10-Q 1 igc_10q-sept02.txt 3RD QTR 10Q UNITED STATES 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 quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ______________________ Commission file number 1-6494 INDIANA GAS COMPANY, INC. --------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-0793669 -------------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 20 N.W. Fourth Street, Evansville, Indiana 47708 ------------------------------------------------ (Address of principal executive offices and Zip Code) (812) 491-4000 -------------- (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 the 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 690.00001 November 1, 2002 ---------------------------------- ---------------- ------------------ Class Number of shares Date As of November 1, 2002, all shares outstanding of the Registrant's classes of common stock were held by Vectren Corporation through its wholly owned subsidiary, Vectren Utility Holdings, Inc. Table of Contents Item Page Number Number Part I. Financial Information 1 Financial Statements (Unaudited) Condensed Balance Sheets.......................................... 1-2 Condensed Statements of Income.................................... 3 Condensed Statements of Cash Flows................................ 4 Notes to Condensed Unaudited Financial Statements................. 5-9 2 Management's Discussion and Analysis of Results of Operations and Financial Condition.................. 10-16 3 Qualitative and Quantitative Disclosures About Market Risk........... 16 4 Controls and Procedures.............................................. 17 Part II. Other Information 1 Legal Proceedings.................................................... 18 6 Exhibits and Reports on Form 8-K..................................... 18 Signatures........................................................... 19 Certifications....................................................... 20-22 Definitions As discussed in this Form 10-Q, the abbreviations AFUDC means allowance for funds used during construction APB means Accounting Principles Board FASB means Financial Accounting Standards Board IDEM means Indiana Department of Environmental Management IURC means Indiana Utility Regulatory Commission MMDth means millions of dekatherms MMBTU means millions of British thermal units PUCO means Public Utilities Commission of Ohio Throughput means combined gas sales and gas transportation volumes PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) INDIANA GAS COMPANY, INC. CONDENSED BALANCE SHEETS (Unaudited - In thousands) September 30, December 31, 2002 2001 ------------ ----------- ASSETS Utility Plant Original cost $1,129,278 $1,094,349 Less: Accumulated depreciation & amortization 481,837 458,310 ---------- ---------- Net utility plant 647,441 636,039 ---------- ---------- Current Assets Cash & cash equivalents 3,482 294 Accounts receivable-less reserves of $2,627 & $987, respectively 17,778 49,788 Receivables from other Vectren companies 6,409 15,874 Accrued unbilled revenues 5,771 38,557 Inventories 10,652 15,341 Recoverable natural gas costs 30,820 34,497 Prepayments & other current assets 45,177 34,445 ---------- ---------- Total current assets 120,089 188,796 ---------- ---------- Investment in the Ohio operations 227,082 223,624 Other investments 3,014 1,734 Non-utility property-net 265 303 Regulatory assets 19,781 14,720 Other assets 13,140 9,652 ---------- ---------- TOTAL ASSETS $1,030,812 $1,074,868 ========== ========== The accompanying notes are an integral part of these condensed financial statements.

The accompanying notes are an integral part of these condensed financial statements.

