May 13, 1999
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
March 31, 1999, 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 March 31, 1999
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 29,786,555 April 30, 1999
Class Number of shares Date
TABLE OF CONTENTS
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
at March 31, 1999, and 1998
and September 30, 1998
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998,
Six Months Ended March 31, 1999 and 1998,
and Twelve Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998,
and Twelve Months Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk
Part II - Other Information
Item 1 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security
Holders
Item 6 - Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands - Unaudited)
March 31 September 30
1999 1998 1998
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,164 $ 24,147 $ 9,325
Accounts receivable, less reserves of $2,660,
$2,565 and $900 respectively 42,454 43,451 10,939
Accrued unbilled revenues 23,603 23,275 6,453
Liquefied petroleum gas - at average cost 808 868 883
Gas in underground storage - at last-in,
first-out cost 6,106 904 19,373
Prepayments and other 6,351 5,201 5,483
81,486 97,846 52,456
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 39,022 30,396 32,186
UTILITY PLANT:
Original cost 958,685 935,390 937,977
Less - accumulated depreciation and
amortization 384,207 366,936 370,872
574,478 568,454 567,105
NONUTILITY PLANT:
Original cost 61,412 48,264 55,225
Less - accumulated depreciation and
amortization 15,616 10,128 12,613
45,796 38,136 42,612
DEFERRED CHARGES AND OTHER ASSETS:
Unamortized debt discount and expense 12,419 12,649 12,954
Regulatory income tax asset 1,778 - 1,778
Other 6,388 5,813 4,466
20,585 18,462 19,198
$ 761,367 $ 753,294 $ 713,557
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Thousands except shares - Unaudited)
March 31 September 30
1999 1998 1998
<S> <C> <C> <C>
CURRENT LIABILITIES:
Maturities and sinking fund requirements of
long-term debt $ 10,174 $ 272 $ 10,119
Notes payable 31,579 80,100 33,705
Accounts payable (See Note 12) 28,621 26,957 19,416
Refundable gas costs 28,013 19,282 10,730
Customer deposits and advance payments 8,758 9,118 19,229
Accrued taxes 18,044 22,104 4,728
Accrued interest 1,425 1,687 1,974
Other current liabilities 22,909 26,769 26,319
149,523 186,289 126,220
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 60,712 56,266 60,448
Accrued postretirement benefits other than pensions 26,914 24,450 25,388
Unamortized investment tax credit 8,849 9,779 9,313
Regulatory income tax liability - 1,874 -
Other 5,556 5,258 4,994
102,031 97,627 100,143
COMMITMENTS AND CONTINGENCIES (See Notes 7 & 11) - - -
CAPITALIZATION:
Long-term debt 183,375 149,873 183,489
Common stock (no par value) - authorized 200,000,000
shares - issued and outstanding 29,792,755,
30,126,017 and 30,063,667 shares, respectively (1) 136,866 143,595 142,653
Retained earnings 189,572 175,910 161,052
Total common shareholders' equity 326,438 319,505 303,705
509,813 469,378 487,194
$ 761,367 $ 753,294 $ 713,557
(1) Adjusted to reflect the four-for-three stock split October 2, 1998.
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share data)
(Unaudited)
Three Months Six Months
Ended March 31 Ended March 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Utility $ 161,484 $ 163,131 $ 286,431 $ 333,263
Other 355 155 649 358
161,839 163,286 287,080 333,621
OPERATING EXPENSES:
Cost of gas (See Note 12) 83,993 92,724 151,930 199,776
Other operating 19,061 19,580 38,387 37,600
Depreciation and amortization 9,839 9,396 19,754 18,302
Taxes other than income taxes 4,839 4,743 9,090 9,656
117,732 126,443 219,161 265,334
OPERATING INCOME 44,107 36,843 67,919 68,287
OTHER INCOME:
Equity in earnings of unconsolidated
affiliates (See Note 7) 4,294 3,822 5,719 5,785
Other - net 381 476 757 881
4,675 4,298 6,476 6,666
INCOME BEFORE INTEREST AND
INCOME TAXES 48,782 41,141 74,395 74,953
INTEREST EXPENSE 4,297 4,538 8,528 9,199
INCOME BEFORE INCOME TAXES 44,485 36,603 65,867 65,754
INCOME TAXES 16,382 13,461 23,488 24,256
NET INCOME $ 28,103 $ 23,142 $ 42,379 $ 41,498
AVERAGE COMMON SHARES OUTSTANDING (1) 29,808 30,125 29,908 30,123
BASIC AND DILUTED EARNINGS PER AVERAGE
SHARE OF COMMON STOCK (1) $ 0.94 $ 0.77 $ 1.42 $ 1.38
(1) Adjusted to reflect the four-for-three stock split October 2, 1998. See Note 10.
