August 13, 1998
Securities and Exchange Commission
Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
Gentlemen:
We are transmitting herewith Indiana Energy, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9091
INDIANA ENERGY, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1654378
(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 22,590,150 July 31, 1998
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Consolidated Balance Sheets
at June 30, 1998, and 1997
and September 30, 1997
Consolidated Statements of Income
Three Months Ended June 30, 1998 and 1997,
Nine Months Ended June 30, 1998 and 1997,
and Twelve Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997,
and Twelve Months Ended June 30, 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 ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands - Unaudited)
June 30 September 30
1998 1997 1997
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,715 $ 20 $ 48
Accounts receivable, less reserves of $553,
$2,253 and $1,784 respectively 23,357 20,657 22,318
Accrued unbilled revenues 7,639 7,994 8,964
Materials and supplies - at average cost 198 428 63
Liquefied petroleum gas - at average cost 865 847 872
Gas in underground storage - at last-in,
first-out cost 7,558 9,918 19,240
Recoverable gas costs - 967 5,843
Prepayments and other 4,803 424 3,703
56,135 41,255 61,051
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 30,011 24,875 24,549
UTILITY PLANT:
Original cost 923,385 968,416 951,617
Less - accumulated depreciation and amortization 362,531 357,694 361,936
560,854 610,722 589,681
NONUTILITY PLANT:
Original cost 49,293 4,114 4,114
Less - accumulated depreciation and amortization 11,061 750 779
38,232 3,364 3,335
DEFERRED CHARGES:
Unamortized debt discount and expense 13,185 7,115 7,074
Other 4,504 5,497 5,155
17,689 12,612 12,229
$ 702,921 $ 692,828 $ 690,845
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Thousands except shares - Unaudited)
June 30 September 30
1998 1997 1997
<S> <C> <C> <C>
CURRENT LIABILITIES:
Maturities and sinking fund requirements of long-term debt $ 272 $ 35,272 $ 35,272
Notes payable 1,000 12,550 23,800
Accounts payable (See Note 12) 19,146 23,327 25,523
Refundable gas costs 27,155 - -
Customer deposits and advance payments 5,484 6,670 20,405
Accrued taxes 13,065 12,319 8,659
Accrued interest 4,372 4,457 2,629
Other current liabilities 24,721 27,558 31,817
95,215 122,153 148,105
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 56,797 68,533 55,205
Accrued postretirement benefits other than pensions 25,156 17,432 23,038
Unamortized investment tax credit 9,547 10,477 10,243
Regulatory income tax liability 1,874 2,835 1,874
Other 2,025 1,888 1,992
95,399 101,165 92,352
COMMITMENTS AND CONTINGENCIES (See Notes 10 & 11) - - -
CAPITALIZATION:
Long-term debt 194,889 142,899 157,791
Common stock (no par value) - authorized 200,000,000
shares - issued and outstanding 22,589,570, 22,580,998
and 22,580,543 shares, respectively (See Note 9) 146,758 146,508 146,498
Less unearned compensation - restricted stock grants 1,360 1,798 1,589
145,398 144,710 144,909
Retained earnings 172,020 181,901 147,688
Total common shareholders' equity 317,418 326,611 292,597
512,307 469,510 450,388
$ 702,921 $ 692,828 $ 690,845
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share data)
(Unaudited)
Three Months Nine Months
Ended June 30 Ended June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Utility $ 70,560 $ 83,733 $ 403,823 $ 471,909
Other 210 95 568 95
70,770 83,828 404,391 472,004
OPERATING EXPENSES:
Cost of gas (See Note 12) 35,032 40,084 234,808 289,884
Other operating 17,925 20,870 55,525 60,703
Depreciation and amortization 9,605 8,794 27,907 26,259
Taxes other than income taxes 2,985 3,847 12,641 13,615
65,547 73,595 330,881 390,461
OPERATING INCOME 5,223 10,233 73,510 81,543
OTHER INCOME:
Equity in earnings of unconsolidated
affiliates (See Note 11) 1,423 629 7,208 3,860
Other - net 845 3,126 1,726 3,698
2,268 3,755 8,934 7,558
INCOME BEFORE INTEREST AND
INCOME TAXES 7,491 13,988 82,444 89,101
INTEREST EXPENSE 3,581 3,996 12,780 12,906
INCOME BEFORE INCOME TAXES 3,910 9,992 69,664 76,195
INCOME TAXES 1,199 3,526 25,455 28,095
NET INCOME $ 2,711 $ 6,466 $ 44,209 $ 48,100
AVERAGE COMMON SHARES
OUTSTANDING (See Note 9) 22,593 22,581 22,593 22,580
BASIC AND DILUTED EARNINGS PER AVERAGE
SHARE OF COMMON STOCK (See Notes 9 & 13) $ 0.12 $ 0.29 $ 1.96 $ 2.13
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share data)
(Unaudited)
Twelve Months
Ended June 30
1998 1997
<S> <C> <C>
OPERATING REVENUES:
Utility $ 462,321 $ 534,430
Other 615 93
462,936 534,523
OPERATING EXPENSES:
Cost of gas (See Note 12) 267,065 324,537
Other operating 74,824 83,159
Restructuring costs (See Note 3) 39,531 -
Depreciation and amortization 36,810 34,779
Taxes other than income taxes 16,024 16,882
434,254 459,357
OPERATING INCOME 28,682 75,166
OTHER INCOME:
Equity in earnings of unconsolidated
affiliates (See Note 11) 11,990 4,850
Other - net 1,255 2,843
13,245 7,693
INCOME BEFORE INTEREST AND
INCOME TAXES 41,927 82,859
INTEREST EXPENSE 17,005 16,785
INCOME BEFORE INCOME TAXES 24,922 66,074
INCOME TAXES 8,310 23,902
NET INCOME $ 16,612 $ 42,172
AVERAGE COMMON SHARES OUTSTANDING (See Note 9) 22,590 22,554
BASIC AND DILUTED EARNINGS PER AVERAGE
SHARE OF COMMON STOCK (See Notes 9 & 13) $ 0.74 $ 1.87
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Nine Months Twelve Months
Ended June 30 Ended June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,209 $ 48,100 $ 16,612 $ 42,172
Adjustments to reconcile net income to cash
provided from operating activities -
Noncash restructuring costs - - 32,838 -
Depreciation and amortization 28,047 26,318 36,997 34,858
Deferred income taxes 1,592 1,671 (12,697) 1,209
Investment tax credit (697) (697) (930) (930)
Gain on sale of assets (2,102) (2,923) (2,102) (2,923)
Undistributed earnings of unconsolidated
affiliates (7,208) (3,860) (11,990) (4,850)
19,632 20,509 42,116 27,364
Changes in assets and liabilities -
Receivables - net 286 (5,895) (2,345) 11,318
Inventories 11,554 33,008 2,572 13,532
Accounts payable, customer deposits, advance
payments and other current liabilities (28,394) (18,249) (8,204) (1,349)
Accrued taxes and interest 6,149 10,018 661 (4,134)
Recoverable/refundable gas costs 32,998 1,743 28,122 (7,489)
Prepayments (1,100) (378) (4,379) 103
Accrued postretirement benefits other than
pensions 2,118 2,528 7,724 3,589
Other - net (1,207) (6,247) 4,109 (4,337)
Total adjustments 42,036 37,037 70,376 38,597
Net cash flows from operations 86,245 85,137 86,988 80,769
CASH FLOWS REQUIRED FOR FINANCING ACTIVITIES:
Sale of long-term debt 95,044 49 110,059 65
Reduction in long-term debt (92,946) (213) (93,069) (19,296)
Net change in short-term borrowings (22,800) (15,486) (11,550) 8,750
Dividends on common stock (19,877) (19,171) (26,493) (25,552)
Net cash flows required for financing activities (40,579) (34,821) (21,053) (36,033)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (46,477) (52,416) (65,968) (83,065)
Nonutility investments - net (3,209) (900) (3,959) (900)
Cash distribution from unconsolidated affiliate 6,483 - 6,483 -
Proceeds from sale of assets 9,204 3,000 9,204 3,000
Net cash flows required for investing activities (33,999) (50,316) (54,240) (80,965)
NET INCREASE (DECREASE) IN CASH 11,667 - 11,695 (36,229)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 48 20 20 36,249
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,715 $ 20 $ 11,715 $ 20
</TABLE>
Indiana Energy, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
1. Financial Statements.
The consolidated financial statements include the
accounts of Indiana Energy, Inc. (Indiana Energy or the
company) and its wholly and majority-owned subsidiaries,
after elimination of intercompany transactions. The
company's consolidated financial statements include the
operations of its regulated gas distribution subsidiary,
Indiana Gas Company, Inc., (Indiana Gas), its
nonregulated administrative services provider, IEI
Services, LLC, and its nonutility subsidiaries and
investments grouped under its nonregulated subsidiary,
IEI Investments, Inc. The nonutility operations include
IGC Energy, Inc. (IGC Energy), Energy Realty, Inc.
(Energy Realty) and Indiana Energy Services, Inc. (IES),
all indirect wholly owned subsidiaries of Indiana
Energy, and interests in ProLiance Energy, LLC, CIGMA,
LLC and Energy Systems Group, LLC.
The interim condensed consolidated financial statements
included in this report have been prepared by Indiana
Energy, 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 Energy 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 Energy's latest annual report on Form 10-K.
Because of the seasonal nature of Indiana Energy's gas
distribution operations, the results shown on a
quarterly basis are not necessarily indicative of annual
results.
2. Financial Statement Presentation.
The consolidated financial statements of Indiana Energy,
Inc. and Subsidiary Companies are presented in the
conventional classified format rather than a regulated
utility format, which has been used in the past.
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.
3. Corporate Restructuring.
In April 1997, the Board of Directors of Indiana Energy
approved a new growth strategy designed to support the
company's transition into a more competitive
environment.
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. These actions by Indiana Gas were
consistent with the company's new growth strategy. The
effect on the company's earnings for the twelve months
ended June 30, 1998, is a reduction in earnings of $1.08
per common share.
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. 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, employees totaled approximately
895 as of June 30, 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 September 30, 1997, and were disposed of
during the quarter ended June 30, 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,
as well as to third-parties in the future. The formation
of IEI Services was established by a contribution of
$32.2 million of fixed assets at net book value from
Indiana Gas, which subsequently dividended its
membership interest to Indiana Energy. These assets,
which relate to the provision of administrative
services, are classified in Nonutility Plant on the
Consolidated Balance Sheet at June 30, 1998. 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.
4. Cash Flow Information.
For the purposes of the Consolidated Statements of Cash
Flows, Indiana Energy 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>
Nine Months Ended Twelve Months Ended
June 30 June 30
Thousands 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest (net of
amount capitalized) $ 9,886 $ 9,913 $15,469 $16,291
Income taxes $18,080 $17,701 $22,230 $27,553
</TABLE>
5. Utility 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.
6. Gas in Underground Storage.
Based on the average cost of purchased gas during June
1998, the cost of replacing the current portion of gas
in underground storage exceeded last-in, first-out cost
at June 30, 1998, by approximately $3,206,000.
7. 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).
8. 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. Issues under this registration
statement follow. In December 1997, Indiana Gas issued
$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, $15
million of 5.75% Medium-Term Notes, Series F, due
January 15, 2003, were issued. In April 1998, $15
million of 6.75% Medium-Term Notes, Series F, due March
15, 2028, were issued. In May 1998, $10 million of
6.36% Medium-Term Notes, Series F, due May 1, 2028, were
issued. In June 1998, the final issuance, $20 million
of 6.55% Medium-Term Notes, Series F, due June 30, 2028,
was made. The net proceeds from the sale of these new
debt securities were 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.
In March 1998, Indiana Gas redeemed $33 million of its
9.125% Series A Notes.
9.Common Stock.
On July 31, 1998, the board of directors of Indiana
Energy authorized a four-for-three stock split of the
issued and outstanding shares of its common stock to
shareholders of record on September 18, 1998. The
shares will be issued on October 2, 1998. No
adjustments have been made in this report, however, all
share and per share amounts will be restated in the
September 1998 Report on Form 10-K to reflect the stock
split upon consumation.
10. 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 and NIPSCO are currently negotiating with
PSI 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 believed that a
number of the Court's rulings were contrary to Indiana
law and appealed all adverse rulings to the United
States Court of Appeals for the Seventh Circuit. On
April 6, 1998, the appeals court issued a decision
dismissing the District Court action for lack of
diversity jurisdiction. The Seventh Circuit denied the
London market insurers' request to rehear and reconsider
the decision. The insurers are expected to appeal the
decision to the United States Supreme Court. Because
the adverse rulings have been vacated, Indiana Gas has
filed a complaint in Indiana state court to continue its
pursuit of insurance coverage. As of June 30, 1998,
Indiana Gas has obtained settlements from some insurance
carriers in an aggregate amount of approximately $14.7
million.
These environmental matters have had no material impact
on earnings since Indiana Gas has recorded all costs (in
aggregate approximately $15.0 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.
11. ProLiance Energy, LLC.
ProLiance Energy, LLC (ProLiance) is owned jointly and
equally by IGC Energy and Citizens By-Products Coal
Company, a wholly owned subsidiary of Citizens Gas and
Coke Utility (Citizens Gas). ProLiance is the supplier
of gas and related services to both Indiana Gas and
Citizens Gas, as well as a provider of similar services
to other utilities and customers in Indiana and
surrounding states. ProLiance added power marketing in
late fiscal 1997 to its services offered. Power
marketing involves buying electricity on the wholesale
market and then reselling it to other marketers,
utilities and other customers. IGC Energy's investment
in ProLiance is accounted for using the equity method.
Pretax earnings recognized from ProLiance totaled $1.3
million for the third quarter of fiscal 1998, compared
to $.5 million for the same period one year ago. Pretax
earnings recognized from ProLiance for the nine months
ended June 30, 1998, totaled $7.1 million compared to
$3.9 million for the same period last year. Pretax
earnings recognized from ProLiance for the twelve months
ended June 30, 1998, totaled $12.0 million compared to
$4.9 million for the same period last year. Earnings
recognized from ProLiance are included in Equity in
Earnings of Unconsolidated Affiliates on the
Consolidated Statements of Income.
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.
In the appeal of the IURC's September 12, 1997
decision, the Petitioners, the Indiana Office of
Utility Consumer Counselor and the Citizens Action
Coalition of Indiana, including the United Senior
Action, Inc., have filed with the Indiana Court of
Appeals (Court) their appellants' briefs. Their
arguments primarily relate to whether the
implementation of the ProLiance service
arrangements with Indiana Gas and Citizens Gas
required pre-approval under an Indiana law relating
to deregulation and incentive ratemaking. They
also make certain arguments with respect to whether
the IURC was required to pre-approve the
establishment of those service arrangements under
other provisions of Indiana law and whether Indiana
Gas' actions were consistent with agreements
previously approved by the IURC. Indiana Gas,
Citizens Gas and ProLiance have filed their
appellees' briefs in defense of the IURC's
decision.
As a result of the IURC's decision and
notwithstanding the initiation of the appeal,
during the fourth quarter of fiscal 1997, Indiana
Energy recognized approximately $4.8 million pretax
of its share of ProLiance's earnings which had
previously been reserved. Of that amount, $3.9
million related to the twelve months ended June 30,
1997. At June 30, 1998, $1.8 million continues to
be reserved pending the outcome of the consolidated
GCA proceeding involving Indiana Gas and Citizens
Gas.
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.
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 determine whether there
is, has been or may be a violation of Section 1 of the Sherman
Act. Indiana Gas intends to cooperate with the Department of
Justice in connection with the CID.
12. Affiliate Transactions.
ProLiance began providing natural gas supply and related
services to Indiana Gas effective April 1, 1996.
Indiana Gas' purchases from ProLiance for resale and for
injections into storage for the three-, nine- and twelve-
month periods ended June 30, 1998, totaled $41.5
million, $223.8 million and $275.7 million,
respectively. Indiana Gas' purchases from ProLiance for
the three-, nine- and twelve-month periods ended June
30, 1997, totaled $51.6 million, $252.6 million and
$309.7 million, respectively.
ProLiance has a standby letter of credit facility with a
bank for letters up to $30 million. This facility is
secured in part by a support agreement from Indiana
Energy. Letters of credit outstanding at June 30, 1998,
totaled $1.6 million.
CIGMA, LLC, owned jointly and equally by IGC Energy and
Citizens By-Products Coal Company, provides materials
acquisition and related services that are used by the
company and Citizens Gas, as well as similar services
for third parties. The company's purchases of these
services during the three-, nine- and twelve-month
periods ended June 30, 1998, totaled $4.2 million, $17.3
million and $22.3 million, respectively. The company's
purchases of these services during all periods reported
ending June 30, 1997, totaled $4.6 million.
Indiana Energy is a one-third guarantor of certain
surety bond obligations of Energy Systems Group, LLC.
Indiana Energy's share totaled $7.2 million at June 30,
1998.
Amounts owed to affiliates totaled $16.4 million and
$18.0 million at June 30, 1998 and 1997, respectively,
and are included in Accounts Payable on the Consolidated
Balance Sheets.
13. Earnings Per Share.
For fiscal 1998, the company adopted Statement of
Financial Accounting Standards No. 128, Earnings Per
Share, which requires the computation of basic and
diluted earnings per share. Since the company has a
simple capital structure with no outstanding dilutive
securities, the computation is the same for both
earnings per share amounts.
14. Pace Carbon Synfuels Investors, L.P.
On February 5, 1998, IEI Synfuels, Inc. (IEI
Synfuels), a wholly-owned, indirect subsidiary of
IEI Investments, purchased one limited partnership
unit in Pace Carbon Synfuels Investors, L.P. (Pace
Carbon), a Delaware limited partnership formed to
develop, own and operate four projects to produce
and sell coal-based synthetic fuel. Pace Carbon
will convert coal fines (small coal particles) into
coal pellets that can be sold to major coal users
such as utilities and steel companies. This
process is eligible for federal tax credits under
Section 29 of the Internal Revenue Code (Code) and
the Internal Revenue Service has issued a private
letter ruling with respect to the four projects.
IEI Synfuels has committed an initial investment of
$7.5 million in Pace Carbon (of which $4.8 million
was paid through June 30, 1998) for an 8.3 percent
ownership interest in the partnership. The balance
of the initial investment will be paid in
installments during 1998 following the satisfaction
by Pace Carbon of certain project milestones regarding
the construction and operation of the coal pellet
production plants and related coal fines feedstock
plants. In addition to its initial investment, IEI
Synfuels has a continuing obligation to invest in
Pace Carbon up to approximately $43 million, with
any such additional investments to be funded solely
from federal tax credits that are realized from the
production and sale of coal pellets by the
projects.
The realization of the tax credits from this
investment is dependent upon a number of factors
including among others (1) the production
facilities must be in operation by June 30, 1998,
(2) adequate coal fines must be available to
produce the coal pellets, and (3) the coal pellets
must be produced and sold. All four of Pace
Carbon's coal-based synthetic fuel production
facilities were placed into service by June 30,
1998. Management believes that significant project
benefits, primarily in the form of tax savings and
tax credits realized, will be achieved but cannot
be assured.
15. IEI Financial Services, LLC
On April 1, 1998, IEI Financial Services, LLC (IEI
Financial Services), a wholly-owned, indirect subsidiary
of IEI Investments, began its operations. IEI Financial
Services will perform third-party collections, energy-
related equipment leasing and related services. IEI
Financial Services will provide these services to
Indiana Gas and to other third-parties.
Indiana Energy, Inc. and Subsidiary Companies
Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
Indiana Energy, Inc.'s (Indiana Energy or the company)
consolidated earnings are from the operations of its gas
distribution subsidiary, Indiana Gas Company, Inc.
(Indiana Gas), its nonregulated administrative services
provider, IEI Services, LLC (IEI Services), and its
nonutility subsidiaries and investments grouped under its
nonregulated subsidiary, IEI Investments, Inc. (IEI
Investments). The nonutility operations include IGC
Energy, Inc. (IGC Energy), Energy Realty, Inc. (Energy
Realty) and Indiana Energy Services, Inc. (IES), all
indirect wholly owned subsidiaries of Indiana Energy, and
interests in ProLiance Energy, LLC, CIGMA, LLC and Energy
Systems Group, LLC. The company is currently implementing
a new growth strategy and restructuring plan which
provides for, among other things, growing the earnings
contribution from nonutility operations to over 20 percent
of its total annual earnings within the next five years,
and aggressively managing costs within its utility
operations.
On July 31, 1998, the board of directors of Indiana
Energy authorized a four-for-three stock split of the
issued and outstanding shares of its common stock to
shareholders of record on September 18, 1998. The shares
will be issued on October 2, 1998. No adjustments have
been made in this report, however, all share and per share
amounts will be restated in the September 1998 Report on
Form 10-K to reflect the stock split upon consumation.
Earnings
Before restructuring costs, which were recorded in the
fourth quarter of fiscal 1997, income and earnings per
average share of common stock for the three-, nine- and
twelve-month periods ended June 30, 1998, when compared to
the same periods one year ago, were as follows:
<TABLE>
(Millions except Three Months Ended Nine Months Ended Twelve Months Ended
per share amounts) June 30 June 30 June 30
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Indiana Gas & IEI Services (1) $1.4 $4.3 $38.3 $43.6 $32.3 $37.1
IEI Investments 1.3 2.2 5.9 4.5 8.8 5.1
Net Income $2.7 $6.5 $44.2 $48.1 $41.1 $42.2
Earnings per share:
Indiana Gas & IEI Services (1) $.06 $.19 $1.70 $1.93 $1.43 $1.64
IEI Investments .06 .10 .26 .20 .39 .23
Total $.12 $.29 $1.96 $2.13 $1.82 $1.87
(1) Income and earnings per share from Indiana Gas and IEI Services for the twelve-months ended
June 30, 1998, after restructuring costs were $7.8 million and 35 cents, respectively.
</TABLE>
The decrease in net income and earnings per share for
the three-month period is primarily attributable to
weather 44 percent warmer than the same period last year
and 20 percent warmer than normal. The effects of the
warmer weather were offset somewhat by lower operation and
maintenance expenses and the addition of new residential
and commercial customers.
The decrease in net income and earnings per share for
the nine-month period is due primarily to weather 14
percent warmer than the same period last year and 13
percent warmer than normal. The effects of the warmer
weather were offset somewhat by lower operation and
maintenance expenses, higher earnings recognized from
Indiana Energy's nonutility operations and the addition of
new residential and commercial customers.
The decrease in net income and earnings per share
before restructuring costs for the twelve-month period is
due primarily to weather 14 percent warmer than the same
period last year and 13 percent warmer than normal. The
effects of the warmer weather were offset significantly by
higher earnings recognized from Indiana Energy's
nonutility operations, lower operation and maintenance
expenses and the addition of new residential and
commercial customers.
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 in the fourth quarter of fiscal 1997. These
actions by Indiana Gas were consistent with the company's
growth strategy that was approved by its board of
directors during fiscal 1997. The effect on the company's
earnings for the twelve months ended June 30, 1998, is a
reduction in earnings of $1.08 per common share (see New
Growth Strategy and Corporate Restructuring).
Utility Margin (Utility Operating Revenues Less Utility Cost of Gas)
Utility margin for the quarter ended June 30, 1998,
was $35.5 million compared to $43.6 million for the same
period last year. The decrease reflects weather 44
percent warmer than the same period last year and 20
percent warmer than normal, offset somewhat by the
addition of new residential and commercial customers.
Utility margin for the nine months ended June 30,
1998, was $167.5 million compared to $181.6 million for
the same period last year. The decrease reflects weather
14 percent warmer than the same period last year and 13
percent warmer than normal, offset somewhat by the
addition of new residential and commercial customers.
Utility margin for the twelve-month period ended June
30, 1998, was $193.7 million compared to $209.7 million
for the same period last year. The decrease is primarily
attributable to weather 14 percent warmer than the same
period last year and 13 percent warmer than normal, offset
somewhat by the addition of new residential and commercial
customers.
Total system throughput (combined sales and
transportation) decreased 15 percent (3.4 MMDth) for the
third quarter of fiscal 1998, 8 percent (8.3 MMDth) for
the nine-month period and 6 percent (7.9 MMDth) for the
twelve-month period ended June 30, 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 $2.54 for the three-month period ended June 30, 1998,
compared to $2.88 for the same period one year ago. For
the nine-month period, cost of gas per unit decreased to
$3.60 in the current period compared to $3.71 for the same
period last year. For the twelve-month period, cost of
gas per unit decreased to $3.55 in the current period
compared to $3.57 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 (excluding Cost of Gas)
Other operating expenses decreased $2.9 million and
$5.2 million for the three-and nine-month periods ended
June 30, 1998, respectively, when compared to the same
periods one year ago due in part to lower labor costs and
related benefits resulting from work force reductions.
Other operating expenses decreased $8.3 million for
the twelve-month period when compared to the same period
last year due in part to lower labor costs and related
benefits resulting from work force reductions and lower
costs for uncollectible accounts. Lower distribution
system costs also contributed to the decrease as the prior
period includes the impact of the acceleration of projects
into the last portion of fiscal 1996 allowed by the
increased margin resulting from very cold weather that
year.
Restructuring costs of $39.5 million were recorded in
the fourth quarter of fiscal 1997 related to the
implementation of the company's new growth strategy (see
New Growth Strategy and Corporate Restructuring).
Depreciation and amortization expense increased for
the three-, nine- and twelve-month periods ended June 30,
1998, when compared to the same periods one year ago as
the result of additions to plant to serve new customers
and to maintain dependable service to existing customers.
Taxes other than income taxes decreased for the three-
, nine- and twelve-month periods ended June 30, 1998, when
compared to the same periods one year ago due to lower
gross receipts tax expense and lower property tax expense.
Other Income
Equity in earnings of unconsolidated affiliates
increased for the three-, nine- and twelve-month periods
ended June 30, 1998, when compared to the same periods one
year ago due primarily to higher earnings recognized from
the company's energy marketing affiliate, ProLiance
Energy, LLC (ProLiance). Pretax earnings recognized from
ProLiance totaled $1.3 million for the third quarter of
fiscal 1998, compared to $.5 million for the same period
one year ago. Pretax earnings recognized from ProLiance
for the nine months ended June 30, 1998, totaled $7.1
million compared to $3.9 million for the same period last
year. Pretax earnings recognized from ProLiance for the
twelve months ended June 30, 1998, totaled $12.0 million
compared to $4.9 million for the same period last year
(see ProLiance Energy, LLC).
Other-net decreased for the three-, nine- and twelve-
month periods ended June 30, 1998, when compared to the
same periods one year ago. The prior periods reflect the
gain on the sale of certain nonutility assets by IGC
Energy.
Interest Expense
Interest expense decreased for the three-month period
ended June 30, 1998, when compared to the same period one
year ago due to a decrease in interest rates, offset
slightly by an increase in average debt outstanding.
Interest expense remained approximately the same for the
nine- and twelve-month periods when compared to the same
periods last year.
Income Taxes
Federal and state income taxes decreased for the three-
and nine-month periods ended June 30, 1998, when compared
to the same periods one year ago due to decreases in
taxable income. 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.
Other Operating Matters
New Growth Strategy and Corporate Restructuring
In April 1997, the Board of Directors of Indiana
Energy 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.
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. These actions by Indiana
Gas were consistent with the company's new growth
strategy. The effect on the company's earnings for the
twelve months ended June 30, 1998, is a reduction in
earnings of $1.08 per common share.
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. 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, employees totaled approximately 895 as of
June 30, 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 September 30, 1997, and
were disposed of during the quarter ended June 30, 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, as well
as to third-parties in the future. The formation of IEI
Services was established by a contribution of $32.2
million of fixed assets at net book value from Indiana
Gas, which subsequently dividended its membership interest
to Indiana Energy. These assets, which relate to the
provision of administrative services, are classified in
Nonutility Plant on the Consolidated Balance Sheet at June
30, 1998. 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 the company in meeting its
earnings growth targets.
As a result of the restructuring, the company expects
reductions in future operating expenses, which should help
the company to be more successful in an increasingly
competitive energy marketplace.
ProLiance Energy, LLC
ProLiance Energy, LLC (ProLiance) is owned jointly and
equally by IGC Energy and Citizens By-Products Coal
Company, a wholly owned subsidiary of Citizens Gas.
ProLiance is the supplier of gas and related services to
both Indiana Gas and Citizens Gas, as well as a provider
of similar services to other utilities and customers in
Indiana and surrounding states. ProLiance added power
marketing in late fiscal 1997 to its services offered.
Power marketing involves buying electricity on the
wholesale market and then reselling it to other marketers,
utilities and other customers.
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, substantial gas
costs savings has been realized and will continue to be
realized for the customers of those utilities over the
initial 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.
In the appeal of the IURC's September 12, 1997
decision, the Petitioners, the Indiana Office of Utility
Consumer Counselor and the Citizens Action Coalition of
Indiana, including the United Senior Action, Inc., have
filed with the Indiana Court of Appeals (Court) their
appellants' briefs. Their arguments primarily relate to
whether the implementation of the ProLiance service
arrangements with Indiana Gas and Citizens Gas required
pre-approval under an Indiana law relating to deregulation
and incentive ratemaking. They also make certain
arguments with respect to whether the IURC was required to
pre-approve the establishment of those service
arrangements under other provisions of Indiana law and
whether Indiana Gas' actions were consistent with
agreements previously approved by the IURC. Indiana Gas,
Citizens Gas and ProLiance have filed their appellees'
briefs in defense of the IURC's decision.
As a result of the IURC's decision and notwithstanding
the initiation of the appeal, during the fourth quarter of
fiscal 1997, Indiana Energy recognized approximately $4.8
million pretax of its share of ProLiance's earnings which
had previously been reserved. Of that amount, $3.9 million
related to the twelve months ended June 30, 1997. At June
30, 1998, $1.8 million continues to be reserved pending
the outcome of the consolidated GCA proceeding involving
Indiana Gas and Citizens Gas.
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.
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 determine whether there
is, has been or may be a violation of Section 1 of the Sherman
Act. Indiana Gas intends to cooperate with the Department of
Justice in connection with the CID.
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 and
NIPSCO are currently negotiating with PSI 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
believed that a number of the Court's rulings were
contrary to Indiana law and appealed all adverse rulings
to the United States Court of Appeals for the Seventh
Circuit. On April 6, 1998, the appeals court issued a
decision dismissing the District Court action for lack of
diversity jurisdiction. The Seventh Circuit denied the
London market insurers' request to rehear and reconsider
the decision. The insurers are expected to appeal the
decision to the United States Supreme Court. Because the
adverse rulings have been vacated, Indiana Gas has filed a
complaint in Indiana state court to continue its pursuit
of insurance coverage. As of June 30, 1998, Indiana Gas
has obtained settlements from some insurance carriers in
an aggregate amount of approximately $14.7 million.
These environmental matters have had no material
impact on earnings since Indiana Gas has recorded all
costs (in aggregate approximately $15.0 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.
Pace Carbon Synfuels Investors, L.P.
On February 5, 1998, IEI Synfuels, Inc. (IEI
Synfuels), a wholly-owned, indirect subsidiary of IEI
Investments, purchased one limited partnership unit in
Pace Carbon Synfuels Investors, L.P. (Pace Carbon), a
Delaware limited partnership formed to develop, own and
operate four projects to produce and sell coal-based
synthetic fuel. Pace Carbon will convert coal fines
(small coal particles) into coal pellets that can be
sold to major coal users such as utilities and steel
companies. This process is eligible for federal tax
credits under Section 29 of the Internal Revenue Code
(Code) and the Internal Revenue Service has issued a
private letter ruling with respect to the four
projects.
IEI Synfuels has committed an initial investment
of $7.5 million in Pace Carbon (of which $4.8 million
was paid through June 30, 1998) for an 8.3 percent
ownership interest in the partnership. The balance of
the initial investment will be paid in installments
during 1998 following the satisfaction by Pace Carbon
of certain project milestones regarding the
construction and operation of the coal pellet
production plants and related coal fines feedstock
plants. In addition to its initial investment, IEI
Synfuels has a continuing obligation to invest in Pace
Carbon up to approximately $43 million, with any such
additional investments to be funded solely from federal
tax credits that are realized from the production and
sale of coal pellets by the projects.
The realization of the tax credits from this
investment is dependent upon a number of factors
including among others (1) the production facilities
must be in operation by June 30, 1998, (2) adequate
coal fines must be available to produce the coal
pellets, and (3) the coal pellets must be produced and
sold. All four of Pace Carbon's coal-based synthetic
fuel production facilities were placed into service by
June 30, 1998. Management believes that significant
project benefits, primarily in the form of tax savings
and tax credits realized, will be achieved but cannot
be assured.
IEI Financial Services, LLC
On April 1, 1998, IEI Financial Services, LLC (IEI
Financial Services), a wholly-owned, indirect
subsidiary of IEI Investments, began its operations.
IEI Financial Services will perform third-party
collections, energy-related equipment leasing and
related services. IEI Financial Services will provide
these services to Indiana Gas and to other third-
parties.
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 and is making
appropriate progress to address the exposures related
to the impact on its computer systems of the year 2000,
including 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
Consolidated capitalization objectives for Indiana
Energy are 55-65 percent common equity and preferred stock
and 35-45 percent long-term debt, but may vary from time
to time, depending on particular business opportunities.
Indiana Energy's common equity component was 62 percent of
total capitalization at June 30, 1998. The long-term debt
of Indiana Energy is currently rated Aa3 by Moody's
Investors Service and A+ by Standard & Poor's Corporation.
Because of its current capital structure, the company
has the ability to issue additional long-term debt, if
necessary, to fund nonutility investments or for other
corporate purposes and still meet its capitalization
objectives. This is particularly important as it relates
to the company's new growth strategy which provides for,
among other things, expansion of its nonutility
operations.
In October 1997, Indiana Energy formed a new
subsidiary, IEI Capital Corp., to conduct the financing
for Indiana Energy and its subsidiaries other than Indiana
Gas. IEI Capital Corp. will provide the non-regulated
businesses with short-term financing for working capital
requirements, as well as secure permanent financing for
those entities.
On January 28, 1998, the shareholders of Indiana
Energy approved an amendment to the company's Articles of
Incorporation to increase the authorized shares of common
stock from 64,000,000 shares to 200,000,000 shares.
On July 31, 1998, the board of directors of Indiana
Energy authorized a four-for-three stock split of the
issued and outstanding shares of its common stock to
shareholders of record on September 18, 1998. The shares
will be issued on October 2, 1998.
Indiana Gas' capitalization objectives, which are 55-
65 percent common equity and preferred stock and 35-45
percent long-term debt, remain unchanged from prior years.
Indiana Gas' common equity component was 57 percent of its
total capitalization at June 30, 1998.
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 $67.0
million of which $46.5 million have been expended during
the nine-month period ended June 30, 1998. For the twelve
months ended June 30, 1998, capital expenditures totaled
$66.0 million.
Nonutility investments and commitments, excluding the
continuing obligation to invest in Pace Carbon as
previously discussed, totaled approximately $8.5 million
for the nine- and twelve-month periods ended June 30,
1998.
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 June 30, 1998, 53 percent of Indiana Gas' capital
expenditures was funded internally (i.e. from utility
income less dividends plus charges to utility income not
requiring funds).
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. Issues under this registration statement
follow. In December 1997, Indiana Gas issued $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, Indiana Gas issued $15
million of 5.75% Medium-Term Notes, Series F, due January
15, 2003. In April 1998, $15 million of 6.75% Medium-Term
Notes, Series F, due March 15, 2028, were issued. In May
1998, $10 million of 6.36% Medium-Term Notes, Series F,
due May 1, 2028, were issued. In June 1998, the final
issuance, $20 million of 6.55% Medium-Term Notes, Series
F, due June 30, 2028, was made. The net proceeds from the
sale of these new debt securities were 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.
In March 1998, Indiana Gas redeemed $33 million of its
9.125% Series A Notes.
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 Energy, Inc. and Subsidiary Companies
Part II - Other Information
Item 1. Legal Proceedings
See Note 10 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 11 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
27 Financial Data Schedule, filed herewith.
(b) Indiana Energy and Indiana Gas filed Current
Reports on Form 8-K on April 29, 1998, and
May 1, 1998, respectively with respect to
the release of unaudited summary financial
information to the investment community
regarding Indiana Energy's consolidated
results of operations, financial position
and cash flows for the three-, six- and
twelve-month periods ended March 31, 1998.
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Second
Quarter 1998
On July 31, 1998, Indiana Energy filed a
Current Report on Form 8-K with respect to
board of director authorization for a four-
for-three stock split of the issued and
outstanding shares of its common stock, and
with respect to the release of unaudited
summary financial information to the
investment community regarding Indiana
Energy's consolidated results of operations,
financial position and cash flows for the
three-, nine- and twelve-month periods ended
June 30, 1998.
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Third
Quarter 1998
On July 31, 1998, Indiana Gas filed a
Current Report on Form 8-K with respect to
the release of unaudited summary financial
information to the investment community
regarding Indiana Energy's consolidated
results of operations, financial position
and cash flows for the three-, nine- and
twelve-month periods ended June 30, 1998.
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Third
Quarter 1998
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 ENERGY, INC.
Registrant
Dated August 13, 1998 /s/Niel C. Ellerbrook
Niel C. Ellerbrook
President and Chief Operating Officer
Dated August 13, 1998 /s/Jerome A. Benkert
Jerome A. Benkert
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Indiana
Energy, Inc.'s consolidated financial statements as of June 30, 1998, and
for the nine months then ended and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 560,854
<OTHER-PROPERTY-AND-INVEST> 68,243
<TOTAL-CURRENT-ASSETS> 56,135
<TOTAL-DEFERRED-CHARGES> 17,689
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 702,921
<COMMON> 145,398
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 172,020
<TOTAL-COMMON-STOCKHOLDERS-EQ> 317,418
0
0
<LONG-TERM-DEBT-NET> 194,889
<SHORT-TERM-NOTES> 1,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 272
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 189,342
<TOT-CAPITALIZATION-AND-LIAB> 702,921
<GROSS-OPERATING-REVENUE> 404,391
<INCOME-TAX-EXPENSE> 22,067
<OTHER-OPERATING-EXPENSES> 330,881
<TOTAL-OPERATING-EXPENSES> 352,948
<OPERATING-INCOME-LOSS> 51,443
<OTHER-INCOME-NET> 5,546
<INCOME-BEFORE-INTEREST-EXPEN> 56,989
<TOTAL-INTEREST-EXPENSE> 12,780
<NET-INCOME> 44,209
0
<EARNINGS-AVAILABLE-FOR-COMM> 44,209
<COMMON-STOCK-DIVIDENDS> 19,877
<TOTAL-INTEREST-ON-BONDS> 9,945
<CASH-FLOW-OPERATIONS> 86,245
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
</TABLE>
