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, 2002
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.
--------------------------------
(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. Fourth Street, Evansville, Indiana 47708
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(Address of principal executive offices) (Zip Code)
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
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None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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None None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) 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 ___. No |X|.
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
28, 2002 was zero. All shares outstanding of the Registrant's common stock were
held by Vectren Corporation.
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 690.001 March 15, 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 (I)(1)(a) and (b) of
Form 10-K and is therefore filing with the reduced disclosure format
contemplated thereby.
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 NOx: nitrogen oxide
FASB: Financial Accounting Standards Board OUCC: Indiana Office of the Utility
Consumer Counselor
FERC: Federal Energy Regulatory Commission SFAS: Statement of Financial Accounting
Standards
IDEM: Indiana Department of Environmental USEPA: United States Environmental
Management Protection Agency
IURC: Indiana Utility Regulatory Commission Throughput: combined gas sales and gas
transportation volumes
Table of Contents
Item Page
Number Number
Part I
1 Business (A).......................................................1
2 Properties ........................................................1
3 Legal Proceedings..................................................2
4 Submission of Matters to Vote of Security Holders (A)..............2
Part II
5 Market for the Company's Common Equity and Related
Stockholder Matters .............................................2
6 Selected Financial Data (A)........................................2
7 Management's Discussion and Analysis of Results of
Operations and Financial Condition (A)...........................3
7A Qualitative and Quantitative Disclosures About
Market Risk....................................................10
8 Financial Statements and Supplementary Data.......................12
9 Change in and Disagreements with Accountants on
Accounting and Financial Disclosure............................58
Part III
10 Directors and Executive Officers of the Company (A)...............58
11 Executive Compensation (A)........................................58
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters (A)..................58
13 Certain Relationships and Related Transactions (A)................58
Part IV
14 Controls and Procedures...........................................58
15 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................59
Signatures........................................................62
Certifications....................................................63
(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 (I)(1)(a) and (b) of Form 10-K 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 47702-0209 Vice President, Investor
Relations
sschein@vectren.com
PART I
ITEM 1. BUSINESS
Description of the Business
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
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 on
the equity method in accordance with APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." Indiana Gas' initial investment was
approximately $218.1 million. The Ohio operations provide natural gas
distribution and transportation services to 17 counties in west central Ohio,
including counties surrounding Dayton.
Because the Ohio operations are a significant subsidiary as defined by Rule 3-09
of Regulation S-X, the financial statements of the Ohio operations are included
in this filing under Part II Item 8 Financial Statements and Supplementary Data.
The narrative description of the business, competition and personnel sections
were intentionally omitted. See the table of contents of this Annual Report on
Form 10-K for explanation.
ITEM 2. PROPERTIES
Indiana Gas
Indiana Gas owns and operates four gas storage fields located in Indiana
covering 58,489 acres of land with an estimated ready delivery from storage
capability of 4.2 BCF of gas with delivery capabilities of 119,160 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 31,000 MCF of manufactured gas
per day. In addition to its owned storage and manufacturing and daily delivery
capabilities, Indiana Gas contracts for a maximum of 17.2 BCF of gas
availability across various pipelines with a delivery capability of 283,298 MCF
per day. Indiana Gas' gas delivery system includes 11,590 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.
Ohio operations
The Ohio operations owns and operates three liquefied petroleum (propane)
air-gas manufacturing plants and one cavern for propane storage, all of which
are located in Ohio. The plants and cavern can store 3.7 million gallons of
propane, and the plants can manufacture for delivery 51,047 MCF of manufactured
gas per day. In addition to its owned storage and manufacturing and daily
delivery capabilities, the Ohio operations contracts for a maximum of 13.2 BCF
of gas availability across various pipelines with a delivery capability of
281,491 MCF per day. The Ohio operations' gas delivery system includes 5,176
miles of distribution and transmission mains, all of which are located in Ohio.
ITEM 3. LEGAL PROCEEDINGS
Indiana Gas 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. Legal proceedings involving
transactions with ProLiance were substantially resolved during 2002. See Note 5
of its financial statements included in Part II Item 8 Financial Statements and
Supplementary Data for a discussion of regulatory matters related to ProLiance.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Intentionally omitted. See the table of contents of this Annual Report on Form
10-K for explanation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price
All of the outstanding shares of Indiana Gas' common stock are owned by VUHI.
Indiana Gas' common stock is not traded.
There are no outstanding options or warrants to purchase Indiana Gas' common
equity or securities convertible into Indiana Gas' common equity. Additionally,
Indiana Gas has no plans to publicly offer any of its common equity.
Dividends Paid to Parent
During 2002, Indiana Gas paid dividends to its parent company of $6.9 million,
$7.7 million, $7.7 million, and zero in the first, second, third, and fourth
quarters, respectively.
During 2001, Indiana Gas paid dividends to its parent company of $7.9 million,
$7.1 million, $7.7 million, and $3.3 million in the first, second, third, and
fourth quarters, respectively.
On January 22, 2003, the board of directors declared a dividend $7.3 million
payable to its parent company on March 3, 2003.
Dividends on shares of common stock are payable at the discretion of the board
of directors out of legally available funds. Future payments of dividends, and
the amounts of these dividends, will depend on the Company's financial
condition, results of operations, capital requirements, and other factors.
ITEM 6. SELECTED FINANCIAL DATA
Intentionally omitted. See the table of contents of this Annual Report on Form
10-K for explanation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Pursuant to General Instructions I(2)(a) of Form 10-K, 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.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto. As discussed in Note 3 in the financial
statements, subsequent to the issuance of the Company's 2001 financial
statements, the Company's management determined that previously issued financial
statements should be restated. As a result, the Company has restated its 2001
and 2000 financial statements and has decreased reported retained earnings as of
January 1, 2000 by $1.2 million. The restatement had the effect of decreasing
net income for 2001 by approximately $8.1 million and increasing net income for
2000 by $0.2 million. Note 3 to the financial statements includes a summary of
the significant effects of the restatement. The effect of the restatement on
quarterly results, including previously reported 2002 quarterly information, is
discussed in Note 14. The following discussion and analysis gives effect to the
restatement.
Results of Operations
In 2002, net income was $34.5 million, an increase of $31.2 million when
compared to 2001, as restated. The year ended December 31, 2001 included
nonrecurring merger, integration, and restructuring costs totaling $11.7 million
after tax. In addition to the nonrecurring 2001 items, the increase reflects
improved margins and lower operating costs. These resulted from favorable
weather and a return to lower gas prices and the related reduction in costs
incurred in 2001.
In 2001, net income of $3.3 million decreased $8.1 million when compared to
2000. The year ended December 31, 2000 included nonrecurring merger and
integration costs totaling $19.5 million after tax. The decrease reflects lower
earnings resulting from extraordinarily high gas costs early in 2001 that
unfavorably impacted margins and operating costs including uncollectible
accounts expense, interest, and excise taxes; heating weather that was 9% warmer
than the prior year; and a weakened national economy.
Restatement of Previously Reported Results
The Company identified adjustments that, in the aggregate, reduced previously
reported 2001 earnings by approximately $8.1 million after tax and other
adjustments, as described below, related to 2000 and prior periods. Adjustments
were also made to previously reported 2002 quarterly results. In addition to
adjustments affecting previously reported net income, other reclassifications
were made to the previously reported 2001 and 2000 results to conform with the
2002 presentation.
Previously Reported 2001 and 2000 Net Income Adjustments
The Company determined that $8.3 million ($5.2 million after tax) of gas costs
were improperly recorded as recoverable gas costs due from customers. The error
related primarily to the accounting for natural gas inventory and resulted in an
overstatement of 2001 earnings.
The Company also identified an accounting error related to certain employee
benefit and other related costs that are routinely accumulated on the balance
sheet and systematically cleared to operating expense and capital projects.
Because of inadequate loading rates, these costs were not fully cleared to
operating expense and capital projects in 2001. As a result, 2001 earnings were
overstated by $2.2 million ($1.4 million after tax).
The Company identified reconciliation errors and other errors related to the
recording of estimates, including estimates used in the calculation of unbilled
revenue. As a result of changes to unbilled revenue and other additional items,
2001 earnings were reduced by $1.8 million ($1.0 million after tax). The
Company's equity in earnings of the Ohio operations also was restated, resulting
in a decrease to 2001 earnings of $0.5 million.
In 2000, the Company identified reconciliation errors, including errors in
billing and collections, and other errors related to the recording of estimates
that decreased earnings by $0.3 million ($0.2 million after tax). The Company's
equity in earnings of the Ohio operations also was restated, resulting in an
increase to earnings of $0.4 million. The impact of the restatement of results
for the year ended 2000 is an increase to net income of $0.2 million.
Previously Reported 2002 Quarterly Net Income Adjustments
For the nine months ended September 30, 2002, earnings increased approximately
$1.3 million from those previously reported. The increase is primarily the
result of $1.3 million of software conversion errors of which $0.9 million ($0.6
million after tax) were originally reflected in 2002 that are now reflected in
common shareholder's equity as of January 1, 2000. The Company identified other
adjustments that were not significant, either individually or in the aggregate
that increased previously reported 2002 quarterly pre-tax and after tax earnings
by approximately $1.1 million and $0.7 million, respectively.
Beginning Retained Earnings Adjustments
In addition to the adjustment of software conversion costs discussed above, the
Company identified other errors that were not significant, either individually
or in the aggregate that relate to years prior to 2000. As a result of these
additional items, beginning common shareholder's equity was reduced by $0.6
million. Accordingly, retained earnings as of January 1, 2000 reflects a
cumulative net decrease of $1.2 million.
Other Balance Sheet Adjustments
Certain reclassifications were made to reflect separate Company current and
deferred income taxes that are included in Vectren's consolidated tax position.
These reclassifications are the principal adjustments to intercompany
receivables and payables as well as prepayments and other current assets and
deferred income taxes.
The Company has restated its financial statements to give effect to the matters
discussed above. A summary of the significant effects of the restatement on
previously reported financial position and results of operations is included in
Note 3 to the financial statements. The effects of the restatement on 2001
quarterly results and on 2002 previously reported quarterly information, is
discussed in Note 14. The financial statements are included under Item 8
Financial Statements and Supplementary Data.
Nonrecurring Items in 2001 and 2000
Merger and Integration Costs
Merger and integration costs incurred for the years ended December 31, 2001 and
2000 were $0.6 million and $16.8 million, respectively. Merger and integration
activities resulting from the 2000 merger were completed in 2001.
Since March 31, 2000, $17.4 million has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$11.9 million. Of this amount, $4.8 million related to employee and executive
severance costs, $5.0 million related to transaction costs and regulatory filing
fees incurred prior to the closing of the merger, and the remaining $2.1 million
related to employee relocations that occurred prior to or coincident with the
merger closing. At December 31, 2001, the remaining accrual related to employee
severance was not significant. The remaining $5.5 million was expensed ($4.9
million in 2000 and $0.6 million in 2001) for accounting fees resulting from
merger related filing requirements, consulting fees related to integration
activities such as organization structure, employee travel between company
locations, internal labor of employees assigned to integration teams, investor
relations communication activities, and certain benefit costs.
During the merger planning process, approximately 81 positions were identified
for elimination. As of December 31, 2001, all such identified positions have
been vacated.
The integration activities experienced by the Company included such things as
information system consolidation, process review and definition, organization
design and consolidation, and knowledge sharing.
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. These information system assets are owned by
a wholly owned subsidiary of Vectren, and the fees allocated by the subsidiary
for the use of these systems by the Company's subsidiaries are reflected in
other operating expenses. As a result of the shortened useful lives, additional
fees were incurred by the Company, resulting in additional other operating
expense of $9.6 million for the year ended December 31, 2001 and $11.4 million
for the year ended December 31, 2000.
In total, for the year ended December 31, 2001, merger and integration costs
totaled $10.2 million ($6.3 million after tax) compared to $28.2 million ($19.5
million after tax) in 2000.
Restructuring Costs
As part of continued cost saving efforts, in June 2001, the Company's management
and board of directors approved a plan to restructure, primarily, its regulated
operations. The restructuring plan included the elimination of certain
administrative and supervisory positions in its utility operations and corporate
office. Charges of $5.4 million were expensed in June 2001 as a direct result of
the restructuring plan. Additional charges of $3.3 million were incurred during
the remainder of 2001 primarily for consulting fees, employee relocation, and
duplicate facilities costs. In total, the Company incurred restructuring charges
of $8.7 million, ($5.4 million after tax) in 2001. These charges were comprised
of $3.2 million for employee severance, related benefits and other employee
related costs, $4.0 million for lease termination fees related to duplicate
facilities and other facility costs, and $1.5 million for consulting and other
fees incurred through December 31, 2001. The restructuring program was completed
during 2001, except for the departure of certain employees impacted by the
restructuring which occurred during 2002 and the final settlement of the lease
obligation which has yet to occur. (See Note 12 for further information on
restructuring costs.)
Significant Fluctuations
Gas Utility Margin
Gas Utility margin for the year ended December 31, 2002 of $207.0 million
increased $11.2 million, or 6%. The increase is primarily due to weather 6%
cooler for the year and 31% cooler in the fourth quarter. Customer growth of
over 2% also contributed. The effects of cooler weather resulted in an overall
6% increase in total throughput to 118,241 MDth in 2002 from 111,885 MDth in
2001. Total throughput in 2000 was 126,960 MDth.
Gas Utility margin for the year ended December 31, 2001 of $195.9 million
decreased $11.3 million, compared to 2000. The primary factors contributing to
this decrease were weather that was 9% warmer than the prior year and the
unfavorable impact resulting from extraordinarily high gas costs early in 2001,
coupled with the effects of a weakened economy. These decreases were offset
somewhat by customer growth of nearly 1% compared to 2000 and by a $3.8 million
disallowance of recoverable gas costs by the IURC, charged against gas revenues
in December 2000.
Cost of gas sold was $320.4 million in 2002, $373.6 million in 2001, and $390.5
million in 2000. Cost of gas sold decreased $53.2 million, or 14%, during 2002
compared to 2001, primarily due to a return to lower gas prices somewhat offset
by an increase in retail volumes sold. Cost of gas sold decreased $16.9 million,
or 4%, in 2001. The decrease is primarily due to lower volumes sold due to the
warmer weather and a weakened economy, offset by an increase in gas prices. The
total average cost per dekatherm of gas purchased was $4.71 in 2002, $5.86 in
2001, and $5.77 in 2000. The price changes are due primarily to changing
commodity costs in the marketplace.
Operating Expenses
Other Operating
Other operating expenses decreased $17.5 million for the year ended December 31,
2002 when compared to 2001. The decrease results primarily from lower charges
for the use of corporate assets which had useful lives shortened as a result of
the merger and a return to lower gas prices and the related reduction in costs
incurred in 2001. Specific expenses affected by increased gas costs in 2001 were
uncollectible accounts expense and contributions to low income heating
assistance programs.
Other operating expenses for the year ended December 31, 2001 decreased $2.7
million or 3% compared to 2000. The 2001 decrease results, primarily, from
reduced charges for those assets which had their useful lives shortened as part
of the merger and merger synergies in the current year, offset by increased
uncollectible accounts expense resulting from increased gas costs.
Depreciation and Amortization
Depreciation and amortization increased $2.6 million, or 7%, and $1.4 million,
or 4%, in 2002 and in 2001, respectively. The increases are due to depreciation
of normal utility plant additions.
Income Tax
Federal and state income taxes increased $13.2 million in 2002 when compared to
2001 and decreased $8.2 million in 2001 compared to 2000. The changes in income
taxes result principally from fluctuations in pre-tax earnings. The effective
tax rate in 2000 was higher due to the nondeductibility of certain merger and
integration costs.
