UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number: 1-6494
INDIANA GAS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
INDIANA 35-0793669
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20 N.W. 4th Street, Evansville, Indiana, 47708
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(Address of principal executive offices)
(Zip Code)
812-491-4000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock- Without Par Value 805.001 October 31, 2003
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Class Number of Shares Date
Omission of Information by Certain Wholly Owned Subsidiaries
The Registrant is a wholly owned subsidiary of Vectren Utility Holdings, Inc.
and meets the conditions set forth in General Instructions (H)(1)(a) and (b) of
Form 10-Q and is therefore filing with the reduced disclosure format
contemplated thereby.
Table of Contents
Item Page
Number Number
PART I. FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Indiana Gas Company, Inc.
Condensed Balance Sheets 1-2
Condensed Statements of Income 3
Condensed Statements of Cash Flows 4
Notes to Unaudited Condensed Financial Statements 5-10
2 Management's Discussion and Analysis of Results of 11-15
Operations and Financial Condition (A)
3 Quantitative and Qualitative Disclosures About Market
Risk (A) 15
4 Controls and Procedures 15
PART II. OTHER INFORMATION
1 Legal Proceedings 16
6 Exhibits and Reports on Form 8-K 16
Signatures 17
(A) Omitted or amended as the Registrant is a wholly-owned subsidiary of
Vectren Utility Holdings, Inc. and meets the conditions set forth in
General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing
with the reduced disclosure format contemplated thereby.
Access to Information
Vectren Corporation makes available all SEC filings and recent annual reports
free of charge, including those of its wholly owned subsidiaries, through its
website at www.vectren.com, or by request, directed to Investor Relations at the
mailing address, phone number, or email address that follows:
Mailing Address: Phone Number: Investor Relations Contact:
P.O. Box 209 (812) 491-4000 Steven M. Schein
Evansville, Indiana Vice President, Investor Relations
47702-0209 [email protected]
Definitions
AFUDC: allowance for funds used during MCF / BCF: millions / billions of
construction cubic feet
APB: Accounting Principles Board MDth / MMDth: thousands / millions
of dekatherms
EITF: Emerging Issues Task Force OUCC: Indiana Office of the
Utility Consumer Counselor
FASB: Financial Accounting Standards Board SFAS: Statement of Financial
Accounting Standards
IDEM: Indiana Department of Environmental Throughput: combined gas sales
Management and gas transportation volumes
IURC: Indiana Utility Regulatory Commission
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDIANA GAS COMPANY, INC.
CONDENSED BALANCE SHEETS
(Unaudited - In thousands)
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September 30, December 31,
2003 2002
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ASSETS
Utility Plant
Original cost $ 1,184,821 $ 1,148,614
Less: accumulated depreciation & amortization 519,736 492,673
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Net utility plant 665,085 655,941
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Current Assets
Cash & cash equivalents 2,978 3,729
Accounts receivable-less reserves of $1,960 &
$1,399, respectively 16,814 48,446
Receivables due from other Vectren companies 38 10,754
Accrued unbilled revenues 13,080 53,192
Inventories 10,941 13,286
Recoverable gas costs 13,604 10,241
Prepayments & other current assets 76,479 37,090
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Total current assets 133,934 176,738
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Investment in the Ohio operations 222,294 220,417
Other Investments 2,773 2,459
Non-Utility Property - Net 215 253
Regulatory Assets 19,306 18,132
Other Assets 3,232 4,207
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TOTAL ASSETS $ 1,046,839 $ 1,078,147
================================================================================
The accompanying notes are an integral part of these condensed financial
statements.
INDIANA GAS COMPANY, INC.
