August 13, 1998
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, 1998, 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, 1998
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, 1998
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Balance Sheets
at June 30, 1998, and 1997
and September 30, 1997
Consolidated Statements of Income
Three Months Ended June 30, 1998 and 1997,
Nine Months Ended June 30, 1998 and 1997,
and Twelve Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997,
and Twelve Months Ended June 30, 1998 and 1997
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
1998 1997 1997
UTILITY PLANT:
Original cost $ 923,385 $ 968,416 $ 951,617
Less - accumulated depreciation and amortization 362,531 357,694 361,936
560,854 610,722 589,681
CURRENT ASSETS:
Cash and cash equivalents 7,177 20 48
Accounts receivable, less reserves of $553,
$2,253 and $1,784 respectively 18,943 20,524 25,186
Accrued unbilled revenues 7,639 7,994 8,964
Materials and supplies - at average cost 195 428 63
Liquefied petroleum gas - at average cost 865 847 872
Gas in underground storage - at last-in,
first-out cost 7,558 9,918 19,240
Recoverable gas costs - 967 5,843
Prepayments and other 3,478 419 3,695
45,855 41,117 63,911
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt discount and expense 13,102 7,017 6,980
Other 4,271 5,506 5,147
17,373 12,523 12,127
$ 624,082 $ 664,362 $ 665,719
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands - Unaudited)
June 30 September 30
1998 1997 1997
CAPITALIZATION:
Common stock and paid-in capital $ 142,995 $ 142,995 $ 142,995
Retained earnings 109,639 162,906 125,767
Total common shareholder's equity 252,634 305,901 268,762
Long-term debt 192,000 139,733 154,733
444,634 445,634 423,495
CURRENT LIABILITIES:
Maturities and sinking fund requirements
of long-term debt - 35,000 35,000
Notes payable 1,000 8,750 20,000
Accounts payable (See Note 9) 19,810 38,869 39,456
Refundable gas costs 27,155 - -
Customer deposits and advance payments 5,484 6,670 20,405
Accrued taxes 7,895 9,952 8,659
Accrued interest 4,089 4,395 2,580
Other current liabilities 18,958 14,260 24,105
84,391 117,896 150,205
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 56,797 68,533 55,205
Accrued postretirement benefits other than pensions 25,156 17,432 23,038
Unamortized investment tax credit 9,547 10,477 10,243
Regulatory income tax liability 1,874 2,835 1,874
Other 1,683 1,555 1,659
95,057 100,832 92,019
COMMITMENTS AND CONTINGENCIES (See Notes 8 & 9) - - -
$ 624,082 $ 664,362 $ 665,719
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Three Months Nine Months
Ended June 30 Ended June 30
1998 1997 1998 1997
OPERATING REVENUES $ 70,560 $ 83,733 $ 403,823 $ 471,909
COST OF GAS (See Note 9) 35,032 40,084 236,325 290,265
MARGIN 35,528 43,649 167,498 181,644
OPERATING EXPENSES:
Operation and maintenance 20,884 20,755 62,159 60,370
Depreciation and amortization 8,150 8,767 24,157 26,178
Income taxes (191) 2,499 21,065 26,361
Taxes other than income taxes 2,756 3,829 11,933 13,523
31,599 35,850 119,314 126,432
OPERATING INCOME 3,929 7,799 48,184 55,212
OTHER INCOME - NET 27 416 375 1,295
INCOME BEFORE INTEREST EXPENSE 3,956 8,215 48,559 56,507
INTEREST EXPENSE 3,635 3,906 12,391 12,640
NET INCOME $ 321 $ 4,309 $ 36,168 $ 43,867
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Twelve Months
Ended June 30
1998 1997
OPERATING REVENUES $ 462,321 $ 534,430
COST OF GAS (See Note 9) 268,582 324,718
MARGIN 193,739 209,712
OPERATING EXPENSES:
Operation and maintenance 81,356 82,812
Restructuring costs (See Note 2) 39,531 -
Depreciation and amortization 33,033 34,671
Income taxes 2,556 22,474
Taxes other than income taxes 15,280 16,787
171,756 156,744
OPERATING INCOME 21,983 52,968
OTHER INCOME - NET 321 925
INCOME BEFORE INTEREST EXPENSE 22,304 53,893
INTEREST EXPENSE 16,525 16,427
NET INCOME $ 5,779 $ 37,466
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Nine Months Twelve Months
Ended June 30 Ended June 30
1998 1997 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,168 $ 43,867 $ 5,779 $ 37,466
Adjustments to reconcile net income to cash
provided from operating activities -
Noncash restructuring costs - - 32,838 -
Depreciation and amortization 24,297 26,318 33,220 34,858
Deferred income taxes 1,592 1,671 (12,697) 1,209
Investment tax credit (697) (697) (930) (930)
