February 11, 1999
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, 1998, 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, 1998
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, 1999
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Balance Sheets
at December 31, 1998, and 1997
and September 30, 1998
Consolidated Statements of Income
Three Months Ended December 31, 1998 and 1997,
and Twelve Months Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997,
and Twelve Months Ended December 31, 1998 and 1997
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
1998 1997 1998
<S> <C> <C> <C>
UTILITY PLANT:
Original cost $ 946,602 $ 922,491 $ 937,977
Less - accumulated depreciation and
amortization 376,133 358,750 370,872
570,469 563,741 567,105
CURRENT ASSETS:
Cash and cash equivalents 20 1,384 742
Accounts receivable, less reserves of $1,749,
$2,104 and $900 respectively (See Note 8) 28,668 53,195 16,145
Accrued unbilled revenues 40,577 46,123 6,453
Liquefied petroleum gas - at average cost 892 878 883
Gas in underground storage - at last-in,
first-out cost 18,150 17,024 19,373
Prepayments and other 4,903 3,778 4,760
93,210 122,382 48,356
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt discount and expense 12,653 8,048 12,874
Regulatory income tax asset 1,778 - 1,778
Other 2,622 4,718 3,041
17,053 12,766 17,693
$ 680,732 $ 698,889 $ 633,154
</TABLE>
<TABLE>
INDIANA GAS COMPANY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SHAREHOLDER'S EQUITY AND LIABILITIES
(Thousands - Unaudited)
December 31 September 30
1998 1997 1998
<S> <C> <C> <C>
CAPITALIZATION:
Common stock and paid-in capital $ 142,995 $ 142,995 $ 142,995
Retained earnings 102,885 103,411 97,354
Total common shareholder's equity 245,880 246,406 240,349
Long-term debt 181,964 165,000 181,975
427,844 411,406 422,324
CURRENT LIABILITIES:
Maturities and sinking fund requirements of
long-term debt 10,000 - 10,000
Notes payable 48,675 69,000 33,705
Accounts payable (See Note 8) 30,589 49,482 17,847
Refundable gas costs 14,343 10,333 10,730
Customer deposits and advance payments 22,416 19,738 19,229
Accrued taxes 9,848 17,904 4,469
Accrued interest 4,746 4,300 1,728
Other current liabilities 14,871 23,640 16,451
155,488 194,397 114,159
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 60,580 55,736 60,448
Accrued postretirement benefits other than pensions 25,884 23,744 25,169
Unamortized investment tax credit 9,082 10,012 9,313
Regulatory income tax liability - 1,874 -
Other 1,854 1,720 1,741
97,400 93,086 96,671
COMMITMENTS AND CONTINGENCIES (See Notes 7 & 8) - - -
$ 680,732 $ 698,889 $ 633,154
</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
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 124,947 $ 170,132 $ 420,459 $ 528,058
COST OF GAS (See Note 8) 67,937 107,052 231,889 319,738
MARGIN 57,010 63,080 188,570 208,320
OPERATING EXPENSES:
Operation and maintenance 21,529 19,826 85,871 80,156
Restructuring costs (See Note 2) - - - 39,531
Depreciation and amortization 8,315 7,910 32,758 34,340
Income taxes 6,438 9,829 14,058 7,813
Taxes other than income taxes 4,151 4,687 13,882 16,901
40,433 42,252 146,569 178,741
OPERATING INCOME 16,577 20,828 42,001 29,579
OTHER INCOME - NET 81 321 626 1,118
INCOME BEFORE INTEREST EXPENSE 16,658 21,149 42,627 30,697
INTEREST EXPENSE 4,127 4,560 15,802 17,049
NET INCOME $ 12,531 $ 16,589 $ 26,825 $ 13,648
</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
1998 1997 1998 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM (REQUIRED FOR)
OPERATING ACTIVITIES:
Net income $ 12,531 $ 16,589 $ 26,825 $ 13,648
Adjustments to reconcile net income
to cash provided from operating
activities -
Noncash restructuring costs - - - 32,838
Depreciation and amortization 8,362 7,957 32,945 34,527
Deferred income taxes 132 531 1,192 (12,645)
Investment tax credit (232) (232) (930) (930)
Gain on sale of assets - - (1,219) -
8,262 8,256 31,988 53,790
Changes in assets and liabilities -
Receivables - net (46,647) (65,168) 30,073 (17,001)
Inventories 1,204 2,131 (1,193) 21,231
Accounts payable, customer deposits,
advance payments and other current
liabilities 14,349 8,894 (24,984) (11,901)
Accrued taxes and interest 8,397 10,965 (7,610) 3,736
Recoverable/refundable gas costs 3,613 16,176 4,010 27,282
Prepayments (133) 65 (1,072) (2,613)
Accrued postretirement benefits other
than pensions 715 706 2,140 7,916
Other - net 1,090 (718) 5,436 3,615
Total adjustments (9,150) (18,693) 38,788 86,055
Net cash flows from (required for)
operations 3,381 (2,104) 65,613 99,703
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Sale of long-term debt - 35,000 60,000 50,000
Reduction in long-term debt (11) (59,733) (33,036) (59,733)
Net change in short-term borrowings 14,970 49,000 (20,325) 6,000
Dividends on common stock (7,000) (6,750) (27,500) (26,500)
Net cash flows from (required for)
financing activities 7,959 17,517 (20,861) (30,233)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (12,062) (14,077) (55,320) (68,271)
Proceeds from sale of assets - - 9,204 -
Net cash flows required for investing
activities (12,062) (14,077) (46,116) (68,271)
NET INCREASE (DECREASE) IN CASH (722) 1,336 (1,364) 1,199
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 742 48 1,384 185
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20 $ 1,384 $ 20 $ 1,384
</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.
During 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) in the fourth quarter
of fiscal 1997 as described below.
In July 1997, Indiana Energy 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 by 2002. The reductions are being implemented
through involuntary separation and attrition. Indiana
Gas recorded restructuring costs of $5.4 million during
the fourth quarter of fiscal 1997 related to the 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. As a result
primarily of initial work force reductions during
September 1997 and attrition, employees totaled 878 as
of December 31, 1998.
Further, Indiana Gas' management 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 were disposed of later
in fiscal 1998.
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.
The formation of IEI Services was established by a
contribution of $32 million of fixed assets at net book
value from Indiana Gas, which subsequently dividended
its membership interest to Indiana Energy. The
contributed assets relate to the provision of
administrative services. IEI Services provides
information technology, financial, human resources,
building and fleet 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 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest (net of
amount capitalized) $ 812 $ 2,507 $13,646 $15,683
Income taxes $ 404 $ 70 $21,704 $17,556
</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 1998, the cost of replacing the current portion
of gas in underground storage exceeded last-in,
first-out cost at December 31, 1998, by approximately
$7,953,000.
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. Environmental Costs.
Indiana Gas is currently conducting environmental
investigations and work at 26 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 determined that
these costs are not recoverable from utility customers.
Indiana Gas has completed the process of identifying
PRPs and now has PRP agreements in place covering 19 of
the 26 sites. The agreements provide for coordination
of efforts and sharing of investigation and clean-up
costs incurred and to be incurred at the sites. PSI
Energy, Inc. is a PRP on all 19 sites. Northern Indiana
Public Service Company is a PRP on 5 of the 19 sites.
These agreements limit Indiana Gas' share of past and
future response costs at these 19 sites to between 20
and 50 percent. Based on the agreements, Indiana Gas
has recorded a receivable from PRPs for their unpaid
share of the liability for work performed by Indiana Gas
to date, as well as accrued Indiana Gas' proportionate
share of the estimated cost related to work not yet
performed.
Indiana Gas has filed a complaint in Indiana state court
to continue its pursuit of insurance coverage from four
insurance carriers, with the trial scheduled for January of
2000. As of December 31, 1998, Indiana Gas has obtained
settlements from other insurance carriers in an
aggregate amount of approximately $14.7 million.
These environmental matters have had no material impact
on earnings since costs recorded to date approximate
insurance settlements received. While Indiana Gas has
recorded all costs which it presently expects to incur
in connection with remediation activities, it is
possible that future events may require some level of
additional remedial activities which are not presently
foreseen.
8. Affiliate Transactions.
ProLiance Energy, LLC (ProLiance), a non-regulated
marketing affiliate of Indiana Energy, provides natural
gas supply and related services to Indiana Gas. Indiana
Gas' purchases from ProLiance for resale and for
injections into storage for the three- and twelve-month
periods ended December 31, 1998, totaled $67.4 million
and $232.2 million, respectively. Indiana Gas'
purchases from ProLiance for the three- and twelve-month
periods ended December 31, 1997, totaled $104.1 million
and $311.7 million, respectively.
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 proceeding
currently pending before the IURC.
On September 12, 1997, the Indiana Utility Regulatory
Commission (IURC) issued a decision finding the gas
supply and portfolio administration agreements between
ProLiance and Indiana Gas and ProLiance and Citizens Gas
(the gas supply agreements) to be consistent with the
public interest. The IURC's decision reflected the
significant gas cost savings to customers obtained by
ProLiance's services and suggested that all material
provisions of the agreements between ProLiance and the
utilities are reasonable. Nevertheless, with respect to
the pricing of gas commodity purchased from ProLiance
and two other pricing terms, the IURC concluded that
additional 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.
The IURC's September 12, 1997, decision was appealed to
the Indiana Court of Appeals by certain Petitioners
including the Indiana Office of Utility Consumer
Counselor and the Citizens Action Coalition of Indiana.
On October 8, 1998, the Indiana Court of Appeals issued
a decision which reversed and remanded the case to the
IURC with instructions that the gas supply agreements be
disapproved. The basis for the decision is that because
the gas supply agreements provide for index based
pricing of gas commodity sold by ProLiance to the
utilities, they should have been the subject of an
application for approval of an alternative regulatory
plan under Indiana statutory law. The court held that
absent this type of application, the IURC exceeded its
authority in implementing what the court saw to be
alternative regulatory treatment.
Management believes the decision incorrectly applies the
statute and on November 9, 1998, petitioned for transfer
of the case to the Indiana Supreme Court. If the Supreme
Court does not overturn the Court of Appeals' decision,
the matter will be remanded to the IURC for further
proceedings. Whether or not the Supreme Court reverses
the Court of Appeals' decision, the reasonableness of
the gas costs incurred by Indiana Gas under the gas
supply agreements will be further reviewed in the
consolidated GCA proceeding. Management takes note of
the fact that the Court of Appeals has not challenged
the IURC findings that the agreements provide
significant economic value to customers and are in the
public interest. Indiana Gas is continuing to utilize
ProLiance for its gas supply.
On or about August 11, 1998, Indiana Gas, Citizens Gas
and ProLiance each received a Civil Investigative Demand
("CID") from the United States Department of Justice
requesting information relating to Indiana Gas' and
Citizens Gas' relationship with and the activities of
ProLiance. The Department of Justice issued the CID to
gather information regarding ProLiance's formation and
operations, and to determine if trade or commerce has
been restrained. Indiana Gas is providing the Department
of Justice with information regarding the formation of
ProLiance in connection with the CID.
While the results of the ProLiance issues mentioned
above cannot be predicted, management does not expect
these matters to have a material impact on Indiana Gas'
financial position or results of operations. However,
no assurance can be provided.
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, 1998, totaled $4.6 million and $15.9
million, respectively. 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
information technology, financial, human resources,
building and fleet services. Amounts billed by IEI
Services to Indiana Gas for the three- and twelve-month
periods ended December 31, 1998, totaled $6.7 million
and $25.9 million, respectively. Amounts billed by IEI
Services to Indiana Gas for the three-month period 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 $27.9 million and
$47.9 million at December 31, 1998 and 1997,
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.
9. 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 for the three- and twelve-month periods
ended December 31, 1998, when compared to the same periods
one year ago, were as follows:
<TABLE>
Periods Ended December 31
(millions) 1998 1997
<S> <C> <C>
Three Months $12.5 $16.6
Twelve Months (1) $26.8 $13.6
(1)Reflects the recording of restructuring costs
of $24.5 million after-tax in the fourth quarter
of fiscal 1997 (see Growth Strategy and Corporate
Restructuring).
</TABLE>
Margin (Operating Revenues Less Cost of Gas)
Margin for the quarter ended December 31, 1998, was
$57.0 million compared to $63.1 million for the same
period last year. The decrease reflects weather 19
percent warmer than the same period last year and 17
percent warmer than normal, offset somewhat by the
addition of new residential and commercial customers.
Margin for the twelve-month period ended December 31,
1998, was $188.6 million compared to $208.3 million for
the same period last year. The decrease is primarily
attributable to weather 22 percent warmer than the same
period last year and 21 percent warmer than normal, offset
somewhat by the addition of new residential and commercial
customers.
Total system throughput (combined sales and
transportation) decreased 13 percent (5.0 MMDth) for the
first quarter of fiscal 1999 and 11 percent (14.1 MMDth)
for the twelve-month period ended December 31, 1998,
compared to the same periods 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 $3.44 for the three-month period ended December 31,
1998, compared to $3.87 for the same period one year ago.
For the twelve-month period, cost of gas per unit
decreased to $3.44 in the current period compared to $3.60
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 $1.7
million for the three-month period ended December 31,
1998, when compared to the same period one year ago due in
part to higher labor-related costs, including training
costs related to the implementation of the company's new
customer information system. Rental expense related to
buildings previously owned also contributed to the
increase.
Operation and maintenance expenses increased $5.7
million for the twelve-month period when compared to the
same period last year 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). The increase was
offset somewhat by lower labor-related costs resulting
from work force reductions.
Restructuring costs of $39.5 million (pre-tax) were
recorded in the fourth quarter of fiscal 1997 related to
the implementation of Indiana Energy's new growth strategy
during that year (see Growth Strategy and Corporate
Restructuring).
Depreciation and amortization expense increased for
the three-month period ended December 31, 1998, when
compared to the same period one year ago due primarily to
additions to plant to serve new customers and to maintain
dependable service to existing customers.
Depreciation and amortization decreased for the twelve-
month period ended December 31, 1998, when compared to the
same period last year due primarily to the transfer of
assets to IEI Services, and assets held for disposal which
were written down to estimated fair value in the fourth
quarter of fiscal 1997. The decrease was offset somewhat
by additions to plant to serve new customers and to
maintain dependable service to existing customers.
Federal and state income taxes decreased for the three-
month period ended December 31, 1998, while increasing for
the twelve-month period when compared to the same periods
one year ago due to changes in taxable income.
Taxes other than income taxes decreased for the three-
month period ended December 31, 1998, when compared to the
same period one year ago due to lower gross receipts tax
expense. Taxes other than income taxes decreased for the
twelve-month period due to lower gross receipts tax
expense and lower property tax expense.
Interest Expense
Interest expense decreased for the three- and twelve-
month periods ended December 31, 1998, when compared to
the same periods one year ago due primarily to decreases
in interest rates.
Other Operating Matters
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
Indiana Energy's transition into a more competitive
environment. As part of the current 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 through 2003. To achieve
such earnings growth, Indiana Energy's aim is to grow
the earnings contribution from non-utility operations
to over 25 percent of its total annual earnings by
2003, and to aggressively manage costs within its
utility operations.
During 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) in
the fourth quarter of fiscal 1997 as described below.
In July 1997, Indiana Energy 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 by 2002. The reductions are being
implemented through involuntary separation and
attrition. Indiana Gas recorded restructuring costs of
$5.4 million during the fourth quarter of fiscal 1997
related to the 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.
As a result primarily of initial work force reductions
during September 1997 and attrition, employees totaled
878 as of December 31, 1998.
Further, Indiana Gas' management 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 were
disposed of later in fiscal 1998.
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. The formation of IEI Services was
established by a contribution of $32 million of fixed
assets at net book value from Indiana Gas, which
subsequently dividended its membership interest to
Indiana Energy. The contributed assets relate to the
provision of administrative services. IEI Services
provides information technology, financial, human
resources, building and fleet services. These services
had been provided by Indiana Gas in the past.
As a result of the restructuring, Indiana Energy
has realized reductions in operating costs 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, provides natural
gas and related services to Indiana Gas and Citizens Gas
and Coke Utility (Citizens Gas).
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 proceeding
currently pending before the IURC.
On September 12, 1997, the Indiana Utility Regulatory
Commission (IURC) issued a decision finding the gas supply
and portfolio administration agreements between ProLiance
and Indiana Gas and ProLiance and Citizens Gas (the gas
supply agreements) to be consistent with the public
interest. The IURC's decision reflected the significant
gas cost savings to customers obtained by ProLiance's
services and suggested that all material provisions of the
agreements between ProLiance and the utilities are
reasonable. Nevertheless, with respect to the pricing of
gas commodity purchased from ProLiance and two other
pricing terms, the IURC concluded that additional 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.
The IURC's September 12, 1997, decision was appealed
to the Indiana Court of Appeals by certain Petitioners
including the Indiana Office of Utility Consumer Counselor
and the Citizens Action Coalition of Indiana. On October
8, 1998, the Indiana Court of Appeals issued a decision
which reversed and remanded the case to the IURC with
instructions that the gas supply agreements be
disapproved. The basis for the decision is that because
the gas supply agreements provide for index based pricing
of gas commodity sold by ProLiance to the utilities, they
should have been the subject of an application for
approval of an alternative regulatory plan under Indiana
statutory law. The court held that absent this type of
application, the IURC exceeded its authority in
implementing what the court saw to be alternative
regulatory treatment.
Management believes the decision incorrectly applies
the statute and on November 9, 1998, petitioned for
transfer of the case to the Indiana Supreme Court. If the
Supreme Court does not overturn the Court of Appeals'
decision, the matter will be remanded to the IURC for
further proceedings. Whether or not the Supreme Court
reverses the Court of Appeals' decision, the
reasonableness of the gas costs incurred by Indiana Gas
under the gas supply agreements will be further reviewed
in the consolidated GCA proceeding. Management takes note
of the fact that the Court of Appeals has not challenged
the IURC findings that the agreements provide significant
economic value to customers and are in the public
interest. Indiana Gas is continuing to utilize ProLiance
for its gas supply.
On or about August 11, 1998, Indiana Gas, Citizens Gas
and ProLiance each received a Civil Investigative Demand
("CID") from the United States Department of Justice
requesting information relating to Indiana Gas' and
Citizens Gas' relationship with and the activities of
ProLiance. The Department of Justice issued the CID to
gather information regarding ProLiance's formation and
operations, and to determine if trade or commerce has been
restrained. Indiana Gas is providing the Department of
Justice with information regarding the formation of
ProLiance in connection with the CID.
While the results of the ProLiance issues mentioned
above cannot be predicted, management does not expect
these matters to have a material impact on Indiana Gas'
financial position or results of operations. However, no
assurance can be provided.
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. This issue relates not only to information
technology (IT) but also to non-IT related equipment
and plant that may contain embedded date-sensitive
microcontrollers or microchips.
The company has identified what it believes are
its most significant worst case Year 2000 scenarios for
the purpose of helping it to focus its Year 2000
efforts. These scenarios are the interference with the
company's ability to (1) receive and deliver gas to
customers, (2) monitor gas pressure throughout the
company's gas distribution system, (3) bill and receive
payments from customers, and (4) maintain continuous
operation of its computer systems. As discussed below,
the company is taking the steps necessary to ensure
that these worst case scenarios are addressed.
The company has evaluated the Year 2000 readiness
of all IT hardware and software including the
mainframe, network, servers, personal computers, system
and application software and telecommunications. Almost
all hardware was found to be in compliance as a result
of projects conducted in 1997 and 1998. Replacements of
major customer information and billing systems, which
had already begun in 1997, were placed into service
in January 1999. These new systems, driven by the need
for additional functionality and business flexibility,
were also designed to be Year 2000 compliant. Other
maintenance and project activities conducted in 1998 and
scheduled for 1999 have been initiated to bring the
remaining software environment into compliance. The projects
include replacements, upgrades and rewrites. The
company's plan for IT items includes the following
phases and timeline: (a) Assessment - completed in
1998, (b) Strategy - completed in 1998 and (c) Design,
Implementation, Testing and Validation - in process and
to be substantially completed by June 30, 1999. The
company has not found it necessary to postpone work on
any other critical IT projects because of efforts to
achieve Year 2000 compliance.
Non-IT systems with embedded microcontrollers or
microchips are being evaluated to determine if they are
Year 2000 compliant. These systems include buildings,
transportation, monitoring equipment, process controls,
engineering and construction. The internal assessment
process has generally been completed, and few
compliance issues have been found to date. These
consist primarily of needed software upgrades for
equipment in the gas control system. It is anticipated
these upgrades will be installed by July of 1999.
The company is currently in the process of
contacting its major vendors, suppliers and customers
to gather information regarding the status of their
Year 2000 compliance. While compliance issues may be
identified from these inquiries and any issues raised
will be addressed, this process may not fully ensure
these parties' Year 2000 compliance. Disruptions in the
operations of these parties could have an adverse
financial and operational effect on the company.
The company is also formulating a contingency plan
related to Year 2000 issues. This plan will include
modifying the company's already existing plans for
business resumption, information technology disaster
recovery and gas supply contingencies, and would allow
for, among other things, alternate recovery locations,
backup power generation, adequate material supplies and
personnel requirements. This plan is expected to be in
place, tested and refined as needed by December 31,
1999.
Total costs expected to be incurred by the company
to remedy its Year 2000 issues are estimated at $1.5
million, which include costs estimated to replace
certain existing systems sooner than otherwise planned.
Management expects that Year 2000 issues will be
addressed on a schedule and in a manner that will
prevent such issues from having a material impact on
the company's financial position or results of
operations. However, while the company has and will
continue to manage its Year 2000 compliance plan, there
can be no assurance that the company will be successful
in identifying and addressing all material Year 2000
issues including those related to the company's
vendors, suppliers and customers.
Environmental Matters
Indiana Gas is currently conducting environmental
investigations and work at 26 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 determined
that these costs are not recoverable from utility
customers.
Indiana Gas has completed the process of
identifying PRPs and now has PRP agreements in place
covering 19 of the 26 sites. The agreements provide
for coordination of efforts and sharing of
investigation and clean-up costs incurred and to be
incurred at the sites. PSI Energy, Inc. is a PRP on
all 19 sites. Northern Indiana Public Service Company
is a PRP on 5 of the 19 sites. These agreements limit
Indiana Gas' share of past and future response costs at
these 19 sites to between 20 and 50 percent. Based on
the agreements, Indiana Gas has recorded a receivable
from PRPs for their unpaid share of the liability for
work performed by Indiana Gas to date, as well as
accrued Indiana Gas' proportionate share of the
estimated cost related to work not yet performed.
Indiana Gas has filed a complaint in Indiana state
court to continue its pursuit of insurance coverage
from four insurance carriers, with the trial scheduled for
January of 2000. As of December 31, 1998, Indiana Gas
has obtained settlements from other insurance carriers
in an aggregate amount of approximately $14.7 million.
These environmental matters have had no material
impact on earnings since costs recorded to date
approximate insurance settlements received. While
Indiana Gas has recorded all costs which it presently
expects to incur in connection with remediation
activities, it is possible that future events may
require some level of additional remedial activities
which are not presently foreseen.
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 56 percent of its total capitalization at
December 31, 1998.
New construction and normal system maintenance and
improvements needed to provide service to a growing
customer base will continue to require substantial
expenditures. Capital expenditures for fiscal 1999 are
estimated at $60.8 million of which $12.1 million have
been expended during the three-month period ended December
31, 1998. For the twelve months ended December 31, 1998,
capital expenditures totaled $55.3 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, 1998, 59 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 3.5 for the twelve months ended December 31,
1998 (see Exhibit 12).
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
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 earnings growth strategy,
ProLiance and Year 2000 issues, 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 judicial and
administrative proceedings.
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.
The inability of Indiana Energy, Inc. and its
subsidiaries and their vendors, suppliers and customers
to achieve Year 2000 readiness.
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.
Item 1. Legal Proceedings
See Note 7 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 8 of the Notes to Consolidated Financial
Statements for discussion of litigation matters
relating to the gas supply and portfolio administration
agreements between ProLiance and Indiana Gas and
ProLiance and Citizens Gas.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-A Employment Agreement between
Indiana Energy, Inc. and Lawrence
A. Ferger, effective January 1,
1999. Incorporated by reference
to Exhibit 10-A to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-B Employment Agreement between
Indiana Energy, Inc. and Niel C.
Ellerbrook, effective January 1,
1999. Incorporated by reference
to Exhibit 10-B to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-C Employment Agreement between
Indiana Energy, Inc. and Paul T.
Baker, effective January 1, 1999.
Incorporated by reference to
Exhibit 10-C to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-D Employment Agreement between
Indiana Energy, Inc. and Anthony
E. Ard, effective January 1, 1999.
Incorporated by reference to
Exhibit 10-D to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-E Employment Agreement between
Indiana Energy, Inc. and Timothy
M. Hewitt, effective January 1,
1999. Incorporated by reference
to Exhibit 10-F to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-F Indiana Energy, Inc. Unfunded
Supplemental Retirement Plan for a
Select Group of Management
Employees as amended and restated
effective December 1, 1998.
Incorporated by reference to
Exhibit 10-G to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-G Indiana Energy, Inc. Nonqualified
Deferred Compensation Plan
effective January 1, 1999.
Incorporated by reference to
Exhibit 10-H to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-H Amendment to the Indiana Energy,
Inc. Executive Restricted Stock
Plan effective December 1, 1998.
Incorporated by reference to
Exhibit 10-I to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
10-I Amendment to the Indiana Energy,
Inc. Directors' Restricted Stock
Plan effective December 1, 1998.
Incorporated by reference to
Exhibit 10-J to the Quarterly
Report on Form 10-Q of Indiana
Energy, Inc. for the quarterly
period ended December 31, 1998.
12 Computation of Ratio of
Earnings to Fixed Charges, filed
herewith.
27 Financial Data Schedule, filed
herewith.
(b)On October 9, 1998, Indiana Gas filed a
Current Report on Form 8-K with respect to a
press release (dated October 9, 1998),
announcing the decision by Indiana Gas,
Citizens Gas and ProLiance to appeal the
October 8, 1998, Indiana Court of Appeals
decision regarding ProLiance. Items reported
include:
Item 5. Other Events
Press release dated October 9,1998
On October 30, 1998, Indiana Gas filed a
Current Report on Form 8-K with respect to
the release of summary financial information
to the investment community regarding Indiana
Energy's consolidated results of operations,
financial position and cash flows for the
three- and twelve-month periods ended
September 30, 1998. Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Fourth
Quarter 1998
On January 27, 1999, Indiana Gas filed a
Current Report on Form 8-K with respect to
the release of summary financial information
to the investment community regarding Indiana
Energy's consolidated results of operations,
financial position and cash flows for the
three- and twelve-month periods ended
December 31, 1998. Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - First Quarter 1999
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 11, 1999 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
President
Dated February 11, 1999 /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)
Twelve Mos.
Ended Fiscal Year Ended September 30
12/31/98 1998 1997(1) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $26,825 $30,883 $13,478 $38,630 $32,109 $34,596
Income taxes 14,148 17,510 7,147 22,568 18,630 17,977
Fixed charges
(see below) 16,133 16,967 17,728 16,844 16,395 16,986
Total adjusted earnings $57,106 $65,360 $38,353 $78,042 $67,134 $69,559
Fixed charges:
Total interest expense $15,802 $16,234 $16,774 $15,907 $15,530 $16,037
Interest component of
rents 331 733 954 937 865 949
Total fixed charges $16,133 $16,967 $17,728 $16,844 $16,395 $16,986
Ratio of earnings to
fixed charges 3.5 3.9 2.2 4.6 4.1 4.1
(1)Reflects the recording of restructuring costs in
fiscal 1997 (see Note 2). Indiana Gas' ratio of
earnings to fixed charges for 1997 before
restructuring costs 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, 1998, 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-30-1999
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 570,469
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 93,210
<TOTAL-DEFERRED-CHARGES> 17,053
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 680,732
<COMMON> 142,995
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 102,885
<TOTAL-COMMON-STOCKHOLDERS-EQ> 245,880
0
0
<LONG-TERM-DEBT-NET> 181,964
<SHORT-TERM-NOTES> 48,675
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 10,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 194,213
<TOT-CAPITALIZATION-AND-LIAB> 680,732
<GROSS-OPERATING-REVENUE> 124,947
<INCOME-TAX-EXPENSE> 6,438
<OTHER-OPERATING-EXPENSES> 101,932
<TOTAL-OPERATING-EXPENSES> 108,370
<OPERATING-INCOME-LOSS> 16,577
<OTHER-INCOME-NET> 81
<INCOME-BEFORE-INTEREST-EXPEN> 16,658
<TOTAL-INTEREST-EXPENSE> 4,127
<NET-INCOME> 12,531
0
<EARNINGS-AVAILABLE-FOR-COMM> 12,531
<COMMON-STOCK-DIVIDENDS> 7,000
<TOTAL-INTEREST-ON-BONDS> 3,389
<CASH-FLOW-OPERATIONS> 3,381
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