CONDENSED BALANCE SHEETS
(Unaudited - In thousands)
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September 30, December 31,
2003 2002
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LIABILITIES & SHAREHOLDER'S EQUITY
Capitalization
Common shareholder's equity
Common stock (no par value) $ 357,995 $ 242,995
Retained earnings 73,023 79,061
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Total common shareholder's equity 431,018 322,056
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Long-term debt-net of current maturities 214,917 228,480
Long-term debt due to VUHI 184,448 147,275
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Total capitalization 830,383 697,811
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Commitments & Contingencies (Notes 4, 8, & 9)
Current Liabilities
Accounts payable 13,494 33,728
Accounts payable to affiliated companies 27,695 47,255
Accounts payable due to other Vectren companies 7,953 38,818
Accrued liabilities 33,822 30,052
Short-term borrowings due to VUHI 52,265 108,182
Current maturities of long-term debt - 38,750
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Total current liabilities 135,229 296,785
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Deferred Income Taxes & Other Liabilities
Deferred income taxes 45,509 45,601
Deferred credits & other liabilities 35,718 37,950
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Total deferred credits & other liabilities 81,227 83,551
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TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,046,839 $ 1,078,147
================================================================================
The accompanying notes are an integral part of these condensed financial
statements.
INDIANA GAS COMPANY, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited - In thousands)
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Three Months Nine Months
Ended September 30, Ended September 30,
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2003 2002 2003 2002
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As Restated, As Restated,
See Note 3 See Note 3
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OPERATING REVENUES $ 73,606 $ 57,900 $ 473,832 $ 342,054
COST OF GAS 45,908 29,648 319,426 201,877
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GAS OPERATING MARGIN 27,698 28,252 154,406 140,177
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OPERATING EXPENSES
Other operating 20,914 18,053 63,540 58,124
Depreciation & amortization 10,912 10,124 32,236 30,281
Income taxes (5,078) (4,077) 9,052 5,060
Taxes other than income taxes 3,075 3,470 12,897 11,781
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Total operating expenses 29,823 27,570 117,725 105,246
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OPERATING INCOME (LOSS) (2,125) 682 36,681 34,931
OTHER INCOME (EXPENSE)-NET
Equity in earnings (losses) of
the Ohio operations-net of tax (2,100) (2,229) 1,877 3,216
Other - net 306 36 (914) 657
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Total other income (expense)-net (1,794) (2,193) 963 3,873
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Interest expense 7,217 7,827 21,742 24,053
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NET INCOME (LOSS) $ (11,136) $ (9,338) $ 15,902 $ 14,751
=====================================================================================
The accompanying notes are an integral part of these condensed financial
statements.
INDIANA GAS COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In thousands)
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Nine Months Ended
September 30,
-------------------------
2003 2002
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As Restated,
See Note 3
-----------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 18,333 $ 100,062
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Common stock issuance to VUHI 115,000 -
Long-term debt issuance to VUHI 37,137 -
Requirements for:
Retirement of long-term debt, including
premiums paid (53,429) (6,470)
Dividends to VUHI (21,940) (22,340)
Net change in short-term borrowings due to VUHI (55,917) (36,386)
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Net cash flows from financing activities 20,851 (65,196)
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, excluding AFUDC-equity (39,935) (30,184)
Other investments - (1,494)
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Net cash flows from investing activities (39,935) (31,678)
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Net (decrease) increase in cash & cash equivalents (751) 3,188
Cash & cash equivalents at beginning of period 3,729 268
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Cash & cash equivalents at end of period $ 2,978 $ 3,456
===============================================================================
The accompanying notes are an integral part of these condensed financial
statements.
INDIANA GAS COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Overview
Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation,
provides natural gas distribution and transportation services to a diversified
customer base in 49 of Indiana's 92 counties. Indiana Gas is a direct wholly
owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct,
wholly owned subsidiary of Vectren Corporation (Vectren).
Vectren, an Indiana corporation, is an energy and applied technology holding
company headquartered in Evansville, Indiana. Vectren was organized on June 10,
1999, solely for the purpose of effecting the merger of Indiana Energy, Inc.
(Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of
Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free
exchange of shares and has been accounted for as a pooling-of-interests in
accordance with Accounting Principles Board (APB) Opinion No. 16 "Business
Combinations."
Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding
company for its three operating public utilities: Indiana Gas, 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. 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.
Investment in the Gas Distribution Assets of The Dayton Power and Light Company
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On October 31, 2000, Vectren acquired the natural gas distribution assets of The
Dayton Power and Light Company for approximately $471 million, including
transaction costs, as a tenancy in common through two separate wholly owned
subsidiaries. Vectren Energy Delivery of Ohio, Inc. (VEDO) holds a 53% undivided
ownership interest in the assets, and Indiana Gas holds a 47% undivided
ownership interest. VEDO is the operator of the assets, and these assets are
referred to as "the Ohio operations." Indiana Gas' ownership is accounted for
using the equity method in accordance with APB Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock" and is included in
investment in the Ohio operations, and its interest in the results of operations
is included in equity in earnings of the Ohio operations. The Ohio operations
provide natural gas distribution and transportation services to 17 counties in
west central Ohio, including counties surrounding Dayton.
2. Basis of Presentation
The interim condensed financial statements included in this report have been
prepared by the Company, without audit, as provided in the rules and regulations
of the Securities and Exchange Commission. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
omitted as provided in such rules and regulations. The Company believes that the
information in this report reflects all adjustments necessary to fairly state
the results of the interim periods reported. These condensed financial
statements and related notes should be read in conjunction with the Company's
audited annual financial statements for the year ended December 31, 2002, filed
on Form 10-K/A. Because of the seasonal nature of the Company's utility
operations, the results shown on a quarterly basis are not necessarily
indicative of annual results.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
3. Restatement of Previously Reported Information
Subsequent to the issuance of the Company's 2002 quarterly financial statements,
the Company's management determined that previously issued financial statements
should be restated. The restatement had the effect of increasing net income for
the three and nine months ended September 30, 2002, by $0.2 million after tax
and $1.3 million after tax, respectively.
During the nine months ended September 30, 2002, the Company identified errors
related to the recording of estimates used in the calculation of unbilled
revenue. As a result, earnings for the nine months ended September 30, 2002,
increased by $2.1 million ($1.3 million after tax). Additionally, the Company
identified reconciliation errors and errors related to the recording of other
estimates that were not significant, either individually or in the aggregate,
that had an impact of less than $0.1 million after tax on previously reported
earnings for the nine months ended September 30, 2002, and increased previously
reported earnings for the three months ended September 30, 2002, by
approximately $0.2 million after tax.
Following is a summary of the effects of the restatement on previously reported
results of operations for the three months ended September 30, 2002.
In Thousands
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As reported Restatement As Restated
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OPERATING REVENUES $ 57,544 $ 356 $ 57,900
COST OF GAS 29,648 - 29,648
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GAS OPERATING MARGIN 27,896 356 28,252
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OPERATING EXPENSES
Other operating 17,756 297 18,053
Depreciation & amortization 10,124 - 10,124
Income taxes (4,212) 135 (4,077)
Taxes other than income taxes 3,470 - 3,470
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Total operating expenses 27,138 432 27,570
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OPERATING INCOME 758 (76) 682
OTHER INCOME (EXPENSE) - NET
Equity in earnings (losses)
of the Ohio operations - net of tax (2,249) 20 (2,229)
Other - net 26 10 36
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Total other income (expense) - net (2,223) 30 (2,193)
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Interest expense 8,115 (288) 7,827
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NET INCOME (LOSS) $ (9,580) $ 242 $ (9,338)
================================================================================
Following is a summary of the effects of the restatement on previously reported
results of operations for the nine months ended September 30, 2002.
