Edgar Filing: VECTREN UTILITY HOLDINGS INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018



[_]	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: 1-16739

VECTREN UTILITY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



INDIANA		35-2104850
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

One Vectren Square, Evansville, IN 47708

(Address of principal executive offices)

(Zip Code)

(812) 491-4000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o

Non-accelerated filer ý (Do not check if a smaller reporting company) Smaller reporting company o

Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes ý No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



Common Stock- Without Par Value	10	October 31, 2018
Class	Number of Shares	Date

Access to Information

Vectren Corporation makes available all SEC filings and recent annual reports, including those of its wholly owned subsidiaries, free of charge through its website at www.vectren.com as soon as reasonably practicable after electronically filing or furnishing the reports to the SEC, or by request, directed to Investor Relations at the mailing address, phone number, or email address that follows:



Mailing Address: One Vectren Square Evansville, Indiana 47708	Phone Number: (812) 491-4000	Investor Relations Contact: David E. Parker Director, Investor Relations vvcir@vectren.com

Definitions



The Administration: Executive Office of the President of the United States	IRP: Integrated Resource Plan
AFUDC: allowance for funds used during construction	IURC: Indiana Utility Regulatory Commission
ASC: Accounting Standards Codification	kV: Kilovolt
ASU: Accounting Standards Update	MCF / BCF: thousands / billions of cubic feet
BTU / MMBTU: British thermal units / millions of BTU	MDth / MMDth: thousands / millions of dekatherms
DOT: Department of Transportation	MISO: Midcontinent Independent System Operator
EPA: Environmental Protection Agency	MW: megawatts
FAC: Fuel Adjustment Clause	MWh / GWh: megawatt hours / thousands of megawatt hours (gigawatt hours)
FASB: Financial Accounting Standards Board	OUCC: Indiana Office of the Utility Consumer Counselor
FERC: Federal Energy Regulatory Commission	PHMSA: Pipeline and Hazardous Materials Safety Administration
GAAP: Generally Accepted Accounting Principles	PUCO: Public Utilities Commission of Ohio
GCA: Gas Cost Adjustment	XBRL: eXtensible Business Reporting Language
IDEM: Indiana Department of Environmental Management

Table of Contents



Item Number		Page Number
	PART I. FINANCIAL INFORMATION
1	Financial Statements (Unaudited)
	Vectren Utility Holdings, Inc. and Subsidiary Companies
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
2	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
3	Quantitative and Qualitative Disclosures About Market Risk	56
4	Controls and Procedures	57

	PART II. OTHER INFORMATION
1	Legal Proceedings	57
1A	Risk Factors	57
2	Unregistered Sales of Equity Securities and Use of Proceeds	58
3	Defaults Upon Senior Securities	58
4	Mine Safety Disclosures	58
5	Other Information	58
6	Exhibits	59
	Signatures	60

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited – In millions)



	September 30, 2018		December 31, 2017
ASSETS
Current Assets
Cash & cash equivalents	$	7.0	$	9.8
Accounts receivable - less reserves of $3.2 & $3.9, respectively	82.2		109.5
Accrued unbilled revenues	42.3		123.7
Inventories	100.8		117.5
Recoverable fuel & natural gas costs	7.8		19.2
Prepayments & other current assets	37.2		32.7
Total current assets	277.3		412.4
Utility Plant
Original cost	7,394.5		7,015.4
Less: accumulated depreciation & amortization	2,850.9		2,738.7
Net utility plant	4,543.6		4,276.7
Investments in unconsolidated affiliates	0.2		0.2
Other investments	30.7		26.7
Nonutility plant - net	202.5		198.6
Goodwill	205.0		205.0
Regulatory assets	366.6		314.0
Other assets	64.0		64.2
TOTAL ASSETS	$	5,689.9	$	5,497.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited – In millions)



	September 30, 2018		December 31, 2017
LIABILITIES & SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable	$	125.2	$	221.8
Payables to other Vectren companies	29.2		33.3
Accrued liabilities	176.9		154.0
Short-term borrowings	225.3		179.5
Current maturities of long-term debt	—		100.0
Total current liabilities	556.6		688.6
Long-Term Debt - Net of Current Maturities	1,729.6		1,479.5

Deferred Credits & Other Liabilities
Deferred income taxes	483.1		457.5
Regulatory liabilities	938.7		937.2
Deferred credits & other liabilities	220.5		212.2
Total deferred credits & other liabilities	1,642.3		1,606.9
Commitments & Contingencies (Notes 9 - 12)
Common Shareholder's Equity
Common stock (no par value)	879.2		877.5
Retained earnings	882.2		845.3
Total common shareholder's equity	1,761.4		1,722.8
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY	$	5,689.9	$	5,497.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited – In millions)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
OPERATING REVENUES
Gas utility	$	122.1	$	120.4	$	600.7	$	557.2
Electric utility	160.0		159.2		437.4		433.0
Other	0.1		0.1		0.2		0.2
Total operating revenues	282.2		279.7		1,038.3		990.4
OPERATING EXPENSES
Cost of gas sold	24.5		23.9		211.4		174.0
Cost of fuel & purchased power	47.5		44.1		137.7		128.8
Other operating	83.5		82.0		265.6		250.4
Depreciation & amortization	63.4		59.0		186.3		174.3
Taxes other than income taxes	13.5		12.6		47.5		40.1
Total operating expenses	232.4		221.6		848.5		767.6
OPERATING INCOME	49.8		58.1		189.8		222.8
Other income - net	9.2		8.1		27.9		21.4
Interest expense	20.3		18.3		60.3		53.5
INCOME BEFORE INCOME TAXES	38.7		47.9		157.4		190.7
Income taxes	5.7		17.1		24.6		68.5
NET INCOME	$	33.0	$	30.8	$	132.8	$	122.2

The accompanying notes are an integral part of these condensed consolidated financial statements.

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – In millions)



	Nine Months Ended
	September 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	132.8		$	122.2
Adjustments to reconcile net income to cash from operating activities:
Depreciation & amortization	186.3			174.3
Deferred income taxes & investment tax credits	11.1			72.0
Expense portion of pension & postretirement benefit cost	3.3			2.6
Provision for uncollectible accounts	4.7			4.0
Other non-cash items - net	1.4			(3.3		)
Changes in working capital accounts:
Accounts receivable & accrued unbilled revenues	104.0			90.0
Inventories	16.7			(1.4		)
Recoverable/refundable fuel & natural gas costs	11.4			—
Prepayments & other current assets	(4.3		)	(5.8		)
Accounts payable, including to Vectren companies & affiliated companies	(111.0		)	(79.0		)
Accrued liabilities	22.9			(1.8		)
Cash to fund pension & postretirement plans	(6.7		)	—
Changes in noncurrent assets	(33.1		)	(26.3		)
Changes in noncurrent liabilities	(18.3		)	(9.3		)
Net cash from operating activities	321.2			338.2
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Long-term debt - net of issuance costs	249.3			99.2
Additional capital contribution	1.7			44.6
Requirements for:
Dividends to parent	(96.0		)	(92.5		)
Retirement of long-term debt	(100.0		)	—
Net change in short-term borrowings	45.8			17.3
Net cash from financing activities	100.8			68.6
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from other collections	—			2.8
Requirements for:
Capital expenditures, excluding AFUDC equity	(424.8		)	(411.7		)
Other costs	—			(2.4		)
Changes in restricted cash	—			0.9
Net cash from investing activities	(424.8		)	(410.4		)
Net change in cash & cash equivalents	(2.8		)	(3.6		)
Cash & cash equivalents at beginning of period	9.8			9.4
Cash & cash equivalents at end of period	$	7.0		$	5.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

VECTREN UTILITY HOLDINGS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


1.	Organization and Nature of Operations

Vectren Utility Holdings, Inc. (the Company, Utility Holdings or VUHI), an Indiana corporation, was formed on March 31, 2000, to serve as the intermediate holding company for Vectren Corporation’s (Vectren or the Company's parent) three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas or Vectren Energy Delivery of Indiana - North), Southern Indiana Gas and Electric Company (SIGECO or Vectren Energy Delivery of Indiana - South), and Vectren Energy Delivery of Ohio, Inc. (VEDO). Herein, 'the Company' may also refer to Indiana Gas Company, Inc., Southern Indiana Gas and Electric Company, Inc. and/or Vectren Energy Delivery of Ohio, Inc. The Company also has other assets that provide information technology and other services to the three utilities. Vectren, an Indiana corporation, is an energy holding company headquartered in Evansville, Indiana and was organized on June 10, 1999. Both Vectren and the Company are holding companies as defined by the Energy Policy Act of 2005 (Energy Act).

Indiana Gas provides energy delivery services to approximately 598,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to approximately 146,000 electric customers and approximately 112,000 gas customers located near Evansville in southwestern Indiana. SIGECO also owns and operates electric generation assets to serve its electric customers and optimizes those assets in the wholesale power market. Indiana Gas and SIGECO generally do business as Vectren Energy Delivery of Indiana. VEDO provides energy delivery services to approximately 320,000 natural gas customers located near Dayton in west-central Ohio.

Merger with CenterPoint Energy, Inc.

On April 21, 2018, Vectren entered into an Agreement and Plan of Merger (the “Merger Agreement”), with CenterPoint Energy, Inc., a Texas corporation (“CenterPoint”), and Pacer Merger Sub, Inc., an Indiana corporation and wholly owned subsidiary of CenterPoint (“Merger Sub”). Pursuant to the Merger Agreement, and subject to the terms and conditions of the agreement, Merger Sub will merge with and into Vectren (the “Merger”), with Vectren continuing as the surviving corporation and becoming a wholly owned subsidiary of CenterPoint.

Subject to the terms and conditions in the Merger Agreement, upon closing, each share of common stock of Vectren shall be converted into the right to receive $72.00 in cash without interest.

Vectren, CenterPoint and Merger Sub each have made various representations, warranties and covenants in the Merger Agreement. Among other things, Vectren has agreed, subject to certain exceptions, to conduct its businesses in the ordinary course, consistent with past practice, from the date of the Merger Agreement until closing, and not to take certain actions prior to the closing of the Merger without the approval of CenterPoint. Vectren has made certain additional customary covenants, including, subject to certain exceptions: (1) to cause a meeting of Vectren's shareholders to be held to consider approval of the Merger Agreement, (2) not to solicit proposals relating to alternative business combination transactions and not to participate in discussions concerning, or furnish information in connection with, alternative business combination transactions and (3) not to withdraw its recommendation to Vectren’s shareholders regarding the Merger. In addition, subject to the terms of the Merger Agreement, Vectren, CenterPoint and Merger Sub are required to use reasonable best efforts to obtain all required regulatory approvals, which will include clearance under federal antitrust laws and certain approvals by federal regulatory bodies, including the Federal Energy Regulatory Commission ("FERC"), subject to certain exceptions, including such efforts not result in a "Burdensome Condition" (as defined in the Merger Agreement). While approval of the Merger Agreement is not required by the Indiana Utility Regulatory Commission ("IURC") or the Public Utilities Commission of Ohio ("PUCO"), informational filings have been made with each commission.

Consummation of the Merger is subject to various conditions, including: (1) approval of the shareholders of Vectren, (2) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period, (3) receipt of all required regulatory and statutory approvals without the imposition of a "Burdensome Condition," (4) absence of any law or order prohibiting the consummation of the Merger and (5) other customary closing conditions, including (a) subject to materiality qualifiers, the accuracy of each party's representations and warranties, (b) each party's compliance in all material respects with its

obligations and covenants under the Merger Agreement and (c) the absence of a material adverse effect with respect to Vectren and its subsidiaries.

The Merger Agreement contains certain termination rights for both Vectren and CenterPoint, including if the Merger is not consummated by April 21, 2019 (subject to extension for an additional six months if all conditions to closing, other than the conditions related to obtaining regulatory approvals, have been satisfied). The Merger Agreement also provides for certain termination rights for each of Vectren and CenterPoint, and provides that, upon termination of the Merger Agreement under certain specified circumstances, CenterPoint would be required to pay a termination fee of $210 million to Vectren, and under other specified circumstances Vectren would be required to pay CenterPoint a termination fee of $150 million.

On June 15, 2018, Vectren and CenterPoint submitted their filings with the FERC and initiated informational proceedings with regulators in Indiana and Ohio. Further, on June 18, 2018, Vectren and CenterPoint submitted their filings pursuant to the Hart-Scott-Rodino Act and the Federal Communications Commission. On June 26, 2018, CenterPoint and Vectren received notice from the Federal Trade Commission granting early termination of the waiting period under the Hart-Scott-Rodino Act.

On July 16, 2018, Vectren filed a definitive proxy statement, and a Form 8-K including supplemental disclosures to the proxy statement, with the Securities and Exchange Commission in connection with the Merger. On July 24, 2018, the Federal Communications Commission provided the final approvals for the transfer of control of the Vectren subsidiaries which hold radio licenses. At the special shareholders meeting held on August 28, 2018, the Merger Agreement and the Merger, as well as other matters relating to the proposed Merger, were voted on and approved by Vectren's shareholders. On October 5, 2018, the FERC issued an order indicating its approval of the Merger. In Indiana, the IURC held a hearing on October 17, 2018 on Vectren's informational filing. Final briefs are to be filed by December 21, 2018, and an order is expected in early 2019. A similar informational filing was made in Ohio and, though a hearing before the PUCO is not anticipated, an order is expected in early 2019, as well. As of November 6, 2018, seven purported Vectren shareholders have filed lawsuits under the federal securities laws in the United States District Court for the Southern District of Indiana challenging the adequacy of the disclosures made in Vectren's proxy statement in connection with the Merger as discussed in Note 9. Subject to receipt of remaining approvals, Vectren continues to anticipate that the closing of the Merger will occur no later than the first quarter of 2019.


2.	Basis of Presentation

The interim condensed consolidated financial statements included in this report have been prepared by the Company, without audit, as provided in the rules and regulations of the Securities and Exchange Commission and include a review of subsequent events through the date the financial statements were issued. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted as provided in such rules and regulations. The information in this report reflects all adjustments which are, in the opinion of management, necessary to fairly state the interim periods presented, inclusive of adjustments that are normal and recurring in nature. These interim condensed consolidated financial statements and related notes should be read in conjunction with the Company’s audited annual consolidated financial statements for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 8, 2018, on Form 10-K. Because of the seasonal nature of the Company’s utility operations, the results shown on a quarterly basis are not necessarily indicative of annual results.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.


3.	Revenue

In May 2014, the FASB issued new accounting guidance, ASC 606, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The amendments in this guidance state an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new guidance

requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

On January 1, 2018, the Company adopted the new accounting standard and all the related amendments (“new revenue standard”) to all contracts not complete at the date of initial application using the modified retrospective method, which resulted in no cumulative adjustment to retained earnings. The Company expects ongoing application to continue to be immaterial to financial condition and net income. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Substantially all the Company’s revenues are within the scope of the new revenue standard.

Revenue Policy

Revenue is recognized when obligations under the terms of a contract with the customer are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The satisfaction of performance obligation occurs when the transfer of goods and services occur, which may be at a point in time or over time; resulting in revenue being recognized over the course of the underlying contract or at a single point in time based upon the delivery of services to customers. The Company determines that disaggregating revenue into customer class, as discussed further below, achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The Company provides commodity service to customers at rates, charges, and terms and conditions included in tariffs approved by regulators. The Company’s utilities bill customers on a monthly basis and have the right to consideration from customers in an amount that corresponds directly with the performance obligation satisfied to date. The performance obligation is satisfied and revenue is recognized upon the delivery of services to customers. The Company records revenues for services and goods delivered but not billed at the end of an accounting period in Accrued unbilled revenues, derived from estimated unbilled consumption and tariff rates. The Company's revenues are also adjusted for the effects of regulation including tracked operating expenses, infrastructure replacement mechanisms, decoupling mechanisms, and lost margin recovery. Decoupling and lost margin recovery mechanisms are considered alternative revenue programs, which are excluded from the scope of the new revenue standard. Revenues from alternative revenue programs are not material to any reporting period. Customers are billed monthly and payment terms, set by the regulator, require payment within a month of billing. The Company's revenues are not subject to significant returns, refunds, or warranty obligations.

In the following table, the Company's revenue is disaggregated by customer class.



(In millions)	Three Months Ended		Nine Months Ended
(In millions)	September 30, 2018		September 30, 2018
Gas Utility Services
Residential	$	80.9	$	400.9
Commercial	23.7		136.4
Industrial	15.6		56.1
Other	1.9		7.3
Total Gas Utility Services	$	122.1	$	600.7

Electric Utility Services
Residential	$	63.1	$	163.5
Commercial	40.3		112.1
Industrial	43.3		121.7
Other	13.3		40.1
Total Electric Utility Services	$	160.0	$	437.4

Contract Balances

The Company does not have any material contract balances (right to consideration for services already provided or obligations to provide services in the future for consideration already received) as of January 1, 2018 or September 30, 2018. Substantially all of the Company's accounts receivable results from contracts with customers.

Remaining Performance Obligations

In accordance with the optional exemptions available under the new revenue standard, the Company has not disclosed the value of unsatisfied performance obligations from contracts for which revenue is recognized at the amount to which the Company has the right to invoice for goods provided and services performed. Substantially all of the Company's contracts with customers are eligible for this exemption.


4.	Subsidiary Guarantor and Consolidating Information

The Company’s three operating utility companies, SIGECO, Indiana Gas, and VEDO, are guarantors of the Company's $400 million in short-term credit facilities, of which $225 million was outstanding at September 30, 2018, and the Company's $1.345 billion in unsecured senior notes outstanding at September 30, 2018. The guarantees are full and unconditional and joint and several, and the Company has no subsidiaries other than the subsidiary guarantors. However, it does have operations other than those of the subsidiary guarantors. Pursuant to Item 3-10 of Regulation S-X, disclosure of the results of operations and balance sheets of the subsidiary guarantors, which are wholly owned, separate from the parent company’s operations is required. Following are condensed consolidating financial statements including information on the combined operations of the subsidiary guarantors separate from the other operations of the parent company. Pursuant to a tax sharing agreement, consolidating tax effects, which are calculated on a separate return basis, are reflected at the parent level.

Condensed Consolidating Balance Sheet as of September 30, 2018 (in millions):



ASSETS	Subsidiary		Parent		Eliminations &
	Guarantors		Company		Reclassifications			Consolidated
Current Assets
Cash & cash equivalents	$	5.2	$	1.8	$	—		$	7.0
Accounts receivable - less reserves	82.0		0.2		—			82.2
Intercompany receivables	7.5		167.6		(175.1		)	—
Accrued unbilled revenues	42.3		—		—			42.3
Inventories	100.7		0.1		—			100.8
Recoverable fuel & natural gas costs	7.8		—		—			7.8
Prepayments & other current assets	34.4		8.0		(5.2		)	37.2
Total current assets	279.9		177.7		(180.3		)	277.3
Utility Plant
Original cost	7,394.3		0.2		—			7,394.5
Less: accumulated depreciation & amortization	2,850.9		—		—			2,850.9
Net utility plant	4,543.4		0.2		—			4,543.6
Investments in consolidated subsidiaries	—		1,776.4		(1,776.4		)	—
Notes receivable from consolidated subsidiaries	—		1,220.0		(1,220.0		)	—
Investments in unconsolidated affiliates	0.2		—		—			0.2
Other investments	30.3		0.4		—			30.7
Nonutility plant - net	1.6		200.9		—			202.5
Goodwill - net	205.0		—		—			205.0
Regulatory assets	351.8		14.8		—			366.6
Other assets	62.4		1.6		—			64.0
TOTAL ASSETS	$	5,474.6	$	3,392.0	$	(3,176.7	)	$	5,689.9

LIABILITIES & SHAREHOLDER'S EQUITY	Subsidiary		Parent		Eliminations &
	Guarantors		Company		Reclassifications			Consolidated
Current Liabilities
Accounts payable	$	118.5	$	6.7	$	—		$	125.2
Intercompany payables	14.5		—		(14.5		)	—
Payables to other Vectren companies	29.2		—		—			29.2
Accrued liabilities	162.6		19.5		(5.2		)	176.9
Short-term borrowings	—		225.3		—			225.3
Intercompany short-term borrowings	153.1		7.5		(160.6		)	—
Total current liabilities	477.9		259.0		(180.3		)	556.6
Long-Term Debt
Long-term debt	384.3		1,345.3		—			1,729.6
Long-term debt due to VUHI	1,220.0		—		(1,220.0		)	—
Total long-term debt - net	1,604.3		1,345.3		(1,220.0		)	1,729.6
Deferred Credits & Other Liabilities
Deferred income taxes	459.4		23.7		—			483.1
Regulatory liabilities	937.6		1.1		—			938.7
Deferred credits & other liabilities	219.0		1.5		—			220.5
Total deferred credits & other liabilities	1,616.0		26.3		—			1,642.3
Common Shareholder's Equity
Common stock (no par value)	892.2		879.2		(892.2		)	879.2
Retained earnings	884.2		882.2		(884.2		)	882.2
Total common shareholder's equity	1,776.4		1,761.4		(1,776.4		)	1,761.4
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY	$	5,474.6	$	3,392.0	$	(3,176.7	)	$	5,689.9

Condensed Consolidating Balance Sheet as of December 31, 2017 (in millions):



ASSETS	Subsidiary		Parent		Eliminations &
	Guarantors		Company		Reclassifications			Consolidated
Current Assets
Cash & cash equivalents	$	8.2	$	1.6	$	—		$	9.8
Accounts receivable - less reserves	109.2		0.3		—			109.5
Intercompany receivables	—		227.5		(227.5		)	—
Accrued unbilled revenues	123.7		—		—			123.7
Inventories	117.5		—		—			117.5
Recoverable fuel & natural gas costs	19.2		—		—			19.2
Prepayments & other current assets	28.9		12.6		(8.8		)	32.7
Total current assets	406.7		242.0		(236.3		)	412.4
Utility Plant
Original cost	7,015.4		—		—			7,015.4
Less: accumulated depreciation & amortization	2,738.7		—		—			2,738.7
Net utility plant	4,276.7		—		—			4,276.7
Investments in consolidated subsidiaries	—		1,741.0		(1,741.0		)	—
Notes receivable from consolidated subsidiaries	—		970.7		(970.7		)	—
Investments in unconsolidated affiliates	0.2		—		—			0.2
Other investments	26.3		0.4		—			26.7
Nonutility plant - net	1.6		197.0		—			198.6
Goodwill - net	205.0		—		—			205.0
Regulatory assets	298.7		15.3		—			314.0
Other assets	62.5		1.8		(0.1		)	64.2
TOTAL ASSETS	$	5,277.7	$	3,168.2	$	(2,948.1	)	$	5,497.8

LIABILITIES & SHAREHOLDER'S EQUITY	Subsidiary		Parent		Eliminations &
	Guarantors		Company		Reclassifications			Consolidated
Current Liabilities
Accounts payable	$	179.4	$	42.4	$	—		$	221.8
Intercompany payables	8.3		—		(8.3		)	—
Payables to other Vectren companies	25.2		8.1		—			33.3
Accrued liabilities	147.7		15.1		(8.8		)	154.0
Short-term borrowings	—		179.5		—			179.5
Intercompany short-term borrowings	120.2		—		(120.2		)	—
Current maturities of long-term debt	—		100.0		—			100.0
Current maturities of long-term debt due to VUHI	99.0		—		(99.0		)	—
Total current liabilities	579.8		345.1		(236.3		)	688.6
Long-Term Debt
Long-term debt - net of current maturities &
debt subject to tender	384.5		1,095.0		—			1,479.5
Long-term debt due to VUHI	970.7		—		(970.7		)	—
Total long-term debt - net	1,355.2		1,095.0		(970.7		)	1,479.5
Deferred Credits & Other Liabilities
Deferred income taxes	455.3		2.2		—			457.5
Regulatory liabilities	936.1		1.1		—			937.2
Deferred credits & other liabilities	210.3		2.0		(0.1		)	212.2
Total deferred credits & other liabilities	1,601.7		5.3		(0.1		)	1,606.9
Common Shareholder's Equity
Common stock (no par value)	890.7		877.5		(890.7		)	877.5
Retained earnings	850.3		845.3		(850.3		)	845.3
Total common shareholder's equity	1,741.0		1,722.8		(1,741.0		)	1,722.8
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY	$	5,277.7	$	3,168.2	$	(2,948.1	)	$	5,497.8

Condensed Consolidating Statement of Income for the three months ended September 30, 2018 (in millions):




	Subsidiary Guarantors		Parent Company		Eliminations & Reclassifications			Consolidated
OPERATING REVENUES
Gas utility	$	122.1	$	—	$	—		$	122.1
Electric utility	160.0		—		—			160.0
Other	—		11.8		(11.7		)	0.1
Total operating revenues	282.1		11.8		(11.7		)	282.2
OPERATING EXPENSES
Cost of gas sold	24.5		—		—			24.5
Cost of fuel & purchased power	47.5		—		—			47.5
Other operating	95.1		—		(11.6		)	83.5
Depreciation & amortization	56.3		7.1		—			63.4
Taxes other than income taxes	13.0		0.5		—			13.5
Total operating expenses	236.4		7.6		(11.6		)	232.4
OPERATING INCOME	45.7		4.2		(0.1		)	49.8
Other income - net	9.0		14.6		(14.4		)	9.2
Interest expense	19.1		15.7		(14.5		)	20.3
INCOME BEFORE INCOME TAXES	35.6		3.1		—			38.7
Income taxes	5.7		—		—			5.7
Equity in earnings of consolidated companies, net of tax	—		29.9		(29.9		)	—
NET INCOME	$	29.9	$	33.0	$	(29.9	)	$	33.0

Condensed Consolidating Statement of Income for the three months ended September 30, 2017 (in millions):




	Subsidiary Guarantors		Parent Company		Eliminations & Reclassifications			Consolidated
OPERATING REVENUES
Gas utility	$	120.4	$	—	$	—		$	120.4
Electric utility	159.2		—		—			159.2
Other	—		11.4		(11.3		)	0.1
Total operating revenues	279.6		11.4		(11.3		)	279.7
OPERATING EXPENSES
Cost of gas sold	23.9		—		—			23.9
Cost of fuel & purchased power	44.1		—		—			44.1
Other operating	93.2		—		(11.2		)	82.0
Depreciation & amortization	52.5		6.5		—			59.0
Taxes other than income taxes	12.1		0.5		—			12.6
Total operating expenses	225.8		7.0		(11.2		)	221.6
OPERATING INCOME	53.8		4.4		(0.1		)	58.1
Other income - net	7.7		12.7		(12.3		)	8.1
Interest expense	17.2		13.5		(12.4		)	18.3
INCOME BEFORE INCOME TAXES	44.3		3.6		—			47.9
Income taxes	16.1		1.0		—			17.1
Equity in earnings of consolidated companies, net of tax	—		28.2		(28.2		)	—
NET INCOME	$	28.2	$	30.8	$	(28.2	)	$	30.8

Condensed Consolidating Statement of Income for the nine months ended September 30, 2018 (in millions):




	Subsidiary Guarantors		Parent Company			Eliminations & Reclassifications			Consolidated
OPERATING REVENUES
Gas utility	$	600.7	$	—		$	—		$	600.7
Electric utility	437.4		—			—			437.4
Other	—		35.3			(35.1		)	0.2
Total operating revenues	1,038.1		35.3			(35.1		)	1,038.3
OPERATING EXPENSES
Cost of gas sold	211.4		—			—			211.4
Cost of fuel & purchased power	137.7		—			—			137.7
Other operating	300.2		—			(34.6		)	265.6
Depreciation & amortization	165.3		20.9			0.1			186.3
Taxes other than income taxes	45.9		1.6			—			47.5
Total operating expenses	860.5		22.5			(34.5		)	848.5
OPERATING INCOME	177.6		12.8			(0.6		)	189.8
Other income - net	27.0		42.8			(41.9		)	27.9
Interest expense	56.4		46.4			(42.5		)	60.3
INCOME BEFORE INCOME TAXES	148.2		9.2			—			157.4
Income taxes	25.2		(0.6		)	—			24.6
Equity in earnings of consolidated companies, net of tax	—		123.0			(123.0		)	—
NET INCOME	$	123.0	$	132.8		$	(123.0	)	$	132.8

Condensed Consolidating Statement of Income for the nine months ended September 30, 2017 (in millions):




	Subsidiary Guarantors		Parent Company		Eliminations & Reclassifications			Consolidated
OPERATING REVENUES
Gas utility	$	557.2	$	—	$	—		$	557.2
Electric utility	433.0		—		—			433.0
Other	—		34.2		(34.0		)	0.2
Total operating revenues	990.2		34.2		(34.0		)	990.4
OPERATING EXPENSES
Cost of gas sold	174.0		—		—			174.0
Cost of fuel & purchased power	128.8		—		—			128.8
Other operating	283.8		—		(33.4		)	250.4
Depreciation & amortization	154.9		19.3		0.1			174.3
Taxes other than income taxes	38.7		1.4		—			40.1
Total operating expenses	780.2		20.7		(33.3		)	767.6
OPERATING INCOME	210.0		13.5		(0.7		)	222.8
Other income - net	20.4		36.9		(35.9		)	21.4
Interest expense	51.0		39.1		(36.6		)	53.5
INCOME BEFORE INCOME TAXES	179.4		11.3		—			190.7
Income taxes	66.8		1.7		—			68.5
Equity in earnings of consolidated companies, net of tax	—		112.6		(112.6		)	—
NET INCOME	$	112.6	$	122.2	$	(112.6	)	$	122.2

Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2018 (in millions):



	Subsidiary Guarantors			Parent Company			Eliminations			Consolidated
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	298.3		$	22.9		$	—		$	321.2
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Long-term debt - net of issuance costs	124.7			250.3			(125.7		)	249.3
Additional capital contribution from parent	1.6			1.7			(1.6		)	1.7
Requirements for:
Dividends to parent	(89.2		)	(96.0		)	89.2			(96.0		)
Retirement of long term debt	—			(100.0		)	—			(100.0		)
Net change in intercompany short-term borrowings	(66.1		)	7.4			58.7			—
Net change in short-term borrowings	—			45.8			—			45.8
Net cash used in financing activities	(29.0		)	109.2			20.6			100.8
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Consolidated subsidiary distributions	—			89.2			(89.2		)	—
Requirements for:
Capital expenditures, excluding AFUDC equity	(389.2		)	(35.6		)	—			(424.8		)
Consolidated subsidiary investments	—			(1.6		)	1.6			—
Net change in long-term intercompany notes receivable	124.3			(250.0		)	125.7			—
Net change in short-term intercompany notes receivable	(7.4		)	66.1			(58.7		)	—
Net cash used in investing activities	(272.3		)	(131.9		)	(20.6		)	(424.8		)
Net change in cash & cash equivalents	(3.0		)	0.2			—			(2.8		)
Cash & cash equivalents at beginning of period	8.2			1.6			—			9.8
Cash & cash equivalents at end of period	$	5.2		$	1.8		$	—		$	7.0

Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2017 (in millions):



	Subsidiary Guarantors			Parent Company			Eliminations			Consolidated
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	293.8		$	44.4		$	—		$	338.2
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Long-term debt, net of issuance costs	24.7			99.4			(24.9		)	99.2
Additional capital contribution from parent	44.6			44.6			(44.6		)	44.6
Requirements for:
Dividends to parent	(54.9		)	(92.5		)	54.9			(92.5		)
Net change in intercompany short-term borrowings	44.4			(5.8		)	(38.6		)	—
Net change in short-term borrowings	—			17.3			—			17.3
Net cash used in financing activities	58.8			63.0			(53.2		)	68.6
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Consolidated subsidiary distributions	—			54.9			(54.9		)	—
Other collections	2.8			—			—			2.8
Requirements for:
Capital expenditures, excluding AFUDC equity	(363.3		)	(48.4		)	—			(411.7		)
Consolidated subsidiary investments	—			(44.6		)	44.6			—
Other costs	(2.4		)	—			—			(2.4		)
Changes in restricted cash	0.9			—			—			0.9
Net change in long-term intercompany notes receivable	—			(24.9		)	24.9			—
Net change in short-term intercompany notes receivable	5.8			(44.4		)	38.6			—
Net cash used in investing activities	(356.2		)	(107.4		)	53.2			(410.4		)
Net change in cash & cash equivalents	(3.6		)	—			—			(3.6		)
Cash & cash equivalents at beginning of period	7.6			1.8			—			9.4
Cash & cash equivalents at end of period	$	4.0		$	1.8		$	—		$	5.8


5.	Excise and Utility Receipts Taxes

Excise taxes and a portion of utility receipts taxes are included in rates charged to customers. Accordingly, the Company records these taxes billed to customers, which totaled $5.4 million and $5.3 million in the three months ended September 30, 2018 and 2017, respectively, as a component of operating revenues. During the nine months ended September 30, 2018 and 2017, these taxes totaled $22.2 million and $20.2 million, respectively. Expenses associated with excise and utility receipts taxes are recorded as a component of Taxes other than income taxes.


6.	Supplemental Cash Flow Information

As of September 30, 2018 and December 31, 2017, the Company had accruals related to utility and nonutility plant purchases totaling approximately $39.4 million and $27.5 million, respectively.


7.	Transactions with Other Vectren Companies and Affiliates

Vectren Infrastructure Services Corporation (VISCO)

VISCO, a wholly owned subsidiary of the Company's parent, provides underground pipeline construction and repair services. VISCO's customers include the Company's utilities and fees incurred by the Company totaled $40.9 million and $46.5 million for the three months ended September 30, 2018 and 2017, respectively, and for the nine months ended September 30, 2018 and 2017 totaled $105.2 million and $123.9 million, respectively. Amounts owed to VISCO at September 30, 2018 and December 31, 2017 are included in Payables to other Vectren companies in the Condensed Consolidated Balance Sheets.

Support Services & Purchases

The Company's parent provides corporate and general and administrative services to the Company and allocates certain costs to the Company, including costs for share-based compensation and for pension and other postretirement benefits that are not directly charged to subsidiaries. These costs are allocated using various allocators, including number of employees, number of customers and/or the level of payroll, revenue contribution and capital expenditures. Allocations are at cost. For the three months ended September 30, 2018 and 2017, the company received corporate allocations totaling $11.4 million and $16.4 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company received corporate allocations totaling $40.7 million and $49.8 million, respectively.

The Company does not have share-based compensation plans and pension or other postretirement plans separate from the Company's parent and allocated costs include participation in the plans of the Company's parent. The allocation methodology for retirement costs is consistent with FASB guidance related to “multiemployer” benefit accounting.

Income Taxes

On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The TCJA makes broad and complex changes to the Internal Revenue Code (“IRC”), many of which were effective on January 1, 2018, including, but not limited to, (1) reducing the Federal corporate income tax rate from 35 percent to 21 percent, (2) eliminating the use of bonus depreciation for regulated utilities, while permitting full expensing of qualified property for non-regulated entities, (3) eliminating the domestic production activities deduction previously allowable under Section 199 of the IRC, (4) creating a new limitation on the deductibility of interest expense for non-regulated businesses, (5) eliminating the corporate Alternative Minimum Tax (“AMT”) and changing how existing AMT credits can be realized, (6) limiting the deductibility of certain executive compensation, (7) restricting the deductibility of entertainment and lobbying-related expenses, (8) requiring regulated entities to employ the average rate assumption method (“ARAM”) to refund excess deferred taxes created by the rate change to their customers, and (9) changing the rules regarding taxability of contributions made by government or civic groups.

The Company's gas and electric utilities currently recover corporate income tax expense in approved rates charged to customers. The IURC and the PUCO both issued orders which initiated proceedings to investigate the impact of the TCJA on utility companies and customers within each state. In addition, both Commissions have ordered each utility to establish regulatory assets and liabilities to record all estimated impacts of tax reform starting January 1, 2018. The Company is

complying with both orders. As of September 30, 2018, the Company has established $35.7 million in liabilities associated with the rate impacts of tax reform, including $5.2 million in Regulatory Liabilities and $30.5 million in Accrued Liabilities.

In Indiana, an order was issued by the IURC on February 16, 2018, outlining the process the utility companies are to follow. In accordance with the order, the Company filed March 26, 2018 for proposed changes to its rates and charges to consider the impact of the lower corporate federal income tax rate. The IURC approved an initial reduction to the Company’s current rates and charges, effective June 1, 2018, to capture the immediate impact of the lower corporate federal income tax rate. Also, on June 1, 2018, a settlement agreement, reached between the Company, the Indiana Office of the Utility Consumer Counselor (OUCC), and a coalition of industrial customers, was filed with the IURC. The settlement agreement resolves all the proposed changes to rates as a result of the TCJA, specifically regarding the refund of excess deferred taxes and the refund of the regulatory liabilities established starting January 1, 2018. The IURC issued an order on August 29, 2018 approving the settlement agreement. The refund of excess deferred taxes and regulatory liabilities will commence in November 2018 for the Company's Indiana electric customers and in January 2019 for the Company's Indiana gas customers.

In Ohio, on October 24, 2018, the PUCO issued an Order requiring all utilities to file by January 1, 2019 for a request to adjust rates to reflect the impact of the TCJA. In compliance with this Order and consistent with VEDO comments submitted within this proceeding, VEDO will make a filing later this year to address its proposal for the refund of TCJA impacts, with a request to consolidate the proceeding with its pending base rate case filed on March 30, 2018.


8.	Financing Activities

SIGECO Variable Rate Tax-Exempt Bonds

On March 1, 2018 and May 1, 2018, the Company, through SIGECO, executed first and second amendments to a Bond Purchase and Covenants Agreement originally signed in September 2017. These amendments provided SIGECO the ability to remarket bonds that were callable from current bondholders on those dates. Pursuant to these amendments, lenders purchased the following SIGECO bonds on March 1 and May 1, respectively:


•	2013 Series A Notes with a principal of $22.2 million and final maturity date of March 1, 2038; and


•	2013 Series B Notes with a principal of $39.6 million and final maturity date of May 1, 2043.

Prior to the call, the 2013 Series A Notes had an interest rate of 4.0% and the 2013 Series B Notes had an interest rate of 4.05%. The bonds converted to a variable rate based on the one month LIBOR through May 1, 2023.

The Company has now remarketed $152 million of tax exempt bonds through the Bonds Purchase and Covenants Agreement, which is the agreement’s full capacity. Bonds remarketed through the Bond Purchase and Covenants Agreement in 2017 were:


•	2013 Series C Notes with a principal of $4.6 million and final maturity date of January 1, 2022;


•	2013 Series D Notes with a principal of $22.5 million and final maturity date of March 1, 2024;


•	2013 Series E Notes with a principal of $22.0 million and final maturity date of May 1, 2037; and


•	2014 Series B Notes with a principal of $41.3 million and final maturity date of July 1, 2025.

These bonds also have a variable interest rate based on the one month LIBOR through May 1, 2023.

The Company, through SIGECO, executed forward starting interest rate swaps during 2017 providing that on January 1, 2020, the Company will begin hedging the variability in interest rates on the 2013 Series A, B, and E Notes through final maturity dates. The swaps contain customary terms and conditions and generally provide offset for changes in the one month LIBOR rate. Other interest rate variability that may arise through the Bond Purchase and Covenants Agreement, such as variability caused by changes in tax law or SIGECO’s credit rating, among others, may result in an actual interest rate above or below the anticipated fixed rate. Regulatory orders require SIGECO to include the impact of its interest rate risk management activities, such as gains and losses arising from these swaps, in its cost of capital utilized in rate cases and other periodic filings.

Utility Holdings Term Loan

On July 30, 2018, Utility Holdings executed a term loan agreement and closed a two-year term loan with two banking partners. The term loan agreement provides for a $250 million draw at closing and $50 million on or prior to December 31, 2018. Proceeds from the term loan have been utilized to pay a $100 million August 1, 2018, debt maturity and for general utility

purposes. The term loan’s interest rate is currently priced at one month LIBOR, plus a credit spread, which is subject to change based on changes in Utility Holdings’ credit rating. A change in credit rating would add approximately 10 basis points, per rating notch, to the existing rate. In addition, the term loan contains a provision that should Utility Holdings or any of its subsidiaries execute certain capital market transactions, and subject to certain other conditions, the outstanding balance is subject to mandatory prepayment. The term loan is jointly and severally guaranteed by Utility Holdings' wholly-owned operating companies, SIGECO, Indiana Gas, and VEDO.

Utility Holdings Borrowing Arrangements

The Merger would constitute a “Change of Control” under the note agreements pursuant to which Senior Notes issued by Utility Holdings in an aggregate principal amount of $1.025 billion were issued. While the Merger would not result in an event of default under such note agreements, upon the consummation of the Merger the issuer would be required to offer to repurchase these notes at 100% of the principal amount thereof plus accrued interest.

The Merger will represent an event of default pursuant to Utility Holdings' short-term credit facility, and Utility Holdings is in process of seeking a waiver from the facility bank group of this event of default. If a waiver is not obtained, upon closing of the merger, CenterPoint will fund the obligations associated with the credit facility.


9.	Commitments & Contingencies

Commitments

The Company's regulated utilities have both firm and non-firm commitments, some of which are between five and twenty year agreements to purchase natural gas, electricity, and coal, as well as certain transportation and storage rights. Costs arising from these commitments, while significant, are pass-through costs, generally collected dollar-for-dollar from retail customers through regulator-approved cost recovery mechanisms.

Letters of Credit

The Company from time to time, through its subsidiaries, issues letters of credit that support consolidated operations. At September 30, 2018, letters of credit outstanding total $8.6 million.

Legal & Regulatory Proceedings

The Company is party to various legal proceedings, audits, and reviews by taxing authorities and other government agencies arising in the normal course of business. In the opinion of management, there are no legal proceedings or other regulatory reviews or audits pending against the Company, including those described below, that are likely to have a material adverse effect on its financial condition, results of operations or cash flows.

Litigation Related to the Merger

As of November 6, 2018, seven purported Vectren shareholders have filed lawsuits under the federal securities laws in the United States District Court for the Southern District of Indiana challenging the adequacy of the disclosures made in Vectren's proxy statement in connection with the merger. These cases are captioned Kuebler v. Vectren Corp., et al., Case No. 3:18-cv-00113-RLY-MPB (S.D. Ind.) (the “Kuebler Action”), Danigelis v. Vectren Corp., et al., Case No. 3:18-cv-00114-RLY-MPB (S.D. Ind.) (the “Danigelis Action”), Scarantino v. Vectren Corp., et al., Case No. 3:18-cv-00115-RLY-MPB (S.D. Ind.) (the “Scarantino Action”), Stein v. Vectren Corp., et al., Case No. 3:18-cv-00117-RLY-MPB (S.D. Ind.) (the “Stein Action”), Nisenshal v. Vectren Corp., et al., Case No. 3:18-cv-00121-RLY-MPB (S.D. Ind.) (the “Nisenshal Action”), VonSalzen v. Vectren Corp., et al., Case No. 3:18-cv-00122-RLY-MPB (S.D. Ind.) (the “VonSalzen Action”), and Kent v. Vectren Corp., et al., Case No. 1:18-cv-02263-SEB-TAB (S.D. Ind.) (the “Kent Action,” referred to together with the preceding actions, as the "Actions"). The Kuebler Action, the Danigelis Action, the Scarantino Action, the Nisenshal Action, and the Kent Action are asserted on behalf of putative classes of Vectren shareholders, while the Stein Action and the VonSalzen Action are brought only on behalf of their respective named plaintiffs.

The actions allege violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder based on various alleged omissions of material information from this proxy statement. The Kuebler Action, the Danigelis Action, the Stein Action, and the Nisenshal Action name as defendants Vectren and each of its directors, individually, and seek to enjoin the merger (or, in the alternative, rescission or an award of rescissory damages in the event the Merger is completed), damages,

and an award of costs and attorneys’ and expert fees. The Scarantino Action and Kent Action also name as defendants Vectren and each of its directors, individually, and seek to enjoin the Merger (or, in the alternative, rescission or an award of rescissory damages in the event the merger is completed), to compel Vectren's directors to issue a revised proxy statement, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and an award of costs and attorneys’ and expert fees, and damages. The VonSalzen Action also names as defendants Vectren and each of its directors, individually, and seeks to enjoin the Merger (or, in the alternative, rescission or an award of rescissory damages in the event the Merger is completed), a declaration that the proxy statement is materially false or misleading, to compel Vectren's directors to account for damages, profits, and any special benefits obtained, and an award of costs and attorneys’ and expert fees, and damages.

On July 10, 2018, the plaintiffs in the Kuebler Action and in the Danigelis Action filed motions for preliminary injunctions seeking to enjoin Vectren from consummating the Merger. On August 10, 2018, the court consolidated the actions and appointed a group as interim lead plaintiff. On August 22, 2018, the court denied interim lead plaintiffs' preliminary injunction, which sought to halt the Vectren shareholder vote on the Vectren Merger.

Vectren and the Vectren director defendants filed a motion to dismiss on August 15, 2018. On September 4, 2018, the court entered the parties’ stipulation that the interim lead plaintiff group is under no obligation to oppose or otherwise respond to the motion to dismiss. Instead, under the stipulation, the lead plaintiff shall file a consolidated amended complaint or designate an operative complaint within thirty (30) days of the entry appointing lead plaintiff and lead counsel, and once the lead plaintiff files a consolidated amended complaint or designates an operative complaint, the case will proceed, as it ordinarily would, under the Federal Rules of Civil Procedure and the Local Rules for the Southern District of Indiana. On September 4, 2018, interim plaintiffs filed a motion for appointment as lead plaintiffs and approval of their selection of counsel as lead counsel. On September 28, 2018, the court granted the interim plaintiffs’ motion for appointment and ordered lead plaintiffs to file a consolidated amended complaint or designate an operative complaint within thirty (30) days of the entry in accordance with the court’s September 4, 2018 entry of the parties’ stipulation.

On October 29, 2018, lead plaintiffs filed an amended consolidated complaint asserting claims under Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder based on various alleged omissions of material information from the final proxy statement. Plaintiffs seek compensatory and/or rescissory damages and an award of costs and attorneys’ and expert fees. On November 8, 2018, the court entered the parties’ stipulation for the filing of a motion, answer, or other response to plaintiffs’ amended complaint, by which defendants shall have filed their motion, answer, or other response by December 7, 2018. Plaintiffs shall file response to any motion to dismiss by January 11, 2018 and defendants shall reply by February 8, 2018.

Vectren believes that these complaints are without merit and cannot predict the outcome of or estimate the possible loss or range of loss from these matters.

10. Gas Rate & Regulatory Matters

Regulatory Treatment of Investments in Natural Gas Infrastructure Replacement

The Company monitors and maintains its natural gas distribution system to ensure natural gas is delivered in a safe and efficient manner. The Company's natural gas utilities are currently engaged in programs to replace bare steel and cast iron infrastructure and other activities in both Indiana and Ohio to mitigate risk, improve the system, and comply with applicable regulations, many of which are the result of federal pipeline safety requirements. Laws passed in both Indiana and Ohio provide utilities the opportunity to timely recover costs of federally mandated projects and other infrastructure improvement projects outside of a base rate proceeding.

Indiana Senate Bill 251 (Senate Bill 251) provides a framework to recover 80 percent of federally mandated costs through a periodic rate adjustment mechanism outside of a general rate case. Such costs include a return on the federally mandated capital investment, based on the overall rate of return most recently approved by the IURC, through a base rate case or other proceeding, along with recovery of depreciation and other operating costs associated with these mandates. The remaining 20 percent of those costs is deferred for future recovery in the utility's next general rate case.

Indiana Senate Bill 560 (Senate Bill 560) supplements Senate Bill 251 described above, and provides for cost recovery outside of a base rate proceeding for projects that either improve electric and gas system reliability and safety or are economic development projects that provide rural areas with access to gas service. Provisions of the legislation require, among other

things, requests for recovery including a seven-year project plan. Once the plan is approved by the IURC, 80 percent of such costs are eligible for current recovery using a periodic rate adjustment mechanism. Recoverable costs include a return on the investment that reflects the current capital structure and associated costs, except for the rate of return on equity, which remains fixed at the rate determined in the Company's last base rate case. Recoverable costs also include recovery of depreciation and other operating expenses. The remaining 20 percent of project costs are deferred for future recovery in the utility’s next general rate case, which must be filed before the expiration of the seven-year plan. The adjustment mechanism is capped at an annual increase in retail revenues of not more than two percent.

Ohio House Bill 95 (House Bill 95) permits a natural gas utility to apply for recovery of much of its capital expenditure program. This legislation also allows for the deferral of costs, such as depreciation, property taxes, and debt-related post-in-service carrying costs until recovery is approved by the PUCO.

Requests for Recovery under Indiana Regulatory Mechanisms

In August 2014, the IURC issued an Order approving the Company’s seven-year capital infrastructure replacement and improvement plan (the Plan), beginning in 2014, and the proposed accounting authority and recovery. Compliance projects and other infrastructure improvement projects were approved pursuant to Senate Bill 251 and 560, respectively. As provided in the statutes, the Order approved semi-annual filings for rate recovery of 100 percent of the costs, inclusive of return, related to these capital investments and operating expenses, with 80 percent of the costs, including a return, recovered currently via an approved tracking mechanism and 20 percent of the costs deferred and recovered in the Company’s next base rate proceeding. In addition, the Order established guidelines to annually update the seven-year capital investment plan. Finally, the Order approved the Company’s proposal to recover eligible costs assigned to the residential customer class via a fixed monthly charge per residential customer.

Since this August 2014 Order, the Company has received eight semi-annual orders which approved the inclusion in rates of approximately $563 million of approved capital investments through December 31, 2017.

On June 20, 2018, the Indiana Supreme Court issued an opinion (Opinion) in an appeal of an IURC order under Indiana Senate Bill 560 for a utility unrelated to the Company. In this Opinion, the Court determined that one of the programs within that utility’s approved plan did not constitute a “designated” capital improvement because the individual projects within the program were not specifically set forth in the approved seven-year plan, and, instead were designated later based on subsequently developed information. The IURC had previously approved the program and thereby allowed individual projects under the program to be designated in the future and that action was then appealed by intervenors in the TDSIC proceeding. The Company has evaluated the opinion's potential application to the Company’s Plan. The Company believes the ruling is limited to prospective projects that have not previously been designated and approved in final orders issued in the TDSIC process. The Company has determined that TDSIC projects in the service replacement plan category do not constitute a designated capital improvement, and therefore as a result of the Opinion is removing the associated projects that were not previously the subject of final orders, totaling approximately $40 million over the remaining term of the plan. Such projects are still eligible for recovery in a future base rate case. The Company does not expect a resulting material impact to results of operations or cash flow from operations.

On October 1, 2018, the Company submitted its ninth semi-annual filing, seeking approval of the recovery in rates of investments made through June 30, 2018, and updates to the approved seven-year capital investment plan. The updated plan reflects capital expenditures of approximately $955 million. The Company expects an order in this proceeding in early 2019.

At September 30, 2018 and December 31, 2017, the Company has regulatory assets related to the Plan totaling $92.3 million and $78.0 million, respectively.

In December 2016, PHMSA issued interim final rules related to integrity management for storage operations. Efforts are underway to implement the new requirements. Further, the Company reviewed the Underground Natural Gas Storage Safety Recommendations from a joint Department of Energy and PHMSA led task force. On August 3, 2017, the Company filed for authority to recover the associated costs using the mechanism allowed under Senate Bill 251.

Approximately $15 million of operating expenses and $17 million of capital investments will be included in the plan over a four-year period beginning in 2018. The Company received the IURC Order approving the request for recovery on

December 28, 2017. The Company does not have company-owned storage operations in Ohio.

Ohio Recovery and Deferral Mechanisms

The PUCO Order approving the Company's 2009 base rate case in the Ohio service territory authorized a distribution replacement rider (DRR). The DRR's primary purpose is recovery of investments in utility plant and related operating expenses associated with replacing bare steel and cast iron pipelines, as well as certain other infrastructure investments. This rider is updated annually for qualifying capital expenditures and allows for a return on those capital expenditures based on the rate of return approved in the 2009 base rate case. In addition, deferral of depreciation and the ability to accrue debt-related post-in-service carrying costs is also allowed until the related capital expenditures are included in the DRR. The Order also initially established a prospective bill impact evaluation on the annual deferrals. On February 19, 2014, the PUCO issued an Order approving a Stipulation entered into by the PUCO Staff and the Company which provided for the extension of the DRR for the recovery of costs incurred through 2017 and expanded the types of investment covered by the DRR to include recovery of certain other infrastructure investments. The Order limits the resulting DRR fixed charge per month for residential and small general service customers to specific graduated levels through 2017. The capital expenditure plan is subject to the graduated caps on the fixed DRR monthly charge applicable to residential and small general service customers approved in the Order. In the event the Company exceeds these caps, amounts in excess can be deferred for future recovery. The Order also approved the Company's commitment that the DRR can only be further extended as part of a base rate case. In the Company's base rate case, it requested extension to include investments made starting 2018 through completion of the program, currently estimated at 2023. In total, the Company has made capital investments on projects that are now in-service under the DRR totaling $353.1 million as of September 30, 2018, of which $321.1 million has been approved for recovery under the DRR through December 31, 2017. Regulatory assets associated with post-in-service carrying costs and depreciation deferrals were $36.5 million and $31.2 million at September 30, 2018 and December 31, 2017, respectively.

The PUCO has also issued Orders approving the Company's filings under Ohio House Bill 95. These Orders approve deferral of the Company’s Ohio capital expenditure program for items not covered by the DRR as well as expenditures necessary to comply with PUCO rules, regulations, orders, and system expansion to some new customers. Ohio House Bill 95 Orders also established a prospective bill impact evaluation on the cumulative deferrals, limiting the total deferrals at a level which would equal $1.50 per residential and small general service customer per month. The Company has requested recovery of these deferrals through December 31, 2017 in its rate case, along with a mechanism to recover future Ohio House Bill 95 deferrals. At September 30, 2018 and December 31, 2017, the Company has regulatory assets totaling $90.1 million and $66.1 million, respectively, associated with the deferral of depreciation, post-in-service carrying costs, and property taxes. On May 1, 2018, the Company submitted its most recent annual report required under its House Bill 95 Order. This report covers the Company's capital expenditure program through calendar year 2017.

Vectren Ohio Gas Rate Case

On March 30, 2018, the Company filed with the PUCO a request for a $34 million increase in its base rates and charges for VEDO’s distribution business in its 17 county service area in west-central Ohio. The requested increase includes the benefit of the TCJA, which decreased the corporate rate from 35 percent to 21 percent. The filing is necessary to extend the DRR mechanism beyond 2017 through completion of the accelerated replacement program, and to recover the costs of capital investments made over the past ten years, much of which has been deferred as part of the Company’s capital expenditure program under Ohio House Bill 95. The filing also addresses the recovery of the current Ohio House Bill 95 regulatory asset balance, and a proposed mechanism to recover future Ohio House Bill 95 deferrals.

On October 1, 2018, the PUCO staff filed its report of its audit in this proceeding, including recommendations for a revenue increase between $12 million and $16 million. Much of the reduction relates to periodic recovery mechanism versus base rate method of cost recovery, a reduction to the requested ROE, and a reduction to certain operating expenses. Staff was supportive of the continuation of the DRR and the expansion of straight-fixed-variable rate design to small commercial customers. The Company and other parties filed objections to the Staff report adjustments on October 31, 2018, and the Company will file supplemental testimony in early November 2018, continuing to support its filed position. The Commission has set the procedural schedule in this proceeding, with a prehearing conference scheduled for November 15, 2018, followed by three field hearings to occur in November and an evidentiary hearing to begin on December 4, 2018. The Company expects an order by early 2019.

Pipeline and Hazardous Materials Safety Administration (PHMSA)

In March 2016, PHMSA published a notice of proposed rulemaking (NOPR) on the safety of gas transmission and gathering lines. The proposed rule addresses many of the remaining requirements of the 2011 Pipeline Safety Act, with a focus on extending integrity management rules to address a much larger portion of the natural gas infrastructure and adds requirements to address broader threats to the integrity of a pipeline system. The Company continues to evaluate the impact these proposed rules will have on its integrity management programs and transmission and distribution systems. Progress on finalizing the rule continues to work through the administrative process. The rule is expected to be finalized in 2019 and the Company believes the costs to comply with the new rules would be considered federally mandated and therefore should be recoverable under Senate Bill 251 in Indiana and eligible for deferral under House Bill 95 in Ohio.

11. Electric Rate & Regulatory Matters

Electric Requests for Recovery under Senate Bill 560

The provisions of Senate Bill 560, as described in Note 10 for gas projects, are the same for qualifying electric projects. On February 23, 2017, the Company filed for authority to recover costs related to its electric system modernization plan, using the mechanism allowed under Senate Bill 560. The electric system modernization plan includes investments to upgrade portions of the Company’s network of substations, transmission and distribution systems, to enhance reliability and allow the grid to accept advanced technology to improve the information and service provided to customers.

On September 20, 2017, the IURC issued an Order approving the Company’s electric system modification as reflected in the settlement agreement reached between the Company, the OUCC, and a coalition of industrial customers. The settlement agreement includes defined annual caps on recoverable capital investments, with the total approved plan set at $446.5 million. The settlement agreement also addresses how the eligible costs would be recoverable in rates, with a cap on the residential and small general service fixed monthly charge per customer in each semi-annual filing. The remaining costs to residential and small general service customers would be recovered via a volumetric energy charge. The settlement agreement removed advanced metering infrastructure (AMI or digital meters) from the plan. However, deferral of the costs for AMI was agreed upon in the settlement whereby the company can move forward with deployment in the near-term. The request for cost recovery for the AMI project will not occur until the next base rate review proceeding, which is expected to be filed by the end of 2023. In that proceeding, settling parties have agreed not to oppose inclusion of the AMI project in rate base.

On December 20, 2017, the IURC issued an Order approving the initial rates necessary to begin cash recovery of 80 percent of the revenue requirement, inclusive of return, with the remaining 20 percent deferred for recovery in the utility's next general rate case. These initial rates captured approved investments made through April 30, 2017.