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands except per share data)
(Unaudited)
Twelve Months
Ended March 31
1999 1998
<S> <C> <C>
OPERATING REVENUES:
Utility $ 418,812 $ 475,494
Other 1,076 511
419,888 476,005
OPERATING EXPENSES:
Cost of gas (See Note 12) 221,641 272,117
Other operating 76,370 77,780
Restructuring costs (See Note 2) - 39,531
Depreciation and amortization 39,107 35,999
Taxes other than income taxes 14,169 16,886
351,287 442,313
OPERATING INCOME 68,601 33,692
OTHER INCOME:
Equity in earnings of unconsolidated
affiliates (See Note 7) 7,160 11,195
Other - net 2,379 3,536
9,539 14,731
INCOME BEFORE INTEREST AND
INCOME TAXES 78,140 48,423
INTEREST EXPENSE 15,974 17,420
INCOME BEFORE INCOME TAXES 62,166 31,003
INCOME TAXES 21,081 10,636
NET INCOME $ 41,085 $ 20,367
AVERAGE COMMON SHARES OUTSTANDING (1) 30,008 30,116
BASIC AND DILUTED EARNINGS PER AVERAGE
SHARE OF COMMON STOCK (1) $ 1.37 $ 0.68
(1) Adjusted to reflect the four-for-three stock split October 2, 1998. See Note 10.
</TABLE>
<TABLE>
INDIANA ENERGY, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands - Unaudited)
Six Months Twelve Months
Ended March 31 Ended March 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
CASH FLOWS FROM (REQUIRED FOR)
OPERATING ACTIVITIES:
Net income $ 42,379 $ 41,498 $ 41,085 $ 20,367
Adjustments to reconcile net income to cash
provided from operating activities -
Noncash restructuring costs - - - 32,838
Depreciation and amortization 19,815 18,302 39,261 35,999
Deferred income taxes 264 1,061 794 (12,672)
Investment tax credit (465) (465) (930) (930)
Gain on sale of assets - - (2,102) (2,923)
Undistributed earnings of unconsolidated
affiliates (5,719) (5,785) (7,160) (11,195)
13,895 13,113 29,863 41,117
Changes in assets and liabilities -
Receivables - net (48,665) (35,444) 669 4,219
Inventories 13,299 18,181 (5,154) 3,153
Accounts payable, customer deposits, advance
payments and other current liabilities (4,676) (14,901) (2,556) 447
Accrued taxes and interest 12,767 12,503 (4,322) 1,266
Recoverable/refundable gas costs 17,283 25,125 8,731 34,379
Prepayments (825) (1,276) (1,138) (4,190)
Accrued postretirement benefits other than
pensions 1,526 1,412 2,464 7,699
Other - net 583 (4,897) 1,612 (3,034)
Total adjustments 5,187 13,816 30,169 85,056
Net cash flows from (required for)
operations 47,566 55,314 71,254 105,423
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Repurchase of common stock (5,857) - (7,046) -
Sale of long-term debt - 50,028 45,052 65,060
Reduction in long-term debt (59) (92,946) (1,648) (93,069)
Net change in short-term borrowings (2,126) 56,300 (48,521) 37,800
Dividends on common stock (13,829) (13,251) (27,419) (26,258)
Net cash flows from (required for)
financing activities (21,871) 131 (39,582) (16,467)
CASH FLOWS REQUIRED FOR INVESTING ACTIVITIES:
Capital expenditures (32,132) (32,873) (65,289) (68,104)
Nonutility investments in unconsolidated
affiliates - net (2,131) (3,211) (5,382) (4,461)
Cash distributions from unconsolidated affiliates 1,407 4,738 3,699 4,738
Proceeds from sale of assets - - 13,317 3,000
Net cash flows required for investing
activities (32,856) (31,346) (53,655) (64,827)
NET INCREASE (DECREASE) IN CASH (7,161) 24,099 (21,983) 24,129
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 9,325 48 24,147 18
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,164 $ 24,147 $ 2,164 $ 24,147
</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, its financing subsidiary, IEI Capital
Corp. (Capital Corp.) and its nonutility subsidiaries
and investments grouped under its nonregulated
subsidiary, IEI Investments, Inc (IEI Investments).
The nonutility operations of IEI Investments include IGC
Energy, Inc. (IGC Energy), Energy Realty, Inc. (Energy
Realty), Energy Financial Group, Inc. and IEI Financial
Services, LLC, all indirect wholly owned subsidiaries of
Indiana Energy, and interests in ProLiance Energy, LLC,
CIGMA, LLC, Energy Systems Group, LLC, Pace Carbon
Synfuels Investors, L.P., Reliant Services, LLC and
Haddington Energy Partners, L.P.
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.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates. For example, during the second quarter of
1999, the company implemented a new customer information
system. In connection with the conversion process, at
March 31, 1999, certain estimates were made in the
recording of revenues which are believed to be
reasonable.
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. 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.
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, the company 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
involuntary terminations planned under the company's
specific near-term employee reduction plan, which was
scheduled for completion by the end of fiscal 1999.
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 of initial work force
reductions during September 1997 and primarily attrition
thereafter, employees totaled 866 as of March 31, 1999.
This reduced employee count achieved most of the
reductions contemplated during the 2 year period for
which the restructuring accrual had been established.
During the second quarter of fiscal 1999, the company
reviewed its remaining accruals for costs associated
with the work force reductions. Taking into
consideration an unexpectedly high level of voluntary
terminations and the staffing implications related to
significant process change associated with the company's
recently implemented new customer information system,
the company determined that no additional significant
work force reductions were likely to occur during the
remainder of fiscal 1999, and accordingly, that an
adjustment to reverse the remaining severance accrual
was necessary. As a result, the severance accrual and
other operating expenses were reduced by $1.3 million
during the second quarter of fiscal 1999.
Indiana Gas' management also 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 March 31, 1998, 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 $32.2 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 Non-utility
Plant on the Consolidated Balance Sheets. 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 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>
Six Months Ended Twelve Months Ended
March 31 March 31
Thousands 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest (net of
amount capitalized) $ 7,704 $ 9,072 $14,230 $16,405
Income taxes $12,076 $11,070 $25,736 $20,906
</TABLE>
4. 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.
5. Gas in Underground Storage.
Based on the average cost of purchased gas during March
1999, the cost of replacing the current portion of gas
in underground storage exceeded last-in, first-out cost
at March 31, 1999, by approximately $2,778,000.
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. 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 the services it offers. Power
marketing involves buying electricity on the wholesale
market and then reselling it to marketers, utilities and
other customers. To effectively manage the risks
associated with power marketing, ProLiance utilizes a
disciplined approach to credit analysis, obtains letters
of credit or corporate guarantees when appropriate, and
does not "sleeve" or assume the credit risk between the
buyer and seller. IGC Energy's investment in ProLiance
is accounted for using the equity method.
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 review 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, the Citizens Action Coalition of Indiana and
a small group of large-volume customers. 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 was that because
the gas supply agreements provide for index based
pricing of gas commodity sold by ProLiance to the
utilities, the gas supply agreements should have been
the subject of an application for approval of an
alternative regulatory plan under Indiana statutory law.
Management believes the Court of Appeals incorrectly
applied the alternative regulation statute. On April 22,
1999, the Indiana Supreme Court granted management's
petition for transfer of the case and will now consider
the appeal of the IURC's decision and issue its own
decision on the merits of the appeal at a later date.
By granting transfer, the Supreme Court has vacated the
Court of Appeals' decision.
If the Supreme Court reverses the IURC's decision , the
case will be remanded to the IURC for further
proceedings regarding the public interest in the gas
supply agreements. If the Supreme Court affirms the
IURC's decision, the reasonableness of certain of the
gas costs incurred by Indiana Gas under the gas supply
agreements will be further reviewed by the IURC in the
consolidated GCA proceeding. The existence of
significant benefits to the utilities and their
customers resulting from ProLiance's services has not
been challenged on appeal. 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.
Indiana Gas continues to record gas costs in accordance
with the terms of the ProLiance contract and Indiana
Energy continues to record its proportional share of
ProLiance's earnings. Pretax earnings recognized from
ProLiance totaled $5.0 million and $3.9 million for the
three-month periods ended March 31, 1999 and 1998,
respectively. Pretax earnings recognized from ProLiance
totaled $6.4 million and $5.7 million for the six-month
periods ended March 31, 1999 and 1998, respectively.
Pretax earnings recognized from ProLiance totaled $8.1
million and $11.2 million for the twelve-month periods
ended March 31, 1999 and 1998, respectively. Earnings
recognized from ProLiance are included in Equity in
Earnings of Unconsolidated Affiliates on the
Consolidated Statements of Income. Earnings recognized
for the twelve months ended March 31, 1998, include $4.2
million of ProLiance's earnings from prior periods which
had previously been reserved.
At March 31, 1999, Indiana Energy has reserved
approximately $1.6 million of ProLiance earnings after
tax. Total after-tax ProLiance earnings recognized to
date approximate $14.1 million. This amount includes
earnings from all of ProLiance's business activities,
and therefore is believed to be a conservative estimate
of the upper risk limit. Resolution of the above
proceedings may also impact future operations and
earnings contributions from ProLiance. Based on the
IURC's findings described above, management believes the
ProLiance issues may be resolved near the levels that
are already being reserved, and therefore, while these
proceedings are pending, does not anticipate changing
the level at which it reserves ProLiance earnings.
However, no assurance of this outcome can be provided.
8. 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 converts coal fines (small coal
particles) into coal pellets that are 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 $5.9 million was paid
through March 31, 1999) for an 8.3 percent ownership
interest in the partnership. The balance of the initial
investment will be paid following the satisfaction by
Pace Carbon of certain project milestones regarding the
operation of the coal pellet production plants and long-
term feedstock acquisition. 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 expected 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 have been 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, and are
currently producing and selling pellets in an extended
ramp up mode. Further enhancements to the production
process are expected to continue through the remainder
of fiscal 1999.
Generally all pellets produced through March 31, 1999,
have been sold. However, due to a deterioration in the
United States coal export market, domestic companies'
coal supplies and capacities are up, which in turn has
reduced the demand and created some price pressure for
Pace Carbon's coal-based synthetic product. Management
does not believe that the extended time required to make
necessary production process enhancements nor the
current coal market conditions will significantly affect
the long-term success of the projects. Accordingly,
management continues to believe that significant project
benefits, primarily in the form of tax savings and tax
credits realized, will be achieved in the future,
however, no assurance can be given.
9. Haddington Energy Partners, L.P.
On October 9, 1998, IEI Investments committed to invest
$10 million in Haddington Energy Partners, L.P.
(Haddington). Haddington, a Delaware limited
partnership, plans to raise up to $100 million to invest
in six to eight projects that represent a portfolio of
development opportunities, including natural gas
gathering and storage and electric power generation.
Haddington's investment opportunities will focus on
acquiring and building on projects in progress rather
than start-up ventures. Haddington's first investment
is a high-deliverability gas storage project which is
under development. Through March 31, 1999, Haddington
has achieved $77 million in commitments. Through March
31, 1999, IEI Investments had paid approximately
$1,000,000 of its commitment in Haddington, with
additional amounts to be paid as Haddington's portfolio
grows.
10. 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
were issued on October 2, 1998. All share and per share
amounts have been restated for all periods reported to
reflect the stock split.
On July 28, 1995, Indiana Energy's Board of Directors
authorized Indiana Energy to repurchase up to 700,000
shares of its outstanding common stock. During the three
months ended March 31, 1999, the company repurchased
104,900 shares with an associated cost of $2,213,000.
For the six-month period ended March 31, 1999, 264,100
shares were repurchased with an associated cost of
$5,857,000. Of the 700,000 shares authorized, 301,400
shares remain available for repurchase at March 31,
1999.
11. 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 March 31, 1999, 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.
12. Affiliate Transactions.
The obligations of Capital Corp., which handles
financing for the company and its non-utility
subsidiaries, are subject to a support agreement between
the company and Capital Corp., under which the company
has committed to make payments of interest and principal
on Capital Corp.'s securities in the event of default.
Under the terms of the support agreement in addition to
the cash flow of cash dividends paid to the company by
any of its consolidated subsidiaries, the non-utility
assets of the company are available as recourse to
holders of Capital Corp.'s securities. The carrying
value of such non-utility assets reflected in the
consolidated financial statements of the company is
approximately $85.5 million at March 31, 1999.
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-, six- and twelve-
month periods ended March 31, 1999, totaled $71.7
million, $139.1 million and $229.6 million,
respectively. Indiana Gas' purchases from ProLiance for
the three-, six- and twelve-month periods ended March
31, 1998, totaled $74.6 million, $178.7 million and
$286.3 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 March 31,
1999, totaled $4.9 million.
CIGMA, LLC provides materials acquisition and related
services that are used by the company. The company's
purchases of these services during the three-, six- and
twelve-month periods ended March 31, 1999, totaled $4.5
million, $10.1 million and $18.3 million, respectively.
The company's purchases of these services during the
three-, six- and twelve-month periods ended March 31,
1998, totaled $6.5 million, $13.1 million and $22.7
million, respectively.
Indiana Energy is a one-third guarantor of certain
surety bond obligations of Energy Systems Group, LLC.
Indiana Energy's share totaled $8.2 million at March 31,
1999.
Amounts owed to affiliates totaled $20.0 million and
$22.0 million at March 31, 1999 and 1998, respectively,
and are included in Accounts Payable on the Consolidated
Balance Sheets.
13. 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 Energy, Inc. and Subsidiary Companies
Item 2. 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 of IEI Investments include
IGC Energy, Inc. (IGC Energy), Energy Realty, Inc. (Energy
Realty), Energy Financial Group, Inc. and IEI Financial
Services, LLC, all indirect wholly owned subsidiaries of
Indiana Energy, and interests in ProLiance Energy, LLC,
CIGMA, LLC, Energy Systems Group, LLC, Pace Carbon
Synfuels Investors, L.P., Reliant Services, LLC and
Haddington Energy Partners, L.P.
The company's growth strategy provides for growing the
earnings contribution from non-utility operations to over
25 percent of its total annual earnings by 2003, and
aggressively managing costs within its utility operations
(see Growth Strategy and Corporate Restructuring).
Stock Split
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
were issued on October 2, 1998. All share and per share
amounts have been restated for all periods reported to
reflect the stock split.
Earnings
Income and earnings per average share of common stock
for the three-, six- and twelve-month periods ended March
31, 1999, when compared to the same periods one year ago,
were as follows:
<TABLE>
(Millions except Three Months Ended Six Months Ended Twelve Months Ended
per share amounts) March 31 March 31 March 31
1999 1998 1999 1998 1999 1998(1)(3)
<S> <C> <C> <C> <C> <C> <C>
Indiana Gas &
IEI Services $25.2 $19.7 $38.5 $36.9 $35.5 $10.7
IEI Investments 2.9 3.4 3.9 4.6 5.6 9.7
Net Income $28.1 $23.1 $42.4 $41.5 $41.1 $20.4
Earnings per share (2):
Indiana Gas &
IEI Services $ .85 $ .66 $1.29 $1.23 $1.18 $ .36
IEI Investments .09 .11 .13 .15 .19 .32
Total $ .94 $ .77 $1.42 $1.38 $1.37 $.68
(1) Reflects restructuring costs of $24.5 million after-tax or
$.81 per common share at Indiana Gas(see Growth Strategy and
Corporate Restructuring).
(2) Adjusted to reflect the four-for-three stock split
October 2, 1998.
(3) Reflects certain non-recurring items for IEI
Investments which are discussed in the Other Income
section below.
</TABLE>
Utility Margin (Utility Operating Revenues Less Utility
Cost of Gas)
Utility margin for the quarter ended March 31, 1999,
was $77.5 million compared to $68.9 million for the same
period last year. The increase is due primarily to
weather 20 percent colder than the same period last year
but 8 percent warmer than normal, and the addition of new
residential and commercial customers.
Utility margin for the six-month period ended March
31, 1999, was $134.5 million compared to $132.0 million
for the same period last year. The increase is due
primarily to weather 1 percent colder than the same period
last year but 12 percent warmer than normal, and the
addition of new residential and commercial customers.
Utility margin for the twelve-month period ended March
31, 1999, was $197.2 million compared to $201.9 million
for the same period last year. The decrease is primarily
attributable to weather 7 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 all current periods was also
impacted by a one-time sale of native gas, offset somewhat
by the higher cost of unaccounted for gas and reduced
collections of gross receipts taxes.
Total system throughput (combined sales and
transportation) increased 14 percent (6.1 MMDth) for the
second quarter of fiscal 1999 and 1 percent (1.1 MMDth)
for the six-month period ended March 31, 1999, compared to
the same periods one year ago. Throughput decreased 2
percent (2.1 MMDth) for the twelve-month period ended
March 31, 1999, compared to the same period one year ago.
Indiana Gas' rates for transportation generally provide
the same margins as are earned on the sale of gas under
its sales tariffs. Approximately one-half of total system
throughput represents gas used for space heating and is
affected by weather.
Total average cost per unit of gas purchased decreased
to $3.17 for the three-month period ended March 31, 1999,
compared to $3.85 for the same period one year ago. For
the six-month period, cost of gas per unit decreased to
$3.30 in the current period compared to $3.95 for the same
period last year. For the twelve-month period, cost of
gas per unit decreased to $3.23 in the current period
compared to $3.61 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 $.5 million for the
three-month period ended March 31, 1999, when compared to
the same period one year ago due primarily to an
adjustment to the company's severance accrual associated
with its 1997 restructuring plan (see Growth Strategy and
Corporate Restructuring), offset somewhat by rental
expense related to buildings previously owned.
Other operating expenses increased $.8 million for the
six-month period when compared to the same period last
year due in part to rental expense related to buildings
previously owned and higher labor-related costs, including
training costs related to the implementation of the
company's new customer information system. These
increases were offset by the adjustment to the company's
severance accrual.
Other operating expenses decreased $1.4 million for
the twelve-month period when compared to the same period
last year due primarily to lower labor-related costs
resulting from work force reductions and the adjustment to
the company's severance accrual. These decreases were
offset somewhat by rental expense related to buildings
previously owned.
Restructuring costs of $39.5 million (pre-tax) were
recorded in the fourth quarter of fiscal 1997 related to
the company's implementation of a new growth strategy
during that year (see Growth Strategy and Corporate
Restructuring).
Depreciation and amortization expense increased for
the three-, six- and twelve-month periods ended March 31,
1999, when compared to the same periods one year ago due
primarily to additions to plant to serve new customers and
to maintain dependable service to existing customers.
Taxes other than income taxes remained approximately
the same for the three-month period ended March 31, 1999,
when compared to the same period one year ago. Taxes
other than income taxes decreased for the six-month period
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.
Other Income
Equity in earnings of unconsolidated affiliates
increased for the three-month period ended March 31, 1999,
while decreasing for the six- and twelve-month periods
when compared to the same periods one year ago. Equity in
earnings consist primarily of earnings recognized from the
company's energy marketing affiliate, ProLiance Energy,
LLC (ProLiance). Pretax earnings recognized from
ProLiance totaled $5.0 million for the second quarter of
fiscal 1999, compared to $3.9 million for the same period
one year ago. Pretax earnings recognized from ProLiance
for the six months ended March 31, 1999, totaled $6.4
million compared to $5.7 million for the same
period last year. Pretax earnings recognized from
ProLiance for the twelve months ended March 31, 1999,
totaled $8.1 million compared to $11.2 million for the
same period last year. Earnings recognized for the twelve
months ended March 31, 1998, include $4.2 million of
ProLiance's earnings from prior periods which had
previously been reserved (see ProLiance Energy, LLC). All
current period amounts were offset somewhat by operating
losses from Pace Carbon Synfuels Investors, L.P. (Pace
Carbon). The tax credits recognized from Pace Carbon are
reflected in Income Taxes on the Consolidated Statements
of Income (see Pace Carbon Synfuels Investors, L.P.).
Other-net decreased for the twelve-month period ended
March 31, 1999, when compared to the same period one year
ago due primarily to the gain on the sale of certain
nonutility assets by IGC Energy reflected in the prior
period.
Interest Expense
Interest expense decreased for the three-, six- and
twelve-month periods ended March 31, 1999, when compared
to the same periods one year ago due primarily to
decreases in interest rates.
Income Taxes
Federal and state income taxes increased for the three-
and twelve-month periods ended March 31, 1999, while
decreasing for the six-month period when compared to the
same periods one year ago due primarily to changes in
taxable income. Additionally, the company realized more
tax credits from its investments in Pace Carbon and
affordable housing projects during each of the current
periods than were realized in the same periods one year
ago.
Other Operating Matters
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 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, the company 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
involuntary terminations planned under the company's
specific near-term employee reduction plan, which was
scheduled for completion by the end of fiscal 1999.
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 of initial work force
reductions during September 1997 and primarily
attrition thereafter, employees totaled 866 as of March
31, 1999. This reduced employee count achieved most of
the reductions contemplated during the 2 year period
for which the restructuring accrual had been
established. During the second quarter of fiscal 1999,
the company reviewed its remaining accruals for costs
associated with the work force reductions. Taking into
consideration an unexpectedly high level of voluntary
terminations and the staffing implications related to
significant process change associated with the
company's recently implemented new customer information
system, the company determined that no additional
significant work force reductions were likely to occur
during the remainder of fiscal 1999, and accordingly,
that an adjustment to reverse the remaining severance
accrual was necessary. As a result, the severance
accrual and other operating expenses were reduced by
$1.3 million during the second quarter of fiscal 1999.
Indiana Gas' management also 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 March 31, 1998, 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 $32.2 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
Non-utility Plant on the Consolidated Balance Sheets.
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, the company has
realized reductions in operating costs 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 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 the
services it offers. Power marketing involves buying
electricity on the wholesale market and then reselling it
to marketers, utilities and other customers. To
effectively manage the risks associated with power
marketing, ProLiance utilizes a disciplined approach to
credit analysis, obtains letters of credit or corporate
guarantees when appropriate, and does not "sleeve" or
assume the credit risk between the buyer and seller. IGC
Energy's investment in ProLiance is accounted for using
the equity method.
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 review
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, the Citizens Action Coalition of Indiana and a
small group of large-volume customers. 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 was that because
the gas supply agreements provide for index based pricing
of gas commodity sold by ProLiance to the utilities, the
gas supply agreements should have been the subject of an
application for approval of an alternative regulatory plan
under Indiana statutory law.
Management believes the Court of Appeals incorrectly
applied the alternative regulation statute. On April 22,
1999, the Indiana Supreme Court granted management's
petition for transfer of the case and will now consider
the appeal of the IURC's decision and issue its own
decision on the merits of the appeal at a later date. By
granting transfer, the Supreme Court has vacated the Court
of Appeals' decision.
If the Supreme Court reverses the IURC's decision ,
the case will be remanded to the IURC for further
proceedings regarding the public interest in the gas
supply agreements. If the Supreme Court affirms the IURC's
decision, the reasonableness of certain of the gas costs
incurred by Indiana Gas under the gas supply agreements
will be further reviewed by the IURC in the consolidated
GCA proceeding. The existence of significant benefits to
the utilities and their customers resulting from
ProLiance's services has not been challenged on appeal.
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.
Indiana Gas continues to record gas costs in
accordance with the terms of the ProLiance contract and
Indiana Energy continues to record its proportional share
of ProLiance's earnings. Pretax earnings recognized from
ProLiance totaled $5.0 million and $3.9 million for the
three-month periods ended March 31, 1999 and 1998,
respectively. Pretax earnings recognized from ProLiance
totaled $6.4 million and $5.7 million for the six-month
periods ended March 31, 1999 and 1998, respectively.