The accompanying notes are an integral part of these condensed financial statements INDIANA GAS COMPANY, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited - In thousands) Nine Months Ended September 30, ---------------------- 2002 2001 --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES $ 100,062 $ 55,136 --------- --------- CASH FLOWS (REQUIRED FOR) FINANCING ACTIVITIES Proceeds from additional capital contribution - 100,000 Requirements for: Dividends on common stock (22,341) (22,647) Retirement of long-term debt (6,470) (7,322) Net change in short-term borrowings due to VUHI (36,386) (89,548) --------- --------- NET CASH FLOWS (REQUIRED FOR) FINANCING ACTIVITIES (65,197) (19,517) --------- --------- CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES Capital expenditures (30,183) (35,899) Other investments (1,494) - --------- --------- NET CASH FLOWS (REQUIRED FOR) INVESTING ACTIVITIES (31,677) (35,899) --------- --------- Net increase in cash & cash equivalents 3,188 (280) Cash & cash equivalents at beginning of period 294 300 --------- --------- Cash & cash equivalents at end of period $ 3,482 $ 20 ========= ========= The accompanying notes are an integral part of these condensed financial statements. INDIANA GAS COMPANY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Nature of Operations Overview Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation, provides natural gas distribution and transportation services to a diversified customer base in 311 communities in 49 of Indiana's 92 counties. Indiana Gas is a direct, wholly owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct, wholly owned subsidiary of Vectren Corporation (Vectren). Vectren was organized on June 10, 1999 solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with APB Opinion No. 16 "Business Combinations." Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding company for its three operating public utilities: Indiana Gas, formerly a wholly owned subsidiary of Indiana Energy, Inc., Southern Indiana Gas and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc., and the Ohio operations. Both Vectren and VUHI are exempt from registration pursuant to Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935. Investment in the Gas Distribution Assets of The Dayton Power and Light Company On October 31, 2000, Vectren acquired the natural gas distribution assets of The Dayton Power and Light Company (DP&L) for approximately $465 million as a tenancy in common through two separate wholly owned subsidiaries. Vectren Energy Delivery of Ohio, Inc. (VEDO) holds a 53% undivided ownership interest in the assets, and Indiana Gas holds a 47% undivided ownership interest. VEDO is the operator of the assets, and these assets are referred to as "the Ohio operations." Indiana Gas' ownership is accounted for on the equity method in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." Its ownership interest is included in investment in the Ohio operations, and its interest in the results of operations is included in equity in earnings of the Ohio operations. The Ohio operations are a significant subsidiary of Indiana Gas that provide natural gas distribution and transportation services to Dayton, Ohio, and 87 other communities in 17 counties in west central Ohio. 2. Basis of Presentation The interim condensed financial statements included in this report have been prepared by the Company, 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 accounting principles generally accepted in the United States have been omitted as provided in such rules and regulations. The Company believes that the information in this report reflects all adjustments necessary to fairly state the results of the interim periods reported. These condensed financial statements and related notes should be read in conjunction with the Company's audited annual financial statements for the year ended December 31, 2001 filed on Form 10-K. Because of the seasonal nature of the Company's operations, the results shown on a quarterly basis are not necessarily indicative of annual results. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain reclassifications have been made to prior period condensed financial statements to conform with the current year classification. These reclassifications have no impact on previously reported net income. 3. Investment in the Ohio Operations Unaudited summarized financial information of the Ohio operations for the three and nine months ended September 30, 2002 and 2001 is presented below. Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- In thousands 2002 2001 2002 2001 ------ ------ ------ ------ Operating revenues $ 23,146 $ 28,423 $ 191,308 $ 262,731 Gas operating margin 9,548 10,577 66,399 58,549 Operating income (loss) (4,750) (3,590) 7,703 (756) Net income (loss) (4,785) (5,180) 7,358 (1,621) Interest costs arising from financing arrangements utilized to purchase the Ohio operations are not reflected in the above summarized financial information. Had the financing arrangements of Indiana Gas and VEDO used to facilitate the acquisition been pushed down to the Ohio operations, the net loss would have been $6.9 million for both the three months ended September 30, 2002 and 2001. For the nine months ended September 30, 2002, net income would have been $0.5 million. For the nine months ended September 30, 2001, the net loss would have been $11.3 million. 4. Impact of Recently Issued Accounting Guidance SFAS 142 In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company adopted the provisions of SFAS 142, as required on January 1, 2002. SFAS 142 changed the accounting for goodwill from an amortization approach to an impairment-only approach. Thus, amortization of goodwill that is not included as an allowable cost for rate-making purposes ceased upon adoption of this statement. Goodwill is to be tested for impairment at a reporting unit level at least annually. SFAS 142 also required the initial impairment review of all goodwill within six months of the adoption date. The impairment review consisted of a comparison of the fair value of a reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying amount, an impairment loss would be recognized. Results of the initial impairment review were to be treated as a change in accounting principle in accordance with APB Opinion No. 20 "Accounting Changes." An impairment loss recognized as a result of an impairment test occurring after the initial impairment review is to be reported as a part of operations. SFAS 142 also changed certain aspects of accounting for other intangible assets; however, the Company does not have any significant other intangible assets. A component of equity in earnings of the Ohio operations was amortization of goodwill. As required by SFAS 142, amortization of goodwill relating to the Company's investment in the Ohio operations, which approximated $2.3 million per year, ceased on January 1, 2002. The initial impairment review performed within six months of the adoption of SFAS 142 was completed and resulted in no impairment. SFAS 144 In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 develops one accounting model for all impaired long-lived assets and long-lived assets to be disposed of. SFAS 144 replaces the existing authoritative guidance in FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain aspects of APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." This new accounting model retains the framework of SFAS 121 and requires that those impaired long-lived assets and long-lived assets to be disposed of be measured at the lower of carrying amount or fair value (less cost to sell for assets to be disposed of), whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations are no longer measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS 144 on January 1, 2002 did not materially impact operations. SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the impact that SFAS 143 will have on its operations. 5. Transactions with Other Vectren Companies Support Services & Purchases Vectren and certain subsidiaries of Vectren have provided corporate, general and administrative services to the Company including legal, finance, tax, risk management and human resources. The costs have been allocated to the Company using various allocators, primarily number of employees, number of customers and/or revenues. Management believes that the allocation methodology is reasonable and approximates the costs that would have been incurred had the Company secured those services on a stand-alone basis. For the three months ended September 30, 2002 and 2001, amounts billed by other wholly owned subsidiaries of Vectren to the Company were $13.8 million and $14.3 million, respectively. For the nine months ended September 30, 2002 and 2001, amounts billed by other wholly owned subsidiaries of Vectren to the Company were $41.9 million and $50.8 million, respectively. Cash Management & Borrowing Arrangements The Company participates in a centralized cash management program with Vectren, other wholly owned subsidiaries, and banks which permits funding of checks as they are presented. Guarantees of Parent Company Debt Vectren's three operating utility companies, Indiana Gas, VEDO, and SIGECO are guarantors of VUHI's $325 million commercial paper program, of which $168.5 million is outstanding at September 30, 2002 and VUHI's $350.0 million unsecured senior notes outstanding at September 30, 2002. These guarantees are full and unconditional and joint and several. VUHI has no significant independent assets or operations other than the assets and operations of these operating utility companies. 6. Transactions with Vectren Affiliates ProLiance Energy, LLC (ProLiance), a nonregulated, energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas), began providing natural gas and related services to Indiana Gas, Citizens Gas, and others in April 1996. ProLiance also provides services to the Ohio operations and began providing service to SIGECO in 2002. ProLiance's primary business is optimizing the gas portfolios of utilities and providing services to large end use customers. Regulatory Matters The sale of gas and provision of other services to Indiana Gas and SIGECO by ProLiance is subject to regulatory review through the quarterly gas cost adjustment (GCA) process administered by the IURC. The sale of gas and provision of other services to the Ohio operations by ProLiance is subject to regulatory review through the quarterly gas cost recovery (GCR) process administered by the PUCO. Specific to the sale of gas and provision of other services to Indiana Gas by ProLiance, on September 12, 1997, the IURC issued a decision finding the gas supply and portfolio administration agreements between ProLiance and Indiana Gas and ProLiance and Citizens Gas to be consistent with the public interest and that ProLiance is not subject to regulation by the IURC as a public utility. The IURC's decision reflected the significant gas cost savings to customers obtained through ProLiance's services and suggested that all material provisions of the agreements between ProLiance and the utilities were reasonable. Nevertheless, with respect to the pricing of gas commodity purchased from ProLiance, the price paid by ProLiance to the utilities for the prospect of using pipeline entitlements if and when they are not required to serve the utilities' firm customers, and the pricing of fees paid by the utilities to ProLiance for portfolio administration services, the IURC concluded that additional review in the 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. In 2001, the IURC commenced processing the GCA proceeding regarding the three pricing issues. The IURC indicated that it would consider the prospective relationship of ProLiance with the utilities in this proceeding. On June 4, 2002, Indiana Gas and Citizens Gas, together with the Office of Utility Consumer Counselor and other consumer parties, entered into and filed with the IURC a settlement setting forth the terms for resolution of all pending regulatory issues related to ProLiance. On July 23, 2002, the IURC approved the settlement filed by the parties. The GCA proceeding has been concluded and new supply agreements between Indiana Gas, SIGECO, Citizens Gas, and ProLiance have been approved and extended through March 31, 2007. As a result of the settlements, Indiana Gas will refund amounts to customers. The Company expects refunds to be made in December 2002. A subsidiary of Vectren's nonregulated operations has indemnified Indiana Gas for the amount of the refund as well as any other amounts incurred as a result of the settlement. Accordingly, the refund has no effect on operating margin or net income. Transactions with ProLiance Purchases from ProLiance for resale and for injections into storage for the three months ended September 30, 2002 and 2001 totaled $58.9 million and $53.9 million, respectively; and for the nine months ended September 30, 2002 and 2001 totaled $202.5 million and $305.1 million, respectively. Amounts owed to ProLiance at September 30, 2002 and December 31, 2001 for those purchases were $19.5 million and $20.4 million, respectively, and are included in accounts payable to affiliated companies. Amounts charged by ProLiance for gas supply services are established by supply agreements with the utility. 7. Commitments & Contingencies The Company is party to various legal and regulatory proceedings arising in the normal course of business. In the opinion of management there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. See Note 6 regarding ProLiance Energy, LLC and Note 8 regarding environmental matters. 8. Environmental Matters In the past, the Company and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, the Company and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. The Company has identified the existence, location and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. The Company has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between the Company and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although the Company has not begun an RI/FS at additional sites, the Company has submitted several of the sites to the IDEM's Voluntary Remediation Program and is currently conducting some level of remedial activities including groundwater monitoring at certain sites where deemed appropriate and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by expert consultants, the Company has accrued the estimated costs for further investigation, remediation, groundwater monitoring and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, the Company has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to the Company's proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit the Company's share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, the Company has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While the Company has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Description of the Business Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation, provides natural gas distribution and transportation services to a diversified customer base in 311 communities in 49 of Indiana's 92 counties. Indiana Gas is a direct, wholly owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct, wholly owned subsidiary of Vectren Corporation (Vectren). Vectren was organized on June 10, 1999 solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with APB Opinion No. 16 "Business Combinations." Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding company for its three operating public utilities: Indiana Gas, formerly a wholly owned subsidiary of Indiana Energy, Inc., Southern Indiana Gas and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, Inc., and the Ohio operations. Both Vectren and VUHI are exempt from registration pursuant to Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935. Investment in the Gas Distribution Assets of The Dayton Power and Light Company On October 31, 2000, Vectren acquired the natural gas distribution assets of The Dayton Power and Light Company (DP&L) for approximately $465 million as a tenancy in common through two separate wholly owned subsidiaries. Vectren Energy Delivery of Ohio, Inc. (VEDO) holds a 53% undivided ownership interest in the assets, and Indiana Gas holds a 47% undivided ownership interest. VEDO is the operator of the assets, and these assets are referred to as "the Ohio operations." Indiana Gas' ownership is accounted for on the equity method in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." Its ownership interest is included in investment in the Ohio operations, and its interest in the results of operations is included in equity in earnings of the Ohio operations. The Ohio operations are a significant subsidiary of Indiana Gas that provide natural gas distribution and transportation services to Dayton, Ohio, and 87 other communities in 17 counties in west central Ohio. Results of Operations

Net Income (Loss) For the three months ended September 30, 2002, the net loss decreased $0.8 million and for the nine-month period net income increased $20.3 million due primarily to improved margins and lower operations and maintenance costs. During 2002, the Company experienced a reduction in costs incurred in 2001 due to higher gas costs, merger synergies, and the completion of merger and restructuring activities and related costs. These favorable impacts were offset somewhat by the effects of warm weather during the heating season. New Accounting Principles SFAS 142 In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company adopted the provisions of SFAS 142, as required on January 1, 2002. SFAS 142 changed the accounting for goodwill from an amortization approach to an impairment-only approach. Thus, amortization of goodwill that is not included as an allowable cost for rate-making purposes ceased upon adoption of this statement. Goodwill is to be tested for impairment at a reporting unit level at least annually. SFAS 142 also required the initial impairment review of all goodwill within six months of the adoption date. The impairment review consisted of a comparison of the fair value of a reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying amount, an impairment loss would be recognized. Results of the initial impairment review were to be treated as a change in accounting principle in accordance with APB Opinion No. 20 "Accounting Changes." An impairment loss recognized as a result of an impairment test occurring after the initial impairment review is to be reported as a part of operations. SFAS 142 also changed certain aspects of accounting for other intangible assets; however, the Company does not have any significant other intangible assets. A component of equity in earnings of the Ohio operations was amortization of goodwill. As required by SFAS 142, amortization of goodwill relating to the Company's investment in the Ohio operations, which approximated $2.3 million per year, ceased on January 1, 2002. The initial impairment review performed within six months of the adoption of SFAS 142 was completed and resulted in no impairment. SFAS 144 In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 develops one accounting model for all impaired long-lived assets and long-lived assets to be disposed of. SFAS 144 replaces the existing authoritative guidance in FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain aspects of APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." This new accounting model retains the framework of SFAS 121 and requires that those impaired long-lived assets and long-lived assets to be disposed of be measured at the lower of carrying amount or fair value (less cost to sell for assets to be disposed of), whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations are no longer measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS 144 on January 1, 2002 did not materially impact operations. SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the impact that SFAS 143 will have on its operations. Significant Fluctuations Gas Operating Margin Gas operating margin decreased $2.9 million, or 9%, for the three months ended September 30, 2002 and $6.0 million, or 4%, for the nine months ended September 30, 2002 when compared to the prior year. The decrease is primarily due to warmer weather, especially during the heating season, fluctuations in unaccounted for gas, and customer conservation. Operating Expenses Other Operating Other operating expenses decreased $4.6 million, or 21%, for the three months ended September 30, 2002 and $18.8 million, or 25%, for the nine months ended September 30, 2002 compared to the prior year. The decrease results from lower charges for the use of corporate assets related to those assets which had useful lives shortened as a result of the merger, merger synergies, and less uncollectible accounts expense. Uncollectible accounts expense in 2001 was higher due to increased customer account balances as a result of the extraordinarily high gas costs experienced in 2001. Income Tax Expense Federal and state income taxes increased $7.3 million for the nine months ended September 30, 2002, compared to the prior year. The increase results from primarily higher pre-tax earnings. Other Income (Expense) Equity in Earnings of the Ohio Operations The Company has a 47% undivided interest in the Ohio operations. Equity in earnings of the Ohio operations represents the Company's portion of the Ohio operations' net income. The increase is attributable to the return of lower gas prices and increased revenues from rate recovery riders for excise taxes and Percentage of Income Payment Plan customers. Other - Net Other - net increased $1.1 million for the nine months ended September 30, 2002 compared to 2001. In 2001, contributions were made to low income heating assistance programs to assist customers with their increased utility bills reflecting higher gas