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 quarterly period ended March 31, 2001
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.)
20 N.W. Fourth Street, Evansville, Indiana 47741
-------------------------------------------------
(Address of principal executive offices and Zip Code)
(812) 465-5300
--------------------------------
(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 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
issuer's classes of common stock, as of the latest practicable
date.
Common Stock -Without
par value 482.41561 May 10, 2001
-------------------- ---------------- -------------
Class Number of shares Date
2
TABLE OF CONTENTS
Item Page
Number Number
PART I. FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Indiana Gas Company, Inc.
Balance Sheets 3-4
Statements of Income 5
Statements of Cash Flows 6
Notes to Unaudited Financial Statements 7-11
2 Management's Discussion and Analysis of Results
of Operations and Financial Condition 12-17
3 Quantitative and Qualitative Disclosure About
Market Risk 17-18
PART II. OTHER INFORMATION
1 Legal Proceedings 19
6 Exhibits and Reports on Form 8-K 19-20
Signatures 21
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(Unaudited - Thousands)
March 31, December 31,
2001 2000 2000
---------- ---------- ------------
ASSETS
Utility Plant:
Original cost $1,061,789 $1,019,811 $1,056,945
Less accumulated depreciation 443,246 415,781 434,845
---------- ---------- ----------
Net utility plant 618,543 604,030 622,100
---------- ---------- ----------
Current Assets:
Cash and cash equivalents 3,119 5,016 300
Accounts receivable, less
reserves of $2,302, $2,553,
and $2,063 68,334 40,615 81,225
Accounts receivable from
affiliated company - 2,205 11,774
Accrued unbilled revenues 30,223 20,130 69,444
Inventories - 5,736 12,004
Prepaid gas delivery service 4,589 114 34,849
Recoverable natural gas costs 55,479 - 38,096
Prepayments and other current
assets 7,111 13,465 32,012
---------- ---------- ----------
Total current assets 168,855 87,281 279,704
---------- ---------- ----------
Investment in Unconsolidated
Affiliate 223,688 - 220,802
Other Assets:
Regulatory assets 23,187 12,199 18,578
Other 2,584 4,214 2,488
---------- ---------- ----------
Total other assets 25,771 16,413 21,066
---------- ---------- ----------
TOTAL ASSETS $1,036,857 $707,724 $1,143,672
========== ========== ==========
The accompanying notes are an integral part of these financial
statements.
4
INDIANA GAS COMPANY, INC.
BALANCE SHEETS
(Unaudited - Thousands)
SHAREHOLDER'S EQUITY AND March 31, December 31,
LIABILITIES 2001 2000 2000
---------- -------- ------------
Capitalization:
Common stock and paid-in
capital $ 142,995 $142,995 $ 142,995
Retained earnings 98,103 108,758 90,499
---------- -------- ---------
Total common shareholder's
equity 241,098 251,753 233,494
Long-term debt, net of
current maturities 274,287 211,849 281,109
---------- -------- ---------
Total capitalization 515,385 463,602 514,603
---------- -------- ---------
Commitments and Contingencies
(Notes 8 and 11)
Current Liabilities:
Notes payable to affiliated
company 184,700 - 218,200
Notes payable 153,034 50,203 134,724
Interest payable to
affiliated company 910 - 2,340
Accounts payable 20,990 24,809 102,268
Accounts payable to
affiliated company 17,072 14,226 18,329
Refunds to customers and
customer deposits 6,981 23,675 3,953
Accrued taxes 14,256 7,834 25,054
Accrued interest 1,703 872 4,215
Deferred income taxes 5,667 - 4,227
Other current liabilities 11,923 12,943 14,504
--------- -------- ---------
Total current liabilities 417,236 134,562 527,814
--------- -------- ---------
Deferred Credits and Other
Liabilities:
Deferred income taxes 51,131 55,006 54,807
Accrued postretirement
benefits other than pensions 30,848 29,080 29,938
Unamortized investment tax
credit 11,262 7,919 7,222
Other 10,995 17,555 9,288
---------- -------- ----------
Total deferred credits and
other liabilities 104,236 109,560 101,255
---------- -------- ----------
TOTAL SHAREHOLDER'S EQUITY AND
LIABILITIES $1,036,857 $707,724 $1,143,672
========== ======== ===========
The accompanying notes are an integral part of these financial
statements.
5
INDIANA GAS COMPANY, INC.
STATEMENTS OF INCOME
(Unaudited - Thousands)
Three Months Twelve Months
Ended March 31, Ended March 31,
2001 2000 2001 2000
--------- --------- -------- --------
OPERATING REVENUES $287,973 $171,618 $714,467 $441,495
COST OF GAS 215,166 98,893 506,747 241,717
-------- -------- -------- --------
Total margin 72,807 72,725 207,720 199,778
-------- -------- -------- --------
OPERATING EXPENSES:
Operation and maintenance 26,410 25,205 101,177 94,899
Merger and integration
costs 503 13,448 3,737 13,448
Depreciation and
amortization 9,796 9,018 37,438 35,162
Income tax expense 6,533 6,599 7,185 8,979
Taxes other than income
taxes 5,769 4,961 16,666 15,971
-------- -------- -------- --------
Total operating expenses 49,011 59,231 166,203 168,459
-------- -------- -------- --------
OPERATING INCOME 23,796 13,494 41,517 31,319
OTHER INCOME:
Equity in earnings of
unconsolidated affiliate 2,886 - 5,607 -
Other - net (1,291) 370 (2,034) 1,093
-------- -------- -------- --------
Total other income 1,595 370 3,573 1,093
-------- -------- -------- --------
INCOME BEFORE INTEREST 25,391 13,864 45,090 32,412
INTEREST EXPENSE 10,264 5,033 27,585 17,837
-------- ------- ------- --------
NET INCOME $ 15,127 $ 8,831 $17,505 $ 14,575
======== ======= ======= ========
The accompanying notes are an integral part of these financial
statements
6
INDIANA GAS COMPANY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited - Thousands)
Three Months Twelve Months
Ended March 31, Ended March 31,
2001 2000 2001 2000
-------- -------- -------- --------
CASH FLOWS FROM (REQUIRED
FOR) OPERATING ACTIVITIES
Net income $15,127 $ 8,831 $ 17,505 $14,575
Adjustments to reconcile
net income to cash
provided from operating
activities -
Depreciation and
amortization 9,796 9,018 37,438 35,162
Deferred income taxes
and investment tax
credits (2,532) (4,074) 10,897 (5,386)
Allowance for funds used
during construction (71) (128) (538) (463)
Undistributed earnings
of unconsolidated
affiliate (2,886) - (5,607) -
Changes in assets and
liabilities -
Receivables - net 63,886 10,742 (35,607) 6,231
Inventories 12,004 6,706 5,736 1,178
Prepaid gas delivery
service 30,260 20,823 (4,475) (114)
Recoverable fuel and
natural gas costs (17,383) - (55,479) -
Prepayments and other
current assets 24,901 3,003 6,354 (4,063)
Regulatory assets (4,609) 2,448 (10,988) 1,998
Accounts payable,
refunds to customers,
customer deposits,
other current
liabilities (81,178) 17,272 (17,777) 6,330
Accrued taxes and
interest (11,314) (14,968) 1,491 (11,964)
Accrued post-retirement
benefits other than
pensions 910 606 1,768 2,481
Other - net 3,398 (2,444) (1,831) (1,892)
-------- -------- --------- --------
Total adjustments 25,182 49,004 (68,618) 29,498
-------- -------- --------- --------
Net cash flows from
(required for)
operating activities 40,309 57,835 (51,113) 44,073
-------- -------- -------- -------
CASH FLOWS (REQUIRED FOR)
FROM FINANCING ACTIVITIES
Proceeds from long-term
debt - - 70,000 30,000
Retirement of long-term
debt and other
obligations (6,822) - (7,562) (10,090)
Net change in short-term
borrowings (15,190) (31,969) 287,531 30,224
Dividends on common
stock (7,870) (5,700) (28,506) (25,700)
Other (544) - 346 -
-------- -------- --------- --------
Net cash flows
(required for) from
financing activities (30,426) (37,669) 321,809 24,434
-------- -------- -------- --------
CASH FLOWS (REQUIRED FOR)
INVESTING ACTIVITIES
Capital expenditures (7,955) (15,852) (54,512) (65,595)
Investment in
unconsolidated affiliate - - (218,081) -
Other 891 349 - (699)
-------- ------- --------- --------
Net cash flows
(required for)
investing activities (7,064) (15,503) (272,593) (66,294)
-------- -------- --------- --------
Net increase (decrease) in
cash 2,819 4,663 (1,897) 2,213
Cash and cash equivalents at
beginning of period 300 353 5,016 2,803
-------- -------- --------- --------
Cash and cash equivalents at
end of period $ 3,119 $ 5,016 $ 3,119 $ 5,016
======== ======== ========= ========
The accompanying notes are an integral part of these financial
statements.
7
INDIANA GAS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Indiana Gas Company, Inc. (Indiana Gas) operates as a separate
wholly owned subsidiary of Vectren Corporation (Vectren) and
provides natural gas and transportation services to a diversified
base of customers in 311 communities in 49 of Indiana's 92
counties.
Vectren is an Indiana corporation that was organized on June 10,
1999, solely for the purpose of effecting the merger of Indiana
Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On
March 31, 2000, the merger of Indiana Energy with SIGCORP and
into Vectren was consummated with a tax-free exchange of shares
and has been accounted for as a pooling-of-interests. The merger
did not affect Indiana Gas' debt securities.
Indiana Gas has a 47 % undivided interest in the Ohio operations
acquired by Vectren on October 31, 2000. The Ohio operations
provide natural gas distribution and transmission services to
Dayton, Ohio and 16 counties in west central Ohio. Indiana Gas'
ownership is accounted for on the equity method in accordance
with Accounting Principles Board (APB) Opinion No. 18. Its
ownership interest is included in investment in unconsolidated
affiliate in the Balance Sheets, and its interest in the results
of operations is included in other income, net, as equity in
earnings of unconsolidated affiliate in the Statements of Income.
2. Basis of Presentation
The interim financial statements included in this report have
been prepared by Indiana Gas, without audit, as provided in the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with 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. These financial statements and related notes
should be read in conjunction with Indiana Gas' audited annual
financial statements for the year ended December 31, 2000 filed
on Form 10-K. Because of the seasonal nature of Indiana Gas'
operations, the results shown on a quarterly basis are not
necessarily indicative of annual results.
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 periods. Actual results could differ from those
estimates.
Certain reclassifications have been made to prior period
financial statements to conform with the current year
classification. These reclassifications have no impact on
previously reported net income.
8
3. Investment in Unconsolidated Affiliate
Unaudited summarized financial information as to assets and
liabilities of the Ohio operations as of March 31, 2001 and
December 31, 2000 and its results of operations for the three and
twelve months ended March 31, 2001 are presented below.
In thousands At March 31, 2001 At December 31, 2000
----------------- --------------------
Current assets $148,561 $180,109
Non current assets $391,003 $392,795
Current liabilities $312,837 $350,438
Non current $ 969 $ 491
liabilities
Three Months Ended Twelve Months Ended
In thousands March 31, 2001 March 31, 2001
----------------- --------------------
Revenues $ 182,967 $294,323
Margin $ 35,519 $ 63,711
Operating income $ 7,927 $ 14,742
Net income $ 6,140 $ 11,930
4. Merger and Integration Costs
Merger and integration costs incurred for the three and twelve
months ended March 31, 2001 were $.5 million and $3.7 million,
respectively. These costs relate primarily to transaction costs,
severance, and other merger and integration activities such as
signage and vehicle identification changes. The accrual remaining
for such costs at March 31, 2001 was $1.0 million. Merger costs
are reflected in the financial statements of the subsidiaries in
which merger savings are expected to be realized. The continued
merger integration activities will be substantially completed in
2001.
As a result of merger integration activities, Vectren management
has identified certain information systems that 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 are 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 resulting in additional operations and
maintenance expense of approximately $3.2 million and $14.6
million for the three and twelve months ended March 31, 2001.
5. Inventories
Inventories consist principally of gas in underground storage
valued using the last in- first out (LIFO) method. During the
three months ended March 31, 2001, a LIFO liquidation occurred
that will be replaced by December 31, 2001. Accordingly, the
liability created by the decrement of $1.6 million is included in
other current liabilities as of March 31, 2001.
6. Short - Term Borrowings
At March 31, 2001, Indiana Gas was not in compliance with the
total indebtedness to capitalization ratio contained in its back
up credit facility for its commercial paper program. The non-
compliance resulted from the indebtedness incurred to purchase
its ownership interest in the Ohio operations and working capital
requirements associated with higher gas costs. A waiver on the
Indiana Gas facility has been obtained to waive the non-
compliance through and including March 31, 2001 which effectively
waives the noncompliance up to June 30, 2001, the date of the
next quarterly test of the financial covenants. Vectren
anticipates making an equity investment in Indiana Gas to bring
Indiana Gas back into compliance. No amount is outstanding under
the back up facility.
7. New Accounting Principle
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which requires that every derivative
instrument be recorded on the balance sheet as an asset or
liability measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
SFAS 133, as amended, is effective for fiscal years beginning
after June 15, 2000 and must be applied to derivative instruments
and certain derivative instruments embedded in hybrid contracts
that were issued, acquired or substantively modified after
December 31, 1998. Indiana Gas adopted SFAS 133 as of January 1,
2001.
SFAS 133 requires that as of the date of initial adoption, the
difference between the fair market value of derivative
instruments recorded on the balance sheet and the previous
carrying amount of those derivatives be reported in net income or
other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle in accordance with APB
20, "Accounting Changes."
As of the date of adoption and through March 31, 2001, Indiana
Gas was not engaged in any derivative or hedging activity as
defined by SFAS 133, as amended; therefore, there was no impact
at adoption or for the three and twelve months ended March 31,
2001.
8. 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 the litigation matter related to ProLiance
Energy Services, LLC (See Note 11), there are no legal
proceedings pending against Indiana Gas that are likely to have a
material adverse effect on its financial position or results of
operations.
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 was issued by the 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 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 that 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.
10
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 %. For these sites,
Indiana Gas has accrued only its proportionate share of the
estimated response costs.
With respect to insurance coverage, as of March 31, 2001, Indiana
Gas has received and recorded settlements from all known
insurance carriers in an aggregate amount of approximately $20.3
million.
Environmental matters related to manufactured gas plants 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. Rate and Regulatory Matters
Commodity prices for natural gas purchases have increased
significantly, primarily due to a colder winter, increased demand
and tighter supplies. Indiana Gas is allowed full recovery of
such changes in purchased gas costs for their retail customers
through commission-approved gas cost adjustment mechanisms.
On October 11, 2000, Indiana Gas filed for approval of its
regular quarterly GCA. In early December, the Indiana Utility
Regulatory Commission (IURC) issued an interim order approving
the request by Indiana Gas for a GCA factor for December 2000.
On January 4, 2001, the IURC approved the January and February
2001 GCA as filed. The order also addressed the claim by the
Indiana Office of Utility Consumer Counselor (OUCC) that a
portion of the requested GCA be disallowed because Indiana Gas
should have entered into additional commitments for this winter's
gas supply in late 1999 and early 2000. In procuring gas supply
for this winter, Indiana Gas followed the gas procurement
practices that it had employed over the last several years. In
response to the claim by the OUCC, the IURC found that there
should be a $3.8 million disallowance related to gas procurement
for the winter season. As a result, Indiana Gas recognized a pre-
tax charge of $3.8 million in December 2000. Both Indiana Gas and
the OUCC appealed the ruling. The Citizens Action Coalition of
Indiana, Inc.(CAC), a not for profit consumer advocate, also
filed with the IURC a petition to intervene and a notice of
appeal of the order.
In March 2001, Indiana Gas reached agreement with the OUCC and
CAC regarding the IURC Order. As part of the agreement, among
other things, Indiana Gas agreed to contribute additional amounts
to the state of Indiana's Low Income Heating Assistance Program
in 2001, and to credit $3.3 million of the $3.8 million
disallowed amount to Indiana Gas customers' April 2001 utility
bills in exchange for both the OUCC and the CAC dropping their
appeals of the IURC Order. In April 2001, the IURC issued an
order approving the settlement.
11. Affiliate Transactions
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 wholly owned subsidiaries of Vectren to Indiana Gas for
the three months ended March 31, 2001 and 2000 was $19.4 million
and $8.4 million, respectfully. For the twelve months ended
March 31, 2001 and 2000, amounts billed were $44.3 million and
$32.6, respectfully.
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.
ProLiance Energy, LLC. (ProLiance), a 50 % owned, non-regulated,
energy marketing affiliate of Vectren, provides natural gas
supply and related services to Indiana Gas. Purchases from
ProLiance for resale and for injections into storage for the
three months ended March 31, 2001 and 2000 totaled $166.3 million
and $66.1 million, respectively; and for the twelve months ended
March 31, 2001 and 2000 totaled $501.7 million and $240.4
million, respectively.
11
ProLiance 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 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. 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. The IURC has recently commenced the processing of these
further proceedings by conducting a prehearing conference.
Discovery is ongoing in the further proceeding at the current
time.
In August 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.
Indiana Gas continues to record gas costs in accordance with the
terms of the ProLiance contract.
CIGMA, LLC (CIGMA), 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.
Purchases of these services for both the three months ended March
31, 2001 and 2000 totaled $0.7 million, and for the twelve months
ended March 31 2001 and 2000 totaled $2.8 million and $3.0
million respectively.
Amounts owed to wholly owned subsidiaries of Vectren totaled
$202.7 million, $14.2 million and $238.9 million at March 31,
2001, March 31, 2000 and December 31, 2000, respectively, and are
included in payables to affiliated company in the Balance Sheets.
Amounts due from wholly owned subsidiaries of Vectren totaled
$2.2 million and $ 11.8 at March 31, 2000 and December 31, 2000,
respectively, and are included in accounts receivable from
affiliated company in the Balance Sheets.
Amounts owed to unconsolidated affiliates of Vectren totaled
$40.0 million, $39.0 million and $97.8 million at March 31, 2001,
March 31, 2000 and December 31, 2000, respectively, and are
included in accounts payable in the Balance Sheets.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
INDIANA GAS COMPANY, INC.
Description of the Business
Indiana Gas Company, Inc. (Indiana Gas) operates as a separate
wholly owned subsidiary of Vectren Corporation (Vectren) and
provides natural gas and transportation services to a diversified
base of customers in 311 communities in 49 of Indiana's 92
counties.
Vectren is an Indiana corporation that was organized on June 10,
1999, solely for the purpose of effecting the merger of Indiana
Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On
March 31, 2000, the merger of Indiana Energy with SIGCORP and
into Vectren was consummated with a tax-free exchange of shares
and has been accounted for as a pooling of interests. The merger
did not affect Indiana Gas' debt securities.
Indiana Gas has a 47 % undivided interest in the Ohio operations
acquired by Vectren on October 31, 2000. The Ohio operations
provide natural gas distribution and transmission services to
Dayton, Ohio and 16 counties in west central Ohio. Indiana Gas'
ownership is accounted for on the equity method in accordance
with Accounting Principles Board Opinion No. 18. Its
ownership interest is included in investment in unconsolidated
affiliate in the Balance Sheets, and its interest in the results
of operations is included in other income net, as in equity
earnings of unconsolidated affiliate in the Statements of Income.
Results of Operations
Net Income
For the three months ended March 31, 2001, net income was $15.1
million. Net income before merger and integration costs of $3.7
million, including $3.2 million of additional operations and
maintenance expense related to the shortened useful lives of
certain information systems to be retired in 2001 (see merger and
integration costs below), was $17.4 million, compared to net
income before merger and integration costs for the first quarter
of 2000 of $18.2 million.
For the twelve months ended March 31, 2001, net income was $17.5
million. Net income before merger and integration costs of $18.5
million, including $14.6 million of additional operations and
maintenance expense related to the shortened useful lives of
certain information systems to be retired in 2001 (see merger and
integration costs below), was $29.9 million, compared to net
income before merger and integration costs for the twelve months
ended March 31, 2000 of $24.0 million.
Utility Margin (Operating Revenues Less Cost of Gas)
Gas Utility Margin
Gas Utility margin for the three months ended March 31, 2001 of
$72.8 million was comparable to 2000. The favorable impact of a
7 % increase in throughput to retail customers resulting from
temperatures being 15 % colder than normal and a 2 % increase in
retail customers were offset by reduced consumption and the cost
of unaccounted for gas due to much higher gas costs (see below).
Total cost of gas sold was $215.2 million for the three months
ended March 31, 2001 and $98.9 million in 2000. This increase of
$116.3 million, or 118%, is primarily due to significantly higher
average per unit purchased gas costs. The total average cost per
dekatherm of gas purchased by Indiana Gas for the three months
ended March 31, 2001 was $7.54 compared to $3.84 for the same
period in 2000.
13
Gas Utility margin for the twelve months ended March 31, 2001 of
$207.7 million increased $7.9 million, or 4 %, compared to 2000.
The increase is due to a 9 % increase in throughput resulting
primarily from temperatures being 26 % colder than the previous
year and a 2 % increase in residential customer base. These
favorable impacts on gas margin were partially offset by a $3.8
million disallowance of gas costs by the Indiana Utility
Regulatory Commission (IURC) and the cost of unaccounted for gas
due to much higher gas costs.
Total cost of gas sold was $506.7 million for the twelve months
ended March 31, 2001 and $241.7 million in 2000. This increase
of $265.0 million, or 110 %, is primarily due to significantly
higher average per unit purchased gas costs.
Commodity prices for natural gas purchases have increased
significantly, primarily due to a colder winter, increased demand
and tighter supplies. Indiana Gas is allowed full recovery of
such charges in purchased gas costs from their retail customers
through commission-approved gas cost adjustment mechanisms, and
margin on gas sales should not be impacted. However, in 2001
Indiana Gas has experienced and may continue to experience higher
working capital requirements, increased expenses, including
unrecoverable interest costs, uncollectibles and unaccounted for
gas, and some level of price sensitive reduction in volumes sold.
(See Note 10 of the Financial Statements.)
Operating Expenses
Operations and Maintenance
Operations and maintenance expenses increased $1.2 million, or 5
%, for the three months ended March 31, 2001 compared to the
prior year, and operations and maintenance expenses increased
$6.3 million, or 7 %, for the twelve months ended March 31, 2001.
The increases are primarily attributable to increased fees
allocated 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 integration costs below).
Depreciation and Amortization
Depreciation and amortization increased $0.8 million and $2.3
million, respectively, for the three and twelve months ended
March 31, 2001 compared to the prior year due primarily to
depreciation of additions to utility plant.
Income Tax Expense
Federal and state income taxes were comparable to the prior year
for the three months ended March 31, 2001 and decreased $1.8
million for the twelve months ended March 31, 2001, compared to
the prior year periods due primarily to a normal effective tax
rate in 2001, partially offset by higher pre-tax earnings. The
effective tax rate in 2000 was higher as a result of the non-
deductibility of certain merger and integration costs.
Taxes Other Than Income Taxes
Taxes other than income taxes increased $0.8 million and $0.7
million, respectively, for the three and twelve-month periods
ended March 31, 2001 compared to the prior year. The increases
result from increases in gross receipts and property taxes.
Merger and Integration Costs
Merger and integration costs incurred for the three and twelve
months ended March 31, 2001 were $0.5 million and $3.7 million,
respectively. These costs relate primarily to transaction costs,
severance, and other merger and integration activities such as
signage and vehicle identification changes. 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 the merger
savings, will be substantially completed in 2001. Merger costs
are reflected in the financial statements of Vectren's operating
subsidiaries in which merger savings are expected to be realized.
14
As a result of merger integration activities, Vectren 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 are 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, resulting in an increase in operation and
maintenance expense of approximately $3.2 million and $14.6
million for the three and twelve months ended March 31, 2001.
In total, for the three months ended March 31, 2001, merger and
integration costs totaled $3.7 million ($2.3 million after tax),
compared to $13.4 million ($9.4 million after tax) for the same
period in 2000.
In total, for the twelve months ended March 31, 2001, merger and
integration costs totaled $18.5 million ($12.4 million after
tax), compared to $13.4 million ($9.4 million after tax) for the
same period in 2000.
Other Income
Equity in Earnings of Unconsolidated Affiliate
Indiana Gas has a 47 % undivided interest in the Ohio operations
acquired by Vectren on October 31, 2000. Equity in earnings of
unconsolidated affiliate represents Indiana Gas' portion of the
Ohio operations' net income.
Other Income, Net
Other income, net decreased $1.7 million and $3.1 million for the
three and twelve month periods ended March 31, 2001, compared to
2000. The decreases are due to increased additional Low Income
Heating Assistance Program contributions. (See Note 10 of the
Financial Statements).
Interest Expense
Interest expense increased by $5.2 million, or 104 %, and $9.7
million, 55 %, respectively, for the three and twelve months
ended March 31, 2001, when compared to the prior year. The
increases were due primarily to interest related to the financing
of the acquisition of the Ohio operations, increased working
capital requirements resulting from extremely high natural gas
prices, and higher average interest rates on utility debt and
short-term borrowings.
New Accounting Principle
See Note 7 of the Financial Statements regarding the adoption of
SFAS 133, as amended.
Financial Condition
Environmental and Regulatory Matters
See Notes 9, 10, and 11 of the Financial Statements regarding
matters affecting operations including manufactured gas plants
(Note 9), gas cost adjustment proceedings (Note 10), and
transactions with ProLiance Energy, LLC (Note 11).
15
Liquidity and Capital Resources
Indiana Gas' capitalization objective is 40-55 % permanent
capitalization. This objective 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 47 %, 54 % and 45 % of
total capitalization, including current maturities of long-term
debt, at March 31, 2001, March 31, 2000 and December 31, 2000,
respectively.
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 summer when revenues are lowest and gas storage
facilities are being refilled. However, working capital
requirements have been significantly higher during the fourth
quarter of 2000 and first quarter of 2001 due to the higher
natural gas costs.
Cash Flow from Operations
Cash flow from operations decreased during the three and twelve
months ended March 31, 2001 compared to 2000 by $17.5 million and
$95.2 million, respectively, due primarily to increased working
capital requirements due to higher gas costs, offset by
additional net income.
Indiana Gas expects the majority of its capital expenditures and
debt security redemptions to be provided by internally generated
funds.
Financing Activities
Cash flow required for financing activities of $30.4 million for
the three months ended March 31, 2001 includes $22.0 million of
reductions in net borrowings and $7.9 million common stock
dividends paid to Vectren. This is a decrease in cash required for
financing activities when compared to the three months ended
March 31, 2000 of $7.2 million. The decrease is primarily due to
increased payments on short-term borrowings from internally
generated funds in the prior year.
Cash flow from financing activities of $321.8 million for the
twelve months ended March 31, 2001 includes $350.0 million of
additional net borrowings offset by $28.5 million of common stock
dividends paid to Vectren. This is an increase of $297.4 million over
the same period in the prior year due primarily to funding the
investment in the Ohio operations and increased working capital
requirements.
At March 31, 2001, Indiana Gas has approximately $155 million of
short-term borrowing capacity with third parties for use in its
operations, of which approximately $2 million is available. On
October 31, 2000, Indiana Gas' investment in the Ohio operations
of approximately $218 million was funded with a combination of
short-term borrowings from Vectren Utility Holdings, Inc. and
Indiana Gas' commercial paper program. These short-term
borrowings will be replaced over time with permanent financing.
At March 31, 2001, Indiana Gas was not in compliance with the
total indebtedness to capitalization ratio contained in its back
up credit facility for its commercial paper program. The non-
compliance resulted from the indebtedness incurred to purchase
its ownership interest in the Ohio operations and working capital
requirements associated with higher gas costs. A waiver on the
Indiana Gas facility has been obtained to waive the non-
compliance through and including March 31, 2001 which effectively
waives the noncompliance up to June 30, 2001, the date of the
next quarterly test of the financial covenants. Vectren
anticipates making an equity investment in Indiana Gas to bring
Indiana Gas back into compliance. No amount is outstanding under
the back up facility.
Indiana Gas' credit rating on outstanding debt at March 31, 2001
was A/A2. Indiana Gas' commercial paper retains an A-1/P-1
rating.
Capital Expenditures and Other Investment Activities
Cash required for investing activities of $7.1 million for the
three months ended March 31, 2001 includes $8.0 million of
capital expenditures. Investing activities for the three months
ended March 31, 2000 were $15.5 million.
16
Cash required for investing activities of $272.6 million for the
twelve months ended March 31, 2001 includes $218.1 million
required for the Ohio operations acquisition, and $54.5 million
of capital expenditures. This is an increase of $206.3 million
over the same period in the prior year due primarily to the
investment in the Ohio operations.
New construction, normal system maintenance and improvements, and
technology investments needed to provide service to a growing
customer base will continue to require substantial expenditures.
Capital expenditures for the remainder of 2001 are estimated at
$40 million.
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
Results of Operations and Financial Condition, including, but not
limited to Vectren's realization of net merger savings and
ProLiance, 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 "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 Vectren and its
subsidiaries' 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
gas supply costs, or availability due to higher demand,
shortages, transportation problems or other
developments; environmental or pipeline incidents;
transmission or distribution incidents; or availability
due to demand, shortages, transmission problems or other
developments; 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
and costs 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 Vectren Corporation and its subsidiaries, interest
rates, and securities ratings or market perceptions of
the utility industry and energy-related industries.
17
* 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 Management's Discussion and Analysis of
Results of Operations and Financial Condition.
* Changes in federal, state or local legislature
requirements, such as changes in tax laws or rates,
environmental laws and regulations.
Indiana Gas undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of changes in
actual results, changes in assumptions, or other factors
affecting such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Indiana Gas is exposed to market risks associated with interest
rates. The company employs a variety of risk management policies
to monitor and control these risks including the use of both
derivative and non derivative financial instruments. The company
does not presently utilize financial instruments for trading or
speculative purposes. Indiana Gas is not currently exposed to
market risks for purchases of natural gas for its retail
customers due to current Indiana regulations which allow for
recovery of such purchases through natural gas cost adjustment
mechanisms.
Interest Rate Risk
Indiana Gas attempts to mitigate its exposure to interest rate
fluctuations through management of its short-term borrowings. An
internal guideline to manage short-term interest rate exposure
has been established. This guideline targets a maximum of 25 %
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, Indiana Gas acknowledges
that there may be times during the business cycle that the
guideline may be exceeded. At March 31, 2001, Indiana Gas' short-
term debt represented 55 % of the company's total debt portfolio,
due primarily to financing Indiana Gas' ownership interest in the
Ohio operations initially with short-term debt and the increased
working capital requirements resulting from higher purchased gas
costs and increased customer consumption. The short-term debt
utilized for the Ohio operations acquisition will be replaced
over time with permanent financing (see Liquidity and Capital
Resources).
Market risk is estimated as the potential impact resulting from
fluctuations in interest rates on short-term borrowings,
including bank notes, lines of credit, commercial paper and notes
payable to an affiliated company. These instruments have
interest rates indexed to short-term market interest rates. At
March 31, 2001, March 31 2000 and December 31, 2000, the combined
borrowings under these facilities totaled $337.7 million, $50.2
million and $352.9 million, respectively. Based upon average
borrowing rates under these facilities during the three months
ended March 31, 2001 and 2000, an increase of 100 basis points (1
%) in the rates would have increased interest expense by $0.9
million and $0.2 million. For the twelve months ended March 31,
2001 and 2000, an increase of 100 basis points in the rates would
have increased interest expense by $1.9 million and $0.5 million,
respectively.
18
INDIANA GAS COMPANY, INC.
PART II . OTHER ITEMS
ITEM 1. LEGAL PROCEEDINGS
Indiana Gas is party to various legal proceedings arising in the
normal course of business. In the opinion of management, with
the exception litigation matter related to ProLiance (See Note
11), 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
EX - 12 Computation of Ratio of Earnings
to Fixed Charges
Reports on Form 8-K
On January 5, 2001, Indiana Gas filed a Current Report on Form 8-
K with respect to a $3.8 million disallowance of gas costs by
the Indiana Utility Regulatory Commission.
Item 5. Other Events
On January 16, 2001, Indiana Gas filed a Current Report on Form
8-K with respect to the completion of the acquisition of the
natural gas distribution assets of the Dayton Power & Light
Company, a wholly owned subsidiary of DPL, Inc.
Item 7. Financial Statements and Exhibits
Financial Statements
(a) Audited financial statements of The Dayton Power &
Light Company's natural gas retail distribution
business for the year ended December 31, 1999 and
unaudited interim financial statements of same as of
September 30, 2000 and for the nine month periods ended
September 30, 2000 and 1999.
(b) Pro forma financial statements of Indiana Gas for
the year ended December 31, 1999 and as of September
30, 2000 and for the nine months ended September 30,
2000.
Exhibit
23 - Consent of PricewaterhouseCoopers LLP
On January 26, 2001, Indiana Gas filed a Current Report on Form
8-K with respect to Vectren Corporation's release of financial
information to the investment community regarding the Vectren's
results of operations, financial position and cash flows for the
three and twelve month periods ended December 31, 2000, and
declared quarterly common dividends payable on March 1, 2001.
The financial information was released to the public through
this filing.
Item 7. Exhibits
99.1 - Press Release - Fourth Quarter 2000 Vectren
Earnings
99.2 - Financial Analyst Report - Fourth Quarter 2000
99.3 - Press Release - Declaration of Common Stock
Dividend
99.4 - Analyst Teleconference Script - Fourth Quarter
2000
99.5 - Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995
19
On March 29, 2001, Indiana Gas filed a Current Report on Form 8-
K with respect to the settlement between the Indiana Gas, the
Indiana Office of the Utility Consumer Counselor, and the
Citizens Action Coalition of the appeals surrounding the Indiana
Utility Regulatory Commission's January 4, 2001 order that
disallowed $3.8 million of gas cost recovery by Indiana Gas.
Item 5. Other Events
Item 7. Exhibits
99.1 - Press Release
99.2 - Forward Looking Statements
20
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
May 14, 2001 /s/Jerome A. Benkert, Jr.
------------------------------------
Jerome A. Benkert, Jr.
Executive Vice President and
Chief Financial Officer
/s/M. Susan Hardwick
------------------------------------
M. Susan Hardwick
Vice President and Controller