Gain on sale of assets (1,219) - (1,219) -
23,973 27,292 51,212 35,137
Changes in assets and liabilities -
Receivables - net 7,568 (4,892) 1,936 10,954
Inventories 11,557 33,008 2,575 13,532
Accounts payable, customer deposits, advance
payments and other current liabilities (39,714) (28,686) (15,547) (11,289)
Accrued taxes and interest 745 7,636 (2,363) (5,328)
Recoverable/refundable gas costs 32,998 1,743 28,122 (7,489)
Prepayments 217 (376) (3,059) 107
Accrued postretirement benefits other
than pensions 2,118 2,528 7,724 3,589
Other - net (1,111) 5,282 (1,841) 6,367
Total adjustments 38,351 43,535 68,759 45,580
Net cash flows from operations 74,519 87,402 74,538 83,046
CASH FLOWS REQUIRED FOR FINANCING ACTIVITIES:
Sale of long-term debt 95,000 - 110,000 -
Reduction in long-term debt (92,733) - (92,733) (18,960)
Net change in short-term borrowings (19,000) (15,486) (7,750) 8,750
Dividends on common stock (20,250) (19,500) (27,000) (26,000)
Net cash flows required for financing activities (36,983) (34,986) (17,483) (36,210)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (39,611) (52,416) (59,102) (83,065)
Proceeds from sale of assets 9,204 - 9,204 -
Net cash flows required for investing activities (30,407) (52,416) (49,898) (83,065)
NET INCREASE (DECREASE) IN CASH 7,129 - 7,157 (36,229)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 48 20 20 36,249
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,177 $ 20 $ 7,177 $ 20
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. Corporate Restructuring.
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.
The Indiana Gas Board of Directors authorized management
to undertake the actions necessary and appropriate to
restructure Indiana Gas' operations and recognize a
resulting restructuring charge of $39.5 million ($24.5
million after tax) in the fourth quarter of fiscal 1997
as described below. These actions by Indiana Gas were
consistent with Indiana Energy's new growth strategy.
In July 1997, Indiana Gas advised its employees of its
plan to reduce its work force from about 1,025 full-time
employees at June 30, 1997, to approximately 800
employees within five years. The reductions are being
implemented through involuntary separation and
attrition. Indiana Gas recorded restructuring costs of
$5.4 million during the fourth quarter of fiscal 1997
related to the work force reductions. These costs
include separation pay in accordance with Indiana Gas'
severance policy, and net curtailment losses related to
these employees' postretirement and pension benefits. As
a result primarily of initial work force reductions
during September 1997, employees totaled approximately
895 as of June 30, 1998.
Further, Indiana Gas' management committed to sell,
abandon or otherwise dispose of certain assets,
including buildings, gas storage fields and intangible
plant. Indiana Gas recorded restructuring costs of
$34.1 million during the fourth quarter of fiscal 1997
to adjust the carrying value of those assets to estimated
fair value. Net assets held for disposal totaled $8.0
million at September 30, 1997, and were disposed of during the
quarter ended June 30, 1998.
In October 1997, Indiana Energy formed a new business
unit, IEI Services, LLC (IEI Services), to provide
support services to Indiana Energy and its subsidiaries,
as well as to third-parties in the future. The formation
of IEI Services was established by a contribution of
$32.2 million of fixed assets at net book value from
Indiana Gas, which subsequently dividended its
membership interest to Indiana Energy. The contributed
assets relate to the provision of administrative
services. Services provided by IEI Services include
human resources functions, information technology and
various financial services. These services had been
provided by Indiana Gas in the past.
3. 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 1998 1997 1998 1997
Interest (net of
amount capitalized) $ 9,691 $ 9,659 $15,162 $15,923
Income taxes $13,732 $16,557 $16,318 $26,229
4. 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.
5. Gas in Underground Storage.
Based on the average cost of purchased gas during June
1998, the cost of replacing the current portion of gas
in underground storage exceeded last-in, first-out cost
at June 30, 1998, by approximately $3,206,000.
6. 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).
7. Long-Term Debt.
In October 1997, Indiana Gas filed a registration
statement with the Securities and Exchange Commission
with respect to the issuance of up to $95 million in
debt securities and in November 1997 filed a prospectus
supplement with respect to $95 million in Medium-Term
Notes, Series F. Issues under this registration
statement follow. In December 1997, Indiana Gas issued
$35 million in aggregate principal amount of its Medium-
Term Notes, Series F as follows: $20 million of 6.34%
Notes due December 10, 2027; and $15 million of 6.36%
Notes due December 6, 2004. In January 1998, $15
million of 5.75% Medium-Term Notes, Series F, due
January 15, 2003, were issued. In April 1998, $15
million of 6.75% Medium-Term Notes, Series F, due March
15, 2028, were issued. In May 1998, $10 million of
6.36% Medium-Term Notes, Series F, due May 1, 2028, were
issued. In June 1998, the final issuance, $20 million
of 6.55% Medium-Term Notes, Series F, due June 30, 2028,
was made. The net proceeds from the sale of these new
debt securities were used to refinance certain of
Indiana Gas' long-term debt issues and to refinance
short-term obligations incurred in connection with
Indiana Gas' ongoing construction program and other
corporate purposes.
In December 1997, Indiana Gas retired $35 million of 6
5/8% Series D Notes and, called and redeemed $24.7
million of 8 1/2% Series B Debentures.
In March 1998, Indiana Gas redeemed $33 million of its
9.125% Series A Notes.
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 has
been seeking to recover the costs of the investigations
and work from insurance carriers and other potentially
responsible parties (PRPs).
The IURC has previously 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 August 12, 1997, Indiana Gas and PSI Energy, Inc.
(PSI) signed an agreement with respect to thirteen of
the nineteen sites where PSI is a PRP, which provides
for an equal sharing between Indiana Gas and PSI of past
and future response costs at the thirteen sites. 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. Five other sites are already the subject
of an agreement between Indiana Gas and Northern Indiana
Public Service Company (NIPSCO) which provides for
coordination of efforts and sharing of investigation and
clean-up costs incurred and to be incurred at the sites.
Indiana Gas and NIPSCO are currently negotiating with
PSI regarding these five sites for the purpose of
including PSI in the Indiana Gas-NIPSCO agreement.
On April 14, 1995, Indiana Gas filed suit in the United
States District Court for the Northern District of
Indiana, Fort Wayne Division (the Court) 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 believed that a
number of the Court's rulings were contrary to Indiana
law and appealed all adverse rulings to the United
States Court of Appeals for the Seventh Circuit. On
April 6, 1998, the appeals court issued a decision
dismissing the District Court action for lack of
diversity jurisdiction. The Seventh Circuit denied the
London market insurers' request to rehear and reconsider
the decision. The insurers are expected to appeal the
decision to the United States Supreme Court. Because
the adverse rulings have been vacated, Indiana Gas has
filed a complaint in Indiana state court to continue its
pursuit of insurance coverage. As of June 30, 1998,
Indiana Gas has obtained settlements from some insurance
carriers in an aggregate amount of approximately $14.7
million.
These environmental matters have had no material impact
on earnings since Indiana Gas has recorded all costs (in
aggregate approximately $15.0 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. Affiliate Transactions.
ProLiance Energy, LLC (ProLiance), a non-regulated
marketing affiliate of Indiana Energy, began providing
natural gas supply and related services to Indiana Gas
effective April 1, 1996. Indiana Gas' purchases from
ProLiance for resale and for injections into storage for
the three-, nine- and twelve-month periods ended June
30, 1998, totaled $41.5 million, $223.8 million and
$275.7 million, respectively. Indiana Gas' purchases
from ProLiance for the three-, nine- and twelve-month
periods ended June 30, 1997, totaled $51.6 million,
$252.6 million and $309.7 million, respectively.
The sale of gas and provision of other services to
Indiana Gas by ProLiance is subject to regulatory review
through the quarterly gas cost adjustment proceeding
currently pending before the IURC.
On September 12, 1997, the Indiana Utility
Regulatory Commission (IURC) issued the decision in
the complaint proceeding relating to the gas supply
and portfolio administration agreements between
ProLiance and Indiana Gas and ProLiance and
Citizens Gas. The IURC concluded that these
agreements are consistent with the public interest.
The management of Indiana Energy believes that the
decision is supportive of the utilities'
relationship with ProLiance in all material
respects.
The IURC's decision suggests that all material
provisions of the agreements between ProLiance and
the utilities are reasonable. In the decision the
IURC acknowledged that the utilities' purchases of
gas commodity from ProLiance at index prices, as
compared to ProLiance's actual cost, is not
unreasonable. The IURC also acknowledged that the
amounts paid by ProLiance to the utilities for the
prospect of using pipeline entitlements if and when
they are not required to serve the utilities' firm
customers, and the fees paid by the utilities to
ProLiance for portfolio administration services are
not unreasonable. Nevertheless, with respect to
each of these matters, the IURC concluded that
additional findings in the gas cost adjustment
(GCA) process would be appropriate and directed
that these matters be considered further in the
pending, consolidated GCA proceeding involving
Indiana Gas and Citizens Gas. The IURC has not yet
established a schedule for conducting these
additional proceedings.
In the appeal of the IURC's September 12, 1997
decision, the Petitioners, the Indiana Office of
Utility Consumer Counselor and the Citizens Action
Coalition of Indiana, including the United Senior
Action, Inc., have filed with the Indiana Court of
Appeals (Court) their appellants' briefs. Their
arguments primarily relate to whether the
implementation of the ProLiance service
arrangements with Indiana Gas and Citizens Gas
required pre-approval under an Indiana law relating
to deregulation and incentive ratemaking. They
also make certain arguments with respect to whether
the IURC was required to pre-approve the
establishment of those service arrangements under
other provisions of Indiana law and whether Indiana
Gas' actions were consistent with agreements
previously approved by the IURC. Indiana Gas,
Citizens Gas and ProLiance have filed their
appellees' briefs in defense of the IURC's
decision.
Although Indiana Gas' management believes that based
upon applicable Indiana law and the IURC's record of
proceedings in the ProLiance case the IURC's decision
should be upheld by the Court, there can be no assurance
as to that outcome.
While the results of the appeal and the pending GCA
proceeding cannot be predicted, management does not
expect this matter to have a material impact on Indiana
Gas' financial position or results of operations.
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 determine whether there
is, has been or may be a violation of Section 1 of the Sherman
Act. Indiana Gas intends to cooperate with the Department of
Justice in connection with the CID.
CIGMA, LLC, owned jointly and equally by IGC Energy,
Inc., an indirect wholly owned subsidiary of Indiana
Energy, and Citizens By-Products Coal Company, a wholly
owned subsidiary of Citizens Gas, provides materials
acquisition and related services that are used by
Indiana Gas. Indiana Gas' purchases of these services
during the three-, nine- and twelve-month periods ended
June 30, 1998, totaled $3.5 million, $11.8 million and
$16.8 million, respectively. Indiana Gas' purchases of
these services during all periods reported ending June
30, 1997, totaled $4.6 million.
IEI Services, a wholly owned subsidiary of Indiana
Energy, began providing support services to Indiana Gas
effective October 1, 1997. Services provided include
human resources functions, information technology and
various financial services. Amounts billed by IEI
Services to Indiana Gas for the three- and nine-month
periods ended June 30, 1998, totaled $7.2 million and
$19.3 million, respectively.
Indiana Gas also participates in a centralized cash
management program with its parent, affiliated
companies and banks which permits funding of checks
as they are presented.
Amounts owed to affiliates totaled $17.2 million and
$34.3 million at June 30, 1998 and 1997, respectively,
and are included in Accounts Payable on the Consolidated
Balance Sheets.
10. 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 Operation and Financial Condition
Results of Operations
Earnings
Before restructuring costs, which were recorded in the
fourth quarter of fiscal 1997, net income for the three-,
nine- and twelve-month periods ended June 30, 1998, when
compared to the same periods one year ago were as follows:
Periods Ended June 30
(Millions) 1998 1997
Three Months $ .3 $ 4.3
Nine Months $36.2 $43.9
Twelve Months (1) $30.3 $37.5
(1) Net income for the twelve-months ended June 30, 1998,
after restructuring costs was $5.8 million.
The decreases in net income before restructuring costs
for all periods are due primarily to significantly warmer
weather, offset somewhat by the addition of new
residential and commercial customers.
The Indiana Gas Board of Directors authorized
management to undertake the actions necessary and
appropriate to restructure Indiana Gas' operations and
recognize a resulting after-tax restructuring charge of
$24.5 million in the fourth quarter of fiscal 1997. These
actions by Indiana Gas were consistent with Indiana
Energy, Inc.'s (Indiana Gas' parent) growth strategy that
was approved by its board of directors during fiscal 1997
(see New Growth Strategy and Corporate Restructuring).
Margin (Operating Revenues Less Cost of Gas)
Margin for the quarter ended June 30, 1998, was $35.5
million compared to $43.6 million for the same period last
year. The decrease reflects weather 44 percent warmer
than the same period last year and 20 percent warmer than
normal, offset somewhat by the addition of new residential
and commercial customers.
Margin for the nine months ended June 30, 1998, was
$167.5 million compared to $181.6 million for the same
period last year. The decrease reflects weather 14
percent warmer than the same period last year and 13
percent warmer than normal, offset somewhat by the
addition of new residential and commercial customers.
Margin for the twelve-month period ended June 30,
1998, was $193.7 million compared to $209.7 million for
the same period last year. The decrease is primarily
attributable to weather 14 percent warmer than the same
period last year and 13 percent warmer than normal, offset
somewhat by the addition of new residential and commercial
customers.
Total system throughput (combined sales and
transportation) decreased 15 percent (3.4 MMDth) for the
third quarter of fiscal 1998, 8 percent (8.3 MMDth) for
the nine-month period and 6 percent (7.9 MMDth) for the
twelve-month period ended June 30, 1998, 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 $2.54 for the three-month period ended June 30, 1998,
compared to $2.88 for the same period one year ago. For
the nine-month period, cost of gas per unit decreased to
$3.60 in the current period compared to $3.71 for the same
period last year. For the twelve-month period, cost of
gas per unit decreased to $3.55 in the current period
compared to $3.57 for the same period last year.
Adjustments to Indiana Gas' rates and charges related
to the cost of gas are made through gas cost adjustment
(GCA) procedures established by Indiana law and
administered by the Indiana Utility Regulatory Commission
(IURC). The GCA passes through increases and decreases in
the cost of gas to Indiana Gas' customers dollar for
dollar.
Operating Expenses
Operation and maintenance expenses increased $.1
million and $1.8 million for the three- and nine-month
periods ended June 30, 1998, respectively, when compared
to the same periods one year ago due primarily to service
fees paid to Indiana Gas' affiliate, IEI Services, LLC
(IEI Services) related to assets now owned by IEI
Services. IEI Services began providing support services
to Indiana Gas effective October 1, 1997 (see resulting
lower depreciation and amortization below). These
increases were offset somewhat by lower labor costs and
related benefits resulting from work force reductions.
Operation and maintenance expenses decreased $1.5
million for the twelve-month period when compared to the
same period last year due in part to lower labor costs and
related benefits resulting from work force reductions and
lower costs for uncollectible accounts. Lower
distribution system costs also contributed to the decrease
as the prior period includes the impact of the
acceleration of projects into the last portion of fiscal
1996 allowed by the increased margin resulting from very
cold weather that year. The decrease was offset somewhat
by service fees paid to IEI Services related to assets now
owned by IEI Services.
Restructuring costs of $39.5 million were recorded in
the fourth quarter of fiscal 1997 related to the
implementation of Indiana Energy, Inc.'s new growth
strategy (see New Growth Strategy and Corporate
Restructuring).
Depreciation and amortization expense decreased for
the three-, nine- and twelve-month periods ended June 30,
1998, when compared to the same periods one year ago due
primarily to the current periods' amounts excluding
depreciation on assets transferred to IEI Services, and on
assets held for disposal which were written down to
estimated fair value in the fourth quarter of fiscal 1997.
The decreases were offset somewhat by 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-
and nine-month periods ended June 30, 1998, when compared
to the same periods one year ago due to decreases in
taxable income. Federal and state income taxes decreased
for the twelve-month period when compared to the same
period last year due primarily to the recording of
restructuring costs.
Taxes other than income taxes decreased for the three-
, nine- and twelve-month periods ended June 30, 1998, when
compared to the same periods one year ago due to lower
gross receipts tax expense and lower property tax expense.
Interest Expense
Interest expense decreased for the three-month period
ended June 30, 1998, when compared to the same period one
year ago due to a decrease in interest rates, offset
slightly by an increase in average debt outstanding.
Interest expense remained approximately the same for the
nine- and twelve-month periods when compared to the same
periods last year.
Other Operating Matters
New Growth Strategy and Corporate Restructuring
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 an average of 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 over 20 percent of its total
annual earnings within the next five years, and to
aggressively manage costs within its utility operations.
The Indiana Gas Board of Directors authorized
management to undertake the actions necessary and
appropriate to restructure Indiana Gas' operations and
recognize a resulting restructuring charge of $39.5
million ($24.5 million after-tax) in the fourth quarter of
fiscal 1997 as described below. These actions by Indiana
Gas were consistent with Indiana Energy's new growth
strategy.
In July 1997, Indiana Gas advised its employees of its
plan to reduce its work force from about 1,025 full-time
employees at June 30, 1997, to approximately 800 employees
within five years. The reductions are being implemented
through involuntary separation and attrition. Indiana Gas
recorded restructuring costs of $5.4 million during the
fourth quarter of fiscal 1997 related to the work force
reductions. These costs include separation pay in
accordance with Indiana Gas' severance policy, and net
curtailment losses related to these employees'
postretirement and pension benefits. As a result primarily
of initial work force reductions during September 1997,
employees totaled approximately 895 as of June 30, 1998.
Further, Indiana Gas' management committed to sell,
abandon or otherwise dispose of certain assets, including
buildings, gas storage fields and intangible plant. Indiana
Gas recorded restructuring costs of $34.1 million during the
fourth quarter of fiscal 1997 to adjust the carrying value
of those assets to estimated fair value. Net assets held for
disposal totaled $8.0 million at September 30, 1997, and
were disposed of during the quarter ended June 30, 1998.
In October 1997, Indiana Energy formed a new business
unit, IEI Services, LLC (IEI Services), to provide support
services to Indiana Energy and its subsidiaries, as well
as to third-parties in the future. The formation of IEI
Services was established by a contribution of $32.2
million of fixed assets at net book value from Indiana
Gas, which subsequently dividended its membership interest
to Indiana Energy. The contributed assets relate to the
provision of administrative services. Services provided
by IEI Services include human resources functions,
information technology and various financial services.
These services had been provided by Indiana Gas in the
past. IEI Services has been designed to avoid duplicate
business unit support costs, eliminate low-value support
activities and to assist in cost containment, which should
help Indiana Energy in meeting its earnings growth
targets.
As a result of the restructuring, Indiana Energy
expects reductions in future operating expenses, which
should help it to be more successful in an increasingly
competitive energy marketplace.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated
marketing afiliate of Indiana Energy, began providing
natural gas and related services to Indiana Gas and
Citizens Gas and Coke Utility (Citizens Gas) effective
April 1, 1996.
The sale of gas and provision of other services to
Indiana Gas by ProLiance is subject to regulatory review
through the quarterly gas cost adjustment proceeding
currently pending before the IURC.
On September 12, 1997, the Indiana Utility Regulatory
Commission (IURC) issued the decision in the complaint
proceeding relating to the gas supply and portfolio
administration agreements between ProLiance and Indiana
Gas and ProLiance and Citizens Gas. The IURC concluded
that these agreements are consistent with the public
interest. The management of Indiana Energy believes that
the decision is supportive of the utilities' relationship
with ProLiance in all material respects.
This decision is particularly important because the
IURC has recognized that significant customer benefits can
be achieved if utilities are encouraged to work toward
innovative customer solutions in the changing energy
marketplace. As a result of ProLiance's provision of
service to Indiana Gas and Citizens Gas, substantial gas
costs savings has been realized and will continue to be
realized for the customers of those utilities over the
initial term of the utilities' agreements. Further, the
IURC has recognized that benefits for investors are
appropriate when risks are being assumed by those
investors.
The IURC's decision suggests that all material
provisions of the agreements between ProLiance and the
utilities are reasonable. In the decision the IURC
acknowledged that the utilities' purchases of gas
commodity from ProLiance at index prices, as compared to
ProLiance's actual cost, is not unreasonable. The IURC
also acknowledged that the amounts paid by ProLiance to
the utilities for the prospect of using pipeline
entitlements if and when they are not required to serve
the utilities' firm customers, and the fees paid by the
utilities to ProLiance for portfolio administration
services are not unreasonable. Nevertheless, with respect
to each of these matters, the IURC concluded that
additional findings in the gas cost adjustment (GCA)
process would be appropriate and directed that these
matters be considered further in the pending, consolidated
GCA proceeding involving Indiana Gas and Citizens Gas. The
IURC has not yet established a schedule for conducting
these additional proceedings.
In the appeal of the IURC's September 12, 1997
decision, the Petitioners, the Indiana Office of Utility
Consumer Counselor and the Citizens Action Coalition of
Indiana, including the United Senior Action, Inc., have
filed with the Indiana Court of Appeals (Court) their
appellants' briefs. Their arguments primarily relate to
whether the implementation of the ProLiance service
arrangements with Indiana Gas and Citizens Gas required
pre-approval under an Indiana law relating to deregulation
and incentive ratemaking. They also make certain
arguments with respect to whether the IURC was required to
pre-approve the establishment of those service
arrangements under other provisions of Indiana law and
whether Indiana Gas' actions were consistent with
agreements previously approved by the IURC. Indiana Gas,
Citizens Gas and ProLiance have filed their appellees'
briefs in defense of the IURC's decision.
Although Indiana Gas' management believes that based
upon applicable Indiana law and the IURC's record of
proceedings in the ProLiance case the IURC's decision
should be upheld by the Court, there can be no assurance
as to that outcome.
While the results of the appeal and the pending GCA
proceeding cannot be predicted, management does not expect
this matter to have a material impact on Indiana Gas'
financial position or results of operations.
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 determine whether there
is, has been or may be a violation of Section 1 of the Sherman
Act. Indiana Gas intends to cooperate with the Department of
Justice in connection with the CID.
Environmental Matters
Indiana Gas is currently conducting environmental
investigations and work at certain sites that were the
locations of former manufactured gas plants. It has been
seeking to recover the costs of the investigations and
work from insurance carriers and other potentially
responsible parties (PRPs).
The IURC has previously 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 August 12, 1997, Indiana Gas and PSI Energy, Inc.
(PSI) signed an agreement with respect to thirteen of the
nineteen sites where PSI is a PRP, which provides for an
equal sharing between Indiana Gas and PSI of past and
future response costs at the thirteen sites. 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. Five other sites are already the subject of an
agreement between Indiana Gas and Northern Indiana Public
Service Company (NIPSCO) which provides for coordination
of efforts and sharing of investigation and clean-up costs
incurred and to be incurred at the sites. Indiana Gas and
NIPSCO are currently negotiating with PSI regarding these
five sites for the purpose of including PSI in the Indiana
Gas-NIPSCO agreement.
On April 14, 1995, Indiana Gas filed suit in the
United States District Court for the Northern District of
Indiana, Fort Wayne Division (the Court) 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
believed that a number of the Court's rulings were
contrary to Indiana law and appealed all adverse rulings
to the United States Court of Appeals for the Seventh
Circuit. On April 6, 1998, the appeals court issued a
decision dismissing the District Court action for lack of
diversity jurisdiction. The Seventh Circuit denied the
London market insurers' request to rehear and reconsider
the decision. The insurers are expected to appeal the
decision to the United States Supreme Court. Because the
adverse rulings have been vacated, Indiana Gas has filed a
complaint in Indiana state court to continue its pursuit
of insurance coverage. As of June 30, 1998, Indiana Gas
has obtained settlements from some insurance carriers in
an aggregate amount of approximately $14.7 million.
These environmental matters have had no material
impact on earnings since Indiana Gas has recorded all
costs (in aggregate approximately $15.0 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.
The Year 2000 Issue
Many existing computer programs use only two
digits to identify a year in the date field. These
programs were designed and developed without
considering the impact of the upcoming change in the
century. If not corrected, many computer applications
could fail or create erroneous results by or at the
year 2000.
The company has developed plans and is making
appropriate progress to address the exposures related
to the impact on its computer systems of the year 2000,
including modifications to and replacements of key
financial and operational systems required by December
31, 1999. The financial impact of making the required
changes is not expected to be material to the company's
financial position or results of operations.
Liquidity and Capital Resources
Indiana Gas' capitalization objectives are 55-65
percent common equity and preferred stock and 35-45
percent long-term debt. Indiana Gas' common equity
component was 57 percent of its total capitalization at
June 30, 1998.
New construction, normal system maintenance and
improvements, and information technology investments
needed to provide service to a growing customer base will
continue to require substantial expenditures. Capital
expenditures for fiscal 1998 are estimated at $59.0
million of which $39.6 million have been expended during
the nine-month period ended June 30, 1998. For the twelve
months ended June 30, 1998, capital expenditures totaled
$59.1 million.
Indiana Gas' long-term goal is to internally fund at
least 75 percent of its capital expenditure program. This
will help Indiana Gas to maintain its high
creditworthiness. The long-term debt of Indiana Gas is
currently rated Aa2 by Moody's Investors Service and AA-
by Standard & Poor's Corporation. For the twelve months
ended June 30, 1998, 53 percent of Indiana Gas' capital
expenditures was funded internally (i.e. from net income
less dividends plus charges to net income not requiring
funds). Indiana Gas' ratio of earnings to fixed charges
was 1.5 for the twelve months ended June 30, 1998. Before
restructuring costs, Indiana Gas' ratio of earnings to
fixed charges for the twelve months ended June 30, 1998,
was 3.8 (see Exhibit 12).
In October 1997, Indiana Gas filed a registration
statement with the Securities and Exchange Commission with
respect to the issuance of up to $95 million in debt
securities and in November 1997 filed a prospectus
supplement with respect to $95 million in Medium-Term
Notes, Series F. Issues under this registration statement
follow. In December 1997, Indiana Gas issued $35 million
in aggregate principal amount of its Medium-Term Notes,
Series F as follows: $20 million of 6.34% Notes due
December 10, 2027; and $15 million of 6.36% Notes due
December 6, 2004. In January 1998, Indiana Gas issued $15
million of 5.75% Medium-Term Notes, Series F, due January
15, 2003. In April 1998, $15 million of 6.75% Medium-Term
Notes, Series F, due March 15, 2028, were issued. In May
1998, $10 million of 6.36% Medium-Term Notes, Series F,
due May 1, 2028, were issued. In June 1998, the final
issuance, $20 million of 6.55% Medium-Term Notes, Series
F, due June 30, 2028, was made. The net proceeds from the
sale of these new debt securities were used to refinance
certain of Indiana Gas' long-term debt issues and to
refinance short-term obligations incurred in connection
with Indiana Gas' ongoing construction program and other
corporate purposes.
In December 1997, Indiana Gas retired $35 million of 6
5/8% Series D Notes and, called and redeemed $24.7 million
of 8 1/2% Series B Debentures.
In March 1998, Indiana Gas redeemed $33 million of its
9.125% Series A Notes.
Short-term cash working capital is required primarily
to finance customer accounts receivable, unbilled utility
revenues resulting from cycle billing, gas in underground
storage and capital expenditures until permanently
financed. Short-term borrowings tend to be greatest during
the heating season when accounts receivable and unbilled
utility revenues are at their highest. Indiana Gas'
commercial paper is rated P-1 by Moody's and A-1+ by
Standard & Poor's. Recently, bank lines of credit have
been the primary source of short-term financing.
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, Inc. and
subsidiary companies' actual results to differ
materially from those contemplated in any forward-
looking statements include, among others, the
following:
Factors affecting utility operations such as
unusual weather conditions; catastrophic weather-
related damage; unusual maintenance or repairs;
unanticipated changes to gas supply costs, or
availability due to higher demand, shortages,
transportation problems or other developments;
environmental or pipeline incidents; or gas pipeline
system constraints.
Increased competition in the energy environment,
including effects of industry restructuring and
unbundling.
Regulatory factors such as unanticipated changes
in rate-setting policies or procedures; recovery of
investments made under traditional regulation, and the
frequency and timing of rate increases.
Financial or regulatory accounting principles or
policies imposed by the Financial Accounting Standards
Board, the Securities and Exchange Commission, the
Federal Energy Regulatory Commission, state public
utility commissions, state entities which regulate
natural gas transmission, gathering and processing, and
similar entities with regulatory oversight.
Economic conditions including inflation rates and
monetary fluctuations.
Changing market conditions and a variety of other
factors associated with physical energy and financial
trading activities, including, but not limited to,
price, basis, credit, liquidity, volatility, capacity,
interest rate and warranty risks.
Availability or cost of capital, resulting from
changes in: Indiana Energy, Inc. and its subsidiaries,
interest rates, and securities ratings or market
perceptions of the utility industry and energy-related
industries.
Employee workforce factors, including changes in
key executives, collective bargaining agreements with
union employees or work stoppages.
Legal and regulatory delays and other obstacles
associated with mergers, acquisitions and investments
in joint ventures such as the ProLiance complaint
proceeding.
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, Inc. and its subsidiaries undertake no
obligation to publicly update or revise any forward-
looking statements, whether as a result of changes in
actual results, changes in assumptions, or other
factors affecting such statements.
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.
See Note 9 of the Notes to Consolidated Financial
Statements for discussion of the IURC's decision in the
complaint proceeding relating to the gas supply and
portfolio administration agreements between ProLiance
and Indiana Gas and ProLiance and Citizens Gas, and
discussion of the subsequent appeal to that decision.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Computation of Ratio of Earnings to
Fixed Charges, filed herewith.
27 Financial Data Schedule, filed herewith.
(b) On May 1, 1998, Indiana Gas filed a Current
Report on Form 8-K with respect to the
release by Indiana Energy, Inc. (Indiana
Energy) of unaudited summary financial
information to the investment community
regarding Indiana Energy's consolidated
results of operations, financial position
and cash flows for the three-, six- and
twelve-month periods ended March 31, 1998.
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Second
Quarter 1998
On July 31, 1998, Indiana Gas filed a
Current Report on Form 8-K with respect to
the release by Indiana Energy, Inc. (Indiana
Energy) of unaudited summary financial
information to the investment community
regarding Indiana Energy's consolidated
results of operations, financial position
and cash flows for the three-, nine- and
twelve-month periods ended June 30, 1998.
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Third
Quarter 1998
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, 1998 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
President
Dated August 13, 1998 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller