SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6494
INDIANA GAS COMPANY, INC.
--------------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-0793669
--------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1630 North Meridian Street, Indianapolis, Indiana 46202
(Address of principal executive offices) (Zip Code)
317-926-3351
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock - Without par value 9,080,770 November 10, 2000
- -------------------------------- ---------- -----------------
Class Number of Date
shares
TABLE OF CONTENTS
Item Page
Numbe Number
r
Part I - Financial Information
1 Financial Statements (Unaudited)
Indiana Gas Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-12
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
3 Quantitative and Qualitative Disclosure about
Market Risk 19
Part II - Other Information
1 Legal Proceedings 20
4 Submission of Matters to a Vote of Security Holders 20
6 Exhibits and Reports on Form 8-K 20
Signatures 20
3
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
September 30 December 31
ASSETS 2000 1999 1999
Utility Plant:
Original cost $1,039,176 $ 990,780 $1,005,304
Less - accumulated
depreciation 425,599 398,912 407,887
---------- --------- ---------
Net utility plant 613,577 591,868 597,417
Current Assets:
Cash and cash equivalents 4,924 14 353
Accounts receivable, less
reserves of $849, $733 and
$1,739, respectively 22,304 17,716 37,058
Accrued unbilled revenues 8,669 8,136 36,634
Inventories 10,400 10,311 12,442
Prepaid gas delivery service 46,788 25,810 20,937
Prepaid taxes 16,614 - -
Recoverable fuel and natural
gas costs 16,218 - -
Prepayments and other
current assets 13,531 11,815 16,468
---------- --------- ---------
Total current assets 139,448 73,802 123,892
Other Assets:
Unamortized debt discount
and expense 11,201 11,954 11,906
Regulatory income tax asset 528 2,741 2,741
Other 2,721 2,159 3,914
---------- -------- ---------
Total other assets 14,450 16,854 18,561
TOTAL ASSETS $ 767,475 $ 682,524 $ 739,870
========== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - Thousands)
SHAREHOLDER'S EQUITY AND September 30 December 31
LIABILITIES
2000 1999 1999
Capitalization:
Common stock and paid-in capital $ 142,995 $ 142,995 $ 142,995
Retained earnings 84,598 100,431 105,627
Total common shareholder's
equity 227,593 243,426 248,622
Long-term debt, net of current
maturities 211,274 181,849 211,849
--------- --------- ---------
Total capitalization 438,867 425,275 460,471
Commitments and Contingencies
Current Liabilities:
Current maturities and sinking
fund requirements
of long-term debt - - -
Notes payable 142,784 68,621 82,172
Accounts payable 38,884 33,081 37,111
Refunds to customers and
customer deposits 12,529 25,905 22,021
Accrued taxes 9,809 12,471 16,208
Accrued interest 6,637 1,173 5,252
Other current liabilities 15,015 13,398 12,697
--------- --------- ---------
Total current liabilities 225,658 154,649 175,461
Deferred Credits and Other Liabilities:
Deferred income taxes 55,254 60,931 61,061
Accrued postretirement benefits
other than pensions 30,291 27,868 28,474
Unamortized investment tax
credit 7,455 8,383 8,152
Other 9,950 5,418 6,251
--------- --------- ----------
Total deferred credits and
other liabilities 102,950 102,600 103,938
--------- --------- ----------
TOTAL SHAREHOLDER'S EQUITY AND
LIABILITIES $ 767,475 $ 682,524 $ 739,870
========= ========= ==========
The accompanying notes are an integral part of these
consolidated financial statements.
5
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands)
Three Months Nine Months
Ended September 30 Ended September 30
2000 1999 2000 1999
OPERATING REVENUES $ 75,417 $ 60,499 $ 333,338 $ 294,114
COST OF GAS 45,070 30,010 192,849 147,754
-------- -------- --------- ---------
Total margin 30,347 30,489 140,489 146,360
OPERATING EXPENSES:
Operation and
maintenance 24,898 24,588 72,908 68,882
Merger costs 432 - 15,726 -
Depreciation and
amortization 9,179 8,720 27,329 25,711
Income tax expense
(benefit) (4,750) (3,879) 689 10,529
Taxes other than income
taxes 2,436 3,146 11,080 11,265
-------- -------- -------- --------
32,195 32,575 127,732 116,387
OPERATING INCOME (LOSS) (1,848) (2,086) 12,757 29,973
OTHER INCOME - NET 591 243 1,279 758
--------- --------- --------- ---------
INCOME (LOSS)BEFORE
INTEREST (1,257) (1,843) 14,036 30,731
INTEREST EXPENSE 5,463 3,948 15,422 11,885
--------- --------- --------- ---------
NET INCOME (LOSS) $ (6,720) $ (5,791) $ (1,386) $ 18,846
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
6
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - Thousands)
Twelve Months
Ended September 30
2000 1999
OPERATING REVENUES $ 470,585 $ 419,061
COST OF GAS 271,912 215,691
-------- --------
Total margin 198,673 203,370
OPERATING EXPENSES:
Operation and maintenance 95,855 90,411
Merger costs 15,726 -
Depreciation and
amortization 36,203 34,026
Income taxes 6,894 16,967
Taxes other than income
taxes 15,510 15,416
-------- --------
170,188 156,820
OPERATING INCOME 28,485 46,550
OTHER INCOME - NET 1,531 839
-------- ---------
INCOME BEFORE INTEREST 30,016 47,389
INTEREST EXPENSE 20,506 16,012
NET INCOME $ 9,510 $ 31,377
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
7
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Thousands)
Nine Months Twelve Months
Ended September 30 Ended September 30
2000 1999 2000 1999
CASH FLOWS FROM (REQUIRED FOR)
OPERATING ACTIVITIES:
Net Income (Loss) $ (1,386) $ 18,846 $ 9,510 $ 31,377
Adjustments to reconcile
net income to cash
provided from operating
activities -
Depreciation and
amortization 27,329 25,711 36,203 34,026
Deferred income taxes
and investment tax
credits (6,504) (1,310) (6,605) (1,410)
--------- -------- --------- --------
19,439 43,247 39,108 63,993
Changes in assets and liabilities -
Receivables - net
(including unbilled
revenues) 42,719 44,407 (5,121) (2,240)
Inventories 2,042 8,695 (89) 9,899
Accounts payable,
refunds to customers,
customer deposits,
advance payments and
other current
liabilities (5,401) (6,576) (9,424) 8,267
Accrued taxes and
interest (5,014) (950) 2,802 7,447
Recoverable/refundable (16,218) (3,151) (16,218) 462
gas costs
Prepaid taxes (16,614) - (16,614) -
Prepayments and other
current assets 2,937 133 (1,716) 539
Prepaid gas delivery
service (25,851) (25,810) (20,978) (25,810)
Accrued postretirement
benefits other than
pensions 1,817 1,984 2,423 2,699
Other - net 3,406 (2,405) 1,651 (2,301)
-------- -------- --------- --------
Total adjustments (16,177) 16,327 (63,284) (1,038)
-------- -------- --------- --------
Net cash flows from
(required for)
operating activities 3,262 59,574 (24,176) 62,955
CASH FLOWS (REQUIRED FOR)
FROM FINANCING ACTIVITIES:
Retirement of long-term
debt (575) (10,115) (575) (10,126)
Proceeds from long-term
debt - - 30,000 -
Net change in short-term
borrowings 60,612 19,946 74,163 34,916
Dividends on common stock (19,643) (21,300) (25,343) (28,300)
--------- -------- -------- --------
Net cash flows (required
for) from financing
activities 40,394 (11,469) 78,245 (3,510)
CASH FLOWS (REQUIRED FOR)
INVESTING ACTIVITIES:
Capital expenditures (43,628) (48,111) (58,397) (60,173)
Other 4,543 - 9,238 -
--------- -------- --------- --------
Net cash flows required
for investing
activities (39,085) (48,111) (49,159) (60,173)
--------- -------- --------- --------
Net increase (decrease) in
cash 4,571 (6) 4,910 (728)
Cash and cash equivalents
at beginning of period 353 20 14 742
-------- -------- --------- --------
Cash and cash equivalents
at end of period $ 4,924 $ 14 $ 4,924 $ 14
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
8
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Indiana Gas Company, Inc. and its subsidiary companies (Indiana
Gas or the Company) provide natural gas and transportation
services to a diversified base of customers in 311 communities in
49 of Indiana's 92 counties. On October 31, 2000, the acquisition
of the natural gas distribution assets of The Dayton Power and
Light Company was completed (see Note 5).
2. Financial Statements
The interim consolidated financial statements included in this
report have been prepared, without audit, as provided in the
rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States
have been omitted as provided in such rules and regulations.
Indiana Gas believes that the information in this report reflects
all adjustments necessary to fairly state the results of the
interim periods reported, that all such adjustments are of a
normal recurring nature, and the disclosures are adequate to make
the information presented not misleading. The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States 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 statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the
notes thereto included in Indiana Gas' Form 10-K/A, filed on May
15, 2000, that reflects the change in fiscal year end to December
31 from September 30 to conform its year end to the year end of
its parent company (see Note 3 below).
Because all of the common stock of Indiana Gas is owned by
Vectren (see Note 3 below), Indiana Gas does not report earnings
per share.
Because of the seasonal nature of Indiana Gas' gas distribution
operations, the results shown on a quarterly basis are not
necessarily indicative of annual results.
3. Indiana Energy, Inc. and SIGCORP, Inc. Merger
On June 14, 1999, Indiana Energy, Inc. (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). The merger was conditioned,
among other things, upon the approvals of the shareholders of
each company and customary regulatory approvals. Such approvals
were obtained and the merger was consummated on March 31, 2000.
As provided for in the merger agreement, Indiana Energy
shareholders received one share of Vectren common stock for each
share of Indiana Energy held at the March 31, 2000 closing date.
SIGCORP shareholders received one and one-third shares of Vectren
common stock for each share of SIGCORP held at the March 31, 2000
closing date. The transaction was accounted for as a pooling of
interests. The transaction was a tax-free exchange of shares.
Indiana Gas, formerly a wholly owned subsidiary of Indiana
Energy, operates as a separate wholly owned subsidiary of
Vectren.
4. Merger and Merger Related Costs
Merger costs incurred by Vectren for the three, nine and twelve
months ended September 30, 2000 totaled $0.9 million, $31.3
million and $31.3 million, respectively. These costs relate
primarily to transaction costs, severance and other merger
integration activities. Merger costs are reflected in the
financial statements of the operating subsidiaries in which
merger savings are expected to be realized. Merger costs
expensed by Indiana Gas for the three and nine months ended
September 30, 2000 totaled $0.4 million, $15.7 million and $15.7
million, respectively.
As a result of merger integration activities, management has
identified certain information systems which are expected to be
retired in 2001. Accordingly, the useful lives of these assets
have been shortened to reflect this decision. These information
system assets are owned by a wholly owned subsidiary of Vectren
and the fee allocated by the subsidiary for the use of these
systems by Indiana Gas is reflected as operations and maintenance
expense in the accompanying financial statements. As a result of
the shortened useful lives, additional fees were incurred by
Indiana Gas during the third quarter, resulting in an increase in
operations expense of approximately $3.3 million for the three
months ended and $6.7 million for the nine and twelve months
ended September 30, 2000.
5. Acquisition of the Gas Distribution Assets of The Dayton
Power and Light Company
On December 15, 1999, Indiana Energy, now Vectren, announced that
the board of directors had approved a definitive agreement under
which the company will acquire the natural gas distribution
assets of The Dayton Power and Light Company (DP&L), which will
add 305,000 gas distribution customers in 16 counties in west
central Ohio. In June 2000, the Department of Justice concluded
that it had completed its review of its Hart Scott Rodino
notification filings and would take no further action. In July
2000, the Public Utilities Commission of Ohio granted approval
for the transaction. In October 2000, Vectren received approval
from the SEC under the Public Utility Holding Company Act, the
final approval necessary to complete the transaction. On October
31, 2000, the approximate $465 million acquisition was completed.
Operations will be conducted under the name Vectren Energy
Delivery of Ohio, Inc. (VEDO). Under VEDO's ownership structure,
Indiana Gas holds a 47 percent undivided ownership interest and
VEDO has a 53 percent undivided ownership interest. Vectren
Utility Holdings, Inc., the holding company of Vectren's
operating public utilities, established a 435 million commercial
paper program to fund the majority of the acquisition. This
facility was utilized as at October 31, 2000, and will be
replaced over time with permanent financing. Indiana Gas'
portion of the acquisition was funded through the use of a
combination of short-term borrowings from Vectren Utility
Holdings and commercial paper.
6. Gas in Underground Storage
Based on the average cost of purchased gas during September 2000,
the cost of replacing the current portion of gas in underground
storage exceeded last-in, first-out cost at September 30, 2000,
by approximately $19.9 million.
7. Refundable or Recoverable Natural Gas Costs
All metered gas rates contain a gas cost adjustment clause, which
allows for adjustment in charges for changes in the cost of
purchased gas.
Indiana Gas records any adjustment clause under-or-overrecovery
each month in revenues. A corresponding asset or liability is
recorded until such time as the under-or-overrecovery is billed
or refunded to utility customers. The cost of gas sold is charged
to operating expense as delivered to customers and the cost of
fuel for electric generation is charged to operating expense when
consumed.
8. Cash Flow Information
For the purposes of the consolidated statements of cash flows,
Indiana Gas considers cash investments with an original maturity
of three months or less to be cash equivalents. Cash paid during
the periods reported for interest and income taxes were as
follows:
Nine Months Twelve Months
Ended Ended
September 30 September 30
2000 1999 2000 1999
------- ------- ------- -------
Thousands
Interest (net of amount
capitalized) $13.7 $15.2 $12.8 $16.0
Income taxes $23.4 $14.9 $25.4 $16.0
9. Environmental Matters
In the past, Indiana Gas and others operated facilities for the
manufacture of gas. Given the availability of natural gas
transported by pipelines, these facilities 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 the
regulatory thresholds at these sites.
Indiana Gas has identified the existence, location and certain
general characteristics of 26 gas manufacturing and storage sites
for which it may have some remedial responsibility. Indiana Gas
has completed a remedial investigation/feasibility study (RI/FS)
at one of the sites under an agreed order between Indiana Gas and
the Indiana Department of Environmental Management (IDEM), and a
Record of Decision (ROD) was issued by IDEM in January 2000.
Although Indiana Gas has not begun an RI/FS at additional sites,
Indiana Gas has submitted several of the sites to IDEM's
Voluntary Remediation Program (VRP) and is currently conducting
some level of remedial activities including groundwater
monitoring at certain sites where deemed appropriate and will
continue remedial activities at the sites as appropriate and
necessary.
Indiana Gas has accrued the estimated costs for further
investigation, remediation, groundwater monitoring and related
costs for the sites. While the total costs which may be incurred
in connection with addressing these sites cannot be determined at
this time, Indiana Gas has accrued costs that it reasonably
expects to incur.
Indiana Gas has recovered these estimated accrued costs from
insurance carriers and other potentially responsible parties
(PRPs). Indiana Gas has PRP agreements in place for 19 of the 26
sites, which serve to limit Indiana Gas' share of response costs
at these 19 sites to between 20 and 50 percent. For these sites,
Indiana Gas has accrued only its proportionate share of the
estimated response costs.
With respect to insurance coverage, as of September 30, 2000,
Indiana Gas has received and recorded settlements from all known
insurance carriers in an aggregate amount of approximately $20.3
million.
These environmental matters have had no material impact on
earnings since costs recorded to date approximate PRP and
insurance settlement recoveries. While Indiana Gas has recorded
all costs which it presently expects to incur in connection with
activities at these sites, it is possible that future events may
require some level of additional remedial activities which are
not presently foreseen.
10. Commitments and Contingencies
Indiana Gas is party to various legal proceedings arising in the
normal course of business. In the opinion of management,with the
exception of litigation matters related to Proliance, there are
no legal proceedings pending against Indiana Gas that are likely
to have a material adverse effect on the financial position or
results of operations. Refer to Note 11 for litigation matters
related to ProLiance Energy, LLC.
11. Proliance Energy, LLC
ProLiance Energy, LLC (ProLiance), a 50 percent owned, non-
regulated, marketing affiliate of Vectren, began providing
natural gas and related services to Indiana Gas, Citizens Gas and
Coke Utility (Citizens Gas) and others 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 (GCA) process administered by the IURC.
On September 12, 1997, the 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 through 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
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. Through a series of appeals, the order was finally
considered by the Indiana Supreme Court.
On September 22, 2000, the Indiana Supreme Court issued a
decision affirming the IURC's decision on Proliance in all
respects. 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.
12. Affiliate Transactions
ProLiance provides natural gas supply and related services to
Indiana Gas. Indiana Gas' purchases from ProLiance for resale
and for injections into storage for the three, nine and twelve
months ended September 30, 2000, totaled $81.2 million, $217.5
million and $291.7 million, respectively. Indiana Gas' purchases
from ProLiance for the three, nine and twelve months ended
September 30, 1999, totaled $52.0 million, $166.1 million and
$232.6 million, respectively.
ProLiance has a standby letter of credit facility with a bank for
letters up to $30 million. This facility is secured in part by a
support agreement from Indiana Gas. Letters of credit outstanding
at September 30, 2000 totaled $22.4 million. On November 1,
2000, the credit facility was increased to $45 million.
CIGMA, LLC, owned jointly and equally by a wholly owned
subsidiary of Vectren and a third party, provides materials
acquisition and related services that are used by Indiana Gas.
Indiana Gas' purchases of these services during the three, nine
and twelve months ended September 30, 2000, totaled $4.2 million,
$12.4 million and $16.6 million, respectively. Indiana Gas'
purchases of these services during the three, nine and twelve
months ended September 30, 1999, totaled $3.8 million, $12.3
million and $16.9 million, respectively.
Reliant Services, LLC (Reliant), owned jointly and equally by a
wholly owned subsidiary of Vectren and a third party, provides
utility locating, meter reading and construction services to
Indiana Gas and others. Amounts paid by Indiana Gas to Reliant
for such services totaled $1.1 million, $3.1 million and $4.0
million, respectively, for the three, nine and twelve months
ended September 30, 2000. Amounts paid by Indiana Gas to Reliant
totaled $1.1 million, $2.5 million and $2.7 million,
respectively, for the three, nine and twelve months ended
September 30, 1999.
Certain wholly owned subsidiaries of Vectren provide support
services to Indiana Gas. Services provided include corporate-
level management services, information technology, financial,
human resources, purchasing, building and fleet services.
Amounts billed by the affiliates to Indiana Gas for the three,
nine and twelve months ended September 30, 2000, totaled $13.1
million, $34.3 million and $42.5 million, respectively. Amounts
billed by the affiliates to Indiana Gas for the three, nine and
twelve months ended September 30, 1999, totaled $7.6 million,
$23.7 million and $30.4 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 $31.0 million, $20.0 million
and $28.8 million at September 30, 2000 and 1999 and December 31,
1999, respectively, and are included in Accounts Payable on the
Consolidated Balance Sheets.
13. Segment Reporting
Statement of Financial Accounting Standards (SFAS) No. 131,
'Disclosures about Segments of an Enterprise and Related
Information' establishes standards for the reporting of
information about operating segments in financial statements and
disclosure about products, services and geographic areas.
Operating segments are defined as components of an enterprise for
which separate financial information is available and evaluated
regularly by the chief operating decision makers in deciding how
to allocate resources and in the assessment of performance.
Indiana Gas operates as one reportable segment.
14. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, 'Accounting for Derivative Instruments and
Hedging Activities.' The statement, as amended by SFAS No. 138,
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. SFAS No. 133 requires that a company formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting. Indiana Gas is required to adopt
SFAS No. 133 no later than January 1, 2001. Through arrangements
with its affiliates, Indiana Gas utilizes derivative instruments
to manage pricing decisions, minimize the risk of price
volatility, and minimize price risk exposure in the energy
markets. In preparation for the implementation of this new
statement, Vectren has formed a team to identify and analyze its
contracts and its subsidiaries' contracts which could be subject
to the new statement, develop required documentation, define
relevant processes and information system needs and promote
internal awareness of the requirements and potential effects of
the new statement, for its subsidiaries. While Vectren continues
to analyze and follow the development of implementation
guidelines, at this time, Vectren has not quantified the impact
of adopting this statement on Indiana Gas' financial position or
results of operations and is unable to predict whether the
implementation of this accounting standard will be material to
Indiana Gas' results of operations and financial position.
However, the adoption of SFAS No. 133 could increase volatility
in earnings and other comprehensive income.
15. Reclassifications
Certain reclassifications have been made to the prior periods'
financial statements to conform to the current year presentation.
These reclassifications have no impact on net income previously
reported.
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Indiana Energy, Inc. and SIGCORP, Inc. Merger
On March 31, 2000, the merger of Indiana Energy, Inc. (Indiana
Energy) and SIGCORP, Inc.(SIGCORP) and into Vectren Corporation
(Vectren) was consummated with a tax-free exchange of shares and
was accounted for as a pooling of interests. As provided for in
the merger agreement, Indiana Energy shareholders received one
share of Vectren common stock for each share of Indiana Energy
held at the March 31, 2000 closing date. SIGCORP shareholders
received one and one-third shares of Vectren common stock for
each share of SIGCORP held at the March 31, 2000 closing date.
Indiana Gas Company, Inc. (Indiana Gas), formerly a wholly owned
subsidiary of Indiana Energy, operates as a separate wholly owned
subsidiary of Vectren.
Results of Operations
Net Income (Loss)
Consolidated net loss was $6.7 million for the three months ended
September 30, 2000. Consolidated net loss before merger and
merger related charges (see merger and merger related costs
below) was $4.4 million for the three months ended September 30,
2000, as compared to net loss of $5.8 million for the same period
in 1999.
Consolidated net loss was $1.4 million for the nine months ended
September 30, 2000. Consolidated net income before merger and
merger related charges was $14.5 million for the nine months
ended September 30, 2000, as compared to net income of $18.9
million for the same period in 1999.
Consolidated net income was $9.5 million for the twelve months
ended September 30, 2000. Consolidated net income before merger
and merger related charges was $25.4 million for the twelve
months ended September 30, 2000, as compared to net income of
$31.4 million for the same period in 1999.
Margin (Operating Revenues Less Cost of Gas)
Utility margin for the three months ended September 30, 2000, of
$30.3 million was comparable to the same period last year.
Utility margin for the nine months ended September 30, 2000, was
$140.5 million compared to $146.4 million for the same period
last year. Gas margin was lower due to weather being 3 percent
warmer than the prior year nine month period and 14 percent
warmer than normal. The warmer temperatures caused a 5% percent
decline from the prior year period in total residential and
commercial gas sales. Additionally, gas margin was negatively
affected by a less favorable sales mix to industrial and contract
customers. The decrease in gas margin was partially offset by
additional residential and commercial customer growth.
Utility margin for the twelve months ended September 30, 2000,
was $198.7 million compared to $203.4 million for the same period
last year for the same reasons explained above.
Indiana Gas' rates for gas transportation generally provide for
the same margins as are earned on the sale of gas under its
applicable sales tariffs. Approximately one-half of total gas
system throughput represents gas used for space heating and is
affected by weather.
Total cost of gas sold increased $15.1 million, or 50 percent,
$45.1 million, or 31 percent, and $56.2 million, or 26 percent,
respectively, for the three, nine and twelve month periods ended
September 30, 2000, compared to the comparable periods in 1999
due to significantly higher average per unit purchased gas costs
incurred primarily during the six month period ended September
30, 2000, compared to the year ago period. Indiana Gas is
allowed full recovery of such changes in purchased gas costs from
their retail retail customers through commission-approved gas
cost adjustment mechanisms.
Operating Expenses
Operation and maintenance expenses for the three months ended
September 30, 2000, were comparable to the same period in 1999.
Operation and maintenance expenses increased $4.0 million, or 5.8
percent, for the nine months ended September 30, 2000, when
compared to the same period a year ago due to $6.7 million
additional allocations from a wholly owned subsidiary of Vectren
to reflect the shortened useful lives of certain information
systems in use by Indiana Gas (see merger and merger related
costs below). Additionally, operation and maintenance expenses
were higher during the nine months ended September 30, 2000 as
compared to the comparable period in 1999 due to a first quarter
1999 reversal of part of a restructuring reserve of $1.3 million.
The increases were partially offset by a reduction in general and
administrative expenses.
Operation and maintenance expenses increased $5.4 million, or 6.0
percent, for the twelve months ended September 30, 2000 when
compared to the same period last year. In addition to the items
noted above, the increase reflects additional support costs
related to the implementation of a new customer information
system.
Depreciation and amortization increased $0.5 million, $1.6
million and $2.2 million for the three, nine and twelve months
ended September 30, 2000, when compared to the same periods last
year due primarily to additions to plant.
Income taxes decreased $0.9 million, $9.8 million and $10.1
million, respectively, for the three, nine and twelve months
ended September 30, 2000, when compared to the same periods a
year ago due to lower taxable income.
Merger and Merger Related Costs
Merger costs incurred by Vectren for the three, nine and twelve
months ended September 30, 2000 totaled $0.9 million, $31.3
million and $31.3 million, respectively. These costs relate
primarily to transaction costs, severance and other merger
integration activities. Vectren expects to realize net merger
savings of nearly $200 million over the next ten years from the
elimination of duplicate corporate and administrative programs
and greater efficiencies in operations, business processes and
purchasing. The continued merger integration activities, which
will contribute to merger savings, will be substantially complete
by 2001. Merger costs are reflected in the financial statements
of the operating subsidiaries in which merger savings are
expected to be realized. Merger costs expensed by Indiana Gas for
the three, nine and twelve months ended September 30, 2000
totaled $0.4 million, $15.7 million and $15.7 million,
respectively.
As a result of merger integration activities, management has
identified certain information systems which are expected to be
retired in 2001. Accordingly, the useful lives of these assets
have been shortened to reflect this decision. These information
system assets are owned by a wholly owned subsidiary of Vectren
and the fees allocated by the subsidiary for the use of these
systems by Indiana Gas is reflected in operation and maintenance
expenses in the accompanying financial statements. As a result
of the shortened useful lives, additional fees were incurred by
Indiana Gas during the third quarter, resulting in an increase in
operation and maintenance expense of $3.3 million for the three
month period and $6.7 million for the nine and twelve months
ended September 30, 2000.
Interest Expense
Interest expense increased $1.5 million, $3.5 million and $4.5
million, respectively, for the three, nine and twelve months
ended September 30, 2000, when compared to the same periods one
year ago due primarily to the additional average debt outstanding
during the comparative periods and higher interest rates on short-
term borrowings. The additional debt is partially attributed to
higher cost of purchased gas and decreased gas margins due to
warmer weather.
Other Operating Matters
Acquisition of the Gas Distribution Assets of The Dayton Power
and Light Company
On December 15, 1999, Indiana Energy, now Vectren, announced that
the board of directors had approved a definitive agreement under
which the company will acquire the natural gas distribution
assets of The Dayton Power and Light Company (DP&L), which will
add 305,000 gas distribution customers in 16 counties in west
central Ohio. In June 2000, the Department of Justice concluded
that it had completed its review of its Hart Scott Rodino
notification filings and would take no further action. In July
2000, the Public Utilities Commission of Ohio granted approval
for the transaction. In October 2000, Vectren received approval
from the SEC under the Public Utility Holding Company Act for the
acquisition, the final approval necessary to complete the
transaction. On October 31, 2000, the acquisition was completed
for a purchase price of approximately $465 million. Operations
will be conducted under the name Vectren Energy Delivery of Ohio,
Inc (VEDO). Under VEDO's ownership structure, Indiana Gas holds
a 47 percent undivided ownership and VEDO has a 53 percent
undivided ownership interest. Vectren Utility Holdings, Inc., the
holding company of Vectren's operating public utilities,
established a $435 million commercial paper program to fund the
majority of the acquisition. This facility was utilized at
October 31, 2000, and will be replaced over time with permanent
financing. Indiana Gas' portion of the acquisition was funded
through the use of a combination of short-term borrowings from
Vectren Utility Holdings and commercial paper.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a 50 percent owned, non-
regulated, marketing affiliate of Vectren, began providing
natural gas and related services to Indiana Gas, Citizens Gas and
Coke Utility (Citizens Gas) and others 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 (GCA) process administered by the IURC.
On September 12, 1997, the 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 through 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
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. Through a series of appeals, the order was finally
considered by the Indiana Supreme Court.
On September 22, 2000, the Indiana Supreme Court issued a
decision affirming the IURC's decision on Proliance in all
respects. 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.
Environmental Matters
In the past, Indiana Gas and others operated facilities for the
manufacture of gas. Given the availability of natural gas
transported by pipelines, these facilities 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 the
regulatory thresholds at these sites.
Indiana Gas has identified the existence, location and certain
general characteristics of 26 gas manufacturing and storage sites
for which it may have some remedial responsibility. Indiana Gas
has completed a remedial investigation/feasibility study (RI/FS)
at one of the sites under an agreed order between Indiana Gas and
the Indiana Department of Environmental Management (IDEM), and a
Record of Decision (ROD) was issued by IDEM in January 2000.
Although Indiana Gas has not begun an RI/FS at additional sites,
Indiana Gas has submitted several of the sites to IDEM's
Voluntary Remediation Program (VRP) and is currently conducting
some level of remedial activities including groundwater
monitoring at certain sites where deemed appropriate and will
continue remedial activities at the sites as appropriate and
necessary.
Indiana Gas has accrued the estimated costs for further
investigation, remediation, groundwater monitoring and related
costs for the sites. While the total costs which may be incurred
in connection with addressing these sites cannot be determined at
this time, Indiana Gas has accrued costs that it reasonably
expects to incur.
Indiana Gas has recovered these estimated accrued costs from
insurance carriers and other potentially responsible parties
(PRPs). Indiana Gas has PRP agreements in place for 19 of the 26
sites, which serve to limit Indiana Gas' share of response costs
at these 19 sites to between 20 and 50 percent. For these sites,
Indiana Gas has accrued only its proportionate share of the
estimated response costs.
With respect to insurance coverage, as of September 30, 2000,
Indiana Gas has received and recorded settlements from all known
insurance carriers in an aggregate amount of approximately $20.3
million.
These environmental matters have had no material impact on
earnings since costs recorded to date approximate PRP and
insurance settlement recoveries. While Indiana Gas has recorded
all costs which it presently expects to incur in connection with
activities at these sites, it is possible that future events may
require some level of additional remedial activities which are
not presently foreseen.
New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement, as
amended by SFAS No. 138, 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. SFAS No. 133 requires that a company
formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. Indiana Gas is
required to adopt SFAS No. 133 no later than January 1, 2001.
Through arrangements with its affiliates, Indiana Gas utilizes
derivative instruments to manage pricing decisions, minimize the
risk of price volatility, and minimize price risk exposure in the
energy markets. In preparation for the implementation of this new
statement, Vectren has formed a team to identify its contracts
and its subsidiaries' contracts which could be subject to the new
statement, develop required documentation , define relevant
processes and information system needs and promote internal
awareness of the requirements and potential effects of the new
statement, for its subsidiaries. While Vectren continues to
analyze and follow the development of implementation guidelines,
at this time, Vectren has not quantified the impact of adopting
this statement on Indiana Gas' financial position or results of
operations and is unable to predict whether the implementation of
this accounting standard will be material to Indiana Gas' results
of operations or financial position. However, the adoption of
SFAS No. 133 could increase volatility in earnings and other
comprehensive income.
Liquidity and Capital Resources
Indiana Gas' capitalization objectives are 45-60 percent common
and preferred equity and 40-55 percent permanent debt. These
objectives may have varied, and will vary, from time to time,
depending on particular business opportunities and seasonal
factors that affect the company's operation. Indiana Gas' common
equity component was 52 percent of its total capitalization at
September 30, 2000.
New construction and normal system maintenance and improvements
needed to provide service to a growing customer base will
continue to require substantial expenditures. Capital
expenditures for fiscal 2000 are estimated at approximately $60
million of which $43.6 million have been expended during the nine
month period ended September 30, 2000. For the twelve months
ended September 30, 2000, capital expenditures totaled $58.4
million.
As of September 30, 2000, Indiana Gas had a $100 million
commercial paper program, of which $92.9 was utilized at quarter
end. As of October 31, 2000, Indiana Gas had a $155 million
commercial paper program, of which $144 million was utilized.
Indiana Gas' acquisition of 47 percent of VEDO was funded with a
combination of short-term borrowings from Vectren Utility
Holdings and commercial paper. Indiana Gas expects to reduce the
high level of short term borrowings significantly during 2001.
Short-term cash working capital is required primarily to finance
customer accounts receivable, unbilled utility revenues resulting
from cycle billing, gas in underground storage, prepaid gas
delivery services, capital expenditures and investments until
permanently financed. Short-term borrowings tend to be greatest
during the heating season when accounts receivable and unbilled
utility revenues related to sales of natural gas are at their
highest.
Financing Activities
Indiana Gas expects the majority of the utility construction
requirements and debt security redemptions to be provided by
internally generated funds. Short term borrowings are at a high
level due to the acquisition adjustment discussed above and the
higher natural gas costs.
Indiana Gas' credit ratings on outstanding debt at September 30,
2000 was AA-/Aa2. Effective October 2000, the credit rating on
Indiana Gas' outstanding debt was lowered to A/A2 due to the
increase in debt resulting from the acquisition of the DP&L
assets. Indiana Gas' commercial paper retains an A-1/P-1 rating.
Cash from financing activities of $40.4 million for the nine
months ended September 30, 2000 includes $60.6 million of
additional short-term borrowings offset by $19.6 million of
dividends on common stock. Cash from financing activities of
$78.2 million for the twelve months ended September 30, 2000
includes $104.2 million of additional net borrowings offset by
$25.3 million of dividends on common stock.
Cash required for investing activities of $39.1 million for the
nine months ended September 30, 2000 includes $43.6 million of
capital expenditures. Cash required for investing activities of
$49.2 million for the twelve months ended September 30, 2000
includes $58.4 million of capital expenditures.
Forward-Looking Information
A 'safe harbor' for forwarding-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 Financial
Condition and Results of Operations, including but not limited to
Vectren's realization of net merger savings and ProLiance, are
forward-looking statements. When used in Indiana Gas Company,
Inc. and its subsidiary companies' documents or oral
presentations, the words 'believe,' '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 Gas Company,
Inc. and its subsidiary companies' actual results to differ
materially from those contemplated in any forward-looking
statements included, among others, the following:
* Factors affecting utility operations such as unusual weather
conditions; catastrophic weather-related damage; unusual
maintenance or repairs; unanticipated changes to fossil fuel
costs; unanticipated changes to gas supply costs, or availability
due to higher demand, shortages, transportation problems or other
developments; environmental or pipeline incidents; transmission
or distribution incidents; unanticipated changes to electric
energy supply costs, or availability due to demand, shortages,
transmission problems or other developments; or electric
transmission 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 Gas Company, Inc. and its subsidiary companies, 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.
* 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 Financial Condition and Results of Operations.
* Changes in federal, state or local legislature requirements,
such as changes in tax laws or rates, environmental laws and
regulations.
Indiana Gas Company, Inc. and its subsidiary companies undertake
no obligation to publicly update or revise any forward-looking
statements, whether as a result of changes in actual results,
changes in assumptions, or other factors affecting such
statements.
Seasonality
Because of the seasonal nature of Indiana Gas' gas distribution
operations, the results shown on a quarterly basis are not
necessarily indicative of annual results.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Indiana Gas' 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. Indiana Gas attempts to
mitigate its exposure to interest rate fluctuations through
management of its short-term borrowings and the use of interest
rate hedging instruments. An internal guideline to manage short-
term interest rate exposure has been established. This guideline
targets a level of 25 percent of the company's total debt
portfolio to consist of adjustable rate bonds with a maturity of
less than one year, short-term notes and commercial paper.
However, it is acknowledged that there may be times that the
guideline may be exceeded. Due to the completion of the DP&L
asset acquisition and the higher natural gas prices, Indiana Gas
anticipates that its short-term borrowings will be highest in the
beginning of 2001 and be reduced during the year.
Indiana Gas is also exposed to counterparty credit risk when a
supplier defaults upon a contract to pay or deliver the
commodity. To mitigate risk, procedures to determine and monitor
the creditworthiness of counterparties have been established.
At September 30, 2000, Indiana Gas 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.
21
INDIANA GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 of the Notes to Consolidated Financial Statements
for discussion of litigation matters relating to the gas supply
and portfolio administration agreements between ProLiance and
Indiana Gas.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
12 Computation of Ratio of Earnings to Fixed Charges,
filed herewith.
27 Financial Data Schedule, filed herewith
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INDIANA GAS COMPANY, INC.
Registrant
November 14, 2000 /s/ M. Susan Hardwick
M. Susan Hardwick
Vice President and Controller
November 14, 2000 /s/ Jerome E. Benkert
Jerome E. Benkert
Executive Vice President
and Chief Financial Officer