May 13, 1999
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
March 31, 1999, 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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6494
INDIANA GAS COMPANY, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0793669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
1630 North Meridian Street, Indianapolis, Indiana 46202
(Address of principal executive offices) (Zip Code)
317-926-3351
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Common Stock - Without par value 9,080,770 April 30, 1999
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
at March 31, 1999, and 1998
and September 30, 1998
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998,
Six Months Ended March 31, 1999 and 1998,
and Twelve Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998,
and Twelve Months Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk
Part II - Other Information
Item 1 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security
Holders
Item 6 - Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands - Unaudited)
March 31 September 30
1999 1998 1998
UTILITY PLANT:
Original cost 958,685 935,390 937,977
Less - accumulated depreciation and
amortization 384,207 366,936 370,872
574,478 568,454 567,105
CURRENT ASSETS:
Cash and cash equivalents 2,803 7,031 742
Accounts receivable, less reserves of $2,660,
$2,565 and $900 respectively 42,247 43,409 16,145
Accrued unbilled revenues 23,603 23,275 6,453
Liquefied petroleum gas - at average cost 808 868 883
Gas in underground storage - at last-in,
first-out cost 6,106 904 19,373
Prepayments and other 4,968 3,849 4,760
80,535 79,336 48,356
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt discount and expense 12,419 12,563 12,874
Regulatory income tax asset 1,778 - 1,778
Other 3,281 4,614 3,041
17,478 17,177 17,693
$672,491 $664,967 $633,154
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands - Unaudited)
March 31 September 30
1999 1998 1998
CAPITALIZATION:
Common stock and paid-in capital 142,995 142,995 142,995
Retained earnings 119,883 116,068 97,354
Total common shareholder's equity 262,878 259,063 240,349
Long-term debt 181,939 147,000 181,975
444,817 406,063 422,324
CURRENT LIABILITIES:
Maturities and sinking fund requirements of
long-term debt 10,000 - 10,000
Notes payable 19,979 60,075 33,705
Accounts payable (See Note 8) 29,217 36,574 17,847
Refundable gas costs 28,013 19,282 10,730
Customer deposits and advance payments 8,758 9,118 19,229
Accrued taxes 18,004 18,596 4,469
Accrued interest 1,416 1,550 1,728
Other current liabilities 14,294 19,695 16,451
129,681 164,890 114,159
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 60,712 56,266 60,448
Accrued postretirement benefits other than pensions 26,599 24,450 25,169
Unamortized investment tax credit 8,849 9,779 9,313
Regulatory income tax liability - 1,874 -
Other 1,833 1,645 1,741
97,993 94,014 96,671
COMMITMENTS AND CONTINGENCIES (See Notes 7 & 8) - - -
$672,491 $664,967 $633,154
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Three Months Six Months
Ended March 31 Ended March 31
1999 1998 1999 1998
OPERATING REVENUES $ 161,484 $ 163,131 $ 286,431 $ 333,263
COST OF GAS (See Note 8) 83,993 94,241 151,930 201,293
MARGIN 77,491 68,890 134,501 131,970
OPERATING EXPENSES:
Operation and maintenance 22,135 21,449 43,664 41,275
Depreciation and amortization 8,441 8,097 16,756 16,007
Income taxes 14,354 11,427 20,792 21,256
Taxes other than income taxes 4,685 4,490 8,836 9,177
49,615 45,463 90,048 87,715
OPERATING INCOME 27,876 23,427 44,453 44,255
OTHER INCOME - NET 287 27 368 348
INCOME BEFORE INTEREST EXPENSE 28,163 23,454 44,821 44,603
INTEREST EXPENSE 4,165 4,196 8,292 8,756
NET INCOME $ 23,998 $ 19,258 $ 36,529 $ 35,847
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Twelve Months
Ended March 31
1999 1998
OPERATING REVENUES $ 418,812 $ 475,494
COST OF GAS (See Note 8) 221,641 273,634
MARGIN 197,171 201,860
OPERATING EXPENSES:
Operation and maintenance 86,557 81,227
Restructuring costs (See Note 2) - 39,531
Depreciation and amortization 33,102 33,650
Income taxes 16,985 5,246
Taxes other than income taxes 14,078 16,353
150,722 176,007
OPERATING INCOME 46,449 25,853
OTHER INCOME - NET 886 710
INCOME BEFORE INTEREST EXPENSE 47,335 26,563
INTEREST EXPENSE 15,770 16,796
NET INCOME $ 31,565 $ 9,767
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Six Months Twelve Months
Ended March 31 Ended March 31
1999 1998 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,529 $ 35,847 $ 31,565 $ 9,767
Adjustments to reconcile net income to cash
provided from operating activities -
Noncash restructuring costs - - - 32,838
Depreciation and amortization 16,817 16,101 33,256 33,837
Deferred income taxes 264 1,061 794 (12,672)
Investment tax credit (465) (465) (930) (930)
Gain on sale of assets - - (1,219) -
16,616 16,697 31,901 53,073
Changes in assets and liabilities -
Receivables - net (43,252) (32,534) 834 3,794
Inventories 13,299 18,184 (5,157) 3,156
Accounts payable, customer deposits,
advance payments and other current
liabilities (1,258) (18,579) (13,118) (3,487)
Accrued taxes and interest 13,223 8,907 (726) (1,223)
Recoverable/refundable gas costs 17,283 25,125 8,731 34,379
Prepayments (165) 65 (1,104) (2,847)
Accrued postretirement benefits other
than pensions 1,430 1,412 2,149 7,699
Other - net 982 (4,164) 8,780 (1,340)
Total adjustments 18,158 15,113 32,290 93,204
Net cash flows from operations 54,687 50,960 63,855 102,971
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Sale of long-term debt - 50,000 45,000 65,000
Reduction in long-term debt (36) (92,733) (61) (92,733)
Net change in short-term borrowings (13,726) 40,075 (40,096) 21,575
Dividends on common stock (14,000) (13,500) (27,750) (26,750)
Net cash flows from (required for)
financing activities (27,762) (16,158) (22,907) (32,908)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (24,864) (27,819) (54,380) (63,050)
Proceeds from sale of assets - - 9,204 -
Net cash flows required for investing
activities (24,864) (27,819) (45,176) (63,050)
NET INCREASE (DECREASE) IN CASH 2,061 6,983 (4,228) 7,013
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 742 48 7,031 18
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,803 $ 7,031 $ 2,803 $ 7,031
Indiana Gas Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
Indiana Gas Company, Inc. and its subsidiaries (Indiana
Gas or the company) provide natural gas and
transportation services to a diversified base of
customers in 311 communities in 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.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates. For example, during the second quarter of
1999, the company implemented a new customer information
system. In connection with the conversion process, at
March 31, 1999, certain estimates were made in the
recording of revenues which are believed to be
reasonable.
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.
During 1997, the Indiana Gas Board of Directors
authorized management to undertake the actions necessary
and appropriate to restructure Indiana Gas' operations
and recognize a resulting restructuring charge of $39.5
million ($24.5 million after-tax) in the fourth quarter
of fiscal 1997 as described below.
In July 1997, Indiana Energy 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 by 2002. 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
involuntary terminations planned under the company's
specific near-term employee reduction plan, which was
scheduled for completion by the end of fiscal 1999.
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 of initial work force
reductions during September 1997 and primarily attrition
thereafter, employees totaled 866 as of March 31, 1999.
This reduced employee count achieved most of the
reductions contemplated during the 2 year period for
which the restructuring accrual had been established.
During the second quarter of fiscal 1999, the company
reviewed its remaining accruals for costs associated
with the work force reductions. Taking into
consideration an unexpectedly high level of voluntary
terminations and the staffing implications related to
significant process change associated with the company's
recently implemented new customer information system,
the company determined that no additional significant
work force reductions were likely to occur during the
remainder of fiscal 1999, and accordingly, that an
adjustment to reverse the remaining severance accrual
was necessary. As a result, the severance accrual and
operation and maintenance expenses were reduced by $1.3
million during the second quarter of fiscal 1999.
Indiana Gas' management also 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 March 31, 1998, and were disposed of later in
fiscal 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.
The formation of IEI Services was established by a
contribution of $32 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. IEI Services provides
information technology, financial, human resources,
building and fleet 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:
Six Months Ended Twelve Months Ended
March 31 March 31
Thousands 1999 1998 1999 1998
Interest (net of
amount capitalized) $7,495 $8,900 $13,936 $16,035
Income taxes $9,374 $8,071 $21,694 $15,138
4. Utility 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 March
1999, the cost of replacing the current portion of gas
in underground storage exceeded last-in, first-out cost
at March 31, 1999, by approximately $2,778,000.
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. Environmental Costs.
Indiana Gas is currently conducting environmental
investigations and work at 26 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 determined that
these costs are not recoverable from utility customers.
Indiana Gas has completed the process of identifying
PRPs and now has PRP agreements in place covering 19 of
the 26 sites. The agreements provide for coordination
of efforts and sharing of investigation and clean-up
costs incurred and to be incurred at the sites. PSI
Energy, Inc. is a PRP on all 19 sites. Northern Indiana
Public Service Company is a PRP on 5 of the 19 sites.
These agreements limit Indiana Gas' share of past and
future response costs at these 19 sites to between 20
and 50 percent. Based on the agreements, Indiana Gas
has recorded a receivable from PRPs for their unpaid
share of the liability for work performed by Indiana Gas
to date, as well as accrued Indiana Gas' proportionate
share of the estimated cost related to work not yet
performed.
Indiana Gas has filed a complaint in Indiana state court
to continue its pursuit of insurance coverage from four
insurance carriers, with the trial scheduled for January
of 2000. As of March 31, 1999, Indiana Gas has obtained
settlements from other insurance carriers in an
aggregate amount of approximately $14.7 million.
These environmental matters have had no material impact
on earnings since costs recorded to date approximate
insurance settlements received. While Indiana Gas has
recorded all costs which it presently expects to incur
in connection with remediation activities, it is
possible that future events may require some level of
additional remedial activities which are not presently
foreseen.
8. Affiliate Transactions.
ProLiance Energy, LLC (ProLiance), a non-regulated
marketing affiliate of Indiana Energy, provides natural
gas supply and related services to Indiana Gas. Indiana
Gas' purchases from ProLiance for resale and for
injections into storage for the three-, six- and twelve-
month periods ended March 31, 1999, totaled $71.7
million, $139.1 million and $229.6 million,
respectively. Indiana Gas' purchases from ProLiance for
the three-, six- and twelve-month periods ended March
31, 1998, totaled $74.6 million, $178.7 million and
$286.3 million, respectively.
The sale of gas and provision of other services to
Indiana Gas by ProLiance is subject to regulatory review
through the quarterly gas cost adjustment proceeding
currently pending before the IURC.
On September 12, 1997, the Indiana Utility Regulatory
Commission (IURC) issued a decision finding the gas
supply and portfolio administration agreements between
ProLiance and Indiana Gas and ProLiance and Citizens Gas
(the gas supply agreements) to be consistent with the
public interest. The IURC's decision reflected the
significant gas cost savings to customers obtained by
ProLiance's services and suggested that all material
provisions of the agreements between ProLiance and the
utilities are reasonable. Nevertheless, with respect to
the pricing of gas commodity purchased from ProLiance
and two other pricing terms, the IURC concluded that
additional review in the gas cost adjustment (GCA)
process would be appropriate and directed that these
matters be considered further in the pending,
consolidated GCA proceeding involving Indiana Gas and
Citizens Gas. The IURC has not yet established a
schedule for conducting these additional proceedings.
The IURC's September 12, 1997, decision was appealed to
the Indiana Court of Appeals by certain Petitioners
including the Indiana Office of Utility Consumer
Counselor, the Citizens Action Coalition of Indiana and
a small group of large-volume customers. On October 8,
1998, the Indiana Court of Appeals issued a decision
which reversed and remanded the case to the IURC with
instructions that the gas supply agreements be
disapproved. The basis for the decision was that because
the gas supply agreements provide for index based
pricing of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have been
the subject of an application for approval of an
alternative regulatory plan under Indiana statutory law.
Management believes the Court of Appeals incorrectly
applied the alternative regulation statute. On April 22,
1999, the Indiana Supreme Court granted management's
petition for transfer of the case and will now consider
the appeal of the IURC's decision and issue its own
decision on the merits of the appeal at a later date.
By granting transfer, the Supreme Court has vacated the
Court of Appeals' decision.
If the Supreme Court reverses the IURC's decision , the
case will be remanded to the IURC for further
proceedings regarding the public interest in the gas
supply agreements. If the Supreme Court affirms the
IURC's decision, the reasonableness of certain of the
gas costs incurred by Indiana Gas under the gas supply
agreements will be further reviewed by the IURC in the
consolidated GCA proceeding. The existence of
significant benefits to the utilities and their
customers resulting from ProLiance's services has not
been challenged on appeal. Indiana Gas is continuing to
utilize ProLiance for its gas supply.
On or about August 11, 1998, Indiana Gas, Citizens Gas
and ProLiance each received a Civil Investigative Demand
("CID") from the United States Department of Justice
requesting information relating to Indiana Gas' and
Citizens Gas' relationship with and the activities of
ProLiance. The Department of Justice issued the CID to
gather information regarding ProLiance's formation and
operations, and to determine if trade or commerce has
been restrained. Indiana Gas is providing the Department
of Justice with information regarding the formation of
ProLiance in connection with the CID.
While the results of the ProLiance issues mentioned
above cannot be predicted, management does not expect
these matters to have a material impact on Indiana Gas'
financial position or results of operations. However,
no assurance can be provided.
CIGMA, LLC, owned jointly and equally by IGC Energy,
Inc., an indirect wholly owned subsidiary of Indiana
Energy, and Citizens By-Products Coal Company, a wholly
owned subsidiary of Citizens Gas, provides materials
acquisition and related services that are used by
Indiana Gas. Indiana Gas' purchases of these services
during the three-, six- and twelve-month periods ended
March 31, 1999, totaled $4.3 million, $8.9 million and
$16.2 million, respectively. Indiana Gas' purchases of
these services during the three-, six- and twelve-month
periods ended March 31, 1998, totaled $4.0 million, $8.3
million and $17.9 million, respectively.
IEI Services, a wholly owned subsidiary of Indiana
Energy, began providing support services to Indiana Gas
effective October 1, 1997. Services provided include
information technology, financial, human resources,
building and fleet services. Amounts billed by IEI
Services to Indiana Gas for the three-, six- and twelve-
month periods ended March 31, 1999, totaled $7.7
million, $14.4 million and $27.6 million, respectively.
Amounts billed by IEI Services to Indiana Gas for the
three- and six-month periods ended March 31, 1998,
totaled $6.1 million and $12.1 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 $20.7 million and
$31.7 million at March 31, 1999 and 1998, respectively,
and are included in Accounts Payable on the Consolidated
Balance Sheets.
9. Reclassifications.
Certain reclassifications have been made to the prior
periods' financial statements to conform to the current
year presentation. These reclassifications have no
impact on net income previously reported.
Indiana Gas Company, Inc. and Subsidiary Companies
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
Earnings
Net income for the three-, six- and twelve-month
periods ended March 31, 1999, when compared to the same
periods one year ago, were as follows:
Periods Ended March 31
(millions) 1999 1998
Three Months $24.0 $19.3
Six Months $36.5 $35.8
Twelve Months (1) $31.6 $ 9.8
(1)Reflects the recording of restructuring costs of
$24.5 million after-tax in the fourth quarter of
fiscal 1997 (see Growth Strategy and Corporate
Restructuring).
Margin (Operating Revenues Less Cost of Gas)
Margin for the quarter ended March 31, 1999, was $77.5
million compared to $68.9 million for the same period last
year. The increase is due primarily to weather 20 percent
colder than the same period last year but 8 percent warmer
than normal, and the addition of new residential and
commercial customers.
Margin for the six-month period ended March 31, 1999,
was $134.5 million compared to $132.0 million for the same
period last year. The increase is due primarily to
weather 1 percent colder than the same period last year
but 12 percent warmer than normal, and the addition of new
residential and commercial customers.
Margin for the twelve-month period ended March 31,
1999, was $197.2 million compared to $201.9 million for
the same period last year. The decrease is primarily
attributable to weather 7 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 all current periods was also impacted by a
one-time sale of native gas, offset somewhat by the higher
cost of unaccounted for gas and reduced collections of
gross receipts taxes.
Total system throughput (combined sales and
transportation) increased 14 percent (6.1 MMDth) for the
second quarter of fiscal 1999 and 1 percent (1.1 MMDth)
for the six-month period ended March 31, 1999, compared to
the same periods one year ago. Throughput decreased 2
percent (2.1 MMDth) for the twelve-month period ended
March 31, 1999, compared to the same period 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 $3.17 for the three-month period ended March 31, 1999,
compared to $3.85 for the same period one year ago. For
the six-month period, cost of gas per unit decreased to
$3.30 in the current period compared to $3.95 for the same
period last year. For the twelve-month period, cost of
gas per unit decreased to $3.23 in the current period
compared to $3.61 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 $.7
million for the three-month period ended March 31, 1999,
when compared to the same period one year ago due
primarily to higher administrative services costs
associated with the company's new customer information and
work management systems. Rental expense related to
buildings previously owned also contributed to the
increase. These increases were offset somewhat by an
adjustment to the company's severance accrual associated
with its 1997 restructuring plan (see Growth Strategy and
Corporate Restructuring).
Operation and maintenance expenses increased $2.4
million for the six-month period when compared to the same
period last year due primarily to higher administrative
services costs associated with the company's new customer
information and work management systems. Rental expense
related to buildings previously owned and training costs
related to the implementation of the company's new
customer information system also contributed to the
increase. These increases were offset somewhat by the
adjustment to the company's severance accrual.
Operation and maintenance expenses increased $5.3
million for the twelve-month period when compared to the
same period last year due primarily to service fees paid
to Indiana Gas' affiliate, IEI Services, LLC (IEI
Services) related to assets now owned by IEI Services.
IEI Services began providing support services to Indiana
Gas effective October 1, 1997 (see resulting lower
depreciation and amortization below). Higher
administrative services costs associated with the
company's new customer information and work management
systems and rental expense related to buildings previously
owned also contributed to the increase. These increases
were offset somewhat by lower labor-related costs
resulting from work force reductions and the adjustment to
the company's severance accrual.
Restructuring costs of $39.5 million (pre-tax) were
recorded in the fourth quarter of fiscal 1997 related to
the implementation of Indiana Energy's new growth strategy
during that year (see Growth Strategy and Corporate
Restructuring).
Depreciation and amortization expense increased for
the three- and six-month periods ended March 31, 1999,
when compared to the same periods one year ago due
primarily to additions to plant to serve new customers and
to maintain dependable service to existing customers.
Depreciation and amortization decreased for the twelve-
month period ended March 31, 1999, when compared to the
same period last year due primarily to the transfer of
assets to IEI Services, and assets held for disposal which
were written down to estimated fair value in the fourth
quarter of fiscal 1997. The decrease was offset somewhat
by additions to plant to serve new customers and to
maintain dependable service to existing customers.
Federal and state income taxes increased for the three-
and twelve-month periods ended March 31, 1999, while
decreasing for the six-month period when compared to the
same periods one year ago due primarily to changes in
taxable income.
Taxes other than income taxes remained approximately
the same for the three-month period ended March 31, 1999,
when compared to the same period one year ago. Taxes
other than income taxes decreased for the six-month period
due primarily to lower gross receipts tax expense. Taxes
other than income taxes decreased for the twelve-month
period due primarily to lower gross receipts tax expense
and lower property tax expense.
Interest Expense
Interest expense decreased for the three-, six- and
twelve-month periods ended March 31, 1999, when compared
to the same periods one year ago due primarily to
decreases in interest rates.
Other Operating Matters
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 the current 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 through 2003. To achieve
such earnings growth, Indiana Energy's aim is to grow
the earnings contribution from non-utility operations
to over 25 percent of its total annual earnings by
2003, and to aggressively manage costs within its
utility operations.
During 1997, the Indiana Gas Board of Directors
authorized management to undertake the actions
necessary and appropriate to restructure Indiana Gas'
operations and recognize a resulting restructuring
charge of $39.5 million ($24.5 million after-tax) in
the fourth quarter of fiscal 1997 as described below.
In July 1997, Indiana Energy 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 by 2002. 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 involuntary terminations planned under
the company's specific near-term employee reduction
plan, which was scheduled for completion by the end of
fiscal 1999. 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 of
initial work force reductions during September 1997 and
primarily attrition thereafter, employees totaled 866
as of March 31, 1999. This reduced employee count
achieved most of the reductions contemplated during the
2 year period for which the restructuring accrual had
been established. During the second quarter of fiscal
1999, the company reviewed its remaining accruals for
costs associated with the work force reductions.
Taking into consideration an unexpectedly high level of
voluntary terminations and the staffing implications
related to significant process change associated with
the company's recently implemented new customer
information system, the company determined that no
additional significant work force reductions were
likely to occur during the remainder of fiscal 1999,
and accordingly, that an adjustment to reverse the
remaining severance accrual was necessary. As a
result, the severance accrual and operation and
maintenance expenses were reduced by $1.3 million
during the second quarter of fiscal 1999.
Indiana Gas' management also 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 March 31, 1998, and were
disposed of later in fiscal 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. The formation of IEI Services was
established by a contribution of $32 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. IEI Services
provides information technology, financial, human
resources, building and fleet services. These services
had been provided by Indiana Gas in the past.
As a result of the restructuring, Indiana Energy
has realized reductions in operating costs which should
help it to be more successful in an increasingly
competitive energy marketplace.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated
marketing affiliate of Indiana Energy, provides natural
gas and related services to Indiana Gas and Citizens Gas
and Coke Utility (Citizens Gas).
The sale of gas and provision of other services to
Indiana Gas by ProLiance is subject to regulatory review
through the quarterly gas cost adjustment proceeding
currently pending before the IURC.
On September 12, 1997, the Indiana Utility Regulatory
Commission (IURC) issued a decision finding the gas supply
and portfolio administration agreements between ProLiance
and Indiana Gas and ProLiance and Citizens Gas (the gas
supply agreements) to be consistent with the public
interest. The IURC's decision reflected the significant
gas cost savings to customers obtained by ProLiance's
services and suggested that all material provisions of the
agreements between ProLiance and the utilities are
reasonable. Nevertheless, with respect to the pricing of
gas commodity purchased from ProLiance and two other
pricing terms, the IURC concluded that additional review
in the gas cost adjustment (GCA) process would be
appropriate and directed that these matters be considered
further in the pending, consolidated GCA proceeding
involving Indiana Gas and Citizens Gas. The IURC has not
yet established a schedule for conducting these additional
proceedings.
The IURC's September 12, 1997, decision was appealed
to the Indiana Court of Appeals by certain Petitioners
including the Indiana Office of Utility Consumer
Counselor, the Citizens Action Coalition of Indiana and a
small group of large-volume customers. On October 8, 1998,
the Indiana Court of Appeals issued a decision which
reversed and remanded the case to the IURC with
instructions that the gas supply agreements be
disapproved. The basis for the decision was that because
the gas supply agreements provide for index based pricing
of gas commodity sold by ProLiance to the utilities, the
gas supply agreements should have been the subject of an
application for approval of an alternative regulatory plan
under Indiana statutory law.
Management believes the Court of Appeals incorrectly
applied the alternative regulation statute. On April 22,
1999, the Indiana Supreme Court granted management's
petition for transfer of the case and will now consider
the appeal of the IURC's decision and issue its own
decision on the merits of the appeal at a later date. By
granting transfer, the Supreme Court has vacated the Court
of Appeals' decision.
If the Supreme Court reverses the IURC's decision ,
the case will be remanded to the IURC for further
proceedings regarding the public interest in the gas
supply agreements. If the Supreme Court affirms the IURC's
decision, the reasonableness of certain of the gas costs
incurred by Indiana Gas under the gas supply agreements
will be further reviewed by the IURC in the consolidated
GCA proceeding. The existence of significant benefits to
the utilities and their customers resulting from
ProLiance's services has not been challenged on appeal.
Indiana Gas is continuing to utilize ProLiance for its gas
supply.
On or about August 11, 1998, Indiana Gas, Citizens Gas
and ProLiance each received a Civil Investigative Demand
("CID") from the United States Department of Justice
requesting information relating to Indiana Gas' and
Citizens Gas' relationship with and the activities of
ProLiance. The Department of Justice issued the CID to
gather information regarding ProLiance's formation and
operations, and to determine if trade or commerce has been
restrained. Indiana Gas is providing the Department of
Justice with information regarding the formation of
ProLiance in connection with the CID.
While the results of the ProLiance issues mentioned
above cannot be predicted, management does not expect
these matters to have a material impact on Indiana Gas'
financial position or results of operations. However, no
assurance can be provided.
The Year 2000 Issue
Many existing computer programs use only two
digits to identify a year in the date field. These
programs were designed and developed without
considering the impact of the upcoming change in the
century. If not corrected, many computer applications
could fail or create erroneous results by or at the
year 2000. This issue relates not only to information
technology (IT) but also to non-IT related equipment
and plant that may contain embedded date-sensitive
microcontrollers or microchips.
The company has identified what it believes are
its most significant worst case Year 2000 scenarios for
the purpose of helping it to focus its Year 2000
efforts. These scenarios are the interference with the
company's ability to (1) receive and deliver gas to
customers, (2) monitor gas pressure throughout the
company's gas distribution system, (3) bill and receive
payments from customers, and (4) maintain continuous
operation of its computer systems. As discussed below,
the company is taking the steps necessary to ensure
that these worst case scenarios are addressed.
The company has evaluated the Year 2000 readiness
of all IT hardware and software including the
mainframe, network, servers, personal computers, system
and application software and telecommunications. Almost
all hardware was found to be in compliance as a result
of projects conducted in 1997 and 1998. Replacements of
major customer information and billing systems, which
had already begun in 1997, were placed into service in
January 1999. These new systems, driven by the need for
additional functionality and business flexibility, were
also designed to be Year 2000 compliant. Other
maintenance and project activities conducted in 1998
and 1999 and activities scheduled for the remainder of
1999 have been initiated to bring the remaining
software environment into compliance. The projects
include replacements, upgrades and rewrites. The
company's plan for IT items includes the following
phases and timeline: (a) Assessment - completed in
1998, (b) Strategy - completed in 1998 and (c) Design,
Implementation, Testing and Validation - in process and
to be substantially completed by June 30, 1999, and
fully completed by October 31, 1999. The company has
not found it necessary to postpone work on any other
critical IT projects because of efforts to achieve Year
2000 compliance.
Non-IT systems with embedded microcontrollers or
microchips are being evaluated to determine if they are
Year 2000 compliant. These systems include buildings,
transportation, monitoring equipment, process controls,
engineering and construction. The internal assessment
process has generally been completed, and few
compliance issues have been found to date. These
consist primarily of needed software upgrades for
equipment in the gas control system. It is anticipated
these upgrades will be completed by July of 1999.
The company is currently in the process of
contacting its major vendors, suppliers and customers
to gather information regarding the status of their
Year 2000 compliance. Although compliance issues
identified from these inquiries will be addressed, this
process may not fully ensure these parties' Year 2000
compliance. Disruptions in the operations of these
parties could have an adverse financial and operational
effect on the company.
The company has made significant progress in
developing its contingency plan related to Year 2000
issues. This plan will include modifying the company's
already existing plans for business resumption,
information technology disaster recovery and gas supply
contingencies, and would allow for, among other things,
alternate recovery locations, backup power generation,
adequate material supplies and personnel requirements.
This plan is expected to be in place, tested and
refined as needed by December 31, 1999.
Total costs expected to be incurred by the company
to remedy its Year 2000 issues are estimated at $1.5
million, which include costs estimated to replace
certain existing systems sooner than otherwise planned.
Management expects that Year 2000 issues will be
addressed on a schedule and in a manner that will
prevent such issues from having a material impact on
the company's financial position or results of
operations. However, while the company has and will
continue to manage its Year 2000 compliance plan, there
can be no assurance that the company will be successful
in identifying and addressing all material Year 2000
issues including those related to the company's
vendors, suppliers and customers.
Environmental Matters
Indiana Gas is currently conducting environmental
investigations and work at 26 sites that were the
locations of former manufactured gas plants. It has
been seeking to recover the costs of the investigations
and work from insurance carriers and other potentially
responsible parties (PRPs). The IURC has determined
that these costs are not recoverable from utility
customers.
Indiana Gas has completed the process of
identifying PRPs and now has PRP agreements in place
covering 19 of the 26 sites. The agreements provide
for coordination of efforts and sharing of
investigation and clean-up costs incurred and to be
incurred at the sites. PSI Energy, Inc. is a PRP on
all 19 sites. Northern Indiana Public Service Company
is a PRP on 5 of the 19 sites. These agreements limit
Indiana Gas' share of past and future response costs at
these 19 sites to between 20 and 50 percent. Based on
the agreements, Indiana Gas has recorded a receivable
from PRPs for their unpaid share of the liability for
work performed by Indiana Gas to date, as well as
accrued Indiana Gas' proportionate share of the
estimated cost related to work not yet performed.
Indiana Gas has filed a complaint in Indiana state
court to continue its pursuit of insurance coverage
from four insurance carriers, with the trial scheduled
for January of 2000. As of March 31, 1999, Indiana Gas
has obtained settlements from other insurance carriers
in an aggregate amount of approximately $14.7 million.
These environmental matters have had no material
impact on earnings since costs recorded to date
approximate insurance settlements received. While
Indiana Gas has recorded all costs which it presently
expects to incur in connection with remediation
activities, it is possible that future events may
require some level of additional remedial activities
which are not presently foreseen.
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 58 percent of its total capitalization at
March 31, 1999.
New construction and normal system maintenance and
improvements needed to provide service to a growing
customer base will continue to require substantial
expenditures. Capital expenditures for fiscal 1999 are
estimated at $61.7 million of which $24.9 million have
been expended during the six-month period ended March 31,
1999. For the twelve months ended March 31, 1999, capital
expenditures totaled $54.4 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 March 31, 1999, 68 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 4.0 for the twelve months ended March 31, 1999 (see
Exhibit 12).
Short-term cash working capital is required primarily
to finance customer accounts receivable, unbilled utility
revenues resulting from cycle billing, gas in underground
storage and capital expenditures until permanently
financed. Short-term borrowings tend to be greatest during
the heating season when accounts receivable and unbilled
utility revenues are at their highest. Recently, bank
lines of credit have been the primary source of short-term
financing. Effective in March 1999, Indiana Gas
implemented a $100 million commercial paper program.
Indiana Gas' commercial paper is rated P-1 by Moody's and
A-1+ by Standard & Poor's.
Forward-Looking Information
A "safe harbor" for forward-looking statements is
provided by the Private Securities Litigation Reform
Act of 1995 (Reform Act of 1995). The Reform Act of
1995 was adopted to encourage such forward-looking
statements without the threat of litigation, provided
those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements
identifying important factors that could cause the
actual results to differ materially from those
projected in the statement. Certain matters described
in Management's Discussion and Analysis of Results of
Operations and Financial Condition, including, but not
limited to, Indiana Energy's earnings growth strategy,
ProLiance and Year 2000 issues, are forward-looking
statements. Such statements are based on management's
beliefs, as well as assumptions made by and information
currently available to management. When used in this
filing the words "aim," "anticipate," "endeavor,"
"estimate," "expect," "objective," "projection,"
"forecast," "goal," and similar expressions are
intended to identify forward-looking statements. In
addition to any assumptions and other factors referred
to specifically in connection with such forward-looking
statements, factors that could cause Indiana Energy,
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 judicial and
administrative proceedings.
Costs and other effects of legal and
administrative proceedings, settlements,
investigations, claims and other matters, including,
but not limited to, those described in the Other
Operating Matters section of Management's Discussion
and Analysis of Results of Operations and Financial
Condition.
Changes in federal, state or local legislative
requirements, such as changes in tax laws or rates,
environmental laws and regulations.
The inability of Indiana Energy, Inc. and its
subsidiaries and their vendors, suppliers and customers
to achieve Year 2000 readiness.
Indiana Energy, Inc. and its subsidiaries undertake no
obligation to publicly update or revise any forward-
looking statements, whether as a result of changes in
actual results, changes in assumptions, or other
factors affecting such statements.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Indiana Gas' (the company's) debt portfolio
contains a substantial amount of fixed-rate long-term
debt and, therefore, does not expose the company to the
risk of material earnings or cash flow loss due to
changes in market interest rates. At March 31, 1999,
the company was not engaged in other contracts which
would cause exposure to the risk of material earnings
or cash flow loss due to changes in market commodity
prices, foreign currency exchange rates, or interest
rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 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 8 of the Notes to Consolidated Financial
Statements for discussion of litigation matters
relating to the gas supply and portfolio administration
agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas.
Item 4. Submission of Matters to a Vote of Security
Holders
At the annual meeting of shareholders of Indiana Gas
Company, Inc. on January 27, 1999, (the "Annual
Meeting"), the shareholders elected the following
directors by the vote specified opposite each
director's name:
Broker
Director Votes For(1) Votes Withheld Abstentions Non-Vote
Paul T. Baker 9,080,770 - - -
Niel C. Ellerbrook 9,080,770 - - -
L. A. Ferger 9,080,770 - - -
Otto N. Frenzel III 9,080,770 - - -
William G. Mays 9,080,770 - - -
J. Timothy McGinley 9,080,770 - - -
John E. Worthen 9,080,770 - - -
(1) All outstanding shares of Indiana Gas' common stock
are held by its parent company, Indiana Energy, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-A Amended appendices to the Gas
Sales and Portfolio Administration
Agreement between Indiana Gas
Company, Inc. and ProLiance
Energy, LLC effective November 1,
1998, filed herewith.
12 Computation of Ratio of
Earnings to Fixed Charges, filed
herewith.
27 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
On January 27, 1999, Indiana Gas filed a
Current Report on Form 8-K with respect to
the release of summary financial information
to the investment community regarding
Indiana Energy's consolidated results of
operations, financial position and cash
flows for the three- and twelve-month
periods ended December 31, 1998. Items
reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - First Quarter 1999
On April 22, 1999, Indiana Gas filed a
Current Report on Form 8-K with respect to a
press release (dated April 22, 1999),
announcing the decision by the Supreme Court
of Indiana to grant transfer of and
reconsider the ProLiance appeal. Items
reported include:
Item 5. Other Events
Press release dated April 22, 1999
On April 30, 1999, Indiana Gas filed a
Current Report on Form 8-K with respect to
the release of summary financial information
to the investment community regarding
Indiana Energy's consolidated results of
operations, financial position and cash
flows for the three-, six- and twelve-month
periods ended March 31, 1999. Items
reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Second Quarter 1999
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 May 13, 1999 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
President
Dated May 13, 1999 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller