February 14, 2000
Securities and Exchange Commission
Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
Gentlemen:
We are transmitting herewith Indiana Gas Company, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999, pursuant to the requirements of
Section 13 of the Securities Exchange Act of 1934.
Very truly yours,
/s/Pia M. O'Connor
Pia M. O'Connor
PMO:tmw
Enclosures
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6494
INDIANA GAS COMPANY, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0793669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
1630 North Meridian Street, Indianapolis, Indiana 46202
(Address of principal executive offices) (Zip Code)
317-926-3351
(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
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 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 9,080,770 January 31, 2000
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Balance Sheets
at December 31, 1999, and 1998
and September 30, 1999
Consolidated Statements of Income
Three Months Ended December 31, 1999 and 1998,
and Twelve Months Ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998,
and Twelve Months Ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Quantitative and Qualitative Disclosure about Market Risk
Part II - Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
Assets
(Thousands - Unaudited)
December 31 September 30
1999 1998 1999
Utility Plant
Original cost 1,005,304 946,602 990,780
Less - accumulated depreciation and
amortization 407,887 376,133 398,912
597,417 570,469 591,868
Current Assets
Cash and cash equivalents $ 353 $ 20 $ 14
Accounts receivable, less reserves of
$1,739, $1,749 and $733, respectively 37,058 28,668 17,716
Accrued unbilled revenues 36,634 40,577 8,136
Liquefied petroleum gas - at average cost 815 892 810
Gas in underground storage - at last-in,
first-out cost (See Note 6) 11,627 18,150 9,501
Prepaid gas delivery service 20,937 25,810
Prepayments and other 16,468 10,928 11,815
123,892 99,235 73,802
Deferred Charges
Unamortized debt discount and expense 11,906 12,653 11,954
Regulatory income tax asset 2,741 1,778 2,741
Other 3,914 2,622 2,159
18,561 17,053 16,854
$ 739,870 $686,757 $682,524
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
(Thousands - Unaudited)
December 31 September 30
1999 1998 1999
Capitalization
Common stock and paid-in capital $142,995 $142,995 $142,995
Retained earnings 105,627 102,885 100,431
Total common shareholders' equity 248,622 $245,880 243,426
Long-term debt (see schedule) 211,849 181,964 181,849
Total Capitalization 460,471 427,844 425,275
Current Liabilities
Maturities and sinking fund requirements of
long-term debt 0 10,000
Notes payable and commercial paper 82,172 48,675 68,621
Accounts payable 37,111 32,547 33,081
Refundable gas costs 10,204 14,343 11,192
Customer deposits and advance payments 11,817 22,416 14,713
Accrued taxes 16,208 9,848 12,471
Accrued interest 5,252 4,746 1,173
Other current liabilities 12,697 14,245 13,398
175,461 156,820 154,649
Deferred Credits and Other Liabilities
Deferred income taxes 61,061 60,580 60,931
Accrued postretirement benefits other
than pensions 28,474 25,884 27,868
Unamortized investment tax credit 8,152 9,082 8,383
Other 6,251 6,547 5,418
103,938 102,093 102,600
$739,870 $686,757 $682,524
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except earnings per share amounts - Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1999 1998 1999 1998
Operating Revenues $137,247 $124,947 $431,361 $420,459
Cost of gas (See Note 6) 79,063 67,937 226,817 231,889
Margin 58,184 57,010 204,544 188,570
Operating Expenses
Operations and maintenance 22,947 21,529 91,829 85,871
Depreciation and amortization 8,874 8,315 34,585 32,758
Income taxes 6,205 6,438 16,734 14,058
Taxes other than income taxes 4,430 4,151 15,695 13,882
42,456 40,433 158,843 146,569
Operating income 15,728 16,577 45,701 42,001
Other income - net 252 81 1,010 626
Income Before Interest and Income Taxes 15,980 16,658 46,711 42,627
Interest Expense 5,084 4,127 16,969 15,802
Net Income $ 10,896 $ 12,531 $ 29,742 $ 26,825
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1999 1998 1999 1998
Cash Flows from Operating Activities
Net income $ 10,896 $ 12,531 $ 29,742 $ 26,825
Adjustments to reconcile net income to cash
provided from operating activities -
Depreciation and amortization 8,874 8,362 34,585 32,945
Deferred income taxes 130 132 (482) 1,192
Investment tax credit (232) (232) (930) (930)
Loss (gain) on sale or retirement of assets - - - (1,219)
8,772 8,262 33,173 31,988
Changes in assets and liabilities -
Receivables - net (48,854) (46,647) (4,447) 30,073
Inventories (2,987) 1,204 5,708 (1,193)
Accounts payable, customer deposits, advance
payments and other current liabilities (1,574) 14,843 (8,646) (24,277)
Accrued taxes and interest 7,816 8,397 6,866 (7,610)
Recoverable/refundable gas costs (988) 3,613 (4,139) 4,010
Accrued postretirement benefits other than
pensions 606 715 2,590 2,140
Prepayments (776) (133) (3,585) (1,072)
Prepaid gas delivery service 4,873 - (20,937) -
Other - net (527) 596 506 4,729
Total adjustments (33,639) (9,150) 7,089 38,788
Net cash flows from (required for) operations (22,743) 3,381 36,831 65,613
Cash Flows From (Required for) Financing Activities
Repurchase of common stock - - - -
Sale of long-term debt 30,000 - 30,000 60,000
Reduction in long-term debt - (11) (10,115) (33,036)
Net change in short-term borrowings 13,551 14,970 33,497 (20,325)
Dividends on common stock (5,700) (7,000) (27,000) (27,500)
Net cash flows from (required for) financing
activities 37,851 7,959 26,382 (20,861)
Cash Flows From (Required for) Investing Activities
Capital expenditures (14,769) (12,062) (62,880) (55,320)
Non-regulated investments in unconsolidated
affiliates - - - -
Cash distributions from unconsolidated affiliates - - - -
Proceeds from sale of assets - - - 9,204
Net cash flows from (required for) investing
activities (14,769) (12,062) (62,880) (46,116)
Net increase (decrease) in cash 339 (722) 333 (1,364)
Cash and cash equivalents at beginning of period 14 742 20 1,384
Cash and cash equivalents at end of period $ 353 $ 20 $ 353 $ 20
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
Consolidated Schedule of Long Term Debt
(In Thousands - Unaudited)
December 31
Total Due Within 1999 1998
Outstanding One Year Balance Balance
Long-term debt - Uti Due Date
Notes Payable
5.75% Series F January 15, 2003 15,000 15,000 15,000
6.36% Series F December 6, 2004 15,000 15,000 15,000
6.54% Series E July 9, 2007 6,500 6,500 6,500
6.69% Series E June 10, 2013 5,000 5,000 5,000
7.15% Series E March 15, 2015 5,000 5,000 5,000
6.69% Series E December 21, 2015 5,000 5,000 5,000
6.69% Series E December 29, 2015 10,000 10,000 10,000
9.375% January 15, 2021 25,000 25,000 25,000
9.125% Series A February 15, 2021 7,000 7,000 7,000
6.31% Series E June 10, 2025 5,000 5,000 5,000
6.53% Series E June 10, 2025 10,000 10,000 10,000
6.42% Series E July 7, 2027 5,000 5,000 5,000
6.68% Series E July 7, 2027 3,500 3,500 3,500
6.34% Series F December 10, 2027 20,000 20,000 20,000
6.75% Series F March 15, 2028 14,849 14,849 14,964
6.36% Series F May 1, 2028 10,000 10,000 10,000
6.55% Series F June 30, 2028 20,000 20,000 20,000
7.08% Series G October 5, 2029 30,000 30,000 -
Total Long-term debt 211,849 211,849 181,964
Indiana Gas Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
Indiana Gas Company, Inc. and its subsidiaries (Indiana
Gas or the company) provide natural gas and
transportation services to a diversified base of
customers in 311 communities in 49 of Indiana's 92
counties.
The interim condensed consolidated financial statements
included in this report have been prepared by Indiana
Gas, without audit, as provided in the rules and
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles have been
omitted as provided in such rules and regulations.
Indiana Gas believes that the information in this report
reflects all adjustments necessary to fairly state the
results of the interim periods reported, that all such
adjustments are of a normal recurring nature, and the
disclosures are adequate to make the information
presented not misleading. These interim financial
statements should be read in conjunction with the
financial statements and the notes thereto included in
Indiana Gas' latest annual report on Form 10-K.
Because of the seasonal nature of Indiana Gas' gas
distribution operations, the results shown on a
quarterly basis are not necessarily indicative of annual
results.
2. Agreement to Merge with SIGCORP, Inc.
On June 14, 1999, Indiana Energy and SIGCORP, Inc.
(SIGCORP) jointly announced the signing of a
definitive agreement to combine into a new holding
company named Vectren Corporation (Vectren).
SIGCORP is an investor-owned energy and
telecommunications company that through its
subsidiaries provides electric and gas service to
southwest Indiana and energy and telecommunications
products and services throughout the Midwest and
elsewhere.
Under the agreement, Indiana Energy shareholders
will receive one share of Vectren common stock for
each share of Indiana Energy held at the closing
date. SIGCORP shareholders will receive 1.333
shares of Vectren common stock for each share of
SIGCORP held at the closing date. The transaction
is intended to be accounted for as a pooling of
interests. The transaction is also intended to be
a tax-free exchange of shares.
Indiana Gas Company, Inc. and Southern Indiana Gas
and Electric Company, Indiana Energy's and
SIGCORP's utility companies, will operate as
separate subsidiaries of Vectren.
The merger is conditioned, among other things, upon
the approvals of the shareholders of each company
and customary regulatory approvals. On December 17,
1999, the merger was approved by the shareholders
of each company. On December 20, 1999, the Federal
Energy Regulatory Commission (FERC) issued an order
approving the proposed merger. In approving the
merger, the FERC concluded that the merger was in
the public interest and would not adversely affect
competition, rates or regulation. On January 18,
2000, the Department of Justice informed the
Companies that it had concluded its review of their
Hart Scott Rodino notification filings and would
take no further action. The companies anticipate
that the remaining regulatory approvals can be
completed in the first quarter of calendar 2000.
3. Corporate Restructuring.
During 1997, the Indiana Gas Board of Directors
authorized management to undertake the actions necessary
and appropriate to restructure Indiana Gas' operations
and recognize a resulting restructuring which included
estimated costs related to involuntary workforce
reductions. Since that time, the anticipated actions
have been taken. As a result, the remaining severance
accrual was eliminated and other operating expenses were
reduced by $1.7 million during fiscal year 1999.
4. Cash Flow Information.
For the purposes of the Consolidated Statements of Cash
Flows, Indiana Gas considers cash investments with an
original maturity of three months or less to be cash
equivalents. Cash paid during the periods reported for
interest and income taxes were as follows:
Three Months Ended Twelve Months Ended
December 31 December 31
Thousands 1999 1998 1999 1998
Interest (net of
amount
capitalized) $ 624 $ 812 $14,330 $13,646
Income taxes $2,000 $1,057 $16,919 $25,717
5. Revenues.
To more closely match revenues and expenses, revenues
are recorded for all gas delivered to customers but not
billed at the end of the accounting period.
6. Gas in Underground Storage.
Based on the average cost of purchased gas during
December 1999, the cost of replacing the current portion
of gas in underground storage exceeded last-in,
first-out cost at December 31, 1999, by approximately
$11.2 million.
7. Refundable or Recoverable Gas Costs.
The cost of gas purchased and refunds from suppliers,
which differ from amounts recovered through rates, are
deferred, and are being recovered or refunded in
accordance with procedures approved by the Indiana
Utility Regulatory Commission (IURC).
8. Environmental Costs.
In the past, Indiana Gas and others, including
former affiliates, and/or previous landowners,
operated facilities for the manufacturing of gas
and storage of manufactured gas. These facilities
are no longer in operation and have not been
operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas,
and the others, may now be required to take
remedial action if certain byproducts are found
above a regulatory threshold at these sites.
Indiana Gas has identified the existence, location
and certain general characteristics of 26 gas
manufacturing and storage sites. Based upon the
site work completed to date, Indiana Gas believes
that a level of contamination that may require some
level of remedial activity may be present at a
number of the sites. Removal activities continue at
several sites and a remedial
investigation/feasibility study (RI/FS) has been
completed at one of the sites under an agreed order
between Indiana Gas and the Indiana Department of
Environmental Management (IDEM), with a Record of
Decision (ROD) expected to be issued by IDEM in
early 2000. Although Indiana Gas has not begun an
RI/FS at additional sites, Indiana Gas has
submitted several of the sites to IDEM's Voluntary
Remediation Program (VRP) and is currently
conducting some level of remedial activities
including groundwater monitoring at certain sites
where deemed appropriate and will continue remedial
activities at the sites as appropriate and
necessary.
Based upon the work performed to date, Indiana Gas
has accrued investigation, remediation, groundwater
monitoring and related costs for the sites.
Estimated costs of certain remedial actions that
may likely be required have also been accrued.
Costs associated with environmental remedial
activities are accrued when such costs are probable
and reasonably estimable. Indiana Gas does not
believe it can provide an estimate of the
reasonably possible total remediation costs for any
site prior to completion of an RI/FS and the
development of some sense of the timing for
implementation of the site specific remedial
alternative, to the extent such remediation is
required. Accordingly, the total costs which may be
incurred in connection with the remediation of all
sites, to the extent remediation is necessary,
cannot be determined at this time.
Indiana Gas has been recovering the costs it has
incurred and expects to incur relating to the 26
sites from insurance carriers and other potentially
responsible parties (PRPs). The IURC has determined
that these costs are not recoverable from utility
customers.
Indiana Gas has PRP agreements in place covering 19
of the 26 sites. The agreements provide for
coordination of efforts and sharing of
investigation and clean-up costs incurred and to be
incurred at the sites. These agreements limit
Indiana Gas' share of past and future response
costs at these 19 sites to between 20 and 50
percent. Based on the agreements, Indiana Gas has
accrued its proportionate share of the estimated
cost related to work not yet performed.
In early 1999, Indiana Gas filed a complaint in
Indiana state court to continue its pursuit of
insurance coverage from four insurance carriers,
with the trial scheduled for early 2000. As of
December 31, 1999, agreements in principle have
been reached with each of these insurers.
These environmental matters have had no material
impact on earnings since costs recorded to date
approximate insurance settlements received. While
Indiana Gas has recorded all costs which it
presently expects to incur in connection with
remediation activities, it is possible that future
events may require some level of additional
remedial activities which are not presently
foreseen.
9. Affiliate Transactions.
ProLiance Energy, LLC (ProLiance), a non-regulated
marketing affiliate of Indiana Energy, provides natural
gas supply and related services to Indiana Gas. Indiana
Gas' purchases from ProLiance for resale and for
injections into storage for the three and twelve-month
periods ended December 31, 1999, totaled $76.2 million
and $240.7 million, respectively. Indiana Gas'
purchases from ProLiance for the three and twelve-month
periods ended December 31, 1998, totaled $67.4 million
and $232.2 million, respectively.
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 proceeding
currently pending before the IURC.
On September 12, 1997, the Indiana Utility
Regulatory Commission (IURC) issued a decision
finding the gas supply and portfolio administration
agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas (the gas supply
agreements) to be consistent with the public
interest. The IURC's decision reflected the
significant gas cost savings to customers obtained
by ProLiance's services and suggested that all
material provisions of the agreements between
ProLiance and the utilities are reasonable.
Nevertheless, with respect to the pricing of gas
commodity purchased from ProLiance and two other
pricing terms, the IURC concluded that additional
review in the gas cost adjustment (GCA) process
would be appropriate and directed that these
matters be considered further in the pending,
consolidated GCA proceeding involving Indiana Gas
and Citizens Gas. The IURC has not yet established
a schedule for conducting these additional
proceedings.
The IURC's September 12, 1997, decision was
appealed to the Indiana Court of Appeals by certain
Petitioners, including the Indiana Office of
Utility Consumer Counselor, the Citizens Action
Coalition of Indiana and a small group of large-
volume customers. On October 8, 1998, the Indiana
Court of Appeals issued a decision which reversed
and remanded the case to the IURC with instructions
that the gas supply agreements be disapproved. The
basis for the decision was that because the gas
supply agreements provide for index based pricing
of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have
been the subject of an application for approval of
an alternative regulatory plan under Indiana
statutory law.
On April 22, 1999, the Indiana Supreme Court
granted a petition for transfer of the case and
will now consider the appeal of the IURC's decision
and issue its own decision on the merits of the
appeal at a later date. By granting transfer, the
Supreme Court has vacated the Court of Appeals'
decision.
If the Supreme Court reverses the IURC's decision ,
the case will be remanded to the IURC for further
proceedings regarding the public interest in the
gas supply agreements. If the Supreme Court affirms
the IURC's decision, as described above, the
reasonableness of certain of the gas costs incurred
by Indiana Gas under the gas supply agreements will
be further reviewed by the IURC in the consolidated
GCA proceeding. The existence of significant
benefits to the utilities and their customers
resulting from ProLiance's services has not been
challenged on appeal. Indiana Gas and Citizens Gas
are continuing to utilize ProLiance for their gas
supplies.
On or about August 11, 1998, Indiana Gas, Citizens
Gas and ProLiance each received a Civil
Investigative Demand ("CID") from the United States
Department of Justice requesting information
relating to Indiana Gas' and Citizens Gas'
relationship with and the activities of ProLiance.
The Department of Justice issued the CID to gather
information regarding ProLiance's formation and
operations, and to determine if trade or commerce
has been restrained. Indiana Gas has provided all
information requested and management continues to
believe that there are no significant issues in
this matter.
While the results of the ProLiance issues mentioned
above cannot be predicted, management does not
expect these matters to have a material impact on
Indiana Gas' financial position or results of
operations. However, no assurance can be provided.
CIGMA, LLC, owned jointly and equally by IGC Energy,
Inc., an indirect wholly owned subsidiary of Indiana
Energy, and Citizens By-Products Coal Company, a wholly
owned subsidiary of Citizens Gas, provides materials
acquisition and related services that are used by
Indiana Gas. Indiana Gas' purchases of these services
during the three- and twelve-month periods ended
December 31, 1999, totaled $4.4 million and $17.3
million, respectively. Indiana Gas' purchases of these
services during the three- and twelve-month periods
ended December 31, 1998, totaled $4.6 million and $15.9
million, respectively.
IEI Services, a wholly owned subsidiary of Indiana
Energy, began providing support services to Indiana Gas
effective October 1, 1997. Services provided include
information technology, financial, human resources,
building and fleet services. Amounts billed by IEI
Services to Indiana Gas for the three- and twelve-month
periods ended December 31, 1999, totaled $8.2 million
and $31.4 million, respectively. Amounts billed by IEI
Services to Indiana Gas for the three- and twelve-month
periods ended December 31, 1998, totaled $6.7 million
and $25.9 million, respectively.
Indiana Gas also participates in a centralized cash
management program with its parent, affiliated companies
and banks which permits funding of checks as they are
presented.
Amounts owed to affiliates totaled $28.8 million and
$27.9 million at December 31, 1999 and 1998,
respectively, and are included in Accounts Payable on
the Consolidated Balance Sheets.
10. Segment Reporting
In fiscal 1999, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and
Related Information. This statement establishes
standards for the way that public companies report
information about operating segments in annual
financial statements and requires that those
companies report selected information about
operating segments in annual and interim financial
reports issued to shareholders. Indiana Gas has no
reportable segments.
11. Reclassifications.
Certain reclassifications have been made to the prior
periods' financial statements to conform to the current
year presentation. These reclassifications have no
impact on net income previously reported.
Results of Operations
Earnings
Net income for the three- and twelve-month periods ended
December 31, 1999,when compared to the same periods one
year ago, were as follows:
Periods Ended December 31
(millions) 1999 1998
Three Months $10.9 $12.5
Twelve Months $29.7 $26.8
Margin (Operating Revenues Less Cost of Gas)
Utility margin for the quarter ended December 31,
1999, was $58.2 million compared to $57.0 million for
the same period last year. Margins are lower than
expected due to weather being 17% warmer than normal
for both periods. The increase is primarily the
addition of new residential and commercial customers.
Utility margin for the twelve-month period ended
December 31, 1999, was $204.5 million compared to
$188.6 million for the same period last year. The
increase is primarily attributable to weather 8
percent colder than the same period last year, but 13
percent warmer than normal, and the addition of new
residential and commercial customers.
Total system throughput (combined sales and
transportation) increased 2.3 percent (0.8 MMDth) for
the first quarter of fiscal 1999 and 8.4 percent (8.4
MMDth) for the twelve-month period ended December 31,
1999, compared to the same periods one year ago.
Indiana Gas' rates for transportation generally
provide the same margins as are earned on the sale of
gas under its sales tariffs. Approximately one-half
of total system throughput represents gas used for
space heating and is affected by weather.
Total average cost per unit of gas purchased increased
to $4.32 for the three-month period ended December 31,
1999, compared to $3.44 for the same period one year
ago. For the twelve-month period, cost of gas per unit
decreased to $3.26 in the current period compared to
$3.44 for the same period last year.
Adjustments to Indiana Gas' rates and charges related
to the cost of gas are made through gas cost
adjustment (GCA) procedures established by Indiana law
and administered by the Indiana Utility Regulatory
Commission (IURC). The GCA passes through increases
and decreases in the cost of gas to Indiana Gas'
customers dollar for dollar.
Operating Expenses
Operation and maintenance expenses increased $1.4
million for the three-month period ended December 31,
1999, when compared to the same period one year ago
due in part to administrative and service fees paid to
Indiana Gas' affiliate, IEI Services, LLC (IEI
Services). Higher administrative service costs
associated with the company's new customer information
and work management system and rental expense related
to buildings previously owned also contributed to the
increase.
Operation and maintenance expenses increased $6.0
million for the twelve-month period when compared to
the same period last year due primarily to service
fees paid to Indiana Gas' affiliate, IEI Services, LLC
(IEI Services) related to assets now owned by IEI
Services. Additionally, the company has incurred
higher contract labor costs.
Depreciation and amortization increased $0.6 million
for the three-month period and $1.8 million for the
twelve-month period ended December 31, 1999, when
compared to the same periods last year due primarily
to additions to plant to serve new customers and to
maintain dependable service to existing customers.
Federal and state income taxes decreased $0.2 million
for the three-month period ended December 31, 1999,
while increasing $2.7 million for the twelve-month
period when compared to the same periods one year ago
due to changes in taxable income.
Taxes other than income taxes increased $0.3 million
for the three-month and $1.8 million for the twelve-
month period ended December 31, 1999, primarily due to
higher property tax expense, the result of additions
to plant, and an increase in the gross receipts tax.
Interest Expense
Interest expense increased for the three and twelve-
month periods ended December 31, 1999, when compared
to the same periods one year ago due primarily to the
additional average debt outstanding and higher
interest rates. The additional debt is partially
attributed to seasonal and weather shortfalls.
Other Operating Matters
Agreement to Merge with SIGCORP, Inc.
On June 14, 1999, Indiana Energy and SIGCORP, Inc.
(SIGCORP) jointly announced the signing of a
definitive agreement to combine into a new holding
company named Vectren Corporation (Vectren).
SIGCORP is an investor-owned energy and
telecommunications company that through its
subsidiaries provides electric and gas service to
southwest Indiana and energy and telecommunication
products and services throughout the Midwest and
elsewhere.
Under the agreement, Indiana Energy shareholders
will receive one share of Vectren common stock for
each share of Indiana Energy held at the closing
date. SIGCORP shareholders will receive 1.333
shares of Vectren common stock for each share of
SIGCORP held at the closing date. The transaction
is intended to be accounted for as a pooling of
interests. The transaction is also intended to be
a tax-free exchange of shares.
Indiana Gas Company, Inc. and Southern Indiana Gas
and Electric Company, Inc., Indiana Energy's and
SIGCORP's utility companies, will operate as
subsidiaries of Vectren.
The merger is conditioned, among other things, upon
the approvals of the shareholders of each company
and customary regulatory approvals. On December 17,
1999, the merger was approved by the shareholders
of each company. On December 20, 1999, the Federal
Energy Regulatory Commission (FERC) issued an order
approving the proposed merger. In approving the
merger, the FERC concluded that the merger was in
the public interest and would not adversely affect
competition, rates or regulation. On January 18,
2000, the Department of Justice informed the
Companies that it had concluded its review of their
Hart Scott Rodino notification filings and would
take no further actions. The companies anticipate
that the remaining regulatory approvals can be
obtained in the first quarter of calendar 2000.
Acquisition of the Gas Distribution Assets of
Dayton Power and Light Co. Inc.
On December 15, 1999, Indiana Energy, Inc.
announced that the board of directors had approved
a definitive agreement under which the company will
acquire the natural gas distribution business of
Dayton Power and Light Co., Inc. The acquisition,
with a purchase price of $425 million, is expected
to be funded with a bank facility which will be
replaced over time with permanent financing. This
transaction is conditioned upon the approval of
several regulatory bodies. Management hopes to
complete the transaction by the end of the second
quarter of 2000.
Corporate Restructuring
During 1997, the Indiana Gas Board of Directors
authorized management to undertake the actions necessary
and appropriate to restructure Indiana Gas' operations
and recognize a resulting restructuring which included
estimated costs related to involuntary workforce
reductions. Since that time, the anticipated actions
have been taken. As a result, the remaining severance
accrual was eliminated and other operating expenses were
reduced by $1.7 million during fiscal year 1999.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a non-regulated
marketing affiliate of Indiana Energy, began
providing natural gas and related services to
Indiana Gas and Citizens Gas and Coke Utility
(Citizens Gas) effective April 1, 1996.
The sale of gas and provision of other services to
Indiana Gas by ProLiance is subject to regulatory
review through the quarterly gas cost adjustment
proceeding currently pending before the IURC.
On September 12, 1997, the Indiana Utility
Regulatory Commission (IURC) issued a decision
finding the gas supply and portfolio administration
agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas (the gas supply
agreements) to be consistent with the public
interest. The IURC's decision reflected the
significant gas cost savings to customers obtained
by ProLiance's services and suggested that all
material provisions of the agreements between
ProLiance and the utilities are reasonable.
Nevertheless, with respect to the pricing of gas
commodity purchased from ProLiance and two other
pricing terms, the IURC concluded that additional
review in the gas cost adjustment (GCA) process
would be appropriate and directed that these
matters be considered further in the pending,
consolidated GCA proceeding involving Indiana Gas
and Citizens Gas. The IURC has not yet established
a schedule for conducting these additional
proceedings.
The IURC's September 12, 1997, decision was
appealed to the Indiana Court of Appeals by certain
Petitioners, including the Indiana Office of
Utility Consumer Counselor, the Citizens Action
Coalition of Indiana and a small group of large-
volume customers. On October 8, 1998, the Indiana
Court of Appeals issued a decision which reversed
and remanded the case to the IURC with instructions
that the gas supply agreements be disapproved. The
basis for the decision was that because the gas
supply agreements provide for index based pricing
of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have
been the subject of an application for approval of
an alternative regulatory plan under Indiana
statutory law.
On April 22, 1999, the Indiana Supreme Court
granted a petition for transfer of the case and
will now consider the appeal of the IURC's decision
and issue its own decision on the merits of the
appeal at a later date. By granting transfer, the
Supreme Court has vacated the Court of Appeals'
decision.
If the Supreme Court reverses the IURC's decision ,
the case will be remanded to the IURC for further
proceedings regarding the public interest in the
gas supply agreements. If the Supreme Court affirms
the IURC's decision, as described above, the
reasonableness of certain of the gas costs incurred
by Indiana Gas under the gas supply agreements will
be further reviewed by the IURC in the consolidated
GCA proceeding. The existence of significant
benefits to the utilities and their customers
resulting from ProLiance's services has not been
challenged on appeal. Indiana Gas and Citizens Gas
are continuing to utilize ProLiance for their gas
supplies.
On or about August 11, 1998, Indiana Gas, Citizens
Gas and ProLiance each received a Civil
Investigative Demand ("CID") from the United States
Department of Justice requesting information
relating to Indiana Gas' and Citizens Gas'
relationship with and the activities of ProLiance.
The Department of Justice issued the CID to gather
information regarding ProLiance's formation and
operations, and to determine if trade or commerce
has been restrained. Indiana Gas has provided all
information requested and management continues to
believe that there are no significant issues in
this matter.
While the results of the ProLiance issues mentioned
above cannot be predicted, management does not
expect these matters to have a material impact on
Indiana Gas' financial position or results of
operations. However, no assurance can be provided.
The Year 2000 Issue
Many existing computer programs use only two digits
to identify a year in the date field. These
programs were designed and developed without
considering the impact of the upcoming change in
the century. If not corrected, many computer
applications could fail or create erroneous results
by or at the year 2000. This issue relates not only
to information technology (IT), but also to non-IT
related equipment and plant that may contain
embedded date-sensitive microcontrollers or
microchips.
During 1999, the company evaluated the Year 2000
readiness of all IT hardware and software including
the mainframe, network, servers, personal
computers, system and application software and
telecommunications. Almost all hardware was found
to be in compliance as a result of projects
conducted in 1997 and 1998. Replacements of major
customer information and billing systems, which had
already begun in 1997, were placed into service in
January 1999. These new systems, driven by the need
for additional functionality and business
flexibility, are designed to be Year 2000 compliant
and have been tested. Other maintenance and project
activities conducted in 1998 and 1999 brought the
remaining software environment into compliance.
Non-IT systems with embedded microcontrollers or
microchips were also evaluated to determine if they
were Year 2000 compliant. These systems included
buildings, transportation, monitoring equipment,
process controls, engineering and construction.
Software upgrades for equipment in the gas control
system were completed in July 1999.
The company also contacted all of its major
vendors, suppliers and customers to gather
information regarding the status of their Year 2000
compliance. Disruptions in the operations of these
parties could have had an adverse financial and
operational effect on the company.
Total costs expected to be incurred by the company
to address its Year 2000 issues were originally
estimated at $1.5 million, which included costs to
replace certain existing systems sooner than had
been planned. Actual total expenditures for the
Year 2000 issues approximated the original
estimate.
No significant problems have been encountered
related to the Year 2000 issue, through the date of
this report.
Environmental Matters
Indiana Gas is currently conducting environmental
investigations and work at 26 sites that were the
locations of former manufactured gas plants. It has
been recovering the costs of the investigations and
work from insurance carriers and other potentially
responsible parties (PRPs). The IURC has determined
that these costs are not recoverable from utility
customers.
Indiana Gas has PRP agreements in place covering 19
of the 26 sites. The agreements provide for
coordination of efforts and sharing of
investigation and clean-up costs incurred and to be
incurred at the sites. These agreements limit
Indiana Gas' share of past and future response
costs at these 19 sites to between 20 and 50
percent. Based on the agreements, Indiana Gas has
accrued its proportionate share of the estimated
cost related to work not yet performed.
In early 1999, Indiana Gas filed a complaint in
Indiana state court to continue its pursuit of
insurance coverage from four insurance carriers,
with the trial scheduled for early 2000. As of
December 31, 1999, agreements in principle have
been reached with each of these insurers.
These environmental matters have had no material
impact on earnings since costs recorded to date
approximate insurance settlements received. While
Indiana Gas has recorded all costs which it
presently expects to incur in connection with
remediation activities, it is possible that future
events may require some level of additional
remedial activities which are not presently
foreseen.
For further information regarding the status of
investigation and remediation of the sites and
financial reporting, see Note 14 of the Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
Indiana Gas' capitalization objectives, which are 55-
65 percent common equity and preferred stock and 35-45
percent long-term debt. These objectives may have
varied from time to time, depending on particular
business opportunities and seasonal factors that
affect the company's operation. Indiana Gas' common
equity component was 54 percent of its total
capitalization at December 31, 1999.
New construction and normal system maintenance and
improvements needed to provide service to a growing
customer base will continue to require substantial
expenditures. Capital expenditures for fiscal 2000 are
estimated at $60.8 million of which $12.1 million have
been expended during the three-month period ended
December 31, 1998. For the twelve months ended
December 31, 1998, capital expenditures totaled $55.3
million.
In July, 1999, Indiana Gas filed a registration
statement with the Securities and Exchange Commission
which has become effective with respect to $100
million in debt securities. Indiana Gas expects to
issue this debt pursuant to a medium-term note
program, denominated as Series G. The net proceeds
from the sale of these new debt securities will be
used for general corporate purposes, including
repayment of long-term debt and financing of Indiana
Gas' continuing construction program.
On October 5, 1999, Indiana Gas issued $30 million in
principal amount of Series G Medium-term Notes bearing
interest at the per annum rate of 7.08% with a
maturity date of October 5, 2029.
The long-term debt of Indiana Gas is currently rated
Aa2 by Moody's Investors Service and AA- by Standard &
Poor's Corporation. For the twelve months ended
December 31, 1998, 60 percent of Indiana Gas' capital
expenditures was funded internally (i.e. from net
income less dividends plus charges to net income not
requiring funds). Indiana Gas' ratio of earnings to
fixed charges was 3.6 for the twelve months ended
December 31, 1999 (see Exhibit 12).
Short-term cash working capital is required primarily
to finance customer accounts receivable, unbilled
utility revenues resulting from cycle billing, gas in
underground storage and capital expenditures until
permanently financed. Short-term borrowings tend to be
greatest during the heating season when accounts
receivable and unbilled utility revenues are at their
highest. At December 31, 1999 Indiana Gas had $82.2
million in outstanding commercial paper. Indiana Gas'
commercial paper is rated P-1 by Moody's and A-1+ by
Standard & Poor's. Prior to March 1, 1999, bank lines
of credit had been the primary source of short-term
financing.
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, including, but
not limited to, Indiana Energy's earnings growth
strategy, Indiana Energy's merger with SIGCORP and
the formation of Vectren, ProLiance, the
acquisition of the gas distribution assets of
Dayton Power and Light Co., Inc. and Year 2000
issues, 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 "aim," "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 Indiana Energy's actual
results to differ materially from those
contemplated in any forward-looking statements
include, among others, the following:
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; or gas pipeline
system constraints.
Increased competition in the energy environment,
including effects of industry restructuring and
unbundling.
Regulatory factors such as unanticipated changes
in rate-setting policies or procedures; recovery of
investments made under traditional regulation, and the
frequency and timing of rate increases.
Financial or regulatory accounting principles or
policies imposed by the Financial Accounting Standards
Board, the Securities and Exchange Commission, the
Federal Energy Regulatory Commission, state public
utility commissions, state entities which regulate
natural gas transmission, gathering and processing, and
similar entities with regulatory oversight.
Economic conditions including inflation rates and
monetary fluctuations.
Changing market conditions and a variety of other
factors associated with physical energy and financial
trading activities, including, but not limited to,
price, basis, credit, liquidity, volatility, capacity,
interest rate and warranty risks.
Availability or cost of capital, resulting from
changes in: Indiana Energy, Inc. and its subsidiaries,
interest rates, and securities ratings or market
perceptions of the utility industry and energy-related
industries.
Employee workforce factors, including changes in
key executives, collective bargaining agreements with
union employees or work stoppages.
Legal and regulatory delays and other obstacles
associated with mergers, acquisitions and investments
in joint ventures such as the ProLiance judicial and
administrative proceedings.
Costs and other effects of legal and
administrative proceedings, settlements,
investigations, claims and other matters, including,
but not limited to, those described in the Other
Operating Matters section of Management's Discussion
and Analysis of Results of Operations and Financial
Condition.
Changes in federal, state or local legislative
requirements, such as changes in tax laws or rates,
environmental laws and regulations.
The inability of Indiana Energy, Inc. and its
subsidiaries and their vendors, suppliers and customers
to achieve Year 2000 readiness.
Indiana Energy, Inc. and its subsidiaries undertake no obligation
to publicly update or revise any forward-looking statements, whether
as a result of changes in actual results, changes in assumptions,
or other factors affecting such statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Indiana Gas' (the company's) debt portfolio contains a
substantial amount of fixed-rate long-term debt and,
therefore, does not expose the company to the risk of
material earnings or cash flow loss due to changes in
market interest rates. On average, less than 20% of the
company's total debt portfolio consists of short term
notes and commercial paper that are subject to
fluctations in market interest rates and other seasonal
factors.At December 31, 1999, the company was not
engaged in other contracts which would cause exposure
to the risk of material earnings or cash flow loss due
to changes in market commodity prices, foreign currency
exchange rates, or interest rates.
PART II - Other Information
Item 1. Legal Proceedings
See Note 8 of the Notes to Consolidated Financial
Statements for litigation matters involving insurance
carriers pertaining to Indiana Gas' former manufactured
gas plants and storage facilities.
See Note 9 of the Notes to Consolidated Financial
Statements for discussion of litigation matters
relating to the gas supply and portfolio administration
agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2A Agreement and Plan of Merger dated as
of June 14, 1999,
among Indiana Energy, Inc. SIGCORP,
Inc. and the formation of Vectren
Corporation (incorporated by reference
to Exhibit 2 to Indiana Energy's
Current Report on Form 8-K dated June
14, 1999 and filed on June 15, 1999).
2B Amendment No.1, dated December 14,
1999 to Agreement and Plan of
Merger (set forth in 2A, above)
(incorporated by reference to
Exhibit 2 of Indiana Energy's
Current Report on Form 8-K dated
December 16, 1999 and filed on
December 16, 1999).
2C Asset Purchase Agreement dated
December 14, 1999 between Indiana
Energy, Inc. and Dayton Power and
Light Co., Inc. and Number-3CHK
with a commitment letter for 364
-Day Credit Facility dated
December 16, 1999 (incorporated by
reference to Exhibit 2 and 99.1 of
Indiana Energy's Current Report on
Form 8-K dated December 14, 1999
and filed on December 28, 1999).
12 Computation of Ratio of
Earnings to Fixed Charges, filed
herewith.
27 Financial Data Schedule, filed herewith.
(b) On October 29, 1999, Indiana Gas filed a
Current Report on Form 8-K with respect to the
release by Indiana Energy, Inc. (Indiana Energy)
of summary financial information to the investment
community regarding Indiana Energy's consolidated
results of operations, financial position and cash
flows for the twelve-month periods ended September
30, 1999. Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Fourth
Quarter 1999
On November 22, 1999, Indiana Energy and Indiana
Gas filed a Current Report on Form 8-K with
respect to a analyst teleconference call., held on
November 21, 1999.
Item 5. Other Events
Item 7. Exhibits
99.01 Analyst script teleconference call dated
November 21, 1999
On January 27, 2000, Indiana Energy and Indiana
Gas filed a Current Report on Form 8-K with
respect to the release of summary financial
information to the investment community regarding
Indiana Energy's consolidated results of
operations, financial position and cash flows for
the three- and twelve-month periods ended December
31, 1999. Items reported include:
Item 5. Other Events
Item 7. Exhibits
100 Financial Analyst Report and Press Release -
First Quarter 2000
On January 27, 2000, Indiana Energy and Indiana
Gas filed a Current Report on Form 8-K with
respect to a analyst teleconference call., held on
January 27, 2000.
Item 5. Other Events
Item 7. Exhibits
100.01 Analyst script teleconference call dated
January 27, 2000