SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 August 11, 2000
- --------------------------------- --------- ---------------
Class Number of shares Date
2
TABLE OF CONTENTS
Item Page
Number Number
Part I - Financial Information
1 Financial Statements (Unaudited)
Indiana Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-12
2 Management's Discussion and Analysis of Financial
Condition
and Results of Operations 13-18
3 Quantitative and Qualitative Disclosure about Market Risk 18-19
Part II - Other Information
1 Legal Proceedings 20
4 Submission of Matters to a Vote of Security Holders 20
6 Exhibits and Reports on Form 8-K 20-21
Signatures 22
3
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
June 30 December 31
-------------------- -----------
ASSETS 2000 1999 1999
Utility Plant:
Original cost $1,033,001 $972,735 $1,005,304
Less - accumulated depreciation 424,631 392,731 407,887
---------- -------- ----------
Net utility plant 608,370 580,004 597,417
Current Assets:
Cash and cash equivalents 8,907 514 353
Accounts receivable, net 19,529 16,497 37,058
Accrued unbilled revenues 7,476 6,012 36,634
Inventories 2,620 5,811 12,442
Prepaid gas delivery service 20,969 11,645 20,937
Prepayments and other
current assets 15,128 10,838 16,468
---------- -------- ----------
Total current assets 74,629 51,317 123,892
Other Assets:
Unamortized debt discount and
expense 11,436 12,186 11,906
Regulatory income tax asset 528 1,778 2,741
Other 3,339 3,306 3,914
---------- -------- ----------
Total other assets 15,303 17,270 18,561
---------- -------- ----------
TOTAL ASSETS $ 698,302 $648,591 $ 739,870
========== ======== ===========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
4
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
SHAREHOLDER'S EQUITY AND LIABILITIES June 30 December 31
----------------- -----------
2000 1999 1999
Capitalization:
Common stock and paid-in capital $142,995 $142,995 $142,995
Retained earnings 97,719 113,522 105,627
-------- -------- --------
Total common shareholder's equity 240,714 256,517 248,622
Long-term debt, net of current
maturities 211,849 181,854 211,849
-------- -------- --------
Total capitalization 452,563 438,371 460,471
-------- -------- --------
Commitments and Contingencies
Current Liabilities:
Current maturities and sinking fund
requirements of long-term debt - 10,000 -
Notes payable 76,359 8,424 82,172
Accounts payable 37,097 26,711 37,111
Refunds to customers and customer
deposits 8,367 30,557 22,021
Accrued taxes 2,818 16,047 16,208
Accrued interest 4,613 3,848 5,252
Other current liabilities 21,937 16,002 12,697
-------- -------- --------
Total current liabilities 151,191 111,589 175,461
-------- -------- --------
Deferred Credits and Other Liabilities:
Deferred income taxes 55,130 60,844 61,061
Accrued postretirement benefits other
than pensions 29,685 27,314 28,474
Unamortized investment tax credit 7,687 8,617 8,152
Other 2,046 1,856 6,251
-------- -------- --------
Total deferred credits and other
liabilities 94,548 98,631 103,938
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY AND
LIABILITIES $698,302 $648,591 $739,870
======== ======== ========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
5
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands)
Three Months Six Months
Ended June 30 Ended June 30
----------------- ------------------
2000 1999 2000 1999
OPERATING REVENUES $86,303 $72,131 $257,921 $233,615
COST OF GAS 48,886 33,751 147,779 117,744
------- ------- -------- --------
Total Margin 37,417 38,380 110,142 115,871
------- ------- -------- --------
OPERATING EXPENSES:
Operation and maintenance 22,805 22,159 48,010 44,294
Merger costs 1,846 - 15,294 -
Depreciation and amortization 9,132 8,550 18,150 16,991
Income tax expense (benefit) (1,160) 54 5,439 14,408
Taxes other than income taxes 3,683 3,434 8,644 8,119
-------- ------- -------- --------
36,306 34,197 95,537 83,812
-------- ------- -------- --------
OPERATING INCOME 1,111 4,183 14,605 32,059
OTHER INCOME - NET 318 228 688 515
------- ------- -------- --------
INCOME BEFORE INTEREST 1,429 4,411 15,293 32,574
INTEREST EXPENSE 4,926 3,772 9,959 7,937
------- ------- -------- --------
NET (LOSS) INCOME $(3,497) $ 639 $ 5,334 $ 24,637
======== ======= ======== ========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
6
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands)
