August 13, 1996
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 June 30, 1996, pursuant to the requirements of
Section 13 of the Securities Exchange Act of 1934.
Very truly yours,
/s/Kathleen S. Morris
Kathleen S. Morris
KSM:rs
Enclosures (8)
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 June 30, 1996
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 July 31, 1996
Class Number of shares Date
TABLE OF CONTENTS
Page
Numbers
Part I - Financial Information
Consolidated Balance Sheets
at June 30, 1996, and 1995
and September 30, 1995
Consolidated Statements of Income
Three Months Ended June 30, 1996 and 1995,
Nine Months Ended June 30, 1996 and 1995,
and Twelve Months Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1996 `and 1995,
and Twelve Months Ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II - Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands - Unaudited)
June 30 September 30
1996 1995 1995
UTILITY PLANT:
Original cost $904,479 $858,570 $872,287
Less - accumulated depreciation
and amortization 339,651 311,445 316,991
564,828 547,125 555,296
NONUTILITY PLANT - NET 327 387 188
CURRENT ASSETS:
Cash and cash equivalents 36,249 27,620 20
Accounts receivable, less reserves of
$1,511, $1,184 and $1,662 respectively 32,543 15,917 13,403
Accrued unbilled revenues 6,929 5,445 6,405
Materials and supplies - at average cost 4,187 3,956 3,890
Liquefied petroleum gas - at average cost 509 877 883
Gas in underground storage - at last-in,
first-out cost 20,029 43,978 59,394
Prepayments and other 526 596 144
100,972 98,389 84,139
DEFERRED CHARGES:
Unamortized debt discount and expense 6,712 6,915 6,800
Other 9,365 9,608 9,510
16,077 16,523 16,310
$682,204 $662,424 $655,933
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands - Unaudited)
June 30 September 30
1996 1995 1995
CAPITALIZATION:
Common stock and paid-in capital $142,995 $142,995 $142,995
Retained earnings 151,440 135,567 125,159
Total common shareholder's equity 294,435 278,562 268,154
Long-term debt 174,743 173,693 173,693
469,178 452,255 441,847
CURRENT LIABILITIES:
Maturities and sinking fund requirements
of long-term debt 18,950 - -
Notes payable - - 2,225
Accounts payable 45,969 45,334 59,713
Refundable gas costs 6,522 17,571 4,883
Customer deposits and advance payments 3,572 10,512 20,870
Accrued taxes 14,471 19,683 7,928
Accrued interest 5,204 4,463 2,803
Other current liabilities 21,547 21,317 21,560
116,235 118,880 119,982
DEFERRED CREDITS:
Deferred income taxes 66,362 62,097 65,096
Unamortized investment tax credit 11,407 12,337 12,103
Customer advances for construction 1,382 1,253 1,297
Regulatory income tax liability 3,797 4,787 3,797
Other 13,843 10,815 11,811
96,791 91,289 94,104
COMMITMENTS AND CONTINGENCIES
(See Notes 8 & 9) - - -
$682,204 $662,424 $655,933
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Three Months Nine Months
Ended June 30 Ended June 30
1996 1995 1996 1995
OPERATING REVENUES $ 91,211 $ 83,081 $ 468,073 $ 346,611
COST OF GAS 52,464 43,705 285,678 188,765
MARGIN 38,747 39,376 182,395 157,846
OPERATING EXPENSES:
Other operation and maintenance 19,986 18,252 61,694 55,702
Depreciation and amortization 8,391 7,881 24,739 23,274
Income taxes 1,063 2,378 27,061 21,582
Taxes other than income taxes 3,444 3,065 13,104 10,228
32,884 31,576 126,598 110,786
OPERATING INCOME 5,863 7,800 55,797 47,060
OTHER INCOME - NET 436 464 1,279 953
INCOME BEFORE INTEREST
AND OTHER CHARGES 6,299 8,264 57,076 48,013
INTEREST 4,040 3,937 12,120 11,760
OTHER (14) - (75) (14)
4,026 3,937 12,045 11,746
NET INCOME $ 2,273 $ 4,327 $ 45,031 $ 36,267
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Twelve Months
Ended June 30
1996 1995
OPERATING REVENUES $ 525,272 $ 396,517
COST OF GAS 315,408 212,800
MARGIN 209,864 183,717
OPERATING EXPENSES
Other operation and maintenance 81,600 75,328
Depreciation and amortization 32,730 30,797
Income taxes 24,695 18,449
Taxes other than income taxes 15,914 13,315
154,939 137,889
OPERATING INCOME 54,925 45,828
OTHER INCOME - NET 1,749 1,324
INCOME BEFORE INTEREST
AND OTHER CHARGES 56,674 47,152
INTEREST 15,890 15,629
OTHER (89) (30)
15,801 15,599
NET INCOME $ 40,873 $ 31,553
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Nine Months Twelve Months
Ended June 30 Ended June 30
1996 1995 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,031 $ 36,267 $ 40,873 $ 31,553
Adjustments to reconcile net income to cash
provided from operating activities -
Depreciation and amortization 24,879 23,414 32,917 30,984
Deferred income taxes 1,266 2,210 3,050 3,553
Investment tax credit (697) (697) (930) (930)
25,448 24,927 35,037 33,607
Changes in assets and liabilities -
Receivables - net (19,664) 2,080 (18,110) 15,964
Inventories 39,442 20,545 24,086 (4,846)
Accounts payable, customer deposits,
advance payments and other current liabilities (31,055) 15,706 (6,075) 22,594
Accrued taxes and interest 8,944 1,040 (4,471) (13,777)
Recoverable/refundable gas costs 1,639 (14,024) (11,049) (15,024)
Prepayments (382) (352) 70 117
Other - net 3,533 11,695 5,367 13,597
Total adjustments 27,905 61,617 24,855 52,232
Net cash flow from operations 72,936 97,884 65,728 83,785
CASH FLOWS REQUIRED FOR
FINANCING ACTIVITIES:
Sale of long-term debt 20,000 20,000 20,000 20,000
Reduction in long-term debt - (3,158) - (21,208)
Net change in short-term borrowings (2,225) (30,550) - -
Dividends (18,750) (18,000) (25,000) (24,000)
Net cash flow required for financing activities (975) (31,708) (5,000) (25,208)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (35,732) (38,576) (52,099) (54,371)
Net cash flow required for investing activities (35,732) (38,576) (52,099) (54,371)
NET INCREASE IN CASH 36,229 27,600 8,629 4,206
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 20 20 27,620 23,414
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,249 $ 27,620 $ 36,249 $ 27,620
Indiana Gas Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
Indiana Gas Company, Inc. and its subsidiaries, Terre
Haute Gas Corporation (Terre Haute) and Richmond Gas
Corporation (Richmond) which are doing business as
Indiana Gas Company, Inc. (Indiana Gas), provide natural
gas and transportation services to a diversified base of
customers in 281 communities in 48 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 normally 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. 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:
Nine Months Ended Twelve Months Ended
June 30 June 30
Thousands 1996 1995 1996 1995
Interest (net of
amount capitalized) $ 8,995 $ 8,891 $14,146 $14,754
Income taxes $20,756 $16,326 $30,636 $24,326
3. 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.
4. Gas in Underground Storage.
Based on the cost of purchased gas during June 1996, the
cost of replacing the current portion of gas in
underground storage exceeded last-in, first-out cost at
June 30, 1996, by approximately $5,008,000.
5. 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).
6. Allowance For Funds Used During Construction.
An allowance for funds used during construction (AFUDC),
which represents the cost of borrowed and equity funds
used for construction purposes, is charged to
construction work in progress during the period of
construction and included in "Other Income-Net" and
"Other" on the Consolidated Statements of Income. An
annual AFUDC rate of 7.5 percent was used for all
periods reported.
The table below reflects the total AFUDC capitalized and
the portion of which was computed on borrowed and equity
funds for all periods reported.
Three Months Ended Nine Months Ended Twelve Months Ended
June 30 June 30 June 30
Thousands 1996 1995 1996 1995 1996 1995
AFUDC-Borrowed Funds $ 60 $ 46 $215 $154 $276 $217
AFUDC-Equity Funds 49 38 176 126 226 177
Total AFUDC Capitalized $109 $ 84 $391 $280 $502 $394
7. Long-Term Debt.
During December 1995, Indiana Gas issued $20 million in
aggregate principal amount of its Medium-Term Notes,
Series E (Notes) as follows: $5 million of 6.69% Notes
due June 10, 2013, $5 million of 6.69% Notes due
December 21, 2015, and $10 million of 6.69% Notes due
December 29, 2015. On July 15, 1996, Indiana Gas used
those net proceeds to redeem its remaining first
mortgage bonds, $19 million of 9 3/8% Series M First
Mortgage Bonds.
8. Affiliate Transactions.
Indiana Energy Services, Inc. (IES), an indirect wholly-
owned subsidiary of Indiana Energy (Indiana Gas'
parent), provided natural gas and related services to
Indiana Gas from January 1, 1996 to March 31, 1996.
Indiana Gas' purchases from IES for the three months
ended March 31, 1996 totalled $102.7 million. Effective
April 1, 1996, ProLiance Energy, LLC (ProLiance) assumed
the business of IES and is now the supplier of gas and
related services to Indiana Gas (see ProLiance Energy,
LLC in Management's Discussion and Analysis of Results
of Operations and Financial Condition). Indiana Gas'
purchases from ProLiance for the three months ended June
30, 1996, totalled $60.8 million. System supply gas is
provided to Indiana Gas with the commodity priced at
market index. The sales of gas and provision of other
services to Indiana Gas by Indiana Energy's marketing
affiliates are subject to regulatory review through the
quarterly gas cost adjustment proceeding currently
pending before the IURC. In addition, another
proceeding has been initiated by a small group of
Indiana Gas' and Citizens Gas' large-volume customers
who contend that the gas service contracts between
ProLiance and Indiana Gas and Citizens Gas should be
disapproved by the IURC or, alternatively, that the IURC
should regulate the operations of ProLiance. As of June
30, 1996, the two proceedings were each set for a final
hearing to occur in October 1996. While the outcome of
these proceedings cannot be predicted, management does
not expect this matter to have a material impact on
Indiana Gas' financial position or results of
operations.
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 due affiliated companies, as well as checks
written but not cashed are reflected in Accounts Payable
on the Consolidated Balance Sheet. Amounts owed to
affiliates totaled $36.7 million and $11.9 million at
June 30, 1996 and 1995, respectively.
9. 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. In the manufacture and
storage of such gas, various byproducts were
produced, some of which may still be present at the
sites where these manufactured gas plants and
storage facilities were located. Management
believes, and the IURC has found that, those
operations were conducted in accordance with the
then-applicable industry standards. However, 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. Removal activities
have been conducted at two sites and a remedial
investigation/feasibility study (RI/FS) is nearing
completion at one of the sites under an agreed
order between Indiana Gas and the Indiana
Department of Environmental Management. Indiana Gas
and others are assessing, on a site-by-site basis,
whether any of the remaining 24 sites require
remediation, to what extent it is required and the
estimated cost. Preliminary assessments (PAs) have
been completed on all but one of the sites. Site
investigations (SIs) have been completed at 20
sites and supplemental site investigations (SSIs)
have been conducted at 15 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 24 sites. Indiana Gas is currently
conducting groundwater monitoring at many of the
sites. Indiana Gas has not begun an RI/FS at
additional sites, but expects to conduct further
investigation and evaluation in the future.
Based upon the work performed to date, Indiana Gas
has accrued remediation and related costs for the
two sites where remedial activities are taking
place. PA/SI, SSI and groundwater monitoring costs
have been accrued for the remaining sites where
appropriate. Estimated RI/FS costs and the 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
potential remedial alternatives, 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 pursuing recovery from three
separate sources for the costs it has incurred and
expects to incur relating to the 26 sites. Those
sources are insurance carriers, potentially
responsible parties (PRPs) and recovery through
rates from retail gas customers. On April 14, 1995,
Indiana Gas filed suit against a number of
insurance carriers for payment of claims for
investigation and clean-up costs already incurred,
as well as for a determination that those carriers
are obligated to pay these costs in the future.
Presently, that suit is set for trial to begin
October 21, 1996, in the United States District
Court for the Northern District of Indiana in Fort
Wayne, Indiana. Indiana Gas has obtained cash
settlements from some of the defendant insurance
carriers and, as a result, those carriers have been
dismissed from the suit.
Indiana Gas has also completed the process of
identifying PRPs for each site. PRPs include two
financially viable utilities, PSI Energy, Inc.
(PSI) and Northern Indiana Public Service Company
(NIPSCO). PSI has been identified as a PRP at 19 of
the sites. Indiana Gas has been negotiating with
PSI to determine PSI's share of responsibility,
although no agreement has been reached between the
parties. With the help of outside counsel, Indiana
Gas has prepared estimates of PSI's and other PRP's
share of environmental liabilities which may exist
at each of the sites based on equitable principles
derived from case law or applied by parties in
achieving settlements. NIPSCO has been identified
as an additional PRP at five of these 19 sites. On
September 27, 1995, Indiana Gas reached an
agreement with NIPSCO which provides for a
coordination of efforts and a sharing of
investigation and clean-up costs incurred and to be
incurred at the five sites in which they both have
an interest. The cost sharing estimates of PSI and
other PRPs, and the NIPSCO agreement, have been
utilized by Indiana Gas to record a receivable from
PRPs for their share of the liability for work
performed by Indiana Gas to date, as well as to
accrue Indiana Gas' proportionate share of the
estimated cost related to work not yet performed.
The receivable from PRPs of $3.5 million is
reflected in Accounts Receivable on the
Consolidated Balance Sheet at June 30, 1996.
In January 1992, Indiana Gas filed a petition with
the IURC seeking regulatory authority for, among
other matters, recovery through rates of all costs
Indiana Gas incurs in complying with federal, state
and local environmental regulations in connection
with past gas manufacturing activities. On May 3,
1995, the IURC concluded that the costs incurred by
Indiana Gas to investigate and, if necessary, clean-
up former manufactured gas plant sites are not
utility operating expenses necessary for the
provision of utility service and, therefore, are
not recoverable as operating expenses from utility
customers. The decision was contrary to rulings in
other states where utility regulatory commissions
have issued orders on the subject. The precedent
cited by the IURC was a ruling related to a
cancelled nuclear power plant which, unlike
manufactured gas plants, never provided service to
the public. Management believes applying the
nuclear power plant decision to Indiana Gas' case
was an incorrect application of the law and has
appealed the decision to the Indiana Court of
Appeals. The briefing in the appeal has been
concluded, and the case is now before the Court of
Appeals awaiting a decision. The Commission did
indicate that during Indiana Gas' next rate case it
would be appropriate to quantify the effect of the
investigation and clean-up activities as part of
the business risk to be considered by the
Commission in establishing the overall rate of
return to be allowed.
Indiana Gas has recorded $13.0 million for its
share of environmental costs to date. As a result
of its pursuit of recovery of costs from PRPs and
insurance carriers, Indiana Gas has secured
settlements from insurers of approximately $13.5
million. Amounts recovered in excess of its share
of costs to date have been deferred. The May 3,
1995, order of the IURC has had no immediate impact
on Indiana Gas' earnings since settlements with
insurers exceed Indiana Gas' share of environmental
liability recorded to date.
The impact on Indiana Gas' financial position and
results of operations of complying with federal,
state and local environmental regulations related
to former manufactured gas plant sites is
contingent upon several uncertainties. These
include the costs of any compliance activities
which may occur and the timing of the actions
taken, the impact of joint and several liability
upon the magnitude of the contingency, the outcome
of proceedings which challenge the IURC ruling on
recovery of costs from customers, as well as any
additional recoveries of environmental and related
costs from insurance carriers. Although there can
be no assurance of success, to the extent possible
Indiana Gas will continue to manage the
manufactured gas plant remediation program so that
amounts received from insurance carriers and PRPs
will be sufficient to fund all such costs.
10. Regulatory Assets and Liabilities.
Indiana Gas is subject to the provisions of Statement of
Financial Accounting Standards No. 71, Accounting for
the Effects of Certain Types of Regulation (SFAS 71).
Regulatory assets represent probable future revenue to
Indiana Gas associated with certain costs which will be
recovered from customers through the ratemaking process.
Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are
to be credited to customers through the ratemaking
process. Regulatory assets and liabilities reflected in
the Consolidated Balance Sheets as of June 30 (in
thousands) relate to the following:
1996 1995
Regulatory Assets:
Postretirement Benefits Other Than Pensions $ 6,732 $ 7,444
Unamortized Debt Discount and Expense 6,712 6,915
Deferred Acquisition Costs 725 746
Rate Case Costs 109 443
$14,278 $15,548
Regulatory Liabilities:
Gas Costs Due to Customers, Net $ 6,522 $17,571
Amounts Due to Customers - Income Taxes, Net 3,797 4,787
Pension Costs 1,348 585
$11,667 $22,943
It is Indiana Gas' policy to continually assess the
recoverability of costs recognized as regulatory assets
and the ability to continue to account for its
activities in accordance with SFAS 71, based on the
criteria set forth in SFAS 71. Based on current
regulation, Indiana Gas believes that its use of
regulatory accounting is appropriate. If all or part of
Indiana Gas' operations cease to meet the criteria of
SFAS 71, a write-off of related regulatory assets and
liabilities would be required. In addition, Indiana Gas
would be required to determine any impairment to the
carrying costs of deregulated plant and inventory
assets.
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.
Indiana Gas Company, Inc. and Subsidiary Companies
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
Earnings
Net income for the three-, nine- and twelve-month
periods ended June 30, 1996, when compared to the same
periods one year ago are listed below. The decrease in
earnings for the three-month period is primarily
attributable to higher operation and maintenance expenses,
as well as lower margin. The increases in earnings for
the nine- and twelve-month periods reflect significantly
colder weather than last year, offset somewhat by higher
operation and maintenance expenses.
Periods Ended June 30 1996 1995
(Millions)
Three Months $ 2.3 $ 4.3
Nine Months $45.0 $36.3
Twelve Months $40.9 $31.6
The following discussion highlights the factors
contributing to these results.
Margin (Revenues Less Cost of Gas)
Margin for the quarter ended June 30, 1996, decreased
$.6 million compared to the same period last year. While
the current quarter's margin increased due to cooler
weather, the prior year's margin was higher due to the
recovery of gas costs which had been recognized as
expenses in earlier periods.
Margin for the nine-month period ended June 30, 1996,
increased $24.5 million compared to the same period last
year. The increase reflects weather 25 percent colder
than the same period last year and 8 percent colder than
normal.
Margin for the twelve-month period ended June 30,
1996, increased $26.1 million compared to the same period
last year. The increase reflects weather 26 percent
colder than the same period last year and 8 percent colder
than normal.
Additional residential and commercial customers, as
well as rate recovery (beginning May 1995) of
postretirement benefit costs recognized in accordance with
Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other
Than Pensions (SFAS 106) also increased margins for all
periods reported.
Total system throughput (combined sales and
transportation) increased 8 percent (1.7 MMDth) for the
third quarter of fiscal 1996, 19 percent (17.6 MMDth) for
the nine-month period and 17 percent (18.6 MMDth) for the
twelve-month period ended June 30, 1996, compared to the
same periods last year. The increases for all periods are
due primarily to increases in residential and commercial
space heating sales caused by colder weather.
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 $3.31 for the three-month period ended June 30, 1996,
compared to $2.43 for the same period one year ago. For
the nine-month period, cost of gas per unit increased to
$3.18 in the current period compared to $2.61 for the same
period last year. For the twelve-month period, cost of
gas per unit increased to $3.00 in the current period
compared to $2.58 for the same period last year. The
increases are due primarily to higher commodity costs
associated with increased demand for gas during the colder
winter this fiscal 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 $1.7
million for the third quarter of fiscal 1996, $6.0 million
for the nine-month period and $6.3 million for the twelve-
month period ended June 30, 1996, when compared to the
same periods one year ago. The increases are primarily
attributable to higher performance-based compensation, the
recognition (beginning May 1995) of postretirement benefit
costs in accordance with SFAS 106, as well as the intense
cost control measures in place during the prior periods
due to very warm weather.
Depreciation and amortization expense increased for
the three-, nine- and twelve-month periods ended June 30,
1996, when compared to the same periods one year ago as
the result of additions to utility plant to serve new
customers and to maintain dependable service to existing
customers.
Federal and state income taxes decreased for the three-
month period ended June 30, 1996, when compared to the
same period one year ago due to lower taxable income. The
increases for the nine- and twelve-month periods reflect
higher taxable income during those periods.
Taxes other than income taxes increased for the three-
, nine- and twelve-month periods ended June 30, 1996, when
compared to the same periods one year ago due primarily to
higher gross receipts tax expense resulting from increased
revenue, and higher property tax expense.
Interest Expense
Interest expense increased for the three-, nine- and
twelve-month periods ended June 30, 1996, when compared to
the same periods one year ago due to an increase in
average debt outstanding slightly offset by a decrease in
interest rates.
Other Operating Matters
ProLiance Energy, LLC
On March 15, 1996, IGC Energy, Inc., an indirect
wholly-owned subsidiary of Indiana Energy (Indiana Gas'
parent), and Citizens By-Products Coal Company, a
wholly-owned subsidiary of Citizens Gas and Coke
Utility (Citizens Gas), formed a jointly- and equally-
owned limited liability corporation to provide natural
gas supply and related services. The new entity,
ProLiance Energy, LLC (ProLiance), began providing
services to Indiana Gas and Citizens Gas effective
April 1, 1996. ProLiance will also market its products
and services to other gas utilities and customers in
Indiana and surrounding states. ProLiance has assumed
the business of Indiana Energy Services, Inc. (IES),
Indiana Energy's gas marketing affiliate, which had
provided similar services to other customers and from
January 1, 1996, to March 31, 1996, to Indiana Gas.
System supply gas is provided to Indiana Gas with the
commodity priced at market index.
The sale of gas and provision of other services to
Indiana Gas by Indiana Energy's marketing affiliates
are subject to regulatory review through the quarterly
gas cost adjustment proceeding currently pending before
the IURC. In addition, another proceeding has been
initiated by a small group of Indiana Gas' and Citizens
Gas' large-volume customers who contend that the gas
service contracts between ProLiance and Indiana Gas and
Citizens Gas should be disapproved by the IURC or,
alternatively, that the IURC should regulate the
operations of ProLiance. As of June 30, 1996, the two
proceedings were each set for a final hearing to occur
in October 1996. While the outcome of these
proceedings cannot be predicted, management does not
expect this matter to have a material impact on Indiana
Gas' financial position or results of operations.
1996 Settlement Agreement
As provided in the previous year's settlement
agreement among Indiana Gas, the Office of Utility
Consumer Counselor (OUCC) and a group of large-volume
users, the OUCC performed an investigation during
fiscal 1995 to consider an increase to Indiana Gas'
authorized utility operating income. These parties then
entered a series of negotiations designed to increase
Indiana Gas' opportunity to earn on its recent capital
investments while avoiding the necessity of a general
rate filing. As a result of these negotiations, the
IURC approved on November 9, 1995, a settlement
agreement which provided, among other things, for the
following: (1) an increase in Indiana Gas' authorized
utility operating income (weather normalized) from
$51.1 million to $54.2 million beginning in fiscal
1996; (2) with certain specified exceptions, Indiana
Gas may not file a petition to increase its base rates
until November 15, 1996; and (3) an agreement to a
number of operational and other service enhancements
for large-volume customers.
Environmental Matters
Indiana Gas is currently conducting environmental
investigations and work at certain sites that were the
locations of former manufactured gas plants. It is
seeking to recover the costs of the investigations and
work from insurance carriers, other potentially
responsible parties (PRPs) and customers. On May 3,
1995, Indiana Gas received an order from the IURC in
which the Commission concluded that the costs incurred
by Indiana Gas to investigate and, if necessary, clean-
up former manufactured gas plant sites are not utility
operating expenses necessary for the provision of
service and, therefore, are not recoverable as
operating expenses from utility customers. The order is
being appealed. The IURC order has had no immediate
impact on Indiana Gas' earnings since settlements with
insurers of $13.5 million exceed Indiana Gas' share of
environmental liability recorded to date of $13.0
million. For further information regarding the status
of investigation and remediation of the sites, PRPs,
recovery from insurers, financial reporting and
ratemaking, see Note 9.
Indiana Legislative Matters
On April 26, 1995, the Indiana General Assembly
enacted legislation which provides new flexibility to
the IURC for future regulation of Indiana utilities and
modifies the application of the earnings test.
The new law recognizes that competition is
increasing in the provision of energy services and that
flexibility in the regulation of energy services
providers is essential to the well-being of the state,
its economy and its citizens. Under the law, an energy
utility can present to the IURC a broad range of
proposals from performance-based ratemaking to complete
deregulation of a utility's operations. The law gives
the IURC the authority to adopt alternative regulatory
practices, procedures, and mechanisms and establish
rates and charges that are in the public interest, and
will enhance or maintain the value of the energy
utility's retail energy services or property. It also
provides authority for the IURC to establish rates and
charges based on market or average prices that use
performance-based rewards or penalties, or which are
designed to promote efficiency in the rendering of
retail energy services.
The IURC applies the Indiana statute authorizing
the GCA procedures to reduce rates when necessary so as
to limit utility operating income to the level
authorized in the last general rate order. On a
quarterly basis, this earnings test is performed by
comparing Indiana Gas' authorized utility operating
income to its actual utility operating income (weather
normalized) for the previous 12 months. In the past,
one-fourth of the amounts over the authorized utility
operating income would be refundable to Indiana Gas'
customers each quarter. The new law revises the
earnings test to provide that no refund be paid to the
extent a utility has not earned its authorized utility
operating income over the previous 60 months (or during
the period since the utility's last rate order, if
longer). The revised test provides Indiana Gas a
greater opportunity to earn its authorized utility
operating income over the long term.
Liquidity and Capital Resources
New construction to provide service to a growing
customer base and normal system maintenance and
improvements will continue to require substantial capital
expenditures. For the twelve months ended June 30, 1996,
Indiana Gas' capital expenditures totaled $52.1 million.
Of this amount, 98 percent was provided by funds generated
internally (net income less dividends plus charges to net
income not requiring funds). Capital expenditures for
fiscal 1996 were estimated at $58.8 million of which $35.7
million have been expended during the nine-month period
ended June 30, 1996.
Indiana Gas' goal is to fund internally approximately
75 percent of its construction program. Capitalization
objectives for Indiana Gas are 55-65 percent common equity
and 35-45 percent long-term debt. This will help Indiana
Gas to maintain its high creditworthiness. The long-term
debt of Indiana Gas is currently rated Aa3 by Moody's
Investors Service and AA- by Standard & Poor's Corporation.
Indiana Gas' ratio of earnings to fixed charges was 4.9 for
the twelve months ended June 30, 1996 (see Exhibit 12).
During December 1995, Indiana Gas issued $20 million in
aggregate principal amount of its Medium-Term Notes, Series
E (Notes) as follows: $5 million of 6.69% Notes due June
10, 2013, $5 million of 6.69% Notes due December 21, 2015,
and $10 million of 6.69% Notes due December 29, 2015.
Indiana Gas plans to issue an additional $15 million of
the Notes by the end of fiscal 1997. On July 15, 1996,
Indiana Gas used the net proceeds from the December
issuances to redeem its remaining first mortgage bonds, $19
million of 9 3/8% Series M First Mortgage Bonds.
The nature of Indiana Gas' business creates large short-
term cash working capital requirements primarily to finance
customer accounts receivable, unbilled utility revenues
resulting from cycle billing, gas in underground storage
and construction 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. Depending on cost,
commercial paper or bank lines of credit are used as
sources of short-term financing. Indiana Gas' commercial
paper is rated P-1 by Moody's and A-1+ by Standard &
Poor's. Long-term financial strength and flexibility
require maintaining throughput volumes, controlling costs
and, if absolutely necessary, securing timely increases in
rates to recover costs and provide a fair and reasonable
return to shareholders.
Part II - Other Information
Item 1. Legal Proceedings
See Note 9 of the Notes to Consolidated Financial
Statements for litigation matters involving insurance
carriers pertaining to Indiana Gas' former manufactured
gas plants and storage facilities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3-A Code of By-Laws as amended April 26,
1996, filed herewith.
12 Computation of Ratio of Earnings to
Fixed Charges, filed herewith.
27 Financial Data Schedule, filed
herewith.
(b) No Current Reports on Form 8-K were filed
during the quarter ended June 30, 1996.
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
Dated August 13, 1996 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
Senior Vice President and
Chief Financial Officer
Dated August 13, 1996 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller