Item 1. Business
(a) General Development of the Business.
Indiana Energy, Inc. (Indiana Energy or the company) is a publicly owned holding company with subsidiaries in the natural gas distribution business and related services. It was incorporated under the laws of the state of Indiana on October 24, 1985, and has seven direct and indirect subsidiaries.
Indiana Gas Company, Inc. (Indiana Gas), the principal subsidiary and business entity of the holding company, is an operating public utility engaged in the business of providing gas utility service in the state of Indiana.
All of the outstanding capital stock of Terre Haute Gas Corporation (Terre Haute) and Richmond Gas Corporation (Richmond) was acquired by Indiana Energy on July 31, 1990. Both companies were operating public utilities engaged in the business of providing gas distribution services in Indiana. On January 21, 1991, Indiana Gas acquired from Indiana Energy all the outstanding capital stock of Terre Haute and Richmond. While these companies technically exist as separate corporate entities, their business operations have been combined with Indiana Gas' operations and the companies do business under the name of Indiana Gas.
Indiana Energy has a wholly-owned subsidiary, IEI Investments, Inc., which was formed to group the operations and financing of nonregulated businesses and segregate them from the regulated businesses. IEI Investments has two subsidiaries, IGC Energy, Inc., and Energy Realty, Inc. On December 29, 1992, IGC Energy, Inc. sold its majority interest in EnTrade Corporation to Tenneco Gas. EnTrade was a natural gas marketing and related services company with industrial and utility customers primarily in the eastern and midwestern United States. On November 1, 1994, IGC Energy formed a natural gas marketing subsidiary, Indiana Energy Services, Inc. (IES), which provides natural gas services to large-volume industrial and commercial customers, as well as to small local distribution companies and other natural gas marketing companies. IES provides its customers with gas supply, pipeline transportation services and gas management services including nomination services, balancing services and load forecasting. IGC Energy also has an investment in Loggins, Inc., a distributor of flexible gas pipe and of products for distributing and using natural gas. The other subsidiary of IEI Investments is Energy Realty, Inc., a real estate company that owns a warehouse facility which is leased to Indiana Gas. Energy Realty also is a limited partner in two affordable housing complexes.
(c) Narrative Description of the Business.
At September 30, 1995, Indiana Gas supplied gas to about 455,000 residential, commercial and industrial customers in 281 communities in 48 of the 92 counties in the state of Indiana. The service area has a population of approximately 2 million and contains diversified manufacturing and agriculture-related enterprises. The principal industries served include automotive parts and accessories, feed, flour and grain processing, metal castings, aluminum products, gypsum products, electrical equipment, metal specialties and glass.
The largest communities served include Muncie, Anderson, Lafayette-West Lafayette, Bloomington, Terre Haute, Marion, New Albany, Columbus, Jeffersonville, New Castle and Richmond. Indiana Gas does not serve in Indianapolis, although its general office is located in that city.
For the fiscal year ended September 30, 1995, residential customers provided 60 percent of revenues, commercial 20 percent and industrial 20 percent. At such date, approximately 98 percent of Indiana Gas' customers used gas for space heating, and space heating revenues from these customers for the fiscal year were 80 percent of total operating revenues. Sales of gas are seasonal and strongly affected by variations in weather conditions. During the fiscal year ended September 30, 1995, Indiana Gas added approximately 11,300 residential and commercial customers.
Indiana Gas sells gas directly to residential, commercial and industrial customers at approved rates. Indiana Gas also transports gas through its pipelines at approved rates to commercial and industrial customers which have purchased gas directly from producers, or through brokers and marketers. The total volumes of gas provided to both sales and transportation customers is referred to as throughput.
Gas transported on behalf of end-use customers in fiscal 1995 represented 30 percent (33,312 MDth) of throughput compared to 26 percent (30,125 MDth) in 1994 and 11 percent (12,307 MDth) in 1993. Although revenues are lower, rates for transportation generally provide the same margins as would have been earned had the gas been sold under normal sales tariffs.
As a result of a series of FERC orders, including Order No. 636, Indiana Gas now purchases all of its natural gas from producers, brokers and marketers on both short-term and medium-term contracts. Indiana Gas also has contracts with pipelines for storage and transportation of natural gas.
Rates for gas services purchased from interstate pipeline suppliers are governed by tariffs which are subject to adjustment and approval by the Federal Energy Regulatory Commission (FERC) in accordance with the Natural Gas Act. Prices for gas purchased from gas producers and marketers are determined by market conditions. Indiana Gas' rates and charges, terms of service, accounting matters, issuance of securities, and other operational matters are regulated by the Indiana Utility Regulatory Commission (IURC).
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 IURC. The IURC has applied the statute authorizing the GCA procedures to reduce rates when necessary so as to limit utility operating income, after adjusting to normal weather, to the level authorized in the last general rate order. On November 9, 1995, the IURC approved a settlement agreement which provided, among other things, an increase in Indiana Gas' authorized utility operating income from $51.1 million to $54.2 million beginning in fiscal 1996. (See Item 7, 1996 Settlement Agreement.)
Information regarding environmental matters affecting the company is incorporated herein by reference to Item 7, Environmental Matters.
Indiana Gas had 1,084 full-time employees and 36 part- time employees as of September 30, 1995.
Item 2.
Item 2. Property
Indiana Energy owns no properties.
The properties of Indiana Gas are used for the purchase, production, storage and distribution of gas and are located primarily within the state of Indiana. As of September 30, 1995, such properties included approximately 10,164 miles of distribution mains; 467,540 meters; seven reservoirs currently being used for the underground storage of purchased gas with approximately 107,074 acres of land held under storage easements; 9,478,039 Dth of gas in company-owned underground storage with a daily deliverability of 138,860 Dth; 19,953,511 Dth of gas in contract storage with a daily deliverability of 235,170 Dth; and five liquefied petroleum (propane) air-gas manufacturing plants with a total daily capacity of 36,700 Dth of gas.
Indiana Gas' capital expenditures during the fiscal year ended September 30, 1995, amounted to $54.9 million.
Item 3.
Item 3. Legal Proceedings
See Item 8, Note 9 for litigation matters involving insurance carriers pertaining to Indiana Gas' former manufactured gas plants and storage facilities.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year ended September 30, 1995, to a vote of security holders.
Item 4a.Executive Officers of the Company
As of September 30, 1995, the following individuals were Executive Officers of the company:
Part II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The common stock of the company is listed on the New York Stock Exchange. The ranges of high and low sales prices reported in the New York Stock Exchange composite tape and dividends paid on these shares for fiscal 1994 and 1995 are shown in the following table:
Fiscal Year 1994 High Low Dividend First Quarter $23 5/8 $19 1/2 $.25 1/2 Second Quarter $23 1/4 $ 19 $.25 1/2 Third Quarter $20 7/8 $ 18 $.25 1/2 Fourth Quarter $20 1/8 $18 3/8 $.26 1/2
Fiscal Year 1995 High Low Dividend First Quarter $21 7/8 $17 1/2 $.26 1/2 Second Quarter $20 5/8 $17 3/4 $.26 1/2 Third Quarter $20 3/4 $17 5/8 $.26 1/2 Fourth Quarter $ 22 $18 1/2 $.27 1/2
Cash dividends on common stock are considered quarterly by the board of directors and historically have been paid on March 1, June 1, September 1 and December 1 of each year. At the end of fiscal 1995, there were 10,855 individual and institutional investors who were shareholders of record.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Results of Operations
The majority of Indiana Energy, Inc.'s (the company) consolidated earnings are from the operations of its gas distribution subsidiary, Indiana Gas Company, Inc. Nonutility income includes IGC Energy, Inc., Energy Realty, Inc. and Indiana Energy Services, Inc., indirect wholly-owned subsidiaries of Indiana Energy. Also included in nonutility income is EnTrade Corporation's operations through December 29, 1992, and the fiscal 1993 gain on the sale of EnTrade. Though Indiana Energy will continue to consider nonutility opportunities for investment, its principal business is expected to continue to be gas distribution. The following discussion of operating results relates primarily to the operations of Indiana Gas.
Earnings Net income decreased in fiscal 1995 when compared to fiscal 1994 due to weather that was 15 percent warmer than last year. This decrease was partially offset by lower operation and maintenance expenses, as well as the addition of new residential and commercial customers.
While net income for fiscal 1994 was approximately the same as fiscal 1993, utility income increased 21 percent ($6.1 million) when compared to the previous year. The increase reflected weather that was 4 percent colder than the previous year, the addition of new residential and commercial customers and a decrease in operation and maintenance expenses. Net income for fiscal 1993 included the net gain on the sale of EnTrade of $7.1 million, or 33 cents per average share. Utility income, net income and earnings per average share of common stock for the last three fiscal years are summarized below:
1995 1994 1993 Utility income (millions of dollars) $32.1 $34.6 $28.5 Net income (millions of dollars) $33.0 $34.4 $34.6 Earnings per average share of common stock $1.46 $1.53 $1.62
Dividends On July 28, 1995, the board of directors of the company increased the quarterly dividend on common stock to 27 1/2 cents per share from 26 1/2 cents per share. This resulted in total dividends paid in 1995 of $1.07 compared to $1.03 in 1994. This is the 23rd consecutive year that the company's dividends paid on common stock increased over the previous year.
Margin (Revenues Less Cost of Gas) In 1995, margin decreased 5 percent ($9 million) when compared to 1994. The decrease reflects weather that was 15 percent warmer than last year and 13 percent warmer than normal, offset somewhat by the addition of new residential and commercial customers.
In 1994, margin increased 5 percent ($8.6 million) when compared to 1993. The increase reflected weather that was 4 percent colder than the previous year and 2 percent colder than normal, as well as the addition of new residential and commercial customers.
In 1995, total system throughput (combined sales and transportation) decreased 6 percent (6.8 MMDth) when compared to last year. In 1994, throughput increased 4 percent (4.9 MMDth) when compared to 1993. 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 dekatherm of gas purchased (average commodity and demand) decreased to $2.53 in 1995 from $2.89 in 1994. The decrease is due primarily to lower commodity costs associated with decreased demand for gas during the very warm winter this fiscal year.
Total average cost per dekatherm of gas purchased for 1994 was about the same as 1993. Increased fixed costs per dekatherm associated with pipeline rate cases and the restructuring prescribed by Federal Energy Regulatory Commission (FERC) Order No. 636 were offset by lower commodity costs.
Operating Expenses Operation and maintenance expenses decreased approximately $6.4 million in 1995 when compared to 1994. The decrease is primarily attributable to lower expenses for labor and related benefits, distribution mains and services, advertising and outside services. The declining operation and maintenance expenses reflect management's efforts to control costs in response to very warm weather.
Operation and maintenance expenses decreased approximately $2.3 million in 1994 when compared to 1993. The decrease was primarily attributable to labor and related costs which were lower than the levels in 1993 when additional operation and maintenance projects were in progress.
Depreciation and amortization expense increased in 1995 and 1994 as the result of additions to utility plant to serve new customers and to maintain dependable service to existing customers.
Federal and state income taxes decreased in 1995 due to lower taxable utility income. Federal and state income taxes increased in 1994 due to higher taxable utility income.
Taxes other than income taxes decreased in 1995 due to lower gross receipts tax expense resulting from decreased revenue. Property tax expense for 1995 remained approximately the same as compared to 1994. Taxes other than income taxes increased in 1994 as the result of increased property tax expense, due to higher property tax rates and higher assessed values, and as the result of higher gross receipts tax expense.
Interest Expense Interest expense decreased in 1995 due to a decrease in average debt outstanding, slightly offset by an increase in interest rates. Interest expense decreased in 1994 due to slightly lower interest rates.
Sale of EnTrade On December 29, 1992, IGC Energy sold its interest in EnTrade, a marketer of gas supplies to industrial and utility customers, for approximately $13.9 million. The transaction resulted in a net gain after tax of $7.1 million, or 33 cents per average common share, and was included in nonutility income in fiscal 1993.
Other Operating Matters
Gas Cost Adjustment 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.
In addition, the IURC has applied the statute authorizing the GCA procedures to reduce rates when necessary so as to limit utility operating income, after adjusting to normal weather, to the level authorized in the last general rate order (see Indiana Legislative Matters).
1996 Settlement Agreement As provided in the previous year's settlement agreement among Indiana Gas, the Office of Utility Consumer Counselor (OUCC) and a group of large-volume users, the OUCC performed an investigation during fiscal 1995 to consider an increase to Indiana Gas' authorized utility operating income. These parties then entered a series of negotiations designed to increase Indiana Gas' opportunity to earn on its recent capital investments while avoiding the necessity of a general rate filing. As a result of these negotiations, the IURC approved on November 9, 1995, a settlement agreement which provided, among other things, for the following: (1) an increase in Indiana Gas' authorized utility operating income from $51.1 million to $54.2 million beginning in fiscal 1996; (2) with certain specified exceptions, Indiana Gas may not file a petition to increase its base rates until November 15, 1996; and (3) an agreement to a number of operational and other service enhancements for large-volume customers.
Environmental Matters Indiana Gas is currently conducting environmental investigations and work at certain sites that were the locations of former manufactured gas plants. It is seeking to recover the costs of the investigations and work from insurance carriers, other potentially responsible parties (PRPs) and customers. On May 3, 1995, Indiana Gas received an order from the IURC in which the Commission 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. The order is being appealed. The IURC order has had no immediate impact on Indiana Gas' earnings since settlements with insurers of $11.9 million exceed Indiana Gas' share of environmental liability recorded to date. For further information regarding the status of investigation and remediation of the sites, PRPs, financial reporting and ratemaking, see Item 8, Note 9.
Federal Energy Regulatory Commission Matters In accordance with FERC Order No. 636, Indiana Gas' pipeline service providers have made a number of filings to restructure services. Indiana Gas' pipeline service providers are seeking from customers, including Indiana Gas, recovery of certain costs related to the transition to restructured services.
On April 12, 1995, Indiana Gas received an order from the IURC allowing full recovery through the quarterly GCA process of all FERC Order No. 636 transition costs, including those transition costs previously deferred. Indiana Gas has estimated and recorded total transition costs of approximately $12 million.
Postretirement Benefits Other Than Pensions Effective October 1, 1993, Indiana Gas adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (SFAS 106). SFAS 106 requires accounting for the costs of postretirement health care and life insurance benefits on the accrual basis. This means the costs of benefits paid in the future are recognized during the years that an employee provides service to Indiana Gas rather than the "pay-as-you-go" (cash) basis (see Item 8, Note 7).
On May 3, 1995, the IURC issued an order authorizing Indiana Gas to recover the costs related to postretirement benefits other than pensions under the accrual method of accounting consistent with SFAS 106. Amounts accrued prior to the order have been deferred as allowed by the IURC. While this order is consistent with the IURC's rulings for other utilities within the state of Indiana and with the ratemaking treatment of the majority of regulatory jurisdictions outside of Indiana, the Office of Utility Consumer Counselor is appealing the order.
Income Taxes Effective October 1, 1993, Indiana Gas adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Indiana Gas previously used the deferred method of accounting for income taxes as prescribed by Accounting Principles Bulletin Opinion No. 11. SFAS 109 requires the use of the liability method, which effectively results in a reduction in previously provided deferred income taxes to reflect the current statutory corporate tax rate.
Due to the effects of regulation, Indiana Gas is not permitted to recognize the effect of a tax rate change as income but is required to reduce tariff rates to return the "excess" deferred income taxes to ratepayers over the remaining life of the properties that give rise to the taxes. Therefore, the cumulative effect of a change in accounting principle upon the initial application of SFAS 109 resulted in no impact on earnings.
Indiana Legislative Matters On April 26, 1995, the Indiana General Assembly enacted Senate Enrolled Act No. 637, which provides new flexibility to the IURC for future regulation of Indiana utilities and modifies the application of the earnings test.
The new law recognizes that competition is increasing in the provision of energy services and that flexibility in the regulation of energy services providers is essential to the well-being of the state, its economy and its citizens. Under the law, an energy utility can present to the IURC a broad range of proposals from performance-based ratemaking to complete deregulation of a utility's operations. The law gives the IURC the authority to adopt alternative regulatory practices, procedures, and mechanisms and establish rates and charges that are in the public interest, and will enhance or maintain the value of the energy utility's retail energy services or property. It also provides authority to the IURC to establish rates and charges based on market or average prices that use performance-based rewards or penalties, or which are designed to promote efficiency in the rendering of retail energy services.
The IURC applies the Indiana statute authorizing the GCA procedures to reduce rates when necessary so as to limit utility operating income to the level authorized in the last general rate order. On a quarterly basis, this earnings test is performed by comparing Indiana Gas' authorized utility operating income to its actual utility operating income (weather normalized) for the previous 12 months. In the past, one-fourth of the amounts over the authorized utility operating income would be refundable to Indiana Gas' customers each quarter. The new law revises the earnings test to provide that no refund be paid to the extent a utility has not earned its authorized utility operating income over the previous 60 months (or during the period since the utility's last rate order, if longer). The revised test provides Indiana Gas a greater opportunity to earn its authorized utility operating income over the long term.
New Accounting Standard In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long- Lived Assets to be Disposed Of. This statement imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Indiana Gas anticipates adopting this standard on October 1, 1996, and does not expect that the adoption will have a material impact on its financial position or results of operations based on the current regulatory structure in which it operates. This conclusion may change in the future as competitive factors influence pricing in this industry.
Liquidity and Capital Resources New construction to provide service to a growing customer base and normal system maintenance and improvements will continue to require substantial capital expenditures. Indiana Gas' goal is to internally fund approximately 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 Aa3 by Moody's Investors Service and AA- by Standard & Poor's Corporation.
Total capital required to fund both capital expenditures and refinancing requirements for 1994 and 1995, along with estimated amounts for 1996 through 1998, are as follows:
In 1995, 77 percent of Indiana Gas' capital expenditures was provided by funds generated internally (utility income less dividends plus charges to utility income not requiring funds). In 1994, 75 percent of capital expenditures was provided by funds generated internally. External funds required for the 1995 construction program were obtained primarily through Indiana Gas' medium-term note program as discussed below.
Capitalization objectives for Indiana Gas are 55-65 percent common equity and preferred stock and 35-45 percent long-term debt. Consolidated capitalization ratios are generally expected to be similar to those of Indiana Gas, but may vary from time to time, depending on particular business opportunities. The company's common equity component was 61 percent of total capitalization at September 30, 1995.
On October 28, 1994, $3 million of the outstanding 9 3/8 % Series M, First Mortgage Bonds were retired.
On April 5, 1995, Indiana Gas filed with the Securities and Exchange Commission (SEC) a prospectus supplement for the offering of its Medium-Term Notes, Series E (Notes) with an aggregate principal amount of up to $55 million. The Notes were registered under the existing shelf registration statement filed November 20, 1992, with the SEC with respect to the issuance of up to $90 million in aggregate principal amount of debt securities ($35 million was previously withdrawn from this shelf as a result of the December 9, 1992, issuance of 6 5/8 %, Series D Notes). Indiana Gas plans to issue the Notes from time to time through 1997. The Notes, when issued, will be due not less than nine months and not more than 40 years from the date of issue, and will bear interest at a fixed or variable rate as negotiated between the purchaser and Indiana Gas. The net proceeds from the sale of the Notes will be used to finance, in part, the refunding of long-term debt, Indiana Gas' continuing construction program and for other corporate purposes. During June 1995, $20 million in aggregate principal amount of the Notes were issued as follows: $5 million of 7.15% Notes due March 15, 2015; $5 million of 6.31% Notes due June 10, 2025; and $10 million of 6.53% Notes due June 27, 2025.
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. The repurchases will be made over time in open-market transactions.
The nature of Indiana Gas' business creates large short-term cash working capital requirements primarily to finance customer accounts receivable, unbilled utility revenues resulting from cycle billing, gas in underground storage and 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. Depending on cost, commercial paper or bank lines of credit are used as sources of short-term financing. Indiana Gas' commercial paper is rated P-1 by Moody's and A-1+ by Standard & Poor's. Long-term financial strength and flexibility require maintaining throughput volumes, controlling costs and, if absolutely necessary, securing timely increases in rates to recover costs and provide a fair and reasonable return to shareholders.
Item 8.
Item 8.Financial Statements and Supplementary Data
Management's Responsibility for Financial Statements
The management of the company is responsible for the preparation of the consolidated financial statements and the related financial data contained in this report. The financial statements are prepared in conformity with generally accepted accounting principles and follow accounting policies and principles applicable to regulated public utilities.
The integrity and objectivity of the data in this report, including required estimates and judgements, are the responsibility of management. Management maintains a system of internal controls and utilizes an internal auditing program to provide reasonable assurance of compliance with company policies and procedures and the safeguard of assets.
The board of directors pursues its responsibility for these financial statements through its audit committee, which meets periodically with management, the internal auditors and the independent auditors, to assure that each is carrying out its responsibilities. Both the internal auditors and the independent auditors meet with the audit committee, with and without management representatives present, to discuss the scope and results of their audits, their comments on the adequacy of internal accounting controls and the quality of financial reporting.
/s/Niel C. Ellerbrook Niel C. Ellerbrook Vice President and Treasurer and Chief Financial Officer
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Indiana Energy, Inc.:
We have audited the accompanying consolidated balance sheets and schedules of long-term debt of Indiana Energy, Inc. (an Indiana corporation) and subsidiary companies as of September 30, 1995, and 1994, and the related consolidated statements of income, common shareholders' equity and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Indiana Energy, Inc. and subsidiary companies, as of September 30, 1995, and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP Arthur Andersen LLP
Indianapolis, Indiana October 26, 1995
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Practices
A. Consolidation The consolidated financial statements include the accounts of Indiana Energy, Inc. (the company) and its wholly and majority-owned subsidiaries, after elimination of intercompany transactions. The consolidated financial statements separate the regulated utilities, which consist of Indiana Gas Company, Inc., Terre Haute Gas Corporation and Richmond Gas Corporation, from nonutility operations. These regulated utilities, which are doing business as Indiana Gas, provide natural gas and transportation services to a diversified base of customers in 281 communities in 48 of Indiana's 92 counties. The nonutility income includes EnTrade Corporation's operations through December 29, 1992, as well as the fiscal 1993 gain on the sale of EnTrade (see Note 2). IGC Energy, Inc., Energy Realty, Inc. and Indiana Energy Services, Inc., indirect wholly-owned subsidiaries of Indiana Energy, are also included in nonutility income.
Investments in limited partnerships and in the common stock of less than majority-owned affiliates are accounted for on the equity method.
B. Utility Plant and Depreciation Except as described below, utility plant is stated at the original cost and includes allocations of payroll-related costs and administrative and general expenses, as well as an allowance for the cost of funds used during construction. When a depreciable unit of property is retired, the cost is credited to utility plant and charged to accumulated depreciation together with the cost of removal, less any salvage. No gain or loss is recognized upon normal retirement.
Provisions for depreciation of utility property are determined by applying straight-line rates to the original cost of the various classifications of property. The average depreciation rate was approximately 4.1 percent for all periods reported.
Cost in excess of underlying book value of acquired gas distribution companies is reflected as a component of utility plant and is being amortized primarily over 40 years.
C. Unamortized Debt Discount and Expense Indiana Gas was authorized as part of an August 17, 1994, order from the Indiana Utility Regulatory Commission (IURC) to amortize over a 15-year period the debt discount and expense related to new debt issues and future premiums paid for debt reacquired in connection with refinancing. Debt discount and expense for issues in place prior to this order are being amortized over the lives of the related issues. Premiums paid prior to this order for debt reacquired in connection with refinancing are being amortized over the life of the refunding issue. Gains or losses realized from reacquisition of debt for sinking fund purposes are included in "Other" on the Consolidated Statements of Income.
D. Cash Flow Information For the purposes of the Consolidated Statements of Cash Flows, the company 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:
During fiscal 1993, IGC Energy sold its interest in EnTrade for approximately $13.9 million of Tenneco Inc. common stock, which was subsequently sold for approximately the same amount (see Note 2). There were no other significant non-cash activities.
E. Revenues To more closely match revenues and expenses, Indiana Gas records revenues for all gas delivered to customers but not billed at the end of the accounting period.
F. Gas in Underground Storage Based on the cost of purchased gas during September 1995, the cost of replacing the current portion of gas in underground storage was less than last-in, first-out cost at September 30, 1995, by approximately $286,000.
G. Refundable or Recoverable Gas Cost The cost of gas purchased and refunds from suppliers, which differ from amounts recovered through rates, are deferred and are being recovered or refunded in accordance with procedures approved by the IURC.
H. Allowance For Funds Used During Construction An allowance for funds used during construction (AFUDC), which represents the cost of borrowed and equity funds used for construction purposes, is charged to construction work in progress during the period of construction and included in "Other" on the Consolidated Statements of Income. An annual AFUDC rate of 7.5 percent was used for all periods reported.
The table below reflects the total AFUDC capitalized and the portion of which was computed on borrowed and equity funds for all periods reported.
THOUSANDS 1995 1994 1993 AFUDC - borrowed funds $215 $355 $ 579 AFUDC - equity funds 176 290 486 Total AFUDC capitalized $391 $645 $1,065
I. Reclassifications Certain reclassifications have been made in the company's financial statements of prior years to conform to the current year presentation. These reclassifications have no impact on previously reported net income.
J. Use of Estimates 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.
2. Sale of EnTrade On December 29, 1992, IGC Energy sold its interest in EnTrade, a marketer of gas supplies to industrial and utility customers, for approximately $13.9 million. The transaction resulted in a net gain after tax of $7.1 million, or 33 cents per average share, and has been included in nonutility income in fiscal 1993. EnTrade's net operations through the date of sale are reflected separately on the income statement for all periods reported.
Pro forma operating results for Indiana Energy, assuming the sale of EnTrade occurred as of the beginning of 1993, are shown in the following table.
THOUSANDS (Except Per Share Data) 1993 Utility income $28,534 Nonutility income (loss) $ (448) Net income $27,801 Earnings per average share of common stock $ 1.30
3. Fair Value of Financial Instruments
The estimated fair values of the company's financial instruments were as follows:
Certain methods and assumptions must be used to estimate the fair value of financial instruments. Because of the short maturity of cash and cash equivalents and notes payable, the carrying amounts approximate fair values for these financial instruments. The fair value of the company's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the company for debt of the same remaining maturities.
Under current regulatory treatment, call premiums on reacquisition of long-term debt are generally recovered in customer rates over the life of the refunding issue or over a 15-year period (see Note 1C). Accordingly, any reacquisition would not be expected to have a material effect on the company's financial position or results of operations.
4. Short-Term Borrowings
Indiana Gas has board of director approval to borrow up to $100 million under bank lines of credit. Indiana Gas has available committed lines of credit up to $55 million with approximately $2 million outstanding at September 30, 1995. These lines of credit are renewable annually and require fees based on the amounts of the lines. In addition, Indiana Gas has available uncommitted lines of credit with similar arrangements which allow it to borrow up to its board approved amount. Notes payable to banks bore interest at rates negotiated with the bank at the time of borrowing.
Bank loans outstanding during the reported periods were as follows:
In addition, Energy Realty had a $3.8-million bank loan outstanding at year end related to the purchase of a warehouse facility that is leased to Indiana Gas.
5. Long-Term Debt
During the year, the following activity took place with respect to long-term debt.
On October 28, 1994, $3 million of the outstanding 9 3/8% Series M, First Mortgage Bonds were retired.
During June 1995, Indiana Gas issued $20 million in aggregate principal amount of its Medium-Term Notes, Series E (Notes) as follows: $5 million of 7.15% Notes due March 15, 2015; $5 million of 6.31% Notes due June 10, 2025; and $10 million of 6.53% Notes due June 27, 2025. The net proceeds from the sale of the Notes will be used to finance, in part, the refunding of long-term debt, Indiana Gas' continuing construction program and for other corporate purposes.
Consolidated maturities and sinking fund requirements on long-term debt subject to mandatory redemption during the five years following 1995 are $267,000 in 1996, $1,220,000 in 1997, $36,225,000 in 1998, $11,230,000 in 1999 and $1,236,000 in 2000.
6. Capital Stock
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. The repurchases will be made over time in open-market transactions.
Common stock dividends of the company may be reinvested under a Dividend Reinvestment and Stock Purchase Plan. Common shares purchased in connection with the plan are currently being acquired through the open market.
The company has an Executive Restricted Stock Plan for the principal officers of the company and its subsidiary companies. Shares issued are original issue shares of the company, carry transferability restrictions and are subject to forfeiture provisions according to the terms of the plan.
The company also has a Directors' Restricted Stock Plan through which non-employee directors receive one-third of their combined compensation (exclusive of attendance fees) as directors of the company and Indiana Gas in shares of the company's common stock subject to certain restrictions on transferability. They may also elect to receive the remaining two-thirds of their combined compensation (exclusive of attendance fees) in cash or in shares of the company's common stock which are not subject to restrictions on transferability other than those imposed by federal and state laws.
Additionally, under the terms of Indiana Gas' retirement savings plan (see Note 7), eligible participants may direct a specified percentage of their compensation to be invested in shares of the company's common stock.
At September 30, 1995, the shares of the company's common stock reserved for issuance under each of those plans were as follows:
Dividend Reinvestment and Stock Purchase Plan 566,737 Executive Restricted Stock Plan 375,026 Directors' Restricted Stock Plan 55,046 Indiana Gas Retirement Savings Plan 877,190
Dividends on the common stock of Indiana Gas are payable out of the unreserved and unrestricted retained earnings of Indiana Gas. There are certain provisions in the Indiana Gas Indenture, under which the first mortgage bonds of Indiana Gas have been created and issued, restricting the payment of dividends on the Indiana Gas common stock. Such restrictions could affect the company's ability to pay dividends on its common stock. None of the retained earnings of Indiana Gas are presently subject to any such restrictions.
On July 25, 1986, the board of directors of the company declared a dividend distribution of one common share purchase right for each outstanding share of common stock of the company. The distribution was made to shareholders of record August 11, 1986. In addition, one right has been and will be distributed for each share issued following August 11, 1986. Each right entitles the registered holder to purchase from the company one share of common stock at a price of $35 per share, subject to certain adjustments described in the rights agreement. The rights become exercisable only when a person or group acquires beneficial ownership of 20 percent or more of the company's common stock or announces a tender or exchange offer for 30 percent or more of the company's common stock.
If this happens, each holder of a right, except the acquiring group or person, will have the right to receive, upon exercise, that number of shares of the company's common stock having a market value of two times the exercise price if:
1. any person or group becomes the beneficial owner of 30 percent or more of the company's common stock;
2. a 20 percent or more acquiring person engages in one of a number of self-dealing transactions specified in the rights agreement; or
3. the company were acquired in a merger in which the company were the surviving corporation and its common stock were not changed or exchanged.
In addition, if the company is involved in a merger or other business combination transaction, in which more than 50 percent of its assets or earning power is sold, each holder of a right will have the right to receive, upon exercise at the current exercise price of the right, that number of shares of common stock of the acquiring company having a market value of two-times the exercise price of the right. The company may redeem the rights in whole, but not in part, at a price of $.017 per right at any time prior to the time an acquiring person has acquired a 20 percent beneficial ownership of the company's outstanding common stock. Unless extended, the rights will expire on August 11, 1996.
Indiana Gas and Indiana Energy have authorized and unissued shares of preferred stock of 4.2 million and 4 million, respectively. On December 1, 1992, Indiana Gas redeemed all 200,000 shares of its issued and outstanding 8.55% Cumulative Preferred Stock at $104.66 per share with accrued dividends. The redemption premium of $932,000 was charged to retained earnings.
7. Retirement Plans and Other Postretirement Benefits
Effective October 1, 1994, Indiana Gas merged its retirement savings plan for bargaining employees into its retirement savings plan for non-bargaining employees. The primary objective for this action is to reduce the level of resources required to administer two plans. The combined retirement savings plan is a defined contribution plan which is qualified under sections 401(a) and 401(k) of the Internal Revenue Code. Under the terms of the retirement savings plan, eligible participants may direct a specified percentage of their compensation to be invested in shares of the company's common stock or various investment funds. Participants in the retirement savings plan have, subject to prescribed limitations, matching company contributions made to the plan on their behalf, plus a year-end lump sum company contribution. During 1995, 1994 and 1993, Indiana Gas made contributions of $2,335,000, $2,386,000 and $2,270,000, respectively.
Indiana Gas also has two non-contributory defined benefit retirement plans that cover all employees meeting certain minimum age and service requirements. Benefits are determined by a formula based on the employee's base earnings (highest five consecutive years out of the last 10 consecutive years prior to actual retirement date), years of participation in the plan and the employee's age at retirement.
Indiana Gas has an unfunded supplemental retirement plan for certain management employees. Benefits are determined by a formula based on 65 percent of the participant's average monthly earnings, less benefits received under the company's pension and savings plans and the participant's primary Social Security benefits.
The Indiana Gas defined benefit retirement plan assets are under custody of trustees and consist of actively managed stock and bond portfolios, as well as short-term investments. It is Indiana Gas' funding policy to maintain the pension plans on an actuarially sound basis. Under this policy, funding was $143,000 in 1995, $1,110,000 in 1994, and $1,223,000 in 1993. Funding decreased in 1995 as a result of plan contributions being restricted by the full funding limitation. As permitted by the Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation, the company recognizes pension expense based on funding as allowed for ratemaking purposes.
The calculation of pension expense is as follows:
The following table reconciles the plans' SFAS 87 funded status at September 30 with amounts recorded in the company's financial statements. Certain assets and obligations of the plans are deferred and recognized in the financial statements in subsequent periods.
The weighted-average discount rate used in determining the actuarial present value of the SFAS 87 projected benefit obligation was 8 percent. The expected long-term rate of return on assets was 9 percent. The average rate of increase in future compensation levels used ranged from 5 to 5.5 percent. These rates were used for all years reported. The average future service of plan participants used to compute amortization of the net assets existing at the date of initial application of SFAS 87 is approximately 17 years.
In addition to providing pension benefits, Indiana Gas presently provides postretirement health care and life insurance benefits to full-time employees who have completed 10 years of service and retire from the company. The plan pays stated percentages of most reasonable and necessary medical expenses incurred by retirees, after subtracting payments by other providers and after a stated deductible has been met. These benefits are principally self-insured. Currently, Indiana Gas does not fund this postretirement plan. During fiscal 1995, Indiana Gas approved a plan change whereby employees retiring after January 1, 1996, will be required to make a contribution toward their retiree medical benefits provided by the plan. The monthly contribution for retiree medical coverage will be based on a comparison of the actual increase in Indiana Gas' health care costs and the Consumer Price Index (CPI). Cost increases that are higher than the general rate of inflation, as measured by the CPI, will be paid for by retirees. The impact of this plan change on the unrecognized transition obligation as of September 30, 1995, is shown below in the table reconciling the plan's funded status to the accrued postretirement benefit cost.
Effective October 1, 1993, Indiana Gas adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (SFAS 106). SFAS 106 requires accounting for the costs of postretirement health care and life insurance benefits on the accrual basis. This means the costs of benefits paid in the future are recognized during the years that an employee provides service to Indiana Gas rather than the "pay-as-you- go" (cash) basis. Indiana Gas has elected to amortize the unfunded transition obligation as of October 1, 1993, of approximately $55 million over a period of 20 years.
On May 3, 1995, the IURC issued an order authorizing Indiana Gas to recover the costs related to postretirement benefits other than pensions under the accrual method of accounting consistent with SFAS 106. Amounts accrued prior to the order have been deferred as allowed by the IURC. While this order is consistent with the IURC's rulings for other utilities within the state of Indiana and with the ratemaking treatment of the majority of regulatory jurisdictions outside of Indiana, the Office of Utility Consumer Counselor is appealing the order.
Postretirement benefit cost recognized for 1995 and 1994 consisted of the following components:
Prior to fiscal 1994, Indiana Gas recognized postretirement benefit costs on the pay-as-you-go (cash) basis. Postretirement benefit cost recognized for fiscal year 1993 was approximately $2,855,000.
The following table reconciles the plan's funded status to the accrued postretirement benefit cost as reflected on the balance sheet as of September 30, 1995, and 1994:
The assumed health care cost trend rate for medical gross eligible charges used in measuring the accumulated postretirement benefit obligation as of September 30, 1995, was 9.3 percent for fiscal 1996. This rate is assumed to decrease gradually through fiscal 2003 to 5.5 percent and remain at that level thereafter. The assumed CPI rate, relating to the plan's cost sharing provisions for future retirees, was 3.5 percent. Taking into consideration the plan's cost sharing provisions which were in place at September 30, 1995, a 1-percent increase in the assumed health care cost trend rates for each future year produces approximately a $1.6-million increase in the accumulated postretirement benefit obligation as of September 30, 1995. A 1-percent increase in the assumed health care cost trend rates for each future year produces approximately an $873,000 increase in the annual aggregate of the service and interest cost components of postretirement benefit cost. This amount, which is based on assumptions as of October 1, 1994, has not yet been reduced by the impact of the plan's cost sharing provisions. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8 percent.
8. Commitments
Estimated capital expenditures for 1996 are $58.8 million. Total lease expense was $2,811,000 in 1995, $2,595,000 in 1994 and $2,846,000 in 1993.
Lease commitments are $2,217,000 in 1996, $1,303,000 in 1997, $1,213,000 in 1998, $547,000 in 1999, $406,000 in 2000 and $682,000 in total for all later years. Included in these amounts is an operating lease between Indiana Gas and Energy Realty with payments of approximately $464,000 annually that extends through August 1998. There are no leases that extend beyond 2002. Indiana Gas has storage and supply contracts that range from one month to eight years.
9. Environmental Costs
In the past, Indiana Gas and others, including former affiliates, and/or previous landowners, operated facilities for the manufacturing of gas and storage of manufactured gas. These facilities are no longer in operation and have not been operated for many years. In the manufacture and storage of such gas, various byproducts were produced, some of which may still be present at the sites where these manufactured gas plants and storage facilities were located. Management believes, and the IURC has found that, those operations were conducted in accordance with the then- applicable industry standards. However, under currently applicable environmental laws and regulations, Indiana Gas, and the others, may now be required to take remedial action if certain byproducts are found above a regulatory threshold at these sites.
Indiana Gas has identified the existence, location and certain general characteristics of 26 gas manufacturing and storage sites. Removal activities have been conducted at two sites and a remedial investigation/feasibility study (RI/FS) is nearing completion at one of the sites under an agreed order between Indiana Gas and the Indiana Department of Environmental Management. Indiana Gas and others are assessing, on a site-by-site basis, whether any of the remaining 24 sites require remediation, to what extent it is required and the estimated cost. Preliminary assessments (PAs) have been completed on all but one of the sites. Site investigations (SIs) have been completed at 19 sites and supplemental site investigations (SSIs) have been conducted at 15 sites. Based upon the site work completed to date, Indiana Gas believes that a level of contamination that may require some level of remedial activity may be present at a number of the 24 sites. Indiana Gas is currently conducting groundwater monitoring at many of the sites. Indiana Gas has not begun an RI/FS at additional sites, but expects to conduct further investigation and evaluation in the future.
Based upon the work performed to date, Indiana Gas has accrued remediation and related costs for the two sites where remedial activities are taking place. PA/SI, SSI and groundwater monitoring costs have been accrued for the remaining sites where appropriate. Estimated RI/FS costs and the costs of certain remedial actions that may likely be required have also been accrued. Costs associated with environmental remedial activities are accrued when such costs are probable and reasonably estimable. Indiana Gas does not believe it can provide an estimate of the reasonably possible total remediation costs for any site prior to completion of an RI/FS and the development of some sense of the timing for implementation of the potential remedial alternatives, to the extent such remediation is required. Accordingly, the total costs which may be incurred in connection with the remediation of all sites, to the extent remediation is necessary, cannot be determined at this time.
Indiana Gas has been pursuing recovery from three separate sources for the costs it has incurred and expects to incur relating to the 26 sites. Those sources are insurance carriers, potentially responsible parties (PRPs) and recovery through rates from retail gas customers. On April 14, 1995, Indiana Gas filed suit 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 those carriers are obligated to pay these costs in the future. Presently, that suit is set for trial to begin October 21, 1996, in the United States District Court for the Northern District of Indiana in Fort Wayne, Indiana. Indiana Gas has obtained cash settlements from some of the defendant insurance carriers and, as a result, those carriers have been dismissed from the suit.
Indiana Gas has also completed the process of identifying PRPs for each site. PRPs include two financially viable utilities, PSI Energy, Inc. (PSI) and Northern Indiana Public Service Company (NIPSCO). PSI has been identified as a PRP at 19 of the sites. Indiana Gas is presently in negotiations with PSI to determine PSI's share of responsibility. With the help of outside counsel, Indiana Gas has prepared estimates of PSI's and other PRP's share of environmental liabilities which may exist at each of the sites based on equitable principles derived from case law or applied by parties in achieving settlements. NIPSCO has been identified as an additional PRP at five of these 19 sites. On September 27, 1995, Indiana Gas reached an agreement with NIPSCO which provides for a coordination of efforts and a sharing of investigation and clean-up costs incurred and to be incurred at the five sites in which they both have an interest. The cost sharing estimates of PSI and other PRPs, and the NIPSCO agreement, have been utilized by Indiana Gas to record a receivable from PRPs for their share of the liability for work performed by Indiana Gas to date, as well as to accrue Indiana Gas' proportionate share of the estimated cost related to work not yet performed. The receivable from PRPs of $3.4 million is reflected in Accounts Receivable on the Consolidated Balance Sheet at September 30, 1995.
In January 1992, Indiana Gas filed a petition with the IURC seeking regulatory authority for, among other matters, recovery through rates of all costs Indiana Gas incurs in complying with federal, state and local environmental regulations in connection with past gas manufacturing activities. On May 3, 1995, the IURC 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 utility service and, therefore, are not recoverable as operating expenses from utility customers. The decision was contrary to rulings in other states where utility regulatory commissions have issued orders on the subject. The precedent cited by the IURC was a ruling related to a cancelled nuclear power plant which, unlike manufactured gas plants, never provided service to the public. Management believes applying the nuclear power plant issue to Indiana Gas' case was an incorrect application of the law and has appealed the decision to the Indiana Court of Appeals. Under the schedule of the Indiana Court of Appeals, briefing of the issues is expected to occur during the spring of 1996. The Commission did indicate that during Indiana Gas' next rate case it would be appropriate to quantify the effect of the investigation and clean-up activities as part of the business risk to be considered by the Commission in establishing the overall rate of return to be allowed.
Indiana Gas has recorded $11.4 million for its share of environmental costs to date. As a result of its pursuit of recovery of costs from PRPs and insurance carriers, Indiana Gas has secured settlements from insurers of approximately $11.9 million. Amounts recovered in excess of its share of costs to date have been deferred. The May 3, 1995, order of the IURC has had no immediate impact on Indiana Gas' earnings since settlements with insurers exceed Indiana Gas' share of environmental liability recorded to date.
The impact on Indiana Gas' financial position and results of operations of complying with federal, state and local environmental regulations related to former manufactured gas plant sites is contingent upon several uncertainties. These include the costs of any compliance activities which may occur and the timing of the actions taken, the impact of joint and several liability upon the magnitude of the contingency, the outcome of proceedings which challenge the IURC ruling on recovery of costs from customers, as well as any additional recoveries of environmental and related costs from insurance carriers. Although there can be no assurance of success, to the extent possible Indiana Gas will continue to manage the manufactured gas plant remediation program so that amounts received from insurance carriers and PRPs will be sufficient to fund all such costs.
10. Order No. 636 Transition Costs
In accordance with Federal Energy Regulatory Commission (FERC) Order No. 636, Indiana Gas' pipeline service providers have made a number of filings to restructure services. Indiana Gas' pipeline service providers are seeking from customers, including Indiana Gas, recovery of certain costs related to the transition to restructured services.
On April 12, 1995, Indiana Gas received an order from the IURC allowing full recovery through the quarterly GCA process of all FERC Order No. 636 transition costs, including those transition costs previously deferred. Indiana Gas has estimated and recorded total transition costs of approximately $12 million.
11. Income Taxes
The components of consolidated income tax expense, including tax on the gain on the sale of EnTrade in 1993 and amounts in "Other" on the Consolidated Statements of Income, were as follows:
Effective income tax rates were 34.47 percent, 34.08 percent and 37.23 percent of pretax income for 1995, 1994 and 1993, respectively. This compares with a combined federal and state income tax statutory rate of 37.93 percent for 1995 and 1994 and 37.69 percent for 1993. Individual components of these rate differences are not significant except investment tax credit which amounted to (1.8%) for all periods reported.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income taxes are provided for taxes not currently payable due to, among other things, the use of various accelerated depreciation methods, shorter depreciable lives and the deduction of certain construction costs for tax purposes. Taxes deferred in prior years are being charged and income credited as these tax effects reverse. The provisions for the deferred tax effects relating to the excess of tax-over- book depreciation amounted to $4,031,000 in 1995, $2,852,000 in 1994 and $2,073,000 in 1993.
Effective October 1, 1993, Indiana Gas adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Indiana Gas previously used the deferred method of accounting for income taxes as prescribed by Accounting Principles Bulletin Opinion No. 11. SFAS 109 requires the use of the liability method, which effectively results in a reduction in previously provided deferred income taxes to reflect the current statutory corporate tax rate.
Due to the effects of regulation, Indiana Gas is not permitted to recognize the effect of a tax rate change as income but is required to reduce tariff rates to return the "excess" deferred income taxes to ratepayers over the remaining life of the properties that give rise to the taxes. Therefore, the cumulative effect of a change in accounting principle upon the initial application of SFAS 109 resulted in no impact on earnings. Under SFAS 109, Indiana Gas has recorded a net regulatory liability for approximately $3.8 million on its balance sheet as of September 30, 1995, related to deferred taxes.
Significant components of Indiana Gas' net deferred tax liability as of September 30, 1995, and 1994 are as follows:
THOUSANDS 1995 1994 Deferred tax liabilities: Accelerated depreciation $45,902 $41,652 Property basis differences 18,560 18,140 Acquisition adjustment 6,664 6,853 Other (4,791) 2,654 Deferred tax assets: Deferred investment tax credit (4,590) (4,943) Regulatory income tax liability (1,440) (1,815) Less deferred income taxes related to current assets and liabilities 4,791 (2,654) Balance as of September 30 $65,096 $59,887
Investment tax credits have been deferred and are being credited to income over the life of the property giving rise to the credit. The Tax Reform Act of 1986 eliminated investment tax credits for property acquired after January 1, 1986.
12. Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long- Lived Assets to be Disposed Of. This statement imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Indiana Gas anticipates adopting this standard on October 1, 1996, and does not expect that the adoption will have a material impact on its financial position or results of operations based on the current regulatory structure in which it operates. This conclusion may change in the future as competitive factors influence pricing in this industry.
13. Summarized Financial Data (Unaudited)
Summarized quarterly financial data (in thousands of dollars except per share amounts) for 1995 and 1994 are as follows:
Note: Because of the seasonal factors that significantly affect the companies' operations, the results of operations for interim periods within fiscal years are not comparable.
Item 9.
Item 9. Changes in and Disagreements with Accountants
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Except for the list of the executive officers, which can be found in Part I, Item 4(a) of this report, the information required to be shown in this part for Item 10, Directors and Executive Officers of the Registrant is incorporated by reference here from the registrant's definitive proxy statement. That statement was prepared according to Regulations 14A and S-K and filed electronically with the Securities and Exchange Commission on December 7, 1995.
Item 11.
Item 11. Executive Compensation
The information required to be shown in this part for Item 11, Executive Compensation, is incorporated by reference here from the registrant's definitive proxy statement. That statement was prepared according to Regulations 14A and S-K and filed electronically with the Securities and Exchange Commission on December 7, 1995.
Item 12.
Item 12. Securities Ownership of Certain Beneficial Owners and Management
The information required to be shown in this part for Item 12, Securities Ownership of Certain Beneficial Owners and Management is incorporated by reference here from the registrant's definitive proxy statement. That statement was prepared according to Regulations 14A and S-K and filed electronically with the Securities and Exchange Commission on December 7, 1995.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required to be shown in this part for Item 13, Certain Relationships and Related Transactions is incorporated by reference here from the registrant's definitive proxy statement. That statement was prepared according to Regulations 14A and S-K and filed electronically with the Securities and Exchange Commission on December 7, 1995.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following documents are filed as part of this report:
(a)-1 Financial Statements Location in 10-K
Report of Independent Public Accountants Item 8
Consolidated Statements of Income - 1995, 1994 and 1993 Item 8
Consolidated Statements of Cash Flows - 1995, 1994 and 1993 Item 8
Consolidated Balance Sheets at September 30, 1995 and 1994 Item 8
Consolidated Statements of Common Shareholders' Equity - 1995, 1994 and 1993 Item 8
Consolidated Schedules of Long-Term Debt as of September 30, 1995 and 1994 Item 8
Notes to Financial Statements Item 8
(a)-2 Financial Statement Schedules
Report of Independent Public Accountants on Schedules
Schedule II. Valuation and Qualifying Accounts - 1995, 1994 and 1993
(a)-3 Exhibits
See Exhibit Index
(b) Reports on Form 8-K
None filed during the fourth quarter of fiscal 1995.
EXHIBIT INDEX
Exhibit No. Description Reference
2-A Amended and Restated Exhibit 2-A to Agreement and Plan of Indiana Reorganization, dated Energy's 1989 as of November 6, Annual Report 1989, and amended as on Form 10-K. of December 1, 1989, among Indiana Energy, Inc., IEI Acquisition Corporation and Richmond Gas Corporation.
2-B Second Amendment to Exhibit 2-B to Agreement and Plan of Indiana Reorganization among Energy's Indiana Energy, Inc., Current Report IEI Acquisition on Form 8-K Corporation and dated July 31, Richmond Gas 1990, and filed Corporation dated as August 15, of July 31, 1990. 1990.
2-C Amended and Restated Exhibit 2-B to Agreement of Merger, Indiana dated as of November Energy's 1989 6, 1989, and amended Annual Report as of December 1, on Form 10-K. 1989, among Indiana Energy, Inc., IEI Acquisition Corporation and Richmond Gas Corporation.
2-D Amended and Restated Exhibit 2-C to Stock Exchange Indiana Agreement, dated as of Energy's 1989 November 6, 1989, and Annual Report amended as of December on Form 10-K. 1, 1989, between Indiana Energy, Inc. and Indiana Gas & Chemical Corporation.
2-E Second Amendment to Exhibit 2(e) to Stock Exchange Indiana Agreement between Energy's Indiana Energy, Inc. Current Report and Indiana Gas & on Form 8-K Chemical Corporation dated July 31, dated as of July 31, 1990 and filed 1990. August 15, 1990.
2-F Acquisition Agreement Exhibit 10-N of dated October 26, Indiana Gas 1990, between Indiana Company, Inc.'s Energy and Indiana Gas 1990 Annual Company, Inc. Report on Form 10-K.
2-G Acquisition Agreement Exhibit 1 to dated as of December Indiana 28, 1992, between Energy's Tennessee Gas Pipeline Current Report Company, Tenneco on Form 8-K Merger Company, dated December EnTrade Corporation 29, 1992, and and the filed January Interestholders listed 13, 1993. on Exhibit A thereto.
3-A Amended and Restated Exhibit 3-A to Articles of Indiana Incorporation. Energy's 1993 Annual Report on Form 10-K.
3-B Code of By-Laws, as Filed herewith. amended.
4-A Applicable provisions Exhibit 3-A to of Indiana Energy's Indiana Amended and Restated Energy's 1993 Articles of Annual Report Incorporation, as on Form 10-K. amended, as set forth as Exhibit 3-A above.
4-B Amended and Restated Exhibit 1 to Rights Agreement Indiana between Indiana Energy Energy's and Continental Bank, Amendment on N.A. (Now First Form 8 to Form Chicago Trust Company 8-A of New York), as Registration Rights Agent, dated as Statement filed of July 30, 1986, and on April 16, amended and restated 1990. as of December 8, 1989.
4-C Indenture dated as of Indiana Gas September 1, 1950, Company, Inc.'s between Indiana Gas Registration and Merchants National No. 2-77620 Bank & Trust Company (pages 6-8 of of Indianapolis (now the Prospectus National City Bank, on Form S-16 Indiana), as trustee contained ("Trustee"), and therein), to twelve supplemental Registration indentures thereto. No. 2-40825 (Exhibit Nos. 2- A through 2-H), to Registration No. 2-52734 (Exhibit No. 2- C), to Registration No. 2-68469 (Exhibit No. 2- J), to Registration No. 2-77620 (Exhibit No. 4- 0), to Registration No. 33-1262 (Exhibit No. 4K), to the 1985 Annual Report on Form 10-K (Exhibit 4) and to the 1986 Annual Report on Form 10-K (Exhibit No. 4-D).
4-D Indenture dated Exhibit 4(a) to February 1, 1991, Indiana Gas between Indiana Gas Company, Inc.'s and Continental Bank, Current Report National Association. on Form 8-K dated February 1, 1991, and filed February 15, 1991; First Supplemental Indenture thereto dated as of February 15, 1991, (incorporated by reference to Exhibit 4(b) to Indiana Gas Company, Inc.'s Current Report on Form 8-K dated February 1, 1991, and filed February 15, 1991); Second Supplemental Indenture thereto dated as of September 15, 1991, (incorporated by reference to Exhibit 4(b) to Indiana Gas Company, Inc.'s Current Report on Form 8-K dated September 15, 1991, and filed September 25, 1991); Third Supplemental Indenture thereto dated as of September 15, 1991 (incorporated by reference to Exhibit 4(c) to Indiana Gas Company, Inc.'s Current Report on Form 8-K dated September 15, 1991 and filed September 25, 1991);Fourth Supplemental Indenture thereto dated as of December 2, 1992, (incorporated by reference to Exhibit 4(b) to Indiana Gas Company, Inc.'s Current Report on Form 8-K dated December 1, 1992, and filed December 8, 1992); and Officers' Certificate pursuant to dated as of April 5, 1995, (incorporated by reference to Exhibit 4(a) to Indiana Gas Company, Inc.'s Current Report on Form 8-K dated and filed April 5, 1995).
10-A Employment Agreement Exhibit 10-A to among Indiana Energy, Indiana Inc., Indiana Gas Energy's 1990 Company, Inc., and Annual Report Lawrence A. Ferger on Form 10-K. effective January 1, 1990.
10-B Employment Agreement Exhibit 10-C to among Indiana Energy, Indiana Inc., Indiana Gas Energy's 1990 Company, Inc., and Annual Report Niel C. Ellerbrook, on Form 10-K. effective January 1, 1990.
10-C Employment Agreement Exhibit 10-D to between Indiana Gas Indiana Company, Inc., and Energy's 1990 Paul T. Baker Annual Report effective January 1, on Form 10-K. 1990.
10-D Employment Agreement Exhibit 10-E to between Indiana Gas Indiana Company, Inc., and Energy's 1990 Anthony E. Ard Annual Report effective January 1, on Form 10-K. 1990.
10-E Employment Agreement Exhibit 10-F to among Indiana Energy, Indiana Inc., Indiana Gas Energy's 1990 Company, Inc., and Annual Report Carl L. Chapman on Form 10-K. effective January 1, 1990.
10-F Termination Benefits Exhibit 10-F to Agreement, dated July Indiana 29, 1994, among Energy's 1994 Indiana Energy, Inc., Annual Report Indiana Gas Company, on Form 10-K. Inc. and Lawrence A. Ferger.
10-G Termination Benefits Exhibit 10-G to Agreement, dated July Indiana 29, 1994, among Energy's 1994 Indiana Energy, Inc., Annual Report Indiana Gas Company, on Form 10-K. Inc. and Paul T. Baker.
10-H Termination Benefits Exhibit 10-H to Agreement, dated July Indiana 29, 1994, among Energy's 1994 Indiana Energy, Inc., Annual Report Indiana Gas Company, on Form 10-K. Inc. and Niel C. Ellerbrook.
10-I Termination Benefits Exhibit 10-I to Agreement, dated July Indiana 29, 1994, among Energy's 1994 Indiana Energy, Inc., Annual Report Indiana Gas Company, on Form 10-K. Inc. and Anthony E. Ard.
10-J Termination Benefits Exhibit 10-J to Agreement, dated July Indiana 29, 1994, among Energy's 1994 Indiana Energy, Inc., Annual Report Indiana Gas Company, on Form 10-K. Inc. and Carl L. Chapman.
10-K Executive Compensation Exhibit 10-K to Deferral Plan Indiana effective December 1, Energy's 1994 1994. Annual Report on Form 10-K.
10-L Directors Compensation Exhibit 10-M to Deferral Plan Indiana effective January 1, Energy's 1994 1995. Annual Report on Form 10-K.
10-M Executive Restricted Exhibit A to Stock Plan effective Indiana October 1, 1987, as Energy's Proxy amended. Statement filed on December 4, 1987; First Amendment to Indiana Energy, Inc. Executive Restricted Stock Plan (incorporated by reference to Exhibit 10-A to Indiana Energy's 1991 Annual Report on Form 10-K.)
10-N Indiana Energy, Inc. Exhibit 10-D to Annual Management Indiana Incentive Plan Energy's 1987 effective October 1, Annual Report 1987. on Form 10-K.
10-O Indiana Energy, Inc. Indiana Directors' Restricted Energy's Stock Plan, as amended Definitive and restated on Proxy Statement October 25, 1991. filed on December 6, 1991.
10-P Exhibit 10-P schedules all material gas contracts which are in effect between Indiana Gas Company, Inc. and the suppliers listed. The gas contracts within each type are substantially identical in all material respects and at least one of each type of contract has been or is filed as indicated. The schedule details all material aspects in which a contract may differ from the contract filed.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To Indiana Energy, Inc.:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Item 8, in this Form 10-K, and have issued our report thereon dated October 26, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in Item 14(a)-2 are the responsibility of the company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP
Indianapolis, Indiana October 26, 1995
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
Dated December 20, 1995 /s/Lawrence A. Ferger Lawrence A. Ferger, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.