August 13, 1997
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, 1997, pursuant to the requirements of Section 13
of the Securities Exchange Act of 1934.
Very truly yours,
/s/Douglas S. Schmidt
Douglas S. Schmidt
DSS:tmw
Enclosures
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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, 1997
Class Number of shares Date
TABLE OF CONTENTS
Page
Numbers
Part I - Financial Information
Consolidated Balance Sheets
at June 30, 1997, and 1996
and September 30, 1996
Consolidated Statements of Income
Three Months Ended June 30, 1997 and 1996,
Nine Months Ended June 30, 1997 and 1996,
and Twelve Months Ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1997 and 1996,
and Twelve Months Ended June 30, 1997 and 1996
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
1997 1996 1996
UTILITY PLANT:
Original cost $968,416 $904,479 $931,092
Less - accumulated depreciation
and amortization 357,694 339,651 344,268
610,722 564,828 586,824
NONUTILITY PLANT - NET 26 327 33
CURRENT ASSETS:
Cash and cash equivalents 20 36,249 20
Accounts receivable, less reserves of
$2,253, $1,511 and $1,853 respectively 20,524 32,543 15,468
Accrued unbilled revenues 7,994 6,929 8,158
Materials and supplies - at average cost 428 4,187 4,611
Liquefied petroleum gas - at average cost 847 509 507
Gas in underground storage - at last-in,
first-out cost 9,918 20,029 39,083
Recoverable gas costs 967 - 2,710
Prepayments and other 419 526 43
41,117 100,972 70,600
DEFERRED CHARGES:
Unamortized debt discount and expense 7,017 6,712 7,477
Other 5,480 9,365 7,973
12,497 16,077 15,450
$664,362 $682,204 $672,907
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands - Unaudited)
June 30 September 30
1997 1996 1996
CAPITALIZATION:
Common stock and paid-in capital $142,995 $142,995 $142,995
Retained earnings 162,906 151,440 138,539
Total common shareholder's equity 305,901 294,435 281,534
Long-term debt 139,733 174,743 174,733
445,634 469,178 456,267
CURRENT LIABILITIES:
Maturities and sinking fund requirements
of long-term debt 35,000 18,950 -
Notes payable 8,750 - 24,236
Accounts payable (See Note 10) 38,869 45,969 49,402
Refundable gas costs - 6,522 -
Customer deposits and advance payments 6,670 3,572 14,256
Accrued taxes 9,952 14,471 4,206
Accrued interest 4,395 5,204 2,505
Other current liabilities 14,260 21,547 24,827
117,896 116,235 119,432
DEFERRED CREDITS:
Deferred income taxes 68,533 66,362 66,862
Unamortized investment tax credit 10,477 11,407 11,173
Customer advances for construction 1,555 1,382 1,434
Regulatory income tax liability 2,835 3,797 2,835
Other 17,432 13,843 14,904
100,832 96,791 97,208
COMMITMENTS AND CONTINGENCIES
(See Notes 8 & 10) - - -
$664,362 $682,204 $672,907
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Three Months Nine Months
Ended June 30 Ended June 30
1997 1996 1997 1996
OPERATING REVENUES $ 83,733 $ 91,211 $ 471,909 $ 468,073
COST OF GAS (See Note 10) 40,084 52,464 290,265 285,678
MARGIN 43,649 38,747 181,644 182,395
OPERATING EXPENSES:
Other operation and maintenance 20,755 19,986 60,370 61,694
Depreciation and amortization 8,767 8,391 26,178 24,739
Income taxes 2,499 1,063 26,361 27,061
Taxes other than income taxes 3,829 3,444 13,523 13,104
35,850 32,884 126,432 126,598
OPERATING INCOME 7,799 5,863 55,212 55,797
OTHER INCOME - NET 333 436 998 1,279
INCOME BEFORE INTEREST
AND OTHER CHARGES 8,132 6,299 56,210 57,076
INTEREST 3,906 4,040 12,640 12,120
OTHER (83) (14) (297) (75)
3,823 4,026 12,343 12,045
NET INCOME $ 4,309 $ 2,273 $ 43,867 $ 45,031
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Twelve Months
Ended June 30
1997 1996
OPERATING REVENUES $ 534,430 $ 525,272
COST OF GAS (See Note 10) 324,718 315,408
MARGIN 209,712 209,864
OPERATING EXPENSES
Other operation and maintenance 82,812 81,600
Depreciation and amortization 34,671 32,730
Income taxes 22,474 24,695
Taxes other than income taxes 16,787 15,914
156,744 154,939
OPERATING INCOME 52,968 54,925
OTHER INCOME - NET 607 1,749
INCOME BEFORE INTEREST
AND OTHER CHARGES 53,575 56,674
INTEREST 16,427 15,890
OTHER (318) (89)
16,109 15,801
NET INCOME $ 37,466 $ 40,873
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Nine Months Twelve Months
Ended June 30 Ended June 30
1997 1996 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,867 $ 45,031 $ 37,466 $ 40,873
Adjustments to reconcile net income to cash
provided from operating activities -
Depreciation and amortization 26,318 24,879 34,858 32,917
Deferred income taxes 1,671 1,266 1,209 3,050
Investment tax credit (697) (697) (930) (930)
27,292 25,448 35,137 35,037
Changes in assets and liabilities -
Receivables - net (4,892) (19,664) 10,954 (18,110)
Inventories 33,008 39,442 13,532 24,086
Accounts payable, customer deposits,
advance payments and other current liabilities (28,686) (31,055) (11,289) (6,075)
Accrued taxes and interest 7,636 8,944 (5,328) (4,471)
Recoverable/refundable gas costs 1,743 1,639 (7,489) (11,049)
Prepayments (376) (382) 107 70
Other - net 7,810 3,533 9,956 5,367
Total adjustments 43,535 27,905 45,580 24,855
Net cash flow from operations 87,402 72,936 83,046 65,728
CASH FLOWS REQUIRED FOR
FINANCING ACTIVITIES:
Sale of long-term debt - 20,000 - 20,000
Reduction in long-term debt - - (18,960) -
Net change in short-term borrowings (15,486) (2,225) 8,750 -
Dividends (19,500) (18,750) (26,000) (25,000)
Net cash flow required for financing activities (34,986) (975) (36,210) (5,000)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (52,416) (35,732) (83,065) (52,099)
Net cash flow required for investing activities (52,416) (35,732) (83,065) (52,099)
NET INCREASE (DECREASE) IN CASH - 36,229 (36,229) 8,629
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 20 20 36,249 27,620
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20 $ 36,249 $ 20 $ 36,249
Indiana Gas Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
Indiana Gas Company, Inc. and its subsidiaries (Indiana
Gas or the company) provide natural gas and
transportation services to a diversified base of
customers in 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 1997 1996 1997 1996
Interest (net of
amount capitalized) $ 9,659 $ 9,171 $15,923 $14,372
Income taxes $16,557 $19,479 $26,229 $29,478
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 1997, the
cost of replacing the current portion of gas in
underground storage exceeded last-in, first-out cost at
June 30, 1997, by approximately $11,565,000.
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 1997 1996 1997 1996 1997 1996
AFUDC-Borrowed Funds $129 $ 60 $437 $215 $505 $276
AFUDC-Equity Funds 106 49 358 176 414 226
Total AFUDC Capitalized $235 $109 $795 $391 $919 $502
7. Long-Term Debt.
During July 1997, Indiana Gas issued $15 million in
aggregate principal amount of its Medium-Term Notes,
Series E (Notes) as follows: $5.0 million of 6.42% Notes
due July 7, 2027; $3.5 million of 6.68% Notes due July
7, 2027; and $6.5 million of 6.54% Notes due July 9,
2007. The net proceeds from the sale of the Notes will
be used to finance Indiana Gas' continuing construction
program and for other corporate purposes.
8. Environmental Costs.
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 August 12, 1997, Indiana Gas signed an agreement with PSI
Energy, Inc. (PSI) with respect to thirteen of the nineteen
sites where PSI is a potentially responsible party (PRP),
which provides for an equal sharing between Indiana Gas and
PSI of past and future response costs at the thirteen sites.
Further, Indiana Gas and PSI must jointly approve future
management of the sites and the decisions to spend
additional funds. Indiana Gas previously entered into an
agreement with PSI providing for the sharing of costs
related to another site. Indiana Gas expects in the near
future to commence negotiations with PSI and Northern
Indiana Public Service Company (NIPSCO) regarding the other
five sites for which each is considered a PRP. These five
sites are already the subject of an agreement between
Indiana Gas and NIPSCO.
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. On
January 21, 1997, this ruling was affirmed by the
Indiana Court of Appeals. On February 19, 1997, the
company petitioned for transfer to the Indiana Supreme
Court.
On April 14, 1995, Indiana Gas filed suit in the United
States District Court for the Northern District of
Indiana, Fort Wayne Division, 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 the carriers are
obligated to pay these costs in the future. On October
2, 1996, the Court granted several motions filed by
defendant insurance carriers for summary judgment on a
number of issues relating to the insurers' obligations
to Indiana Gas under insurance policies issued by these
carriers. For example, the Court held that because the
placement of residuals on the ground at the sites was
done intentionally, there was no "fortuitous accident"
and therefore no "occurrence" subject to coverage under
the relevant policies. Based on discussions with
counsel, the management of Indiana Gas believes that a
number of the Court's rulings are contrary to Indiana
law and has appealed all adverse rulings to the United
States Court of Appeals for the Seventh Circuit.
However, if these rulings are not reversed on appeal,
they would effectively eliminate coverage under most of
the policies at issue. There can be no assurance as to
whether Indiana Gas will prevail on this appeal. As of
June 30, 1997, Indiana Gas has obtained settlements from
some insurance carriers in an aggregate amount in excess
of $14.7 million.
The Court's rulings have had no material impact on
earnings since Indiana Gas has previously recorded all
costs (in aggregate $14.9 million) which it presently
expects to incur in connection with remediation
activities. It is possible that future events may
require additional remediation activities which are not
presently foreseen.
9. Postretirement Benefits Other Than Pensions
On May 3, 1995, the IURC issued an order authorizing
Indiana Gas to recover the costs related to
postretirement benefits other than pensions under the
accrual method of accounting consistent with Statement
of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than
Pensions (SFAS 106). The Office of Utility Consumer
Counselor appealed the order. On January 21, 1997, the
Indiana Court of Appeals affirmed the IURC decision
authorizing recovery.
10. 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. ProLiance
Energy, LLC (ProLiance), a nonregulated marketing
affiliate of Indiana Energy, assumed the business of IES
effective April 1, 1996, and is the supplier of gas and
related services to both Indiana Gas and Citizens Gas
and Coke Utility (Citizens Gas). Indiana Gas' purchases
from ProLiance for resale and for injections into
storage for the three-, nine- and twelve-month periods
ended June 30, 1997, totalled $51.6 million, $252.6
million and $309.7 million, respectively. Indiana Gas'
purchases from ProLiance for the three months ended June
30, 1996, totaled $60.8 million.
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.
Two proceedings which may affect the formation,
operation or earnings of ProLiance are currently pending
before the IURC. The first proceeding was 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. On September 27, 1996, the IURC issued a
partial decision in that proceeding and found that
ProLiance is not subject to regulation as a public
utility. The IURC did confirm that it will continue to
monitor gas costs incurred by Indiana Gas. Hearings on
the remaining issues were concluded on October 9, 1996.
The company is currently awaiting a decision from the
IURC.
The second proceeding involves the quarterly gas cost
adjustment applications of Indiana Gas and Citizens Gas
wherein these utilities are proposing to recover the
costs they have and will incur under their gas supply
and related agreements with ProLiance. This proceeding
will consider whether the recovery of those costs is
consistent with Indiana law governing gas cost recovery.
The hearing on the second proceeding has not yet been
scheduled.
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.