Twelve Months
Ended June 30
--------------------
2000 1999
OPERATING REVENUES $455,667 $420,383
COST OF GAS 256,852 220,360
-------- --------
Total Margin 198,815 200,023
-------- --------
OPERATING EXPENSES:
Operation and maintenance 95,545 87,832
Merger costs 15,294 -
Depreciation and amortization 35,744 33,502
Income tax expense 7,765 17,230
Taxes other than income taxes 16,220 14,756
-------- --------
170,568 153,320
-------- --------
OPERATING INCOME 28,247 46,703
OTHER INCOME - NET 1,183 1,087
-------- --------
INCOME BEFORE INTEREST 29,430 47,790
INTEREST EXPENSE 18,991 15,907
-------- --------
NET INCOME $ 10,439 $ 31,883
======== ========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
7
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Thousands)
Six Months Twelve Months
Ended June 30 Ended June 30
----------------- -----------------
2000 1999 2000 1999
CASH FLOWS FROM OPERATING ACTIVITES:
Net Income $ 5,334 $24,637 $10,439 $31,883
Adjustments to reconcile net
income to cash provided
from operating activities -
Depreciation and amortization 18,150 16,991 35,744 33,502
Deferred income taxes and
investment tax credits (6,396) (201) (6,644) (535)
-------- -------- -------- --------
17,088 41,427 39,539 64,850
Changes in assets and liabilities -
Receivables - net
(including unbilled revenues) 46,687 46,736 (4,496) 4,073
Inventories 9,822 13,194 3,191 2,569
Accounts payable, refunds to
customers, customer deposits,
advance payments and
other current liabilities (4,428) (24,315) (5,869) 16
Accrued taxes and interest (14,029) 5,301 (12,464) 7,911
Prepayments and other current
assets 1,340 (13,970) (4,290) (15,407)
Prepaid gas delivery service (32) 11,299 (9,324) (1,513)
Accrued postretirement benefits
other than pensions 1,211 1,430 2,371 2,158
Other - net 2,786 949 1,215 6,384
------- ------- ------- -------
Total adjustments 43,357 40,624 (29,666) 6,191
------- ------- -------- -------
Net cash flows from
operating activities 60,445 82,051 9,873 71,041
------- ------- ------- -------
CASH FLOWS (REQUIRED FOR) FROM
FINANCING ACTIVITES
Retirement of long-term debt - (110) (10,000) (146)
Proceeds from long-term debt - - 29,995 -
Net change in short-term
borrowings (5,813) (40,251) 67,935 7,424
Dividends on common stock (13,242) (14,000) (26,242) (28,000)
-------- -------- -------- --------
Net cash flows (required for)
from financing activities (19,055) (54,361) 61,688 (20,722)
-------- -------- ------- --------
CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES
Capital expenditures (29,213) (27,196) (65,668) (56,982)
Other 3,623 - 2,500 -
------- -------- ------- --------
Net cash flows (required for)
investing activities (32,836) (27,196) (63,168) (56,982)
-------- -------- -------- --------
Net increase (decrease) in cash 8,554 494 8,393 (6,663)
Cash and cash equivalents at
beginning of period 353 20 514 7,177
-------- ------- -------- --------
Cash and cash equivalents at
end of period $ 8,907 $ 514 $ 8,907 $ 514
======== ======== ======== ========
<FN>
The accompanying notes are an integral part
of these consolidated financial statements.
</FN>
8
INDIANA GAS COMPANY, INC. AND SUBSDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Indiana Gas Company, Inc. and its subsidiary companies
(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.
2. Financial Statements
The interim consolidated financial statements included in
this report have been prepared, without audit, as provided
in the rules and regulations of the Securities and Exchange
Commission (SEC). 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. The preparation of financial statements in
conformity with generally accepted accounting principles
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 period. Actual results could
differ from those estimates.
These interim financial statements should be read in
conjunction with the financial statements and the notes
thereto included in Indiana Gas' amended annual report on
Form 10-K/A, filed on May 15, 2000, that reflects the change
in fiscal year end to December 31 from September 30 to
conform its year end to the year end of its parent company
(see below).
Because all of the common stock of Indiana Gas is owned by
Vectren (see below), Indiana Gas does not report earnings
per share.
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.
3. Indiana Energy, Inc. and SIGCORP, Inc. Merger
On June 14, 1999, Indiana Energy, Inc. (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). The merger was
conditioned, among other things, upon the approvals of the
shareholders of each company and customary regulatory
approvals. Such approvals were obtained and the merger was
consummated on March 31, 2000. As provided for in the
merger agreement, Indiana Energy shareholders received one
share of Vectren common stock for each share of Indiana
Energy held at the March 31, 2000 closing date. SIGCORP
shareholders received one and one-third shares of Vectren
common stock for each share of SIGCORP held at the March 31,
2000 closing date. The transaction was accounted for as a
pooling of interests. The transaction was a tax-free
exchange of shares.
Indiana Gas Company, Inc., formerly a wholly owned
subsidiary of Indiana Energy, operates as a separate wholly
owned subsidiary of Vectren.
4. Merger and Merger Related Costs
Merger costs incurred by Vectren for the three and six
months ended June 30, 2000 totaled $3.3 million and $30.4
million, respectively. These costs relate primarily to
transaction costs, severance and other merger integration
activities. Vectren expects to realize net merger savings
of nearly $200 million over the next ten years from the
elimination of duplicate corporate and administrative
programs and greater efficiencies in operations, business
processes and purchasing. The continued merger integration
activities will be substantially complete by 2001. Merger
9
costs are reflected in the financial statements of the
operating subsidiaries in which the merger savings are
expected to be realized. Merger costs expensed by Indiana
Gas for the three and six months ended June 30, 2000 totaled
$1.8 million and $15.3 million, respectively.
As a result of merger integration activities, management has
identified certain information systems which are expected to
be retired in 2001. Accordingly, the useful lives of these
assets have been shortened to reflect this decision. These
information system assets are owned by a wholly owned
subsidiary of Vectren and the fee allocated by the
subsidiary for the use of these systems by Indiana Gas is
reflected as operations and maintenance expenses in the
accompanying financial statements. As a result of the
shortened useful lives, additional fees were incurred by
Indiana Gas during the second quarter, resulting in an
increase in operation and maintenance expenses of
approximately $3.3 million for the three, six and twelve
months ended June 30, 2000.
5. Acquisition of the Gas Distribution Assets of The Dayton
Power and Light Company
On December 15, 1999, Indiana Energy, now Vectren, announced
that the board of directors had approved a definitive
agreement under which the company will acquire the natural
gas distribution assets of The Dayton Power and Light
Company (DP&L), which will add 305,000 gas distribution
customers in 16 counties in west central Ohio. The
acquisition, with a purchase price of $425 million, is
expected to be funded with short-term debt which will be
replaced over time with permanent financing. This
transaction is conditioned upon the approval of several
regulatory bodies. In June 2000, the Department of Justice
concluded that it had completed its review of its Hart Scott
Rodino notification filings and would take no further
action. In July 2000, the Public Utilities Commission of
Ohio granted approval for the transaction. Vectren is
awaiting approval from the SEC for the transaction under the
Public Utility Holding Company Act. Other remaining
approvals include the Federal Communications Commission's
authorization of the transfer of radio licenses held by
DP&L, and action by certain local authorities regarding the
transfer of operating rights. Management expects to
complete the transaction during the third quarter of 2000.
6. Gas in Underground Storage
Based on the average cost of purchased gas during June 2000,
the cost of replacing the current portion of gas in
underground storage exceeded last-in, first-out cost at June
30, 2000, by approximately $12.8 million.
7. Refundable or Recoverable Gas Costs
All metered gas rates contain a gas cost adjustment clause,
which allows for adjustment in charges for changes in the
cost of purchased gas.
Indiana Gas records any adjustment clause under-or-
overrecovery each month in revenues. A corresponding asset
or liability is recorded until such time as the under-or-
overrecovery is billed or refunded to utility customers. The
cost of gas sold is charged to operating expense as
delivered to customers and the cost of fuel for electric
generation is charged to operating expense when consumed.
8. 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:
Six Months Ended Twelve Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
Thousands
Interest (net of amount $10,377 $8,658 $16,049 $13,425
capitalized)
Income taxes $18,769 $11,516 $24,174 $19,225
9. Environmental Costs
In the past, Indiana Gas and others operated facilities for
the manufacture of gas. Given the availability of natural
gas transported by pipelines, these facilities have not been
operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas, and the
others, may now be required to take remedial action if
certain byproducts are found above the regulatory threshold
at these sites.
Indiana Gas has identified the existence, location and
certain general characteristics of 26 gas manufacturing and
storage sites for which it may have some remedial
responsibility. Indiana Gas has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites
under an agreed order between Indiana Gas and the Indiana
Department of Environmental Management (IDEM), and a Record
of Decision (ROD) was issued by IDEM in January 2000.
Although Indiana Gas has not begun an RI/FS at additional
sites, Indiana Gas has submitted several of the sites to
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.
Indiana Gas has accrued the estimated costs for further
investigation, remediation, groundwater monitoring and
related costs for the sites. While the total costs which
may be incurred in connection with addressing these sites
cannot be determined at this time, Indiana Gas has accrued
costs that it reasonably expects to incur.
Indiana Gas has recovered these estimated accrued costs from
insurance carriers and other potentially responsible parties
(PRPs). Indiana Gas has PRP agreements in place for 19 of
the 26 sites, which serve to limit Indiana Gas' share of
response costs at these 19 sites to between 20 and 50
percent. For these sites, Indiana Gas has accrued only its
proportionate share of the estimated response costs.
With respect to insurance coverage, as of June 30, 2000,
Indiana Gas has recorded settlements from all known
insurance carriers in an aggregate amount of approximately
$20.1 million.
These environmental matters have had no material impact on
earnings since costs recorded to date approximate PRP and
insurance settlement recoveries. While Indiana Gas has
recorded all costs which it presently expects to incur in
connection with activities at these sites, it is possible
that future events may require some level of additional
remedial activities which are not presently foreseen.
10. Commitments and Contingencies
Indiana Gas is party to various legal proceedings arising in
the normal course of business. In the opinion of
management, there are no legal proceedings pending against
Indiana Gas that are likely to have a material adverse
effect on the financial position or results of operations.
Refer to Note 11 for litigation matters related to
ProLiance.
11. Proliance Energy, LLC
ProLiance Energy, LLC (ProLiance), a 50 percent owned non-
regulated marketing affiliate of Vectren, began providing
natural gas and related services to Indiana Gas, Citizens
Gas and Coke Utility (Citizens Gas) and others 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
(GCA) process administered by the Indiana Utility Regulatory
Commission (IURC).
On September 12, 1997, the IURC issued a decision finding
the gas supply and portfolio administration agreements
between ProLiance and Indiana Gas and ProLiance and Citizens
Gas (the gas supply agreements) to be consistent with the
public interest. The IURC's decision reflected the
significant gas cost savings to customers obtained through
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 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.
11
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.
12. Affiliate Transactions
Proliance 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, six
and twelve months ended June 30, 2000, totaled $70.3
million, $136.3 million and $242.6 million, respectively.
Indiana Gas' purchases from ProLiance for the three, six and
twelve months ended June 30, 1999, totaled $48.2 million,
$114.1 million and $226.6 million, respectively. ProLiance
has a standby letter of credit facility with a bank for
letters up to $30 million. This facility is secured in part
by a support agreement from Indiana Gas. Letters of credit
outstanding at June 30, 2000 totaled $13 million.
CIGMA, LLC, owned jointly and equally by a wholly owned
subsidiary of Vectren and a third party, provides materials
acquisition and related services that are used by Indiana
Gas. Indiana Gas' purchases of these services during the
three, six and twelve months ended June 30, 2000, totaled
$4.1 million, $8.1 million and $16.6 million, respectively.
Indiana Gas' purchases of these services during the three,
six and twelve months ended June 30, 1999, totaled $4.4
million, $8.9 million and $18.5 million, respectively.
Reliant Services, LLC (Reliant), owned jointly and equally
by a wholly owned subsidiary of Vectren and a third party,
provides utility locating, meter reading and construction
services to Indiana Gas and others. Amounts paid by Indiana
Gas to Reliant for such services totaled $1.0 million, $2.0
million and $4.1 million, respectively, for the three, six
and twelve months ended June 30, 2000. Amounts paid by
Indiana Gas to Reliant totaled $0.7 million, $1.4 million
and $1.5 million, respectively, for the three, six and
twelve months ended June 30, 1999.
Certain wholly owned subsidiaries of Vectren provide support
services to Indiana Gas. Services provided include
corporate-level management services, information technology,
financial, human resources, purchasing, building and fleet
services. Amounts billed by the affiliates to Indiana Gas
for the three, six and twelve months ended June 30, 2000,
totaled $12.9 million, $15.7 million and $36.3 million,
respectively. Amounts billed by the affiliates to Indiana
Gas for the three, six and twelve months ended June 30,
1999, totaled $8.4 million, $16.1 million and $28.8 million,
respectively.
12
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, including notes payable, totaled
$26.3 million, $21.9 million and $28.8 million at June 30,
2000 and 1999 and December 31, 1999, respectively, and are
included in Accounts Payable on the Consolidated Balance
Sheets.
13. Segment Reporting
Statement of Financial Accounting Standards (SFAS) No. 131,
'Disclosures about Segments of an Enterprise and Related
Information' establishes standards for the reporting of
information about operating segments in financial statements
and disclosure about products, services and geographic
areas. Operating segments are defined as components of an
enterprise for which separate financial information is
available and evaluated regularly by the chief operating
decision makers in deciding how to allocate resources and in
the assessment of performance. Indiana Gas operates as one
reportable segment.
14. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, 'Accounting for Derivative
Instruments and Hedging Activities.' The statement, as
amended by SFAS No. 138, establishes accounting and
reporting standards requiring that every derivative
instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair
value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in
the income statement, and requires that a company must
formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Indiana Gas
is required to adopt SFAS No. 133 no later than January 1,
2001. Through arrangements with its affiliates, Indiana Gas
utilizes derivative instruments to manage pricing decisions,
minimize the risk of price volatility, and minimize price
risk exposure in the energy markets. Indiana Gas has not
quantified the impact of adopting this statement on its
financial position or results or operations.
15. 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.
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Indiana Energy, Inc. and SIGCORP, Inc. Merger
On June 14, 1999, Indiana Energy, Inc. (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). The merger was
conditioned, among other things, upon the approvals of the
shareholders of each company and customary regulatory
approvals. Such approvals were obtained and the merger was
consummated on March 31, 2000. As provided for in the
merger agreement, Indiana Energy shareholders received one
share of Vectren common stock for each share of Indiana
Energy held at the March 31, 2000 closing date. SIGCORP
shareholders received one and one-third shares of Vectren
common stock for each share of SIGCORP held at the March 31,
2000 closing date. The transaction was accounted for as a
pooling of interests. The transaction was a tax-free
exchange of shares.
Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly
owned subsidiary of Indiana Energy, operates as a separate
wholly owned subsidiary of Vectren.
Results of Operations
Net Income (Loss)
Consolidated net loss was $3.5 million for the three months
ended June 30, 2000. Consolidated net income before merger
and merger related charges (see merger and merger related
costs below) was $.4 million for the three months ended June
30, 2000, as compared to net income of $0.6 million for the
same period in 1999.
Consolidated net income was $5.3 million for the six months
ended June 30, 2000. Consolidated net income before merger
and merger related charges was $18.6 million for the six
months ended June 30, 2000, as compared to net income of
$24.6 million for the same period in 1999.
Consolidated net income was $10.4 million for the twelve
months ended June 30, 2000. Consolidated net income before
merger and merger related charges was $23.7 million for the
twelve months ended June 30, 2000, as compared to net income
of $31.9 million for the same period in 1999.
Margin (Operating Revenues Less Cost of Gas)
Utility margin for the three months ended June 30, 2000, was
$37.4 million, compared to $38.4 million for the same period
last year. Despite slightly more favorable weather
conditions, the slight decrease is due to fewer sales to
commercial customers and lower miscellaneous gas revenues.
Utility margin for the six months ended June 30, 2000, was
$110.1 million compared to $115.9 million for the same
period last year. Gas margin was lower due to weather being
4 percent warmer than the prior year period and 16 percent
warmer than normal, causing a 3 percent decline from the
prior year period in total residential and commercial gas
sales. The decrease in gas margin was partially offset by
additional residential and commercial customer growth.
Utility margin for the twelve months ended June 30, 2000,
was $198.8 million compared to $200.0 million for the same
period last year for the same reasons explained above.
Indiana Gas' rates for gas transportation generally provide
for the same margins as are earned on the sale of gas under
its applicable sales tariffs. Approximately one-half of
total gas system throughput represents gas used for space
heating and is affected by weather.
14
Operating Expenses
Operation and maintenance expenses increased $0.6 million,
or 2.9 percent, for the three months ended June 30, 2000,
when compared to the same period due to $3.3 million
additional allocations from a wholly owned subsidiary of
Vectren to reflect shortened useful lives of certain
information systems (see merger and merger related costs
below). This increase is offset by a reduction in other
operation and maintenance expenses.
