February 12, 1998
Securities and Exchange Commission
Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
Gentlemen:
We are transmitting herewith Indiana Gas Company, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997, pursuant to the requirements of Section 13
of the Securities Exchange Act of 1934.
Very truly yours,
/s/Douglas S. Schmidt
Douglas S. Schmidt
DSS:tmw
Enclosures
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 December 31, 1997
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 January 31, 1998
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Balance Sheets
at December 31, 1997, and 1996
and September 30, 1997
Consolidated Statements of Income
Three Months Ended December 31, 1997 and 1996,
and Twelve Months Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1997 and 1996,
and Twelve Months Ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II - Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands - Unaudited)
December 31 September 30
1997 1996 1997
<S> <C> <C> <C>
UTILITY PLANT:
Original cost 922,491 946,934 951,617
Less - accumulated depreciation and
amortization 358,750 351,496 361,936
563,741 595,438 589,681
CURRENT ASSETS:
Cash and cash equivalents 1,384 185 48
Accounts receivable, less reserves of
$2,104, $2,658 and $1,784
respectively (See Note 9) 53,195 45,070 25,186
Accrued unbilled revenues 46,123 37,247 8,964
Materials and supplies - at average
cost 148 4,075 63
Liquefied petroleum gas - at average
cost 878 864 872
Gas in underground storage - at
last-in, first-out cost 17,024 34,336 19,240
Recoverable gas costs - 16,949 5,843
Prepayments and other 3,630 1,017 3,695
122,382 139,743 63,911
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt discount and expense 8,048 7,324 6,980
Other 4,718 8,423 5,147
12,766 15,747 12,127
$ 698,889 $ 750,928 $ 665,719
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands - Unaudited)
December 31 September 30
1997 1996 1997
<S> <C> <C> <C>
CAPITALIZATION:
Common stock and paid-in capital 142,995 142,995 142,995
Retained earnings 103,411 148,458 125,767
Total common shareholder's equity 246,406 291,453 268,762
Long-term debt 165,000 139,733 154,733
411,406 431,186 423,495
CURRENT LIABILITIES:
Maturities and sinking fund requirements
of long-term debt - 35,000 35,000
Notes payable 69,000 63,000 20,000
Accounts payable (See Note 9) 49,482 67,018 39,456
Refundable gas costs 10,333 - -
Customer deposits and advance payments 19,738 16,533 20,405
Accrued taxes 17,904 13,971 8,659
Accrued interest 4,300 4,497 2,580
Other current liabilities 23,640 21,210 24,105
194,397 221,229 150,205
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 55,736 67,421 55,205
Accrued postretirement benefits other
than pensions 23,744 15,828 23,038
Unamortized investment tax credit 10,012 10,941 10,243
Regulatory income tax liability 1,874 2,835 1,874
Other 1,720 1,488 1,659
93,086 98,513 92,019
COMMITMENTS AND CONTINGENCIES (See Notes 8 & 9) - - -
$ 698,889 $ 750,928 $ 665,719
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands - Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 170,132 $ 172,481 $ 528,058 $ 548,766
COST OF GAS (See Note 9) 107,052 109,836 319,738 340,770
MARGIN 63,080 62,645 208,320 207,996
OPERATING EXPENSES:
Operation and maintenance 19,826 19,237 80,156 84,683
Restructuring costs (See Note 2) - - 39,531 -
Depreciation and amortization 7,910 8,624 34,340 33,738
Income taxes 9,829 9,868 7,813 21,637
Taxes other than income taxes 4,687 4,656 16,901 16,779
42,252 42,385 178,741 156,837
OPERATING INCOME 20,828 20,260 29,579 51,159
OTHER INCOME - NET 321 444 1,118 1,162
INCOME BEFORE INTEREST EXPENSE 21,149 20,704 30,697 52,321
INTEREST EXPENSE 4,560 4,285 17,049 16,200
NET INCOME $ 16,589 $ 16,419 $ 13,648 $ 36,121
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Three Months Twelve Months
Ended December 31 Ended December 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM (REQUIRED FOR)
OPERATING ACTIVITIES:
Net income $ 16,589 $ 16,419 $ 13,648 $ 36,121
Adjustments to reconcile net income
to cash provided from operating
activities -
Noncash restructuring costs - - 32,838 -
Depreciation and amortization 7,957 8,671 34,527 33,925
Deferred income taxes 531 558 (12,645) 661
Investment tax credit (232) (232) (930) (930)
8,256 8,997 53,790 33,656
Changes in assets and liabilities -
Receivables - net (65,168) (58,691) (17,001) 6,117
Inventories 2,131 4,926 21,231 16,820
Accounts payable, customer deposits,
advance payments and other current
liabilities 8,894 16,276 (11,901) (11,986)
Accrued taxes and interest 10,965 11,757 3,736 (4,566)
Recoverable/refundable gas costs 16,176 (14,239) 27,282 (24,957)
Prepayments 65 (974) (2,613) 374
Accrued postretirement benefits other
than pensions 706 924 7,916 3,614
Other - net (718) 219 3,615 1,881
Total adjustments (18,693) (30,805) 86,055 20,953
Net cash flows from (required
for)operations (2,104) (14,386) 99,703 57,074
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Sale of long-term debt 35,000 - 50,000 -
Reduction in long-term debt (59,733) - (59,733) (18,960)
Net change in short-term borrowings 49,000 38,764 6,000 39,800
Dividends on common stock (6,750) (6,500) (26,500) (25,500)
Net cash flows from (required for)
financing activities 17,517 32,264 (30,233) (4,660)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (14,077) (17,713) (68,271) (71,899)
Net cash flows required for investing
activities (14,077) (17,713) (68,271) (71,899)
NET INCREASE (DECREASE) IN CASH 1,336 165 1,199 (19,485)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 48 20 185 19,670
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,384 $ 185 $ 1,384 $ 185
</TABLE>
Indiana Gas Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
Indiana Gas Company, Inc. and its subsidiaries (Indiana
Gas or the company) provide natural gas and
transportation services to a diversified base of
customers in 281 communities in 48 of Indiana's 92
counties.
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. Corporate Restructuring.
In April 1997, the Board of Directors of Indiana Energy,
Inc. (Indiana Energy), Indiana Gas' parent, approved a
new growth strategy designed to support Indiana Energy's
transition into a more competitive environment.
For fiscal 1997, the Indiana Gas Board of Directors
authorized management to undertake the actions necessary
and appropriate to restructure Indiana Gas' operations
and recognize a resulting restructuring charge of $39.5
million ($24.5 million after tax) as described below.
These actions by Indiana Gas were consistent with
Indiana Energy's new growth strategy.
In July 1997, Indiana Gas advised its employees of its
plan to reduce its work force from about 1,025 full-time
employees at June 30, 1997, to approximately 800
employees within five years. The reductions are being
implemented through involuntary separation and
attrition. As a result primarily of initial work force
reductions during September 1997, employees totaled
approximately 930 as of December 31, 1997. Indiana Gas
recorded restructuring costs of $5.4 million during the
fourth quarter of fiscal 1997 related to the 1997 and
planned work force reductions. These costs include
separation pay in accordance with Indiana Gas' severance
policy, and net curtailment losses related to these
employees' postretirement and pension benefits.
Further, Indiana Gas' management has committed to sell,
abandon or otherwise dispose of certain assets,
including buildings, gas storage fields and intangible
plant. Indiana Gas recorded restructuring costs of $34.1
million during the fourth quarter of fiscal 1997 to
adjust the carrying value of those assets to estimated
fair value. Net assets held for disposal totaled $8.0
million at December 31, 1997, and September 30, 1997, and
are included in Utility Plant on the Consolidated Balance
Sheets.
In October 1997, Indiana Energy formed a new business
unit, IEI Services, LLC (IEI Services), to provide
support services to Indiana Energy and its subsidiaries,
as well as to third-parties in the future. The formation
of IEI Services was established by a contribution of
$32.2 million of net fixed assets at book value from
Indiana Gas, which subsequently dividended its membership
interest to Indiana Energy. The contributed assets relate
to the provision of administrative services. Services
provided by IEI Services include human resources functions,
information technology and various financial services. These
services had been provided by Indiana Gas in the past.
3. 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 Twelve Months Ended
December 31 December 31
Thousands 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest (net of
amount capitalized) $2,507 $1,954 $15,683 $15,716
Income taxes $ 70 $ - $17,556 $28,721
</TABLE>
4. Revenues.
To more closely match revenues and expenses, revenues
are recorded for all gas delivered to customers but not
billed at the end of the accounting period.
5. Gas in Underground Storage.
Based on the average cost of purchased gas during
December 1997, the cost of replacing the current portion
of gas in underground storage exceeded last-in,
first-out cost at December 31, 1997, by approximately
$9,232,000.
6. 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 Indiana
Utility Regulatory Commission (IURC).
7. Long-Term Debt.
In October 1997, Indiana Gas filed a registration
statement with the Securities and Exchange Commission
with respect to the issuance of up to $95 million in
debt securities and in November 1997 filed a prospectus
supplement with respect to $95 million in Medium-Term
Notes, Series F. In December 1997, Indiana Gas issued
under this registration statement $35 million in
aggregate principal amount of its Medium-Term Notes,
Series F as follows: $20 million of 6.34% Notes due
December 10, 2027; and $15 million of 6.36% Notes due
December 6, 2004. The net proceeds from the sale of
these new debt securities will be used to refinance
certain of Indiana Gas' long-term debt issues and to
refinance short-term obligations incurred in connection
with Indiana Gas' ongoing construction program and other
corporate purposes.
In December 1997, Indiana Gas retired $35 million of 6
5/8% Series D Notes and, called and redeemed $24.7
million of 8 1/2% Series B Debentures.
8. Environmental Costs.
Indiana Gas is currently conducting environmental
investigations and work at certain sites that were the
locations of former manufactured gas plants. It has
been seeking to recover the costs of the investigations
and work from insurance carriers and other potentially
responsible parties (PRPs).
The IURC has previously concluded that the costs
incurred by Indiana Gas to investigate and, if
necessary, clean-up former manufactured gas plant sites
are not utility operating expenses necessary for the
provision of service and, therefore, are not recoverable
as operating expenses from utility customers.
On August 12, 1997, Indiana Gas and PSI Energy, Inc.
(PSI) signed an agreement with respect to thirteen of
the nineteen sites where PSI is a PRP, which provides
for an equal sharing between Indiana Gas and PSI of past
and future response costs at the thirteen sites. Indiana
Gas and PSI must jointly approve future management of
the sites and the decisions to spend additional funds.
Indiana Gas previously entered into an agreement with
PSI providing for the sharing of costs related to
another site. Five other sites are already the subject
of an agreement between Indiana Gas and Northern Indiana
Public Service Company (NIPSCO) which provides for
coordination of efforts and sharing of investigation and
clean-up costs incurred and to be incurred at the sites.
Indiana Gas further expects in the near future to
commence negotiations with PSI and NIPSCO regarding
these five sites for the purpose of including PSI in the
Indiana Gas-NIPSCO agreement.
On April 14, 1995, Indiana Gas filed suit in the United
States District Court for the Northern District of
Indiana, Fort Wayne Division (the Court) against a
number of insurance carriers for payment of claims for
investigation and clean-up costs already incurred, as
well as for a determination that the carriers are
obligated to pay these costs in the future. On October
2, 1996, the Court granted several motions filed by
defendant insurance carriers for summary judgment on a
number of issues relating to the insurers' obligations
to Indiana Gas under insurance policies issued by these
carriers. For example, the Court held that because the
placement of residuals on the ground at the sites was
done intentionally, there was no "fortuitous accident"
and therefore no "occurrence" subject to coverage under
the relevant policies. Based on discussions with
counsel, the management of Indiana Gas believes that a
number of the Court's rulings are contrary to Indiana
law and has appealed all adverse rulings to the United
States Court of Appeals for the Seventh Circuit.
However, if these rulings are not reversed on appeal,
they would effectively eliminate coverage under most of
the policies at issue. The oral argument for the appeal
was conducted in early January of 1998. Presently, the
case is before the court awaiting the issuance of a
decision. There can be no assurance as to whether
Indiana Gas will prevail on this appeal. As of December
31, 1997, Indiana Gas has obtained settlements from some
insurance carriers in an aggregate amount of
approximately $14.7 million.
The Court's rulings have had no material impact on
earnings since Indiana Gas has recorded all costs (in
aggregate approximately $14.8 million) which it
presently expects to incur in connection with
remediation activities. It is possible that future
events may require additional remediation activities
which are not presently foreseen.
9. Affiliate Transactions.
Indiana Energy Services, Inc. (IES), an indirect
wholly owned subsidiary of Indiana Energy (Indiana
Gas' parent), provided natural gas and related
services to Indiana Gas from January 1, 1996, to
March 31, 1996. Indiana Gas' purchases from IES
for the three months ended March 31, 1996, totalled
$102.7 million. ProLiance Energy, LLC (ProLiance),
a nonregulated marketing affiliate of Indiana
Energy, assumed the business of IES effective April
1, 1996, and is the supplier of gas and related
services to both Indiana Gas and Citizens Gas and
Coke Utility (Citizens Gas). Indiana Gas'
purchases from ProLiance for resale and for
injections into storage for the three- and twelve-
month periods ended December 31, 1997, totaled
$104.1 million and $311.7 million, respectively.
Indiana Gas' purchases from ProLiance for the three-
and twelve-month periods ended December 31, 1996,
totaled $103.2 million and $221.1 million,
respectively.
The sale of gas and provision of other services to
Indiana Gas by Indiana Energy's marketing affiliates are
subject to regulatory review through the quarterly gas
cost adjustment proceeding currently pending before the
IURC.
On September 12, 1997, the Indiana Utility
Regulatory Commission (IURC) issued the decision in
the complaint proceeding relating to the gas supply
and portfolio administration agreements between
ProLiance and Indiana Gas and ProLiance and
Citizens Gas. The IURC concluded that these
agreements are consistent with the public interest.
The management of Indiana Energy believes that the
decision is supportive of the utilities'
relationship with ProLiance in all material
respects.
The IURC's decision suggests that all material
provisions of the agreements between ProLiance and
the utilities are reasonable. In the decision the
IURC acknowledged that the utilities' purchases of
gas commodity from ProLiance at index prices, as
compared to ProLiance's actual cost, is not
unreasonable. The IURC also acknowledged that the
amounts 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 fees paid by the utilities to
ProLiance for portfolio administration services are
not unreasonable. Nevertheless, with respect to
each of these matters, the IURC concluded that
additional findings in the gas cost adjustment
(GCA) process would be appropriate and directed
that these matters be considered further in the
pending, consolidated GCA proceeding involving
Indiana Gas and Citizens Gas. The IURC has not yet
established a schedule for conducting these
additional proceedings.
On January 12, 1998, the Petitioners and the
Indiana Office of Utility Consumer Counselor filed
with the Indiana Court of Appeals (Court) a joint
assignment of errors in which they set forth their
allegations relating to their challenge of the
IURC's September 12, 1997, decision. Those
allegations primarily relate to whether the IURC
erred in finding that the gas supply and portfolio
administration agreements are in the public
interest and whether the IURC erred in concluding
that ProLiance is not subject to regulation by the
IURC as a public utility.
Although Indiana Gas' management believes that based
upon applicable Indiana law and the IURC's record of
proceedings in the ProLiance case the IURC's decision
should be upheld by the Court, there can be no assurance
as to that outcome.
While the results of the appeal and the pending GCA
proceeding cannot be predicted, management does not
expect this matter to have a material impact on Indiana
Gas' financial position or results of operations.
CIGMA, LLC, owned jointly and equally by IGC Energy,
Inc. an indirect wholly owned subsidiary of Indiana
Energy, and Citizens By-Products Coal Company, a wholly
owned subsidiary of Citizens Gas, provides materials
acquisition and related services that are used by
Indiana Gas. Indiana Gas' purchases of these services
during the three- and twelve-month periods ended
December 31, 1997, totaled $4.3 million and $13.9
million, respectively.
IEI Services, a wholly owned subsidiary of Indiana
Energy, began providing support services to Indiana Gas
effective October 1, 1997. Services provided include
human resources functions, information technology and
various financial services. Amounts billed by IEI
Services to Indiana Gas for the three-months ended
December 31, 1997, totaled $6.0 million.
Indiana Gas also participates in a centralized cash
management program with its parent, affiliated
companies and banks which permits funding of checks
as they are presented.
Amounts owed to affiliates totaled $47.9 million
and $64.4 million at December 31, 1997 and 1996,
respectively, and are included in Accounts Payable
on the Consolidated Balance Sheets.
Amounts due from affiliates totaled $5.8 million at
December 31, 1997, and are included in Accounts
Receivable on the Consolidated Balance Sheet.
10. Reclassifications.
Certain reclassifications have been made to the prior
periods' financial statements to conform to the current
year presentation. These reclassifications have no
impact on net income previously reported.
Indiana Gas Company, Inc. and Subsidiary Companies
Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
Earnings
Net income before 1997 restructuring costs for the
three- and twelve-month periods ended December 31, 1997,
when compared to the same periods one year ago are listed
below:
<TABLE>
Periods Ended December 31
(Millions) 1997 1996
<S> <C> <C>
Three Months $16.6 $16.4
Twelve Months (1) $38.1 $36.1
</TABLE>
(1) Net income for the twelve-months ended December 31, 1997,
after restructuring costs was $13.6 million.
The increase in net income before restructuring costs
for the twelve-month period is due primarily to lower
operation and maintenance expenses, including lower costs
for uncollectible accounts and lower labor costs resulting
from work force reductions.
For fiscal 1997, the Indiana Gas Board of Directors
authorized management to undertake the actions necessary
and appropriate to restructure Indiana Gas' operations and
recognize a resulting after-tax restructuring charge of
$24.5 million. These actions by Indiana Gas were
consistent with Indiana Energy, Inc.'s (Indiana Gas'
parent) growth strategy that was approved by its board of
directors during fiscal 1997 (see New Growth Strategy and
Corporate Restructuring).
Margin (Revenues Less Cost of Gas)
Margin for the quarter ended December 31, 1997,
increased $.4 million compared to the same period last
year. The increase reflects weather 2 percent colder than
the same period last year and 3 percent colder than
normal, as well as the addition of new residential and
commercial customers.
Margin for the twelve-month period ended December 31,
1997, increased $.3 million compared to the same period
last year. The increase is primarily attributable to the
addition of new residential and commercial customers,
offset substantially by weather 3 percent warmer than the
same period last year and 1 percent colder than normal.
Total system throughput (combined sales and
transportation) increased 2 percent (.8 MMDth) for the
first quarter of fiscal 1998, when compared to the same
period last year. Throughput decreased 1 percent (1.3
MMDth) for the twelve-month period, when compared to the
same period one year ago. 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 $3.87 for the three-month period ended December 31,
1997, compared to $4.04 for the same period one year ago.
For the twelve-month period, cost of gas per unit
increased to $3.60 in the current period compared to $3.55
for the same period last year.
Adjustments to Indiana Gas' rates and charges related
to the cost of gas are made through gas cost adjustment
(GCA) procedures established by Indiana law and
administered by the Indiana Utility Regulatory Commission
(IURC). The GCA passes through increases and decreases in
the cost of gas to Indiana Gas' customers dollar for
dollar.
Operating Expenses
Operation and maintenance expenses increased $.6
million for the three-month period ended December 31,
1997, when compared to the same period one year ago due
primarily to service fees paid to Indiana Gas' affiliate,
IEI Services, LLC (IEI Services) related to assets now
owned by IEI Services. IEI Services began providing
support services to Indiana Gas effective October 1, 1997
(see resulting lower depreciation and amortization below).
This increase was offset by lower distribution system
costs and lower labor costs resulting from work force
reductions.
Operation and maintenance expenses decreased $4.5
million for the twelve-month period when compared to the
same period last year due primarily to lower distribution
system costs, lower costs for uncollectible accounts and
lower labor costs resulting from work force reductions.
The decrease was offset somewhat by service fees paid to
IEI Services related to assets now owned by IEI Services.
Restructuring costs of $39.5 million were recorded in
the fourth quarter of fiscal 1997 related to the
implementation of Indiana Energy, Inc.'s new growth
strategy (see New Growth Strategy and Corporate
Restructuring).
Depreciation and amortization expense decreased for
the three-month period ended December 31, 1997, when
compared to the same period one year ago due primarily to
the current quarter's amount excluding depreciation on
assets transferred to IEI Services, and on assets held for
disposal which were written down to estimated fair value
in the fourth quarter of fiscal 1997.
Depreciation and amortization expense increased for
the twelve-month period ended December 31, 1997, when
compared to the same period last year due primarily to
additions to utility plant to serve new customers and to
maintain dependable service to existing customers. This
increase was offset by the current twelve-month amount
excluding depreciation on assets transferred to IEI
Services and on assets held for disposal.
Federal and state income taxes remained approximately
the same for the three-month period ended December 31,
1997, when compared to the same period one year ago.
Federal and state income taxes decreased for the twelve-
month period when compared to the same period last year
due primarily to the recording of restructuring costs.
Taxes other than income taxes remained approximately
the same for the three- and twelve-month periods ended
December 31, 1997, when compared to the same periods one
year ago.
Interest Expense
Interest expense increased for the three- and twelve-
month periods ended December 31, 1997, when compared to
the same periods one year ago due to increases in average
debt outstanding slightly offset by decreases in interest
rates.
Other Operating Matters
New Growth Strategy and Corporate Restructuring
In April 1997, the Board of Directors of Indiana
Energy, Inc. (Indiana Energy), Indiana Gas' parent,
approved a new growth strategy designed to support the
company's transition into a more competitive environment.
As part of this new growth strategy, Indiana Energy will
endeavor to become a leading regional provider of energy
products and services and to grow its consolidated
earnings per share by an average of 10 percent annually
over the next five years. To achieve such earnings growth,
Indiana Energy's aim is to grow the earnings contribution
from nonutility operations to over 20 percent of its total
annual earnings within the next five years, and to
aggressively manage costs within its utility operations.
For fiscal 1997, the Indiana Gas Board of Directors
authorized management to undertake the actions necessary
and appropriate to restructure Indiana Gas' operations and
recognize a resulting restructuring charge of $39.5
million ($24.5 million after-tax) as described below.
These actions by Indiana Gas were consistent with Indiana
Energy's new growth strategy.
In July 1997, Indiana Gas advised its employees of its
plan to reduce its work force from about 1,025 full-time
employees at June 30, 1997, to approximately 800 employees
within five years. The reductions are being implemented
through involuntary separation and attrition. As a result
primarily of initial work force reductions during
September 1997, employees totaled approximately 930 as of
December 31, 1997. Indiana Gas recorded restructuring
costs of $5.4 million during the fourth quarter of fiscal
1997 related to the 1997 and planned work force
reductions. These costs include separation pay in
accordance with Indiana Gas' severance policy, and net
curtailment losses related to these employees'
postretirement and pension benefits.
Further, Indiana Gas' management has committed to
sell, abandon or otherwise dispose of certain assets,
including buildings, gas storage fields and intangible
plant. Indiana Gas recorded restructuring costs of $34.1
million during the fourth quarter of fiscal 1997 to adjust
the carrying value of those assets to estimated fair
value. Net assets held for disposal totaled $8.0 million
at December 31, 1997, and September 30, 1997, and are included
in Utility Plant on the Consolidated Balance Sheets.
In October 1997, Indiana Energy formed a new business
unit, IEI Services, LLC (IEI Services), to provide support
services to Indiana Energy and its subsidiaries, as well
as to third-parties in the future. The formation of IEI
Services was established by a contribution of $32.2
million of net fixed assets at book value from Indiana
Gas, which subsequently dividended its membership interest
to Indiana Energy. The contributed assets relate to the
provision of administrative services. Services provided
by IEI Services include human resources functions, information
technology and various financial services. These services had
been provided by Indiana Gas in the past. IEI Services has been
designed to avoid duplicate business unit support costs,
eliminate low-value support activities and to assist in
cost containment, which should help Indiana Energy in
meeting its earnings growth targets.
As a result of the restructuring, Indiana Energy
expects reductions in future operating expenses, which
should help it to be more successful in an increasingly
competitive energy marketplace.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance), a nonregulated
marketing affiliate of Indiana Energy, began providing
natural gas and related services to Indiana Gas and
Citizens Gas and Coke Utility (Citizens Gas) effective
April, 1, 1996. ProLiance also provides products and
services to other utilities and customers in Indiana
and surrounding states. ProLiance assumed the business
of Indiana Energy Services, Inc., an indirect wholly
owned subsidiary of Indiana Energy, which had provided
similar services to other customers and from January 1,
1996, to March 31, 1996, to Indiana Gas.
The sale of gas and provision of other services to
Indiana Gas by Indiana Energy's marketing affiliates are
subject to regulatory review through the quarterly gas
cost adjustment proceeding currently pending before the
IURC.
On September 12, 1997, the Indiana Utility Regulatory
Commission (IURC) issued the decision in the complaint
proceeding relating to the gas supply and portfolio
administration agreements between ProLiance and Indiana
Gas and ProLiance and Citizens Gas. The IURC concluded
that these agreements are consistent with the public
interest. The management of Indiana Energy believes that
the decision is supportive of the utilities' relationship
with ProLiance in all material respects.
This decision is particularly important because the
IURC has recognized that significant customer benefits can
be achieved if utilities are encouraged to work toward
innovative customer solutions in the changing energy
marketplace. As a result of ProLiance's provision of
service to Indiana Gas and Citizens Gas, in excess of $50
million in gas costs savings will be realized for the
customers of those utilities over the initial four and one-
half year term of the utilities' agreements. Further, the
IURC has recognized that benefits for investors are
appropriate when risks are being assumed by those
investors.
The IURC's decision suggests that all material
provisions of the agreements between ProLiance and the
utilities are reasonable. In the decision the IURC
acknowledged that the utilities' purchases of gas
commodity from ProLiance at index prices, as compared to
ProLiance's actual cost, is not unreasonable. The IURC
also acknowledged that the amounts 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 fees paid by the
utilities to ProLiance for portfolio administration
services are not unreasonable. Nevertheless, with respect
to each of these matters, the IURC concluded that
additional findings in the gas cost adjustment (GCA)
process would be appropriate and directed that these
matters be considered further in the pending, consolidated
GCA proceeding involving Indiana Gas and Citizens Gas. The
IURC has not yet established a schedule for conducting
these additional proceedings.
On January 12, 1998, the Petitioners and the Indiana
Office of Utility Consumer Counselor filed with the
Indiana Court of Appeals (Court) a joint assignment of
errors in which they set forth their allegations relating
to their challenge of the IURC's September 12, 1997,
decision. Those allegations primarily relate to whether
the IURC erred in finding that the gas supply and
portfolio administration agreements are in the public
interest and whether the IURC erred in concluding that
ProLiance is not subject to regulation by the IURC as a
public utility.
Although Indiana Gas' management believes that based
upon applicable Indiana law and the IURC's record of
proceedings in the ProLiance case the IURC's decision
should be upheld by the Court, there can be no assurance
as to that outcome.
While the results of the appeal and the pending GCA
proceeding cannot be predicted, management does not expect
this matter to have a material impact on Indiana Gas'
financial position or results of operations.
Environmental Matters
Indiana Gas is currently conducting environmental
investigations and work at certain sites that were the
locations of former manufactured gas plants. It has been
seeking to recover the costs of the investigations and
work from insurance carriers and other potentially
responsible parties (PRPs).
The IURC has previously concluded that the costs
incurred by Indiana Gas to investigate and, if necessary,
clean-up former manufactured gas plant sites are not
utility operating expenses necessary for the provision of
service and, therefore, are not recoverable as operating
expenses from utility customers.
On August 12, 1997, Indiana Gas and PSI Energy, Inc.
(PSI) signed an agreement with respect to thirteen of the
nineteen sites where PSI is a PRP, which provides for an
equal sharing between Indiana Gas and PSI of past and
future response costs at the thirteen sites. Indiana Gas
and PSI must jointly approve future management of the
sites and the decisions to spend additional funds. Indiana
Gas previously entered into an agreement with PSI
providing for the sharing of costs related to another
site. Five other sites are already the subject of an
agreement between Indiana Gas and Northern Indiana Public
Service Company (NIPSCO) which provides for coordination
of efforts and sharing of investigation and clean-up costs
incurred and to be incurred at the sites. Indiana Gas
further expects in the near future to commence
negotiations with PSI and NIPSCO regarding these five
sites for the purpose of including PSI in the Indiana
Gas-NIPSCO agreement.
On April 14, 1995, Indiana Gas filed suit in the
United States District Court for the Northern District of
Indiana, Fort Wayne Division (the Court) against a number
of insurance carriers for payment of claims for
investigation and clean-up costs already incurred, as well
as for a determination that the carriers are obligated to
pay these costs in the future. On October 2, 1996, the
Court granted several motions filed by defendant insurance
carriers for summary judgment on a number of issues
relating to the insurers' obligations to Indiana Gas under
insurance policies issued by these carriers. For example,
the Court held that because the placement of residuals on
the ground at the sites was done intentionally, there was
no "fortuitous accident" and therefore no "occurrence"
subject to coverage under the relevant policies. Based on
discussions with counsel, the management of Indiana Gas
believes that a number of the Court's rulings are contrary
to Indiana law and has appealed all adverse rulings to the
United States Court of Appeals for the Seventh Circuit.
However, if these rulings are not reversed on appeal, they
would effectively eliminate coverage under most of the
policies at issue. The oral argument for the appeal was
conducted in early January of 1998. Presently, the case
is before the court awaiting the issuance of a decision.
There can be no assurance as to whether Indiana Gas will
prevail on this appeal. As of December 31, 1997, Indiana
Gas has obtained settlements from some insurance carriers
in an aggregate amount of approximately $14.7 million.
The Court's rulings have had no material impact on
earnings since Indiana Gas has recorded all costs (in
aggregate approximately $14.8 million) which it presently
expects to incur in connection with remediation
activities. It is possible that future events may require
additional remediation activities which are not presently
foreseen.
The Year 2000 Issue
Many existing computer programs use only two
digits to identify a year in the date field. These
programs were designed and developed without
considering the impact of the upcoming change in the
century. If not corrected, many computer applications
could fail or create erroneous results by or at the
year 2000.
The company has developed plans to address the
exposures related to the impact on its computer systems
of the year 2000, including plans to address
modifications to and replacements of key financial and
operational systems required by December 31, 1999. The
financial impact of making the required changes is not
expected to be material to the company's financial
position or results of operations.
Liquidity and Capital Resources
Indiana Gas' capitalization objectives are 55-65
percent common equity and preferred stock and 35-45
percent long-term debt. Indiana Gas' common equity
component was 60 percent of its total capitalization at
December 31, 1997.
New construction, normal system maintenance and
improvements, and information technology investments
needed to provide service to a growing customer base will
continue to require substantial expenditures. Capital
expenditures for fiscal 1998 are estimated at $61.6
million of which $14.1 million have been expended during
the three-month period ended December 31, 1997. For the
twelve months ended December 31, 1997, capital
expenditures totaled $68.3 million.
Indiana Gas' long-term goal is to internally fund at
least 75 percent of its capital expenditure program. This
will help Indiana Gas to maintain its high
creditworthiness. The long-term debt of Indiana Gas is
currently rated Aa2 by Moody's Investors Service and AA-
by Standard & Poor's Corporation. For the twelve months
ended December 31, 1997, 58 percent of Indiana Gas'
capital expenditures was funded internally (i.e. from net
income less dividends plus charges to net income not
requiring funds). Indiana Gas' ratio of earnings to fixed
charges was 2.2 for the twelve months ended December 31,
1997. Before restructuring costs, Indiana Gas' ratio of
earnings to fixed charges for the twelve months ended
December 31, 1997 was 4.4 (see Exhibit 12).
In October 1997, Indiana Gas filed a registration
statement with the Securities and Exchange Commission with
respect to the issuance of up to $95 million in debt
securities and in November 1997 filed a prospectus
supplement with respect to $95 million in Medium-Term
Notes, Series F. In December 1997, Indiana Gas issued
under this registration statement $35 million in aggregate
principal amount of its Medium-Term Notes, Series F as
follows: $20 million of 6.34% Notes due December 10, 2027;
and $15 million of 6.36% Notes due December 6, 2004. In
January 1998, an additional $15 million of 5.75% Medium-
Term Notes, Series F, due January 15, 2003, were issued
under this registration statement. The net proceeds from
the sale of these new debt securities will be used to
refinance certain of Indiana Gas' long-term debt issues
and to refinance short-term obligations incurred in
connection with Indiana Gas' ongoing construction program
and other corporate purposes.
In December 1997, Indiana Gas retired $35 million of 6
5/8% Series D Notes and, called and redeemed $24.7 million
of 8 1/2% Series B Debentures.
Short-term cash working capital is required primarily
to finance customer accounts receivable, unbilled utility
revenues resulting from cycle billing, gas in underground
storage and capital 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. Indiana Gas'
commercial paper is rated P-1 by Moody's and A-1+ by
Standard & Poor's. Recently, bank lines of credit have
been the primary source of short-term financing.
Forward-Looking Information
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform
Act of 1995.
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, Indiana Energy's new earnings growth
strategy, 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 "aim," "anticipate," "endeavor," "estimate,"
"expect," "objective," "projection," "forecast,"
"goal," and similar expressions are intended to
identify forward-looking statements. In addition to any
assumptions and other factors referred to specifically
in connection with such forward-looking statements,
factors that could cause Indiana Energy, Inc. and
subsidiary companies'actual results to differ
materially from those contemplated in any forward-
looking statements include, among others, the
following:
Factors affecting utility operations such as
unusual weather conditions; catastrophic weather-
related damage; unusual maintenance or repairs;
unanticipated changes to gas supply costs, or
availability due to higher demand, shortages,
transportation problems or other developments;
environmental or pipeline incidents; or gas pipeline
system constraints.
Increased competition in the energy environment,
including effects of industry restructuring and
unbundling.
Regulatory factors such as unanticipated changes
in rate-setting policies or procedures; recovery of
investments made under traditional regulation, and the
frequency and timing of rate increases.
Financial or regulatory accounting principles or
policies imposed by the Financial Accounting Standards
Board, the Securities and Exchange Commission, the
Federal Energy Regulatory Commission, state public
utility commissions, state entities which regulate
natural gas transmission, gathering and processing, and
similar entities with regulatory oversight.
Economic conditions including inflation rates and
monetary fluctuations.
Changing market conditions and a variety of other
factors associated with physical energy and financial
trading activities, including, but not limited to,
price, basis, credit, liquidity, volatility, capacity,
interest rate and warranty risks.
Availability or cost of capital, resulting from
changes in: Indiana Energy, Inc. and its subsidiaries,
interest rates, and securities ratings or market
perceptions of the utility industry and energy-related
industries.
Employee workforce factors, including changes in
key executives, collective bargaining agreements with
union employees or work stoppages.
Legal and regulatory delays and other obstacles
associated with mergers, acquisitions and investments
in joint ventures such as the ProLiance complaint
proceeding.
Costs and other effects of legal and
administrative proceedings, settlements,
investigations, claims and other matters, including,
but not limited to, those described in the Other
Operating Matters section of Management's Discussion
and Analysis of Results of Operations and Financial
Condition.
Changes in Federal, state or local legislative
requirements, such as changes in tax laws or rates,
environmental laws and regulations.
Indiana Energy, Inc. and its subsidiaries undertake no
obligation to publicly update or revise any forward-
looking statements, whether as a result of changes in
actual results, changes in assumptions, or other
factors affecting such statements.
Indiana Gas Company, Inc. and Subsidiary Companies
Part II - Other Information
Item 1. Legal Proceedings
See Note 8 of the Notes to Consolidated Financial
Statements for litigation matters involving insurance
carriers pertaining to Indiana Gas' former manufactured
gas plants and storage facilities.
See Note 9 of the Notes to Consolidated Financial
Statements for discussion of the IURC's decision in the
complaint proceeding relating to the gas supply and
portfolio administration agreements between ProLiance
and Indiana Gas and ProLiance and Citizens Gas, and
discussion of the subsequent appeal to that decision.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Computation of Ratio of Earnings to
Fixed Charges, filed herewith.
27 Financial Data Schedule, filed herewith.
(b) On October 8, 1997, Indiana Gas filed a
Current Report on Form 8-K with respect to
the appeal by a small group of Indiana Gas'
and Citizens Gas' customers and the Office
of Utility Consumer Counselor of the IURC's
September 12, 1997, decision in the
ProLiance complaint proceeding. Items
reported include:
Item 5. Other Events
Information related to the
appeal of the IURC's decision in
the ProLiance complaint proceeding.
On October 31, 1997, Indiana Gas filed a
Current Report on Form 8-K with respect to a
press release (dated October 31, 1997),
announcing the recording of a restructuring
charge by Indiana Gas. Items reported
include:
Item 5. Other Events
Press release dated October 31, 1997.
On November 14, 1997, Indiana Gas filed a Current
Report on Form 8-K which included the September
30, 1997, audited Consolidated Financial
Statements and Notes to Consolidated Financial
Statements of Indiana Energy and Subsidiary
Companies, as well as Management's Discussion and
Analysis of Results of Operations and Financial
Condition (MD&A). Items reported include:
Item 5. Other Events
Indiana Energy, Inc. and
Subsidiary Companies' September
30, 1997, audited Consolidated
Financial Statements and Notes,
and MD&A.
On December 5, 1997, Indiana Gas filed a
Current Form on 8-K to file as Exhibit 4
thereto: Officers' Certificate with respect
to the establishment of the Medium Term
Notes, Series F (including Administrative
Procedures and forms of Fixed Rate Note and
Floating Rate Note).
On December 5, 1997, Indiana Gas filed a
Current Form on 8-K to file as Exhibit 1
thereto: Distribution Agreement dated
November 19, 1997, among Indiana Gas
Company, Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
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 February 12, 1998 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
President
Dated February 12, 1998 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller
<TABLE>
EXHIBIT 12
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands, Except Ratios)
Fiscal Year Ended September 30
Twelve Mos.
Ended
12/31/97(1) 1997(1) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $13,648 $13,478 $38,630 $32,109 $34,596 $28,534
Income taxes 7,237 7,147 22,568 18,630 17,977 16,030
Fixed charges (see below) 17,782 17,728 16,844 16,395 16,986 17,556
Total adjusted earnings $38,667 $38,353 $78,042 $67,134 $69,559 $62,120
Fixed charges:
Total interest expense $17,049 $16,774 $15,907 $15,530 $16,037 $16,640
Interest component of rents 733 954 937 865 949 916
Total fixed charges $17,782 $17,728 $16,844 $16,395 $16,986 $17,556
Ratio of earnings to fixed
charges 2.2 2.2 4.6 4.1 4.1 3.5
(1)Reflects the recording of restructuring costs during the fourth quarter of fiscal
1997 (see Note 2). Before restructuring costs, Indiana Gas' ratio of earnings to
fixed charges for the twelve months ended December 31, 1997, and the twelve months
ended September 30, 1997 was 4.4.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Indiana
Gas Company, Inc.'s consolidated financial statements as of December 31, 1997,
and for the three months then ended and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 563,741
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 122,382
<TOTAL-DEFERRED-CHARGES> 12,766
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 698,889
<COMMON> 142,995
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 103,411
<TOTAL-COMMON-STOCKHOLDERS-EQ> 246,406
0
0
<LONG-TERM-DEBT-NET> 165,000
<SHORT-TERM-NOTES> 69,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 218,483
<TOT-CAPITALIZATION-AND-LIAB> 698,889
<GROSS-OPERATING-REVENUE> 170,132
<INCOME-TAX-EXPENSE> 9,829
<OTHER-OPERATING-EXPENSES> 139,475
<TOTAL-OPERATING-EXPENSES> 149,304
<OPERATING-INCOME-LOSS> 20,828
<OTHER-INCOME-NET> 321
<INCOME-BEFORE-INTEREST-EXPEN> 21,149
<TOTAL-INTEREST-EXPENSE> 4,560
<NET-INCOME> 16,589
0
<EARNINGS-AVAILABLE-FOR-COMM> 16,589
<COMMON-STOCK-DIVIDENDS> 6,750
<TOTAL-INTEREST-ON-BONDS> 3,609
<CASH-FLOW-OPERATIONS> (2,104)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