costs. Interest Expense Interest expense decreased $3.1 million for the nine months ended September 30, 2002, when compared to the prior year. The decrease is due to lower interest rates on adjustable rate debt and lower outstanding debt balances. The reduced debt outstanding is due primarily to decreased working capital requirements resulting from a return to lower gas prices. Environmental Matters In the past, the Company and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, the Company and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. The Company has identified the existence, location and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. The Company has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between the Company and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although the Company has not begun an RI/FS at additional sites, the Company has submitted several of the sites to the IDEM's Voluntary Remediation Program and is currently conducting some level of remedial activities including groundwater monitoring at certain sites where deemed appropriate and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by expert consultants, the Company has accrued the estimated costs for further investigation, remediation, groundwater monitoring and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, the Company has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to the Company's proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit the Company's share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, the Company has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While the Company has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. Regulatory Matters ProLiance Energy, LLC (ProLiance), a nonregulated, energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas), began providing natural gas and related services to Indiana Gas, Citizens Gas, and others in April 1996. ProLiance also provides services to the Ohio operations and began providing service to SIGECO in 2002. ProLiance's primary business is optimizing the gas portfolios of utilities and providing services to large end use customers. The sale of gas and provision of other services to Indiana Gas and SIGECO by ProLiance is subject to regulatory review through the quarterly gas cost adjustment (GCA) process administered by the IURC. The sale of gas and provision of other services to the Ohio operations by ProLiance is subject to regulatory review through the quarterly gas cost recovery (GCR) process administered by the PUCO. Specific to the sale of gas and provision of other services to Indiana Gas by ProLiance, on September 12, 1997, the IURC issued a decision finding the gas supply and portfolio administration agreements between ProLiance and Indiana Gas and ProLiance and Citizens Gas to be consistent with the public interest and that ProLiance is not subject to regulation by the IURC as a public utility. The IURC's decision reflected the significant gas cost savings to customers obtained through ProLiance's services and suggested that all material provisions of the agreements between ProLiance and the utilities were reasonable. Nevertheless, with respect to the pricing of gas commodity purchased from ProLiance, the price paid by ProLiance to the utilities for the prospect of using pipeline entitlements if and when they are not required to serve the utilities' firm customers, and the pricing of fees paid by the utilities to ProLiance for portfolio administration services, the IURC concluded that additional review in the 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. In 2001, the IURC commenced processing the GCA proceeding regarding the three pricing issues. The IURC indicated that it would consider the prospective relationship of ProLiance with the utilities in this proceeding. On June 4, 2002, Indiana Gas and Citizens Gas, together with the Office of Utility Consumer Counselor and other consumer parties, entered into and filed with the IURC a settlement setting forth the terms for resolution of all pending regulatory issues related to ProLiance. On July 23, 2002, the IURC approved the settlement filed by the parties. The GCA proceeding has been concluded and new supply agreements between Indiana Gas, SIGECO, Citizens Gas, and ProLiance have been approved and extended through March 31, 2007. As result of the settlement, Indiana Gas will refund amounts to customers. The Company expects refunds to be made in December 2002. A subsidiary of Vectren's nonregulated operations has indemnified Indiana Gas for the amount of the refund as well as any other amounts incurred as a result of the settlement. Accordingly, the refund has no effect on operating margin or net income. In addition to the above, the IURC order also provides that: |X| A portion of the utilities' natural gas will be purchased through a gas cost incentive mechanism that shares price risk and reward between the utilities and customers; |X| Beginning in 2004, ProLiance will provide the utilities with an interstate pipeline transport and storage service price discount, thus providing additional savings to customers; |X| As ProLiance continues to provide the utilities with its supply services, Citizens and Vectren will together annually provide an additional $2 million per year in customer benefits in 2003, 2004 and 2005; and |X| In 2006, the utilities will conduct a competitive bidding process for provision of gas supply services commencing in 2007. ProLiance