UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[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) 491-4000
--------------
(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
1 Financial Statements (Unaudited)
Indiana Gas Company, Inc.
Condensed Balance Sheets 3-4
Condensed Statements of Operations 5
Condensed Statements of Cash Flows 6
Notes to Condensed Unaudited Financial Statements 7-12
2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 13-19
Signatures 20
3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INDIANA GAS COMPANY, INC.
CONDENSED 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 condensed financial
statements.
4
INDIANA GAS COMPANY, INC.
CONDENSED BALANCE SHEETS
(Unaudited - Thousands)
March 31,
------------------------ December 31,
SHAREHOLDER'S EQUITY AND 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
condensed financial statements.
5
INDIANA GAS COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(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
condensed financial statements
6
INDIANA GAS COMPANY, INC.
CONDENSED 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
condensed 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 condensed 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 condensed 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 $344,675
Non current liabilities $ 969 $ 6,254
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 $0.5 million and $3.7 million, respectively. 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 completed in 2001.
Since March 31, 2000, $17.3 million has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$11.9 million. Of this amount, $4.8 million related to employee and executive
severance, $5.0 million related to transaction costs and filing fees incurred
prior to the closing of the merger, and the remaining $2.1 million related to
employee relocations that occurred prior to or coincident with the merger
closing. At March 31, 2001, the accrual remaining for such costs totaled $1.0
million, all related to severance costs. Of the $17.3 million expensed, the
remaining $5.4 million was expensed through March 31, 2001 ($4.9 million in 2000
and $0.5 million in 2001) for accounting fees resulting from merger related
filing requirements, consulting fees related to integration activities such as
organization structure, employee travel between company locations as part of
integration activities, internal labor of employees assigned to integration
teams, and investor relations communications activities.
The integration activities experienced by the company included such things as
information system consolidation, process review and definition, organization
design and consolidation, and knowledge sharing.
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 condensed 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
($2.0 million after tax) and $14.6 million ($9.1 million after tax) for the
three and twelve months ended March 31, 2001.
9
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 market value and that changes in the
derivative's market 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 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.
10
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 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 the 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.
In conjunction with data compiled by expert consultants, 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 totaling
approximately $20.3 million.
The estimated accrued costs are limited to Indiana Gas' proportionate share of
the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26
sites with other potentially responsible parties, which serve to limit Indiana
Gas' share of response costs at these 19 sites to between 20 and 50 percent.
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 approximating its $20.3 million accrual.
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 its
retail customers through commission-approved gas cost adjustment mechanisms.
10
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 the winter's gas supply in late 1999 and early 2000. In procuring gas supply
for 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 an additional $1.2 million 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. The
contributions to Indiana's Low Income Heating Assistance Program totaling $1.2
million were made in 2001 and were charged to other-net in 2001.
11. Affiliate Transactions
Vectren and certain subsidiaries of Vectren have provided certain corporate
general and administrative services to Indiana Gas including legal, finance,
tax, risk management and employee benefits. The costs have been allocated to
Indiana Gas using various allocators, primarily number of employees, number of
customers and/or revenues. Allocations are based on cost. Management believes
that the allocation methodology is reasonable and approximates the costs that
would have been incurred had Indiana Gas secured those services on a stand alone
basis. Indiana Gas received corporate allocations totaling $19.4 million and
$8.4 million for the three months ended March 31, 2001 and 2000, respectively.
For the twelve months ended March 31, 2001 and 2000, amounts billed were $44.3
million and $32.6, 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.
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.
Amounts charged by ProLiance are market based.
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.
11
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 charged by CIGMA, LLC are market based.
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.
13
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-net
as equity in 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).
14
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.
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 its
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 Condensed 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 for the
three and twelve months ended March 31, 2001, respectively, 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.
15
Taxes Other Than Income Taxes
Taxes other than income taxes increased $0.8 million and $0.7 million for the
three and twelve month periods ended March 31, 2001, respectively, 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 and $13.4
million for both the three and twelve months ended March 31, 2000. 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 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.
Since March 31, 2000, $17.3 million has been expensed associated with merger and
integration activities. Accruals were established at March 31, 2000 totaling
$11.9 million. Of this amount, $4.8 million related to employee and executive
severance costs, $5.0 related to transaction costs and regulatory filing fees
incurred prior to the closing of the merger, and the remaining $2.1 million
related to employee relocations that occurred prior to or coincident with the
merger closing. At March 31, 2001, the accrual remaining for such costs totaled
$1.0 million, all related to severance costs. Of the $17.3 million expensed, the
remaining $5.4 million was expensed through March 31, 2001 ($4.9. million in
2000 and $0.5 in 2001) for accounting fees resulting from merger related filing
requirements, consulting fees related to integration activities such as
organization structure, employee travel between company locations as part of
integration activities, internal labor of employees assigned to integration
teams, investor relations communications activities, and certain benefit costs.
The integration activities experienced by the company included such things as
information system consolidation, process review and definition, organization
design and consolidation, and knowledge sharing.
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.
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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-net
Other-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%, for
the three and twelve months ended March 31, 2001, respectively, 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 Condensed 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).
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 and the company's investment in the Ohio
operations initially financed with short term borrowings.
17
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.
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.
18
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 forward-looking statements is provided by the Private
Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of
1995 was adopted to encourage such forward-looking statements without the threat
of litigation, provided those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statement. Certain matters described in Management's Discussion
and Analysis of Results of Operations and Financial Condition, including, but
not limited to 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:
|X| 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.
|X| Increased competition in the energy environment including effects of
industry restructuring and unbundling.
|X| 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.
|X| 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.
|X| Economic conditions including inflation rates and monetary fluctuations.
|X| 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.
19
|X| 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.
|X| Employee workforce factors including changes in key executives,
collective bargaining agreements with union employees, or work
stoppages.
|X| Legal and regulatory delays and other obstacles associated with mergers,
acquisitions, and investments in joint ventures.
|X| 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.
|X| 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.
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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
August 27, 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