In thousands
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As reported Restatement As Restated
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OPERATING REVENUES $ 339,052 $ 3,002 $ 342,054
COST OF GAS 201,877 - 201,877
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GAS OPERATING MARGIN 137,175 3,002 140,177
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OPERATING EXPENSES
Other operating 57,454 670 58,124
Depreciation & amortization 30,281 - 30,281
Income taxes 4,128 932 5,060
Taxes other than income taxes 11,781 - 11,781
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Total operating expenses 103,644 1,602 105,246
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OPERATING INCOME 33,531 1,400 34,931
OTHER INCOME (EXPENSE) - NET
Equity in earnings of the Ohio operations
- net of tax 3,458 (242) 3,216
Other - net 628 29 657
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Total other income (expense) - net 4,086 (213) 3,873
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Interest expense 24,147 (94) 24,053
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NET INCOME $ 13,470 $ 1,281 $ 14,751
==================================================================================
4. Transactions with Other Vectren Companies
Support Services and Purchases
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, finance, tax, risk
management, human resources, which includes charges for restricted stock
compensation and for pension and other postretirement benefits not directly
charged to subsidiaries. These costs have been allocated using various
allocators, primarily number of employees, number of customers and/or revenues.
Allocations are based on cost. Indiana Gas received corporate allocations
totaling $15.2 million and $12.1 million, respectively, for the three months
ended September 30, 2003 and 2002, and $44.0 million and $38.1 million,
respectively, for the nine months ended September 30, 2003 and 2002.
Guarantees of Parent Company Debt
Vectren's three operating utility companies, VEDO, Indiana Gas, and SIGECO are
guarantors of VUHI's $346 million in short-term credit facilities, of which
$142.5 million is outstanding as of September 30, 2003, and VUHI's $550.0
million unsecured senior notes outstanding at September 30, 2003. The guarantees
are full and unconditional and joint and several, and VUHI has no subsidiaries
other than the subsidiary guarantors.
Stock-Based Incentive Plans
Indiana Gas does not have stock-based compensation plans separate from Vectren.
An insignificant number of Indiana Gas' employees participate in Vectren's
stock-based compensation plans.
5. Transactions with ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides natural gas
and related services to Indiana Gas, the Ohio operations, Citizens Gas and
others. ProLiance also began providing service to SIGECO and Vectren Retail, LLC
(Vectren's retail gas marketer) in 2002. ProLiance's primary businesses include
gas marketing, gas portfolio optimization, and other portfolio and energy
management services.
Purchases from ProLiance for resale and for injections into storage for the
three months ended September 30, 2003 and 2002 totaled $88.9 million and $58.9
million, respectively, and for the nine months ended September 30, 2003 and
2002, totaled $334.2 million and $202.5 million, respectively. Amounts owed to
ProLiance at September 30, 2003, and December 31, 2002, for those purchases were
$27.3 million and $46.1 million, respectively, and are included in accounts
payable to affiliated companies. Amounts charged by ProLiance for gas supply
services are established by supply agreements with each utility.
6. Investment in the Ohio Operations
Unaudited summarized financial information of the Ohio operations for the three
and nine months ended September 30, 2003 and 2002 is presented below.
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Three Months Nine Months
Ended September 30, Ended September 30,
In thousands 2003 2002 2003 2002
- -------------------------------------------------------------------------------
Operating revenues $ 30,670 $ 23,128 $ 238,232 $ 189,935
Gas operating margin 11,053 9,529 73,572 65,026
Operating income (loss) (4,676) (4,740) 3,478 6,588
Net income (loss) (4,468) (4,743) 3,994 6,840
Interest costs arising from financing arrangements utilized to purchase the Ohio
operations are not reflected in the above-summarized financial information. Had
the financing arrangements of Indiana Gas and VEDO used to facilitate the
acquisition been pushed down to the Ohio operations, the net loss would have
been $6.9 million and $7.0 million for the three months ended September 30, 2003
and 2002, respectively. For the nine months ended September 30, 2003, the net
loss would have been $3.1 million and net income of $0.1 million for the nine
months ended September 30, 2002.
7. Financing Transactions
During 2003, the Company called two senior unsecured notes. The first 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 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 $1.1 million were deferred as a
regulatory asset. The proceeds to fund the early redemption were received from
VUHI in the form of new long-term debt totaling $37.1 million and $115 million
in additional equity. To generate the initial proceeds to fund these
transactions, in August 2003, VUHI completed a public offering of long-term debt
netting proceeds of approximately $203 million, and Vectren completed a public
offering of common stock netting proceeds of approximately $163 million.
Additionally, in January 2003, Indiana Gas retired other debt totaling $17.5
million.
The $37.1 million of new long-term debt due to VUHI has terms identical to the
terms of notes issued by VUHI in August 2003 through the public offering. Those
notes have an interest rate of 5.75% priced at 99.177% to yield 5.80% to
maturity and are due August 2018. 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 VUHI's indenture, plus 25 basis points.
8. Commitments & Contingencies
Legal Proceedings
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations.
United States Securities and Exchange Commission (SEC) Informal Inquiry
As more fully described in Note 3 to these consolidated condensed financial
statements and in Note 3 to the 2002 consolidated financial statements filed on
Form 10-K/A, the Company restated its consolidated financial statements for
2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC
in an informal inquiry with respect to this previously announced restatement,
has met with the staff of the SEC, and has provided information in response to
their requests.
9. Environmental Matters
In the past, Indiana Gas and others operated facilities for the manufacture of
gas. Given the availability of natural gas transported by pipelines, these
facilities have not been operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas and others may now be required
to take remedial action if certain byproducts are found above the regulatory
thresholds at these sites.
Indiana Gas has identified the existence, location, and certain general
characteristics of 26 gas manufacturing and storage sites for which it may have
some remedial responsibility. Indiana Gas has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites under an agreed
order between Indiana Gas and the IDEM, and a Record of Decision was issued by
the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at
additional sites, Indiana Gas has submitted several of the sites to the IDEM's
Voluntary Remediation Program and is currently conducting some level of remedial
activities including groundwater monitoring at certain sites where deemed
appropriate and will continue remedial activities at the sites as appropriate
and necessary.
In conjunction with data compiled by environmental consultants, Indiana Gas has
accrued the estimated costs for further investigation, remediation, groundwater
monitoring, and related costs for the sites. While the total costs that may be
incurred in connection with addressing these sites cannot be determined at this
time, Indiana Gas has recorded costs that it reasonably expects to incur
totaling approximately $20.4 million.
The estimated accrued costs are limited to Indiana Gas' proportionate share of
the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26
sites with other potentially responsible parties (PRP), which serve to limit
Indiana Gas' share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, Indiana Gas has received and recorded
settlements from all known insurance carriers in an aggregate amount
approximating $20.4 million.
Environmental matters related to manufactured gas plants have had no material
impact on earnings since costs recorded to date approximate PRP and insurance
settlement recoveries. While Indiana Gas has recorded all costs which it
presently expects to incur in connection with activities at these sites, it is
possible that future events may require some level of additional remedial
activities which are not presently foreseen.
10. Impact of Recently Issued Accounting Guidance
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company adopted this statement on
January 1, 2003. The adoption was not material to the Company's results of
operations or financial condition.
In accordance with regulatory treatment, the Company collects an estimated net
cost of removal of its utility plant in rates through normal depreciation. As of
September 30, 2003 and December 31, 2002, such removal costs approximated $175
million of accumulated depreciation as presented in the condensed consolidated
balance sheets based upon the Company's latest depreciation studies.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150).
SFAS 150 requires issuers to classify as liabilities the following three types
of freestanding financial instruments: mandatorily redeemable financial
instruments; obligations to repurchase the issuer's equity shares by
transferring assets; and certain obligations to issue a variable number of
shares. SFAS 150 is effective immediately for all financial instruments entered
into or modified after May 31, 2003. For all other instruments, SFAS 150 applies
to the Company's third quarter of 2003. SFAS 150's adoption did not affect the
Company's results of operations or financial condition.
FASB Interpretation (FIN) 45
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken.
The initial recognition and measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Since that date, the adoption has not had a material effect on the Company's
results of operations or financial condition.