is authorized to participate in the competitive bidding process. Financial Condition The Company's equity capitalization objective is 40-55% of total capitalization. This objective may have varied, and will vary, depending on particular business opportunities and seasonal factors that affect the Company's operation. The Company's equity component was 43% of total capitalization, including current maturities of long-term debt and long-term debt subject to tender at both September 30, 2002 and December 31, 2001. Short-term cash working capital is required primarily to finance customer accounts receivable, unbilled utility revenues resulting from cycle billing, gas in underground storage, prepaid gas delivery services, capital expenditures, and investments until permanently financed. The Company expects the majority of its capital expenditures and debt security redemptions to be provided by internally generated funds. The Company's credit ratings on outstanding senior unsecured debt at September 30, 2002 are A-/A2 as rated by Standard and Poor's and Moody's, respectively. On August 27, 2002, Moody's Investor Services issued a press release indicating Indiana Gas' rating is under review for a possible downgrade. Moody's raised several concerns including weaker credit and fixed charge coverage measures, resulting from the prior integration and restructuring costs and warm winter of 2001 and 2002. The Company continues to work with Moody's to address these and other items involving Vectren and other Vectren subsidiaries. Cash Flow from Operations The Company's primary source of liquidity to fund working capital requirements has been cash generated from operations, which totaled approximately $100.1 million and $55.1 million for the nine months ended September 30, 2002 and 2001, respectively. Cash flow from operations increased $44.9 million during the nine months ended September 30, 2002 compared to 2001 due to favorable changes in working capital as a result of the return to lower gas costs and increased earnings. Financing Activities Sources & Uses of Liquidity The Company has no short-term borrowing arrangements with third parties and relies entirely on the short-term borrowing arrangements of VUHI for short-term working capital needs. Borrowings outstanding at September 30, 2002 were $97.9 million. The intercompany credit line totals $325 million, but is limited to VUHI's available capacity ($156.5 million at September 30, 2002) and is subject to the same terms and conditions as VUHI's commercial paper program. During the nine months ended September 30, 2002, $1.3 million of long term debt was paid as scheduled, and put provisions totaling $5.0 million were exercised. Other put provisions on long-term debt totaling $6.5 million expired unexercised and have been reclassified as long-term debt. Vectren's three operating utility companies, Indiana Gas, VEDO, and SIGECO are guarantors of VUHI's $325 million commercial paper program, of which $168.5 million is outstanding at September 30, 2002 and VUHI's $350.0 million unsecured senior notes outstanding at September 30, 2002. VUHI has no significant independent assets or operations other than the assets and operations of these operating utility companies. These guarantees are full and unconditional and joint and several. Ratings triggers on VUHI's commercial paper backup facility existing at December 31, 2001, were removed as the facility was renewed during 2002. Financing Cash Flow Cash flow required for financing activities of $65.2 million for the nine months ended September 30, 2002 includes $36.4 million of reductions in borrowings and $22.3 million of common stock dividends paid to VUHI. This $45.7 million increase in cash required for financing activities when compared to the nine months ended September 30, 2001 results from a $100.0 million capital contribution in 2001 from VUHI to permanently finance the investment in the Ohio operations. Capital Expenditures & Other Investment Activities Cash flow required for investing activities decreased during the nine months ended September 30, 2002 compared to 2001 by $4.2 million. The decrease is primarily due to less additions to utility plant. 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 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 "believe," "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 the Company's actual results to differ materially from those contemplated in any forward-looking statements included, among others, the following: |X| 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; transmission or distribution incidents; or availability due to demand, shortages, transmission problems or other developments; or gas pipeline system constraints. |X| Increased competition in the energy environment including effects of industry restructuring and unbundling. |X| Regulatory factors such as unanticipated changes in rate-setting policies or procedures, recovery of investments and costs made under traditional regulation, and the frequency and timing of rate increases. |X| 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. |X| Economic conditions including the effects of an economic downturn, inflation rates, and monetary fluctuations. |X| 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. |X| Availability or cost of capital, resulting from changes in the Company, including its security ratings, changes in interest rates, and/or changes in market perceptions of the utility industry and other energy-related industries. |X| Employee workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages. |X| Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures. |X| Costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters, including, but not limited to, those described in Management's Discussion and Analysis of Results of Operations and Financial Condition. |X| Changes in federal, state or local legislature requirements, such as changes in tax laws or rates, environmental laws and regulations. The Company 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 The information required hereunder is not significantly different from the information as set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in the Indiana Gas Company, Inc. 2001 Form 10-K and is therefore not presented herein. ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures Within 90 days prior to the filing of the report, the Company carried out an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness or the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective in bringing to their attention on timely basis material information relating to the Company required to be disclosed by the Company in its Exchange Act reports. Disclosure controls and procedures, as defined by the Securities Exchange Act of 1934 in Rules 13a-14(c) and 15d-14(c), are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities and Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. "Disclosure controls and procedures" include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Changes in internal control Since the evaluation of disclosure controls and procedures, there have been no significant changes to the Company's internal controls and procedures or significant changes in other factors that could significantly affect the Company's internal controls and procedures. No material weaknesses or other significant deficiencies in the design of internal control were noted by the Company during the most recent disclosure control and procedure evaluation and through the filing of this Form 10-Q. Internal control, as defined in American Institute of Certified Public Accountants Codification of Statements on Auditing Standards (AU ss.319), is defined as a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (a) reliability of financial reporting, (b) effectiveness and efficiency of operations and (c) compliance with applicable laws and regulations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is party to various legal and regulatory proceedings arising in the normal course of business. In the opinion of management there are no legal proceedings pending against the Company that are likely to have a material adverse effect on the financial position or results of operations. See Note 6 regarding ProLiance Energy, LLC and Note 8 regarding environmental matters. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports On Form 8-K During The Last Calendar Quarter On July 23, 2002, the Company filed a Current Report on Form 8-K with respect to the release of financial information to the investment community regarding the Company's results of operations for the three, six and twelve month periods ended June 30, 2002. The financial information was released to the public through this filing. Item 5. Other Events Item 7. Exhibits 99.1 - Press Release - Second Quarter 2002 Vectren Corporation Earnings 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 On July 25, 2002, the Company filed an amendment to current report on Form 8-K, originally filed on April 25, 2002, with respect to the approval of an agreement by the Indiana Utility Regulatory Commission setting forth the settlement of numerous pending issues related to ProLiance Energy, LLC Item 5. Other Events Item 7. Exhibits 99-1 - Press Release - ProLiance Settlement Approved, Customers Save Millions, Utilities Receive Certainty SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INDIANA GAS COMPANY, INC. ------------------------ Registrant November 13, 2002 /s/Jerome A. Benkert, Jr. --------------------------- Jerome A. Benkert, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/M. Susan Hardwick ----------------------------- M. Susan Hardwick Vice President and Controller (Principal Accounting Officer) CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Niel C. Ellerbrook, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Indiana Gas Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Niel C. Ellerbrook ------------------------------------ Niel C. Ellerbrook Chairman and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CHIEF FINANCIAL OFFICER CERTIFICATION I, Jerome A. Benkert, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Indiana Gas Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Jerome A. Benkert, Jr. ---------------------------- Jerome A. Benkert, Jr. Executive Vice President and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Indiana Gas Company, Inc.. Signed this 13th day of November, 2002. /s/ Jerome A. Benkert, Jr. /s/ Niel C. Ellerbrook --------------------------------- --------------------------------- (Signature of Authorized Officer (Signature of Authorized Officer) Jerome A. Benkert, Jr. Niel C. Ellerbrook ---------------------------------- --------------------------------- (Typed Name) (Typed Name) Executive Vice President and Chief Financial Officer Chairman and Chief Executive Officer ---------------------------------- ------------------------------------- (Title) (Title)

INDIANA GAS CO INC 10-Q