On April 1, 1997, IGC Energy, Inc., and indirect wholly
owned subsidiary of Indiana Energy, and Citizens By-
Products Coal Company, a wholly owned subsidiary of
Citizens Gas, formed CIGMA, LLC (CIGMA), a jointly and
equally owned limited liability company. CIGMA provides
materials acquisition and related services that are used
by Indiana Gas and Citizens Gas, as well as similar
services for third parties. Indiana Gas' purchases of
these services for the three-month period ended June 30,
1997, totaled $4.6 million.
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 $34.3 million and $36.7 million at
June 30, 1997 and 1996, respectively.
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, 1997, when compared to the same
periods one year ago, are listed below. The increase in
net income for the three-month period is primarily
attributable to cooler weather.
Periods Ended June 30 Net Income
(Millions) 1997 1996
Three Months $ 4.3 $ 2.3
Nine Months $43.9 $45.0
Twelve Months $37.5 $40.9
The following discussion highlights the factors
contributing to these results.
Margin (Revenues Less Cost of Gas)
Margin for the quarter ended June 30, 1997, increased
$4.9 million compared to the same period last year. The
increase reflects cooler weather, as well as the addition
of new residential and commercial customers.
Margin for the nine-month period ended June 30, 1997,
decreased $.8 million compared to the same period last
year. The decrease is primarily attributable to weather 7
percent warmer than the same period last year and 1
percent colder than normal, offset somewhat by the
addition of new residential and commercial customers.
Margin for the twelve-month period ended June 30,
1997, decreased $.2 million compared to the same period
last year. Despite weather 7 percent warmer than the same
period last year and 1 percent colder than normal, margin
remained approximately the same due to additions of new
residential and commercial customers, as well as the
recognition of revenues associated with the recovery of
certain gas costs which had been recognized as expenses in
the prior period.
Total system throughput (combined sales and
transportation) increased 3 percent (.6 MMDth) for the
third quarter of fiscal 1997, when compared to the same
period last year. Throughput decreased 4 percent (4.2
MMDth) for the nine-month period and 4 percent (4.6 MMDth)
for the twelve-month period, when compared to the same
periods one year ago. Indiana Gas' rates for
transportation generally provide the same margins as are
earned on the sale of gas under its sales tariffs.
Approximately one-half of total system throughput
represents gas used for space heating and is affected by
weather.
Total average cost per unit of gas purchased decreased
to $2.88 for the three-month period ended June 30, 1997,
compared to $3.31 for the same period one year ago. For
the nine-month period, cost of gas per unit increased to
$3.71 in the current period compared to $3.18 for the same
period last year. For the twelve-month period, cost of
gas per unit increased to $3.57 in the current period
compared to $3.00 for the same period last year.
Adjustments to Indiana Gas' rates and charges related
to the cost of gas are made through gas cost adjustment
(GCA) procedures established by Indiana law and
administered by the Indiana Utility Regulatory Commission
(IURC). The GCA passes through increases and decreases in
the cost of gas to Indiana Gas' customers dollar for
dollar.
Operating Expenses
Operation and maintenance expenses increased $.8
million for the three-month period ended June 30, 1997,
when compared to the same period one year ago due
primarily to the timing of accruals for performance-based
compensation.
Operation and maintenance expenses decreased $1.3
million for the nine-month period when compared to the
same period last year due in part to lower labor-related
costs.
Operation and maintenance expenses for the twelve-
month period increased $1.2 million when compared to the
same period last year due in part from the acceleration of
several distribution system maintenance projects into the
last portion of fiscal 1996. The acceleration of these
projects was made possible by higher earnings attributable
to colder than normal weather during the 1996 heating
season.
Depreciation and amortization expense increased for
the three-, nine- and twelve-month periods ended June 30,
1997, 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 increased for the three-
month period ended June 30, 1997, while decreasing for the
nine- and twelve-month periods when compared to the same
periods one year ago due to changes in taxable income.
Taxes other than income taxes increased for the three-
, nine- and twelve-month periods ended June 30, 1997, when
compared to the same periods one year ago due primarily to
higher property tax expense as the result of additions to
utility plant.
Interest Expense
Interest expense remained approximately the same for
the three-month period ended June 30, 1997, when compared
to the same period one year ago. Interest expense
increased for the nine- and twelve-month periods due to an
increase in average debt outstanding slightly offset by a
decrease in interest rates.
Other Operating Matters
New Growth Strategy
In April 1997, the Board of Directors of Indiana
Energy, Inc. (Indiana Energy), Indiana Gas' parent,
approved a new growth strategy designed to support
Indiana Energy's transition into a more competitive
environment. As part of this new growth strategy,
Indiana Energy will endeavor to become a leading
regional provider of energy products and services and
to grow its consolidated earnings per share by at least
10 percent annually over the next five years. To
achieve such earnings growth, Indiana Energy's aim is
to grow the earnings contribution from nonutility
operations to at least 20 percent of its total annual
earnings within the next five years (see ProLiance
Energy, LLC, CIGMA, LLC and Energy Systems Group, LLC),
and to aggressively manage costs within its utility
operations.
As part of Indiana Energy's cost control efforts,
in July 1997, Indiana Gas advised its employees of a
planned reduction of its work force to be implemented
in the near future through an involuntary separation
program and attrition. Currently, staffing levels are
expected to be reduced from about 1,025 full-time
employees to approximately 800 employees within five
years. The details of this staffing reduction plan
have not yet been finalized.
Since Indiana Energy is in the early stages of
implementation, an estimate of the costs related to the
planned work force reductions and any other costs that
may be incurred in connection with its new growth
strategy cannot be made at this time.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated
marketing affiliate of Indiana Energy, began providing
natural gas and related services to Indiana Gas and
Citizens Gas and Coke Utility (Citizens Gas) effective
April 1, 1996. ProLiance also provides products and
services to other utilities and customers in Indiana and
surrounding states. ProLiance assumed the business of
Indiana Energy Services, Inc., an indirect wholly owned
subsidiary of Indiana Energy, which had provided similar
services to other customers and from January 1, 1996, to
March 31, 1996, to Indiana Gas.
ProLiance recently announced plans to add power
marketing to its services offered beginning in late fiscal
1997. Power marketing involves buying electricity on the
wholesale market and then reselling it to other marketers,
utilities and other customers.
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.
Two proceedings which may affect the formation,
operation or earnings of ProLiance are currently pending
before the IURC. The first proceeding was 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. On
September 27, 1996, the IURC issued a partial decision in
that proceeding and found that ProLiance is not subject to
regulation as a public utility. The IURC did confirm that
it will continue to monitor gas costs incurred by Indiana
Gas. Hearings on the remaining issues were concluded on
October 9, 1996. The company is currently awaiting a
decision from the IURC.
The second proceeding involves the quarterly gas cost
adjustment applications of Indiana Gas and Citizens Gas
wherein these utilities are proposing to recover the costs
they have and will incur under their gas supply and
related agreements with ProLiance. This proceeding will
consider whether the recovery of those costs is consistent
with Indiana law governing gas cost recovery. The hearing
on the second proceeding has not yet been scheduled.
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.
CIGMA, LLC
On April 1, 1997, IGC Energy, Inc., an indirect wholly
owned subsidiary of Indiana Energy, and Citizens By-
Products Coal Company, a wholly owned subsidiary of
Citizens Gas, formed CIGMA, LLC (CIGMA), a jointly and
equally owned limited liability company. CIGMA provides
materials acquisition and related services that are used
by Indiana Gas and Citizens Gas, as well as similar
services for third parties. CIGMA is expected to generate
cost savings for the utilities by enabling more efficient
purchasing, warehousing and distribution of materials and
equipment.
Energy Systems Group, LLC
On May 23, 1997, IGC Energy, Inc., Citizens By-
Products Coal Company and Energy Systems Group, Inc.
(ESGI) formed Energy Systems Group, LLC (ESG), an equally
owned limited liability company. ESG will provide a
package of products, services and skills to help energy
users achieve enhanced energy and operational performance.
The packages will provide for improvements to be paid for
by the customers from savings generated within their
existing operating budgets. ESG will assume the
responsibilities of ESGI, an energy related performance
contracting firm and wholly owned subsidiary of SIGCORP,
Inc.
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 August 12, 1997, Indiana Gas signed an agreement with PSI
Energy, Inc. (PSI) with respect to thirteen of the nineteen
sites where PSI is a potentially responsible party (PRP),
which provides for an equal sharing between Indiana Gas and
PSI of past and future response costs at the thirteen sites.
Further, Indiana Gas and PSI must jointly approve future
management of the sites and the decisions to spend
additional funds. Indiana Gas previously entered into an
agreement with PSI providing for the sharing of costs
related to another site. Indiana Gas expects in the near
future to commence negotiations with PSI and Northern
Indiana Public Service Company (NIPSCO) regarding the other
five sites for which each is considered a PRP. These five
sites are already the subject of an agreement between
Indiana Gas and NIPSCO.
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. On January 21, 1997,
this ruling was affirmed by the Indiana Court of Appeals.
On February 19, 1997, the company petitioned for transfer
to the Indiana Supreme Court.
On April 14, 1995, Indiana Gas filed suit in the
United States District Court for the Northern District of
Indiana, Fort Wayne Division, 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 the carriers are obligated to pay these
costs in the future. On October 2, 1996, the Court
granted several motions filed by defendant insurance
carriers for summary judgment on a number of issues
relating to the insurers' obligations to Indiana Gas under
insurance policies issued by these carriers. For example,
the Court held that because the placement of residuals on
the ground at the sites was done intentionally, there was
no "fortuitous accident" and therefore no "occurrence"
subject to coverage under the relevant policies. Based on
discussions with counsel, the management of Indiana Gas
believes that a number of the Court's rulings are contrary
to Indiana law and has appealed all adverse rulings to the
United States Court of Appeals for the Seventh Circuit.
However, if these rulings are not reversed on appeal, they
would effectively eliminate coverage under most of the
policies at issue. There can be no assurance as to
whether Indiana Gas will prevail on this appeal. As of
June 30, 1997, Indiana Gas has obtained settlements from
some insurance carriers in an aggregate amount in excess
of $14.7 million.
The Court's rulings have had no material impact on
earnings since Indiana Gas has previously recorded all
costs (in aggregate $14.9 million) which it presently
expects to incur in connection with remediation
activities. It is possible that future events may require
additional remediation activities which are not presently
foreseen.
Postretirement Benefits Other Than Pensions
On May 3, 1995, the IURC issued an order authorizing
Indiana Gas to recover the costs related to postretirement
benefits other than pensions under the accrual method of
accounting consistent with Statement of Financial
Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions (SFAS 106).
The Office of Utility Consumer Counselor appealed the
order. On January 21, 1997, the Indiana Court of Appeals
affirmed the IURC decision authorizing recovery.
Liquidity and Capital Resources
New construction, normal system maintenance and
improvements, and information technology investments to
provide service to a growing customer base will continue to
require substantial capital expenditures. Capital
expenditures for fiscal 1997 are estimated at $69.8 million
of which $52.4 million have been expended during the nine-
month period ended June 30, 1997. For the twelve months
ended June 30, 1997, Indiana Gas' capital expenditures
totaled $83.1 million. Of this amount, 61 percent was
provided by funds generated internally (net income less
dividends plus charges to net income not requiring funds).
Indiana Gas' long-term goal is to fund internally at
least 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 4.4 for the twelve months
ended June 30, 1997 (see Exhibit 12).
During July 1997, Indiana Gas issued $15 million in
aggregate principal amount of its Medium-Term Notes, Series
E (Notes) as follows: $5.0 million of 6.42% Notes due July
7, 2027; $3.5 million of 6.68% Notes due July 7, 2027; and
$6.5 million of 6.54% Notes due July 9, 2007. The net
proceeds from the sale of the Notes will be used to finance
Indiana Gas' continuing construction program and for other
corporate purposes.