FIN 46
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIE) and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies related to VIE's and, thus
improves comparability between enterprises engaged in similar activities when
those activities are conducted through VIE's. FIN 46 currently applies to VIE's
created after January 31, 2003, and to VIE's in which an enterprise obtains an
interest after that date. For entities created prior to January 31, 2003, FIN 46
is to be adopted on December 31, 2003. Although management is still evaluating
the impact of FIN 46 on its financial position and results of operations, the
adoption is not expected to have a material effect.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Pursuant to General Instructions H(2)(a) of Form 10-Q, the following analysis of
the results of operations is presented in lieu of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Results of Operations
The following discussion and analysis should be read in conjunction with the
unaudited condensed financial statements and notes thereto. Subsequent to the
issuance of the Company's 2002 quarterly financial statements, the Company's
management determined that previously issued financial statements should be
restated. The restatement had the effect of increasing net income for the three
and nine months ended September 30, 2002, by $0.2 million after tax and $1.3
million after tax, respectively. Note 3 to the condensed financial statements
includes a summary of the effects of the restatement. The Company's results of
operations give effect to the restatement.
Net Income (Loss)
The net loss for the third quarter 2003 was $11.1 million as compared to $9.3
million for the same quarter last year, an additional loss of $1.8 million. The
primary contributors to the decline were a slowly recovering economy, higher gas
costs and the timing of operating expenses.
The earnings for the nine months ended September 30, 2003, were $15.9 million as
compared to $14.8 million for the same period in 2002, a increase of $1.1
million. Earnings in 2003 were primarily driven by weather that on the year was
favorably impacted by an estimated $5.1 million after tax compared to last year
partially offset by a slowly recovering economy and increased operating expenses
caused by higher gas costs and the timing of routine expenditures.
Gas Utility Margin
Gas utility margin by customer type and separated between volumes sold and
transported follows:
- ---------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In millions) 2003 2002 2003 2002
- ------------------------- ------------------ -------------------
Residential $ 18.6 $ 17.4 $ 102.4 $ 90.8
Commercial 4.1 4.7 30.1 28.6
Contract 5.6 5.8 19.2 20.1
Other (0.6) 0.3 2.7 0.6
- ---------------------------------------------------------------------------
Total gas margin $ 27.7 $ 28.2 $ 154.4 $ 140.1
===========================================================================
Volumes in MMDth
Sold 3.8 3.4 48.1 41.0
Transported 10.5 12.1 37.0 39.1
- ---------------------------------------------------------------------------
Total throughput 14.3 15.5 85.1 80.1
===========================================================================
Gas margins for the third quarter, a non-heating, base load usage quarter, were
$27.7 million, a decrease of 2% compared to the prior year period. While margin
was generally flat, residential and commercial usage increased slightly, offset
by declining industrial usage due to the slow economic conditions.
Gas margins year-to-date were $154.4 million, an increase of $14.3 million over
the nine months ended September 30, 2002. It is estimated that weather, 20%
colder than the prior year and 6% colder than normal, contributed $8.5 million
to the increased margin. The remaining $5.8 million increase is primarily
attributable to higher utility receipts taxes on higher gas costs and volumes
sold, partially offset by the negative effect of high gas prices on customer
usage. The colder weather is the primary reason for the 6% increase in
throughput.
Higher gas costs and a slowly recovering economy have impacted customer usage.
The total average cost per dekatherm of gas purchased for the three and nine
months ended September 30, 2003, was $6.49 and $6.63, respectively, compared to
$4.43 and $4.49, respectively, for the same periods in 2002.
Operating Expenses
Other Operating
For the three and nine months ended September 30, 2003, other operating expenses
increased $2.9 million and $5.4 million, respectively, compared to the same
periods in the prior year. The increased expenses were principally due to the
timing of routine expenditures between the periods, increased uncollectible
accounts expense and increased employee benefit costs. Year-to-date,
uncollectible accounts expense has increased $1.4 million compared to the prior
year due principally to higher gas costs.
Depreciation & Amortization
For the three and nine months ended September 30, 2003, depreciation and
amortization increased $0.8 million and $2.0 million, respectively, due to a
full nine months depreciation on utility plant.
Income Tax
For the nine months ended September 30, 2003, income taxes increased $4.0
million when compared to 2002. The year-to-date change is primarily due to an
increased effective tax rate and increased pre-tax income. Year to date, the
effective tax rate increased from 30.5% in 2002 to 39.2% in 2003 principally due
to an increase in the Indiana state income tax rate from 4.5% to 8.5% that was
effective January 1, 2003, and a non-recurring tax reserve reduction in 2002 of
$0.8 million.
Taxes Other Than Income Taxes
For the three and nine months ended September 30, 2003, taxes other than income
taxes decreased $0.4 million and increased $1.1 million, respectively, compared
to the prior year. For the quarter, the decrease is attributable to lower
property taxes. Year-to-date, the increase results from higher utility receipts
taxes as a result of higher gas prices and more volumes sold, partially offset
by decreases in property taxes. The higher utility receipts taxes on gas volumes
sold are recovered dollar-for-dollar through customer billings.
Other Income - Net
Equity in Earnings (Losses) of the Ohio operations
As described in Note 1 to the financial statements, Indiana Gas has a 47%
undivided interest in the Ohio operations acquired by Vectren on October 31,
2000. Equity in earnings (losses) of the Ohio operations represents Indiana Gas'
portion of the Ohio operations' net income (loss). The financing costs
associated with VEDO's 53% ownership interest are not included in the Ohio
operations' equity in earnings (losses). For the three and nine months ended
September 30, 2003, equity method losses decreased $0.1 million and earnings
declined $1.3 million, respectively, primarily due to higher operating expenses
caused partly by higher gas costs.
Other- net
For the three and nine months ended September 30, 2003, other, net increased
$0.3 million and decreased $1.6 million, respectively, compared to the prior
year. The year-to-date decrease results principally from increased contributions
to low-income heating assistance programs resulting from the ProLiance
settlement previously approved by the IURC.
Interest Expense
For the three and nine months ended September 30, 2003, interest expense
decreased $0.6 million and $2.3 million, respectively, when compared to the
prior year. The decrease results from lower interest rates on variable rate
debt. Results also include permanent financing transactions executed during the
year whereby short term borrowings due to VUHI and $34.8 million of higher
coupon third party debt were replaced with $115 million in equity and $37.1
million in long term debt payable to VUHI.
Impact of Recently Issued Accounting Guidance
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company adopted this statement on
January 1, 2003. The adoption was not material to the Company's results of
operations or financial condition.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150).
SFAS 150 requires issuers to classify as liabilities the following three types
of freestanding financial instruments: mandatorily redeemable financial
instruments; obligations to repurchase the issuer's equity shares by
transferring assets; and certain obligations to issue a variable number of
shares. SFAS 150 is effective immediately for all financial instruments entered
into or modified after May 31, 2003. For all other instruments, SFAS 150 applies
to the Company's third quarter of 2003. SFAS 150's adoption did not affect the
Company's results of operations or financial condition.
FASB Interpretation (FIN) 45
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosure of certain guarantees issued and
outstanding and that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken.
The initial recognition and measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Since that date, the adoption has not had a material effect on the Company's
results of operations or financial condition.
FIN 46
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities (VIE) and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies related to VIE's and, thus
improves comparability between enterprises engaged in similar activities when
those activities are conducted through VIE's. FIN 46 currently applies to VIE's
created after January 31, 2003, and to VIE's in which an enterprise obtains an
interest after that date. For entities created prior to January 31, 2003, FIN 46
is to be adopted on December 31, 2003. Although management is still evaluating
the impact of FIN 46 on its financial position and results of operations, the
adoption is not expected to have a material effect.
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;
unusual maintenance or repairs; 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; availability due to demand, shortages, transmission
problems or other developments; 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; state public utility commissions; state entities which regulate
natural gas transmission and distribution, natural gas gathering and
processing; and similar entities with regulatory oversight.
o Economic conditions including the effects of an economic downturn,
inflation rates, and monetary fluctuations.
o Changing market conditions and a variety of other factors associated with
physical energy and financial trading activities including, but not limited
to, price, basis, credit, liquidity, volatility, capacity, interest rate,
and warranty risks.
o Direct or indirect effects on our business, financial condition or
liquidity resulting from a change in credit ratings, changes in interest
rates, and/or changes in market perceptions of the utility industry and
other energy-related industries.
o Employee workforce factors including changes in key executives, collective
bargaining agreements with union employees, or work stoppages.
o Legal and regulatory delays and other obstacles associated with mergers,
acquisitions, and investments in joint ventures.
o Costs and other effects of legal and administrative proceedings,
settlements, investigations, claims, and other matters, including, but not
limited to, those described in Management's Discussion and Analysis of
Results of Operations and Financial Condition.
o Changes in federal, state or local legislature requirements, such as
changes in tax laws or rates, environmental laws and regulations.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of changes in actual results,
changes in assumptions, or other factors affecting such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to General Instructions H(2)(c) of Form 10-Q, the following is
intentionally omitted.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2003, the Company carried out an evaluation under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer of the effectiveness and the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective at providing
reasonable assurance that material information relating to the Company required
to be disclosed by the Company in its filings under the Securities Exchange Act
of 1934 (Exchange Act) is brought to their attention on a timely basis.
Disclosure controls and procedures, as defined by the Exchange Act in Rules
13a-15(e) and 15d-15(e), are controls and other procedures of the Company that
are designed to ensure that information required to be disclosed by the Company
in the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms. "Disclosure controls and procedures" include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in its Exchange Act reports is accumulated and
communicated to the Company's management, including its principal executive and
financial officers, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2003, there have been no significant
changes to the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Internal control over financial reporting is defined by the SEC in Final Rule:
Management's Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports. The final rule
defines internal control over financial reporting as a process designed by, or
under the supervision of, the registrant's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
registrant's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that: (1) Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the registrant; (2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the registrant are being made only in accordance with
authorizations of management and directors of the registrant; and (3) Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the registrant's assets that could have a
material effect on the financial statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management, there are no legal proceedings
pending against the Company that are likely to have a material adverse effect on
its financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Certifications
31.1 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002-
Chief Executive Officer
31.2 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002-
Chief Financial Officer
32 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
Other Exhibits
None
(b) Reports On Form 8-K During The Last Calendar Quarter
On July 11, 2003, Vectren Corporation filed a Current Report on Form 8-K with
respect to adjust 2003 earnings guidance and to address recent announcements
related to the production of synthetic fuel. Portions of this information were
furnished to the SEC
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
99.1 - Press Release - Vectren Corporation adjusts 2003
earnings guidance and addresses recent announcements
related to the production of synthetic fuel
99.2 - Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
Item 9. Regulation FD Disclosure and Item 12. Results of Operations
and Financial Condition
On July 23, 2003, Vectren Corporation furnished information to the SEC on a
Current Report on Form 8-K with respect to the release of financial information
to the investment community regarding the Company's results of operations, for
the three, six, and twelve month periods ended June 30, 2003. The financial
information was released to the public through this filing.
Item 7. Exhibits
99.1 - Press Release - Vectren Corporation Reports 2nd
Quarter 2003 Results
99.2 - Press Release - Vectren Corporation Declares Regular
Quarterly Dividend
99.3 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation
Reform Act of 1995
Item 9. Regulation FD Disclosure and Item 12. Results of Operations
and Financial Condition
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDIANA GAS COMPANY, INC.
----------------------------
Registrant
November 12, 2003 /s/ Jerome A. Benkert, Jr.
----------------------------
Jerome A. Benkert, Jr.
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/ M. Susan Hardwick
-----------------------------
M. Susan Hardwick
Vice President & Controller
(Principal Accounting Officer)