Equity in Earnings of the Ohio Operations
As described in Note 1 to the financial statements included in Part II Item 8
Financial Statements and Supplementary Data, Indiana Gas has a 47% undivided
interest in the Ohio operations acquired by Vectren on October 31, 2000. Equity
in earnings of the Ohio operations represents Indiana Gas' portion of the Ohio
operations' net income. The financing costs associated with VEDO's 53% ownership
interest are not included in the Ohio operations' equity in earnings. Earnings
increased in 2002 compared to 2001 and decreased in 2001 compared to 2000 as a
result of warm weather, high gas prices, and increased costs that resulted from
high gas prices in 2001. Earnings in 2002 also increased due the discontinuance
of amortization of goodwill embedded in the investment pursuant to SFAS 142.
Such amortization approximated $1.5 million after tax in 2001.
Interest Expense
Interest expense decreased $3.6 million in 2002 compared to 2001. The decrease
is attributable to lower outstanding borrowings during 2002 and lower average
interest rates on adjustable rate debt.
Interest expense increased $13.6 million in 2001 compared to 2000. The increase
is due primarily to interest related to the financing of its investment in the
Ohio operations and increased working capital requirements resulting from higher
natural gas prices.
Critical Accounting Policies
Management is required to make judgements, assumptions, and estimates that
affect the amounts reported in the financial statements and the related
disclosures that conform to accounting principles generally accepted in the
United States. Note 2 to the financial statements describes the significant
accounting policies and methods used in the preparation of the financial
statements. Certain estimates used in the financial statements are subjective
and use variables that require judgement. These include the estimates to perform
asset impairments tests. The Company makes other estimates in the course of
accounting for unbilled revenue, the effects of regulation, and intercompany
allocations 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 depreciation of utility plant and the allowance for doubtful
accounts, among others. Actual results could differ from these estimates.
Asset Impairment Test
The Company's 47% ownership interest in the Ohio operations is accounted for
using the equity method of accounting. The remaining 53% ownership interest also
resides within Vectren's consolidated group. The investment in the Ohio
operations was tested for impairment in accordance with APB No. 18 "The Equity
Method of Accounting for Investments in Common Stock." This test was performed
while Vectren performed its initial impairment analysis of its goodwill,
including that related to the acquisition of the Ohio operations, as required by
SFAS 142. An impairment test performed in accordance with APB 18 requires that
the carrying value of the investment be examined for other than temporary
declines in value. While making such examination, the Company considered various
factors including that no impairment was recognized by Vectren when it performed
an impairment analysis of its Gas Utility Services operating segment which
includes the operations of Indiana Gas and the Ohio operations. Vectren
performed this analysis using a discounted cash flow model. Based on these
factors, the Company determined there was no impairment of its investment in the
Ohio operations.
The use of a discounted cash flow model requires significant judgement in
applying a discount rate, growth assumptions, company expense allocations, and
longevity of cash flows. A 100 basis point increase in the discount rate or a
10% decrease in the cash flow growth assumption utilized in the cash flow
analysis would not have changed the results of the analysis.
Unbilled Revenues
To more closely match revenues and expenses, the Company records revenues for
all gas 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, these estimates are
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 judgement 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.
Intercompany Allocations
Support Services
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, finance, tax, risk
management, and 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. Management believes that the allocation
methodology is reasonable and approximates the costs that would have been
incurred had the Company secured those services on a stand-alone basis. In
addition, Vectren negotiates service and construction contracts on behalf of its
utilities to obtain those services at less cost than the utility may otherwise
be able to obtain on its own. The allocation methodology is not subject to near
term changes.
Pension and Other Postretirement Obligations
Vectren satisfies the future funding requirements of its pension and other
postretirement plans and the payment of benefits from general corporate assets.
An allocation of expense is determined by Vectren's actuaries, comprised of only
service cost and interest on that service cost, by subsidiary based on headcount
at each measurement date. These costs are directly charged to individual
subsidiaries. Other components of costs (such as interest cost from prior
service and asset returns) are charged to individual subsidiaries through the
corporate allocation process discussed above. Plan assets nor the FAS 87/106
liability are allocated to individual subsidiaries since these assets and
obligations are derived from corporate level decisions. Further, Vectren
satisfies the future funding requirements of plans and the payment of benefits
from general corporate assets. Management believes these direct charges when
combined with benefit-related corporate charges discussed in "support services"
above approximate costs that would have been incurred if the Company accounted
for benefit plans on a stand-alone basis. Vectren annually measures its
obligations on September 30.
Vectren 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 pension and postretirement plans. Vectren used the
following weighted average assumptions to develop 2002 annual costs and the
ending benefit obligations recognized in its consolidated financial statements:
a discount rate of 6.75%, an expected return on plan assets before expenses of
9.00%, a rate of compensation increase of 4.25%, and a health care cost trend
rate of 10% in 2002 declining to 5% in 2006. During 2002, Vectren reduced the
discount rate and rate of compensation increase by 50 basis points from those
assumptions used in 2001 due to the general decline in interest rates and other
market conditions that occurred in 2002. Future changes in health care costs,
work force demographics, interest rates, or plan changes could significantly
affect the estimated cost of these future benefits that are allocated to VUHI
and its subsidiaries.
Impact of Recently Issued Accounting Guidance
EITF 02-03
In October 2002, the EITF reached a final consensus in EITF Issue 02-03 "Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities" (EITF
02-03) that gains and losses (realized and unrealized) on all derivative
instruments within the scope of SFAS 133 should be shown net in the income
statement, whether or not settled physically, if the derivative instruments are
held for "trading purposes." The consensus rescinded EITF Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF 98-10) as well as other decisions reached on energy trading
contracts at the EITF's June 2002 meeting. The Company does not engage in any
activities subject to EITF 02-03.
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. Any costs of removal recorded in
accumulated depreciation pursuant to regulatory authority will require
disclosure in future periods. The Company adopted this statement on January 1,
2003. The adoption was not material to 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 obligations it has undertaken. The objective of
the initial measurement of that liability is the fair value of the guarantee at
its inception. The initial recognition and measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
Although management is still evaluating the impact of FIN 45 on its financial
position and results of operations, the adoption is not expected to have a
material effect.
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 and significantly changes the
consolidation requirements for those entities. FIN 46 is intended to achieve
more consistent application of consolidation policies to variable interest
entities and, thus improves comparability between enterprises engaged in similar
activities when those activities are conducted through variable interest
entities. FIN 46 applies to variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies to the Company's third quarter for
variable interest entities in which the Company holds a variable interest
acquired before February 1, 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;
catastrophic weather-related damage; 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; 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 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.
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 market risks associated with commodity prices,
interest rates, and counter-party credit. These financial exposures are
monitored and managed by the Company as an integral part of its overall risk
management program. The Company does not execute derivative contracts for
speculative or trading purposes.
Interest Rate Risk
The Company is exposed to interest rate risk associated with its adjustable rate
borrowing arrangements. Its risk management program seeks to reduce the
potentially adverse effects that market volatility may have on operations. The
Company tries to limit the amount of adjustable rate borrowing arrangements
exposed to short-term interest rate volatility to a maximum of 25% of total
debt. However, there are times when this targeted level of interest rate
exposure may be exceeded. At December 31, 2002, such obligations represented 21%
of the Company's total debt portfolio. To manage this exposure, the Company may
periodically use derivative financial instruments to reduce earnings
fluctuations caused by interest rate volatility.
Market risk is estimated as the potential impact resulting from fluctuations in
interest rates on adjustable rate borrowing arrangements exposed to short-term
interest rate volatility including bank notes, lines of credit, commercial
paper, and certain adjustable rate long-term debt instruments. At December 31,
2002 and 2001, the combined borrowings under these facilities totaled $108.2
million and $134.3 million, respectively. Based upon average borrowing rates
under these facilities during the years ended December 31, 2002 and 2001, an
increase of 100 basis points (1%) in the rates would have increased interest
expense by $0.8 million and $2.7 million, respectively.
Commodity Price Risk and Other Risks
The Company has limited exposure to commodity price risk for purchases and sales
of natural gas for retail customers due to current Indiana regulations, which
subject to compliance with those regulations, allow for recovery of such
purchases through natural gas cost adjustment mechanisms. The Company does not
engage in wholesale gas marketing activities that may expose it to market risk
associated with fluctuating natural gas commodity prices.
Commodity prices for natural gas purchases were significantly higher during the
2000 - 2001 heating season, primarily due to colder temperatures, increased
demand and tighter supplies. Although the Company's 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's customer receivables from gas sales and gas transportation
services are primarily derived from a diversified base of residential,
commercial, and industrial customers located in Indiana. The Company manages
credit risk associated with its receivables by continually reviewing
creditworthiness and requests cash deposits or refunds cash deposits based on
that review.
ITEM 8. Financial Statements and Supplementary Data
Table of Contents
Page
Number
Financial Information of Indiana Gas Company, Inc.
1 Management's Responsibility for Financial Statements ......... 13
2 Independent Auditors' Report ................................. 14
3 Audited Financial Statements.................................. 15
4 Notes to Audited Financial Statements......................... 20
Financial Statement Schedule of Indiana Gas Company, Inc. (a)
5 Schedule II-Valuation and Qualifying Accounts for the
years ended December 31, 2002, 2001, and 2000................ 60
Financial Information of the Ohio operations
1 Management's Responsibility for Financial Statements ......... 39
2 Independent Auditors' Report.................................. 40
3 Financial Statements.......................................... 41
4 Notes to Financial Statements................................. 46
Financial Statement Schedule of the Ohio operations (a)
5 Schedule II-Valuation and Qualifying Accounts for
the years ended December 31, 2002, 2001, and for
the period November 1, 2000 (Inception) through
December 31, 2000............................................ 61
(a) All other schedules are omitted as the required information is inapplicable
or the information is presented in the Financial Statements or related notes.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Indiana Gas Company, Inc. (Indiana Gas) is responsible for the
preparation of the financial statements and the related financial data contained
in this report. The financial statements are prepared in conformity with
accounting principles generally accepted in the United States and follow
accounting policies and principles applicable to regulated public utilities.
The integrity and objectivity of the data in this report, including required
estimates and judgments, is the responsibility of management. Management
maintains a system of internal control and utilizes an internal auditing program
to provide reasonable assurance of compliance with Company policies and
procedures and the safeguard of assets.
The board of directors of Indiana Gas' parent company, Vectren Corporation,
pursues its responsibility for these financial statements through its audit
committee, which meets periodically with management, the internal auditors and
the independent auditors, to assure that each is carrying out its
responsibilities. Both the internal auditors and the independent auditors meet
with the audit committee of Vectren Corporation's board of directors, with and
without management representatives present, to discuss the scope and results of
their audits, their comments on the adequacy of internal accounting control and
the quality of financial reporting.
/S/ Niel C. Ellerbrook
Niel C. Ellerbrook
Chairman & Chief Executive Officer
February 26, 2003
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors of Indiana Gas Company, Inc.:
We have audited the accompanying balance sheets of Indiana Gas Company, Inc. as
of December 31, 2002 and 2001, and the related statements of income, common
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedule listed in the Table of Contents at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Indiana Gas Company, Inc. as of December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002, 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 financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2, effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other
Intangibles."
As discussed in Note 3, the accompanying 2001 and 2000 financial statements have
been restated.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
February 26, 2003
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(In thousands)
December 31, December 31,
2002 2001
- -------------------------------------------------- ------------ -------------
(As Restated,
ASSETS See Note 3)
------
Utility Plant
Original cost $ 1,148,614 $ 1,095,450
Less: Accumulated depreciation & amortization 492,673 458,310
- ---------------------------------------------------------------------------------------
Net utility plant 655,941 637,140
- ---------------------------------------------------------------------------------------
Current Assets
Cash & cash equivalents 3,729 268
Accounts receivable-less reserves of $1,399 &
$987, respectively 48,446 47,426
Receivables from other Vectren companies 10,754 11,692
Accrued unbilled revenues 53,192 36,028
Inventories 13,286 14,941
Recoverable natural gas costs 10,241 26,674
Prepayments & other current assets 37,090 35,825
- ---------------------------------------------------------------------------------------
Total current assets 176,738 172,854
- ---------------------------------------------------------------------------------------
Investment in the Ohio operations 220,417 223,564
Other investments 2,459 1,734
Non-utility property-net 253 303
Regulatory assets 18,132 15,181
Other assets 4,207 10,334
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,078,147 $ 1,061,110
=======================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(In thousands)
December 31, December 31,
2002 2001
- --------------------------------------------- ------------ ------------
(As Restated,
LIABILITIES & SHAREHOLDER'S EQUITY See Note 3)
----------------------------------
Capitalization
Common shareholder's equity
Common stock (no par value) $ 242,995 $ 242,995
Retained earnings 79,061 66,882
Accumulated other comprehensive loss - (2,382)
- -------------------------------------------------------------------------------------
Total common shareholder's equity 322,056 307,495
- -------------------------------------------------------------------------------------
Long-term debt-net of debt subject to tender
& current maturities 228,480 260,972
Long-term debt due to VUHI 147,275 147,270
- -------------------------------------------------------------------------------------
Total capitalization 697,811 715,737
- -------------------------------------------------------------------------------------
Commitments & Contingencies (Notes 4, 7-9)
Current Liabilities
Accounts payable 33,728 26,856
Accounts payable to affiliated companies 47,255 21,332
Payables to other Vectren companies 39,876 11,435
Accrued liabilities 28,994 40,550
Short-term borrowings due to VUHI 108,182 134,298
Long-term debt subject to tender - 11,500
Current maturities of long-term debt 38,750 1,250
- -------------------------------------------------------------------------------------
Total current liabilities 296,785 247,221
- -------------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 45,601 46,258
Deferred credits & other liabilities 37,950 51,894
- -------------------------------------------------------------------------------------
Total deferred income taxes & other liabilities 83,551 98,152
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,078,147 $ 1,061,110
=====================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF INCOME
(In thousands)
Year Ended December 31,
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
(As Restated, See Note 3)
-------------------------
OPERATING REVENUES $ 527,443 $ 569,478 $ 597,631
COST OF GAS 320,418 373,610 390,474
- --------------------------------------------------------------------------------
GAS OPERATING MARGIN 207,025 195,868 207,157
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 78,965 96,468 99,188
Merger & integration costs - 576 16,846
Restructuring costs - 8,668 -
Depreciation & amortization 40,661 38,053 36,659
Income taxes 12,096 (1,074) 7,121
Taxes other than income taxes 15,084 15,802 15,858
- --------------------------------------------------------------------------------
Total operating expenses 146,806 158,493 175,672
- --------------------------------------------------------------------------------
OPERATING INCOME 60,219 37,375 31,485
OTHER INCOME
Equity in earnings of the Ohio
operations-net of tax 5,855 2,326 3,157
Other - net 858 (344) (749)
- --------------------------------------------------------------------------------
Total other income 6,713 1,982 2,408
- --------------------------------------------------------------------------------
Interest expense 32,413 36,062 22,462
- --------------------------------------------------------------------------------
NET INCOME $ 34,519 $ 3,295 $ 11,431
================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
- -----------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM (REQUIRED FOR) OPERATING ACTIVITIES (As Restated, See Note 3)
------------------------
Net income $ 34,519 $ 3,295 $ 11,431
Adjustments to reconcile net income to cash from
operating activities:
Depreciation & amortization 40,661 38,053 36,659
Deferred income taxes & investment tax credits (14,445) (22,699) 13,682
Equity in earnings of the Ohio operations (5,855) (2,326) (3,157)
Other non-cash charges- net 6,232 14,486 11,018
Changes in working capital accounts:
Accounts receivable, including to Vectren
companies & accrued unbilled revenue (23,449) 69,567 (91,135)
Inventories 1,655 (2,937) 1,531
Recoverable fuel & natural gas costs 16,433 11,422 (48,300)
Prepayments & other current assets (1,265) 26,306 (28,840)
Accounts payable, including to Vectren companies
& affiliated companies 49,156 (41,913) 72,675
Accrued liabilities (2,773) (11,812) (4,379)
Other noncurrent assets & liabilities (4,748) (24,866) (9,123)
- -----------------------------------------------------------------------------------------------
Net cash flows from (required for)
operating activities 96,121 56,576 (37,938)
- -----------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED FOR) FROM
FINANCING ACTIVITIES
Proceeds from:
Long-term debt due to VUHI - 147,270 -
Additional capital contribution - 100,000 -
Long-term debt - - 70,000
Requirements for:
Dividends on common stock (22,340) (25,938) (26,337)
Retirement of long-term debt (6,492) (7,387) (740)
Net change in short-term borrowings,
including due to VUHI (26,111) (218,626) 270,752
- -----------------------------------------------------------------------------------------------
Net cash flows (required for) from
financing activities (54,943) (4,681) 313,675
- -----------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES
Proceeds from:
Distributions from the Ohio operations 9,002 - -
Other - - 4,700
Requirements for:
Capital expenditures (45,225) (51,927) (62,409)
Investment in the Ohio operations - - (218,081)
Other investments (1,494) - -
- -----------------------------------------------------------------------------------------------
Net cash flows (required for) investing activities (37,717) (51,927) (275,790)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash & cash equivalents 3,461 (32) (53)
Cash & cash equivalents at beginning of period 268 300 353
- -----------------------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 3,729 $ 268 $ 300
===============================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
(In thousands)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Loss Total
- -------------------------------------------------------------------------------------------------------
Balance at January 1, 2000, As Reported $142,995 $105,627 $ - $248,622
Restatement adjustment - (1,196) - (1,196)
- -------------------------------------------------------------------------------------------------------
Balance at January 1, 2000, As Restated 142,995 104,431 - 247,426
Net income & comprehensive income, As Restated 11,431 11,431
Common stock dividends (26,337) (26,337)
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 2000, As Restated 142,995 89,525 - 232,520
Comprehensive income:
Net income, As Restated 3,295 3,295
Minimum pension liability adjustments- net of tax (2,382) (2,382)
- -------------------------------------------------------------------------------------------------------
Total comprehensive income, As Restated 913
- -------------------------------------------------------------------------------------------------------
Common stock:
Issuance 100,000 100,000
Dividends (25,938) (25,938)
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 2001, As Restated 242,995 66,882 (2,382) 307,495
Comprehensive income:
Net income 34,519 34,519
Minimum pension liability adjustments- net of tax 2,382 2,382
- -------------------------------------------------------------------------------------------------------
Total comprehensive income 36,901
- -------------------------------------------------------------------------------------------------------
Common stock dividends (22,340) (22,340)
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $242,995 $ 79,061 $ - $322,056
=======================================================================================================
The accompanying notes are an integral part of these financial statements.
INDIANA GAS COMPANY, INC.
NOTES TO THE FINANCIAL STATEMENTS
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
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 on
the equity method in accordance with APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." Indiana Gas' initial investment was
approximately $218.1 million. The Ohio operations provide natural gas
distribution and transportation services to 17 counties in west central Ohio,
including counties surrounding Dayton.
Because the Ohio operations are a significant subsidiary as defined by Rule 3-09
of Regulation S-X, the financial statements of the Ohio operations are included
in this filing under Part II Item 8 Financial Statements and Supplementary Data.
2. Summary of Significant Accounting Policies
A. Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less
at the date of purchase are considered cash equivalents. Cash paid during the
periods reported for interest and income taxes follows:
- -----------------------------------------------------------------------------
In thousands 2002 2001 2000
- -----------------------------------------------------------------------------
Cash paid during the year for:
Interest (net of amount capitalized) $ 30,926 $ 32,611 $ 22,957
Income taxes 18,073 5,157 23,188
- ------------------------------------------------------------------------------
B. Inventories
Inventories consist of the following:
At December 31,
- ------------------------------------------------------------------------
In thousands 2002 2001
- ------------------------------------------------------------------------
Gas in storage-at LIFO cost $ 12,497 $ 13,895
Other 789 1,046
- ------------------------------------------------------------------------
Total inventories $ 13,286 $ 14,941
========================================================================
Based on the average cost of gas purchased during December, the cost of
replacing the current portion of gas in storage carried at LIFO cost exceeded
LIFO cost at December 31, 2002 and 2001 by approximately $14.0 million and $2.0
million, respectively. All other inventories are carried at average cost.
C. Utility Plant and Depreciation
Utility plant is stated at historical cost, including AFUDC. Depreciation of
utility property is provided using the straight-line method over the estimated
service lives of the depreciable assets. The original cost of utility plant,
together with depreciation rates expressed as a percentage of original cost,
follows:
At & For the Year Ended December 31,
- --------------------------------------------------------------------------------------------
In thousands 2002 2001
- ------------------------------------ ------------------------------------ --------------
Depreciation Depreciation
Rates as a Rates as a
Percent of Percent of
Original Cost Original Cost Original Cost Original Cost
- --------------------------------------------------------------------------------------------
Utility plant $ 1,104,811 3.9% $1,031,344 3.8%
Construction work in progress 43,803 - 64,106 -
- --------------------------------------------------------------------------------------------
Total original cost $ 1,148,614 $1,095,450
============================================================================================
AFUDC represents the cost of borrowed and equity funds used for construction
purposes and is charged to construction work in progress during the construction
period and is included in other - net in the Statements of Income. The total
AFUDC capitalized into utility plant and the portion of which was computed on
borrowed and equity funds for all periods reported follows:
Year Ended December 31,
- ----------------------------------------------------------------------------
In thousands 2002 2001 2000
- ----------------------------------------------------------------------------
AFUDC - borrowed funds $ 594 $ 444 $ 487
AFUDC - equity funds 240 545 595
- ----------------------------------------------------------------------------
Total AFUDC capitalized $ 834 $ 989 $ 1,082
============================================================================
Maintenance and repairs, including the cost of removal of minor items of
property and planned major maintenance projects, are charged to expense as
incurred. When property that represents a retirement unit is replaced or
removed, the cost of such property is credited to utility plant, and such cost,
together with the cost of removal less salvage, is charged to accumulated
depreciation.
D. 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 as required 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 replaced
authoritative guidance in SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) and
certain aspects of APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business." SFAS
144 retains the framework of SFAS 121 and 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.
E. Investment in the Ohio operations The Company's investment in the Ohio
operations is accounted for using the equity method of accounting. The Company's
share of the Ohio operations' after tax earnings is recorded in equity in
earnings of the Ohio operations. Because the Ohio operations is responsible for
its income taxes and is also within Vectren's consolidated tax group, no
additional tax provision for these earnings is included in these financial
statements. Dividends are recorded as a reduction of the carrying value of the
investment when received. Goodwill which is a component of the Company's net
investment is accounted for in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). The Company adopted SFAS 142, as required on
January 1, 2002. SFAS 142 changed the accounting for goodwill from an
amortization approach to an impairment-only approach. As required by SFAS 142,
amortization of goodwill ceased on January 1, 2002. Such amortization of
approximately $1.5 million in 2001 and $0.2 million in 2000 is reflected in
equity in earnings of the Ohio operations. Periodically the Company examines the
carrying value of its investment for other than temporary declines in value.
F. Regulation
SFAS 71
Retail public utility operations affecting Indiana customers are subject to
regulation by the IURC. The Company's accounting policies give recognition to
the rate-making and accounting practices of this agency and to accounting
principles generally accepted in the United States, including the provisions of
SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS
71). Regulatory assets represent probable future revenues associated with
certain incurred costs, which will be recovered from customers through the
rate-making process. Regulatory liabilities represent probable future reductions
in revenues associated with amounts that are to be credited to customers through
the rate-making process.
The Company 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 thousands 2002 2001
- -----------------------------------------------------------
Unamortized debt discount & expenses $11,971 $ 13,101
Regulatory income tax asset 6,158 2,080
Other 3 -
- -----------------------------------------------------------
Total regulatory assets $ 18,132 $ 15,181
===========================================================
As of December 31, 2002, all regulatory assets are reflected in rates charged to
customers, of which $0.4 million is earning a return. At December 31, 2002, the
weighted average recovery period of regulatory assets, other than those arising
from book - tax basis differences, included in rates is 12.8 years. Regulatory
income tax assets are recovered as deferred tax assets and liabilities discussed
in Note 4 become payable or receivable.
Indiana Gas was authorized as part of an August 17, 1994 financing order from
the IURC to amortize over a 15-year period the debt discount and expense related
to new debt issues and future debt issues and future premiums paid for debt
reacquired in connection with refinancing. Debt discount and expense for issues
in place prior to this order are being amortized over the lives of the related
issues. Premiums paid prior to this order for debt reacquired in connection with
refinancing are being amortized over the life of the refunding issue.
Refundable or Recoverable Gas Costs
All metered gas rates contain a gas cost adjustment clause that allows the
Company to charge for changes in the cost of purchased gas. The Company records
any under-or-over-recovery resulting from gas 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.
G. Comprehensive Income
Comprehensive income is a measure of all changes in equity that result from the
transactions or other economic events during the period from non-shareholder
transactions. This information is reported in the Statements of Common
Shareholder's Equity. The transaction resulting in other comprehensive income
relates to a minimum pension liability adjustment which is a loss of $3.8
million ($2.4 million after tax) in 2001. In 2002, all such liabilities were
transferred to Vectren.
H. Revenues
Revenues are recorded as products and services are delivered to customers. To
more closely match revenues and expenses, the Company records revenues for all
gas delivered to customers but not billed at the end of the accounting period.
I. Excise and Gross Receipts Taxes
Excise taxes and gross receipts taxes are included in rates charged to
customers. Accordingly, the Company records these taxes received as a component
of operating revenues. Excise and gross receipts taxes paid are recorded as a
component of taxes other than income taxes.
J. 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.
K. Earnings Per Share
Earnings per share are not presented as the Company's common stock is wholly
owned by Vectren Utility Holdings, Inc.
3. Restatement of Previously Reported Results
The Company identified adjustments that, in the aggregate, reduced previously
reported 2001 earnings by approximately $8.1 million after tax and other
adjustments, as described below, related to 2000 and prior periods. Adjustments
were also made to previously reported 2002 quarterly results. In addition to
adjustments affecting previously reported net income, other reclassifications
were made to the previously reported 2001 and 2000 results to conform with the
2002 presentation.
Previously Reported 2001 and 2000 Net Income Adjustments
The Company determined that $8.3 million ($5.2 million after tax) of gas costs
were improperly recorded as recoverable gas costs due from customers. The error
related primarily to the accounting for natural gas inventory and resulted in an
overstatement of 2001 earnings.
The Company also identified an accounting error related to certain employee
benefit and other related costs that are routinely accumulated on the balance
sheet and systematically cleared to operating expense and capital projects.
Because of inadequate loading rates, these costs were not fully cleared to
operating expense and capital projects in 2001. As a result, 2001 earnings were
overstated by $2.2 million ($1.4 million after tax).
The Company identified reconciliation errors and other errors related to the
recording of estimates, including estimates used in the calculation of unbilled
revenue. As a result of changes to unbilled revenue and other additional items,
2001 earnings were reduced by $1.8 million ($1.0 million after tax). The
Company's equity in earnings of the Ohio operations also was restated, resulting
in a decrease to 2001 earnings of $0.5 million.
In 2000, the Company identified reconciliation errors, including errors in
billing and collection accounts, and other errors related to the recording of
estimates that decreased earnings by $0.3 million ($0.2 million after tax). The
Company's equity in earnings of the Ohio operations also was restated, resulting
in an increase to earnings of $0.4 million. The impact of the restatement of
results for the year ended 2000 is an increase to net income of $0.2 million.
Previously Reported 2002 Quarterly Net Income Adjustments
For the nine months ended September 30, 2002, earnings increased approximately
$1.3 million from those previously reported. The increase is primarily the
result of $1.3 million of software conversion errors of which $0.9 million ($0.6
million after tax) were originally reflected in 2002 that are now reflected in
common shareholder's equity as of January 1, 2000. The Company identified other
adjustments that were not significant, either individually or in the aggregate
that increased previously reported 2002 quarterly pre-tax and after tax earnings
by approximately $1.1 million and $0.7 million, respectively.
Beginning Retained Earnings Adjustments
In addition to the adjustment of software conversion costs discussed above, the
Company identified other errors that were not significant, either individually
or in the aggregate that relate to years prior to 2000. As a result of these
additional items, beginning common shareholder's equity was reduced by $0.6
million. Accordingly, retained earnings as of January 1, 2000 reflects a
cumulative net decrease of $1.2 million.
Other Balance Sheet Adjustments
Certain reclassifications were made to reflect separate Company current and
deferred income taxes that are included in Vectren's consolidated tax position.
These reclassifications are the principal adjustments to intercompany
receivables and payables as well as prepayments and other current assets and
deferred income taxes.
The Company has restated its financial statements to give effect to the matters
discussed above. Following is a summary of the significant effects of the
restatement on previously reported financial position and results of operations.
The effects of the restatement on 2001 quarterly results and on 2002 previously
reported quarterly information, is discussed in Note 14. Note 14 is unaudited.
The effects on the income statement for the year ending December 31, 2001
follow:
As Reported Adjustments As Restated
- -------------------------------------------------------------------------------
OPERATING REVENUES $ 580,258 $ (10,780) $ 569,478
COST OF GAS 373,610 - 373,610
- -------------------------------------------------------------------------------
GAS OPERATING MARGIN 206,648 (10,780) 195,868
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 95,250 1,218 96,468
Merger & integration costs 576 - 576
Restructuring costs 8,668 - 8,668
Depreciation & amortization 38,053 - 38,053
Income taxes 3,556 (4,630) (1,074)
Taxes other than income taxes 15,802 - 15,802
- -------------------------------------------------------------------------------
Total operating expenses 161,905 (3,412) 158,493
- -------------------------------------------------------------------------------
OPERATING INCOME 44,743 (7,368) 37,375
OTHER INCOME
Equity in earnings of the Ohio
operations-net of tax 2,822 (496) 2,326
Other - net (190) (154) (344)
- -------------------------------------------------------------------------------
Total other income 2,632 (650) 1,982
- -------------------------------------------------------------------------------
Interest expense 36,009 53 36,062
- -------------------------------------------------------------------------------
NET INCOME $ 11,366 $ (8,071) $ 3,295
===============================================================================
The effects on the income statement for the year ending December 31, 2000
follow:
As Reported Adjustments As Restated
- ------------------------------------------------------------------------------
OPERATING REVENUES $ 598,113 $ (482) $ 597,631
COST OF GAS 390,474 - 390,474
- ------------------------------------------------------------------------------
GAS OPERATING MARGIN 207,639 (482) 207,157
- ------------------------------------------------------------------------------
OPERATING EXPENSES
Other operating 99,810 (622) 99,188
Merger & integration costs 16,846 - 16,846
Restructuring costs - - -
Depreciation & amortization 36,659 - 36,659
Income taxes 7,251 (130) 7,121
Taxes other than income taxes 15,858 - 15,858
- ------------------------------------------------------------------------------
Total operating expenses 176,424 (752) 175,672
- ------------------------------------------------------------------------------
OPERATING INCOME 31,215 270 31,485
OTHER INCOME
Equity in earnings of the Ohio
operations-net of tax 2,721 436 3,157
Other - net (318) (431) (749)
- ------------------------------------------------------------------------------
Total other income 2,403 5 2,408
- ------------------------------------------------------------------------------
Interest expense 22,409 53 22,462
- ------------------------------------------------------------------------------
NET INCOME $ 11,209 $ 222 $ 11,431
==============================================================================
The effects on the balance sheet as of December 31, 2001 follow:
ASSETS As Reported Adjustments As Restated
------ ---------------------------------------
Utility Plant
Original cost $ 1,094,349 $ 1,101 $ 1,095,450
Less: Accumulated depreciation & amortization 458,310 - 458,310
- --------------------------------------------------------------------------------------------------
Net utility plant 636,039 1,101 637,140
- --------------------------------------------------------------------------------------------------
Current Assets
Cash & cash equivalents 294 (26) 268
Accounts receivable-less reserves 49,788 (2,362) 47,426
Receivables from other Vectren companies 2,252 9,440 11,692
Accrued unbilled revenues 38,557 (2,529) 36,028
Inventories 15,341 (400) 14,941
Recoverable natural gas costs 34,497 (7,823) 26,674
Prepayments & other current assets 48,067 (12,242) 35,825
- --------------------------------------------------------------------------------------------------
Total current assets 188,796 (15,942) 172,854
- --------------------------------------------------------------------------------------------------
Investment in the Ohio operations 223,624 (60) 223,564
Other investments 1,734 - 1,734
Non-utility property-net 303 - 303
Regulatory assets 14,720 461 15,181
Other assets 9,652 682 10,334
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,074,868 $ (13,758) $ 1,061,110
==================================================================================================
LIABILITIES & SHAREHOLDER'S EQUITY
Capitalization
Common shareholder's equity
Common stock (no par value) $ 242,995 $ - $ 242,995
Retained earnings 75,927 (9,045) 66,882
Accumulated other comprehensive loss (2,382) - (2,382)
- --------------------------------------------------------------------------------------------------
Total common shareholder's equity 316,540 (9,045) 307,495
- --------------------------------------------------------------------------------------------------
Long-term debt-net of debt subject to tender
& current maturities 260,972 - 260,972
Long-term debt due to VUHI 147,270 - 147,270
- --------------------------------------------------------------------------------------------------
Total capitalization 724,782 (9,045) 715,737
- --------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 25,642 1,214 26,856
Accounts payable to affiliated companies 21,337 (5) 21,332
Payables to other Vectren companies 9,755 1,680 11,435
Accrued liabilities 42,757 (2,207) 40,550
Short-term borrowings due to VUHI 134,298 - 134,298
Long-term debt subject to tender 11,500 - 11,500
Current maturities of long-term debt 1,250 - 1,250
- --------------------------------------------------------------------------------------------------
Total current liabilities 246,539 682 247,221
- --------------------------------------------------------------------------------------------------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 50,970 (4,712) 46,258
Deferred credits & other liabilities 52,577 (683) 51,894
- --------------------------------------------------------------------------------------------------
Total deferred income taxes & other liabilities 103,547 (5,395) 98,152
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,074,868 $ (13,758) $ 1,061,110
==================================================================================================
4. Transactions with Other Vectren Companies
Support Services
Vectren and certain subsidiaries of Vectren provided corporate and general and
administrative services to the Company including legal, finance, tax, risk
management, and 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. In addition, Vectren negotiates service and
construction contracts on behalf of its utilities to obtain those services at
less cost than the utility may otherwise be able to obtain on its own. For the
year ended December 31, 2002, 2001, and 2000, amounts billed by other wholly
owned subsidiaries of Vectren to the Company were $50.6 million, $63.3 million,
and $51.1 million, respectively.
Retirement Plans and Other Postretirement Benefits
Vectren has multiple defined benefit pension plans and postretirement plans that
require accounting as described in SFAS No. 87 "Employers' Accounting for
Pensions and SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions," respectively. Subsequent to the merger forming Vectren, an
allocation of expense is determined by Vectren's actuaries, comprised of only
service cost and interest on that service cost, by subsidiary based on headcount
at each measurement date. These costs are directly charged to individual
subsidiaries. Other components of costs (such as interest cost from prior
service and asset returns) are charged to individual subsidiaries through the
corporate allocation process discussed above. Plan assets nor the SFAS 87/106
liability is allocated to individual subsidiaries since these assets and
obligations are derived from corporate level decisions. Further, Vectren
satisfies the future funding requirements of plans and the payment of benefits
from general corporate assets. This allocation methodology is consistent with
"multiemployer" benefit accounting as described in SFAS 87 and 106.
For the years ended December 31, 2002 and 2001 pension expense totaling $1.3
million in both years was directly charged by Vectren to the Company. For the
years ended December 31, 2002 and 2001other benefit expenses totaling $0.4
million in both years were directly charged by Vectren to the Company. In 2000,
the Company recognized $5.3 million in charges for participation in Vectren
benefit plans. As of December 31, 2002 and 2001, $25.0 million and $29.2 million
is included in other non-current liabilities and represents expense directly
charged to the Company that is yet to be funded to Vectren, and $3.5 million and
$4.8 million is included in other assets for amounts funded in advance to
Vectren.
Cash Management and Borrowing Arrangements
The Company participates in a centralized cash management program with Vectren,
other wholly owned subsidiaries, and banks which permits funding of checks as
they are presented.
See Note 6 regarding long-term and short-term intercompany borrowing
arrangements.
Guarantees of Parent Company Debt
Vectren's three operating utility companies, VEDO, Indiana Gas, and SIGECO are
guarantors of VUHI's $350.0 million commercial paper program, of which
approximately $239.1 million is outstanding at December 31, 2002 and VUHI's
$350.0 million unsecured senior notes outstanding at December 31, 2001. VUHI has
no independent assets or operations, 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.
Income Taxes
Vectren and subsidiary companies file a consolidated federal income tax return.
For financial reporting purposes, Indiana Gas' current and deferred tax expense
is computed on a separate company basis. Because the Ohio operations is
responsible for its income taxes and is also within Vectren's consolidated tax
group, no additional tax provision for these earnings is included in these
financial statements. The components of income tax expense and utilization of
investment tax credits follows:
Year Ended December 31,
- -----------------------------------------------------------------------------
In thousands 2002 2001 2000
- -----------------------------------------------------------------------------
Current:
Federal $ 24,305 $ 20,811 $ (6,403)
State 2,236 814 (158)
- -----------------------------------------------------------------------------
Total current taxes 26,541 21,625 (6,561)
- -----------------------------------------------------------------------------
Deferred:
Federal (12,332) (21,048) 13,462
State (1,188) (724) 1,152
- -----------------------------------------------------------------------------
Total deferred taxes (13,520) (21,772) 14,614
- -----------------------------------------------------------------------------
Amortization of investment tax credits (925) (927) (932)
- -----------------------------------------------------------------------------
Total income tax expense $ 12,096 $ (1,074) $ 7,121
=============================================================================
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 as of
December 31, 2002 and 2001 follow:
At December 31,
- ------------------------------------------------------------------------------------
In thousands 2002 2001
- ------------------------------------------------------------------------------------
Noncurrent deferred tax liabilities (assets):
Depreciation & cost recovery timing differences $ 53,338 $ 63,935
Regulatory assets recoverable through future rates 11,703 8,832
Regulatory liabilities to be settled through future rates (5,545) (6,752)
Employee benefit obligations (15,704) (14,333)
Other - net 1,809 (5,424)
- ------------------------------------------------------------------------------------
Net noncurrent deferred tax liability 45,601 46,258
- ------------------------------------------------------------------------------------
Current deferred tax liabilities (assets):
Deferred fuel costs-net 2,245 13,049
LIFO inventory - (2,020)
- ------------------------------------------------------------------------------------
Net current deferred tax liability 2,245 11,029
- ------------------------------------------------------------------------------------
Net deferred tax liability $ 47,846 $ 57,287
====================================================================================
At December 31, 2002 and 2001, investment tax credits totaling $5.4 million and
$6.3 million, respectively, are included in deferred credits and other
liabilities. These investment tax credits are amortized over the lives of the
related investments. Indiana Gas has no tax credit carryforwards at December 31,
2002. Alternative Minimum Tax credit carryforwards of approximately $5.2 million
were utilized in 2001.
A reconciliation of the statutory rate to the effective income tax rate follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Tax at federal statutory rate $14,316 $ (83) $ 6,267
State and local taxes, net of federal benefit 594 58 640
Nondeductible merger costs - - 1,946
Amortization of investment tax credit (925) (927) (932)
All other-net (1,889) (122) (800)
- --------------------------------------------------------------------------------
Effective tax rate $12,096 $ (1,074) $ 7,121
================================================================================
5. Transactions with Vectren Affiliates
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
(the Company's retail gas marketer) in 2002. ProLiance's primary business is
optimizing the gas portfolios of utilities and providing services to large end
use customers. Vectren continues to account for its investment in ProLiance
using the equity method of accounting.
Regulatory Matters
The sale of gas and provision of other services to Indiana Gas by ProLiance is
subject to regulatory review through the quarterly gas cost adjustment (GCA)
process administered by the IURC. On September 12, 1997, the IURC issued a
decision finding the gas supply and portfolio administration agreements between
ProLiance and Indiana Gas and ProLiance and Citizens Gas to be consistent with
the public interest and that ProLiance is not subject to regulation by the IURC
as a public utility. However, with respect to the pricing of gas commodity
purchased from ProLiance, the price paid by ProLiance to the utilities for the
prospect of using pipeline entitlements if and when they are not required to
serve the utilities' firm customers, and the pricing of fees paid by the
utilities to ProLiance for portfolio administration services, the IURC concluded
that additional review in the GCA process would be appropriate and directed that
these matters be considered further in a consolidated GCA proceeding involving
Indiana Gas and Citizens Gas.
On June 4, 2002, Indiana Gas and Citizens Gas, together with the OUCC and other
consumer parties, entered into and filed with the IURC a settlement setting
forth the terms for resolution of all pending regulatory issues related to
ProLiance, including the three pricing issues. On July 23, 2002, the IURC
approved the settlement filed by the parties. The GCA proceeding has been
concluded and new supply agreements between Indiana Gas, SIGECO, Citizens Gas,
and ProLiance have been approved and extended through March 31, 2007. ProLiance
will also have the opportunity, if it so elects, to participate in a "request
for proposal" process for service to the utilities after March 31, 2007.
For past services provided to Indiana Gas by ProLiance, Indiana Gas made refunds
to retail customers pursuant to the settlement totaling $6.4 million in the
fourth quarter of 2002. A subsidiary of Vectren's nonregulated operations has
indemnified Indiana Gas for the amount of the refund as well as any other
amounts incurred as a result of the settlement. Accordingly, the refund had no
effect on operating margin or net income.
Transactions with ProLiance
Purchases from ProLiance for resale and for injections into storage for the
years ended December 31, 2002, 2001, and 2000 totaled $321.6 million, $396.5
million, and $401.4 million, respectively. Amounts charged by ProLiance for gas
supply services are established by supply agreements.
Other Affiliate Transactions
Vectren has ownership interests in other affiliated companies accounted for
using the equity method of accounting that provide materials management,
underground construction and repair, facilities locating, and meter reading
services to the Company. For the years ended December 31, 2002, 2001, and 2000,
fees for these services and construction-related expenditures totaled $29.5
million, $21.1 million, and $6.6 million, respectively. Amounts charged by these
affiliates are market based.
Payables to Affiliates
Amounts owed to unconsolidated affiliates of Vectren approximated $47.3 million
and $21.3 million at December 31, 2002 and 2001, respectively, and are included
in accounts payable to affiliated companies in the Balance Sheets.
6. Borrowing Arrangements
Long-Term Debt
Senior unsecured obligations outstanding and classified as long-term follows:
At December 31,
- -------------------------------------------------------------------------------
In thousands 2002 2001
- -------------------------------------------------------------------------------
Fixed Rate Senior Unsecured Notes Payable to VUHI:
2011, 6.625% $ 98,920 $ 98,920
2031, 7.25% 48,355 48,350
- -------------------------------------------------------------------------------
Total long-term debt to VUHI $ 147,275 $ 147,270
===============================================================================
Fixed Rate Senior Unsecured Notes Payable to Third Parties:
2003, Series F, 5.75% $ 15,000 $ 15,000
2004, Series F, 6.36% 15,000 15,000
2007, Series E, 6.54% 6,500 6,500
2013, Series E, 6.69% 5,000 5,000
2015, Series E, 7.15% 5,000 5,000
2015, Insured Quarterly, 7.15% 20,000 20,000
2015, Series E, 6.69% 5,000 5,000
2015, Series E, 6.69% 10,000 10,000
2021, Private Placement, 9.375%,
$1,250 due annually in 2002 23,750 25,000
2025, Series E, 6.31% - 5,000
2025, Series E, 6.53% 10,000 10,000
2027, Series E, 6.42% 5,000 5,000
2027, Series E, 6.68% 3,500 3,500
2027, Series F, 6.34% 20,000 20,000
2028, Series F, 6.75% 13,563 13,722
2028, Series F, 6.36% 10,000 10,000
2028, Series F, 6.55% 20,000 20,000
2029, Series G, 7.08% 30,000 30,000
2030, Insured Quarterly, 7.45% 49,917 50,000
- -------------------------------------------------------------------------------
Total long-term debt outstanding due to third parties 267,230 273,722
Less: Current maturities 38,750 1,250
Debt subject to tender - 11,500
- -------------------------------------------------------------------------------
Total long-term debt-net $ 228,480 $ 260,972
===============================================================================
Issuances Payable to VUHI
At December 31, 2001, the Company has $147.3 million of long-term debt
outstanding with VUHI. Of this amount, $48.4 million has terms that are
identical to the terms of notes issued by VUHI in October 2001 (October Notes)
and $98.9 million has terms identical to the notes issued by VUHI in December
2001 (December Notes), both through public offerings. The October Notes have an
aggregate principal amount of $100.0 million and an interest rate of 7.25%. The
December Notes have an aggregate principal amount of $250.0 million and an
interest rate of 6.625%, priced at 99.302% to yield 6.69% to maturity.
The issues have no sinking fund requirements, and interest payments are due
quarterly for the October Notes and semi-annually for the December Notes. The
October Notes are due October 2031, but may be called by VUHI, in whole or in
part, at any time after October 2006 at 100% of the principal amount plus any
accrued interest thereon. The December Notes are due December 2011, but may be
called by VUHI, in whole or in part, at any time for an amount equal to accrued
and unpaid interest, plus the greater of 100% of the principal amount of the
notes to be redeemed or the sum of the present values of the remaining scheduled
payments of principal and interest, discounted to the redemption date on a
semi-annual basis at the Treasury Rate, as defined in VUHI's indenture, plus 25
basis points.
Issuances Payable to Third Parties
In December 2000, $20.0 million of 15-Year Insured Quarterly (IQ) Notes at an
interest rate of 7.15% and $50.0 million of 30-Year IQ Notes at an interest rate
of 7.45% were issued. Indiana Gas may call the 15-Year IQ Notes, in whole or in
part, from time to time on or after December 15, 2004 and has the option to
redeem the 30-Year IQ Notes in whole or in part, from time to time on or after
December 15, 2005. The IQ notes have no sinking fund requirements. The net
proceeds totaled $67.9 million.
Long-Term Debt Put and Call Provisions
On January 15, 2003, the Company called the remaining $23.8 million of Indiana
Gas' 9.375% private placement notes originally due in 2021. Since the proceeds
to repay the notes were generated from short-term borrowings, these notes are
classified in current maturities of long-term debt at December 31, 2002.
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 f