Indiana Gas plans to finance the redemption of its $35
million of 6 5/8% Series D Notes, due December 1, 1997, and
its near-term working capital requirements by the use of
short-term and long-term debt.
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.
Forward-Looking Information
Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995.
A "safe harbor" for forward-looking statements is
provided by the Private Securities Litigation Reform
Act of 1995 (Reform Act of 1995). The Reform Act of
1995 was adopted to encourage such forward-looking
statements without the threat of litigation, provided
those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements
identifying important factors that could cause the
actual results to differ materially from those
projected in the statement. Certain matters described
in Management's Discussion And Analysis Of Results Of
Operations And Financial Condition, including, but not
limited to, Indiana Energy's new earnings growth
strategy, are forward-looking statements. Such
statements are based on management's beliefs, as well
as assumptions made by and information currently
available to management. When used in this filing the
words "aim," "anticipate," "endeavor," "estimate,"
"expect," "objective," "projection," "forecast,"
"goal," and similar expressions are intended to
identify forward-looking statements. In addition to
any assumptions and other factors referred to
specifically in connection with such forward-looking
statements, factors that could cause Indiana Energy's
or Indiana Gas' actual results to differ materially
from those contemplated in any forward-looking
statements include, among others, the following:
Factors affecting utility operations such as
unusual weather conditions; catastrophic weather-
related damage; unusual maintenance or repairs;
unanticipated changes to gas supply costs, or
availability due to higher demand, shortages,
transportation problems or other developments;
environmental or pipeline incidents; or gas pipeline
system constraints.
Increased competition in the energy environment,
including effects of: industry restructuring and
unbundling.
Regulatory factors such as unanticipated changes
in rate-setting policies or procedures; recovery of
investments made under traditional regulation, and the
frequency and timing of rate increases.
Financial or regulatory accounting principles or
policies imposed by the Financial Accounting Standards
Board, the Securities and Exchange Commission, the
Federal Energy Regulatory Commission, state public
utility commissions, state entities which regulate
natural gas transmission, gathering and processing, and
similar entities with regulatory oversight.
Economic conditions including inflation rates and
monetary fluctuations.
Changing market conditions and a variety of other
factors associated with physical energy and financial
trading activities, including, but not limited to,
price, basis, credit, liquidity, volatility, capacity,
interest rate, and warranty risks.
Availability or cost of capital, resulting from
changes in: Indiana Energy, Indiana Gas, 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 Results Of Operations And Financial
Condition.
Changes in Federal, state or local legislative
requirements, such as changes in tax laws or rates,
environmental laws and regulations.
Indiana Energy and Indiana Gas 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.
Indiana Gas Company, Inc. and Subsidiary Companies
Part II - Other Information
Item 1. Legal Proceedings
See Note 8 of the Notes to Consolidated Financial
Statements for litigation matters involving insurance
carriers pertaining to Indiana Gas' former manufactured
gas plants and storage facilities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-A Indiana Energy, Inc. Directors Compensation
Deferral Plan, as amended and restated effective
May 1, 1997. Incorporated by reference to
Exhibit 10-A to Indiana Energy, Inc.'s Quarterly
Report on Form 10-Q for the period ended
June 30, 1997.
10-B Indiana Energy, Inc. Directors Restricted Stock
Plan, as amended and restated effective May 1, 1997.
Incorporated by reference to Exhibit 10-B to Indiana
Energy, Inc.'s Quarterly Report on Form 10-Q for the
period ended June 30, 1997.
12 Computation of Ratio of Earnings to Fixed Charges,
filed herewith.
27 Financial Data Schedule, filed herewith.
(b) On July 31, 1997, Indiana Gas filed a Current Report on
Form 8-K to provide information related to the new growth
strategy of Indiana Energy, Inc., the parent of Indiana Gas.
Items reported include:
Item 5. Other Events
Information related to Indiana Energy, Inc.'s
new growth strategy.
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, 1997 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
Executive Vice President
and Chief Financial Officer
Dated August 13, 1997 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller