February 14, 2000
Securities and Exchange Commission
Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
Gentlemen:
We are transmitting herewith Indiana Energy, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999, pursuant to the requirements of Section 13
of the Securities Exchange Act of 1934.
Very truly yours,
/s/Pia M. O'Connor
Pia M. O'Connor
PMO: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 December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9091
INDIANA ENERGY, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1654378
(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 29,804,590 January 31,2000
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Balance Sheets
at December 31, 1999, and 1998
and September 30, 1999
Consolidated Statements of Income
Three Months Ended December 31, 1999 and 1998,
and Twelve Months Ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998,
and Twelve Months Ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Quantitative and Qualitative Disclosure about Market Risk
Part II - Other Information
Item 1 - Legal Proceedings
Item 4 - Submission of Matters to Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
Assets
(Thousands- Unaudited)
December 31 September 30
1999 1998 1999
Current Assets
Cash and cash equivalents $ 1,255 $ 20 $ 20
Accounts receivable, less reserves
of $1,739, $1,749 and $733,
respectively 37,256 28,610 16,895
Accrued unbilled revenues 36,634 40,577 8,136
Liquefied petroleum gas - at
average 815 892 810
Gas in underground storage - at
last-in, first-out cost
(See Note 7) 11,627 18,150 9,501
Prepaid gas delivery service 20,937 - 25,810
Prepayments and other 14,926 10,734 13,479
123,450 98,983 74,651
Investments in Unconsolidated
Affiliates 43,341 33,336 44,315
Utility Plant
Original cost 1,005,304 946,602 990,780
Less - accumulated depreciation
and amortization 407,887 376,133 398,912
597,417 570,469 591,868
NonUtility Plant
Original cost 64,066 58,456 63,626
Less - accumulated depreciation
and amortization 20,562 14,219 18,815
43,504 44,237 44,811
Deferred Charges
Unamortized debt discount
and expense 11,906 12,653 11,954
Regulatory income tax asset 2,741 1,778 2,741
Other 10,526 5,602 7,038
25,173 20,033 21,733
$ 832,885 $767,058 $777,378
The accompanying notes are an integral part of these statements.
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
(Thousands - Unaudited)
December 31 September 30
1999 1998 1999
Current Liabilities
Maturities and sinking fund requirements
of long-term debt $ 180 $ 10,174 $ 180
Notes payable and commercial paper 99,072 56,475 86,521
Accounts payable 31,759 29,677 26,311
Refundable gas costs 10,204 14,343 11,192
Customer deposits and advance payments 11,817 22,416 14,713
Accrued taxes 16,536 10,127 12,860
Accrued interest 5,274 4,984 1,182
Other current liabilities 24,938 26,840 26,386
199,780 175,036 179,345
Deferred Credits and Other Liabilities
Deferred income taxes 61,061 60,580 60,931
Accrued postretirement benefits other than pensions 28,901 26,150 28,286
Unamortized investment tax credit 8,152 9,082 8,383
Other 5,247 5,444 5,625
103,361 101,256 103,225
Capitalization
Long-term debt (see schedule) 213,195 183,386 183,183
Common stock (no par value) - authorized 200,000
shares - issued and outstanding 29,805,
30,121 and 29,787 shares, respectively 139,204 140,385 137,582
Less: Unearned Compensation - restricted
stock grants 1,545 1,377 822
137,659 139,008 136,760
Retained earnings 178,890 168,372 174,865
Total common shareholders' equity 316,549 307,380 311,625
Total Capitalization 529,744 490,766 494,808
$832,885 $767,058 $777,378
The accompanying notes are an integral part of these statements.
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except earnings per share amounts - Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1999 1998 1999 1998
Operating Revenues
Utility $137,247 $124,947 $431,361 $420,459
Other 347 294 1,953 888
137,594 125,241 433,314 421,347
Operating Expenses
Cost of gas (See Note 7) 79,063 67,937 226,817 230,372
Other operating 19,471 19,326 79,451 76,902
Depreciation and amortization 10,785 9,915 41,482 38,664
Taxes other than income taxes 4,495 4,251 16,129 14,072
113,814 101,429 363,879 360,010
Operating Income 23,780 23,812 69,435 61,337
Other Income
Equity in earnings of unconsolidated
affiliates (See Note 9) (1,602) 1,425 6,137 6,688
Other - net 155 376 312 2,469
(1,447) 1,801 6,449 9,157
Income Before Interest and Income Taxes 22,333 25,613 75,884 70,494
Interest Expense 5,252 4,231 17,679 16,209
Income Before Income Taxes 17,081 21,382 58,205 54,285
Income Taxes 5,865 7,106 19,514 18,161
Net Income $ 11,216 $ 14,276 $ 38,691 $ 36,124
Average Common Shares Outstanding 29,805 29,970 29,806 30,078
Basic and Diluted Earnings per Average
Share of Common Stock $ 0.38 $ 0.48 $ 1.30 $ 1.20
The accompanying notes are an integral part of these statements.
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1999 1998 1999 1998
Cash Flows from Operating Activities
Net income $ 11,216 $ 14,276 $ 38,691 $ 36,124
Adjustments to reconcile net income
to cash provided from operating
activities -
Depreciation and amortization 10,785 9,962 41,482 38,851
Deferred income taxes 130 132 (482) 1,192
Investment tax credit (232) (232) (930) (930)
Loss (gain) on sale or retirement
of assets - - - (2,102)
Undistributed earnings of
unconsolidated affiliates 1,602 (1,425) (6,137) (6,688)
12,285 8,437 33,933 30,323
Changes in assets and liabilities -
Receivables - net (48,859) (51,795) (4,703) 30,480
Inventories (2,987) 1,204 5,708 (1,191)
Accounts payable, customer
deposits, advance payments and
other current liabilities 1,404 10,396 (10,419) (16,969)
Accrued taxes and interest 7,768 8,409 6,699 (8,377)
Recoverable/refundable gas costs (988) 3,613 (4,139) 4,010
Accrued postretirement benefits
other than pensions 615 762 2,751 2,406
Prepaid gas delivery service 4,873 - (20,937)
Other - net (2,822) (488) (5,185) (1,958)
Total adjustments (28,711) (19,462) 3,708 38,724
Net cash flows from (reguired for)
operations 17,495 (5,186) 42,399 74,848
Cash Flows From (Required for) Financing
Activities
Repurchase of common stock - (3,645) (2,330) (4,834)
Sale of long-term debt 30,000 - 30,000 60,052
Reduction in long-term debt 12 (48) (10,185) (34,623)
Net change in short-term borrowings 12,551 22,770 42,597 (16,325)
Dividends on common stock (7,191) (6,924) (28,141) (27,140)
Net cash flows from (required for)
financing activities 35,372 12,153 31,941 (22,870)
Cash Flows From (Required for) Investing
Activities
Capital expenditures (15,914) (16,375) (70,284) (66,066)
Non-regulated investments in
unconsolidated affiliates - net (1,141) (673) (7,371) (7,035)
Cash distributions from unconsolidated
affiliates 413 776 4,550 7,806
Proceeds from sale of assets - - - 13,317
Net cash flows from (required for)
investing activities (16,642) (16,272) (73,105) (51,978)
Net increase (decrease) in cash 1,235 (9,305) 1,235 -
Cash and cash equivalents at beginning
of period 20 9,325 20 20
Cash and cash equivalents at end of period $ 1,255 $ 20 $ 1,255 $ 20
The accompanying notes are an integral part of these statements.
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
Consolidated Schedule of Long Term Debt
(In Thousands - Unaudited)
December 31
Total Due Within 1999 1998
Outstanding One Year Balance Balance
Long-term debt - Utility Due Date
Notes Payable
5.75% Series F January 15, 2003 $ 15,000 $15,000 $15,000
6.36% Series F December 6, 2004 15,000 15,000 15,000
6.54% Series E July 9, 2007 6,500 6,000 6,000
6.69% Series E June 10, 2013 5,000 5,000 5,000
7.15% Series E March 15, 2015 5,000 5,000 5,000
6.69% Series E December 21, 2015 5,000 5,000 5,000
6.69% Series E December 29, 2015 10,000 10,000 10,000
9.375% January 15, 2021 25,000 25,000 25,000
9.125% Series A February 15, 2021 7,000 7,000 7,000
6.31% Series E June 10, 2025 5,000 5,000 5,000
6.53% Series E June 10, 2025 10,000 10,000 10,000
6.42% Series E July 7, 2027 5,000 5,000 5,000
6.68% Series E July 7, 2027 3,500 3,000 3,000
6.34% Series F December 10, 2027 20,000 20,000 20,000
6.75% Series F March 15, 2028 14,849 14,849 14,964
6.36% Series F May 1, 2028 10,000 10,000 10,000
6.55% Series F June 30, 2028 20,000 20,000 20,000
7.08% Series G October 5, 2029 30,000 30,000 -
Total Long-term debt - Utility 211,849 211,849 181,964
Long-term debt - Non-utility
Noninterest bearing August 1, 2005 576 75 501 577
Variable Rate Note January 1, 2007 950 105 845 845
Total Long-term debt - Non-utility 1,526 180 1,346 1,422
Total Long-term debt $213,375 $ 180 $ 213,195 $ 183,386
Indiana Energy, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
The consolidated financial statements include the
accounts of Indiana Energy, Inc. (Indiana Energy or
the company) and its wholly and majority-owned
subsidiaries, after elimination of intercompany
transactions. The company's consolidated financial
statements include the operations of its regulated
gas distribution subsidiary, Indiana Gas Company,
Inc. (Indiana Gas), its non-regulated
administrative services provider, IEI Services,
LLC, its financing subsidiary, IEI Capital Corp.
(Capital Corp.), and its non-regulated subsidiaries
and investments grouped under IEI Investments, Inc.
(IEI Investments).
Indiana Gas provides natural gas and transportation
services to a diversified base of customers in 311
communities in 49 of Indiana's 92 counties. The non-
regulated operations of IEI Investments include IGC
Energy, Inc. (IGC Energy), Energy Realty, Inc.
(Energy Realty), Energy Financial Group, Inc. and
IEI Financial Services, LLC, all indirect wholly
owned subsidiaries of Indiana Energy, and interests
in ProLiance Energy, LLC, Energy Systems Group,
LLC, Reliant Services, LLC, CIGMA, LLC, Haddington
Energy Partners, L.P. and Pace Carbon Synfuels
Investors, L.P.
Investments in limited partnerships and less than
majority-owned affiliates are accounted for on the
equity method.
The interim condensed consolidated financial statements
included in this report have been prepared by Indiana
Energy, 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 Energy believes that the information in this
report reflects all adjustments necessary to fairly
state the results of the interim periods reported, that
all such adjustments are of a normal recurring nature,
and the disclosures are adequate to make the information
presented not misleading. These interim financial
statements should be read in conjunction with the
financial statements and the notes thereto included in
Indiana Energy's latest annual report on Form 10-K.
Because of the seasonal nature of Indiana Energy's gas
distribution operations, the results shown on a
quarterly basis are not necessarily indicative of annual
results.
2. Agreement to Merge with SIGCORP, Inc.
On June 14, 1999, Indiana Energy and SIGCORP, Inc.
(SIGCORP) jointly announced the signing of a
definitive agreement to combine into a new holding
company named Vectren Corporation (Vectren).
SIGCORP is an investor-owned energy and
telecommunications company that through its
subsidiaries provides electric and gas service to
southwest Indiana and energy and telecommunications
products and services throughout the Midwest and
elsewhere.
Under the agreement, Indiana Energy shareholders
will receive one share of Vectren common stock for
each share of Indiana Energy held at the closing
date. SIGCORP shareholders will receive 1.333
shares of Vectren common stock for each share of
SIGCORP held at the closing date. The transaction
is intended to be accounted for as a pooling of
interests. The transaction is also intended to be
a tax-free exchange of shares.
Indiana Gas Company, Inc. and Southern Indiana Gas
and Electric Company, Indiana Energy's and
SIGCORP's utility companies, will operate as
separate subsidiaries of Vectren.
The merger is conditioned, among other things, upon
the approvals of the shareholders of each company
and customary regulatory approvals. On December 17,
1999, the merger was approved by the shareholders
of each company. On December 20, 1999, the Federal
Energy Regulatory Commission (FERC) issued an order
approving the proposed merger. In approving the
merger, the FERC concluded that the merger was in
the public interest and would not adversely affect
competition, rates or regulation. On January 18,
2000, the Department of Justice informed the
Companies that it had concluded its review of the
Hart Scott Rodino notification filings and would
take no further action. The companies anticipate
that the remaining regulatory approvals can be
completed in the first quarter of calendar 2000.
Indiana Energy has incurred and deferred
transaction and related costs, which are included
in Other Deferred Charges in the Balance Sheet, of
$4.2 million, through December 31, 1999.
3. Acquisition of the Gas Distribution Assets of Dayton
Power and Light Co. Inc.
On December 15, 1999, the company announced that
the board of directors had approved a definitive
agreement under which the company will acquire the
natural gas distribution assets of Dayton Power and
Light Co., Inc. The acquisition, with a purchase
price of $425 million, is expected to be funded
with a bank facility which will be replaced over
time with permanent financing. This transaction is
conditioned upon the approval of several regulatory
bodies. Management hopes to complete the
transaction by the end of the second quarter of
2000.
4. Corporate Restructuring.
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 which included
estimated costs related to involuntary workforce
reductions. Since that time, the anticipated actions
have been taken. As a result, the remaining severance
accrual was eliminated and other operating expenses were
reduced by $1.7 million during fiscal year 1999.
5. Cash Flow Information.
For the purposes of the Consolidated Statements of Cash
Flows, Indiana Energy 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:
Three Months Ended Twelve Months Ended
December 31 December 31
Thousands 1999 1998 1999 1998
Interest (net of
amount
capitalized) $ 792 $ 893 $15,049 $13,898
Income taxes $2,000 $1,057 $16,919 $25,717
6. 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.
7. Gas in Underground Storage.
Based on the average cost of purchased gas during
December 1999, the cost of replacing the current portion
of gas in underground storage exceeded last-in,
first-out cost at December 31, 1999, by approximately
$11.2 million.
8. Refundable or Recoverable Gas Costs.
The cost of gas purchased and refunds from suppliers,
which differ from amounts recovered, currently, through
rates, are deferred and are being recovered or refunded
in accordance with procedures approved by the Indiana
Utility Regulatory Commission (IURC).
9. ProLiance Energy, LLC.
ProLiance Energy, LLC (ProLiance) is owned jointly
and equally by IGC Energy and Citizens By-Products
Coal Company, a wholly owned subsidiary of Citizens
Gas and Coke Utility (Citizens Gas). ProLiance is
the supplier of gas and related services to both
Indiana Gas and Citizens Gas, as well as a provider
of similar services to other utilities and
customers in Indiana and surrounding states.
ProLiance also is a power marketer which involves
buying electricity on the wholesale market and then
reselling it to marketers, utilities and other
customers. To effectively manage the risks
associated with power marketing, ProLiance utilizes
a disciplined approach to credit analysis, obtains
letters of credit or corporate guarantees when
appropriate, and does not assume the credit risk
between the buyer and seller. IGC Energy's
investment in ProLiance is accounted for using the
equity method.
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.
On April 22, 1999, the Indiana Supreme Court
granted a petition for transfer of the case and
will now consider the appeal of the IURC's decision
and issue its own decision on the merits of the
appeal at a later date. By granting transfer, the
Supreme Court has vacated the Court of Appeals'
decision.
If the Supreme Court reverses the IURC's decision,
the case will be remanded to the IURC for further
proceedings regarding the public interest in the
gas supply agreements. If the Supreme Court affirms
the IURC's decision, 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 and ProLiance have
provided all information requested and management
continues to believe that there are no significant
issues in this matter.
Indiana Gas continues to record gas costs in
accordance with the terms of the ProLiance contract
and Indiana Energy continues to record its
proportional share of ProLiance's earnings. A
pretax loss, of $1.3 million, was recognized as
Proliance's contribution to earnings in the first
quarter of fiscal year 2000. This loss was due to
ProLiance's net position on financial instruments
held to hedge storage inventories. Management
believes, in future periods, gains on these storage
inventories will be recognized to fully offset the
losses that ProLiance incurred, since sales
commitments are already in place. Pretax earnings
recognized from ProLiance for the twelve months
ended December 31, 1999, totaled $6.7 million
compared to $7.0 million for the same period last
year. Earnings recognized from ProLiance are
included in Equity in Earnings of Unconsolidated
Affiliates on the Consolidated Statements of
Income.
At December 31, 1999, Indiana Energy has reserved
approximately $1.7 million of ProLiance earnings
after tax. Total after-tax ProLiance earnings
recognized to date approximate $15.1 million. This
amount includes earnings from all of ProLiance's
business activities, and therefore is believed to
be a conservative estimate of the upper risk limit.
Resolution of the above proceedings may also impact
future operations and earnings contributions from
ProLiance. Based on the IURC's findings described
above, management believes the ProLiance issues may
be resolved near the levels that are already being
reserved, and therefore, while these proceedings
are pending, does not anticipate changing the level
at which it reserves ProLiance earnings. However,
no assurance of this outcome can be provided.
10. Pace Carbon Synfuels Investors, L.P.
On February 5, 1998, IEI Synfuels, Inc. (IEI
Synfuels), a wholly-owned, indirect subsidiary of
IEI Investments, purchased one limited partnership
unit in Pace Carbon Synfuels Investors, L.P. (Pace
Carbon), a Delaware limited partnership formed to
develop, own and operate four projects to produce
and sell coal-based synthetic fuel. Pace Carbon
converts coal fines (small coal particles) into
briquettes that are sold to major coal users such
as utilities and steel companies. This process is
eligible for federal tax credits under Section 29
of the Internal Revenue Code (Code) and the
Internal Revenue Service has issued a private
letter ruling with respect to the four projects.
IEI Synfuels has made an initial investment of $7.5
million in Pace Carbon (of which $7.3 million was
paid through December 31, 1999) for an 8.3 percent
ownership interest in the partnership. IEI
Synfuels has agreed to advance up to $1.8 million,
of which $0.4 million was paid in January, 2000,
against future cash flows of the partnership for
capital improvements and financing capital needs.
In addition to its initial investment, IEI Synfuels
has a continuing obligation to invest in Pace
Carbon approximately $40 million, with any such
additional investments to be funded solely from a
portion of the federal tax credits that are earned
from the production and sale of briquettes by the
projects.
The realization of the tax credits from this
investment is dependent upon a number of factors
including among others (1) the production
facilities must have been in operation by June 30,
1998, (2) adequate coal fines must be available to
produce the briquettes, and (3) the briquettes must
be produced and sold. All four of Pace Carbon's
coal-based synthetic fuel production facilities
were placed into service by June 30, 1998, and are
currently producing and selling briquettes in an
extended ramp up mode. Further enhancements to the
production process and project upgrades are
expected to be completed and in full production in
early calendar year 2000.
Generally, all briquettes produced through December
31, 1999 have been sold. However, due to a
deterioration in both the domestic and export coal
markets, domestic companies' coal supplies are up,
which in turn has reduced the demand and created
some price pressure for Pace Carbon's coal-based
synthetic product. Management does not believe
that the extended time required to make necessary
production process enhancements nor the current
coal market conditions will significantly affect
the long-term success of the projects.
Accordingly, management continues to believe that
significant project benefits, primarily in the form
of tax savings and tax credits realized, will be
achieved in the future, however, no assurance can
be given.
11. Haddington Energy Partners, L.P.
On October 9, 1998, IEI Investments committed to
invest $10 million in Haddington Energy Partners,
L.P. (Haddington). Haddington, a Delaware limited
partnership, raised $77 million to invest in
projects that represent a portfolio of development
opportunities, including natural gas gathering and
storage and electric power generation. Haddington's
investment opportunities will focus on acquiring
and building on projects in progress rather than
start-up ventures. In addition to Haddington's
initial investment in high deliverability gas
storage, additional investments, in line with their
original plan, are expected to be announced in
early 2000. Through December 31, 1999, IEI
Investments had paid approximately $2.5 million of
its commitment in Haddington, with additional
amounts to be paid as Haddington's portfolio grows.
In January, 2000, additional contributions toward
IEI Investments' commitment to Haddington, totaling
$4.6 million were paid.
12. Reliant Services, LLC
On June 30, 1998, IGC Energy and Cinergy Supply
Network, Inc., a subsidiary of Cinergy Corp.
(Cinergy), formed Reliant Services, LLC (Reliant),
an equally owned limited liability company, to
perform underground facilities locating and
construction services. In May 1999, Reliant
purchased the assets of two Indianapolis-based
companies that will enable it to enter that market.
The asset purchase was completed after Cinergy
received all necessary regulatory approvals. In
August 1999, Reliant entered the meter reading
business as well. Reliant is based in the
Indianapolis area and focuses on serving electric,
gas, telephone, cable and water companies in
Indiana, Ohio and Kentucky. Through December 31,
1999, IGC Energy had invested approximately $3.1
million in Reliant.
13. Common Stock.
On July 28, 1995, Indiana Energy's Board of Directors
authorized Indiana Energy to repurchase up to 700,000
shares of its outstanding common stock. During 1999,
the company repurchased 270,333 shares with an
associated cost of $5,975,000. During 1998, 56,533
shares were repurchased with an associated cost of
$1,189,000. Of the 700,000 shares authorized, 281,067
shares remain available for repurchase at December 31,
1999.
14. Environmental Costs.
In the past, Indiana Gas and others, including
former affiliates, and/or previous landowners,
operated facilities for the manufacturing of gas
and storage of manufactured gas. These facilities
are no longer in operation and have not been
operated for many years. Under currently applicable
environmental laws and regulations, Indiana Gas,
and the others, may now be required to take
remedial action if certain byproducts are found
above a regulatory threshold at these sites.
Indiana Gas has identified the existence, location
and certain general characteristics of 26 gas
manufacturing and storage sites. Based upon the
site work completed to date, Indiana Gas believes
that a level of contamination that may require some
level of remedial activity may be present at a
number of the sites. Removal activities continue at
several sites and a remedial
investigation/feasibility study (RI/FS) has been
completed at one of the sites under an agreed order
between Indiana Gas and the Indiana Department of
Environmental Management (IDEM), with a Record of
Decision (ROD) expected to be issued by IDEM in
early 2000. Although Indiana Gas has not begun an
RI/FS at additional sites, Indiana Gas has
submitted several of the sites to IDEM's Voluntary
Remediation Program (VRP), and is currently
conducting some level of remedial activities
including groundwater monitoring at certain sites
where deemed appropriate and will continue remedial
activities at the sites as appropriate and
necessary.
Based upon the work performed to date, Indiana Gas
has accrued investigation, remediation, groundwater
monitoring and related costs for the sites.
Estimated costs of certain remedial actions that
may likely be required have also been accrued.
Costs associated with environmental remedial
activities are accrued when such costs are probable
and reasonably estimable. Indiana Gas does not
believe it can provide an estimate of the
reasonably possible total remediation costs for any
site prior to completion of an RI/FS and the
development of some sense of the timing for
implementation of the site specific remedial
alternative, to the extent such remediation is
required. Accordingly, the total costs which may be
incurred in connection with the remediation of all
sites, to the extent remediation is necessary,
cannot be determined at this time.
Indiana Gas has been recovering the costs it has
incurred and expects to incur relating to the 26
sites 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 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. 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
accrued its proportionate share of the estimated
cost related to work not yet performed.
In early 1999, Indiana Gas filed a complaint in
Indiana state court to continue its pursuit of
insurance coverage from four insurance carriers,
with the trial scheduled for early 2000. As of
December 31, 1999, agreements in principle have
been reached with each of these insurers.
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.
15. Affiliate Transactions.
The obligations of Capital Corp., which provides
financing for the company and its non-utility
subsidiaries, are subject to a support agreement between
the company and Capital Corp., under which the company
has committed to make payments of interest and principal
on Capital Corp.'s securities in the event of default.
At December 31, 1999, Capital Corp. had $16.9 million in
notes payable. Under the terms of the support agreement
in addition to the cash flow of cash dividends paid to
the company by any of its consolidated subsidiaries, the
non-utility assets of the company are available as
recourse to holders of Capital Corp.'s securities. The
carrying value of such non-utility assets reflected in
the consolidated financial statements of the company is
approximately $93.0 million at December 31, 1999.
ProLiance 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- and twelve-month
periods ended December 31, 1999, totaled $76.2 million
and $240.7 million, respectively. Indiana Gas'
purchases from ProLiance for the three- and twelve-month
periods ended December 31, 1998, totaled $67.4 million
and $232.2 million, respectively.
ProLiance has a standby letter of credit facility with a
bank for letters up to $30 million. This facility is
secured in part by a support agreement from Indiana
Energy. Letters of credit outstanding at December 31,
1999, totaled $12.4 million.
CIGMA, LLC provides materials acquisition and related
services that are used by the company. The company's
purchases of these services during the three- and twelve-
month periods ended December 31, 1999, totaled $4.4
million and $17.3 million, respectively. The company's
purchases of these services during the three- and twelve-
month periods ended December 31, 1998, totaled $5.6
million and $20.3 million, respectively.
Indiana Energy is a one-third guarantor of certain
surety bond obligations of Energy Systems Group, LLC.
Indiana Energy's share totaled $14.7 million at December
31, 1999.
Amounts owed to affiliates totaled $29.8 million and
$26.4 million at December 31, 1999 and 1998,
respectively, and are included in Accounts Payable on
the Consolidated Balance Sheets.
16. Segment Reporting
The Company adopted SFAS No. 131 "Disclosure about
Segments of an Enterprise and Related Information"
in 1999. SFAS No. 131 establishes standards for the
reporting of information about operating segments
in financial statements and disclosures about
products, services and geographical areas.
Operating segments are defined as components of an
enterprise for which separate financial information
is available and evaluated regularly by the chief
operating decision-makers in deciding how to
allocate resources and in the assessment of
performance.
The operating segments of the Company are defined
as: (1) Gas Distribution, which provides local
distribution and transportation of natural gas to a
diversified base of customers in 311 communities
throughout Indiana, (2) Non-regulated operations,
which includes the various non-regulated
subsidiaries and investments of the Company, and
(3) Administrative Services/Other, which provides
administrative, financial and technical services to
Indiana Energy and its subsidiaries.
The company's identified operating segments are
strategic business units that offer different
products and services and which are managed and
aligned with the Company's strategic and financial
goals. The accounting policies of the identified
segments are consistent with those policies and
procedures described in the summary of significant
accounting policies. Intersegment sales are
generally based on prices that reflect the current
market conditions.
Certain financial information relating to IEI's
significant segments of business is presented below:
Three Months Twelve Months
Ended Ended
December 31 December 31
1999 1998 1999 1998
Operating revenues:
Gas Distribution $137,247 $124,947 $431,361 $420,459
Non-regulated Operations 573 547 1,850 1,430
Admin Svcs/Other 8,873 6,769 33,154 26,294
Total $146,693 $132,263 $466,365 $448,183
Interest expense:
Gas Distribution $ 5,084 $ 4,127 $ 16,969 $ 15,802
Non-regulated Operations 71 30 211 232
Admin Svcs/Other 374 356 1,500 971
Total $ 5,529 $ 4,513 $ 18,680 $ 17,005
Income Taxes:
Gas Distribution $ 6,205 $ 6,438 $ 16,734 $ 14,058
Non-regulated Operations (955) 226 279 2,091
Admin Svcs/Other 620 427 2,529 1,922
Total $ 5,870 $ 7,091 $ 19,542 $ 18,071
Net income:
Gas Distribution $ 10,896 $ 12,531 $ 29,742 $ 26,825
Non-regulated Operations (694) 1,047 4,810 6,152
Admin Svcs/Other 1,014 698 4,139 3,147
Total $ 11,216 $ 14,276 $ 38,691 $ 36,124
Depreciation and
amortization expense:
Gas Distribution $ 8,874 $ 8,315 $ 34,585 $ 32,758
Non-regulated Operations 12 11 45 74
Admin Svcs/Other 1,899 1,589 6,852 5,832
Total $ 10,785 $ 9,915 $ 41,482 $ 38,664
Capital expenditures:
Gas Distribution $ 14,769 $ 12,062 $ 62,880 $ 55,320
Non-regulated Operations - - - -
Admin Svcs/Other 1,145 4,313 7,404 10,746
Total $ 15,914 $ 16,375 $ 70,284 $ 66,066
Identifiable assets:
Gas Distribution $739,870 $686,757
Non-regulated Operations 48,861 39,680
Admin Svcs/Other 65,305 59,138
Total $854,036 $785,575
The following is a reconciliation to the financial statements:
Period ended
December 31
(unaudited) 1999 1998 1999 1998
Operating Revenues:
Total revenues for
segments $146,693 $132,263 $466,365 $448,183
Elimination of
intersegment revenues (9,099) (7,022) (33,051) (26,836)
Total consolidated
revenues $137,594 $125,241 $433,314 $421,347
Interest expense:
Total interest expense
for segments $ 5,529 $ 4,513 $ 18,680 $ 17,005
Elimination of
intersegment interest (277) (282) (1,001) (796)
Total consolidated
interest expense $ 5,252 $ 4,231 $ 17,679 $ 16,209
Income taxes:
Total income taxes for
segments $ 5,870 $ 7,091 $ 19,542 $ 18,071
Elimination of
intersegment income
taxes (5) 15 (28) 90
Total consolidated
income taxes $ 5,865 $ 7,106 $ 19,514 $ 18,161
Net income:
Total net income for
segments $ 11,216 $ 14,276 $ 38,691 $ 36,124
Elimination of
intersegment net income - - - -
Total consolidated net
income $ 11,216 $ 14,276 $ 38,691 $ 36,124
Identifiable assets:
Total assets for
segments $854,036 $785,575
Elimination of
intersegment assets (21,151) (18,517)
Total consolidated
assets $832,885 $767,058
17. 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 Energy, Inc. and Subsidiary Companies
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
Indiana Energy, Inc.'s (Indiana Energy or the
company) consolidated earnings are from the
operations of its gas distribution subsidiary,
Indiana Gas Company, Inc. (Indiana Gas), its non-
regulated administrative services provider, IEI
Services, LLC (IEI Services), and its non-regulated
subsidiaries and investments grouped under IEI
Investments, Inc. (IEI Investments).
The non-regulated operations of IEI Investments
include IGC Energy, Inc. (IGC Energy), Energy
Realty, Inc. (Energy Realty), Energy Financial
Group, Inc. and IEI Financial Services, LLC, all
indirect, wholly-owned subsidiaries of Indiana
Energy, and interests in ProLiance Energy, LLC,
Energy Systems Group, LLC, Reliant Services, LLC,
CIGMA, LLC, Haddington Energy Partners, L.P. and
Pace Carbon Synfuels Investors, L.P.
The company's growth strategy provides for growing
the earnings contribution from non-regulated
operations to over 35 percent of its total annual
earnings by 2004, and aggressively managing costs
within its utility operations and the non-regulated
administrative services provider (see Growth
Strategy and Corporate Restructuring).
Earnings
Income and earnings per average share of common stock
for the three- and twelve-month periods ended December
31, 1999, when compared to the same periods one year
ago, were as follows:
(Millions except Three Months Ended Twelve Months Ended
per share amounts) December 31 December 31
1999 1998 1999 1998
Income
Indiana Gas $10.9 $12.5 $29.7 $26.8
IEI Investments (0.7) 1.0 4.8 6.1
Admin Svcs/Other 1.0 0.8 4.2 3.2
Net Income $11.2 $14.3 $38.7 $36.1
Earnings per share
Indiana Gas $ .37 $ .42 $1.00 $ .89
IEI Investments (.02) .04 .16 .20
Admin Svcs/Other .03 .02 .14 .11
Total $ .38 $ .48 $1.30 $1.20
Utility Margin (Utility Operating Revenues Less Utility Cost of Gas)
Utility margin for the quarter ended December 31,
1999, was $58.2 million compared to $57.0 million for
the same period last year. Margins are lower than
expected due to weather being 17% warmer than normal
for both periods. The increase is primarily the
addition of new residential and commercial customers.
Utility margin for the twelve-month period ended
December 31, 1999, was $204.5 million compared to
$188.6 million for the same period last year. The
increase is primarily attributable to weather 8
percent colder than the same period last year, but 13
percent warmer than normal, and the addition of new
residential and commercial customers.
Total system throughput (combined sales and
transportation) increased 2.3 percent (0.8 MMDth) for
the first quarter of fiscal 1999 and 8.4 percent (8.4
MMDth) for the twelve-month period ended December 31,
1999, 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 increased
to $4.32 for the three-month period ended December 31,
1999, compared to $3.44 for the same period one year
ago. For the twelve-month period, cost of gas per unit
decreased to $3.26 in the current period compared to
$3.44 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 (excluding Cost of Gas)
Other operating expenses were relatively unchanged for
the three-month period ended December 31, 1999 when
compared to the same period one year ago.
Other operating expenses increased $2.7 million for
the twelve-month period when compared to the same
period last year due in part to costs associated with
the company's new customer information system. Rental
expense related to buildings previously owned also
contributed to the increase.
Depreciation and amortization expense increased $0.9
million for the three-month period and $2.8 million
for the twelve-month periods ended December 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 and the implementation of the company's new
customer information system.
Taxes other than income taxes increased $0.2 million
for the three-month period and $2.3 million for the
twelve- month period ended December 31, 1999,
primarily due to higher property tax expense, the
result of additions to plant, and an increase in the
gross receipts tax.
Other Income
Equity in earnings of unconsolidated affiliates
decreased for the three- and twelve-month periods
ended December 31, 1999, when compared to the same
periods one year ago due primarily to lower earnings
recognized from the company's energy marketing
affiliate, ProLiance Energy, LLC (ProLiance). A pretax
loss, of $1.3 million, was recognized as Proliance's
contribution to earnings for the quarter ended
December 31,1999. This loss was due to ProLiance's net
position on financial instruments held to hedge
storage inventories. Pretax earnings recognized from
ProLiance for the twelve months ended December 31,
1999, totaled $6.7 million compared to $7.0 million
for the same period last year.
Other-net decreased for the twelve-month period ended
December 31, 1999, when compared to the same period
one year ago due primarily to the gain on the sale of
certain non-utility assets by IGC Energy reflected in
the twelve-month period ended December 31, 1998.
Interest Expense
Interest expense increased for the three and twelve-
month periods ended December 31, 1999, when compared
to the same periods one year ago due primarily to the
additional average debt outstanding and higher
interest rates. The additional debt is partially
attributed to seasonal and weather shortfalls.
Income Taxes
Federal and state income taxes decreased for the three-
month period ended December 31, 1999, while increasing
for the twelve-month period when compared to the same
periods one year ago due to changes in taxable income.
Other Operating Matters
Agreement to Merge with SIGCORP, Inc.
On June 14, 1999, Indiana Energy and SIGCORP, Inc.
(SIGCORP) jointly announced the signing of a
definitive agreement to combine into a new holding
company named Vectren Corporation (Vectren).
SIGCORP is an investor-owned energy and
telecommunications company that through its
subsidiaries provides electric and gas service to
southwest Indiana and energy and telecommunication
products and services throughout the Midwest and
elsewhere.
Under the agreement, Indiana Energy shareholders
will receive one share of Vectren common stock for
each share of Indiana Energy held at the closing
date. SIGCORP shareholders will receive 1.333
shares of Vectren common stock for each share of
SIGCORP held at the closing date. The transaction
is intended to be accounted for as a pooling of
interests. The transaction is also intended to be
a tax-free exchange of shares.
Indiana Gas Company, Inc. and Southern Indiana Gas
and Electric Company, Inc., Indiana Energy's and
SIGCORP's utility companies, will operate as
separate subsidiaries of Vectren.
The merger is conditioned, among other things, upon
the approvals of the shareholders of each company
and customary regulatory approvals. On December 17,
1999, the merger was approved by the shareholders
of each company. On December 20, 1999, the Federal
Energy Regulatory Commission (FERC) issued an order
approving the proposed merger. In approving the
merger, the FERC concluded that the merger was in
the public interest and would not adversely affect
competition, rates or regulation. On January 18,
2000, the Department of Justice informed the
Companies that it had concluded its review of their
Hart Scott Rodino notification filings and would
take no further action. The companies anticipate
that the remaining regulatory approvals can be
completed in the first quarter of calendar 2000.
Acquisition of the Gas Distribution Assets of
Dayton Power and Light Co. Inc.
On December 15, 1999, the company announced that
the board of directors had approved a definitive
agreement under which the company will acquire the
natural gas distribution business of Dayton Power
and Light Co., Inc. The acquisition, with a
purchase price of $425 million, is expected to be
funded with a bank facility which will be replaced
over time with permanent financing. This
transaction is conditioned upon the approval of
several regulatory bodies. Management hopes to
complete the transaction by the end of the second
quarter of 2000.
Growth Strategy and Corporate Restructuring
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 which included
estimated costs related to involuntary workforce
reductions. Since that time, the anticipated actions
have been taken. As a result, the remaining severance
accrual was eliminated and other operating expenses were
reduced by $1.7 million during fiscal year 1999.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance) is owned jointly
and equally by IGC Energy and Citizens By-Products
Coal Company, a wholly owned subsidiary of Citizens
Gas and Coke Utility (Citizens Gas). ProLiance is
the supplier of gas and related services to both
Indiana Gas and Citizens Gas, as well as a provider
of similar services to other utilities and
customers in Indiana and surrounding states.
ProLiance also is a power marketer which involves
buying electricity on the wholesale market and then
reselling it to marketers, utilities and other
customers. To effectively manage the risks
associated with power marketing, ProLiance utilizes
a disciplined approach to credit analysis, obtains
letters of credit or corporate guarantees when
appropriate, and does not "sleeve" or assume the
credit risk between the buyer and seller. IGC
Energy's investment in ProLiance is accounted for
using the equity method.
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.
On April 22, 1999, the Indiana Supreme Court
granted a petition for transfer of the case and
will now consider the appeal of the IURC's decision
and issue its own decision on the merits of the
appeal at a later date. By granting transfer, the
Supreme Court has vacated the Court of Appeals'
decision.
If the Supreme Court reverses the IURC's decision,
the case will be remanded to the IURC for further
proceedings regarding the public interest in the
gas supply agreements. If the Supreme Court affirms
the IURC's decision, as described above, the
reasonableness of certain of the gas costs incurred
by Indiana Gas under the gas supply agreements will
be further reviewed by the IURC in the consolidated
GCA proceeding. The existence of significant
benefits to the utilities and their customers
resulting from ProLiance's services has not been
challenged on appeal. Indiana Gas and Citizens Gas
are continuing to utilize ProLiance for their gas
supplies.
On or about August 11, 1998, Indiana Gas, Citizens
Gas and ProLiance each received a Civil
Investigative Demand ("CID") from the United States
Department of Justice requesting information
relating to Indiana Gas' and Citizens Gas'
relationship with and the activities of ProLiance.
The Department of Justice issued the CID to gather
information regarding ProLiance's formation and
operations, and to determine if trade or commerce
has been restrained. Indiana Gas and ProLiance have
provided all information requested and management
continues to believe that there are no significant
issues in this matter.
Indiana Gas continues to record gas costs in
accordance with the terms of the ProLiance contract
and Indiana Energy continues to record its
proportional share of ProLiance's earnings. A
pretax loss, of $1.3 million, was recognized as
Proliance's contribution to earnings in the first
quarter of fiscal year 2000. This loss was due to
ProLiance's net position on financial instruments
held to hedge storage inventories. Management
believes, in future periods, gains on these storage
inventories will be recognized to fully offset the
losses that ProLiance incurred, since sales
commitments are already in place. Pretax earnings
recognized from ProLiance for the twelve months
ended December 31, 1999, totaled $6.7 million
compared to $7.0 million for the same period last
year. Earnings recognized from ProLiance are
included in Equity in Earnings of Unconsolidated
Affiliates on the Consolidated Statements of
Income.
At December 31, 1999, Indiana Energy has reserved
approximately $2.7 million of ProLiance earnings
after tax. Total after-tax ProLiance earnings
recognized to date approximate $15.1 million. This
amount includes earnings from all of ProLiance's
business activities, and therefore is believed to
be a conservative estimate of the upper risk limit.
Resolution of the above proceedings may also impact
future operations and earnings contributions from
ProLiance. Based on the IURC's findings described
above, management believes the ProLiance issues may
be resolved near the levels that are already being
reserved, and therefore, while these proceedings
are pending, does not anticipate changing the level
at which it reserves ProLiance earnings. However,
no assurance of this outcome can be provided.
Pace Carbon Synfuels Investors, L.P.
On February 5, 1998, IEI Synfuels, Inc. (IEI
Synfuels), a wholly-owned, indirect subsidiary of
IEI Investments, purchased one limited partnership
unit in Pace Carbon Synfuels Investors, L.P. (Pace
Carbon), a Delaware limited partnership formed to
develop, own and operate four projects to produce
and sell coal-based synthetic fuel. Pace Carbon
converts coal fines (small coal particles) into
briquettes that are sold to major coal users such
as utilities and steel companies. This process is
eligible for federal tax credits under Section 29
of the Internal Revenue Code (Code) and the
Internal Revenue Service has issued a private
letter ruling with respect to the four projects.
IEI Synfuels has made an initial investment of $7.5
million in Pace Carbon (of which $7.3 million was
paid through December 31, 1999) for an 8.3 percent
ownership interest in the partnership. IEI
Synfuels has also agreed to advance up to $1.8
million against future cash flows from the
partnership for capital improvements and financing
capital needs. In addition to its initial
investment, IEI Synfuels has a continuing
obligation to invest approximately $40 million,
with any such additional investments to be funded
solely from a portion of the federal tax credits
that are earned from the production and sale of
briquettes by the projects.
The realization of the tax credits from this
investment is dependent upon a number of factors
including among others (1) the production
facilities must have been in operation by June 30,
1998, (2) adequate coal fines must be available to
produce the briquettes, and (3) the briquettes must
be produced and sold. All four of Pace Carbon's
coal-based synthetic fuel production facilities
were placed into service by June 30, 1998, and are
currently producing and selling briquettes in an
extended ramp up mode. Further enhancements to the
production process and project upgrades are
expected to be completed and in full production in
early calendar year 2000.
Generally, all briquettes produced through December
31, 1999 have been sold. However, due to a
deterioration in both the domestic and export coal
markets, domestic companies' coal supplies are up,
which in turn has reduced the demand and created
some price pressure for Pace Carbon's coal-based
synthetic product. Management does not believe
that the extended time required to make necessary
production process enhancements nor the current
coal market conditions will significantly affect
the long-term success of the projects. Accordingly,
management continues to believe that significant
project benefits, primarily in the form of tax
savings and tax credits realized, will be achieved
in the future, however, no assurance can be given.
Haddington Energy Partners, L.P.
On October 9, 1998, IEI Investments committed to
invest $10 million in Haddington Energy Partners,
L.P. (Haddington). Haddington, a Delaware limited
partnership, raised $77 million to invest in
projects that represent a portfolio of development
opportunities, including natural gas gathering and
storage and electric power generation. Haddington's
investment opportunities will focus on acquiring
and building on projects in progress rather than
start-up ventures. In addition to Haddington's
initial investment in high deliverability gas
storage, additional investments, in line with their
original plan, are expected to be announced in
early 2000. Through December 31, 1999, IEI
Investments had paid approximately $2.5 million of
its commitment in Haddington, with additional
amounts to be paid as Haddington's portfolio grows.
In January, 2000, additional payments of IEI
Investments commitment to Haddington, totaling $4.6
million were paid.
Reliant Services, LLC
On June 30, 1998, IGC Energy and Cinergy Supply
Network, Inc., a subsidiary of Cinergy Corp.
(Cinergy), formed Reliant Services, LLC (Reliant),
an equally owned limited liability company, to
perform underground facilities locating and
construction services. In May 1999, Reliant
purchased the assets of two Indianapolis-based
companies and began operations. The asset purchase
was completed after Cinergy received all necessary
regulatory approvals. In August 1999, Reliant
entered the meter reading business as well.
Reliant is based in the Indianapolis area and
focuses on serving electric, gas, telephone, cable
and water companies in Indiana, Ohio and Kentucky.
Reliant's customer base includes major utility
companies in metropolitan areas in which it
currently operates. Through December 31, 1999, IGC
Energy had invested approximately $3.1 million in
Reliant.
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.
During 1999, the company 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, are designed to be Year 2000 compliant
and have been tested. Other maintenance and project
activities conducted in 1998 and 1999 brought the
remaining software environment into compliance.
Non-IT systems with embedded microcontrollers or
microchips were also evaluated to determine if they
were Year 2000 compliant. These systems included
buildings, transportation, monitoring equipment,
process controls, engineering and construction.
Software upgrades for equipment in the gas control
system were completed in July 1999.
The company also contacted all of its major
vendors, suppliers and customers to gather
information regarding the status of their Year 2000
compliance. Disruptions in the operations of these
parties could have had an adverse financial and
operational effect on the company.
Total costs expected to be incurred by the company
to address its Year 2000 issues were originally
estimated at $1.5 million, which included costs to
replace certain existing systems sooner than had
been planned. Actual total expenditures for the
Year 2000 issues approximated the original
estimate.
No significant problems have been encountered
related to the Year 2000 issue, through the date of
this report.
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 recovering 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 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. 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
accrued its proportionate share of the estimated
cost related to work not yet performed.
In early 1999, Indiana Gas filed a complaint in
Indiana state court to continue its pursuit of
insurance coverage from four insurance carriers,
with the trial scheduled for early 2000. As of
December 31, 1999, agreements in principle have
been reached with each of these insurers.
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.
For further information regarding the status of
investigation and remediation of the sites and
financial reporting, see Note 14 of the Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
Consolidated capitalization objectives for Indiana
Energy have been 55-65 percent common equity and
preferred stock and 35-45 percent long-term debt.
These objectives may have varied from time to time,
depending on particular business opportunities.
Indiana Energy's common equity component was 59.8
percent of total capitalization at December 31, 1999.
With the acquisition of the gas distribution assets of
Dayton Power and Light Cop, Inc., a credit facility
will be in place to fund the acquisition with term out
financing to follow. The long-term debt of Indiana
Energy is currently rated A+ by Standard & Poor's
Corporation.
Because of its current capital structure, the company
has the ability to issue additional long-term debt, if
necessary, to fund nonutility investments or for other
corporate purposes and still meet its capitalization
objectives. This is particularly important as it
relates to its growth strategy which provides for,
among other things, expansion of its nonutility
operations.
On July 28, 1995, Indiana Energy's Board of
Directors authorized Indiana Energy to repurchase
up to 700,000 shares of its outstanding common
stock. During 1999, the company repurchased
270,333 shares with an associated cost of
$5,975,000. During 1998, 56,533 shares were
repurchased with an associated cost of $1,189,000.
Of the 700,000 shares authorized, 281,067 shares
remain available for repurchase at December 31,
1999.
Indiana Gas' capitalization objectives, which are 55-
65 percent common equity and preferred stock and 35-45
percent long-term debt. These objectives may have
varied from time to time, depending on particular
business opportunities and seasonal factors that
affect the company's operation. Indiana Gas' common
equity component was 54 percent of its total
capitalization at December 31, 1999.
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 2000 are estimated at
$60.0 million of which $15.9 million have been
expended during the three-month period ended December
31, 1999. For the twelve months ended December 31,
1999, capital expenditures totaled $70.3 million.
Nonutility investments and commitments, excluding the
continuing obligation to invest in Pace Carbon as
previously discussed, totaled approximately $1.2
million and $7.5 million for the three and twelve-
month periods ended December 31, 1999.
In July, 1999, Indiana Gas filed a registration
statement with the Securities and Exchange Commission
which has become effective with respect to $100
million in debt securities. Indiana Gas expects to
issue this debt pursuant to a medium-term note
program, denominated as Series G. The net proceeds
from the sale of these new debt securities will be
used for general corporate purposes, including
repayment of long-term debt and financing of Indiana
Gas' continuing construction program.
On October 5, 1999, Indiana Gas issued $30 million in
principal amount of Series G Medium-term Notes bearing
interest at the per annum rate of 7.08% with a
maturity date of October 5, 2029.
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
December 31, 1999, 57 percent of Indiana Gas' capital
expenditures was funded internally (i.e. from utility
income less dividends plus charges to utility income
not requiring funds).
Short-term cash working capital is required primarily
to finance customer accounts receivable, unbilled
utility revenues resulting from cycle billing, gas in
underground storage, prepaid gas delivery services 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. At December 31, 1999
Capital Corp. had $17.0 million in outstanding notes
payable and Indiana Gas had $82.1 million in
outstanding commercial paper. Indiana Gas' commercial
paper is rated P-1 by Moody's and A-1+ by Standard &
Poor's. Prior to March 1, 1999, bank lines of credit
had been the primary source of short-term financing.
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, Indiana Energy's merger with SIGCORP and
the formation of Vectren, ProLiance, the
acquisition of the gas distribution assets of
Dayton Power and Light Co., Inc. 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's 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, 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, the formation of Vectren,
and the acquisition of the gas distribution business of
Dayton Power & Light Co., Inc.
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 the company and its vendors,
suppliers and customers to achieve Year 2000 readiness.
Indiana Energy undertakes 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 Energy's (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.
On average, less than 25% of the company's total
debt portfolio consists of short term notes and
commercial paper that are subject to fluctations in
market interest rates and other seasonal factors.
ProLiance engages in energy hedging activities to
manage pricing decisions, minimize the risk of
price volatility, and minimize price risk exposure
in the energy markets. ProLiance's market exposure
arises from storage inventory, imbalances and fixed-
price purchase and sale commitments which are
entered into to support ProLiance's operating
activities. Currently ProLiance buys and sells
physical commodities and utilizes financial
instruments to hedge its market exposure. However,
net open positions in terms of price, volume and
specified delivery point do occur. ProLiance
manages open positions with policies which limit
its exposure to market risk and require reporting
potential financial exposure to its management and
its members. As a result of ProLiance's risk
management policies, Indiana Energy does not
believe that ProLiance's exposure to market risk
will result in material earnings or cash flow loss
to the company.
At December 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.
Item 1. Legal Proceedings
See Note 9 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.
See Note 14 of the Notes to Consolidated
Financial Statements for litigation matters
involving insurance carriers pertaining to Indiana
Gas' former manufactured gas plants and storage
facilities.
Item 4. Submission of Matters to a Vote of Security Holders
On December 17, 1999, the shareholders of Indiana
Energy, at a special shareholder's meeting, voted
to approve the merger with SIGCORP, Inc. and the
formation of Vectren. At this meeting, there was no
change in the composition of the Board of Directors
of Indiana Energy.
The results of the shareholder's vote were:
For 21,593,317
Against 713,624
Abstentions 307,702
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Merger dated as of June
11,1999, among Indiana Energy, Inc., SIGCORP, Inc. and
Vectren Corporation (incorporated by reference to
Exhibit 2 to Indiana Energy's Current Report on Form 8-
K dated June 14, 1999, and filed on June 15, 1999).
2B Amendment No.1, dated December 14,
1999 to Agreement and Plan of
Merger (set forth in 2A, above)
(incorporated by reference to
Exhibit 2 of Indiana Energy's
Current Report on Form 8-K dated
December 16, 1999 and filed on
December 16, 1999).
2C Asset Purchase Agreement dated
December 14, 1999 between Indiana
Energy, Inc. and Dayton Power and
Light Co., Inc. and Number-3CHK
with a commitment letter for 364
-Day Credit Facility dated
December 16, 1999 (incorporated by
reference to Exhibit 2 and 99.1 of
Indiana Energy's Current Report on
Form 8-K dated December 14, 1999
and filed on December 28, 1999).
27 Financial Data Schedule, filed herewith.
(b) On October 29, 1999, Indiana Energy and
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
September 30, 1999. Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report and Press Release -
Fourth Quarter 1999
On November 22, 1999, Indiana Energy and Indiana
Gas filed a Current Report on Form 8-K with
respect to a analyst teleconference call., held
on November 21, 1999.
Item 5. Other Events
Item 7. Exhibits
99.01 Analyst script teleconference call dated
November 21, 1999
On December 15, 1999, Indiana Energy filed a
Current Report on Form 8-K with respect to the
signing of an Asset Purchase Agreement between
Indiana Energy and Dayton Power & Light Co., Inc.
Items reported include:
Item 5. Other Events
Item 7. Exhibits
99.1 Press release announcing Asset
Purchase Agreement dated
December 15, 1999.
On December 15, 1999, Indiana Energy filed a
Current Report on Form 8-K with respect to an
Analyst Call Script announcing the signing of an
Asset Purchase Agreement between Indiana Energy
and Dayton Power & Light Company. Items
reported include:
Item 5. Other Events
Item 7. Exhibits
99.1 Analyst Call Script for telephone
conference held December 15, 1999.
On December 17, 1999 Indiana Energy filed a
Current Report on Form 8-K announcing the
results of the special shareholders meeting
held on December 17, 1999 to approve the
merger of Indiana Energy, Inc. and SIGCORP, Inc.
Item 5. Other Events
Item 7. Exhibits
99.1 Presentation schedules provided to
shareholders at special shareholders
meeting of December 17, 1999.
On January 27, 2000, Indiana Energy and 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, 1999. Items reported include:
Item 5. Other Events
Item 7. Exhibits
100 Financial Analyst Report and Press Release - First
Quarter 2000
On January 27, 2000, Indiana Energy and Indiana
Gas filed a Current Report on Form 8-K with
respect to a analyst teleconference call., held
on January 27, 2000.
Item 5. Other Events
Item 7. Exhibits
100.01 Analyst script teleconference call dated
January 27, 2000
On January 27, 2000, Indiana Energy filed a
Current Report on Form 8-K with respect to a
consent form of Arthur Andersen, LLP.
Item 5. Other Events
Item 7. Exhibits
23 Consent form of Arthur Andersen, LLP.
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 ENERGY, INC.
Registrant
Dated February 14, 2000 /s/Carl L. Chapman
Carl L. Chapman
Senior Vice President and Chief
Financial Officer
Dated February 14, 2000 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller