SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6494
INDIANA GAS COMPANY, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0793669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1630 North Meridian Street, Indianapolis, Indiana 46202
(Address of principal executive offices) (Zip Code)
317-926-3351
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Common Stock - Without par value 9,080,770 July 31, 1994
Class Number of shares Date
TABLE OF CONTENTS
Page
Numbers
Part I - Financial Information
Consolidated Balance Sheets
at June 30, 1994 and 1993
and September 30, 1993
Consolidated Statements of Income
Three Months Ended June 30, 1994 and 1993,
Nine Months Ended June 30, 1994 and 1993,
and Twelve Months Ended June 30, 1994 and 1993
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1994 and 1993,
and Twelve Months Ended June 30, 1994 and 1993
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands - Unaudited)
June 30 September 30
1994 1993 1993
<S> <C> <C> <C>
UTILITY PLANT:
Original cost $810,925 $755,310 $773,174
Less - accumulated depreciation
and amortization 286,510 262,952 267,629
524,415 492,358 505,545
NONUTILITY PLANT - NET 396 237 234
CURRENT ASSETS:
Cash and cash equivalents 23,414 30,106 20
Accounts receivable, less reserves of
$2,137, $3,320 and $2,055 respectively 29,413 22,362 14,231
Accrued unbilled revenues 7,913 7,390 10,748
Materials and supplies - at average cost 3,886 4,315 3,710
Liquefied petroleum gas - at average cost 869 831 1,019
Gas in underground storage - at last-in,
first-out cost 39,210 32,287 59,534
Recoverable gas costs - - 7,453
Prepayments and other 713 686 296
105,418 97,977 97,011
DEFERRED CHARGES:
Unamortized debt discount and expense 6,237 6,744 6,614
Other 15,998 9,938 12,254
22,235 16,682 18,868
$652,464 $607,254 $621,658
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands - Unaudited)
June 30 September 30
1994 1993 1993
<S> <C> <C> <C>
CAPITALIZATION:
Common stock and paid-in capital $142,995 $102,995 $142,995
Retained earnings 128,014 116,041 106,104
Total common shareholder's equity 271,009 219,036 249,099
Long-term debt 164,901 174,901 164,901
435,910 393,937 414,000
CURRENT LIABILITIES:
Maturities and sinking fund requirements
of long-term debt 10,000 10,000 20,000
Notes payable - - 10,252
Accounts payable 37,082 76,351 41,602
Refundable gas costs 32,595 3,921 -
Customer deposits and advance payments 2,077 2,317 13,466
Accrued taxes 32,820 27,846 31,579
Accrued interest 5,103 5,200 3,342
Other current liabilities 15,410 14,686 13,441
135,087 140,321 133,682
DEFERRED CREDITS:
Deferred income taxes (See Note 11) 56,828 55,473 56,911
Unamortized investment tax credit 13,267 14,196 13,963
Customer advances for construction 1,100 1,032 998
Regulatory income tax liability (See Note 11) 4,789 - -
Other 5,483 2,295 2,104
81,467 72,996 73,976
COMMITMENTS AND CONTINGENCIES
(See Notes 9 and 10) - - -
$652,464 $607,254 $621,658
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Three Months Nine Months
Ended June 30 Ended June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 77,827 $ 101,249 $ 425,391 $ 435,042
COST OF GAS 41,468 63,910 256,953 275,275
MARGIN 36,359 37,339 168,438 159,767
OPERATING EXPENSES:
Other operation and maintenance 19,579 22,671 62,356 65,122
Depreciation and amortization 7,384 6,737 21,654 19,968
Income taxes 482 98 22,600 18,111
Taxes other than income taxes 3,363 3,292 12,753 11,986
30,808 32,798 119,363 115,187
OPERATING INCOME 5,551 4,541 49,075 44,580
OTHER INCOME - NET 747 321 2,258 282
INCOME BEFORE INTEREST
AND OTHER CHARGES 6,298 4,862 51,333 44,862
INTEREST 3,885 4,183 12,168 12,412
OTHER (1) (82) (145) (221)
3,884 4,101 12,023 12,191
NET INCOME 2,414 761 39,310 32,671
DIVIDENDS ON PREFERRED STOCK - - - 285
EARNINGS AVAILABLE FOR COMMON STOCK $ 2,414 $ 761 $ 39,310 $ 32,386
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Twelve Months
Ended June 30
1994 1993
<S> <C> <C>
OPERATING REVENUES $ 489,627 $ 491,487
COST OF GAS 295,231 308,614
MARGIN 194,396 182,873
OPERATING EXPENSES
Other operation and maintenance 81,536 78,889
Depreciation and amortization 28,492 26,457
Income taxes 20,305 17,253
Taxes other than income taxes 15,295 13,803
145,628 136,402
OPERATING INCOME 48,768 46,471
OTHER INCOME - NET 2,555 1,059
INCOME BEFORE INTEREST
AND OTHER CHARGES 51,323 47,530
INTEREST 16,396 15,743
OTHER (246) (283)
16,150 15,460
NET INCOME 35,173 32,070
DIVIDENDS ON PREFERRED STOCK - 712
EARNINGS AVAILABLE FOR COMMON STOCK $ 35,173 $ 31,358
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Nine Months Twelve Months
Ended June 30 Ended June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39,310 $ 32,671 $ 35,173 $ 32,070
Adjustments to reconcile net income to cash
provided from operating activities -
Depreciation and amortization 21,801 20,160 28,704 26,700
Deferred income taxes 1,930 1,494 3,367 2,276
Investment tax credit (697) (775) (929) (930)
23,034 20,879 31,142 28,046
Changes in assets and liabilities -
Receivables - net (12,347) (7,622) (7,574) (4,364)
Inventories 20,298 16,192 (6,532) (4,833)
Accounts payable, customer deposits,
advance payments and other current liabilities (13,940) 35,521 (38,785) 53,970
Accrued taxes and interest 3,002 8,535 4,877 2,074
Recoverable/refundable gas costs 40,048 (5,749) 28,674 (9,415)
Prepayments (417) (460) (27) 88
Other - net 3,401 (1,283) 1,191 (3,441)
Total adjustments 63,079 66,013 12,966 62,125
Net cash flow from operations 102,389 98,684 48,139 94,195
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Issuance of common stock - - 40,000 -
Redemption of preferred stock - (20,932) - (20,932)
Sale of long-term debt - 35,000 - 35,000
Reduction in long-term debt (10,000) - (10,000) (67)
Net change in short-term borrowings (10,252) (30,238) - (3,552)
Dividends (17,400) (15,536) (23,200) (21,014)
Net cash flow from (required for) financing activities (37,652) (31,706) 6,800 (10,565)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (41,343) (37,094) (61,631) (53,812)
Net cash flow required for investing activities (41,343) (37,094) (61,631) (53,812)
NET INCREASE (DECREASE) IN CASH 23,394 29,884 (6,692) 29,818
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 20 222 30,106 288
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,414 $ 30,106 $ 23,414 $ 30,106
</TABLE>
Indiana Gas Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
Indiana Gas Company, Inc. and its subsidiaries, Terre
Haute Gas Corporation (Terre Haute) and Richmond Gas
Corporation (Richmond) which are doing business as
Indiana Gas Company, Inc. (Indiana Gas), provide natural
gas and transportation services to a diversified base of
customers in 281 communities within the lower two-thirds
of the state of Indiana.
The interim condensed consolidated 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 generally accepted accounting principles have been
omitted as provided in such rules and regulations.
Indiana Gas believes that the information in this report
reflects all adjustments necessary to fairly state the
results of the interim periods reported, that all such
adjustments are of a normally recurring nature, and the
disclosures are adequate to make the information
presented not misleading. These interim financial
statements should be read in conjunction with the
financial statements and the notes thereto included in
Indiana Gas' latest annual report on Form 10-K.
Because of the seasonal nature of Indiana Gas' gas
distribution operations, the results shown on a
quarterly basis are not necessarily indicative of annual
results.
2. Cash Flow Information.
For the purposes of the Consolidated Statements of Cash
Flows, Indiana Gas considers cash investments with an
original maturity of three months or less to be cash
equivalents. Cash paid during the periods reported for
interest and income taxes were as follows:
<TABLE>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30 June 30 June 30
Thousands 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Interest (net of
amount capitalized) $ 1,522 $ 1,807 $ 9,329 $ 8,494 $14,829 $14,163
Income taxes $ 4,800 $ 500 $15,880 $11,039 $16,580 $14,138
</TABLE>
3. Revenues.
To more closely match revenues and expenses, Indiana Gas
records revenues for all gas delivered to customers but
not billed at the end of the accounting period.
4. Gas in Underground Storage.
Based on the cost of purchased gas during June 1994, the
cost of replacing the current portion of gas in
underground storage was less than last-in, first-out
cost at June 30,1994, by approximately $4,038,000.
Actual cost of purchased gas is recoverable through
rates in accordance with procedures approved by the
Indiana Utility Regulatory Commission (IURC).
5. Refundable or Recoverable Gas Costs.
The cost of gas purchased and refunds from suppliers,
which differ from amounts recovered through rates are
deferred and are being recovered or refunded in
accordance with procedures approved by the IURC.
6. Allowance For Funds Used During Construction.
An allowance for funds used during construction (AFUDC),
which represents the cost of borrowed and equity funds
used for construction purposes, is charged to
construction work in progress during the period of
construction and included in "Other Income-Net" and
"Other" on the Consolidated Statements of Income. The
current annual AFUDC rate is 7.5 percent, however, prior
to September 30, 1992, a rate of 10 percent was used.
The table below reflects the total interest capitalized
and the portion of which was computed on borrowed funds
and equity funds for all periods reported.
<TABLE>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30 June 30 June 30
Thousands 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
AFUDC-Borrowed Funds $ 48 $ 146 $ 292 $ 413 $ 458 $ 526
AFUDC-Equity Funds 39 119 239 350 375 458
Total AFUDC Capitalized $ 87 $ 265 $ 531 $ 763 $ 833 $ 984
</TABLE>
7. Long-Term Debt.
On October 15, 1993, $10 million of 9.30% medium-term
notes were redeemed.
8. Cash Management/Accounts Payable.
Indiana Gas participates in a centralized cash
management program with its parent, affiliated companies
and banks which permits funding of checks as they are
presented. Amounts borrowed from affiliated companies as
well as checks written but not cashed are
reflected in accounts payable. There were no amounts
borrowed from affiliated companies at June 30, 1994.
At June 30, 1993, Accounts Payable included $40 million
borrowed from affiliated companies which was invested in
Indiana Gas by its parent, Indiana Energy, on July 30, 1993.
9. Environmental.
In the past, Indiana Gas and others, including its
predecessors, former affiliates and/or previous
landowners, operated facilities for the manufacturing of
gas and storage of manufactured gas. These facilities
are no longer in operation and have not been operated
for many years. In the manufacture and storage of such
gas, various byproducts were produced, some of which may
still be present at the sites where these manufactured
gas plants and storage facilities were located. While
management believes those operations were conducted in
accordance with the then-applicable industry standards,
under currently applicable environmental laws and
regulations, Indiana Gas, and the others, may now be
required to take remedial action if certain materials
are found at these sites.
Indiana Gas has identified the existence, location and
certain general characteristics of 26 gas manufacturing
and storage sites. Indiana Gas is currently undertaking
remediation at two sites. Indiana Gas' share of
remediation and related costs for these two sites has
been accrued. These sites are currently being reviewed
by the Indiana Department of Environmental Management.
Indiana Gas is assessing, on a site-by-site basis,
whether any of the remaining 24 sites require
remediation, to what extent it is required and the
estimated cost of such action. Indiana Gas' share of the
estimated cost of performing these site-by-site
assessments has also been accrued. Indiana Gas has
completed preliminary assessments (PAs) on these sites
and has completed site work for site investigations
(SIs) at 15 of these sites. Based upon the site work
completed to date, Indiana Gas believes some level of
contamination may be present and ground water
monitoring, at a minimum, will likely be required. As a
result, Indiana Gas has accrued its share of the
estimated costs of ground water monitoring for all 24
sites. The total costs which may be incurred in
connection with the remediation of these 24 sites, if
remedial action beyond monitoring is required, cannot be
determined at this time.
Indiana Gas has nearly completed the process of
identifying all potentially responsible parties (PRPs)
for each site. Indiana Gas, with the help of outside
counsel, has prepared estimates for its share of
environmental liabilities, if they exist, at each of the
sites. Indiana Gas has accrued only its proportionate
share of the estimated costs, as described above, based
on equitable principles derived from case law or applied
by parties in achieving settlements.
Indiana Gas does not believe it can provide an estimate
of the reasonably possible total remediation costs for
any site, prior to completion of the remedial
investigation/ feasibility study (RI/FS) and developing
some sense of the timing of the resulting potential
remedial alternatives.
Indiana Gas has notified insurance carriers of potential
claims where policies may provide coverage for these
environmental costs. Indiana Gas has not recorded any
receivables related to recovery from insurance carriers
at this time.
In January 1992, Indiana Gas filed a petition with the
IURC seeking regulatory authority for, among other
matters, recovery through rates of all costs Indiana Gas
incurs in complying with federal, state and local
environmental regulations in connection with past gas
manufacturing activities. On February 26, 1992, Indiana
Gas received authority from the IURC to employ deferred
accounting for these costs. This authorization will
extend until the IURC rules upon Indiana Gas' pending
request to establish and implement an ongoing ratemaking
mechanism that will be designed and intended to provide
for the recovery of these costs. An order is not
expected until later in calendar 1994. Indiana Gas has
deferred all environmental costs previously paid or
accrued. These costs are approximately $10.5 million
(including assessment, remediation and related costs) as
of June 30,1994.
The impact of complying with federal, state and local
environmental regulations related to former manufactured
gas plant sites on Indiana Gas' financial position and
results of operations is contingent upon several
uncertainties. These include the cost of compliance, the
impact of joint and several liability upon the magnitude
of the contingency, the ratemaking treatment authorized
for these items by the IURC, as well as the recovery of
environmental and related costs from insurance carriers.
Indiana Gas believes it will be successful in recovering
the costs which it has incurred and may incur through
rates, from other potentially responsible parties and
from insurance carriers. However, there can be no
assurance as to the amount or timing of any such
recoveries.
10. Postretirement Benefits Other Than Pensions.
Indiana Gas provides postretirement health care and life
insurance benefits. Substantially all employees who
have completed 10 years of service will become eligible
for such benefits if they reach retirement age while
still working for the company. The plan pays stated
percentages of most reasonable and necessary medical
expenses incurred by retirees, after subtracting
payments by other providers and after a stated
deductible has been met. These benefits, as well as
similar benefits for active employees, are principally
self-insured. Currently, Indiana Gas does not fund this
postretirement plan.
Effective October 1, 1993, Indiana Gas adopted Statement
of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than
Pensions (SFAS 106). SFAS 106 requires accounting for
the costs of postretirement health care and life
insurance benefits on the accrual basis. This means the
costs of benefits paid in the future are recognized
during the years that an employee provides service to
Indiana Gas rather than the "pay-as-you-go" (cash)
basis.
Indiana Gas has elected to amortize the unfunded
transition obligation as of October 1, 1993, of
approximately $55 million over a period of 20 years.
The estimated annual provision for postretirement
benefit cost (including transition obligation
amortization) is approximately $8.2 million for fiscal
1994. This compares with the projected pay-as-you-go
cost of approximately $2.9 million for the same period.
Prior to fiscal 1994, Indiana Gas recognized
postretirement benefit costs on the pay-as-you-go (cash)
basis. Postretirement benefit costs recognized for
fiscal years 1993 and 1992 were approximately $2,855,000
and $2,653,000, respectively.
The following table reconciles the plan's funded status
to the accrued postretirement benefit cost as reflected
on the balance sheet as of October 1, 1993:
Thousands
Accumulated postretirement benefit obligation:
Retirees and dependents $30,313
Other fully eligible participants 6,839
Other active participants 18,288
55,440
Fair value of plan assets -
Accumulated postretirement benefit obligation
in excess of plan assets 55,440
Unrecognized transition obligation 55,440
Accrued postretirement benefit cost $ -
Net postretirement benefit cost for the three months and
nine months ended June 30, 1994, consisted of the
following components:
<TABLE>
Three Months Nine Months
Thousands Ended June 30 Ended June 30
<S> <C> <C>
Service cost - benefits attributed to service
during the period $ 348 $ 1,092
Interest cost on accumulated postretirement
obligation 1,006 3,155
Amortization of transition obligation 695 2,178
Net postretirement benefit cost 2,049 6,425
Amounts deferred pending rate recognition 1,326 3,978
Actual cash payments $ 723 $ 2,447
</TABLE>
The assumed health care cost trend rate for medical
gross eligible charges used in measuring the accumulated
postretirement benefit obligation as of October 1, 1993,
was 11% for fiscal 1994. This rate is assumed to
decrease gradually through fiscal 2003 to 4.75% and
remain at that level thereafter. A one percent increase
in the assumed health cost trend rates for each future
year produces approximately a $6.9 million increase in
the accumulated postretirement benefit obligation as of
October 1, 1993, and approximately a $884,000 increase
in the annual aggregate of the service and interest cost
components of net postretirement benefit cost. The
weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.25%.
In January 1992, Indiana Gas filed a petition with the
IURC seeking regulatory authority for, among other
matters, rate recovery of implementation of SFAS 106
relating to postretirement benefits other than
pensions. Through a generic order issued on December
30, 1992, Indiana Gas received authority from the IURC
to employ deferred accounting for these costs. This
authorization will extend until the IURC rules upon
Indiana Gas' pending request to adopt SFAS 106 for
ratemaking purposes. An order is not expected until
later in calendar 1994. On November 12, 1993, Indiana
Michigan Power Company (I & M) received an order from
the IURC in its general rate case authorizing SFAS 106
to be adopted for ratemaking purposes. Indiana Gas
continues to pursue full recovery of the costs of
implementation of SFAS 106, however, no assurance can
be given as to the ratemaking treatment for this
issue.
11. Income Taxes.
Effective October 1, 1993, Indiana Gas adopted Statement
of Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS 109). Indiana Gas previously
used the deferred method of accounting for income taxes
as prescribed by Accounting Principles Bulletin Opinion
No. 11. SFAS 109 requires the use of the liability
method, which effectively results in a reduction in
previously provided deferred income taxes to reflect the
current statutory corporate tax rate.
Due to the effects of regulation on Indiana Gas, Indiana
Gas is not permitted to recognize the effect of a tax
rate change as income but is required to reduce tariff
rates to return the "excess" deferred income taxes to
ratepayers over the remaining life of the properties
that give rise to the taxes. Therefore, the cumulative
effect of a change in accounting principle upon the
initial application of SFAS 109 resulted in no impact on
earnings. Under SFAS 109, Indiana Gas has recorded a
net regulatory liability for approximately $4.8 million
on its balance sheet as of October 1, 1993, related to
deferred taxes.
Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of Indiana Gas' net deferred tax
liability as of October 1, 1993, are as follows:
Thousands
Deferred tax liabilities:
Accelerated depreciation $37,759
Property basis differences 17,347
Deferred fuel costs 9,528
Take-or-pay costs 5,102
Acquisition adjustment 6,904
Other 1,885
Deferred tax assets:
Deferred investment tax credit (5,296)
Regulatory income tax liability (1,815)
Less deferred income taxes related to
current assets and liabilities (16,515)
Balance at October 1, 1993 $54,899
12. Reclassifications.
Certain reclassifications have been made to the prior
periods' financial statements to conform to the current
year presentation. These reclassifications have no
impact on margin or net income previously reported.
Indiana Gas Company, Inc. and Subsidiary Companies
Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
Earnings
Earnings available for common stock for the three-,
nine- and twelve-month periods ended June 30, 1994, when
compared to the same periods one year ago are listed
below.
Periods Ended June 30
(Millions) 1994 1993
Three Months $ 2.4 $ .8
Nine Months $39.3 $32.4
Twelve Months $35.2 $31.4
The following discussion highlights the factors
contributing to these results.
Margin (Revenues Less Cost of Gas)
Margin for the quarter ended June 30, 1994, decreased
$1.0 million compared to the same period last year. The
decrease was primarily due to weather 6 percent warmer
than the same period last year and 3 percent warmer than
normal, resulting in a decrease in space heating sales
during the period. Additional residential and commercial
customers and additional industrial throughput partially
offset the decrease.
Margin for the nine-month period ended June 30, 1994,
increased $8.7 million compared to the same period last
year. The increase for the nine-month period reflects
weather 5 percent colder than the same period last year
and 2 percent colder than normal. Additional residential
and commercial customers, as well as the general rate
increase which was implemented October 28, 1992, also
contributed to the increase.
Margin for the twelve-month period ended June 30,
1994, increased $11.5 million compared to the same period
last year. The increase for the twelve-month period is
attributable to the general rate increase which was
implemented October 28, 1992, weather 6 percent colder
than the same period last year and 3 percent colder than
normal, as well as additional residential and commercial
customers.
Total system throughput (combined sales and
transportation) for the third quarter of fiscal 1994 was
approximately equal to the same period last year. This
was due to an increase in industrial throughput which
offset decreases in residential and commercial space
heating sales caused by warmer weather.
Throughput increased approximately 5 percent in the
nine-month and twelve-month periods (4.8 MMdth and 5.4
MMdth, respectively) when compared to the same periods
last year. Indiana Gas' rates for transportation
generally provide the same margins as are earned on the
sale of gas under its sales tariffs. Approximately
one-half of total system throughput represents gas used
for space heating and is affected by weather.
Total average cost per unit of gas purchased decreased
to $2.62 for the three-month period ended June 30, 1994,
compared to $3.04 for the same period one year ago. For
the nine-month period, cost of gas per unit increased to
$2.99 in the current period compared to $2.88 for the same
period last year. For the twelve-month period, cost of
gas per unit increased to $2.98 in the current period
compared to $2.82 for the same period last year.
Significant factors in the changes include the influence
of weather on the demand for gas and the increased fixed
costs per unit associated with pipeline rate cases and the
restructuring prescribed by Federal Energy Regulatory
Commission Order No. 636. (See Federal Energy Regulatory
Commission Matters.) Despite the increase in unit price,
total cost of gas has decreased for all reporting periods
when compared to the same periods one year ago as the
transportation component of total system throughput has
increased. While this does not impact margin, gas cost is
lowered by the commodity cost on transportation units.
Adjustments to Indiana Gas' rates and charges related
to the cost of gas are made quarterly through gas cost
adjustment (GCA) procedures established by Indiana law and
administered by the Indiana Utility Regulatory Commission
(IURC).
Operating Expenses
Operation and maintenance expenses decreased
approximately $3.1 million for the three-month period
ended June 30, 1994, when compared to the same period one
year ago. The decrease is attributable to labor and
related costs in the current quarter which are lower than
the levels experienced during the same quarter last year
when operation and maintenance projects were in progress
which had been deferred in fiscal years 1991 and 1992
because of very warm weather during those years.
Operation and maintenance expenses for the nine-month
period decreased approximately $2.8 million compared to
the same period one year ago. The decrease is
attributable to slightly lower labor costs for the reasons
described above as well as lower provisions for health
insurance claims.
Operation and maintenance expenses for the twelve-
month period increased approximately $2.6 million compared
to the same period one year ago. The slight increase is
attributable to costs related to the addition of new
customers, including increased labor and related
benefits.
Depreciation and amortization expense increased for
the three-, nine- and twelve-month periods ended June 30,
1994, when compared to the same periods one year ago as
the result of additions to utility plant to serve new
customers and to maintain dependable service to existing
customers.
Federal and state income taxes increased for the
three-, nine- and twelve-month periods ended June 30,
1994, when compared to the same periods one year ago due
to higher taxable income and a higher federal tax rate.
Taxes other than income taxes remained approximately
the same for the three-month period ended June 30, 1994,
when compared to the same period one year ago. Increased
property tax expense, due to higher property tax rates and
higher assessed values, and higher gross receipts tax
expenses resulted in the increase for the nine- and twelve-
month periods.
Interest Expense
Interest expense for the three- and nine-month periods
ended June 30, 1994, decreased slightly when compared to
the same periods one year ago due to slightly lower
interest rates. Interest expense increased for the
twelve-month period when compared to the same period one
year ago primarily as the result of an increase in
average debt outstanding slightly offset by a decrease in
interest rates.
Other Operating Matters
Environmental Matters
Indiana Gas is currently conducting environmental
investigations and work at certain sites that were the
location of former manufactured gas plants. (See Note 9.)
Federal Energy Regulatory Commission Matters
In accordance with Federal Energy Regulatory Commission
(FERC) Order No. 636, Indiana Gas' pipeline service
providers have made a number of filings to restructure
services. On May 1, 1993, Panhandle Eastern Pipe Line
Company implemented a restructured services tariff. Texas
Eastern Transmission Company's restructured tariff was
implemented June 1, 1993. Indiana Gas' remaining pipeline
service providers implemented restructured services on
November 1, 1993. Indiana Gas' pipeline service providers
have begun to seek from customers, including Indiana Gas,
recovery of certain costs related to the transition to
restructured services. Those costs will include certain gas
supply realignment costs and are not expected to exceed $10
million.
In February 1994, Indiana Gas included certain
transition costs in a routine quarterly gas cost adjustment
(GCA) filing with the IURC. As part of that proceeding,
Indiana Gas was given authority to pass the Account 191
component of such costs through to ratepayers and to employ
deferred accounting for all other components of transition
costs pending the IURC's consideration of Indiana Gas'
request for authority to recover those costs. Indiana Gas'
proposal regarding the recovery of the remaining components
of transition costs, primarily gas supply realignment
costs, will be evaluated and ruled upon by the IURC later
this summer. The pending issues concern cost allocation
among customers and whether the remaining components of
transition costs are recoverable through the GCA or
alternatively, through base rates.
Indiana Gas believes these costs will be recoverable
and does not expect these matters to have a material effect
on its financial position or results of operation. Indiana
Gas continues to monitor developments concerning these and
other pipeline issues, to participate in related
negotiations and to represent its interest in pipeline
matters before FERC.
Postretirement Benefits Other Than Pensions
Effective October 1, 1993, Indiana Gas adopted Statement
of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions
(SFAS 106). SFAS 106 requires accounting for the costs of
postretirement health care and life insurance benefits on
the accrual basis. This means the costs of benefits paid in
the future are recognized during the years that an employee
provides service to Indiana Gas rather than the "pay-as-you-
go" (cash) basis. (See Note 10.)
In January 1992, Indiana Gas filed a petition with
the IURC seeking regulatory authority for, among other
matters, rate recovery of implementation of SFAS 106
relating to postretirement benefits other than pensions.
Through a generic order issued on December 30, 1992,
Indiana Gas received authority from the IURC to employ
deferred accounting for these costs. This authorization
will extend until the IURC rules upon Indiana Gas' pending
request to adopt SFAS 106 for ratemaking purposes. An
order is not expected until later in calendar 1994. On
November 12, 1993, Indiana Michigan Power Company (I & M)
received an order from the IURC in its general rate case
authorizing SFAS 106 to be adopted for ratemaking
purposes. Indiana Gas continues to pursue full recovery
of the costs of implementation of SFAS 106, however, no
assurance can be given as to the ratemaking treatment for
this issue.
Income Taxes
Effective October 1, 1993, Indiana Gas adopted Statement
of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109). Indiana Gas previously used the
deferred method of accounting for income taxes as prescribed
by Accounting Principles Bulletin Opinion No. 11. SFAS 109
requires the use of the liability method, which effectively
results in a reduction in previously provided deferred
income taxes to reflect the current statutory corporate tax
rate.
Due to the effects of regulation on Indiana Gas, Indiana
Gas is not permitted to recognize the effect of a tax rate
change as income but is required to reduce tariff rates to
return the "excess" deferred income taxes to ratepayers over
the remaining life of the properties that give rise to the
taxes. Therefore, the cumulative effect of a change in
accounting principle upon the initial application of SFAS
109 resulted in no impact on earnings.
Liquidity and Capital Resources
New construction to provide service to a growing
customer base and normal system maintenance and
improvements will continue to require substantial capital
expenditures. For the twelve months ended June 30, 1994,
Indiana Gas' capital expenditures totaled $61.6 million.
Of this amount, 70 percent was provided by funds generated
internally (net income plus charges not requiring funds
less dividends). Capital expenditures for fiscal 1994 are
estimated at $51.4 million of which $41.3 million have been
expended during the nine-month period ended June 30, 1994.
Indiana Gas' goal is to fund internally approximately
75 percent of its construction program. Capitalization
objectives for Indiana Gas are 55-65 percent common equity
and 35-45 percent long-term debt. This will help Indiana
Gas to maintain its high creditworthiness. The senior debt
of Indiana Gas is currently rated Aa3 by Moody's Investors
Service and AA- by Standard & Poor's Corporation and Duff &
Phelps.
On October 15, 1993, $10 million of 9.30% medium-term
notes were redeemed.
The nature of Indiana Gas' business creates large short-
term cash working capital requirements primarily to finance
customer accounts receivable, unbilled utility revenues
resulting from cycle billing, gas in underground storage
and construction expenditures until permanently financed.
Short-term borrowings tend to be greatest during the
heating season when accounts receivable and unbilled
utility revenues are at their highest. Depending on cost,
commercial paper or bank lines of credit are used as
sources of short-term financing. Indiana Gas' commercial
paper is rated P-1 by Moody's and A-1+ by Standard &
Poor's. Long-term financial strength and flexibility
require maintaining throughput volumes, controlling costs
and, if absolutely necessary, securing timely increases in
rates to recover costs and provide a fair and reasonable
return to shareholders.
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned
thereunto duly authorized.
INDIANA GAS COMPANY, INC.
Registrant
Dated August 11, 1994 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
Senior Vice President
and Chief Financial Officer
Dated August 11, 1994 /s/Jerome A. Benkert
Jerome A. Benkert
Controller
