating income 94.7 17.5 18.2 69.0
Net income 55.7 4.1 7.3 44.1
Earnings per share:
Basic $ 0.82 $ 0.06 $ 0.10 $ 0.59
Diluted 0.82 0.06 0.10 0.58
|
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Changes in Internal Controls over Financial Reporting During the quarter ended December 31, 2004, there have been no changes to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures As of December 31, 2004, the Company conducted an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness and the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective at providing reasonable assurance that material information relating to the Company required to be disclosed by the Company in its filings under the Securities Exchange Act of 1934 (Exchange Act) is brought to their attention on a timely basis.
Management's Report on Internal Control over Financial Reporting Vectren Corporation's management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation under the framework in Internal Control -- Integrated Framework, the Company concluded that its internal control over financial reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in Item 8 of this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Part III, Item 10 of this Form 10-K is incorporated
by reference herein, and made part of this Form 10-K, from the Company's
definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A, within 120 days after the end of the fiscal year. The Company's executive
officers are the same as those named executive officers detailed in the Proxy
Statement
The Company's Corporate Governance Guidelines, its charters for each of its Audit, Compensation and Nominating and Corporate Governance Committees, and its Code of Ethics covering the Company's directors, officers and employees are available on the Company's website, www.vectren.com, and a copy will be mailed upon request to Investor Relations, Attention: Steve Schein, 20 N.W. Fourth Street, Evansville, Indiana 47708. The Company intends to disclose any amendments to the Code of Ethics or waivers of the Code of Ethics on behalf of the Company's directors or officers including, but not limited to, the principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions on the Company's website at the internet address set forth above promptly following the date of such amendment or waiver and such information will also be available by mail upon request to Investor Relations, Attention: Steve Schein, 20 N.W. Fourth Street, Evansville, Indiana 47708.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Part III, Item 11 of this Form 10-K is incorporated by reference herein, and made part of this Form 10-K, from the Company's definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except with respect to equity compensation plan information of the Registrant, which is included herein, the information required by Part III, Item 12 of this Form 10-K is incorporated by reference herein, and made part of this Form 10-K, from the Company's definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, within 120 days after the end of the fiscal year.
Shares Issuable under Share-Based Compensation Plans
As of December 31, 2004, the following shares were authorized to be issued under share-based compensation plans:
-----------------------------------------------------------------------------------------------
A B C
Number of Weighted Number of securities
securities to be average exercise remaining available for
issued upon price of future issuance under
exercise of outstanding equity compensation
outstanding options, plans (excluding
options, warrants warrants and securities reflected
Plan category and rights rights in column (a)
----------------------------------- ----------------- -------------- -----------------------
Equity compensation plans approved
by security holders (1) 2,211,853 (2) $ 23.10 2,515,241 (3)
Equity compensation plans not
approved by security holders - - -
-----------------------------------------------------------------------------------------------
Total 2,211,853 $ 23.10 2,515,241
===============================================================================================
|
(1) Includes the following Vectren Corporation Plans: Vectren Corporation
At-Risk Compensation Plan, 1994 SIGCORP Stock Option Plan, Vectren
Corporation Executive Restricted Stock Plan, and Vectren Corporation
Directors Restricted Stock Plan.
(2) Includes a stock option grant of 286,400 options approved by the board of
directors' Compensation Committee, effective January 1, 2005.
(3) Includes shares available for issuance under the Vectren Corporation
At-Risk Compensation Plan (1,769,221), of which up to 800,000 shares may be
issued in restricted stock, 1994 SIGCORP Stock Option Plan (387,503),
Vectren Corporation Executive Restricted Stock Plan (310,288), and Vectren
Corporation Directors Restricted Stock Plan (48,229). Shares available for
issuance under the At Risk Plan have been reduced by the issuance of
138,900 restricted shares approved by the board of directors' Compensation
Committee, effective January 1, 2004.
The SIGCORP stock option plan was approved by SIGCORP common shareholders prior to the merger forming Vectren, and both the directors and executive restricted stock plans were approved by Indiana Energy common shareholders prior to the merger forming Vectren. The At-Risk Compensation plan was approved by Vectren Corporation common shareholders after the merger forming Vectren.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Part III, Item 13 of this Form 10-K is incorporated by reference herein, and made part of this Form 10-K, from the Company's definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, within 120 days after the end of the fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Part III, Item 14 of this Form 10-K is incorporated by reference herein, and made part of this Form 10-K, from the Company's definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A, within 120 days after the end of the fiscal year.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
List Of Documents Filed As Part Of This Report
Consolidated Financial Statements
The consolidated financial statements and related notes, together with the report of Deloitte & Touche LLP, appear in Part II "Item 8 Financial Statements and Supplementary Data" of this Form 10-K.
Supplemental Schedules
For the years ended December 31, 2004, 2003, and 2002, the Company's Schedule II -- Valuation and Qualifying Accounts Consolidated Financial Statement Schedules is presented herein. The report of Deloitte & Touche LLP on the schedule may be found in Item 8. All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes in Item 8.
SCHEDULE II
Vectren Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
---------------------------------------------------------------------------------------------------
Additions
--------------------
Balance at Charged Charged Deductions Balance at
Beginning to to Other from End of
Description Of Year Expenses Accounts Reserves, Net Year
----------------------------------------------------------------------------------------------------
(In millions)
VALUATION AND QUALIFYING ACCOUNTS:
Year 2004 - Accumulated provision for
uncollectible accounts $ 3.2 $ 11.9 $ - $ 13.1 $ 2.0
Year 2003 - Accumulated provision for
uncollectible accounts $ 5.5 $ 12.8 $ - $ 15.1 $ 3.2
Year 2002 - Accumulated provision for
uncollectible accounts $ 5.3 $ 11.7 $ - $ 11.5 $ 5.5
OTHER RESERVES:
Year 2004 - Restructuring costs $ 3.2 $ - $ - $ 0.5 $ 2.7
Year 2003 - Restructuring costs $ 4.2 $ - $ - $ 1.0 $ 3.2
Year 2002 - Restructuring costs $ 5.1 $ - $ - $ 0.9 $ 4.2
Year 2002 - Merger & integration costs $ 0.4 $ - $ - $ 0.4 $ -
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List of Exhibits
The Company has incorporated by reference herein certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act. Exhibits for the Company attached to this filing filed electronically with the SEC are listed below. Exhibits for the Company are listed in the Index to Exhibits beginning on page 80.
Vectren Corporation Form 10-K Attached Exhibits
The following Exhibits were filed electronically with the SEC with this filing.
Exhibit
Number Document
------- --------
4.1 Southern Indiana Gas and Electric Company with Deutsche Bank Trust
Company, as Trustee. Supplemental Indenture related to the First
Mortgage Bonds Series B 1993 due 2023, dated August 1, 2004
4.2 Southern Indiana Gas and Electric Company with Deutsche Bank Trust
Company, as Trustee. Supplemental Indenture related to the First
Mortgage Bonds Series A 1985 due 2015, dated October 1, 2004
21.1 List of Company's Significant Subsidiaries
23.1 Consent of Registered Public Accounting Firm
31.1 Chief Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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INDEX TO EXHIBITS
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
2.1 Asset Purchase Agreement dated December 14, 1999 between Indiana Energy,
Inc. and The Dayton Power and Light Company and Number-3CHK with a
commitment letter for a 364-Day Credit Facility dated December 16,1999.
(Filed and designated in Current Report on Form 8-K dated December 28,
1999, File No. 1-9091, as Exhibit 2 and 99.1)
3. Articles of Incorporation and By-Laws
3.1 Amended and Restated Articles of Incorporation of Vectren Corporation
effective March 31, 2000. (Filed and designated in Current Report on
Form 8-K filed April 14, 2000, File No. 1-15467, as Exhibit 4.1.)
3.2 Amended and Restated Code of By-Laws of Vectren Corporation as of
October 29, 2003. (Filed and designated in Quarterly Report on Form 10-Q
filed November 13, 2003, File No. 1-15467, as Exhibit 3.1.)
3.3 Shareholders Rights Agreement dated as of October 21, 1999 between
Vectren Corporation and Equiserve Trust Company, N.A., as Rights Agent.
(Filed and designated in Form S-4 (No. 333-90763),filed November 12,
1999, File No. 1-15467, as Exhibit 4.)
4. Instruments Defining the Rights Of Security Holders, Including Indentures
4.1 Mortgage and Deed of Trust dated as of April 1, 1932 between
Southern Indiana Gas and Electric Company and Bankers Trust Company, as
Trustee, and Supplemental Indentures thereto dated August 31, 1936,
October 1, 1937, March 22, 1939, July 1, 1948, June 1, 1949, October 1,
1949, January 1, 1951, April 1, 1954, March 1, 1957, October 1, 1965,
September 1, 1966, August 1, 1968, May 1, 1970, August 1, 1971, April 1,
1972, October 1, 1973, April 1, 1975, January 15, 1977, April 1, 1978,
June 4, 1981, January 20, 1983, November 1, 1983, March 1, 1984, June 1,
1984, November 1, 1984, July 1, 1985, November 1, 1985, June 1, 1986.
(Filed and designated in Registration No. 2-2536 as Exhibits B-1 and
B-2; in Post-effective Amendment No. 1 to Registration No. 2-62032 as
Exhibit (b)(4)(ii), in Registration No. 2-88923 as Exhibit 4(b)(2), in
Form 8-K, File No. 1-3553, dated June 1, 1984 as Exhibit (4), File No.
1-3553, dated March 24, 1986 as Exhibit 4-A, in Form 8-K, File No.
1-3553, dated June 3, 1986 as Exhibit (4).) July 1, 1985 and
November 1, 1985 (Filed and designated in Form 10-K, for the fiscal year
1985, File No. 1-3553, as Exhibit 4-A.) November 15, 1986 and
January 15, 1987. (Filed and designated in Form 10-K, for the fiscal
year 1986, File No. 1-3553, as Exhibit 4-A.) December 15, 1987. (Filed
and designated in Form 10-K, for the fiscal year 1987, File No. 1-3553,
as Exhibit 4-A.) December 13, 1990. (Filed and designated in Form
10-K, for the fiscal year 1990, File No. 1-3553, as Exhibit 4-A.)
April 1, 1993. (Filed and designated in Form 8-K, dated April 13, 1993,
File No. 1-3553, as Exhibit 4.) June 1, 1993 (Filed and designated in
Form 8-K, dated June 14, 1993, File No. 1-3553, as Exhibit 4.) May 1,
1993. (Filed and designated in Form 10-K, for the fiscal year 1993,
File No. 1-3553, as Exhibit 4(a).) July 1, 1999. (Filed and designated
in Form 10-Q, dated August 16, 1999, File No. 1-3553, as Exhibit 4(a).)
March 1, 2000. (Filed and designated in Form 10-K for the year ended
December 31, 2001, File No. 1-15467, as Exhibit 4.1.) August 1, 2004.
(Filed Herewith.) October 1, 2004. (Filed Herewith.)
4.2 Indenture dated February 1, 1991, between Indiana Gas and U.S. Bank
Trust National Association (formerly know as First Trust National
Association, which was formerly know as Bank of America Illinois, which
was formerly know as Continental Bank, National Association. Inc.'s.
(Filed and designated in Current Report on Form 8-K filed February 15,
1991, File No. 1-6494.); First Supplemental Indenture thereto dated as
of February 15, 1991. (Filed and designated in Current Report on Form
8-K filed February 15, 1991, File No. 1-6494, as Exhibit 4(b).); Second
Supplemental Indenture thereto dated as of September 15, 1991, (Filed
and designated in Current Report on Form 8-K filed September 25, 1991,
File No. 1-6494, as Exhibit 4(b).); Third supplemental Indenture thereto
dated as of September 15, 1991 (Filed and designated in Current Report
on Form 8-K filed September 25, 1991, File No. 1-6494, as Exhibit
4(c).); Fourth Supplemental Indenture thereto dated as of December 2,
1992, (Filed and designated in Current Report on Form 8-K filed December
8, 1992, File No. 1-6494, as Exhibit 4(b).); Fifth Supplemental
Indenture thereto dated as of December 28, 2000, (Filed and designated
in Current Report on Form 8-K filed December 27, 2000, File No. 1-6494,
as Exhibit 4.)
4.3 Indenture dated October 19, 2001, among Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed and designated in Form 8-K, dated October 19, 2001, File No. 1-16739, as Exhibit 4.1); First Supplemental Indenture, dated October 19, 2001, between Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed and designated in Form 8-K, dated October 19, 2001, File No. 1-16739, as Exhibit 4.2); Second Supplemental Indenture, among Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed and designated in Form 8-K, dated November 29, 2001, File No. 1-16739, as Exhibit 4.1); Third Supplemental Indenture, among Vectren Utility Holdings, Inc., Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Vectren Energy Delivery of Ohio, Inc., and U.S. Bank Trust National Association. (Filed and designated in Form 8-K, dated July 24, 2003, File No. 1-16739, as Exhibit 4.1).
10. Material Contracts
10.1 Summary description of Southern Indiana Gas and Electric Company's
nonqualified Supplemental Retirement Plan (Filed and designated in Form
10-K for the fiscal year 1992, File No. 1-3553, as Exhibit 10-A-17.)
First Amendment, effective April 16, 1997 (Filed and designated in Form
10-K for the fiscal year 1997, File No. 1-3553, as Exhibit 10.29.).
10.2 Southern Indiana Gas and Electric Company 1994 Stock Option Plan (Filed
and designated in Southern Indiana Gas and Electric Company's Proxy
Statement dated February 22, 1994, File No. 1-3553, as Exhibit A.)
10.3 Indiana Energy, Inc. Unfunded Supplemental Retirement Plan for a
Select Group of Management Employees as amended and restated effective
December 1, 1998. (Filed and designated in Form 10-Q for the quarterly
period ended December 31, 1998, File No. 1-9091, as Exhibit 10-G.)
10.4 Indiana Energy, Inc. Nonqualified Deferred Compensation Plan
effective January 1, 1999. (Filed and designated in Form 10-Q for the
quarterly period ended December 31, 1998, File No. 1-9091, as Exhibit
10-H.)
10.5 Indiana Energy, Inc. Executive Restricted Stock Plan as amended and
restated effective October 1, 1998. (Filed and designated in Form 10-K
for the fiscal year ended September 30, 1998, File No. 1-9091, as
Exhibit 10-O.) First Amendment, effective December 1, 1998 (Filed and
designated in Form 10-Q for the quarterly period ended December 31,
1998, File No. 1-9091, as Exhibit 10-I.).
10.6 Indiana Energy, Inc. Director's Restricted Stock Plan as amended and
restated effective May 1, 1997. (Filed and designated in Form 10-Q for
the quarterly period ended June 30, 1997, File No. 1-9091, as Exhibit
10-B.) First Amendment, effective December 1, 1998. (Filed and
designated in Form 10-Q for the quarterly period ended December 31,
1998, File No. 1-9091, as Exhibit 10-J.) Second Amendment, Plan renamed
the Vectren Corporation Directors Restricted Stock Plan effective
October 1, 2000. (Filed and designated in Form 10-K for the year ended
December 31, 2000, File No. 1-15467, as Exhibit 10-34.) Third Amendment,
effective March 28, 2001. (Filed and designated in Form 10-K for the
year ended December 31, 2000, File No. 1-15467, as Exhibit 10-35.)
10.7 Vectren Corporation At Risk Compensation Plan effective May 1, 2001.
(Filed and designated in Vectren Corporation's Proxy Statement dated
March 16, 2001, File No. 1-15467, as Appendix B.)
10.8 Vectren Corporation Non-Qualified Deferred Compensation Plan, as amended
and restated effective January 1, 2001. (Filed and designated in Form
10-K, for the year ended December 31, 2001, File No. 1-15467, as Exhibit
10.32.)
10.9 Vectren Corporation Employment Agreement between Vectren Corporation
and Niel C. Ellerbrook dated as of March 31, 2000. (Filed and
designated in Form 10-Q for the quarterly period ended June 30, 2000,
File No. 1-15467, as Exhibit 99.1.)
10.10 Vectren Corporation Employment Agreement between Vectren Corporation
and Jerome A. Benkert, Jr. dated as of March 31, 2000. (Filed and
designated in Form 10-Q for the quarterly period ended June 30, 2000,
File No. 1-15467, as Exhibit 99.3.)
10.11 Vectren Corporation Employment Agreement between Vectren Corporation
and Carl L. Chapman dated as of March 31, 2000. (Filed and designated
in Form 10-Q for the quarterly period ended June 30, 2000, File No.
1-15467, as Exhibit 99.4.)
10.12 Vectren Corporation Employment Agreement between Vectren Corporation
and Ronald E. Christian dated as of March 31, 2000. (Filed and
designated in Form 10-Q for the quarterly period ended June 30, 2000,
File No. 1-15467, as Exhibit 99.5.)
10.13 Vectren Corporation Employment Agreement between Vectren Corporation
and Richard G. Lynch dated as of March 31, 2000. (Filed and designated
in Form 10-Q for the quarterly period ended June 30, 2000, File No.
1-15467, as Exhibit 99.8.)
10.14 Vectren Corporation Employment Agreement between Vectren Corporation
and William S. Doty dated as of April 30, 2001. (Filed and designated
in Form 10-K, for the year ended December 31, 2001, File No. 1-15467,
as Exhibit 10.43.)
10.15 Vectren Corporation At Risk Compensation Plan specimen Restricted
Stock Grant Agreement for officers, effective January 1, 2005. (Filed
and designated in Form 8-K, dated January 1, 2005, File No. 1-15467, as
Exhibit 99-1.)
10.16 Vectren Corporation At Risk Compensation Plan specimen Stock Option
Grant Agreement for officers, effective January 1, 2005. (Filed and
designated in Form 8-K, dated January 1, 2005, File No. 1-15467, as
Exhibit 99-2.)
10.17 Vectren Corporation specimen employment agreement dated February 1,
2005. (Filed and designated in Form 8-K, dated February 1, 2005, File
No. 1-15467, as Exhibit 99-1.)
10.18 Gas Sales and Portfolio Administration Agreement between Indiana Gas
Company, Inc. and ProLiance Energy, LLC, effective August 30, 2003.
(Filed and designated in Form 10-K, for the year ended December 31,
2003, File No. 1-15467, as Exhibit 10.15.)
10.19 Gas Sales and Portfolio Administration Agreement between Southern
Indiana Gas and Electric Company and ProLiance Energy, LLC, effective
September 1, 2002. (Filed and designated in Form 10-K, for the year
ended December 31, 2003, File No. 1-15467, as Exhibit 10.16.)
10.20 Gas Sales and Portfolio Administration Agreement between Vectren Energy
Delivery of Ohio and ProLiance Energy, LLC, effective October 31, 2000.
(Filed and designated in Form 10-K, for the year ended December 31,
2001, File No. 1-15467, as Exhibit 10-24.)
10.21 Coal Supply Agreement for F.B. Culley Generating Station between
Southern Indiana Gas and Electric Company and Vectren Fuels, Inc., dated
December 17, 1997 and effective January 1, 1998. (Filed and designated
in Form 10-K, for the year ended December 31, 2003, File No. 1-15467, as
Exhibit 10.18.) Portions of the document have been omitted pursuant to a
request to a request for confidential treatment.
10.22 Amendment 1, effective January 1, 2003, to Coal Supply Agreement between
Southern Indiana Gas and Electric Company and Vectren Fuels, Inc
originally dated December 17, 1997. (Filed and designated in Form 10-K,
for the year ended December 31, 2003, File No. 1-15467, as Exhibit
10.19.)
10.23 Coal Supply Agreement for Generating Stations at Yankeetown, Warrick
County, Indiana, and West Franklin, Posey County, Indiana between
Southern Indiana Gas and Electric Company and Vectren Fuels, Inc., dated
January 19, 2000. (Filed and designated in Form 10-K, for the year ended
December 31, 2003, File No. 1-15467, as Exhibit 10.20.)
10.24 Amendment 1, effective January 1, 2004, to Coal Supply Agreement between
Southern Indiana Gas and Electric Company and Vectren Fuels, Inc
originally dated January 19, 2000. (Filed and designated in Form 10-K,
for the year ended December 31, 2003, File No. 1-15467, as Exhibit
10.21.)
10.25 Coal Supply Agreement for Warrick Generating Station between Southern
Indiana Gas and Electric Company and Vectren Fuels, Inc. dated October
1, 2003. (Filed and designated in Form 10-K, for the year ended
December 31, 2003, File No. 1-15467, as Exhibit 10.22.)
10.26 Coal Supply Agreement for Warrick Generating Station between Southern
Indiana Gas and Electric Company and Vectren Fuels, Inc. dated January
1, 2004. (Filed and designated in Form 10-K, for the year ended December
31, 2003, File No. 1-15467, as Exhibit 10.23.)
10.27 Formation Agreement among Indiana Energy, Inc., Indiana Gas Company,
Inc., IGC Energy, Inc., Indiana Energy Services, Inc., Citizens Gas &
Coke Utility, Citizens Energy Services Corporation and ProLiance Energy,
LLC, effective March 15, 1996. (Filed and designated in Form 10-Q for
the quarterly period ended March 31, 1996, File No. 1-9091, as Exhibit
10-C.)
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21. Subsidiaries of the Company The list of the Company's significant subsidiaries is attached hereto as Exhibit 21.1.
23. Consents of Experts and Counsel The consent of Deloitte & Touche LLP is attached hereto as Exhibit 23.1.
31. Certification Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 Chief Executive Officer Certification Pursuant to Section 302 Of The Sarbanes- Oxley Act Of 2002 is attached hereto as Exhibit 31.1
Chief Financial Officer Certification Pursuant to Section 302 Of The Sarbanes- Oxley Act Of 2002 is attached hereto as Exhibit 31.2
32. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002 is attached hereto as Exhibit 32.1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VECTREN CORPORATION
Dated February 23, 2005
/s/ Niel C. Ellerbrook ----------------------------- Niel C. Ellerbrook, Chairman, President, Chief Executive Officer, and Director |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in capacities and on the dates indicated.
Signature Title Date
Chairman, President, Chief
/s/ Niel C. Ellerbrook Executive Officer, & February 23, 2005
---------------------------- Director (Principal Executive -------------------
Niel C. Ellerbrook Officer)
/s/ Jerome A. Benkert, Jr. Executive Vice President & February 23, 2005
---------------------------- Chief Financial Officer -------------------
Jerome A. Benkert, Jr. (Principal Financial Officer)
/s/ M. Susan Hardwick Vice President & Controller February 23, 2005
---------------------------- (Principal Accounting Officer) -------------------
M. Susan Hardwick
/s/ John M. Dunn Director February 23, 2005
---------------------------- -------------------
John M. Dunn
/s/ John D. Engelbrecht Director February 23, 2005
---------------------------- -------------------
John D. Engelbrecht
/s/ Anton H. George Director February 23, 2005
---------------------------- -------------------
Anton H. George
/s/ Robert L. Koch II Director February 23, 2005
---------------------------- -------------------
Robert L. Koch II
/s/ William G. Mays Director February 23, 2005
---------------------------- -------------------
William G. Mays
/s/ J. Timothy McGinley Director February 23, 2005
---------------------------- -------------------
J. Timothy McGinley
/s/ Richard P. Rechter Director February 23, 2005
---------------------------- -------------------
Richard P. Rechter
/s/ Ronald G. Reherman Director February 23, 2005
---------------------------- -------------------
Ronald G. Reherman
/s/ R. Daniel Sadlier Director February 23, 2005
---------------------------- -------------------
R. Daniel Sadlier
/s/ Richard W. Shymanski Director February 23, 2005
---------------------------- -------------------
Richard W. Shymanski
/s/ Jean L.Wojtowicz Director February 23, 2005
---------------------------- -------------------
Jean L.Wojtowicz
|
Exhibit 4.1
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
WITH
DEUTSCHE BANK TRUST COMPANY AMERICAS,
as Trustee
SUPPLEMENTAL INDENTURE
Relating to the
FIRST MORTGAGE BONDS
Series B 1993 due 2023
Dated as of August 1, 2004
SUPPLEMENTAL INDENTURE, dated as of August 1, 2004, between SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Indiana (hereinafter called the "Company"), party of the first part, and DEUTSCHE BANK TRUST COMPANY AMERICAS, a corporation organized and existing under the laws of the State of New York, formerly known as BANKERS TRUST COMPANY, as Trustee under the Mortgage hereinafter referred to, party of the second part.
WHEREAS, the Company heretofore executed and delivered to Deutsche Bank Trust Company Americas, formerly known as Bankers Trust Company, as Trustee (hereinafter called the "Trustee"), a certain Indenture of Mortgage and Deed of Trust dated as of April 1, 1932, to secure an issue of bonds of the Company, issued and to be issued in series, from time to time, in the manner and subject to the conditions set forth in the said Indenture, and the said Indenture has been amended and supplemented by Supplemental Indentures dated as of August 31, 1936, October 1, 1937, March 22, 1939, July 1, 1948, June 1, 1949, October 1, 1949, January 1, 1951, April 1, 1954, March 1, 1957, October 1, 1965, September 1, 1966, August 1, 1968, May 1, 1970, August 1, 1971, April 1, 1972, October 1, 1973, April 1, 1975, January 15, 1977, April 1, 1978, June 4, 1981, January 20, 1983, November 1, 1983, March 1, 1984, June 1, 1984, November 1, 1984, July 1, 1985, November 1, 1985, June 1, 1986, November 15, 1986, January 15, 1987, December 15, 1987, December 13, 1990, April 1, 1993, May 1, 1993, June 1, 1993, July 1, 1999 and March 1, 2000, which Indenture as so amended and supplemented is hereinafter referred to as the "Mortgage" and as further supplemented by this Supplemental Indenture is hereinafter referred to as the "Indenture"; and
WHEREAS, the Mortgage provides that the Company and the Trustee may, from time to time, enter into such indentures supplemental to the Mortgage as shall be deemed by them necessary or desirable, to amend the Mortgage or any supplemental indenture in accordance with Section 108 of the Mortgage; and
WHEREAS, the Company entered into a Loan Agreement dated as of May 1, 1993, as amended by the First Amendment to Loan Agreement dated as of April 1, 1999 (the "Original Loan Agreement") with Warrick County, Indiana (the "County") pursuant to which the County issued $22,800,000 aggregate principal amount of its Adjustable Rate Environmental Improvement Bonds (Southern Indiana Gas and Electric Company Project) 1993 Series B of which $22,550,000 principal amount is currently outstanding (the "County Bonds") pursuant to the Indenture of Trust dated as of May 1, 1993 (the "Original County Indenture"), between the County and The Bank of New York Trust Company, N.A., as successor to The Citizens National Bank of Evansville as trustee (the "County Trustee") in order to provide funds to loan to the Company for the purpose of financing a portion of the costs of acquiring, constructing and equipping certain solid waste disposal facilities, and pursuant to such Original Loan Agreement the Company agreed to issue a series of its bonds under the Original County Indenture in order to evidence and secure certain of its indebtedness under the Original Loan Agreement; and
WHEREAS, the Company and the Trustee entered into the Supplemental Indenture dated as of May 1, 1993 (the "May 1993 Supplemental Indenture") for such purposes; and
WHEREAS, the Company by appropriate corporate action in conformity with the terms of the Mortgage and pursuant to the May 1993 Supplemental Indenture created a series of bonds which were issued under the Mortgage in an original aggregate principal amount of $22,800,000 (of which $22,550,000 principal amount is currently outstanding) and designated as "First Mortgage Bonds, Series B 1993 due 2023" (hereinafter sometimes referred to as "Bonds of the Thirty-sixth Series"), which bear interest at the rate per annum set forth in, are subject to certain optional and mandatory redemption rights and obligations set forth in, and are otherwise in the form and have the terms and provisions provided for in the May 1993 Supplemental Indenture and set forth in the form of such bonds in the May 1993 Supplemental Indenture; and
WHEREAS, the Company has determined that it would be in its best
interests to (i) add additional methods of determining the interest rate on the
County Bonds, (ii) secure the County Bonds with a financial guaranty insurance
policy (the "Bond Insurance Policy") issued by Ambac Assurance Corporation and
(iii) amend certain provisions of the May 1993 Supplemental Indenture and the
Bonds of the Thirty-sixth Series to allow for the release of such bonds in
certain circumstances; and
WHEREAS, in connection with the foregoing, it is necessary for the County to amend the Original County Indenture and the Original Loan Agreement and for the Company to amend the May 1993 Supplemental Indenture and the Bonds of the Thirty-sixth Series in order to (i) conform to the changes made to the interest rate provisions of the Original County Indenture and (ii) permit the Bonds of the Thirty-sixth Series to cease to secure the Company's obligation under the Loan Agreement (as hereinafter defined) when substantially all of the Company's first mortgage bonds are no longer outstanding, except for the Bonds of the Thirty-sixth Series and any other first mortgage bonds subject to substantially similar release provisions; and
WHEREAS, the Company and the Trustee deem it necessary or desirable to enter into this Supplemental Indenture for such purposes; and
WHEREAS, the execution and delivery of this Supplemental Indenture are authorized by Section 108 of the Mortgage and have been consented to by the registered owner of all of the Bonds of the Thirty-sixth Series;
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That Southern Indiana Gas and Electric Company, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and of the purchase and acceptance of the bonds issued or to be issued hereunder by the holders or registered owners thereof, and in order to secure the payment of the principal, premium, if any, and interest of all bonds at any time issued and outstanding under the Indenture, according to their tenor and effect, and the performance of all of the provisions hereof and of said bonds, hath granted, bargained, sold, released, conveyed, assigned, transferred, pledged, set over and confirmed and by these presents doth grant, bargain, sell, release, convey, assign, transfer, pledge, set over and confirm unto Deutsche Bank Trust Company Americas, formerly known as Bankers Trust Company, as Trustee, and to its successor or successors in said trust, and to its and their assigns forever, all the properties of the Company located in the State of Indiana described in Schedule A (which is identified by the signature of an officer of each party hereto at the end thereof) hereto annexed and hereby made a part hereof and does hereby confirm that the Company will not cause or consent to a partition, either voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common, except as permitted by and in conformity with the provisions of the Indenture and particularly of Article X thereof.
And all other property, real, personal and mixed, tangible and intangible of the character described in the granting clauses of the aforesaid Indenture of Mortgage and Deed of Trust dated as of April 1, 1933 or in any indenture supplemental thereto acquired by the Company on or after the date of the execution and delivery of said Indenture of Mortgage and Deed of Trust (except any in said Indenture of Mortgage and Deed of Trust or in any indenture supplemental thereto expressly excepted).
TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Article X of the Indenture), the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title, interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof.
TO HAVE AND TO HOLD all such properties, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever.
IN TRUST, NEVERTHELESS, upon the terms and trusts of the Indenture, for those who shall hold the bonds and coupons issued and to be issued thereunder, or any of them, without preference, priority or distinction as to lien of any of said bonds and coupons over any others thereof by reason of priority in the time of the issue or negotiation thereof, or otherwise howsoever, subject, however, to the provisions in reference to extended, transferred or pledged coupons and claims for interest set forth in the Indenture (and subject to any sinking funds that may be created for the benefit of any particular series).
PROVIDED, HOWEVER, and these presents are upon the condition that, if the Company, its successors or assigns, shall pay or cause to be paid, the principal of, premium, if any, and interest on said bonds, at the times and in the manner stipulated therein and herein, and shall keep, perform and observe all and singular the covenants and promises in said bonds and in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then this Supplemental Indenture and the estate and rights hereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect.
IT IS HEREBY COVENANTED, DECLARED AND AGREED, by the Company, that all such bonds and coupons are to be issued, authenticated and delivered, and that all property subject or to become subject hereto is to be held, subject to the further covenants, conditions, uses and trusts in the Indenture set forth, and the Company, for itself and its successors and assigns, does hereby covenant and agree to and with the Trustee and its successor or successors in such trust, for the benefit of those who shall hold said bonds and interest coupons, or any of them, as follows:
PART I
DEFINITIONS
All words and terms defined in Part I of the Supplemental Indenture dated as of May 1, 1993 shall have the same meanings in this Supplemental Indenture, except that the definitions of "County Indenture" and "Loan Agreement" are amended in their entirety to read as follows. In addition, certain words and terms are defined in the preamble of this Supplemental Indenture.
COUNTY INDENTURE:
The term "County Indenture," when used in connection with the Bonds of the Thirty-sixth Series, shall mean the Amended and Restated Indenture of Trust, dated as of August 1, 2004, by and between Warrick County, Indiana and The Bank of New York Trust Company, N.A., as successor to The Citizens National Bank of Evansville, as Trustee, and any indenture supplemental thereto or amendatory thereof, pursuant to which the Adjustable Rate Environmental Improvement Revenue Bonds (Southern Indiana Gas and Electric Company Project) 1993 Series B are issued and secured.
LOAN AGREEMENT:
The term "Loan Agreement," when used in connection with the Bonds of the Thirty-sixth Series, shall mean the Loan Agreement dated as of May 1, 1993, as supplemented and amended by the First Amendment to Loan Agreement, dated as of April 1, 1999, and the Second Amendment to Loan Agreement dated as of August 1, 2004 between Warrick County, Indiana, and the Company, relating to the Adjustable Rate Environmental Improvement Revenue Bonds (Southern Indiana Gas and Electric Company Project) 1993 Series B, and any and all modifications, amendments and supplements thereof.
PART II
The form of the definitive registered bonds without coupons of the Bonds of the Thirty-sixth Series and the Trustee's certificate of authentication to be borne by such bonds included in the preamble to the May 1993 Supplemental Indenture are hereby amended in their entirety such that the form of the definitive registered bonds without coupons of the Bonds of the Thirty-sixth Series and the Trustee's certificate of authentication to be borne by such bonds are to be substantially in the following forms, respectively:
"[FORM OF FULLY REGISTERED BOND OF THE THIRTY-SIXTH SERIES]
[FORM OF FACE OF BOND]
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
FIRST MORTGAGE BOND, SERIES B 1993 DUE 2023
No. _________ $____________
Southern Indiana Gas and Electric Company, a corporation of the State of Indiana (hereinafter called the "Company"), for value received, hereby promises to pay to___________________ ______________________________________________________ or registered assigns ____________________________________ dollars, on May 1, 2023, subject to prior redemption, at the office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y., in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered owner hereof interest thereon at the same rate or rates of interest as the Adjustable Rate Environmental Improvement Revenue Bonds (Southern Indiana Gas and Electric Company Project) 1993 Series B (the "Warrick County Bonds") issued by Warrick County, Indiana (the "County") under the Indenture of Trust, dated as of May 1, 1993, as amended and restated by the Amended and Restated Indenture of Trust dated as of August 1, 2004, and any indenture supplemental thereto or amendatory thereof (the "County Indenture"), between the County and The Bank of New York Trust Company, N.A., as successor to The Citizens National Bank of Evansville, as trustee (the "County Trustee") (as determined in accordance with the County Indenture); provided, however, that in no event shall the rate of interest borne by the bonds of this series exceed 10% per annum. Such interest, in like coin or currency, payable at said office or agency on the same dates as interest on the Warrick County Bonds, or if this bond shall be duly called for redemption, until the redemption date, or if the Company shall default in the payment of the principal hereof, until the Company's obligation to pay principal shall be discharged as provided in the Indenture, is paid until the principal sum is paid in full discharge under the Indenture.
The Company has agreed to pay the principal of and interest on the Warrick County Bonds pursuant to a Loan Agreement dated as May 1, 1993, as supplemented and amended by the First Amendment to Loan Agreement dated as of April 1, 1999 and the Second Amendment to Loan Agreement dated as of August 1, 2004 (as so amended and as hereinafter supplemented and amended, the "Agreement") between the Company and the County. Pursuant to the Granting Clause of the County Indenture, this bond is issued to the County Trustee to secure any and all obligations of the Company under the Agreement with respect to payment of the County Bonds. Payment of principal of, or interest on, the County Bonds shall constitute payments on this bond as further provided herein and in the Supplemental Indenture dated May 1, 1993, as supplemented and amended by the Supplemental Indenture dated as of August 1, 2004 pursuant to which this amended bond has been issued (the "Supplemental Indenture").
Upon any payment of the principal of, and interest on, all or any portion of the Warrick County Bonds, whether at maturity or otherwise or upon provision for the payment thereof having been made in accordance with Section 8.01 of the County Indenture, a principal amount of this bond equal to the principal amount of such Warrick County Bonds shall, to the extent of such payment of principal and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal, such bonds shall be surrendered to the Company for cancellation as provided in Section 8.02 of the County Indenture. The Trustee (as hereinafter defined) may at any time and all times conclusively assume that the obligation of the Company to make payments under the Agreement with respect to the principal of, and interest on, the Warrick County Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the County Trustee signed by one of its officers stating (i) that timely payment of principal of, or interest on, the Warrick County Bonds has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the County Trustee pursuant to the Agreement, and (iii) the amount of the arrearage.
The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place.
This bond shall not become obligatory until Deutsche Bank Trust Company Americas, the Trustee under the Mortgage, or its successor thereunder, shall have signed the form of certificate endorsed hereon.
IN WITNESS WHEREOF, Southern Indiana Gas and Electric Company has caused this bond to be signed in its name by its President or a Vice President, by his signature or a facsimile thereof, and a facsimile of its corporate seal to be imprinted hereon, attested by its Secretary or an Assistant Secretary, by his signature or a facsimile thereof.
Dated: ______________
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
[FORM OF TRUSTEE'S CERTIFICATE]
This bond is one of the bonds of the series designated therein, described in the within-mentioned Mortgage.
DEUTSCHE BANK TRUST
COMPANY AMERICAS, as
Trustee
[FORM OF REVERSE OF BOND]
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
FIRST MORTGAGE BOND, SERIES B 1993 DUE 2023
This bond is one of an issue of First Mortgage Bonds of the Company, issuable in series, and is one of the series designated in the title hereof, all issued and to be issued under and equally secured (except as to any sinking fund established in accordance with the provisions of the Mortgage hereinafter mentioned for the bonds of any particular series) by an Indenture of Mortgage and Deed of Trust, dated as of April 1, 1932, executed by the Company to Deutsche Bank Trust Company Americas, formerly known as Bankers Trust Company, as Trustee (the "Trustee"), as amended and supplemented by indentures supplemental thereto, including without limitation a Supplemental Indenture dated as of May 1, 1993, as particularly supplemented and amended by a Supplemental Indenture dated as of August 1, 2004, to which Indenture as amended and supplemented (herein referred to as the "Mortgage") reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof and the terms and conditions upon which the bonds are secured.
The bonds of this series are issued and to be issued in order to evidence and secure a loan made by the County to the Company pursuant to a Loan Agreement dated as of May 1, 1993, as supplemented and amended. In order to provide moneys to fund such loan, the County has issued the Warrick County Bonds under and pursuant to the County Indenture. Payments made by the Company of principal and interest on the bonds of this series are intended to be sufficient to permit payments of principal and interest to be made on the Warrick County Bonds. Upon certain terms and conditions, moneys held under and pursuant to the County Indenture, including moneys so held from the proceeds of the sale of the Warrick County Bonds or earnings on the investment of such proceeds, or redemption of the Warrick County Bonds shall be credited to or used for the payment of the bonds of this series and to the extent so credited or used shall satisfy a like amount otherwise due hereunder.
The bonds of this series are subject to optional and mandatory redemption, in whole or in part, as the case may be, on each date that Warrick County Bonds are to be redeemed. The principal amount of the bonds of this series to be redeemed on any such date shall be equal to the principal amount of Warrick County Bonds called for redemption on that date. All redemptions of bonds of this series shall be at 100% of the principal amount thereof, plus accrued interest to the redemption date.
If and whenever the Trustee or the Company is notified that an event of default has occurred and is continuing under Section 9.01(e) of the County Indenture, and provided that the principal of all Warrick County Bonds then outstanding and the interest thereon shall have been declared immediately due and payable, then not later than two business days following the occurrence of the foregoing events, the Company shall, upon not less than 30 days' and not more than 45 days' prior written notice given in the manner provided in the Mortgage, call for redemption on a redemption date selected by it not later than 45 days following the date of such notice, all of the Bonds of this series then outstanding, and shall on such redemption date redeem the same at a price equal to 100% of the principal amount thereof, together with accrued interest thereon to the redemption date, except that such requirement or redemption shall be deemed to be waived if, prior to the date fixed for such redemption of the bonds of this series, such event of default is waived or cured.
In case a completed default, as defined in the Mortgage, shall occur, the principal of this bond and all other bonds of the Company at any such time outstanding under the Mortgage may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Mortgage. The Mortgage provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the bonds entitled to vote then outstanding.
This bond, subject to the limitations with regard thereto contained in the County Indenture, is transferable as prescribed in the Mortgage by the registered owner hereof in person, or by his duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y., upon surrender and cancellation of this bond, and thereupon, a new fully registered bond of the same series for a like principal amount will be issued to the transferee in exchange thereof as provided in the Mortgage, and upon payment, if the Company shall require it, of the charges therein prescribed. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner for the purpose of receiving payment of or on account of the principal and interest due hereon and for all other purposes.
As provided in Section 8.02 of the County Indenture, from and
after the Release Date (as defined in the County Indenture),
the obligations of the Company with respect to this bond shall
be deemed to be satisfied and discharged, this bond shall
cease to secure in any manner the Company's obligations under
the Agreement with respect to the payment of any County Bonds
outstanding under the County Indenture, and, pursuant to
Section 8.02 of the County Indenture, the County Trustee shall
forthwith deliver this Bond to the Company for cancellation.
The Bonds of this series are issuable as registered bonds without coupons in denominations of $1,000 and authorized multiples thereof. In the manner and upon payment of the charges prescribed in the Mortgage, registered bonds without coupons of this series may be exchanged for a like aggregate principal amount of fully registered bonds without coupons of other authorized denominations of the same series, upon presentation and surrender thereof, for cancellation, to the Trustee at its principal corporate trust office in the Borough of Manhattan, The City of New York, N.Y.
No recourse shall be had for the payment of the principal of or interest on this bond against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company or any predecessor or successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors being released by the holder or owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage.
Pursuant to the Mortgage, the holder or owner of this bond by his acceptance hereof is deemed to have agreed to amendments to the Mortgage which will eventually permit certain amendments to the Mortgage with the consent of the holders of 66-2/3% of the principal amount of the outstanding bonds of all series issued under the Mortgage and which redefine, effective at such time as all bonds of each series of bonds issued under the Mortgage prior to January 1, 1977 are no longer outstanding, the amounts required to be spent by the Company under the Mortgage for the repair, maintenance, renewal and replacement of its property.
[END OF FORM OF BOND]"
PART III
Part III of the Supplemental Indenture dated as of May 1, 1993 is hereby amended in its entirety to read as follows:
"PART III
DESCRIPTION OF BONDS OF THE THIRTY-SIXTH SERIES
Section 1. Bonds of the Thirty-sixth Series shall mature on the date set forth in the form of bond relating hereto hereinbefore set forth, shall bear interest at the rate from time to time borne by the Warrick County Bonds; provided, however, that in no event shall the rate of interest borne by the Bonds of the Thirty-sixth Series exceed 10%. Such interest, payable on the same dates as interest on the Warrick County Bonds, and all bonds of said series shall be designated as hereinbefore in the fifth WHEREAS clause set forth. Both principal of and interest on said bonds shall be payable, to the extent specified in the form of bond hereinabove set forth, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, at the office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. Definitive bonds of said series may be issued, originally or otherwise, only as registered bonds without coupons; and they and the Trustee's certificate of authentication shall be substantially in the forms hereinbefore recited, respectively. Definitive registered Bonds of the Thirty-sixth Series may be issued in the denomination of $1,000 and in such other denominations (in multiples of $1,000) as the Board of Directors of the Company shall approve, and execution and delivery to the Trustee for authentication shall be conclusive evidence of such approval. In the manner and upon payment of the charges prescribed in the Indenture, registered bonds without coupons of said series may be exchanged for a like aggregate principal amount of fully registered bonds without coupons of other authorized denominations of the same series, upon presentation and surrender thereof for cancellation to the Trustee at its principal corporate trust office in the Borough of Manhattan, The City of New York, N.Y. However, notwithstanding the provisions of Section 12 of the Indenture, no charge shall be made upon any transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. The form of the temporary bonds of said series shall be in substantially the form of the form of registered bond hereinbefore recited with such appropriate changes therein as are required on account of the temporary nature thereof. Said temporary bonds of said series shall be in registered form without coupons, registrable as to principal, and shall be exchangeable for definitive bonds of said series when prepared.
The person in whose name any registered bond without coupons of the Thirty-sixth Series is registered at the close of business on any record date (as hereinbelow defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such registered bond upon any transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except if and to the extent the Company shall default in the payment of the interest due on such interest payment date, in which case such defaulted interest shall be paid to the person in whose name such bond is registered either at the close of business on the day preceding the date of payment of such defaulted interest or on a subsequent record date for such payment if one shall have been established as hereinafter provided. A subsequent record date may be established by or on behalf of the Company by notice mailed to the holders of bonds not less than ten days preceding such record date, which record date shall be not more than thirty days prior to the subsequent interest payment date. The term "record date" as used in this Section with respect to any regular interest payment date shall mean the Interest Payment Date (as defined in the County Indenture).
Except as provided in this Section, every registered bond without coupons of the Thirty-sixth Series shall be dated and shall bear interest as provided in Section 10 of the Indenture; provided, however, that so long as there is no existing default in the payment of interest on the bonds, the holder of any bond authenticated by the Trustee between the record date for any interest payment date and such interest payment date shall not be entitled to the payment of the interest due on such interest payment date and shall have no claim against the Company with respect thereto; and provided, further, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then any such bond shall bear interest from the interest payment date to which interest has been paid.
Upon any payment of the principal of and interest on, all or any portion of the Warrick County Bonds, whether at maturity or otherwise or upon provision for the payment thereof having been made in accordance with Section 8.01 of the County Indenture, the Bonds of the Thirty-sixth Series in a principal amount equal to the principal amount of such Warrick County Bonds shall, to the extent of such payment of principal and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal, such Bonds of the Thirty-sixth Series shall be surrendered to the Company for cancellation as provided in and subject to the terms of Section 8.02 of the County Indenture. The Trustee may at any time and all times conclusively assume that the obligation of the Company under the Agreement to make payments with respect to the principal of and interest on the County Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the County Trustee signed by one of its officers stating (i) the timely payment of principal or interest on the Warrick County Bonds has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the County Trustee pursuant to the Agreement, and (iii) the amount of the arrearage."
PART IV
Part IV of the Supplemental Indenture dated as of May 1, 1993 is hereby amended in its entirety to read as follows:
"PART IV
REDEMPTION PROVISIONS
Section 1. The Bonds of the Thirty-sixth Series shall be subject to redemption by the Company prior to maturity, in the events and in the manner and at the redemption prices set forth in the form of Bond of such series."
PART V
MISCELLANEOUS
Section 1. The Company covenants that the provisions of Section 36A of the Indenture and of Section 1.02 of the Supplemental Indenture dated as of July 1, 1948, which are to remain in effect so long as any bonds of the series referred to in said Section shall be outstanding under the Indenture, shall remain in full force and effect so long as any Bonds of the Thirty-sixth Series shall be outstanding under the Indenture.
Section 2. Except as herein otherwise expressly provided, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture, other than as set forth in the Mortgage. The Trustee shall not be responsible for the recitals herein or in the bonds (except the Trustee's certificate of authentication), all of which are made by the Company solely.
Section 3. As supplemented and amended by this Supplemental Indenture, the Mortgage is in all respects ratified and confirmed, and the Mortgage and this Supplemental Indenture shall be read, taken and construed as one and the same instrument.
Section 4. This Supplemental Indenture may be executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument.
IN WITNESS WHEREOF, SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, party of the first part hereto, and DEUTSCHE BANK TRUST COMPANY AMERICAS, party of the second part hereto, have caused these presents to be executed in their respective names by their respective Presidents or one of their Vice Presidents or Assistant Vice Presidents and their respective seals to be hereunto affixed and attested by their respective Secretaries or one of their Assistant Secretaries or Associates, all as of the day and year first above written.
(SEAL)
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
By /s/ Robert L. Goocher
------------------------------------
ROBERT L. GOOCHER
Vice President and Treasurer
Attest:
/s/ Robert Heidorn
-------------------------------------
ROBERT HEIDORN
Vice President, General Counsel and
Assistant Secretary
|
(SEAL)
DEUTSCHE BANK TRUST COMPANY AMERICAS
By /s/ Susan Johnson
--------------------------------------
SUSAN JOHNSON
Vice President
Attest:
/s/ Irina Golovashchuk
------------------------------------
IRINA GOLOVASHCHUK
Associate
|
STATE OF INDIANA )
) SS
COUNTY OF VANDERBURGH )
|
On this 27th day of August, 2004, before me, the undersigned, a notary public in and for the county and state aforesaid, personally came Robert L. Goocher, to me known, who being by me duly sworn, did depose and say that he resides at 67755 River Ridge Drive, Newburgh, Indiana 47630; that he is Vice President and Treasurer of SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of the said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation and that he signed his name thereto by like order; and the said Robert L. Goocher acknowledged the execution of the foregoing instrument on behalf of the said corporation as the voluntary act and deed of the said corporation for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year first above written.
/s/ Lewana Doyle
------------------------------------
Notary Public
(SEAL)
|
My Commission Expires: February 12, 2012
My County of Residence is: Posey
-------------------------
----------------------------
|
STATE OF NEW YORK )
) SS
COUNTY OF NEW YORK )
|
On this 27th day of August, 2004, before me, the undersigned, a notary public in and for the county and state aforesaid, personally came Susan Johnson, to me known, who being by me duly sworn, did depose and say that she resides at 154 E. 46th Street, Brooklyn, New York 11203; that she is Vice President of DEUTSCHE BANK TRUST COMPANY AMERICAS, one of the corporations described in and which executed the foregoing instrument; that she knows the seal of the said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation and that she signed her name thereto by like order; and the said Susan Johnson acknowledged the execution of the foregoing instrument on behalf of the said corporation as the voluntary act and deed of the said corporation for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year first above written.
/s/ Annie Jaghatspanyan
---------------------------------------
Notary Public
(SEAL)
|
My Commission Expires: July 30, 2005
-----------------------------
My County of Residence is: Bergen, New Jersey
-------------------------------
Qualified in New York County
|
SCHEDULE A
Detailed Description of Additional Properties
Real Estate in Vanderburgh County, Indiana
Part of Lot 10 and part of the land lying with the public right of way
adjoining sand part of Lot 10, all in Vanderburgh Industrial Park, as per plat
thereof, recorded in Plat Book Q, page 79 in the office of the Recorder of
Vanderburgh County, Indiana, and being a subdivision of part of the West Half of
Section 1, Township 5 South, Range 10 West of the Second Principal Meridian,
Scott Township, Vanderburgh County, Indiana.
Real Estate in Knox County, Indiana
The Southeast Half of the Southeast Half of the Northeast Half of Donation Number Thirteen (13), Township Two (2) North, Range Nine (9) West, containing 50.5 acres, more or less, EXCEPTING however, 20 acres to be taken in a strip of equal width off of the Northeast side thereof, leaving after said exception 30.5 acres, more or less.
Part of Donation 36 Township 2 North, Ranges 8 and 9 West, Harrison
Township, Knox County, Indiana, and containing 50.52 acres, more or less.
Signed for identification
/s/ Robert L. Goocher
----------------------------------
ROBERT L. GOOCHER, Vice President
and Treasurer
SOUTHERN INDIANA GAS AND ELECTRIC
COMPANY
|
/s/ Susan Johnson
----------------------------------
SUSAN JOHNSON, Vice President
DEUTSCHE BANK TRUST COMPANY
AMERICAS
|
CONSENT OF THE REGISTERED OWNER
Pursuant to Section 1302 of the Indenture of Trust (the "Indenture") between Warrick County, Indiana and The Bank of New York Trust Company, N.A., successor to The Citizens National Bank of Evansville, as Trustee, dated as of May 1, 1993, the undersigned as the registered owner of 100% of the First Mortgage Bonds (as defined in the Indenture) hereby consents to the execution and delivery of the Supplemental Indenture dated as of August 1, 2004 (the "Supplemental Indenture") between Southern Indiana Gas and Electric Company and Deutsche Bank Trust Company Americas, as mortgage trustee and the amendment of the First Mortgage Bonds as set forth in said Supplemental Indenture.
THE BANK OF NEW YORK TRUST COMPANY,
N.A.
By /s/ Mark A. Hudson
-----------------------------------
Its Vice President
-----------------------------
Date: September 2, 2004
|
Exhibit 4.2
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
WITH
DEUTSCHE BANK TRUST COMPANY AMERICAS,
as Trustee
SUPPLEMENTAL INDENTURE
Relating to the
FIRST MORTGAGE BONDS
Series A 1985 due 2015
Dated as of October 1, 2004
SUPPLEMENTAL INDENTURE, dated as of October 1, 2004, between SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, a corporation organized and existing under the laws of the State of Indiana (hereinafter called the "Company"), party of the first part, and DEUTSCHE BANK TRUST COMPANY AMERICAS, a corporation organized and existing under the laws of the State of New York, formerly known as BANKERS TRUST COMPANY, as Trustee under the Mortgage hereinafter referred to, party of the second part.
WHEREAS, the Company heretofore executed and delivered to Deutsche Bank Trust Company Americas, formerly known as Bankers Trust Company, as Trustee (hereinafter called the "Trustee"), a certain Indenture of Mortgage and Deed of Trust dated as of April 1, 1932, to secure an issue of bonds of the Company, issued and to be issued in series, from time to time, in the manner and subject to the conditions set forth in the said Indenture, and the said Indenture has been amended and supplemented by Supplemental Indentures dated as of August 31, 1936, October 1, 1937, March 22, 1939, July 1, 1948, June 1, 1949, October 1, 1949, January 1, 1951, April 1, 1954, March 1, 1957, October 1, 1965, September 1, 1966, August 1, 1968, May 1, 1970, August 1, 1971, April 1, 1972, October 1, 1973, April 1, 1975, January 15, 1977, April 1, 1978, June 4, 1981, January 20, 1983, November 1, 1983, March 1, 1984, June 1, 1984, November 1, 1984, July 1, 1985, November 1, 1985, June 1, 1986, November 15, 1986, January 15, 1987, December 15, 1987, December 13, 1990, April 1, 1993, May 1, 1993, June 1, 1993, July 1, 1999, March 1, 2000 and August 1, 2004, which Indenture as so amended and supplemented is hereinafter referred to as the "Mortgage" and as further supplemented by this Supplemental Indenture is hereinafter referred to as the "Indenture"; and
WHEREAS, the Mortgage provides that the Company and the Trustee may, from time to time, enter into such indentures supplemental to the Mortgage as shall be deemed by them necessary or desirable, to amend the Mortgage or any supplemental indenture in accordance with Section 108 of the Mortgage; and
WHEREAS, the Company entered into a Loan Agreement dated as of July 1, 1985 (the "Original Loan Agreement") with Warrick County, Indiana (the "County") pursuant to which the County issued $9,975,000 aggregate principal amount of its Adjustable Rate Pollution Control Revenue Bonds, 1985 Series A (Southern Indiana Gas and Electric Company Project) of which $9,775,000 principal amount is currently outstanding (the "County Bonds") pursuant to the Indenture of Trust dated as of July 1, 1985, as supplemented and amended by a First Supplemental Indenture of Trust dated as of October 1, 2004 (the "Original County Indenture"), between the County and The Bank of New York Trust Company, N.A., as successor to The Citizens National Bank of Evansville, as trustee (the "County Trustee"), in order to provide funds to loan to the Company for the purpose of refunding the Issuer's $9,730,000 principal amount Pollution Control Revenue Bonds, 1983 Series A (Southern Indiana Gas and Electric Company Project) which were issued for the purpose of financing a portion of the costs of acquiring, constructing and equipping of an undivided one-half interest in certain air pollution control facilities, and pursuant to such Original Loan Agreement the Company agreed to issue a series of its bonds under the Original County Indenture in order to evidence and secure certain of its indebtedness under the Original Loan Agreement; and
WHEREAS, the Company and the Trustee entered into the Supplemental Indenture dated as of July 1, 1985 (the "July 1985 Supplemental Indenture") for such purposes; and
WHEREAS, the Company by appropriate corporate action in conformity with the terms of the Mortgage and pursuant to the July 1985 Supplemental Indenture created a series of bonds which were issued under the Mortgage in an original aggregate principal amount of $9,975,000 (of which $9,775,000 principal amount is currently outstanding) and designated as "First Mortgage Bonds, Series A 1985 due 2015" (hereinafter sometimes referred to as "Bonds of the Twenty-sixth Series"), which bear interest at the rate from time to time borne by the County Bonds, are subject to certain optional and mandatory redemption rights and obligations set forth in, and are otherwise in the form and have the terms and provisions provided for in the July 1985 Supplemental Indenture and set forth in the form of such bonds in the July 1985 Supplemental Indenture; and
WHEREAS, the Company has determined that it would be in its best
interests to (i) add additional methods of determining the interest rate on the
County Bonds, (ii) secure the County Bonds with a financial guaranty insurance
policy (the "Bond Insurance Policy") issued by Ambac Assurance Corporation and
(iii) amend certain provisions of the July 1985 Supplemental Indenture and the
Bonds of the Twenty-sixth Series to allow for the release of such bonds in
certain circumstances; and
WHEREAS, in connection with the foregoing, it is necessary for the County to amend the Original County Indenture and the Original Loan Agreement and for the Company to amend the July 1985 Supplemental Indenture and the Bonds of the Twenty-sixth Series in order to (i) conform to the changes made to the interest rate provisions of the Original County Indenture and (ii) permit the Bonds of the Twenty-sixth Series to cease to secure the Company's obligation under the Loan Agreement (as hereinafter defined) when substantially all of the Company's first mortgage bonds are no longer outstanding, except for the Bonds of the Twenty-sixth Series and any other first mortgage bonds subject to substantially similar release provisions; and
WHEREAS, the Company and the Trustee deem it necessary or desirable to enter into this Supplemental Indenture for such purposes; and
WHEREAS, the execution and delivery of this Supplemental Indenture are authorized by Section 108 of the Mortgage and have been consented to by the registered owner of all of the Bonds of the Twenty-sixth Series;
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That Southern Indiana Gas and Electric Company, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and of the purchase and acceptance of the bonds issued or to be issued hereunder by the holders or registered owners thereof, and in order to secure the payment of the principal, premium, if any, and interest of all bonds at any time issued and outstanding under the Indenture, according to their tenor and effect, and the performance of all of the provisions hereof and of said bonds, hath granted, bargained, sold, released, conveyed, assigned, transferred, pledged, set over and confirmed and by these presents doth grant, bargain, sell, release, convey, assign, transfer, pledge, set over and confirm unto Deutsche Bank Trust Company Americas, formerly known as Bankers Trust Company, as Trustee, and to its successor or successors in said trust, and to its and their assigns forever, all the properties, real, personal and mixed, tangible and intangible of the character described in the granting clauses of the aforesaid Indenture of Mortgage and Deed of Trust dated as of April 1, 1932 or in any indenture supplemental thereto acquired by the Company on or after the date of the execution and delivery of said Indenture of Mortgage and Deed of Trust (except any in said Indenture of Mortgage and Deed of Trust or in any indenture supplemental thereto expressly excepted) and does hereby confirm that the Company will not cause or consent to a partition, either voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common, except as permitted by and in conformity with the provisions of the Indenture and particularly of Article X thereof.
TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Article X of the Indenture), the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title, interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof.
TO HAVE AND TO HOLD all such properties, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever.
IN TRUST, NEVERTHELESS, upon the terms and trusts of the Indenture, for those who shall hold the bonds and coupons issued and to be issued thereunder, or any of them, without preference, priority or distinction as to lien of any of said bonds and coupons over any others thereof by reason of priority in the time of the issue or negotiation thereof, or otherwise howsoever, subject, however, to the provisions in reference to extended, transferred or pledged coupons and claims for interest set forth in the Indenture (and subject to any sinking funds that may be created for the benefit of any particular series).
PROVIDED, HOWEVER, and these presents are upon the condition that, if the Company, its successors or assigns, shall pay or cause to be paid, the principal of, premium, if any, and interest on said bonds, at the times and in the manner stipulated therein and herein, and shall keep, perform and observe all and singular the covenants and promises in said bonds and in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then this Supplemental Indenture and the estate and rights hereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect.
IT IS HEREBY COVENANTED, DECLARED AND AGREED, by the Company, that all such bonds and coupons are to be issued, authenticated and delivered, and that all property subject or to become subject hereto is to be held, subject to the further covenants, conditions, uses and trusts in the Indenture set forth, and the Company, for itself and its successors and assigns, does hereby covenant and agree to and with the Trustee and its successor or successors in such trust, for the benefit of those who shall hold said bonds and interest coupons, or any of them, as follows:
PART I
DEFINITIONS
All words and terms defined in Part I of the Supplemental Indenture dated as of July 1, 1985 shall have the same meanings in this Supplemental Indenture, except that the definitions of "County Indenture" and "Loan Agreement" are amended in their entirety to read as follows. In addition, certain words and terms are defined in the preamble of this Supplemental Indenture.
COUNTY INDENTURE:
The term "County Indenture," when used in connection with the Bonds of the Twenty-sixth Series, shall mean the Amended and Restated Indenture of Trust, dated as of October 1, 2004, by and between Warrick County, Indiana and The Bank of New York Trust Company, N.A., as successor to The Citizens National Bank of Evansville, as Trustee, and any indenture supplemental thereto or amendatory thereof, pursuant to which the Adjustable Rate Pollution Control Revenue Bonds, 1985 Series A (Southern Indiana Gas and Electric Company Project) are issued and secured.
LOAN AGREEMENT:
The term "Loan Agreement," when used in connection with the Bonds of the Twenty-sixth Series, shall mean the Loan Agreement dated as of July 1, 1985, as supplemented and amended by the First Amendment to Loan Agreement, dated as of October 1, 2004 between Warrick County, Indiana, and the Company, relating to the Adjustable Rate Pollution Control Revenue Bonds, 1985 Series A (Southern Indiana Gas and Electric Company Project) and any and all modifications, amendments and supplements thereof.
PART II
The forms of the definitive registered bonds without coupons of the Bonds of the Twenty-sixth Series and the Trustee's certificate of authentication to be borne by such bonds included in the preamble to the July 1985 Supplemental Indenture are hereby amended in their entirety such that the form of the definitive registered bonds without coupons of the Bonds of the Twenty-sixth Series and the Trustee's certificate of authentication to be borne by such bonds are to be substantially in the following forms, respectively:
"[FORM OF FULLY REGISTERED BOND OF THE TWENTY-SIXTH SERIES]
[FORM OF FACE OF BOND]
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
FIRST MORTGAGE BOND, SERIES A 1985 DUE 2015
No. _________ $____________
Southern Indiana Gas and Electric Company, a corporation of the State of Indiana (hereinafter called the "Company"), for value received, hereby promises to pay to____________________ ______________________________________________________ or registered assigns ____________________________________ dollars, on July 1, 2015, subject to prior redemption, at the office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y., in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered owner hereof interest thereon at the same rate or rates of interest as the Adjustable Rate Pollution Control Revenue Bonds, 1985 Series A (Southern Indiana Gas and Electric Company Project) (the "Warrick County Bonds") issued by Warrick County, Indiana (the "County") under the Indenture of Trust, dated as of July 1, 1985, as supplemented and amended by the First Supplemental Indenture of Trust dated as of October 1, 2004, as amended and restated by the Amended and Restated Indenture of Trust dated as of October 1, 2004, and any indenture supplemental thereto or amendatory thereof (the "County Indenture"), between the County and The Bank of New York Trust Company, N.A., as successor to The Citizens National Bank of Evansville, as trustee (the "County Trustee") (as determined in accordance with the County Indenture); provided, however, that in no event shall the rate of interest borne by the bonds of this series exceed 11% per annum. Such interest, in like coin or currency, payable at said office or agency on the same dates as interest on the Warrick County Bonds, or if this bond shall be duly called for redemption, until the redemption date, or if the Company shall default in the payment of the principal hereof, until the Company's obligation to pay principal shall be discharged as provided in the Indenture, is paid until the principal sum is paid in full discharge under the Indenture.
The Company has agreed to pay the principal of and interest on the Warrick County Bonds pursuant to a Loan Agreement dated as July 1, 1985, as supplemented and amended by the First Amendment to Loan Agreement dated as of October 1, 2004 (as so amended and as hereinafter supplemented and amended, the "Agreement") between the Company and the County. Pursuant to the Granting Clause of the County Indenture, this bond is issued to the County Trustee to secure any and all obligations of the Company under the Agreement with respect to payment of the County Bonds. Payment of principal of, or interest on, the County Bonds shall constitute payments on this bond as further provided herein and in the Supplemental Indenture dated July 1, 1985, as supplemented and amended by the Supplemental Indenture dated as of October 1, 2004 pursuant to which this amended bond has been authorized (the "Supplemental Indenture").
Upon any payment of the principal of, and interest on, all or any portion of the Warrick County Bonds, whether at maturity or otherwise or upon provision for the payment thereof having been made in accordance with Section 8.01 of the County Indenture, a principal amount of this bond equal to the principal amount of such Warrick County Bonds shall, to the extent of such payment of principal and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal, such bonds shall be surrendered to the Company for cancellation as provided in Section 8.02 of the County Indenture. The Trustee (as hereinafter defined) may at any time and all times conclusively assume that the obligation of the Company to make payments under the Agreement with respect to the principal of, and interest on, the Warrick County Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the County Trustee signed by one of its officers stating (i) that timely payment of principal of, or interest on, the Warrick County Bonds has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the County Trustee pursuant to the Agreement, and (iii) the amount of the arrearage.
The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place.
This bond shall not become obligatory until Deutsche Bank Trust Company Americas, the Trustee under the Mortgage, or its successor thereunder, shall have signed the form of certificate endorsed hereon.
IN WITNESS WHEREOF, Southern Indiana Gas and Electric Company has caused this bond to be signed in its name by its President or a Vice President, by his signature or a facsimile thereof, and a facsimile of its corporate seal to be imprinted hereon, attested by its Secretary or an Assistant Secretary, by his signature or a facsimile thereof.
[FORM OF TRUSTEE'S CERTIFICATE]
This bond is one of the bonds of the series designated therein, described in the within-mentioned Mortgage.
DEUTSCHE BANK TRUST
COMPANY AMERICAS,
as Trustee
[FORM OF REVERSE OF BOND]
SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
FIRST MORTGAGE BOND, SERIES A 1985 DUE 2015
This bond is one of an issue of First Mortgage Bonds of the Company, issuable in series, and is one of the series designated in the title hereof, all issued and to be issued under and equally secured (except as to any sinking fund established in accordance with the provisions of the Mortgage hereinafter mentioned for the bonds of any particular series) by an Indenture of Mortgage and Deed of Trust, dated as of April 1, 1932, executed by the Company to Deutsche Bank Trust Company Americas, formerly known as Bankers Trust Company, as Trustee (the "Trustee"), as amended and supplemented by indentures supplemental thereto, including without limitation a Supplemental Indenture dated as of July 1, 1985, as particularly supplemented and amended by a Supplemental Indenture dated as of October 1, 2004, to which Indenture as amended and supplemented (herein referred to as the "Mortgage") reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof and the terms and conditions upon which the bonds are secured.
The bonds of this series are issued and to be issued in order to evidence and secure a loan made by the County to the Company pursuant to a Loan Agreement dated as of July 1, 1985, as supplemented and amended. In order to provide moneys to fund such loan, the County has issued the Warrick County Bonds under and pursuant to the County Indenture. Payments made by the Company of principal and interest on the bonds of this series are intended to be sufficient to permit payments of principal and interest to be made on the Warrick County Bonds. Upon certain terms and conditions, moneys held under and pursuant to the County Indenture, including moneys so held from the proceeds of the sale of the Warrick County Bonds or earnings on the investment of such proceeds, or redemption of the Warrick County Bonds shall be credited to or used for the payment of the bonds of this series and to the extent so credited or used shall satisfy a like amount otherwise due hereunder.
The bonds of this series are subject to optional and mandatory redemption, in whole or in part, as the case may be, on each date that Warrick County Bonds are to be redeemed. The principal amount of the bonds of this series to be redeemed on any such date shall be equal to the principal amount of Warrick County Bonds called for redemption on that date. All redemptions of bonds of this series shall be at 100% of the principal amount thereof, plus accrued interest to the redemption date.
If and whenever the Trustee or the Company is notified that an event of default has occurred and is continuing under Section 9.01(e) of the County Indenture, and provided that the principal of all Warrick County Bonds then outstanding and the interest thereon shall have been declared immediately due and payable, then not later than two business days following the occurrence of the foregoing events, the Company shall, upon not less than 30 days' and not more than 45 days' prior written notice given in the manner provided in the Mortgage, call for redemption on a redemption date selected by it not later than 45 days following the date of such notice, all of the bonds of this series then outstanding, and shall on such redemption date redeem the same at a price equal to 100% of the principal amount thereof, together with accrued interest thereon to the redemption date, except that such requirement or redemption shall be deemed to be waived if, prior to the date fixed for such redemption of the bonds of this series, such event of default is waived or cured.
In case a completed default, as defined in the Mortgage, shall occur, the principal of this bond and all other bonds of the Company at any such time outstanding under the Mortgage may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Mortgage. The Mortgage provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the bonds entitled to vote then outstanding.
This bond, subject to the limitations with regard thereto contained in the County Indenture, is transferable as prescribed in the Mortgage by the registered owner hereof in person, or by his duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y., upon surrender and cancellation of this bond, and thereupon, a new fully registered bond of the same series for a like principal amount will be issued to the transferee in exchange thereof as provided in the Mortgage, and upon payment, if the Company shall require it, of the charges therein prescribed. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner for the purpose of receiving payment of or on account of the principal and interest due hereon and for all other purposes.
As provided in Section 8.02 of the County Indenture, from and
after the Release Date (as defined in the County Indenture),
the obligations of the Company with respect to this bond shall
be deemed to be satisfied and discharged, this bond shall
cease to secure in any manner the Company's obligations under
the Agreement with respect to the payment of any County Bonds
outstanding under the County Indenture, and, pursuant to
Section 8.02 of the County Indenture, the County Trustee shall
forthwith deliver this Bond to the Company for cancellation.
The Bonds of this series are issuable as registered bonds without coupons in denominations of $1,000 and authorized multiples thereof. In the manner and upon payment of the charges prescribed in the Mortgage, registered bonds without coupons of this series may be exchanged for a like aggregate principal amount of fully registered bonds without coupons of other authorized denominations of the same series, upon presentation and surrender thereof, for cancellation, to the Trustee at its principal corporate trust office in the Borough of Manhattan, The City of New York, N.Y.
No recourse shall be had for the payment of the principal of or interest on this bond against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company or any predecessor or successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors being released by the holder or owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage.
Pursuant to the Mortgage, the holder or owner of this bond by his acceptance hereof is deemed to have agreed to amendments to the Mortgage which will eventually permit certain amendments to the Mortgage with the consent of the holders of 66-2/3% of the principal amount of the outstanding bonds of all series issued under the Mortgage and which redefine, effective at such time as all bonds of each series of bonds issued under the Mortgage prior to January 1, 1977 are no longer outstanding, the amounts required to be spent by the Company under the Mortgage for the repair, maintenance, renewal and replacement of its property.
[END OF FORM OF BOND]"
PART III
Part II of the Supplemental Indenture dated as of July 1, 1985 is hereby amended in its entirety to read as follows:
"PART II
DESCRIPTION OF BONDS OF THE TWENTY-SIXTH SERIES
Section 1. Bonds of the Twenty-sixth Series shall mature on the date set forth in the form of bond relating hereto hereinbefore set forth, shall bear interest at the rate from time to time borne by the Warrick County Bonds; provided, however, that in no event shall the rate of interest borne by the Bonds of the Twenty-sixth Series exceed 11%. Such interest, payable on the same dates as interest on the Warrick County Bonds, and all bonds of said series shall be designated as hereinbefore in the fifth WHEREAS clause of the Supplemental Indenture dated as of October 1, 2004. Both principal of and interest on said bonds shall be payable, to the extent specified in the form of bond hereinabove set forth, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, at the office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. Definitive bonds of said series may be issued, originally or otherwise, only as registered bonds without coupons; and they and the Trustee's certificate of authentication shall be substantially in the forms hereinbefore recited, respectively. Definitive registered Bonds of the Twenty-sixth Series may be issued in the denomination of $1,000 and in such other denominations (in multiples of $1,000) as the Board of Directors of the Company shall approve, and execution and delivery to the Trustee for authentication shall be conclusive evidence of such approval. In the manner and upon payment of the charges prescribed in the Indenture, registered bonds without coupons of said series may be exchanged for a like aggregate principal amount of fully registered bonds without coupons of other authorized denominations of the same series, upon presentation and surrender thereof for cancellation to the Trustee at its principal corporate trust office in the Borough of Manhattan, The City of New York, N.Y. However, notwithstanding the provisions of Section 12 of the Indenture, no charge shall be made upon any transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. The form of the temporary bonds of said series shall be in substantially the form of the form of registered bond hereinbefore recited with such appropriate changes therein as are required on account of the temporary nature thereof. Said temporary bonds of said series shall be in registered form without coupons, registrable as to principal, and shall be exchangeable for definitive bonds of said series when prepared.
The person in whose name any registered bond without coupons of the Twenty-sixth Series is registered at the close of business on any record date (as hereinbelow defined) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such registered bond upon any transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except if and to the extent the Company shall default in the payment of the interest due on such interest payment date, in which case such defaulted interest shall be paid to the person in whose name such bond is registered either at the close of business on the day preceding the date of payment of such defaulted interest or on a subsequent record date for such payment if one shall have been established as hereinafter provided. A subsequent record date may be established by or on behalf of the Company by notice mailed to the holders of bonds not less than ten days preceding such record date, which record date shall be not more than thirty days prior to the subsequent interest payment date. The term "record date" as used in this Section with respect to any regular interest payment date shall mean the Interest Payment Date (as defined in the County Indenture).
Except as provided in this Section, every registered bond without coupons of the Twenty-sixth Series shall be dated and shall bear interest as provided in Section 10 of the Indenture; provided, however, that so long as there is no existing default in the payment of interest on the bonds, the holder of any bond authenticated by the Trustee between the record date for any interest payment date and such interest payment date shall not be entitled to the payment of the interest due on such interest payment date and shall have no claim against the Company with respect thereto; and provided, further, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then any such bond shall bear interest from the interest payment date to which interest has been paid.
Upon any payment of the principal of and interest on, all or any portion of the Warrick County Bonds, whether at maturity or otherwise or upon provision for the payment thereof having been made in accordance with Section 8.01 of the County Indenture, the Bonds of the Twenty-sixth Series in a principal amount equal to the principal amount of such Warrick County Bonds shall, to the extent of such payment of principal and interest, be deemed paid and the obligation of the Company thereunder to make such payment shall be discharged to such extent and, in the case of the payment of principal, such Bonds of the Twenty-sixth Series shall be surrendered to the Company for cancellation as provided in and subject to the terms of Section 8.02 of the County Indenture. The Trustee may at any time and all times conclusively assume that the obligation of the Company under the Agreement to make payments with respect to the principal of and interest on the County Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged pursuant to the foregoing sentence unless and until the Trustee shall have received a written notice from the County Trustee signed by one of its officers stating (i) the timely payment of principal or interest on the Warrick County Bonds has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the County Trustee pursuant to the Agreement, and (iii) the amount of the arrearage."
PART IV
Part IV of the Supplemental Indenture dated as of July 1, 1985 is hereby amended in its entirety to read as follows:
"PART IV
REDEMPTION PROVISIONS
Section 1. The Bonds of the Twenty-sixth Series shall be subject to redemption by the Company prior to maturity, in the events and in the manner and at the redemption prices set forth in the form of Bond of such series."
PART V
MISCELLANEOUS
Section 1. The Company covenants that the provisions of Section 36A of the Indenture and of Section 1.02 of the Supplemental Indenture dated as of July 1, 1948, which are to remain in effect so long as any bonds of the series referred to in said Section shall be outstanding under the Indenture, shall remain in full force and effect so long as any Bonds of the Twenty-sixth Series shall be outstanding under the Indenture.
Section 2. Except as herein otherwise expressly provided, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture, other than as set forth in the Mortgage. The Trustee shall not be responsible for the recitals herein or in the bonds (except the Trustee's certificate of authentication), all of which are made by the Company solely.
Section 3. As supplemented and amended by this Supplemental Indenture, the Mortgage is in all respects ratified and confirmed, and the Mortgage and this Supplemental Indenture shall be read, taken and construed as one and the same instrument.
Section 4. This Supplemental Indenture may be executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument.
IN WITNESS WHEREOF, SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, party of the first part hereto, and DEUTSCHE BANK TRUST COMPANY AMERICAS, party of the second part hereto, have caused these presents to be executed in their respective names by their respective Presidents or one of their Vice Presidents or Assistant Vice Presidents and their respective seals to be hereunto affixed and attested by their respective Secretaries or one of their Assistant Secretaries or Associates, all as of the day and year first above written.
(SEAL)
SOUTHERN INDIANA GAS AND ELECTRIC
COMPANY
By /s/ Robert L. Goocher
-------------------------------
ROBERT L. GOOCHER
Vice President and Treasurer
Attest:
/s/ Robert E. Heidorn
------------------------------
ROBERT E. HEIDORN
Vice President, General Counsel
and Assistant Secretary
|
(SEAL)
DEUTSCHE BANK TRUST COMPANY
AMERICAS
By /s/ Susan Johnson
-------------------------------
SUSAN JOHNSON
Vice President
Attest:
/s/ Irina Golovashchuk
-----------------------------
IRINA GOLOVASHCHUK
Associate
|
STATE OF INDIANA )
) SS
COUNTY OF VANDERBURGH )
|
On this 5th day of October, 2004, before me, the undersigned, a notary public in and for the county and state aforesaid, personally came Robert L. Goocher, to me known, who being by me duly sworn, did depose and say that he resides at 6755 River Ridge Drive, Newburgh, Indiana 47630; that he is Vice President and Treasurer of SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of the said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation and that he signed his name thereto by like order; and the said Robert L. Goocher acknowledged the execution of the foregoing instrument on behalf of the said corporation as the voluntary act and deed of the said corporation for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year first above written.
/s/ Patricia Williams
--------------------------------
Notary Public
(SEAL)
|
My Commission Expires: April 23, 2009
STATE OF NEW YORK )
) SS
COUNTY OF NEW YORK )
|
On this 5th day of October, 2004, before me, the undersigned, a notary public in and for the county and state aforesaid, personally came Susan Johnson, to me known, who being by me duly sworn, did depose and say that she resides at 154 East 46th Street, Brooklyn, New York 11203; that she is Vice President of DEUTSCHE BANK TRUST COMPANY AMERICAS, one of the corporations described in and which executed the foregoing instrument; that she knows the seal of the said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation and that she signed her name thereto by like order; and the said Susan Johnson acknowledged the execution of the foregoing instrument on behalf of the said corporation as the voluntary act and deed of the said corporation for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year first above written.
/s/ Annie Jaghatspanyan
---------------------------------
Notary Public
(SEAL)
|
My Commission Expires: July 30, 2005
CONSENT OF THE REGISTERED OWNER
Pursuant to Section 1402 of the Indenture of Trust (the "Indenture") between Warrick County, Indiana and The Bank of New York Trust Company, N.A., successor to The Citizens National Bank of Evansville, as Trustee, dated as of July 1, 1985, as amended, the undersigned as the registered owner of 100% of the First Mortgage Bonds (as defined in the Indenture) hereby consents to the execution and delivery of the Supplemental Indenture dated as of October 1, 2004 (the "Supplemental Indenture") between Southern Indiana Gas and Electric Company and Deutsche Bank Trust Company Americas, as mortgage trustee and the amendment of the First Mortgage Bonds as set forth in said Supplemental Indenture.
THE BANK OF NEW YORK TRUST COMPANY,
N.A.
By /s/ Mark A. Hudson
---------------------------------
Its Vice President
----------------------------
Date: October 15, 2004
|
EXHIBIT 21.1
VECTREN CORPORATION
Subsidiaries
Wholly Owned Subsidiaries:
State of Incorporation/ Doing Business As
Name of Entity Jurisdiction
--------------------------------------- ----------------------- -----------------------
|X| Vectren Utility Holdings, Inc. Indiana
|X| Southern Indiana Gas and Indiana Vectren Energy Delivery
Electric Company, Inc. of Indiana, Inc.
|X| Indiana Gas Company, Inc. Indiana, Ohio Vectren Energy Delivery
of Indiana, Inc.
|X| Vectren Energy Delivery of Ohio
Ohio, Inc.
|X| Vectren Enterprises, Inc. Indiana
|X| Vectren Energy Services, Inc. Indiana
|X| Vectren Utility Services, Inc. Indiana
|X| Vectren Communications, Inc. Indiana
|X| Vectren Ventures, Inc. Indiana
|X| Vectren Financial Group, Inc. Indiana
|X| Vectren Energy Marketing and Indiana
Services, Inc.
|X| Vectren Energy Retail, Inc. Indiana
|X| Energy Systems Group, Inc. Indiana
|X| Vectren Environmental Services, Indiana
Inc.
|X| Vectren Fuels, Inc. Indiana
|X| Vectren Broadband, Inc. Indiana
|X| Vectren Communications Services, Indiana
Inc.
|X| Southern Indiana Properties, Inc. Indiana
|X| Vectren Synfuels, Inc. Indiana
|X| Energy Realty, Inc. Indiana
|X| Energy Systems Group, LLC Indiana
|X| Vectren Retail, LLC Indiana, Ohio Vectren Source
|X| Vectren Capital Corp. Indiana
|X| Vectren Aero, LLC Indiana
Less than Wholly Owned Subsidiaries:
State of Incorporation/ Doing Business As
Name of Entity Jurisdiction
--------------------------------------- ----------------------- -----------------------
|X| ProLiance Energy, LLC Indiana
|X| Reliant Services, LLC Indiana
|X| Haddington Energy Partners, LP Delaware
|X| Haddington Energy Partners II, LP Delaware
|X| Pace Carbon Synfuels, LP Delaware
|
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-118399 and 333-33684 on Forms S-8 and in Registration Statement Nos. 333-120357 and 333-31326 on Forms S-3 of our report, dated February 23, 2005, relating to the financial statements and financial statement schedule of Vectren Corporation, and management's report on the effectiveness of internal control over financial reporting appearing in this Annual Report on Form 10-K of Vectren Corporation for the year ended December 31, 2004.
/s/ Deloitte & Touche LLP --------------------------- DELOITTE & TOUCHE LLP Indianapolis, Indiana March 2, 2005 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Niel C. Ellerbrook, certify that:
1. I have reviewed this Annual Report on Form 10-K of Vectren Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 23, 2005
/s/ Niel C. Ellerbrook
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Niel C. Ellerbrook
Chairman, President, & Chief Executive Officer
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Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Jerome A. Benkert, Jr., certify that:
1. I have reviewed this Annual Report on Form 10-K of Vectren Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 23, 2005
/s/ Jerome A. Benkert, Jr.
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Jerome A. Benkert, Jr.
Executive Vice President & Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. No. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge, (i) this Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Vectren Corporation.
Signed this 23rd day of February, 2005.
/s/ Jerome A. Benkert, Jr. /s/ Niel C. Ellerbrook ------------------------------------ --------------------------------------- (Signature of Authorized Officer) (Signature of Authorized Officer) Jerome A. Benkert, Jr. Niel C. Ellerbrook ------------------------------------ ---------------------------------------- (Typed Name) (Typed Name) Executive Vice President & Chief Chairman, President & Chief Financial Officer Executive Officer ------------------------------------ ---------------------------------------- (Title) (Title) |