Pretax earnings recognized from ProLiance totaled $8.1
million and $11.2 million for the twelve-month periods
ended March 31, 1999 and 1998, respectively. Earnings
recognized from ProLiance are included in Equity in
Earnings of Unconsolidated Affiliates on the Consolidated
Statements of Income. Earnings recognized for the twelve
months ended March 31, 1998, include $4.2 million of
ProLiance's earnings from prior periods which had
previously been reserved.
At March 31, 1999, Indiana Energy has reserved
approximately $1.6 million of ProLiance earnings after
tax. Total after-tax ProLiance earnings recognized to date
approximate $14.1 million. This amount includes earnings
from all of ProLiance's business activities, and therefore
is believed to be a conservative estimate of the upper
risk limit. Resolution of the above proceedings may also
impact future operations and earnings contributions from
ProLiance. Based on the IURC's findings described above,
management believes the ProLiance issues may be resolved
near the levels that are already being reserved, and
therefore, while these proceedings are pending, does not
anticipate changing the level at which it reserves
ProLiance earnings. However, no assurance of this outcome
can be provided.
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 converts coal fines (small
coal particles) into coal pellets that are 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 $5.9 million
was paid through March 31, 1999) for an 8.3 percent
ownership interest in the partnership. The balance of
the initial investment will be paid following the
satisfaction by Pace Carbon of certain project
milestones regarding the operation of the coal pellet
production plants and long-term feedstock acquisition.
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 expected 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 have been 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, and are currently producing
and selling pellets in an extended ramp up mode.
Further enhancements to the production process are
expected to continue through the remainder of fiscal
1999.
Generally all pellets produced through March 31,
1999, have been sold. However, due to a deterioration
in the United States coal export market, domestic
companies' coal supplies and capacities are up, which
in turn has reduced the demand and created some price
pressure for Pace Carbon's coal-based synthetic
product. Management does not believe that the extended
time required to make necessary production process
enhancements nor the current coal market conditions
will significantly affect the long-term success of the
projects. Accordingly, management continues to believe
that significant project benefits, primarily in the
form of tax savings and tax credits realized, will be
achieved in the future, however, no assurance can be
given.
Haddington Energy Partners, L.P.
On October 9, 1998, IEI Investments committed to
invest $10 million in Haddington Energy Partners, L.P.
(Haddington). Haddington, a Delaware limited
partnership, plans to raise up to $100 million to
invest in six to eight projects that represent a
portfolio of development opportunities, including
natural gas gathering and storage and electric power
generation. Haddington's investment opportunities will
focus on acquiring and building on projects in progress
rather than start-up ventures. Haddington's first
investment is a high-deliverability gas storage project
which is under development. Through March 31, 1999,
Haddington has achieved $77 million in commitments.
Through March 31, 1999, IEI Investments had paid
approximately $1,000,000 of its commitment in
Haddington, with additional amounts to be paid as
Haddington's portfolio grows.
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 1999 and activities scheduled for the remainder of
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, and
fully completed by October 31, 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 completed 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. Although compliance issues
identified from these inquiries 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 has made significant progress in
developing its 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 March 31, 1999, 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
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 63 percent of
total capitalization at March 31, 1999. 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 its growth strategy which provides for, among other
things, expansion of its nonutility 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
were issued on October 2, 1998.
On July 28, 1995, Indiana Energy's Board of Directors
authorized Indiana Energy to repurchase up to 700,000
shares of its outstanding common stock. During the three
months ended March 31, 1999, the company repurchased
104,900 shares with an associated cost of $2,213,000. For
the six-month period ended March 31, 1999, 264,100 shares
were repurchased with an associated cost of $5,857,000.
Of the 700,000 shares authorized, 301,400 shares remain
available for repurchase at March 31, 1999.
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 58 percent of its
total capitalization at March 31, 1999.
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 1999 are estimated at $68.8
million of which $32.1 million have been expended during
the six-month period ended March 31, 1999. For the twelve
months ended March 31, 1999, capital expenditures totaled
$65.3 million.
Nonutility investments and commitments, excluding the
continuing obligation to invest in Pace Carbon as
previously discussed, totaled approximately $10.0 million
and $10.5 million for the six- and twelve-month periods
ended March 31, 1999, respectively.
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 March 31, 1999, 68 percent of Indiana Gas' capital
expenditures was funded internally (i.e. from utility
income less dividends plus charges to utility income not
requiring funds).
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. Recently, bank
lines of credit have been the primary source of short-term
financing. Effective in March 1999, Indiana Gas
implemented a $100 million commercial paper program.
Indiana Gas' commercial paper is rated P-1 by Moody's and
A-1+ by Standard & Poor's.
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's
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, 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 the company and its vendors,
suppliers and customers to achieve Year 2000 readiness.
Indiana Energy undertakes no obligation to publicly
update or revise any forward-looking statements,
whether as a result of changes in actual results,
changes in assumptions, or other factors affecting such
statements.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Indiana Energy's (the company's) debt portfolio
contains a substantial amount of fixed-rate long-term
debt and, therefore, does not expose the company to the
risk of material earnings or cash flow loss due to
changes in market interest rates.
ProLiance engages in energy hedging activities
to manage pricing decisions, minimize the risk of price
volatility, and minimize price risk exposure in the
energy markets. ProLiance's market exposure arises
from storage inventory, imbalances and fixed-price
purchase and sale commitments which are entered into to
support ProLiance's operating activities. Currently
ProLiance buys and sells physical commodities and
utilizes financial instruments to hedge its market
exposure. However, net open positions in terms of
price, volume and specified delivery point do occur.
ProLiance manages open positions with policies which
limit its exposure to market risk and require reporting
potential financial exposure to its management and its
members. As a result of ProLiance's risk management
policies, Indiana Energy does not believe that
ProLiance's exposure to market risk will result in
material earnings or cash flow loss to the company.
At March 31, 1999, the company was not engaged
in other contracts which would cause exposure to the
risk of material earnings or cash flow loss due to
changes in market commodity prices, foreign currency
exchange rates, or interest rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 7 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.
See Note 11 of the Notes to Consolidated Financial
Statements for litigation matters involving insurance
carriers pertaining to Indiana Gas' former manufactured
gas plants and storage facilities.
Item 4. Submission of Matters to a Vote of Security
Holders
At the annual meeting of shareholders of Indiana
Energy, Inc. on January 27, 1999, (the "Annual
Meeting"), the shareholders elected the following
directors by the vote specified opposite each
director's name:
<TABLE>
Broker
Director Votes For Votes Withheld Abstentions Non-Vote
<S> <C> <C> <C> <C>
L. A. Ferger 25,814,608 437,894 - -
Anton H. George 24,935,067 1,317,435 - -
James C. Shook 25,799,062 453,440 - -
John E. Worthen 24,795,622 1,456,880 - -
The terms of the other eight board members, Paul T.
Baker, Niel C. Ellerbrook, Otto N. Frenzel III, Don E.
Marsh, William G. Mays, J. Timothy McGinley, Richard P.
Rechter and Jean L. Wojtowicz will expire in January
2000 or January 2001.
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-A Amended appendices to the Gas
Sales and Portfolio Administration
Agreement between Indiana Gas
Company, Inc. and ProLiance
Energy, LLC effective November 1,
1998. Incorporated by reference
to Exhibit 10-A to the Quarterly
Report on Form 10-Q of Indiana Gas
Company, Inc. for the quarterly
period ended March 31, 1999.
27 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
On January 27, 1999, Indiana Energy and
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
On April 22, 1999, Indiana Energy and
Indiana Gas filed a Current Report on Form 8-
K with respect to a press release (dated
April 22, 1999), announcing the decision by
the Supreme Court of Indiana to grant
transfer of and reconsider the ProLiance
appeal. Items reported include:
Item 5. Other Events
Press release dated April 22, 1999
On April 30, 1999, Indiana Energy and
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-, six- and twelve-month periods ended
March 31, 1999. Items reported include:
Item 5. Other Events
Item 7. Exhibits
99 Financial Analyst Report - Second 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 ENERGY,INC.
Registrant
Dated May 13, 1999 /s/Carl L. Chapman
Carl L. Chapman
Senior Vice President
and Chief Financial Officer
Dated May 13, 1999 /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 March 31, 1999, and
for the six months then ended and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 574,478
<OTHER-PROPERTY-AND-INVEST> 84,818
<TOTAL-CURRENT-ASSETS> 81,486
<TOTAL-DEFERRED-CHARGES> 20,585
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 761,367
<COMMON> 136,866
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 189,572
<TOTAL-COMMON-STOCKHOLDERS-EQ> 326,438
0
0
<LONG-TERM-DEBT-NET> 183,375
<SHORT-TERM-NOTES> 31,579
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 10,174
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 209,801
<TOT-CAPITALIZATION-AND-LIAB> 761,367
<GROSS-OPERATING-REVENUE> 287,080
<INCOME-TAX-EXPENSE> 21,032
<OTHER-OPERATING-EXPENSES> 219,161
<TOTAL-OPERATING-EXPENSES> 240,193
<OPERATING-INCOME-LOSS> 46,887
<OTHER-INCOME-NET> 4,020
<INCOME-BEFORE-INTEREST-EXPEN> 50,907
<TOTAL-INTEREST-EXPENSE> 8,528
<NET-INCOME> 42,379
0
<EARNINGS-AVAILABLE-FOR-COMM> 42,379
<COMMON-STOCK-DIVIDENDS> 13,829
<TOTAL-INTEREST-ON-BONDS> 6,778
<CASH-FLOW-OPERATIONS> 47,566
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
