February 11, 1999
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, 1998, pursuant to the requirements of Section 13
of the Securities Exchange Act of 1934.
Very truly yours,
/s/Douglas S. Schmidt
Douglas S. Schmidt
DSS:tmw
Enclosures
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
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 29,890,736 January 31, 1999
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Balance Sheets
at December 31, 1998, and 1997
and September 30, 1998
Consolidated Statements of Income
Three Months Ended December 31, 1998 and 1997,
and Twelve Months Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997,
and Twelve Months Ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II - Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands - Unaudited)
December 31 September 30
1998 1997 1998
CURRENT ASSETS:
Cash and cash equivalents $ 20 $ 20 $ 9,325
Accounts receivable, less reserves of $1,749,
$2,104 and $900 respectively (See Note 12) 28,610 53,544 10,939
Accrued unbilled revenues 40,577 46,123 6,453
Liquefied petroleum gas - at average cost 892 878 883
Gas in underground storage - at last-in,
first-out cost 18,150 17,024 19,373
Prepayments and other 6,667 5,162 5,483
94,916 122,751 52,456
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 33,336 27,717 32,186
UTILITY PLANT:
Original cost 946,602 922,491 937,977
Less - accumulated depreciation and amortization 376,133 358,750 370,872
570,469 563,741 567,105
NONUTILITY PLANT:
Original cost 58,456 45,803 55,225
Less - accumulated depreciation and amortization 14,219 9,004 12,613
44,237 36,799 42,612
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt discount and expense 12,653 8,139 12,954
Regulatory income tax asset 1,778 - 1,778
Other 4,225 6,051 3,259
18,656 14,190 17,991
$761,614 $765,198 $712,350
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Thousands except shares - Unaudited)
December 31 September 30
1998 1997 1998
CURRENT LIABILITIES:
Maturities and sinking fund requirements of long-term debt $ 10,174 $ 272 $ 10,119
Notes payable 56,475 72,800 33,705
Accounts payable (See Note 12) 29,677 47,324 19,416
Refundable gas costs 14,343 10,333 10,730
Customer deposits and advance payments 22,416 19,738 19,229
Accrued taxes 10,127 19,127 4,728
Accrued interest 4,984 4,361 1,974
Other current liabilities 22,773 25,480 26,319
170,969 199,435 126,220
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 60,580 55,736 60,448
Accrued postretirement benefits other than pensions 26,150 23,744 25,388
Unamortized investment tax credit 9,082 10,012 9,313
Regulatory income tax liability - 1,874 -
Other 2,157 2,035 2,061
97,969 93,401 97,210
COMMITMENTS AND CONTINGENCIES (See Notes 7 & 11) - - -
CAPITALIZATION:
Long-term debt 183,386 167,859 183,489
Common stock (no par value) - authorized 200,000,000
shares - issued and outstanding 29,919,672,
30,121,850 and 30,063,667 shares, respectively (1) 142,295 146,791 145,586
Less unearned compensation - restricted stock grants 1,377 1,708 1,207
140,918 145,083 144,379
Retained earnings 168,372 159,420 161,052
Total common shareholders' equity 309,290 304,503 305,431
492,676 472,362 488,920
$761,614 $765,198 $712,350
(1) Adjusted to reflect the four-for-three stock split October 2, 1998.
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share data)
(Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1998 1997 1998 1997
OPERATING REVENUES:
Utility $ 124,947 $ 170,132 $ 420,459 $ 528,058
Other 294 203 888 356
125,241 170,335 421,347 528,414
OPERATING EXPENSES:
Cost of gas (See Note 12) 67,937 107,052 230,372 319,357
Other operating 19,326 18,020 76,902 78,778
Restructuring costs (See Note 2) - - - 39,531
Depreciation and amortization 9,915 8,906 38,664 35,417
Taxes other than income taxes 4,251 4,913 14,072 17,200
101,429 138,891 360,010 490,283
OPERATING INCOME 23,812 31,444 61,337 38,131
OTHER INCOME:
Equity in earnings of unconsolidated
affiliates (See Note 7) 1,425 1,963 6,688 9,187
Other - net 376 405 2,469 3,274
1,801 2,368 9,157 12,461
INCOME BEFORE INTEREST AND
INCOME TAXES 25,613 33,812 70,494 50,592
INTEREST EXPENSE 4,231 4,661 16,209 17,416
INCOME BEFORE INCOME TAXES 21,382 29,151 54,285 33,176
INCOME TAXES 7,106 10,795 18,161 11,602
NET INCOME $ 14,276 $ 18,356 $ 36,124 $ 21,574
AVERAGE COMMON SHARES OUTSTANDING (1) 29,970 30,121 30,078 30,111
BASIC AND DILUTED EARNINGS PER
AVERAGE SHARE OF COMMON STOCK (1) $ 0.48 $ 0.61 $ 1.20 $ 0.72
(1) Adjusted to reflect the four-for-three stock split October 2, 1998. See Note 10.
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1998 1997 1998 1997
CASH FLOWS FROM (REQUIRED FOR)
OPERATING ACTIVITIES:
Net income $ 14,276 $ 18,356 $ 36,124 $ 21,574
Adjustments to reconcile net income to cash
provided from operating activities -
Noncash restructuring costs - - - 32,838
Depreciation and amortization 9,962 8,953 38,851 35,604
Deferred income taxes 132 531 1,192 (12,645)
Investment tax credit (232) (232) (930) (930)
Gain on sale of assets - - (2,102) (2,923)
Undistributed earnings of unconsolidated
affiliates (1,425) (1,963) (6,688) (9,187)
8,437 7,289 30,323 42,757
Changes in assets and liabilities -
Receivables - net (51,795) (68,385) 30,480 (16,821)
Inventories 1,204 2,123 (1,191) 21,223
Accounts payable, customer deposits, advance
payments and other current liabilities 9,902 14,797 (17,676) (3,458)
Accrued taxes and interest 8,409 12,200 (8,377) 4,521
Recoverable/refundable gas costs 3,613 16,176 4,010 27,282
Prepayments (1,174) (1,309) (1,454) (3,988)
Accrued postretirement benefits other
than pensions 762 706 2,406 7,916
Other - net 1,180 (2,985) 203 (2,258)
Total adjustments (19,462) (19,388) 38,724 77,174
Net cash flows from (required for)
operations (5,186) (1,032) 74,848 98,748
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Repurchase of common stock (3,645) - (4,834) -
Sale of long-term debt - 35,014 60,052 50,062
Reduction in long-term debt (48) (59,946) (34,623) (60,069)
Net change in short-term borrowings 22,770 49,000 (16,325) 6,000
Dividends on common stock (6,924) (6,625) (27,140) (26,023)
Net cash flows from (required for)
financing activities 12,153 17,443 (22,870) (30,030)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (16,375) (16,339) (66,066) (70,533)
Nonutility investments in unconsolidated
affiliates - net (673) (100) (7,035) (1,350)
Cash distributions from unconsolidated
affiliates 776 - 7,806 -
Proceeds from sale of assets - - 13,317 3,000
Net cash flows required for investing
activities (16,272) (16,439) (51,978) (68,883)
NET INCREASE (DECREASE) IN CASH (9,305) (28) - (165)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 9,325 48 20 185
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20 $ 20 $ 20 $ 20
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
nonregulated administrative services provider, IEI
Services, LLC, its financing subsidiary, IEI Capital
Corp. (Capital Corp.) and its nonutility subsidiaries
and investments grouped under its nonregulated
subsidiary, IEI Investments, Inc (IEI Investments).
The nonutility 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,
CIGMA, LLC, Energy Systems Group, LLC, Pace Carbon
Synfuels Investors, L.P., Reliant Services, LLC and
Haddington Energy Partners, L.P.
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 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 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. Corporate Restructuring.
In April 1997, the Board of Directors of Indiana Energy
approved a new growth strategy designed to support the
company'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, the company 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 work
force reductions. These costs include separation pay in
accordance with Indiana Gas' severance policy, and net
curtailment losses related to these employees'
postretirement and pension benefits. As a result
primarily of initial work force reductions during
September 1997 and attrition, employees totaled 878 as
of December 31, 1998.
Further, Indiana Gas' management committed to sell,
abandon or otherwise dispose of certain assets,
including buildings, gas storage fields and intangible
plant. Indiana Gas recorded restructuring costs of $34.1
million during the fourth quarter of fiscal 1997 to
adjust the carrying value of those assets to estimated
fair value. Net assets held for disposal totaled $8.0
million at December 31, 1997, 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 $32.2 million of fixed assets at net
book value from Indiana Gas, which subsequently
dividended its membership interest to Indiana Energy.
These assets, which relate to the provision of
administrative services, are classified in Non-utility
Plant on the Consolidated Balance Sheets. 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 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 1998 1997 1998 1997
Interest (net of
amount capitalized) $ 893 $ 2,593 $13,898 $16,051
Income taxes $1,057 $ 70 $25,717 $21,921
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
December 1998, the cost of replacing the current portion
of gas in underground storage exceeded last-in,
first-out cost at December 31, 1998, by approximately
$7,953,000.
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. 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 added power marketing in
late fiscal 1997 to the services it offers. Power
marketing 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 findings in the gas cost adjustment (GCA)
process would be appropriate and directed that these
matters be considered further in the pending,
consolidated GCA proceeding involving Indiana Gas and
Citizens Gas. The IURC has not yet established a
schedule for conducting these additional proceedings.
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 and the Citizens Action Coalition of Indiana.
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 is that because
the gas supply agreements provide for index based
pricing of gas commodity sold by ProLiance to the
utilities, they should have been the subject of an
application for approval of an alternative regulatory
plan under Indiana statutory law. The court held that
absent this type of application, the IURC exceeded its
authority in implementing what the court saw to be
alternative regulatory treatment.
Management believes the decision incorrectly applies the
statute and on November 9, 1998, petitioned for transfer
of the case to the Indiana Supreme Court. If the Supreme
Court does not overturn the Court of Appeals' decision,
the matter will be remanded to the IURC for further
proceedings. Whether or not the Supreme Court reverses
the Court of Appeals' decision, the reasonableness of
the gas costs incurred by Indiana Gas under the gas
supply agreements will be further reviewed in the
consolidated GCA proceeding. Management takes note of
the fact that the Court of Appeals has not challenged
the IURC findings that the agreements provide
significant economic value to customers and are in the
public interest. 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.
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. Pretax earnings recognized from
ProLiance totaled $1.4 million and $1.8 million for the
three-month periods ended December 31, 1998 and 1997,
respectively. Pretax earnings recognized from ProLiance
totaled $7.0 million and $9.2 million for the twelve-
month periods ended December 31, 1998 and 1997,
respectively. Earnings recognized from ProLiance are
included in Equity in Earnings of Unconsolidated
Affiliates on the Consolidated Statements of Income.
Earnings recognized for the twelve months ended December
31, 1997, include $1.9 million of ProLiance's earnings
from prior periods which had previously been reserved.
At December 31, 1998, Indiana Energy has reserved
approximately $1.2 million of ProLiance earnings after
tax. Total after-tax ProLiance earnings recognized to
date approximate $11.0 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.
8. 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 coal pellets 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 committed an initial investment of $7.5
million in Pace Carbon (of which $5.4 million was paid
through December 31, 1998) for an 8.3 percent ownership
interest in the partnership. The balance of the initial
investment will be paid following the satisfaction by
Pace Carbon of certain project milestones regarding the
operation of the coal pellet production plants and long-
term feedstock acquisition. In addition to its initial
investment, IEI Synfuels has a continuing obligation to
invest in Pace Carbon up to approximately $43 million,
with any such additional investments expected to be
funded solely from federal tax credits that are realized
from the production and sale of coal pellets 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 coal pellets, and (3) the
coal pellets 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 pellets in a ramp up
mode, while continuing to improve the production
process. Generally all pellets produced through December
31, 1998, have been sold. Management believes that
significant project benefits, primarily in the form of
tax savings and tax credits realized, will be achieved
in the future but cannot be assured.
9. 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, plans to raise $100 million to invest in
six to eight 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. Haddington's initial closing
achieved $72 million in commitments. Through December
31, 1998, IEI Investments had paid approximately
$300,000 of its commitment in Haddington, with
additional amounts to be paid as Haddington's portfolio
grows.
10. Common Stock.
On July 31, 1998, the Board of Directors of Indiana
Energy authorized a four-for-three stock split of the
issued and outstanding shares of its common stock to
shareholders of record on September 18, 1998. The shares
were issued on October 2, 1998. All share and per share
amounts have been restated for all periods reported to
reflect the stock split.
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 the three
months ended December 31, 1998, the company repurchased
159,200 shares with an associated cost of $3,645,000.
Of the 700,000 shares authorized, 406,300 shares remain
available for repurchase at December 31, 1998.
11. 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 December 31, 1998, 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.
12. Affiliate Transactions.
The obligations of Capital Corp., which handles
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.
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 $78.9 million at December 31, 1998.
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, 1998, totaled $67.4 million
and $232.2 million, respectively. Indiana Gas'
purchases from ProLiance for the three- and twelve-month
periods ended December 31, 1997, totaled $104.1 million
and $311.7 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,
1998, totaled $4.7 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, 1998, totaled $5.6
million and $20.3 million, respectively. The company's
purchases of these services during the three- and twelve-
month periods ended December 31, 1997, totaled $6.6
million and $16.2 million, respectively.
Indiana Energy is a one-third guarantor of certain
surety bond obligations of Energy Systems Group, LLC.
Indiana Energy's share totaled $8.1 million at December
31, 1998.
Amounts owed to affiliates totaled $26.4 million and
$35.6 million at December 31, 1998 and 1997,
respectively, and are included in Accounts Payable on
the Consolidated Balance Sheets.
Amounts due from affiliates totaled $6.0 million at
December 31, 1997, and are included in Accounts Receivable
on the Consolidated Balance Sheet.
13. 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
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 nonregulated administrative services
provider, IEI Services, LLC (IEI Services), and its
nonutility subsidiaries and investments grouped under its
nonregulated subsidiary, IEI Investments, Inc. (IEI
Investments).
The nonutility 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,
CIGMA, LLC, Energy Systems Group, LLC, Pace Carbon
Synfuels Investors, L.P., Reliant Services, LLC and
Haddington Energy Partners, L.P.
The company's growth strategy provides for growing the
earnings contribution from non-utility operations to over
25 percent of its total annual earnings by 2003, and
aggressively managing costs within its utility operations
(see Growth Strategy and Corporate Restructuring).
Stock Split
On July 31, 1998, the board of directors of Indiana
Energy authorized a four-for-three stock split of the
issued and outstanding shares of its common stock to
shareholders of record on September 18, 1998. The shares
were issued on October 2, 1998. All share and per share
amounts have been restated for all periods reported to
reflect the stock split.
Earnings
Income and earnings per average share of common stock
for the three- and twelve-month periods ended December 31,
1998, 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
1998 1997 1998 1997(1)
Indiana Gas &
IEI Services $13.3 $17.2 $30.0 $13.9
IEI Investments 1.0 1.2 6.1 7.7
Net Income $14.3 $18.4 $36.1 $21.6
Earnings per
share (2):
Indiana Gas &
IEI Services $ .44 $ .57 $1.00 $ .46
IEI Investments .04 .04 .20 .26
Total $ .48 $ .61 $1.20 $ .72
(1)Reflects restructuring costs of $24.5 million after-tax or $.81
per common share at Indiana Gas (see Growth Strategy and Corporate
Restructuring).
(2)Adjusted to reflect the four-for-three stock split October 2, 1998.
Utility Margin (Utility Operating Revenues Less Utility Cost of Gas)
Utility margin for the quarter ended December 31,
1998, was $57.0 million compared to $63.1 million for the
same period last year. The decrease reflects weather 19
percent warmer than the same period last year and 17
percent warmer than normal, offset somewhat by the
addition of new residential and commercial customers.
Utility margin for the twelve-month period ended
December 31, 1998, was $188.6 million compared to $208.3
million for the same period last year. The decrease is
primarily attributable to weather 22 percent warmer than
the same period last year and 21 percent warmer than
normal, offset somewhat by the addition of new residential
and commercial customers.
Total system throughput (combined sales and
transportation) decreased 13 percent (5.0 MMDth) for the
first quarter of fiscal 1999 and 11 percent (14.1 MMDth)
for the twelve-month period ended December 31, 1998,
compared to the same periods one year ago. Indiana Gas'
rates for transportation generally provide the same
margins as are earned on the sale of gas under its sales
tariffs. Approximately one-half of total system
throughput represents gas used for space heating and is
affected by weather.
Total average cost per unit of gas purchased decreased
to $3.44 for the three-month period ended December 31,
1998, compared to $3.87 for the same period one year ago.
For the twelve-month period, cost of gas per unit
decreased to $3.44 in the current period compared to $3.60
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 increased $1.3 million for
the three-month period ended December 31, 1998, when
compared to the same period one year ago due in part to
higher labor-related costs, including training costs
related to the implementation of the company's new
customer information system. Rental expense related to
buildings previously owned also contributed to the
increase.
Other operating expenses decreased $1.9 million for
the twelve-month period when compared to the same period
last year due in part to lower labor-related costs
resulting from work force reductions.
Restructuring costs of $39.5 million (pre-tax) were
recorded in the fourth quarter of fiscal 1997 related to
the company's implementation of a new growth strategy
during that year (see Growth Strategy and Corporate
Restructuring).
Depreciation and amortization expense increased for
the three- and twelve-month periods ended December 31,
1998, 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.
Taxes other than income taxes decreased for the three-
month period ended December 31, 1998, when compared to the
same period one year ago due to lower gross receipts tax
expense. Taxes other than income taxes decreased for the
twelve-month period due to lower gross receipts tax
expense and lower property tax expense.
Other Income
Equity in earnings of unconsolidated affiliates
decreased for the three- and twelve-month periods ended
December 31, 1998, 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). Pretax earnings recognized from
ProLiance totaled $1.4 million for the first quarter of
fiscal 1999, compared to $1.8 million for the same period
one year ago. Pretax earnings recognized from ProLiance
for the twelve months ended December 31, 1998, totaled
$7.0 million compared to $9.2 million for the same period
last year. Earnings recognized for the twelve months
ended December 31, 1997, include $1.9 million of
ProLiance's earnings from prior periods which had
previously been reserved (see ProLiance Energy, LLC).
Other-net decreased for the twelve-month period ended
December 31, 1998, when compared to the same period one
year ago due primarily to the gain on the sale of certain
nonutility assets by IGC Energy reflected in the prior
period.
Interest Expense
Interest expense decreased for the three- and twelve-
month periods ended December 31, 1998, when compared to
the same periods one year ago due primarily to decreases
in interest rates.
Income Taxes
Federal and state income taxes decreased for the three-
month period ended December 31, 1998, 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
Growth Strategy and Corporate Restructuring
In April 1997, the Board of Directors of Indiana
Energy approved a new growth strategy designed to
support the company'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, the company 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 work
force reductions. These costs include separation pay in
accordance with Indiana Gas' severance policy, and net
curtailment losses related to these employees'
postretirement and pension benefits. As a result
primarily of initial work force reductions during
September 1997 and attrition, employees totaled 878 as
of December 31, 1998.
Further, Indiana Gas' management committed to
sell, abandon or otherwise dispose of certain assets,
including buildings, gas storage fields and intangible
plant. Indiana Gas recorded restructuring costs of
$34.1 million during the fourth quarter of fiscal 1997
to adjust the carrying value of those assets to
estimated fair value. Net assets held for disposal
totaled $8.0 million at December 31, 1997, 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 $32.2 million of fixed
assets at net book value from Indiana Gas, which
subsequently dividended its membership interest to
Indiana Energy. These assets, which relate to the
provision of administrative services, are classified in
Non-utility Plant on the Consolidated Balance Sheets.
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, the company has
realized reductions in operating costs which should
help the company to be more successful in an
increasingly competitive energy marketplace.
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 added power marketing in late fiscal 1997 to the
services it offers. Power marketing 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 findings
in the gas cost adjustment (GCA) process would be
appropriate and directed that these matters be considered
further in the pending, consolidated GCA proceeding
involving Indiana Gas and Citizens Gas. The IURC has not
yet established a schedule for conducting these additional
proceedings.
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
and the Citizens Action Coalition of Indiana. 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 is that because
the gas supply agreements provide for index based pricing
of gas commodity sold by ProLiance to the utilities, they
should have been the subject of an application for
approval of an alternative regulatory plan under Indiana
statutory law. The court held that absent this type of
application, the IURC exceeded its authority in
implementing what the court saw to be alternative
regulatory treatment.
Management believes the decision incorrectly applies
the statute and on November 9, 1998, petitioned for
transfer of the case to the Indiana Supreme Court. If the
Supreme Court does not overturn the Court of Appeals'
decision, the matter will be remanded to the IURC for
further proceedings. Whether or not the Supreme Court
reverses the Court of Appeals' decision, the
reasonableness of the gas costs incurred by Indiana Gas
under the gas supply agreements will be further reviewed
in the consolidated GCA proceeding. Management takes note
of the fact that the Court of Appeals has not challenged
the IURC findings that the agreements provide significant
economic value to customers and are in the public
interest. 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.
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. Pretax earnings recognized from
ProLiance totaled $1.4 million and $1.8 million for the
three-month periods ended December 31, 1998 and 1997,
respectively. Pretax earnings recognized from ProLiance
totaled $7.0 million and $9.2 million for the twelve-month
periods ended December 31, 1998 and 1997, respectively.
Earnings recognized from ProLiance are included in Equity
in Earnings of Unconsolidated Affiliates on the
Consolidated Statements of Income. Earnings recognized for
the twelve months ended December 31, 1997, include $1.9
million of ProLiance's earnings from prior periods which
had previously been reserved.
At December 31, 1998, Indiana Energy has reserved
approximately $1.2 million of ProLiance earnings after
tax. Total after-tax ProLiance earnings recognized to date
approximate $11.0 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 coal pellets 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 committed an initial investment
of $7.5 million in Pace Carbon (of which $5.4 million
was paid through December 31, 1998) for an 8.3 percent
ownership interest in the partnership. The balance of
the initial investment will be paid following the
satisfaction by Pace Carbon of certain project
milestones regarding the operation of the coal pellet
production plants and long-term feedstock acquisition.
In addition to its initial investment, IEI Synfuels has
a continuing obligation to invest in Pace Carbon up to
approximately $43 million, with any such additional
investments expected to be funded solely from federal
tax credits that are realized from the production and
sale of coal pellets 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
coal pellets, and (3) the coal pellets 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 pellets in a ramp up mode, while continuing
to improve the production process. Generally all
pellets produced through December 31, 1998, have been
sold. Management believes that significant project
benefits, primarily in the form of tax savings and tax
credits realized, will be achieved in the future but
cannot be assured.
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, plans to raise $100 million to invest in
six to eight 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. Haddington's initial closing
achieved $72 million in commitments. Through December
31, 1998, IEI Investments had paid approximately
$300,000 of its commitment in Haddington, with
additional amounts to be paid as Haddington's portfolio
grows.
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
scheduled for 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. 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 installed 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. While compliance issues may be
identified from these inquiries and any issues raised
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 is also formulating a 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 December 31, 1998, 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
Consolidated capitalization objectives for Indiana
Energy are 55-65 percent common equity and preferred stock
and 35-45 percent long-term debt, but may vary from time
to time, depending on particular business opportunities.
Indiana Energy's common equity component was 62 percent of
total capitalization at December 31, 1998. The long-term
debt of Indiana Energy is currently rated Aa3 by Moody's
Investors Service and 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 31, 1998, the Board of Directors of Indiana
Energy authorized a four-for-three stock split of the
issued and outstanding shares of its common stock to
shareholders of record on September 18, 1998. The shares
were issued on October 2, 1998.
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 the three
months ended December 31, 1998, the company repurchased
159,200 shares with an associated cost of $3,645,000. Of
the 700,000 shares authorized, 406,300 shares remain
available for repurchase at December 31, 1998.
Indiana Gas' capitalization objectives, which are 55-
65 percent common equity and preferred stock and 35-45
percent long-term debt, remain unchanged from prior years.
Indiana Gas' common equity component was 56 percent of its
total capitalization at December 31, 1998.
New construction, normal system maintenance and
improvements, and information technology investments
needed to provide service to a growing customer base will
continue to require substantial expenditures. Capital
expenditures for fiscal 1999 are estimated at $66.8
million of which $16.4 million have been expended during
the three-month period ended December 31, 1998. For the
twelve months ended December 31, 1998, capital
expenditures totaled $66.1 million.
Nonutility investments and commitments, excluding the
continuing obligation to invest in Pace Carbon as
previously discussed, totaled approximately $10.0 million
and $18.0 million for the three- and twelve-month periods
ended December 31, 1998.
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 December 31, 1998, 59 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 and capital expenditures until permanently
financed. Short-term borrowings tend to be greatest during
the heating season when accounts receivable and unbilled
utility revenues are at their highest. Indiana Gas'
commercial paper is rated P-1 by Moody's and A-1+ by
Standard & Poor's. Recently, bank lines of credit have
been the primary source of short-term financing.
Forward-Looking Information
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'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.
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 1. Legal Proceedings
See Note 7 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 11 of the Notes to Consolidated Financial
Statements for litigation matters involving insurance
carriers pertaining to Indiana Gas' former manufactured
gas plants and storage facilities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-A Employment Agreement between
Indiana Energy, Inc. and Lawrence
A. Ferger, effective January 1,
1999, filed herewith.
10-B Employment Agreement between
Indiana Energy, Inc. and Niel C.
Ellerbrook, effective January 1,
1999, filed herewith.
10-C Employment Agreement between
Indiana Energy, Inc. and Paul T.
Baker, effective January 1, 1999,
filed herewith.
10-D Employment Agreement between
Indiana Energy, Inc. and Anthony
E. Ard, effective January 1, 1999,
filed herewith.
10-E Employment Agreement between
Indiana Energy, Inc. and Carl L.
Chapman, effective January 1,
1999, filed herewith.
10-F Employment Agreement between
Indiana Energy, Inc. and Timothy
M. Hewitt, effective January 1,
1999, filed herewith.
10-G Indiana Energy, Inc. Unfunded
Supplemental Retirement Plan for a
Select Group of Management
Employees as amended and restated
effective December 1, 1998, filed
herewith.
10-H Indiana Energy, Inc. Nonqualified
Deferred Compensation Plan
effective January 1, 1999, filed
herewith.
10-I Amendment to the Indiana Energy,
Inc. Executive Restricted Stock
Plan effective December 1, 1998,
filed herewith.
10-J Amendment to the Indiana Energy,
Inc. Directors' Restricted Stock
Plan effective December 1, 1998,
filed herewith.
27 Financial Data Schedule, filed herewith.
(b)On October 9, 1998, Indiana Energy and
Indiana Gas filed a Current Report on Form 8-
K with respect to a press release (dated
October 9, 1998), announcing the decision by
Indiana Gas, Citizens Gas and ProLiance to
appeal the October 8, 1998, Indiana Court of
Appeals decision regarding ProLiance. Items
reported include:
Item 5. Other Events
Press release dated October 9,1998
On October 13, 1998, Indiana Energy filed a
Current Report on Form 8-K with respect to a
press release (dated October 12, 1998),
announcing IEI Investments' commitment to
invest $10 million in Haddington Energy
Partners, L.P. Items reported include:
Item 5. Other Events
Press release dated October 12,1998
On October 30, 1998, 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,
1998. Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Fourth
Quarter 1998
On January 27, 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 December 31, 1998.
Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - First 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 ENERGY, INC.
Registrant
Dated February 11, 1999 /s/Niel C.Ellerbrook
Niel C. Ellerbrook
President and Chief Operating Officer
Dated February 11, 1999 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller