UNITED STATES
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, 2002
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 Identification
incorporation or organization) No.)
20 N.W. Fourth Street, Evansville, Indiana 47708
------------------------------------------------
(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 690.00001 May 1, 2002
-------------------------------- ----------------- --------------
Class Number of shares Date
As of May 1, 2002, all shares outstanding of the Registrant's classes of common
stock were held by Vectren Corporation through its wholly owned subsidiary,
Vectren Utility Holdings, Inc.
Table of Contents
Item Page
Number Number
PART I. FINANCIAL INFORMATION
1 Financial Statements (Unaudited)
Indiana Gas Company, Inc.
Condensed Balance Sheets 1-2
Condensed Statements of Income 3
Condensed Statements of Cash Flows 4
Notes to Condensed Unaudited Financial Statements 5-9
2 Management's Discussion and Analysis of Results of 10-17
Operations and Financial Condition
3 Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION
1 Legal Proceedings 18
6 Exhibits and Reports on Form 8-K 18
Signatures 19
Definitions
As discussed in this Form 10-Q the abbreviation MMDth means millions of
dekatherms and throughput means combines gas sales and gas transportation
volumes.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INDIANA GAS COMPANY, INC.
CONDENSED BALANCE SHEETS
(Unaudited - In thousands)
March 31, December 31,
2002 2001
---------- ----------
ASSETS
Utility Plant
Original cost $1,102,261 $1,094,349
Less: Accumulated depreciation & amortization 466,356 458,310
---------- ----------
Net utility plant 635,905 636,039
---------- ----------
Current Assets
Cash & cash equivalents 4,638 294
Accounts receivable-less reserves of $2,174 &
$987, respectively 30,556 49,788
Receivables from other Vectren companies 13,365 15,874
Accrued unbilled revenues 33,998 38,557
Inventories 7,487 15,341
Recoverable natural gas costs 36,077 34,497
Prepayments & other current assets 2,450 34,445
---------- ----------
Total current assets 128,571 188,796
---------- ----------
Investment in the Ohio operations 228,791 223,624
Other investments 1,841 1,734
Non-utility property-net 290 303
Regulatory assets 11,768 14,720
Other assets 8,195 9,652
---------- ----------
TOTAL ASSETS $1,015,361 $1,074,868
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
INDIANA GAS COMPANY, INC.
CONDENSED BALANCE SHEETS
(Unaudited - In thousands)
March 31, December 31,
2002 2001
----------- -----------
LIABILITIES & SHAREHOLDER'S EQUITY
Capitalization
Common shareholder's equity
Common stock (no par value) $ 242,995 $ 242,995
Retained earnings 92,308 75,927
Accumulated other comprehensive income (2,382) (2,382)
----------- -----------
Total common shareholder's equity 332,921 316,540
----------- -----------
Long-term debt-net of debt subject to tender 259,694 260,972
Long-term debt to VUHI 147,270 147,270
----------- -----------
Total capitalization 739,885 724,782
----------- -----------
Commitments & Contingencies (Notes 5-8)
Current Liabilities
Accounts payable 7,932 25,642
Accounts payable to affiliated companies 29,579 21,337
Payables to other Vectren companies 5,554 9,755
Accrued liabilities 51,927 42,757
Short-term borrowings to VUHI 64,420 134,298
Long-term debt subject to tender 11,500 11,500
Current maturities of long-term debt 1,250 1,250
----------- -----------
Total current liabilities 172,162 246,539
----------- -----------
Deferred Income Taxes & Other Liabilities
Deferred income taxes 50,887 50,970
Deferred credits & other liabilities 52,427 52,577
----------- -----------
Total deferred income taxes & other
liabilities 103,314 103,547
----------- -----------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,015,361 $ 1,074,868
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
INDIANA GAS COMPANY, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited - In thousands)
Three Months Ended
March 31,
-------------------------
2002 2001
--------- ---------
OPERATING REVENUES $ 197,897 $ 287,972
COST OF GAS 126,760 215,238
--------- ---------
GAS OPERATING MARGIN 71,137 72,734
--------- ---------
OPERATING EXPENSES
Other operating 20,261 26,338
Merger & integration costs - 503
Depreciation & amortization 9,978 9,796
Income taxes 10,120 6,532
Taxes other than income taxes 4,915 5,769
--------- ---------
Total operating expenses 45,274 48,938
--------- ---------
OPERATING INCOME 25,863 23,796
OTHER INCOME
Equity in earnings of the Ohio
operations-net of tax 5,167 2,886
Other-net 402 (1,075)
--------- ---------
Total other income 5,569 1,811
--------- ---------
Interest expense 8,177 10,480
--------- ---------
NET INCOME $ 23,255 $ 15,127
========= =========
The accompanying notes are an integral part of these condensed financial
statements
INDIANA GAS COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited - In thousands)
Three Months
Ended March 31,
---------------------
2002 2001
---------------------
NET CASH FLOWS FROM OPERATING ACTIVITES $ 90,660 $ 40,309
-------- --------
CASH FLOWS (REQUIRED FOR) FINANCING ACTIVITIES
Dividends on common stock (6,874) (7,870)
Retirement of long-term debt (1,278) (6,822)
Other - (544)
Net change in short-term borrowings to VUHI (69,878) (15,190)
-------- --------
NET CASH FLOWS (REQUIRED FOR)
FINANCING ACTIVITIES (78,030) (30,426)
-------- --------
CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES
Capital expenditures (8,286) (7,955)
Other investments - 891
-------- --------
NET CASH FLOWS (REQUIRED FOR)
INVESTING ACTIVITIES (8,286) (7,064)
-------- --------
Net increase in cash & cash equivalents 4,344 2,819
Cash & cash equivalents at beginning of period 294 300
-------- --------
Cash & cash equivalents at end of period $ 4,638 $ 3,119
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
INDIANA GAS COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Nature of Operations
Overview
- --------
Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation,
provides natural gas distribution and transportation services to a diversified
customer base in 311 communities in 49 of Indiana's 92 counties. Indiana Gas is
a direct, wholly owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI
is a direct, wholly owned subsidiary of Vectren Corporation (Vectren).
Vectren 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 in accordance with Accounting Principles Board (APB)
Opinion No. 16 "Business Combinations."
Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding
company for its three operating public utilities: Indiana Gas, formerly a wholly
owned subsidiary of Indiana Energy, Inc., Southern Indiana Gas and Electric
Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc., and the
Ohio operations. Both Vectren and VUHI are exempt from registration pursuant to
Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935.
Investment in the Gas Distribution Assets of The Dayton Power and Light Company
- -------------------------------------------------------------------------------
On October 31, 2000, Vectren acquired the natural gas distribution assets of The
Dayton Power and Light Company (DP&L) for approximately $465.0 million as a
tenancy in common through two separate wholly owned subsidiaries. Vectren Energy
Delivery of Ohio, Inc. (VEDO) holds a 53% undivided ownership interest in the
assets, and Indiana Gas holds a 47% undivided ownership interest. VEDO is the
operator of the assets, and these assets are referred to as "the Ohio
operations." Indiana Gas' ownership is accounted for on the equity method in
accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." Its ownership interest is included in investment
in the Ohio operations, and its interest in the results of operations is
included in equity in earnings of the Ohio operations. The Ohio operations are a
significant subsidiary of Indiana Gas.
2. Basis of Presentation
The interim condensed financial statements included in this report have been
prepared by the Company, 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. The Company 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 the Company's
audited annual financial statements for the year ended December 31, 2001 filed
on Form 10-K. Because of the seasonal nature of the Company's 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 condensed financial
statements to conform with the current year classification. These
reclassifications have no impact on previously reported net income.
3. Investment in the Ohio Operations
Unaudited summarized financial information of the Ohio operations for the three
months ended March 31, 2002 and 2001 is presented below.
In thousands 2002 2001
- ----------------------------- --------------- --------------
Operating revenues $ 125,902 $182,967
Gas operating margin 39,854 35,513
Operating income 10,952 6,659
Net income 10,994 6,140
Interest costs arising from financing arrangements utilized to purchase the Ohio
operations are not reflected in the above summarized financial information. Had
the financing arrangements of Indiana Gas and VEDO used to facilitate the
aquisition been pushed down to the Ohio operations, net income would have been
$8.8 million and $1.8 million, respectively, for the three months ended March
31, 2002 and 2001.
4. Impact of Recently Issued Accounting Guidance
SFAS 142
- --------
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). The Company adopted the provisions of SFAS 142, as required
on January 1, 2002. SFAS 142 changed the accounting for goodwill from an
amortization approach to an impairment-only approach. Thus, amortization of
goodwill that is not included as an allowable cost for rate-making purposes
ceased upon adoption of the statement. Goodwill is to be tested for impairment
at a reporting unit level at least annually.
SFAS 142 also requires the initial impairment review of all goodwill within six
months of the adoption date. The impairment review consists of a comparison of
the fair value of a reporting unit to its carrying amount. If the fair value of
a reporting unit is less than its carrying amount, an impairment loss would be
recognized. Results of the initial impairment review are to be treated as a
change in accounting principle in accordance with APB Opinion No. 20 "Accounting
Changes." An impairment loss recognized as a result of an impairment test
occurring after the initial impairment review is to be reported as a part of
operations. SFAS 142 also changed certain aspects of accounting for intangible
assets; however, the Company does not have any significant intangible assets.
Initial impairment reviews to be performed within six months of adoption of SFAS
142 have not been completed, but no impairment is expected.
SFAS 144
- --------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 develops one accounting
model for all impaired long-lived assets and long-lived assets to be disposed
of. SFAS 144 replaces the existing authoritative guidance in FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and certain aspects of APB Opinion No. 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business."
This new accounting model retains the framework of SFAS 121 and requires that
those impaired long-lived assets and long-lived assets to be disposed of be
measured at the lower of carrying amount or fair value (less cost to sell for
assets to be disposed of), whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations are no longer
measured at net realizable value or include amounts for operating losses that
have not yet occurred.
SFAS 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction.
The adoption of SFAS 144 on January 1, 2002 did not materially impact
operations.
SFAS 143
- --------
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS 143 is effective for fiscal years
beginning after June 15, 2002, with earlier application encouraged. The Company
is currently evaluating the impact that SFAS 143 will have on its operations.
5. Transactions with Other Vectren Companies
Support Services & Purchases
- ----------------------------
Vectren and certain subsidiaries of Vectren have provided corporate, general and
administrative services to the Company including legal, finance, tax, risk
management and human resources. The costs have been allocated to the Company
using various allocators, primarily number of employees, number of customers
and/or revenues. Management believes that the allocation methodology is
reasonable and approximates the costs that would have been incurred had the
Company secured those services on a stand-alone basis. For the three months
ended March 31, 2002 and 2001, amounts billed by other wholly owned subsidiaries
of Vectren to the Company were $14.3 million and $19.4 million, respectively.
Cash Management & Borrowing Arrangements
- ----------------------------------------
The Company participates in a centralized cash management program with Vectren,
other wholly owned subsidiaries, and banks which permits funding of checks as
they are presented.
Guarantees of Parent Company Debt
- ---------------------------------
Vectren's three operating utility companies, Indiana Gas, VEDO, and SIGECO are
guarantors of VUHI's $350.0 million commercial paper program, of which $140.0
million is outstanding at September 30, 2001 and VUHI's $350.0 million unsecured
senior notes outstanding at March 31, 2002. These guarantees are full and
unconditional and joint and several. VUHI has no significant independent assets
or operations other than the assets and operations of these operating utility
companies.
6. Transactions with Vectren Affiliates
ProLiance Energy, LLC (ProLiance), a nonregulated, energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), began providing
natural gas and related services to Indiana Gas, Citizens Gas, and others in
April 1996. ProLiance also provides services to the Ohio operations.
Regulatory Matters
- ------------------
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 and that ProLiance is not subject to regulation by the IURC
as a public utility. 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, the price paid by ProLiance to the utilities for the
prospect of using pipeline entitlements if and when they are not required to
serve the utilities' firm customers, and the pricing of fees paid by the
utilities to ProLiance for portfolio administration services, 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.
In 2001, the IURC commenced processing the GCA proceeding regarding the three
pricing issues. The IURC indicated that it would consider the prospective
relationship of ProLiance with the utilities in this proceeding. On April 23,
2002, Indiana Gas and Citizens Gas, together with the Office of Utility Consumer
Counselor and other consumer parties entered into and filed with the IURC an
agreement in principle setting forth the terms for resolution of all pending
regulatory issues related to ProLiance. The parties intend to submit for IURC
approval a final settlement no later than June 3, 2002. If approved by the IURC,
the pending GCA proceeding will be concluded.
Transactions with ProLiance
- ---------------------------
Purchases from ProLiance for resale and for injections into storage for the
three months ended March 31, 2002 and 2001 totaled $79.9 million and $166.3
million, respectively. Amounts owed to ProLiance at March 31, 2002 and December
31, 2001 for such purchases were $28.8 million and $20.4 million, respectively,
and are included in accounts payable to affiliated companies. Amounts charged by
ProLiance for capacity and storage services are market based.
7. Commitments & Contingencies
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management there are no legal proceedings pending
against the Company that are likely to have a material adverse effect on its
financial position or results of operations. See Note 6 regarding ProLiance
Energy, LLC and Note 8 regarding environmental matters.
8. Environmental Matters
In the past, the Company 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, the Company and others may now be required
to take remedial action if certain byproducts are found above the regulatory
thresholds at these sites.
The Company has identified the existence, location and certain general
characteristics of 26 gas manufacturing and storage sites for which it may have
some remedial responsibility. The Company has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites under an agreed
order between the Company and the Indiana Department of Environmental Management
(IDEM), and a Record of Decision was issued by the IDEM in January 2000.
Although the Company has not begun an RI/FS at additional sites, the Company 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, the Company 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, the Company has accrued costs that it reasonably expects to incur totaling
approximately $20.4 million.
The estimated accrued costs are limited to the Company's proportionate share of
the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26
sites with other potentially responsible parties (PRP), which serve to limit the
Company's share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, the Company has received and recorded
settlements from all known insurance carriers in an aggregate amount
approximating its $20.4 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 the Company 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Description of the Business
Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation,
provides natural gas distribution and transportation services to a diversified
customer base in 311 communities in 49 of Indiana's 92 counties. Indiana Gas is
a direct, wholly owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI
is a direct, wholly owned subsidiary of Vectren Corporation (Vectren).
Vectren 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 in accordance with Accounting Principles Board (APB)
Opinion No. 16 "Business Combinations."
Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding
company for its three operating public utilities: Indiana Gas, formerly a wholly
owned subsidiary of Indiana Energy, Inc., Southern Indiana Gas and Electric
Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc., and the
Ohio operations. Both Vectren and VUHI are exempt from registration pursuant to
Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935.
Investment in the Gas Distribution Assets of The Dayton Power and Light Company
- -------------------------------------------------------------------------------
On October 31, 2000, Vectren acquired the natural gas distribution assets of The
Dayton Power and Light Company (DP&L) for approximately $465.0 million as a
tenancy in common through two separate wholly owned subsidiaries. Vectren Energy
Delivery of Ohio, Inc. (VEDO) holds a 53% undivided ownership interest in the
assets, and Indiana Gas holds a 47% undivided ownership interest. VEDO is the
operator of the assets, and these assets are referred to as "the Ohio
operations." Indiana Gas' ownership is accounted for on the equity method in
accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." Its ownership interest is included in investment
in the Ohio operations, and its interest in the results of operations is
included in equity in earnings of the Ohio operations. The Ohio operations are a
significant subsidiary of Indiana Gas.
Results of Operations
Three Months Ended March 31,
- -----------------------------------------------------------------------------
In thousands 2002 2001
------- -------
Net income, as reported $23,255 $15,127
Merger and integration costs-net of tax - 2,009
------- -------
Net income before nonrecurring items $23,255 $17,136
======= =======
Net Income
For the three months ended March 31, 2002, net income increased $8.1 million
due primarily to merger synergies, a return to lower gas prices and the related
reduction in costs incurred in 2001 related to uncollectible accounts expense
and interest costs, and the completion of merger activities and related costs.
These increases were offset somewhat by the impact of weather that was
approximately 10% warmer than the prior year.
Merger & Integration Costs
For the three months ended March 31, 2001, $0.5 million was expensed related to
the 2000 merger forming Vectren. These costs were primarily for employee
relocation, travel, and consulting fees.
As a result of merger and integration activities, management retired certain
information systems in 2001. Accordingly, the useful lives of these assets were
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 the Company are reflected in other operating
expenses in the accompanying condensed financial statements. As a result of the
shortened useful lives, additional fees were incurred by the Company resulting
in additional other operating expense of $2.7 million for the three months ended
March 31, 2001.
In total, for the three months ended March 31, 2001, merger and integration
costs totaled $3.2 million ($2.0 million after tax). Merger and integration
activities resulting from the 2000 merger were completed in 2001.
New Accounting Principles
SFAS 142
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). The Company adopted the provisions of SFAS 142, as required
on January 1, 2002. SFAS 142 changed the accounting for goodwill from an
amortization approach to an impairment-only approach. Thus, amortization of
goodwill that is not included as an allowable cost for rate-making purposes
ceased upon adoption of the statement. Goodwill is to be tested for impairment
at a reporting unit level at least annually.
SFAS 142 also requires the initial impairment review of all goodwill within six
months of the adoption date. The impairment review consists of a comparison of
the fair value of a reporting unit to its carrying amount. If the fair value of
a reporting unit is less than its carrying amount, an impairment loss would be
recognized. Results of the initial impairment review are to be treated as a
change in accounting principle in accordance with APB Opinion No. 20 "Accounting
Changes." An impairment loss recognized as a result of an impairment test
occurring after the initial impairment review is to be reported as a part of
operations. SFAS 142 also changed certain aspects of accounting for intangible
assets; however, the Company does not have any significant intangible assets.
Initial impairment reviews to be performed within six months of adoption of SFAS
142 have not been completed, but no impairment is expected.
SFAS 143
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS 143 is effective for fiscal years
beginning after June 15, 2002, with earlier application encouraged. The Company
is currently evaluating the impact that SFAS 143 will have on its operations.
SFAS 144
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 develops one accounting
model for all impaired long-lived assets and long-lived assets to be disposed
of. SFAS 144 replaces the existing authoritative guidance in FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and certain aspects of APB Opinion No. 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business."
This new accounting model retains the framework of SFAS 121 and requires that
those impaired long-lived assets and long-lived assets to be disposed of be
measured at the lower of carrying amount or fair value (less cost to sell for
assets to be disposed of), whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations are no longer
measured at net realizable value or include amounts for operating losses that
have not yet occurred.
SFAS 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction.
The adoption of SFAS 144 on January 1, 2002 did not materially impact
operations.
Significant Fluctuations
Gas Operating Margin
Gas operating margin for the three months ended March 31, 2002 of $71.1 million
decreased $1.6 million, or 2%, compared to 2001. Gas operating margin was
favorably impacted by customer growth and the decreased cost of unaccounted for
gas. These favorable impacts were offset by weather 10% warmer than the prior
year and 12% warmer than normal. Overall, throughput declined 3% from 45.7 MMDth
to 44.2 MMDth
Total cost of gas sold was $126.8 million for the three months ended March 31,
2002 and $215.2 million in 2001. Total cost of gas sold decreased $88.5 million,
or 41%, during 2002 compared to 2001, primarily due to a return to lower gas
prices. The total average cost per dekatherm of gas purchased for the three
months ended March 31, 2002 was $4.27 compared to $7.55 for the same period in
2001.
Operating Expenses (excluding Cost of Gas)
Other Operating
Other operating expense decreased $6.1 million, or 23%, for the three months
ended March 31, 2002 compared to the prior year. The decrease results from
reduced charges for those assets which had their useful lives shortened as a
result of the merger, merger synergies, and less uncollectible accounts expense.
Uncollectible accounts expense in 2001 was higher due to increased customer
account balances as a result of the extraordinarily high gas costs experienced
in 2001.
Income Tax Expense
Federal and state income taxes increased $3.6 million for the three months ended
March 31, 2002 compared to the prior year. The increase results from primarily
higher pre-tax earnings and a small increase in the effective tax rate.
Taxes Other Than Income Taxes
Taxes other than income taxes decreased $0.9 million for the three months ended
March 31, 2002 compared to the prior year due to lower gross receipts taxes
resulting from lower sales volumes.
Other Income (Expense)
Equity in Earnings of the Ohio Operations
The Company has a 47% undivided interest in the Ohio operations acquired by
Vectren on October 31, 2000. Equity in earnings of the Ohio operations
represents the Company's portion of the Ohio operations' net income.
Other - Net
Other - net increased $1.5 million for the three months ended March 31, 2002
compared to 2001. In 2001, contributions were made to low income heating
assistance programs to assist customers with their increased utility bills
reflecting higher gas costs.
Interest Expense
Interest expense decreased by $2.3 million for the three months ended March 31,
2002 when compared to the prior year. The decrease is due to lower interest
rates on adjustable rate debt and less debt outstanding. The reduced debt
outstanding is due primarily to decreased working capital requirements resulting
from a return to lower gas prices.
Environmental Matters
In the past, the Company 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, the Company and others may now be required
to take remedial action if certain byproducts are found above the regulatory
thresholds at these sites.
The Company has identified the existence, location and certain general
characteristics of 26 gas manufacturing and storage sites for which it may have
some remedial responsibility. The Company has completed a remedial
investigation/feasibility study (RI/FS) at one of the sites under an agreed
order between the Company and the Indiana Department of Environmental Management
(IDEM), and a Record of Decision was issued by the IDEM in January 2000.
Although the Company has not begun an RI/FS at additional sites, the Company 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, the Company 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, the Company has accrued costs that it reasonably expects to incur totaling
approximately $20.4 million.
The estimated accrued costs are limited to the Company's proportionate share of
the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26
sites with other potentially responsible parties (PRP), which serve to limit the
Company's share of response costs at these 19 sites to between 20% and 50%.
With respect to insurance coverage, the Company has received and recorded
settlements from all known insurance carriers in an aggregate amount
approximating its $20.4 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 the Company 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.
Regulatory Matters
ProLiance Energy, LLC (ProLiance), a nonregulated, energy marketing affiliate of
Vectren and Citizens Gas and Coke Utility (Citizens Gas), began providing
natural gas and related services to Indiana Gas, Citizens Gas, and others in
April 1996. ProLiance also provides services to the Ohio operations.
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 and that ProLiance is not subject to regulation by the IURC
as a public utility. 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, the price paid by ProLiance to the utilities for the
prospect of using pipeline entitlements if and when they are not required to
serve the utilities' firm customers, and the pricing of fees paid by the
utilities to ProLiance for portfolio administration services, 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.
In 2001, the IURC commenced processing the GCA proceeding regarding the three
pricing issues. The IURC indicated that it would consider the prospective
relationship of ProLiance with the utilities in this proceeding. On April 23,
2002, Indiana Gas and Citizens Gas, together with the Office of Utility Consumer
Counselor and other consumer parties entered into and filed with the IURC an
agreement in principle setting forth the terms for resolution of all pending
regulatory issues related to ProLiance. The parties intend to submit for IURC
approval a final settlement no later than June 3, 2002. If approved by the IURC,
the pending GCA proceeding will be concluded.
Financial Condition
The Company's equity capitalization objective is 40-55% of total capitalization.
This objective may have varied, and will vary, depending on particular business
opportunities and seasonal factors that affect the Company's operation. The
Company's equity component was 44% and 43% of total capitalization, including
current maturities of long-term debt and long-term debt subject to tender at
March 31, 2002 and December 31, 2001, 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.
The Company expects the majority of its capital expenditures and debt security
redemptions to be provided by internally generated funds; however, additional
financing may be required due to the possible early redemption of debt.
The Company's credit ratings on outstanding senior unsecured debt at March 31,
2002 are A-/A2 as rated by Standard and Poor's and Moody's, respectively.
Cash Flow from Operations
The Company's primary source of liquidity to fund working capital requirements
has been cash generated from operations, which totaled approximately $90.7
million and $40.3 million for the three months ended March 31, 2002 and 2001,
respectively.
Cash flow from operations increased during the three months ended March 31, 2002
compared to 2001 by $50.4 million due to favorable changes in working capital,
as a result of the return to lower gas costs and increased earnings.
Financing Activities
Sources & Uses of Liquidity
The Company has no short-term borrowing arrangements with third parties and
relies entirely on the short-term borrowing arrangements of VUHI for short-term
working capital needs. Borrowings outstanding at March 31, 2002 were $64.4
million. The intercompany credit line totals $325.0 million, but is limited to
VUHI's available capacity ($210.0 million at March 31, 2002) and is subject to
the same terms and conditions as VUHI's commercial paper program.
During the three months ended March 31, 2002, $1.3 million of long term debt was
paid as scheduled, and in June and July of 2002, put provisions on $5.0 million
and $6.5 million, respectively, of long-term debt become exercisable.
Vectren's three operating utility companies, Indiana Gas, VEDO, and SIGECO are
guarantors of VUHI's $350.0 million commercial paper program, of which $140.0
million is outstanding at March 31, 2002 and VUHI's $350.0 million unsecured
senior notes outstanding at March 31, 2002. VUHI has no significant independent
assets or operations other than the assets and operations of these operating
utility companies. These guarantees are full and unconditional and joint and
several. Under the terms of VUHI's commercial paper program, it must maintain
a rating of better than BB+/Ba1.
Financing Cash Flow
Cash flow required for financing activities of $78.0 million for the three
months ended March 31, 2002 includes $71.2 million of reductions in borrowings
and $6.8 million of common stock dividends paid to VUHI. This $47.6 million
increase in cash required for financing activities when compared to the three
months ended March 31, 2001 results from the use of internally generated funds
to pay down short-term borrowings.
Capital Expenditures & Other Investment Activities
Cash flow required for investing activities increased during the three months
ended March 31, 2002 compared to 2001 by $1.2 million. The increase in cash
requirements is due to more additions to utility plant.
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
2002 are estimated at $34.0 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, 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 the Company's 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 the effects of an economic
downturn, 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.
|X| Availability or cost of capital, resulting from changes in the
Company, including its security ratings, changes in interest
rates, and/or changes in market perceptions of the utility
industry and other 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.
The Company 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
The information required hereunder is not significantly different from the
information as set forth in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk included in the Indiana Gas Company, Inc. 2001 Form 10-K and
is therefore not presented herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the normal course
of business. In the opinion of management there are no legal proceedings pending
against the Company that are likely to have a material adverse effect on the
financial position or results of operations. See Note 6 regarding ProLiance
Energy, LLC and Note 8 regarding environmental matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports On Form 8-K During The Last Calendar Quarter
On January 24, 2002, the Company filed a Current Report on Form 8-K with respect
to the release of financial information to the investment community regarding
Vectren's results of operations, financial position and cash flows for the three
and twelve month periods ended December 31, 2001. The financial information was
released to the public through this filing.
Item 5. Other Events
Item 7. Exhibits
99.1 - Press Release - Fourth Quarter 2001 Vectren Corporation
Earnings
99.2 - Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform
Act of 1995
On March 26, 2002, the Company filed a Current Report on Form 8-K with respect
to its decision to replace Arthur Andersen LLP as the Company's independent
auditors, effective upon completion of a transition period which is expected to
extend through the conclusion of their review of the financial results of the
Company and its subsidiaries for the first quarter of 2002.
Item 4. Changes in Registrant's Certifying Accountant.
Item 7. Exhibits
16 - Letter from Arthur Andersen LLP to the Securities and
Exchange Commission, dated March 26, 2002.
99 - Letter to Vectren Corporation Shareholders dated
March 22, 2002
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, 2002 /s/Jerome A. Benkert, Jr.
-------------------------
Jerome A. Benkert, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/M. Susan Hardwick
----------------------------
M. Susan Hardwick
Vice President and Controller
(Principal Accounting Officer)