Operation and maintenance increased $3.7 million, or 8.4
percent, for the six months ended June 30, 2000, when
compared to the same period a year ago due to the $3.0
million additional allocations from the subsidiary of
Vectren to reflect the shortened useful lives of the
information systems. Additionally, operation and
maintenance expenses were higher during the six months ended
June 30, 2000 due to a first quarter 1999 reduction in
restructuring charges of $1.3 million.
Operation and maintenance expenses increased $7.7 million,
or 8.8 percent, for the twelve months ended June 30, 2000
when compared to the same period last year. In addition to
the items noted above, the increase reflects additional
costs related to the implementation of a new customer
information system in January 1999.
Depreciation and amortization increased $0.6 million, $1.2
million and $2.2 million for the three, six and twelve
months ended June 30, 2000, when compared to the same
periods last year due primarily to additions to plant to
serve new customers.
Income taxes decreased $1.2 million, $9.0 million and $9.5
million, respectively, for the three, six and twelve months
ended June 30, 2000, when compared to the same periods one
year ago due to changes in taxable income. Taxable income
decreased primarily due to the recognition of tax-deductible
merger costs.
.
Taxes other than income taxes increased $0.2 million, $0.5
million and $1.5 million for the three, six and twelve
months ended June 30, 2000, primarily due to higher property
tax expense, the result of additions to plant, and an
increase in the gross receipts tax.
Merger and Merger Related Costs
Merger costs incurred by Vectren for the three and six
months ended June 30, 2000 totaled $3.3 million and $30.4
million, respectively. These costs relate primarily to
transaction costs, severance and other merger integration
activities. Vectren expects to realize net merger savings
of nearly $200 million over the next ten years from the
elimination of duplicate corporate and administrative
programs and greater efficiencies in operations, business
processes and purchasing. The continued merger integration
activities will be substantially complete by 2001. Merger
costs are reflected in the financial statements of the
operating subsidiaries in which the merger savings are
expected to be realized. Merger costs expensed by Indiana
Gas for the three and six months ended June 30, 2000 totaled
$1.8 million and $15.3 million, respectively.
As a result of merger integration activities, management has
identified certain information systems which are expected to
be retired in 2001. Accordingly, the useful lives of these
assets have been shortened to reflect this decision. These
information system assets are owned by a wholly owned
subsidiary of Vectren and the fees allocated by the
subsidiary for the use of these systems by Indiana Gas is
reflected in operation and maintenance expenses in the
accompanying financial statements. As a result of the
shortened useful lives, additional fees were incurred by
Indiana Gas during the second quarter, resulting in an
increase in operation and maintenance expense of
approximately $3.3 million for the three, six and twelve
months ended June 30, 2000.
15
Interest Expense
Interest expense increased $1.2 million, $2.0 million and
$3.1 million, respectively, for the three, six and twelve
months ended June 30, 2000, when compared to the same
periods one year ago due primarily to the additional average
debt outstanding during the comparative periods and higher
interest rates on short-term borrowings. The additional debt
is partially attributed to higher cost of purchased gas and
weather shortfalls.
Other Operating Matters
Acquisition of the Gas Distribution Assets of The Dayton
Power and Light Company
On December 15, 1999, Indiana Energy, now Vectren, announced
that the board of directors had approved a definitive
agreement under which the company will acquire the natural
gas distribution assets of The Dayton Power and Light
Company (DP&L), which will add 305,000 gas distribution
customers in 16 counties in west central Ohio. The
acquisition, with a purchase price of $425 million, is
expected to be funded with short-term debt which will be
replaced over time with permanent financing. This
transaction is conditioned upon the approval of several
regulatory bodies. In June 2000, the Department of Justice
concluded that it had completed its review of its Hart Scott
Rodino notification filings and would take no further
action. In July 2000, the Public Utilities Commission of
Ohio granted approval for the transaction. Vectren is
awaiting approval from the SEC for the transaction under the
Public Utility Holding Company Act. Other remaining
approvals include the Federal Communications Commission's
authorization of the transfer of radio licenses held by
DP&L, and action by certain local authorities regarding the
transfer of operating rights. Management expects to
complete the transaction during the third quarter of 2000.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a 50 percent owned non-
regulated marketing affiliate of Vectren Energy Services,
began providing natural gas and related services to Indiana
Gas, Citizens Gas and Coke Utility (Citizens Gas) and others
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 (GCA) process administered by
the Indiana Utility Regulatory Commission (IURC).
On September 12, 1997, the IURC issued a decision finding
the gas supply and portfolio administration agreements
between ProLiance and Indiana Gas and ProLiance and Citizens
Gas (the gas supply agreements) to be consistent with the
public interest. The IURC's decision reflected the
significant gas cost savings to customers obtained through
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 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. By granting transfer, the Supreme Court
has vacated the Court of Appeals' decision.
16
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.
Environmental Matters
In the past, Indiana Gas and others operated facilities for
the manufacture of gas. Given the availability of natural
gas transported by pipelines, these facilities have not been
operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas, and the
others, may now be required to take remedial action if
certain byproducts are found above the regulatory threshold
at these sites.
Indiana Gas has identified the existence, location and
certain general characteristics of 26 gas manufacturing and
storage sites for which it may have some remedial
responsibility. Indiana Gas has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites
under an agreed order between Indiana Gas and the Indiana
Department of Environmental Management (IDEM), and a Record
of Decision (ROD) was issued by IDEM in January 2000.
Although Indiana Gas has not begun an RI/FS at additional
sites, Indiana Gas has submitted several of the sites to
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.
Indiana Gas has accrued the estimated costs for further
investigation, remediation, groundwater monitoring and
related costs for the sites. While the total costs which
may be incurred in connection with addressing these sites
cannot be determined at this time, Indiana Gas has accrued
costs that it reasonably expects to incur.
Indiana Gas has recovered these estimated accrued costs from
insurance carriers and other potentially responsible parties
(PRPs). Indiana Gas has PRP agreements in place for 19 of
the 26 sites, which serve to limit Indiana Gas' share of
response costs at these 19 sites to between 20 and 50
percent. For these sites, Indiana Gas has accrued only its
proportionate share of the estimated response costs.
With respect to insurance coverage, as of June 30, 2000,
Indiana Gas has recorded settlements from all known
insurance carriers in an aggregate amount of approximately
$20.1 million.
These environmental matters have had no material impact on
earnings since costs recorded to date approximate PRP and
insurance settlement recoveries. While Indiana Gas has
recorded all costs which it presently expects to incur in
connection with activities at these sites, it is possible
that future events may require some level of additional
remedial activities which are not presently foreseen.
New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
statement, as amended by SFAS No. 138, establishes
accounting and reporting standards requiring that every
derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at
its fair value. The statement requires that changes in the
17
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in
the income statement, and requires that a company must
formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Indiana Gas
is required to adopt SFAS No. 133 no later than January 1,
2001. Through arrangements with its affiliates, Indiana Gas
utilizes derivative instruments to manage pricing decisions,
minimize the risk of price volatility, and minimize price
risk exposure in the energy markets. Indiana Gas has not
quantified the impact of adopting this statement on its
financial position or results or operations.
Liquidity and Capital Resources
Indiana Gas' capitalization objectives are 45-60 percent
common and preferred equity and 40-55 percent long-term
debt. These objectives may have varied, and will vary, from
time to time, depending on particular business opportunities
and seasonal factors that affect the company's operation.
Indiana Gas' common equity component was 53 percent of its
total capitalization at June 30, 2000.
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
approximately $60 million of which $29.2 million have been
expended during the six-month period ended June 30, 2000.
For the twelve months ended June 30, 2000, capital
expenditures totaled $65.7 million.
Short-term cash working capital is required primarily to
finance customer accounts receivable, unbilled utility
revenues resulting from cycle billing, gas in underground
storage, prepaid gas delivery services, capital expenditures
and investments 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.
Financing Activities
Indiana Gas expects the majority of the utility construction
requirements and debt security redemptions to be provided by
internally generated funds.
Indiana Gas' credit ratings on outstanding debt at June 30,
2000 was AA-/Aa2.
Cash required for financing activities of $18.8 million for
the six months ended June 30, 2000 includes, among other
things, $13.0 million of dividends on common stock and $5.8
million of additional net debt pay-downs. Cash from
financing activities of $61.9 million for the twelve months
ended June 30, 2000 includes, among other things, $26.0
million of dividends on common stock and $87.9 million of
additional net borrowings.
Cash required for investing activities of $23.8 million for
the six months ended June 30, 2000 includes, among other
things, $29.2 million of capital expenditures. Cash
required for investing activities of $58.5 million for the
twelve months ended June 30, 2000 includes, among other
things, $65.7 million of capital expenditures.
Forward-Looking Information
A 'safe harbor' for forwarding-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
Financial Condition and Results of Operations, including but
not limited to, Vectren's realization of net merger savings,
ProLiance and the acquisition of gas distribution assets of
the DP&L, are forward-looking statements. When used in
Indiana Gas Company, Inc. and its subsidiary companies'
documents or oral presentations, the words 'believe,'
'anticipate,' 'endeavor,' 'estimate,' 'expect,' 'objective,'
'projection,' 'forecast,' 'goal,' and similar expressions
are intended to identify forward-looking statements. In
addition to any assumptions and other factors referred to
specifically in connection with such forward-looking
statements, factors that could cause Indiana Gas Company,
Inc. and its subsidiary companies' actual results to differ
materially from those contemplated in any forward-looking
statements included, among others, the following:
18
* Factors affecting utility operations such as unusual
weather conditions; catastrophic weather-related damage;
unusual maintenance or repairs; unanticipated changes to
fossil fuel costs; unanticipated changes to gas supply
costs, or availability due to higher demand, shortages,
transportation problems or other developments; environmental
or pipeline incidents; transmission or distribution
incidents; unanticipated changes to electric energy supply
costs, or availability due to demand, shortages,
transmission problems or other developments; or electric
transmission or gas pipeline system constraints.
* 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 Gas Company, Inc. and its subsidiary companies,
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.
* 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 Financial Condition and Results
of Operations.
* Changes in federal, state or local legislature
requirements, such as changes in tax laws or rates,
environmental laws and regulations.
Indiana Gas Company, Inc. and its subsidiary companies
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.
Seasonality
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.
19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Indiana Gas' 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. Indiana Gas
attempts to mitigate its exposure to interest rate
fluctuations through management of its short-term borrowings
and the use of interest rate hedging instruments. An
internal guideline to manage short-term interest rate
exposure has been established. This guideline targets a
level of 25 percent of the company's total debt portfolio to
consist of adjustable rate bonds with a maturity of less
than one year, short-term notes and commercial paper.
However, it is acknowledged that there may be times that the
guideline may be exceeded.
Indiana Gas is also exposed to counterparty credit risk when
a supplier defaults upon a contract to pay or deliver the
commodity. To mitigate risk, procedures to determine and
monitor the creditworthiness of counterparties have been
established.
At June 30, 2000, Indiana Gas 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. 20
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 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.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
12 Computation of Ratio of Earnings to Fixed Charges,
filed herewith.
27 Financial Data Schedule, filed herewith.
Reports on Form 8-K
On April 14, 2000, Indiana Gas filed a Current Report on
Form 8-K with respect to the Change in Control of the
Registrant and a Change in Fiscal Year.
Item 1. Change in Control of Registrant
Item 8. Change in Fiscal Year
On April 17, 2000, Indiana Gas filed an Amended Current
Report on Form 8-K changing the signature of the report to
M. Susan Hardwick, Vice President and Controller.
Item 1. Change in Control of Registrant
Item 8. Change in Fiscal Year
On April 27, 2000, Indiana Gas filed a Current Report on
Form 8-K with respect to the release of summary financial
information for the quarter ending March 31, 2000.
Item 5. Other Events
Item 7. Exhibits
Exhibit 99-1 Press Release - First Quarter 2000
Exhibit 99-2 Financial Analyst Report - First
Quarter 2000
Exhibit 99-3 Precautionary Statement for Purposes of
the 'Safe Harbor' Provisions of the Private
Securities Litigation Reform Act of 1995.
On April 27, 2000, Indiana Gas filed a Current Report on
Form 8-K with respect to the release of its teleconference
script for the first quarter ending March 31, 2000.
Item 5. Other Events
Item 7. Exhibits
Exhibit 99 Analyst Teleconference Script - First
Quarter 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
INDIANA GAS COMPANY, INC.
-------------------------
Registrant
August 14, 2000 /s/ M. Susan Hardwick
----------------------
M. Susan Hardwick
Vice President and Controller
August 14, 2000 /s/ Jerome E. Benkert
------------------------
Jerome E. Benkert
Executive Vice President
and Chief Financial Officer