UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 1-6494
INDIANA GAS COMPANY, INC.
(Exact name of Registrant as specified in its charter)
INDIANA 35-0793669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1630 North Meridian Street, Indianapolis, Indiana 46202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 317-926-3351
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 the
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 Registrant's
classes of common stock, as of the latest practicable date.
Common Stock-Without par value 9,080,770 November 30, 1999
- ------------------------------ ------------------ -----------------
Class Number of shares Date
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[X]
Table of Contents
Page
Part I..................................................................... 3
Business.............................................................. 3
Property.............................................................. 5
Legal Proceedings..................................................... 5
Submission of Matters to a Vote of Security Holders................... 5
Executive Officers of the Company..................................... 5
Part II.................................................................... 7
Market for the Registrant's Common Equity and
Related Stockholder Matters...................................... 7
Selected Financial Data............................................... 8
Management's Discussion and Analysis of Results of
Operations and Financial Condition............................... 9
Financial Statements and Supplementary Data........................... 19
Changes in and Disagreements with Accountants......................... 41
Part III................................................................... 41
Directors and Executive Officers of the Registrant.................... 41
Executive Compensation................................................ 41
Securities Ownership of Certain Beneficial Owners and Management...... 41
Certain Relationships and Related Transactions........................ 42
Part IV.................................................................... 42
Exhibits, Financial Statements Schedules, and Reports on Form 8-K..... 42
Part I
Item 1. Business
(a) General Development of the Business.
Indiana Gas Company, Inc. (Indiana Gas or the company) is an
operating public utility engaged in the business of providing gas
utility service in the state of Indiana. It was incorporated under
the laws of the state of Indiana on July 16, 1945. All of the
outstanding shares of common stock of the company are owned by
Indiana Energy, Inc. (Indiana Energy), which is a public holding
company.
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.
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. The companies anticipate
that the remaining regulatory processes can be completed in the
first quarter of calendar 2000.
(c) Narrative Description of the Business.
During fiscal 1999, Indiana Gas supplied gas to about 500,000
residential, small commercial and contract (large commercial and
industrial) customers in 284 communities in 48 of the 92 counties
in the state of Indiana. The service area has a population of
approximately 2 million and contains diversified manufacturing and
agriculture-related enterprises. The principal industries served
include automotive parts and accessories, feed, flour and grain
processing, metal castings, aluminum products, gypsum products,
electrical equipment, metal specialties and glass.
The largest communities served include Muncie, Anderson,
Lafayette-West Lafayette, Bloomington, Terre Haute, Marion, New
Albany, Columbus, Jeffersonville, New Castle and Richmond. While
Indiana Gas does not serve in Indianapolis, it does serve the
counties and communities which border that city.
For the fiscal year ended September 30, 1999, residential
customers provided 66 percent of revenues, small commercial 23
percent and contract 11 percent. Approximately 99 percent of
Indiana Gas' customers used gas for space heating, and revenues
from these customers for the fiscal year were approximately 90
percent of total operating revenues. Sales of gas are seasonal and
strongly affected by variations in weather conditions. Less than
half of total margin, however, is space heating related. During
the fiscal year ended September 30, 1999, Indiana Gas added
approximately 11,400 residential and commercial customers.
Indiana Gas sells gas directly to residential, small commercial
and contract customers at approved rates. Indiana Gas also
transports gas through its pipelines at approved rates to contract
customers which have purchased gas directly from producers or
through brokers and marketers. The total volumes of gas provided
to both sales and transportation customers is referred to as
throughput.
Gas transported on behalf of end-use customers in fiscal 1999
represented 43 percent (51,213 MDth) of throughput compared to 40
percent (45,598 MDth) in 1998 and 34 percent (41,874 MDth) in
1997. Although revenues are lower, rates for transportation
generally provide the same margins as would have been earned had
the gas been sold under normal sales tariffs.
Effective April 1, 1996, Indiana Gas purchases all of its natural
gas and winter delivery service from ProLiance Energy, LLC, a gas
marketing affiliate of Indiana Energy (see Item 7, ProLiance
Energy, LLC). Prices for gas and related services purchased by
Indiana Gas are determined primarily by market conditions and
rates established by the Federal Energy Regulatory Commission.
Indiana Gas' rates and charges, terms of service, accounting
matters, issuance of securities, and certain other operational
matters are regulated by the Indiana Utility Regulatory Commission
(IURC).
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 IURC. The IURC
has applied the statute authorizing the GCA procedures to reduce
rates when necessary so as to limit net operating income, after
adjusting to normal weather, to the level authorized in the last
general rate order. The earnings test provides that no refund be
paid to the extent a utility has not earned its authorized utility
operating income over the previous 60 months (or during the period
since the utility's last rate order, if longer).
Information regarding environmental matters affecting the company
is incorporated herein by reference to Item 7, Environmental
Matters.
Indiana Gas had 736 full-time employees and 25 part-time employees
as of September 30, 1999.
During fiscal 1997, the Indiana Gas Board of Directors authorized
management to undertake the actions necessary and appropriate to
restructure Indiana Gas' operations. These actions by Indiana Gas
were consistent with Indiana Energy, Inc.'s (Indiana Gas' parent)
growth strategy that was approved by its board of directors during
fiscal 1997. See Item 7, Growth Strategy and Corporate
Restructuring.
Item 2. Property
The properties of Indiana Gas are used for the purchase,
production, storage and distribution of gas and are located
primarily within the state of Indiana. As of September 30, 1999,
such properties included 10,948 miles of distribution mains;
512,351 meters; five reservoirs currently being used for the
underground storage of purchased gas with approximately 71,484
acres of land held under storage easements; 7,310,173 Dth of gas
in company-owned underground storage with a daily deliverability
of 134,160 Dth; 171,451 Dth of gas in contract storage with a
daily deliverability of 3,563 Dth; and four liquefied petroleum
(propane) air-gas manufacturing plants with a total daily capacity
of 32,700 Dth of gas.
Indiana Gas' capital expenditures during the fiscal year ended
September 30, 1999, amounted to $60.2 million.
Item 3. Legal Proceedings
See Item 8, Note 11 for litigation matters involving insurance
carriers pertaining to Indiana Gas' former manufactured gas plants
and storage facilities.
See Item 8, Note 12 for discussion of litigation matters relating
to the gas supply and portfolio administration agreements between
ProLiance and Indiana Gas and ProLiance and Citizens Gas.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal
year ended September 30, 1999, to a vote of security holders.
On December 17, 1999, the shareholders of Indiana Energy, Inc.
approved the merger between Indiana Energy, Inc. and SIGCORP, Inc.
Item 4a. Executive Officers of the Company
The Executive Officers of the company are as follows:
Family
Relation- Office or Date Elected
Name Age ship Position Held Or Appointed(1)
Lawrence A. Ferger 65 None Chairman and Chief (Retired May 31, 1999) (2)
Executive Officer Oct. 1, 1997
Chairman, President and
Chief Executive Officer Jan. 26, 1996
President and Chief
Executive Officer July 1, 1987
Niel C. Ellerbrook 50 None President and Chief
Executive Officer June 1, 1999
President Oct. 1, 1997
Executive Vice President
and Chief Financial
Officer Jan . 22, 1997
Senior Vice President and
Chief Financial Officer July 1, 1987
Paul T. Baker 59 None Executive Vice
President and Chief
Operating Officer Oct. 1, 1997
Senior Vice President
and Chief Operating
Officer Aug. 1, 1991
Anthony E. Ard 58 None Secretary Jul. 31, 1998
Senior Vice President of
Corporate Affairs Jan. 9, 1995
(through
Sep. 30, 1997)
Vice President -
Corporate Affairs Jan. 11, 1993
Timothy M. Hewitt 49 None Vice President of
Operations and Engineering Jan. 9, 1995
Vice President of Sales
and Field Operations Jan. 14, 1991
(1) Each of the officers has served continuously since the dates indicated
unless otherwise noted.
(2) Continues role as Chairman of the Board of Indiana Gas Company, Inc.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
All of the outstanding shares of Indiana Gas' common stock are
owned by Indiana Energy, Inc., and are not traded.
During fiscal 1999, the company paid dividends of $7.0 million,
$7.0 million, $7.0 million and $7.3 million in the first, second, third and
fourth quarters, respectively.
During fiscal 1998, the company paid dividends of $6.8 million,
$6.8 million, $6.8 million and $7.0 million in the first, second, third and
fourth quarters, respectively.
Item 6. Selected Financial Data
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
(Thousands)
Year Ended September 30 1999 1998 1997(2) 1996 1995
- ----------------------- --------- --------- ---------- --------- -----------
Operating revenues $419,061 $465,644 $530,407 $530,594 $403,810
Margin 203,370 194,640 207,885 210,463 185,315
Operating expenses 156,820 148,389 178,874 156,910 139,127
Operating income 46,550 46,251 29,011 53,553 46,188
Other income - net 839 866 1,241 984 1,451
Interest expense 16,012 16,234 16,774 15,907 15,530
Net income $ 31,377 $ 30,883 $ 13,478 $ 38,630 $ 32,109
Ratio of earnings to fixed charges 4.0 3.9 2.2 4.6 4.1
Common shareholder's equity $243,426 $240,349 $268,762 $281,534 $268,154
Long-term debt (1) 181,849 191,975 189,733 174,733 173,693
--------- --------- --------- --------- ---------
$425,275 $432,324 $458,495 $456,267 $441,847
-------- -------- -------- -------- --------
Total Assets at Year-End $682,524 $642,940 $665,719 $672,907 $655,933
Total throughput 118,065 114,795 122,846 126,742 109,508
Annual heating degree days
as a percent of normal 87% 86% 100% 108% 87%
Utility customers served -
Average 500,203 488,771 477,235 465,166 454,817
(1) Includes current maturities; excludes sinking fund requirements.
(2) Reflects the recording of pre-tax restructuring costs of $39.5 million in
fiscal 1997 (see Item 8, Note 3).
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net income for Indiana Gas Company, Inc. and subsidiaries (Indiana
Gas or the company) for the last three fiscal years were as
follows:
(Millions) 1999 1998 1997(1)
---------- ------ ------ -------
Net Income $31.4 $30.9 $13.1
(1) Reflects restructuring costs of $24.5 million after-tax (see
Growth Strategy and Corporate Restructuring).
Margin (Operating Revenues Less Cost of Gas)
In 1999, utility margin increased 4 percent ($8.7 million) when
compared to 1998. The increase is primarily attributable to the
addition of new residential and commercial customers, the lower
cost of unaccounted for gas and a one-time sale of native gas.
Weather for the year was 1 percent colder than the same period
last year and 13 percent warmer than normal.
In 1998, utility margin decreased 6 percent ($13.2 million) when
compared to 1997. The decrease is primarily attributable to
weather 14 percent warmer than the prior year and 14 percent
warmer than normal, offset somewhat by the addition of new
residential and commercial customers.
In 1999, total system throughput (combined sales and
transportation) increased 3 percent (3.3 MMDth) when compared to
last year. In 1998, throughput decreased 7 percent (8.1 MMDth)
when compared to 1997. 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 dekatherm of gas purchased (average
commodity and demand) was $3.01 in 1999, $3.65 in 1998 and $3.64
in 1997. The price changes are due primarily to changing commodity
costs in the marketplace.
Operating Expenses
Operation and maintenance expenses increased $6.3 million in 1999
due in part to administrative and service fees paid to Indiana
Gas' affiliate, IEI Services, LLC (IEI Services). Higher
administrative service costs associated with the company's new
customer information and work management systems and rental
expense related to buildings previously owned also contributed to
the increase. These increases were partially offset by the
adjustment to the company's severance accrual.
Operation and maintenance expenses increased approximately $4.6
million in 1998 when compared to 1997. The increase is due
primarily to administrative and service fees paid to Indiana Gas'
affiliate, IEI Services, LLC (IEI Services) related to assets now
owned by IEI Services. IEI Services began providing support
services to Indiana Gas effective October 1, 1997 (see resulting
lower depreciation and amortization below). The increase was
offset somewhat by lower labor costs and related benefits
resulting from work force reductions.
Restructuring costs of $39.5 million (pre-tax) were recorded in
1997 related to the implementation of Indiana Energy, Inc.'s new
growth strategy during that year (see Growth Strategy and
Corporate Restructuring).
Depreciation and amortization increased in 1999 primarily due to
additions to plant to serve new customers and to maintain
dependable service to existing customers. Depreciation and
amortization decreased in 1998 due primarily to the transfer of
assets to IEI Services, and assets held for disposal which were
written down to estimated fair values in 1997. The decrease was
partially offset by additions to plant.
Federal and state income taxes remained about the same in 1999 and
increased in 1998 due primarily to changes in taxable income.
Taxes other than income taxes increased in 1999 by approximately
$1.0 million due to higher property tax expense, the result of
additions to plant. Taxes other than income taxes decreased in
1998 due to lower property tax expense and reduced gross receipts
tax expense.
Interest Expense
In 1999, interest expense was about the same as 1998. Interest
expense decreased in 1998 due to a decrease in interest rates,
partially offset by an increase in the average outstanding debt.
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, which has been approved by the
boards of directors of both companies, 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 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. The companies anticipate
that the remaining regulatory processes can be completed in the
first quarter of calendar 2000.
Subsequent Acquisition Agreement
On December 15, 1999, Indiana Energy Inc. announced that the board
of directors had approved a definitive agreement under which
Indiana Energy will acquire the natural gas distribution business
of Dayton Power and Light Co., Inc. This 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
In April 1997, the Board of Directors of Indiana Energy approved a
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 2004. To achieve such earnings growth, Indiana
Energy's aim is to grow the earnings contribution from
non-regulated operations to over 35 percent of its total annual
earnings by 2004 and to aggressively manage costs within its
utility operations and non-regulated administrative services
provider.
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)
for 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
involuntary terminations planned under the company's specific
near-term employee reduction plan, which was scheduled for
completion by the end of fiscal 1999. These costs include
separation pay in accordance with Indiana Gas' severance policy of
$3.9 million, and net curtailment losses related to these
employees' postretirement and pension benefits. As a result of
initial work force reductions during September 1997 and primarily
attrition thereafter, most of the reductions contemplated during
the two year period and accrued originally have been achieved.
During the second quarter of fiscal 1999, the company reviewed its
remaining accruals for costs associated with the involuntary work
force reductions. Taking into consideration an unexpectedly high
level of voluntary terminations, the company determined that no
additional significant involuntary work force reductions were
likely to occur. Prior to September 30, 1998, $2.2 million of
involuntary termination benefits had been paid. As a result, the
severance accrual and other operating expenses were reduced by
$1.7 million during fiscal year 1999.
Indiana Gas' management also committed to sell, abandon or
otherwise dispose of certain assets, including buildings, gas
storage fields and intangible plant. Indiana Gas recorded
restructuring costs of $34.1 million during the fourth quarter of
fiscal 1997 to adjust the carrying value of those assets to
estimated fair value. These assets have been sold or are no longer
in use.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated marketing
affiliate of Indiana Energy, began providing natural gas and
related services to Indiana Gas and Citizens Gas and Coke Utility
(Citizens Gas) effective April 1, 1996.
The sale of gas and provision of other services to Indiana Gas by
ProLiance is subject to regulatory review through the quarterly
gas cost adjustment proceeding currently pending before the IURC.
On September 12, 1997, the Indiana Utility Regulatory Commission
(IURC) issued a decision finding the gas supply and portfolio
administration agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas (the gas supply agreements) to be
consistent with the public interest. The IURC's decision reflected
the significant gas cost savings to customers obtained by
ProLiance's services and suggested that all material provisions of
the agreements between ProLiance and the utilities are reasonable.
Nevertheless, with respect to the pricing of gas commodity
purchased from ProLiance and two other pricing terms, the IURC
concluded that additional review in the gas cost adjustment (GCA)
process would be appropriate and directed that these matters be
considered further in the pending, consolidated GCA proceeding
involving Indiana Gas and Citizens Gas. The IURC has not yet
established a schedule for conducting these additional
proceedings.
The IURC's September 12, 1997, decision was appealed to the
Indiana Court of Appeals by certain Petitioners, including the
Indiana Office of Utility Consumer Counselor, the Citizens Action
Coalition of Indiana and a small group of large-volume customers.
On October 8, 1998, the Indiana Court of Appeals issued a decision
which reversed and remanded the case to the IURC with instructions
that the gas supply agreements be disapproved. The basis for the
decision was that because the gas supply agreements provide for
index based pricing of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have been the subject
of an application for approval of an alternative regulatory plan
under Indiana statutory law.
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 has provided all information requested and
management continues to believe that there are no significant
issues in this matter.
While the results of the ProLiance issues mentioned above cannot
be predicted, management does not expect these matters to have a
material impact on Indiana Gas' financial position or results of
operations. However, no assurance can be provided.
The Year 2000 Issue
Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the
century. If not corrected, many computer applications could fail
or create erroneous results by or at the year 2000. This issue
relates not only to information technology (IT), but also to
non-IT related equipment and plant that may contain embedded
date-sensitive microcontrollers or microchips.
The company has identified what it believes are its most
significant worst case Year 2000 scenarios for the purpose of
helping it to focus its Year 2000 efforts. These scenarios are the
interference with the company's ability to (1) receive and deliver
gas to customers, (2) monitor gas pressure throughout the
company's gas distribution system, (3) bill and receive payments
from customers, and (4) maintain continuous operation of its
computer systems. As discussed below, the company has taken the
steps necessary to ensure that these worst case scenarios are
addressed and any impact has been minimized.
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, are designed to be Year
2000 compliant and have been tested. Other maintenance and project
activities conducted in 1998 and 1999 and activities scheduled for
the remainder of 1999 have been initiated to bring the remaining
software environment into compliance. The projects include
replacements, upgrades and rewrites. The company's plan for IT
items includes the following phases and timeline: (a) Assessment -
completed in 1998, (b) Strategy - completed in 1998 and (c)
Design, Implementation, Testing and Validation - in process and
substantially completed as of September 30, 1999, and fully
completed by October 31, 1999. The company has not found it
necessary to postpone work on any other critical IT projects
because of efforts to achieve Year 2000 compliance.
Non-IT systems with embedded microcontrollers or microchips have
been 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 been completed, and few compliance issues
were found. Software upgrades for equipment in the gas control
system were completed in July 1999.
The company has contacted its major vendors, suppliers and
customers to gather information regarding the status of their Year
2000 compliance. Although compliance issues identified from these
inquiries have been addressed, this process may not fully ensure
these parties' Year 2000 compliance. Disruptions in the operations
of these parties could have an adverse financial and operational
effect on the company.
The company has developed its contingency plan related to Year
2000 issues. This plan includes modifying the company's already
existing plans for business resumption, information technology
disaster recovery and gas supply contingencies, and considers,
among other things, alternate recovery locations, backup power
generation, adequate material supplies and personnel requirements.
The company's contingency plan was filed with the IURC on
September 30, 1999. This plan will 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 were originally estimated at $1.5 million, which
included costs to replace certain existing systems sooner than had
been planned. At September 30, 1999, the company estimates that
$.1 million remains to be expensed and that total expenditures for
the remedy of Year 2000 issues will approximate the original
estimate.
Management believes that Year 2000 issues have been 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 three insurance
carriers, with the trial scheduled for early 2000. As of September
30, 1999, Indiana Gas has recorded settlements from other
insurance carriers in an aggregate amount of approximately $15.5
million. Subsequent to September 30, 1999, an agreement in
principle has been reached with one 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 11 of
the Notes to Consolidated Financial Statements.
Gas Cost Adjustment
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 IURC. The GCA
passes through increases and decreases in the cost of gas to
Indiana Gas' customers dollar for dollar.
In addition, the IURC has applied the statute authorizing the GCA
procedures to reduce rates when necessary so as to limit utility
operating income, after adjusting to normal weather, to the level
authorized in the last general rate order. The earnings test
provides that no refund be paid to the extent a utility has not
earned its authorized utility operating income over the previous
60 months (or during the period since the utility's last rate
order, if longer).
New Accounting Standards
In fiscal 1999, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information. This statement establishes
standards for the way that public companies report information
about operating segments in annual financial statements and
requires that those companies report selected information about
operating segments in annual and interim financial reports issued
to shareholders. Indiana Gas has no reportable segments.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities. The statement establishes accounting and
reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting. In June 1999, the FASB issued SFAS
137, which defers the effective date of SFAS 133. ProLiance
utilizes derivative instruments to manage pricing decisions,
minimize the risk of price volatility, and minimize price risk
exposure in the energy markets. The standard will be effective for
ProLiance in fiscal 2001. ProLiance has not yet quantified the
impact of adopting this statement on its financial position or
results of operations.
Liquidity and Capital Resources
Indiana Gas' capitalization objectives are 55-65 percent common
equity and preferred stock and 35-45 percent long-term debt.
Indiana Gas' common equity component was 57 percent of its total
capitalization at September 30, 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. Total capital required to fund capital expenditures
and refinancing requirements for 1998 and 1999, along with
estimated amounts for 2000 through 2002, is as follows:
Thousands 1998 1999 2000 2001 2002
--------- ----- ----- ----- ----- -----
Capital expenditures $ 57,000 $60,200 $57,700 $60,050 $60,500
Refinancing requirements 93,000 10,000 - - 3,000
-------- ------- ------- ------- -------
$150,000 $70,100 $57,700 $60,050 $63,500
-------- ------- ------- ------- -------
Indiana Gas' long-term goal is to internally fund at least 75
percent of its capital expenditure program. This has helped
Indiana Gas 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. In 1999, 59 percent of
Indiana Gas' capital expenditures were funded internally (i.e.,
from net income less dividends plus charges to net income not
requiring funds). In 1998, 64 percent of capital expenditures were
provided by funds generated internally. External funds required
for the 1999 construction program were obtained primarily through
short-term debt. Indiana Gas' ratio of earnings to fixed charges
for 1999 was 4.0 (see Exhibit 12).
In July 1999, Indiana Gas retired $10 million of 8.90% Notes.
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 $30,000,000 in principal
amount of Series G Medium Term Notes bearing interest at 7.08%
with a maturity date of October 5, 2029.
Provisions under which certain of Indiana Gas' Series E, Series F
and Series G Medium-Term Notes were issued entitle the holders of
$137 million of these notes to put the debt back to Indiana Gas at
face value at certain specified dates before maturity beginning in
2000. Long-term debt subject to the put provisions during the four
years following 1999 totals $20.0 million.
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 service 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. Prior to March
1999, bank lines of credit had been the primary source of
short-term financing. Effective in March 1999, Indiana Gas
implemented a $100 million commercial paper program.
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 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, Inc. and its subsidiaries 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 7A. Quantitative and Qualitative Disclosures about Market Risk
Indiana Gas' (the company's) debt portfolio contains a substantial
amount of fixed-rate long-term debt and, therefore, does not expose
the company to the risk of material earnings or cash flow loss due
to changes in market interest rates. At September 30, 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 8. Financial Statements and Supplementary Data
Management's Responsibility for Financial Statements
The management of the company is responsible for the preparation of
the consolidated financial statements and the related financial
data contained in this report. The financial statements are
prepared in conformity with generally accepted accounting
principles and follow accounting policies and principles applicable
to regulated public utilities.
The integrity and objectivity of the data in this report, including
required estimates and judgements, are the responsibility of
management. Management maintains a system of internal controls and
utilizes an internal auditing program to provide reasonable
assurance of compliance with company policies and procedures and
the safeguard of assets.
The board of directors pursues its responsibility for these
financial statements through its audit committee, which meets
periodically with management, the internal auditors and the
independent auditors, to assure that each is carrying out its
responsibilities. Both the internal auditors and the independent
auditors meet with the Audit Committee of the company's board of
directors, with and without management representatives present, to
discuss the scope and results of their audits, their comments on
the adequacy of internal accounting controls and the quality of
financial reporting.
/s/ Niel C. Ellerbrook
Niel C. Ellerbrook
President
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Indiana Gas Company,
Inc.:
We have audited the accompanying consolidated balance sheets and
schedules of long-term debt of Indiana Gas Company, Inc. (an
Indiana corporation and wholly owned subsidiary of Indiana Energy,
Inc.) and subsidiary companies as of September 30, 1999, and 1998,
and the related consolidated statements of income, common
shareholder's equity and cash flows for each of the three years in
the period ended September 30, 1999. These financial statements are
the responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Indiana
Gas Company, Inc. and subsidiary companies, as of September 30,
1999, and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended September 30,
1999, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Indianapolis, Indiana
October 29, 1999
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands)
Year Ended September 30
1999 1998 1997
OPERATING REVENUES $419,061 $465,644 $530,407
COST OF GAS (See Note 1) 215,691 271,004 322,522
-------- -------- --------
MARGIN 203,370 194,640 207,885
-------- -------- --------
OPERATING EXPENSES
Operation and maintenance 90,411 84,168 79,567
Restructuring costs (See Note 3) -- -- 39,531
Depreciation and amortization 34,026 32,353 35,054
Income taxes 16,967 17,449 7,852
Taxes other than income taxes 15,416 14,419 16,870
-------- -------- --------
156,820 148,389 178,874
-------- -------- --------
OPERATING INCOME 46,550 46,251 29,011
OTHER INCOME - NET 839 866 1,241
-------- -------- --------
INCOME BEFORE INTEREST EXPENSE 47,389 47,117 30,252
INTEREST EXPENSE 16,012 16,234 16,774
-------- -------- --------
NET INCOME $ 31,377 $ 30,883 $ 13,478
======== ======== ========
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Years Ended September 30
------------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATIONS $ 31,377 $ 30,883 $ 13,478
-------- -------- --------
Net Income
Adjustments to reconcile net income to cash
provided from operating activities -
Non cash restructuring costs -- -- 32,838
Depreciation and amortization 34,114 32,540 35,241
Deferred income taxes (480) 1,591 (12,618)
Investment tax credit (930) (930) (930)
Gain on sale of assets -- (1,219) --
-------- -------- --------
32,704 31,982 54,531
Changes in assets and liabilities
Receivables - net (2,240) 11,552 (10,524)
Inventories 9,899 (272) 24,026
Accounts payable, customer deposits
advance payments, current liabilities 8,267 (30,439) (4,519)
Accrued taxes and interest 7,447 (5,042) 4,528
Recoverable / refundable gas costs 462 16,573 (3,133)
Prepaid gas delivery service (25,810) -- --
Accrued postretirement benefits other than pension 2,699 2,131 8,134
Other - net (1,850) 2,760 900
-------- -------- --------
Total adjustments 31,578 29,245 73,943
-------- -------- --------
Net cash flows from operations 62,955 60,128 87,421
-------- -------- --------
CASH FLOWS FROM (REQUIRED FOR) FINANCING OPERATIONS
Sale of long term debt -- 95,000 15,000
Reduction in long term debt (10,126) (92,758) --
Net change in short term borrowings 34,916 13,705 (4,236)
Dividends on common stock (28,300) (27,250) (26,250)
-------- -------- --------
Net cash flows from (required for) financing operations (3,510) (11,303) (15,486)
-------- -------- --------
CASH FLOWS FROM (REQUIRED FOR) INVESTING ACTIVITIES
Capital expenditures (60,173) (57,335) (71,907)
Proceeds from sale of assets -- 9,204 --
-------- -------- --------
Net cash flows from (required for) investing activities (60,173) (48,131) (71,907)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (728) 694 28
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 742 48 20
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14 $ 742 $ 48
-------- -------- --------
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands)
Years Ended September 30
------------------------
1999 1998
-------- --------
UTILITY PLANT
Original Cost $990,780 $937,977
Less - accumulated depreciation and amortization 398,912 370,872
-------- --------
591,868 567,105
-------- --------
CURRENT ASSETS
Cash and cash equivalents 14 742
Accounts receivable less reserves of $733 and
$900, respectively 17,716 22,358
Accrued unbilled revenue 8,136 6,453
Liquefied petroleum gas at average cost 810 883
Gas in underground storage - at last in, first out cost 9,501 19,373
Prepaid gas delivery services 25,810 --
Prepayments and other 11,815 8,333
-------- --------
73,802 58,142
-------- --------
DEFERRED CHARGES AND OTHER ASSETS
Unamortized debt discount and expense 11,954 12,874
Regulatory income tax asset 2,741 1,778
Other 2,159 3,041
-------- --------
16,854 17,693
-------- --------
$682,524 $642,940
======== ========
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands)
Year Ended September 30
1999 1998
-------- --------
CAPITALIZATION
Common stock and paid-in capital $142,995 $142,995
Retained earnings 100,431 97,354
-------- --------
Total common shareholder's equity 243,426 240,349
Long term debt 181,849 181,975
-------- --------
425,275 422,324
-------- --------
CURRENT LIABILITIES
Maturities and sinking fund requirements of long term debt -- 10,000
Commercial paper / Notes payable 68,621 33,705
Accounts Payable 33,081 24,060
Refundable gas costs 11,192 10,730
Customer deposits and advance payments 14,713 19,229
Accrued taxes 12,471 4,469
Accrued interest 1,173 1,728
Other current liabilities 13,398 14,835
-------- --------
154,649 118,756
-------- --------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 60,931 60,448
Accrued postretirement benefits other than pensions 27,868 25,169
Unamortized investment tax credits 8,383 9,313
Other 5,418 6,930
-------- --------
102,600 101,860
-------- --------
$682,524 $642,940
======== ========
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
(Thousands)
COMMON STOCK AND
PAID-IN CAPITAL RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------------------------------------------------------------------
Balance at September 30, 1996 9,080,770 $ 142,995 $ 138,539 $ 281,534
Net income 13,478 13,478
Common stock dividends ($2.89 per share) (26,250) (26,250)
---------------------------------------------------------------------
Balance at September 30, 1997 9,080,770 142,995 125,767 268,762
Net income 30,883 30,883
Common stock dividends ($3.00 per share) (27,250) (27,250)
Noncash dividend (32,046) (32,046)
---------------------------------------------------------------------
Balance at September 30, 1998 9,080,770 142,995 97,354 240,349
Net income 31,377 31,377
Common stock dividends ($3.12 per share) (28,300) (28,300)
---------------------------------------------------------------------
Balance at September 30, 1999 9,080,770 $ 142,995 $ 100,431 $ 243,426
The accompanying notes are an integral part of these statements.
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF LONG-TERM DEBT
(In Thousands)
September 30
1999 1998
-------- ---------
Unsecured Notes Payable - Utility
8.90% due July15,1999 - 10,000
6.69%, Series E due June 10, 2013 5,000 5,000
7.15%, Series E due March 15, 2015 5,000 5,000
6.69%, Series E due December 21, 2015 5,000 5,000
6.69%, Series E due December 29, 2015 10,000 10,000
9 3/8% due January 15, 2021 25,000 25,000
9 1/8%, Series A due February 15, 2021 7,000 7,000
6.31%, Series E due June 10, 2025 5,000 5,000
6.53%, Series E due June 27, 2025 10,000 10,000
6.42%, Series E due July 7, 2027 5,000 5,000
6.68%, Series E due July 7, 2027 3,500 3,500
6.54% Series E due July 9, 2007 6,500 6,500
6.36% Series F due December 6, 2004 15,000 15,000
6.34% Series F due December 10, 2027 20,000 20,000
5.75% Series F due January 15, 2003 15,000 15,000
6.75% Series F due March 15, 2028 14,849 14,975
6.36% Series F due May 1, 2028 10,000 10,000
6.55% Series F due June 30, 2028 20,000 20,000
-------- ---------
$181,849 $ 191,975
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Practices
A. Consolidation
Indiana Gas Company, Inc. and its subsidiaries (Indiana Gas or the
company) provide natural gas and transportation services to a
diversified base of customers in 284 communities in 48 of Indiana's
92 counties.
B. Utility Plant and Depreciation
Except as described below, utility plant is stated at the original
cost and includes allocations of payroll-related costs and
administrative and general expenses, as well as an allowance for
the cost of funds used during construction. Upon normal retirement
of a depreciable unit of property, the cost is credited to utility
plant and charged to accumulated depreciation together with the
cost of removal, less any salvage. No gain or loss is recognized
upon normal retirement.
Provisions for depreciation of utility property are determined by
applying straight-line rates to the original cost of the various
classifications of property. The average depreciation rate was 4.3
percent for 1999, 3.9 percent for 1998, and 4.1 percent for 1997.
Cost in excess of underlying book value of acquired gas
distribution companies is reflected as a component of utility plant
and is being amortized primarily over 40 years.
C. Unamortized Debt Discount and Expense
Indiana Gas was authorized as part of an August 17, 1994, order
from the Indiana Utility Regulatory Commission (IURC) to amortize
over a 15-year period the debt discount and expense related to new
debt issues and future premiums paid for debt reacquired in
connection with refinancing. Debt discount and expense for issues
in place prior to this order are being amortized over the lives of
the related issues. Premiums paid prior to this order for debt
reacquired in connection with refinancing are being amortized over
the life of the refunding issue.
D. Cash Flow Information
For the purposes of the Consolidated Statements of Cash Flows, the
company 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:
Thousands 1999 1998 1997
--------- ----- ----- -----
Interest (net of amount capitalized) $ 14,518 $ 15,341 $ 15,129
Income taxes $ 16,104 $ 20,391 $ 19,142
E. Revenues
To more closely match revenues and expenses, Indiana Gas records
revenues for all gas delivered to customers but not billed at the
end of the accounting period.
F. Gas in Underground Storage
Gas in underground storage at September 30, 1999, was $9.5 million
compared to $19.4 million at September 30, 1998. This decrease is
the result of the replacement of contract storage with increased
delivery services.
Based on the average cost of purchased gas during September 1999,
the cost of replacing the current portion of gas in underground
storage exceeded last-in, first-out cost at September 30, 1999, by
approximately $4.5 million.
G. Refundable or Recoverable Gas Cost
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
IURC.
H. Allowance For Funds Used During Construction
An allowance for funds used during construction (AFUDC), which
represents the cost of borrowed and equity funds used for
construction purposes, is charged to construction work in progress
during the period of construction and included in "Other - net" on
the Consolidated Statements of Income. An annual AFUDC rate of 6.0
percent was used for 1999 and 1998, while an annual rate of 7.5
percent was used for 1997.
The table below reflects the total AFUDC capitalized and the
portion of which was computed on borrowed and equity funds for all
periods reported.
Thousands 1999 1998 1997
--------- ----- ----- -----
AFUDC - borrowed funds $ 307 $ 448 $ 596
AFUDC - equity funds 376 371 487
---- ---- ------
Total AFUDC capitalized $ 683 $ 819 $1,083
----- ----- ------
I. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
J. Regulatory Assets and Liabilities
Indiana Gas is subject to the provisions of Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain
Types of Regulation (SFAS 71). Regulatory assets represent probable
future revenue to Indiana Gas associated with certain costs which
will be recovered from customers through the ratemaking process.
Regulatory liabilities represent probable future reductions in
revenues associated with amounts that are to be credited to
customers through the ratemaking process. Regulatory assets and
liabilities reflected in the Consolidated Balance Sheet as of
September 30 (in thousands) relate to the following:
Regulatory Assets 1999 1998
----------------- ----- -----
Postretirement benefits other than pensions $ 891 $ 2,688
Unamortized debt discount and expense 10,639 11,388
Amounts due from customers - income taxes, net 2,741 1,778
Deferred acquisition costs 655 677
---- ----
$14,926 $16,531
------- -------
Regulatory Liabilities
Refundable Gas Costs $11,192 $10,730
------- -------
Of the above September 30, 1999 balances, $3.4 million is earning a
return, which is comprised of Amounts due from customers - income
taxes, net and Deferred acquisition costs.
The remaining net assets of $0.3 million, while consisting of items
included in rates but not earning a return, are being recovered
over varying periods. Postretirement benefits other than pensions
will be fully recovered over less than one year. Unamortized debt
discount and expense will be recovered as discussed in Note 1C.
Refundable gas costs will be refunded as discussed in Note 1G.
It is Indiana Gas' policy to continually assess the recoverability
of costs recognized as regulatory assets and the ability to
continue to account for its activities in accordance with SFAS 71,
based on the criteria set forth in SFAS 71. Based on current
regulation, Indiana Gas believes such accounting is appropriate. If
all or part of Indiana Gas' operations cease to meet the criteria
of SFAS 71, a write-off of related regulatory assets and
liabilities would be required. In addition, Indiana Gas would be
required to determine any impairment to the carrying costs of
deregulated plant and inventory assets.
K. Reclassifications
Certain reclassifications have been made in the company's financial
statements of prior years to conform to the current year
presentation. These reclassifications have no impact on previously
reported net income.
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 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, which has been approved by the
boards of directors of both companies, 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 subsidiaries of Vectren.
The merger is conditioned, among other things, upon the approvals
of the shareholders of each company and customary regulatory
approvals. The companies anticipate that the regulatory processes
can be completed in the first quarter of calendar 2000. Transaction
and related costs incurred through September 30, 1999 were $2.7
million and have been deferred.
3. Corporate Restructuring
In April 1997, the Board of Directors of Indiana Energy approved a
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) for
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 involuntary
terminations planned under the company's specific near-term
employee reduction plan, which was scheduled for completion by the
end of fiscal 1999. These costs include separation pay in
accordance with Indiana Gas' severance policy of $3.9 million, and
net curtailment losses related to these employees' postretirement
and pension benefits. As a result of initial work force reductions
during September 1997 and primarily attrition thereafter, most of
the reductions contemplated during the two year period and accrued
originally have been achieved. During the second quarter of fiscal
1999, the company reviewed its remaining accruals for costs
associated with the involuntary work force reductions. Taking into
consideration an unexpectedly high level of voluntary terminations,
the company determined that no additional significant involuntary
work force reductions were likely to occur. Prior to September 30,
1998, $2.2 million of involuntary termination benefits had been
paid. As a result, the severance accrual and other operating
expenses were reduced by $1.7 million during fiscal year 1999.
Indiana Gas' management also committed to sell, abandon or
otherwise dispose of certain assets, including buildings, gas
storage fields and intangible plant. Indiana Gas recorded
restructuring costs of $34.1 million during the fourth quarter of
fiscal 1997 to adjust the carrying value of those assets to
estimated fair value. These assets have been sold or are no longer
in use.
4. Short-Term Borrowings
Effective in March 1999, Indiana Gas implemented a $100 million
commercial paper program. Indiana Gas' commercial paper is priced
to the public at a rate determined by current money market
conditions. At September 30, 1999 Indiana Gas had approximately
$68.6 million outstanding.
In addition to Indiana Gas' $100 million committed facility for its
commercial paper program, Indiana Gas and Capital Corp. have an
aggregate $20 million line of credit. At September 30, 1999,
Indiana Gas had no outstanding bank loans. These lines are
renewable annually. Indiana Gas and Capital Corp. compensate the
participating banks with arrangements that vary from no commitment
fees to a combination of fees that are mutually agreeable. Notes
payable to banks bore interest at rates negotiated with the banks
at the time of borrowing. Indiana Gas' Board of Directors has
authorized short-term borrowings of up to $150 million.
Commercial paper and bank loans outstanding during the reported
periods were as follows:
Thousands 1999(1) 1998(2) 1997(2)
--------- -------- -------- --------
Outstanding at year end $ 68,621 $ 33,705 $ 20,000
Weighted average interest rates at year end 5.4% 5.6% 5.7%
Weighted average interest rates during the year 5.3% 5.7% 5.5%
Weighted average total outstanding during the year $ 32,239 $ 32,293 $ 28,959
Maximum total outstanding during the year $ 68,621 $ 90,900 $ 89,725
(1) Commercial paper
(2) Bank loans
5. Long-Term Debt
In July 1999, Indiana Gas retired $10 million of 8.90% Notes.
In July 1999, Indiana Gas filed a registration statement with the
Securities and Exchange Commission 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.
Consolidated maturities and sinking fund requirements on long-term
debt subject to mandatory redemption during the five years
following 1999 are (in millions) $3.25 in 2002, $18.25 in 2003 and
$3.25 in 2004.
Provisions under which certain of Indiana Gas' Series E, Series F
and Series G Medium Term Notes were issued entitle the holders of
$137 million of these notes to put the debt back to Indiana Gas at
face value at certain specified dates before maturity beginning in
2000. Long-term debt (in millions) subject to the put provisions
during the five years following 1999 totals $5.0 in 2000, $11.5 in
2002 and $3.5 in 2004.
6. Fair Value of Financial Instruments
The estimated fair values of the company's financial instruments
were as follows:
September 30, 1999 September 30, 1998
------------------- -------------------
Carrying Fair Carrying Fair
Thousands Amount Value Amount Value
--------- ------ ------- ------- ------
Cash and cash equivalents $ 14 $ 14 $ 742 $ 742
Notes payable $ 68,621 $ 68,621 $ 33,705 $ 33,705
Long-term debt (includes
amounts due within one year) $181,849 $174,358 $191,975 $208,870
Certain methods and assumptions must be used to estimate the fair
value of financial instruments. Because of the short maturity of
cash and cash equivalents and notes payable, the carrying amounts
approximate fair values for these financial instruments. The fair
value of the company's long-term debt was estimated based on the
quoted market prices for the same or similar issues or on the
current rates offered to the company for debt of the same remaining
maturities.
Under current regulatory treatment, call premiums on reacquisition
of long-term debt are generally recovered in customer rates over
the life of the refunding issue or over a 15-year period (see Note
1C). Accordingly, any reacquisition would not be expected to have a
material effect on the company's financial position or results of
operations.
7. Capital Stock
Indiana Gas has 16 million shares of authorized no par value common
stock.
Indiana Gas has 4 million shares of authorized and unissued
preferred stock.
8. Retirement Plans and Other Postretirement Benefits
Indiana Energy, Inc. and subsidiaries have multiple defined benefit
pension and other postretirement benefit plans. The nonpension
plans include plans for health care and life insurance. All of the
plans are non-contributory with the exception of the health care
plan which contains cost-sharing provisions whereby employees
retiring after January 1, 1996, are required to make contributions
to the plan when increases in the companies' health care costs
exceed the general rate of inflation, as measured by the Consumer
Price Index (CPI). Indiana Gas is a participating company in those
plans and all amounts disclosed below relate solely to Indiana Gas.
The IURC has authorized Indiana Gas to recover the costs related to
postretirement benefits other than pensions under the accrual
method of accounting consistent with Statement of Financial
Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. Amounts accrued prior
to that authorization were deferred as allowed by the IURC and are
currently being amortized.
Net periodic benefit cost, excluding the 1997 curtailment loss
related to the postretirement health care and life insurance plans,
consisted of the following components:
Pension Benefits Other Benefits
Thousands 1999 1998 1997 1999 1998 1997
--------- ------ ------ ------ ------ ------ -----
Service cost $ 1,617 $ 1,133 $1,268 $ 738 $ 608 $ 770
Interest cost 4,887 4,504 4,847 3,098 3,075 3,311
Expected return
on plan assets (7,310) (6,393) (6,606) - - -
Amortization of
transition
obligation (asset) (316) (316) (309) 1,955 1,955 2,280
Amortization of
loss (gain)
and other 108 (19) 884 (149) 1,354 1,397
---- ------ ---- ----- ------ ------
Net periodic
benefit cost $(1,014) $(1,091) $ 84 $5,642 $6,992 $7,758
------- ------- ------- ------ ------ ------
A reconciliation of the plans' benefit obligations, fair value of
plan assets, funded status and amounts recognized in the company's
statement of financial position follows:
Pension Benefits Other Benefits
Thousands 1999 1998 1999 1998
--------- ------ ------ ------ -----
Benefit obligation at
beginning of year $76,708 $65,977 $47,501 $ 42,883
Service cost 1,617 1,133 738 608
Interest cost 4,887 4,504 3,098 3,075
Actuarial loss
(gain) and other (9,216) 9,553 (5,373) 3,998
Benefits paid (4,715) (4,460) (2,944) (3,064)
------- ------- ------- -------
Benefit obligation at
the end of the year 69,281 76,707 43,020 47,500
------- ------- ------- -------
Fair value of plan assets
at beginning of year 97,628 87,801 - -
Actual return on plan assets 8,179 14,194 - -
Employer contributions 119 93 2,944 3,064
Benefits paid (4,715) (4,460) (2,944) (3,064)
------- ------- ------- -------
Fair value of plan assets
at end of year 101,211 97,628 - -
------- ------- -- --
Funded status 31,930 20,921 (43,020) (47,500)
Unrecognized prior service cost 374 3,602 - -
Unrecognized net obligation
(assets) from transition (882) (1,198) 27,375 29,330
Unrecognized net (gain)
loss and other (25,965) (19,371) (12,224) (6,999)
-------- -------- ------- -------
Prepaid (accrued) benefit cost
at end of year $ 5,457 $ 3,954 $(27,869) $(25,169)
------- -------- -------- --------
The aggregate benefit obligation and aggregate fair value of plan
assets for pension plans with benefit obligations in excess of plan
assets were, in thousands, $5,518 and $0, respectively as of
September 30, 1999, and $5,503 and $0, respectively as of September
30, 1998.
Weighted-average assumptions used in the accounting for these plans
were as follows:
Pension Benefits Other Benefits
Thousands 1999 1998 1999 1998
--------- ------ ------ ------ -----
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return
on plan assets 9.00% 9.00% n/a n/a
Rate of compensation
increase 5.00% 5% to 5.5% n/a n/a
CPI rate n/a n/a 3.50% 3.50%
The assumed health care cost trend rate for medical gross eligible
charges used in measuring the postretirement benefit obligation for
the health care plan as of September 30, 1999, was 6.5 percent for
fiscal 2000. This rate is assumed to decrease gradually through
fiscal 2004 to 5.0 percent and remain at that level thereafter.
A 1 percent change in the assumed health care cost trend rates for
the company's postretirement health care plan would have the
following effects:
Thousands 1% Increase 1% Decrease
--------- ----------- -----------
Effect on the aggregate of the service
and interest cost components $ 70 $ (63)
Effect on the postretirement
benefit obligation $ 775 $(701)
The company also participates in Indiana Energy's defined
contribution retirement savings plan which is qualified under
sections 401(a) and 401(k) of the Internal Revenue Code. During
1999, 1998 and 1997, the company made contributions, in millions,
to this plan of $1.2, $1.8 and $2.4, respectively.
9. Commitments
Estimated capital expenditures for 2000 are $58 million. Lease
commitments, in millions, are $1.9 in 2000, $1.1 in 2001, $1.1 in
2002, $1.1 in 2003, $1.0 in 2004 and $3.7 in total for all later
years. There are no leases that extend beyond 2036. Indiana Gas has
storage and supply contracts that extend up to 6 years. Total lease
expense was $2.2 in 1999, $1.0 in 1998 and $2.2 in 1997.
10. Income Taxes
Indiana Energy, Inc. and subsidiary companies file a consolidated
federal income tax return. Indiana Gas' current and deferred tax
expense is computed on a separate company basis. The components of
consolidated income tax expense for Indiana Gas, including amounts
in "Other Income - Net" on the Consolidated Statements of Income,
were as follows:
Thousands 1999 1998 1997
--------- ----- ----- -----
Current:
Federal $15,721 $14,585 $17,817
State 2,656 2,203 2,878
------ ----- ------
18,377 16,788 20,695
------- ------- -------
Deferred:
Federal (477) 1,435 (11,678)
State (3) 156 (940)
--- ---- ---------
(480) 1,591 (12,618)
------- ------ -------
Amortization of investment tax credits (930) (930) (930)
------- ------- -------
Consolidated income tax expense $16,967 $17,449 $ 7,147
------- ------- -------
The recording of restructuring costs of $39.5 million in 1997 had
the effect of decreasing deferred income tax expense by
approximately $15.0 million.
Effective income tax rates were 35.08 percent, 36.18 percent and
34.65 percent of pretax income for 1999, 1998 and 1997,
respectively. This compares with a combined federal and state
income tax statutory rate of 37.93 percent for all years reported.
Individual components of these rate differences were not
significant except investment tax credit which amounted to (1.9%)
in 1999, (1.9%) in 1998 and (4.5%) in 1997.
As required by the IURC, Indiana Gas uses a normalized method of
accounting for deferred income taxes. Deferred income taxes reflect
the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Deferred income taxes
are provided for taxes not currently payable due to, among other
things, the use of various accelerated depreciation methods,
shorter depreciable lives and the deduction of certain construction
costs for tax purposes. Taxes deferred in prior years are being
charged and income credited as these tax effects reverse over the
lives of the related assets.
Significant components of Indiana Gas' net deferred tax liability
as of September 30, 1999, and 1998, are as follows:
Thousands 1999 1998
--------- ----- -----
Deferred tax liabilities:
Accelerated depreciation $ 51,988 $ 50,775
Property basis differences 6,713 6,435
Acquisition adjustment 5,908 6,097
Other (3,285) (6,792)
Deferred tax assets:
Deferred investment tax credit (3,180) (3,533)
Regulatory income tax asset
(liability) 1,039 674
Less deferred income taxes related
to current assets and liabilities 1,748 6,792
------ ------
Balance as of September 30 $ 60,931 $ 60,448
-------- --------
Investment tax credits have been deferred and are being credited to
income over the life of the property giving rise to the credit. The
Tax Reform Act of 1986 eliminated investment tax credits for
property acquired after January 1, 1986.
11. 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 have been conducted 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 by the end
of calendar year 1999. 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 seeking to recover 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 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 three insurance
carriers, with the trial scheduled for early 2000. As of September
30, 1999, Indiana Gas has recorded settlements from other insurance
carriers in an aggregate amount of approximately $15.5 million.
Subsequent to September 30, 1999, an agreement in principle has
been reached with one 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.
12. Affiliate Transactions
ProLiance Energy, LLC (ProLiance), a non-regulated marketing
affiliate of Indiana Energy, began providing natural gas supply and
related services to Indiana Gas effective April 1, 1996. Indiana
Gas' purchases from ProLiance for resale and for injections into
storage for 1999, 1998 and 1997 totaled $231.9 million, $269.2
million and $306.1 million, respectively.
The sale of gas and provision of other services to Indiana Gas by
Indiana Energy's marketing affiliates are subject to regulatory
review through the quarterly gas cost adjustment proceeding
currently pending before the IURC.
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, 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.
While the results of the ProLiance issues mentioned above cannot be
predicted, management does not expect these matters to have a
material impact on Indiana Gas' financial position or results of
operations. However, no assurance can be provided.
CIGMA, LLC, owned jointly and equally by IGC Energy, Inc., an
indirect wholly owned subsidiary of Indiana Energy, and Citizens
By-Products Coal Company, a wholly owned subsidiary of Citizens
Gas, provides materials acquisition and related services that are
used by Indiana Gas. Indiana Gas' purchases of these services
during 1999 and 1998 totaled $16.9 million and $15.6 million,
respectively.
IEI Services, a wholly owned subsidiary of Indiana Energy, provides
information technology, financial, human resources, building and
fleet services. Amounts billed by IEI Services to Indiana Gas for
1999 and 1998 were $30.4 million and $26.7 million, respectively.
Indiana Gas also participates in a centralized cash management
program with its parent, affiliated companies and banks which
permits funding of checks as they are presented.
Amounts owed to affiliates totaled $20.0 million and $15.0 million
at September 30, 1999 and 1998, respectively, and are included in
Accounts Payable on the Consolidated Balance Sheets.
Amounts due from affiliates totaled $1.0 million and $5.4 million
at September 30, 1999 and 1998, respectively, and are included in
Accounts Receivable on the Consolidated Balance Sheets.
13. New Accounting Standards
For fiscal 1999, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information. This statement establishes
standards for the way that public companies report information
about operating segments in annual financial statements and
requires that those companies report selected information about
operating segments in annual and interim financial reports issued
to shareholders. Indiana Gas has no reportable segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. In June 1999, the FASB
issued SFAS 137, which defers the effective date of SFAS 133.
ProLiance utilizes derivative instruments to manage pricing
decisions, minimize the risk of price volatility, and minimize
price risk exposure in the energy markets. SFAS 133 is now
effective for ProLiance in fiscal 2001. ProLiance has not yet
quantified the impact of adopting this statement on its financial
position or results of operations.
14. Summarized Financial Data (Unaudited)
Summarized quarterly financial data (in thousands of dollars) for
1999 and 1998 are as follows:
1999: THREE MONTHS ENDED DEC. 31 MAR. 31 JUNE 30 SEP. 30
------------------------ ------- ------- ------- -------
Operating revenues $124,947 $161,484 $72,131 $60,499
Operating income (loss) 16,577 27,876 4,183 (2,086)
Net income (loss) 12,531 23,998 639 (5,791)
1998: THREE MONTHS ENDED DEC. 31 MAR. 31 JUNE 30 SEP. 30
------------------------ ------- ------- ------- -------
Operating revenues $170,132 $163,131 $70,560 $61,821
Operating income (loss) 20,828 23,427 3,929 (1,933)
Net income (loss) 16,589 19,258 321 (5,285)
Note: Because of the seasonal factors that significantly affect the
companies' operations, the results of operations for interim
periods within fiscal years are not comparable.
Item 9. Changes in and Disagreements with Accountants
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Except for the list of the executive officers, which can be found
in Part I, Item 4(a) of this report, the information required to
be shown in this part for Item 10, Directors and Executive
Officers of the Registrant is incorporated by reference here from
the Form 10-K of the registrant's parent company, Indiana Energy,
Inc. for the fiscal year ended September 30, 1999 (the 1999 10-K).
That statement was prepared and filed electronically with the
Securities and Exchange Commission on December 29, 1999. The
information is included in Item 10 of the 1999 10-K and attached
as Exhibit 99.
Item 11. Executive Compensation
The information required to be shown in this part for Item 11,
Executive Compensation, is incorporated by reference here from the
Form 10-K report of the registrant's parent company, Indiana
Energy, Inc. That report was prepared and filed electronically
with the Securities and Exchange Commission on December 29, 1999.
The information is included in Item 11 of the 1999 10-K and
attached as Exhibit 99.
Contained in the Indiana Energy Form 10-K, Summary Compensation
Table, Column C and Column D, Salary Amounts and Bonus Amounts,
are some compensation dollars which are allocated to subsidiaries
of Indiana Energy other than Indiana Gas. The named executives
received the following compensation, including Bonus, for the
years ended September 30, 1999, 1998 and 1997, as it relates to
only Indiana Gas.
1999 1998 1997
-------- -------- --------
Lawrence A. Ferger $550,990 $588,101 $575,144
Paul T. Baker 389,240 383,881 362,671
Niel C. Ellerbrook 353,783 277,569 291,194
Anthony E. Ard 204,418 196,858 207,087
Timothy M. Hewitt 207,007 196,947 187,487
Item 12. Securities Ownership of Certain Beneficial Owners and Management
The information required to be shown in this part for Item 12,
Securities Ownership of Certain Beneficial Owners and Management,
is incorporated by reference here from the 1999 10-K of the
registrant's parent company, Indiana Energy, Inc. That statement
was prepared and filed electronically with the Securities and
Exchange Commission on December 29, 1999. The information is
included in Item 12 of the 1999 10-K and attached as Exhibit 99.
Item 13. Certain Relationships and Related Transactions
The information required to be shown in this part for Item 13,
Certain Relationships and Related Transactions is incorporated by
reference here from the 1999 10-K of Indiana Energy, Inc. That
statement was prepared and filed electronically with the
Securities and Exchange Commission on December 29, 1999. The
information is included in Item 13 of the 1999 10-K and attached
as Exhibit 99.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following documents are filed as part of this report:
(a)-1 Financial Statements
Location in 10-K
Report of Independent Public Accountants Item 8
Consolidated Statements of Income - 1999,
1998 and 1997 Item 8
Consolidated Statements of Cash Flows - 1999,
1998 and 1997 Item 8
Consolidated Balance Sheets at September 30,
1999 and 1998 Item 8
Consolidated Statements of Common Shareholder's
Equity - 1999, 1998 and 1997 Item 8
Consolidated Schedules of Long-Term Debt
as of September 30, 1999 and 1998 Item 8
Notes to Financial Statements Item 8
(a)-2 Financial Statement Schedules
Report of Independent Public Accountants on Schedules
Schedule II. Valuation and Qualifying
Accounts - 1999, 1998 and 1997
(a)-3 Exhibits
See Exhibit Index
(b) Reports on Form 8-K
On July 30, 1999, Indiana Gas filed a Current Report on Form 8-K
with respect to the release by Indiana Energy, Inc. (Indiana
Energy) of unaudited summary financial information to the
investment community regarding Indiana Energy's consolidated
results of operations, financial position and cash flows for the
three-, nine- and twelve-month periods ended June 30, 1999. Items
reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report -
Third Quarter 1999
On August 17, 1999, Indiana Gas filed a Current Report on Form 8-K
with respect to the filing of an Officers' Certificate, dated
August 13, 1999, distribution Agreement dated August 13, 1999, and
unqualified legal opinion, dated August 13, 1999, with respect to
the Indiana Gas Company, Inc. Medium-Term Note Program effective
July 28, 1999. Items reported include:
Item 5. Other Events
Item 7. Exhibits
1 Distribution Agreement, dated
August 13, 1999, between
Indiana Gas Company, Inc. and
Merrill Lynch & Co., Merrill
Lynch, Pierce, Febber & Smith
Incorporated.
4 Officers' Certificate, dated
August 13, 1999, with respect
to establishment of the
Medium-Term Notes, Series G
(including form of Fixed Rate
Note and Floating Rate Note).
5 Unqualified Legal Opinion,
dated August 13, 1999, with
respect to the Medium-Term
Notes, Series G.
On October 29, 1999, Indiana Gas filed a Current Report on Form
8-K with respect to the release by Indiana Energy, Inc. (Indiana
Energy) of summary financial information to the investment
community regarding Indiana Energy's consolidated results of
operations, financial position and cash flows for the twelve-month
periods ended September 30, 1999. Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report -
Fourth Quarter 1999
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INDIANA GAS COMPANY, INC.
Dated December 29, 1999 /s/ Niel C. Ellerbrook
---------------------------------
Niel C. Ellerbrook, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Lawrence A. Ferger Chairman and Director December 29, 1999
- -------------------------
Lawrence A. Ferger
/s/ Niel C. Ellerbrook President, Chief Executive
- ------------------------- Officer and Director December 29, 1999
Niel C. Ellerbrook
/s/ Paul T. Baker Executive Vice President, December 29, 1999
- ------------------------- Chief Operating Officer and
Paul T. Baker Director
/s/ Jerome A. Benkert Vice President and Controller December 29, 1999
- -------------------------
Jerome A. Benkert
/s/ William G. Mays Director December 29, 1999
- -------------------------
William G. Mays
/s/ J. Timothy McGinley Director December 29, 1999
- -------------------------
J. Timothy McGinley
/s/ John E. Worthen Director December 29, 1999
- -------------------------
John E. Worthen
EXHIBIT INDEX
Exhibit No. Description Reference
2-A Agreement and Plan of Merger Exhibit 2 to Indiana Energy's
dated as of June 11, 1999, Current Report on Form 8-K
among Indiana Energy, Inc., dated as of June 11, 1999, and
SIGCORP, Inc. and Vectren filed as of June 15, 1999.
Corporation.
2-B Amendment No.1, dated December Exhibit 2 to Indiana Energy's
14, 1999 to Agreement and Plan Current Report on Form 8-K
of Merger (Set forth in 2-A, dated as of December 16, 1999,
above) and filed as of December 16,
1999.
2-C Asset Purchase Agreement dated Exhibit 2 and 99.1 to Indiana
December 14, 1999 between Energy, Inc. Current Report on
Indiana Energy, Inc., Dayton Form 8-K dated as of December
Power and Light Co., Inc. and 14, 1999 and filed as of
Number -3CHK with commitment December 28, 1999.
letter for 364-Day Credit
Facility dated December 16, 1999
3-A Amended and Restated Articles of Exhibit 3-A to Indiana Gas' Quarterly
Incorporation. Report on Form 10-Q for the quarterly
period ended March 31, 1997.
3-B Amended and Restated Code of By-Laws. Exhibit 3-B to Indiana Gas' Quarterly
Report on Form 10-Q for the quarterly
period ended March 31, 1997.
4-A Indenture dated February 1, 1991, Exhibit 4(a) to Indiana Gas Company,
between Indiana Gas and Continental Inc.'s Current Report on Form 8-K dated
Bank, National Association. February 1, 1991, and filed February
15, 1991; First Supplemental
Indenture thereto dated
as of February 15, 1991,
(incorporated by reference
to Exhibit 4(b) to Indiana
Gas Company, Inc.'s Current
Report on Form 8-K dated
February 1, 1991, and
filed February 15, 1991);
Second Supplemental Indenture
thereto dated as of September 15, 1991,
(incorporated by reference
to Exhibit 4(b) to Indiana
Gas Company, Inc.'s Current
Report on Form 8-K dated
September 15, 1991,
and filed September 25,
1991); Third Supplemental
Indenture thereto dated
as of September 15,
1991 (incorporated
by reference to Exhibit 4(c)
to Indiana Gas Company, Inc.'s
Current Report on Form 8-K
dated September 15, 1991
and filed September 25, 1991);
Fourth Supplemental Indenture thereto
dated as of December 2, 1992,
(incorporated by reference to Exhibit
4(b) to Indiana Gas Company, Inc.'s
Current Report on Form 8-K dated December
1, 1992, and filed December 8, 1992);
Officers' Certificate pursuant to Section
301 of the Indenture dated as of April 5,
1995, (incorporated by reference to
Exhibit 4(a) to Indiana Gas Company,
Inc.'s Current Report on Form 8-K dated
and filed April 5, 1995); and Officers'
Certificate pursuant to Section 301 of
the Indenture dated as of November 19,
1997 (incorporated by reference to
Exhibit 4 to Indiana Gas Company, Inc.'s
Report on Form 8-K dated November 19,
1997 and filed December 5, 1997);
Officer's Certificate pursuant to Section
301 of the Indenture dated as of August
13, 1999 (incorporated by reference to
Exhibit 4 to Indiana Gas Company Inc.,'s
Current Report on Form 8-K dated August
13, 1999, and filed August 17, 1999).
10-A Employment Agreement between Indiana Exhibit 10-A to Indiana Energy,
Energy, Inc. and Lawrence A. Ferger Inc.'s Quarterly Report on Form 10-Q
effective January 1, 1999. for the quarterly period ended
December 31, 1998.
10-B Employment Agreement between Indiana Exhibit 10-B to Indiana Energy,
Energy, Inc. and Niel C. Ellerbrook Inc.'s Quarterly Report on Form 10-Q
effective January 1, 1999. for the quarterly period ended
December 31, 1998.
10-C Employment Agreement between Indiana Exhibit 10-C to Indiana Energy,
Energy, Inc. and Paul T. Baker Inc.'s Quarterly Report on Form 10-Q
effective January 1, 1999. for the quarterly period ended
December 31, 1998.
10-D Employment Agreement between Indiana Exhibit 10-D to Indiana Energy,
Energy, Inc. and Anthony E. Ard Inc.'s Quarterly Report on Form 10-Q
effective January 1, 1999. for the quarterly period ended
December 31, 1998.
10-E Employment Agreement between Indiana Exhibit 10-E to Indiana Gas Company,
Energy, Inc. and Timothy M. Hewitt, Inc.'s Quarterly Report on Form 10-Q
effective January 1, 1999. for the quarterly period ended
December 31, 1998.
10-F Indiana Energy, Inc. Unfunded Exhibit 10-G to Indiana Energy, Inc.'s
Supplemental Retirement Plan for a Quarterly Report on Form 10-Q for the
Select Group of Management Employees quarterly period ended December 31,
as amended and restated effective 1998.
December 1, 1998.
10-G Indiana Energy, Inc. Nonqualified Exhibit 10-H to Indiana Energy, Inc.'s
Deferred Compensation Plan effective Quarterly Report on Form 10-Q for the
January 1, 1999. quarterly period ended December 31,
1998.
10-H Amendment to Indiana Energy, Inc. Exhibit 10-I to Indiana Energy, Inc.'s
Executive Restricted Stock Plan Quarterly Report on Form 10-Q for the
effective December 1, 1998. quarterly period ended December 31,
1998.
10-I Indiana Energy, Inc. Annual Exhibit 10-D to Indiana Energy's
Management Incentive Plan effective 1987 Annual Report on Form 10-K.
October 1, 1987.
10-J First Amendment to the Indiana Exhibit 10-Q to Indiana Energy's 1998
Energy, Inc. Annual Management Annual Report on Form 10-K.
Incentive Plan effective (set forth in 10-I above)
October 1, 1997.
10-K Amendment to Indiana Energy, Inc. Exhibit 10-J to Indiana Energy, Inc.'s
Directors' Restricted Stock Plan, Quarterly Report on Form 10-Q for the
effective December 1, 1998. quarterly period ended December 31, 1998.
10-L Formation Agreement among Indiana Exhibit 10-C to Indiana Energy's
Energy, Inc., Indiana Gas Company, Quarterly Report on Form 10-Q for the
Inc., IGC Energy, Inc., Indiana quarterly period ended March 31, 1996.
Energy Services, Inc., Citizens Gas
& Coke Utility, Citizens Energy
Services Corporation and ProLiance
Energy, LLC, effective March 15, 1996.
10-M Gas Sales and Portfolio Exhibit 10-C to Indiana Gas' Quarterly
Administration Agreement Report on Form 10-Q for the quarterly
between Indiana Gas Company, period ended March 31, 1996.
Inc. and ProLiance Energy, LLC,
effective March 15, 1996, for
services to begin April 1, 1996.
10-N Amended appendices to the Gas Sales Exhibit 10-A to Indiana Gas' Quarterly
and Portfolio Administration Report on Form 10-Q for the quarterly
Agreement between Indiana Gas period ended March 31, 1999.
Company, Inc. and ProLiance Energy,
LLC effective November 1, 1998.
10-O Amended appendices to the Gas Sales Filed herewith.
and Portfolio Administration
Agreement between Indiana Gas
Company, Inc. and ProLiance Energy,
LLC effective November 1, 1999.
10-P Indian Energy, Inc. Executive Exhibit 10-O to Indiana Energy,
Restricted Stock Plan as amended and Inc.'s 1998 Annual report on
restated effective October 1, 1998 Form 10-K.
10-Q Indian Energy, Inc. Director's Exhibit 10-B to Indiana Energy,
Restricted Stock Plan as amended and Inc.'s Quarterly Report on Form
restated effective May 1, 1997 10-Q for the quarterly period
ended June 30, 1997.
12 Computation of Ratio of Earnings
to Fixed Charges Filed herewith.
21 Subsidiaries of Indiana Gas
Company, Inc. Filed herewith.
23 Consent of Independent Public Accountants. Filed herewith.
27 Financial Data Schedule Filed herewith.
99 Exhibits
99.1 Indiana Energy, Inc. Form 10-K Filed Herewith
for the fiscal year ended
September 30, 1999, Item 10
99.2 Indiana Energy, Inc. Form 10-K Filed Herewith
for the fiscal year ended
September 30, 1999, Item 11
99.3 Indiana Energy, Inc. Form 10-K Filed Herewith
for the fiscal year ended
September 30, 1999, Item 12
99.4 Indiana Energy, Inc. Form 10-K Filed Herewith
for the fiscal year ended
September 30, 1999, Item 13
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30
Col. A Col B. Col C. Col. D Col. E Col. F Col. G
Additions Deductions
For Purposes
Charged to For Which
Beginning Costs and Reserves Other Ending
Description Year Balance Expenses Other Were Created Changes Balance
------------------------------------------------------------------------------------------------------
RESERVE DEDUCTED FROM APPLICABLE ASSET
Reserve for uncollectible accounts 1997 $1,853 2,655 - 2,724 - $1,784
1998 $1,784 3,470 - 4,354 - $ 900
1999 $900 2,580 - 2,747 - $ 733
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To Indiana Gas Company, Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Item 8, in this
Form 10-K, and have issued our report thereon dated October 29, 1999. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedules listed in Item 14(a)-2 are the responsibility of the
company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Indianapolis, Indiana
October 29, 1999