Indiana Energy, Inc.

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Indiana Energy, Inc.

1630 North Meridian Street
Indianapolis, Indiana 46202-1496
U.S.A.
(317) 926-3351
Fax: (317) 321-0498
Web site: http://www.indiana-energy.com

Public Company
Incorporated: 1945 as Indiana Gas and Water Company, Inc.
Employees: 984
Sales: $465 million (1998)
Stock Exchanges: New York
Ticker Symbol: IEI
SICs: 4924 Natural Gas Distribution

Indiana Energy, Inc. (IEI) is a holding company with subsidiaries in natural gas distribution and related services. The company’s primary subsidiary, Indiana Gas, is a public utility that provides natural gas to approximately 489,000 residential, commercial, and industrial customers in Indiana. A second subsidiary, IEI Investments, operates as a holding company for the parent company’s interests in non-regulated industries. The subsidiary companies of IEI Investments are Energy Realty, a limited partner in three affordable housing complexes in the Indiana Gas service area, and IGC Energy. IGC Energy is a joint owner of ProLiance Energy L.L.C., a strategic partnership formed to supply natural gas and related services to Indiana and surrounding states. The co-owner of ProLiance is Citizens Gas and Coke Utility, a natural gas distribution company serving Indianapolis, Indiana.

The Early Years: Reorganization, Incorporation, and Trouble-Shooting

Indiana Energy, Inc. began its existence as Indiana Gas & Water Company, a utility under the corporate umbrella of the large multi-utility Public Service Indiana. PSI, which included gas, water, electric, and transportation divisions, was formed at the beginning of the 20th century as part of Middle West Utilities, a gigantic Chicago-based holding company. Through the 1910s and 1920s, PSI evolved by acquiring and operating a number of small individual utility companies in communities throughout central and southern Indiana. In the early 1930s, however, undercapitalized and hit hard by the Depression, PSF’s parent company Middle West Utilities, filed for reorganization and the company was ordered into receivership. In 1941, as part of its reorganization plan to emerge from bankruptcy, PSI proposed divesting of its gas and water divisions. The plan was approved by the Securities and Exchange Commission, and four years later, the Indiana Gas & Water Company was incorporated.

Most of the total cost of the new company was financed by issuing 277,500 shares of stock worth $8.5 million to PSI. The balance of the purchase price came from $6 million worth of bonds. At the time of its incorporation, the Indianapolis-based Indiana Gas & Water provided gas to approximately 61,000 customers in 42 southern, central, and central-northern Indiana communities. Water service was provided to just over 29,000 customers in 19 communities.

The spin-off company faced an immediate and formidable problem: its gas distribution system was outdated and not well maintained. Through the Depression and the early years of World War II, PSI had lacked both the funding and materials necessary to adequately maintain and expand the system. For the most part, therefore, no improvements had been made since the early 1930s. The newly organized Indiana Gas & Water set about improving the situation in early 1946, with an ambitious three-year, $3 million construction program. The project involved building 60 miles of new gas line and adding more than 4,500 new customers.

A second major problem was the inadequate supplies of pipeline gas available from the company’s suppliers. In the years immediately following Indiana Gas & Water’s incorporation, the use of natural gas grew at an unprecedented rate, and the suppliers were often unable to keep up with the demand. To alleviate part of the shortage, in 1947 the company built a transmission line southward to connect with a major pipeline operated by the Texas Eastern Gas Transmission Corporation. As the gas squeeze grew tighter in the late 1940s, Indiana Gas & Water installed a number of small liquefied-petroleum air gas plants to provide standby gas during peak demand days. Even so, gas remained in short supply throughout the 1940s and into the early 1950s, and the company was forced to move slowly in its expansion efforts.

Strengthening and Expanding the System

The second half of the 1950s was a time of rapid growth for the gas industry throughout the United States. New natural gas fields were discovered in Mexico, Canada, Louisiana, and North Dakota, and the first offshore gas pipeline was built in the Gulf of Mexico. It appeared that the shortage was at an end, and the gas industry boomed. Indiana Gas & Water used the decade to further strengthen and broaden its gas distribution and storage system. By the early 1950s, the company had sold several of its small-town water properties to the Hoosier Water Company and used the proceeds to purchase additional natural gas facilities. Near the end of the 1950s, storage became the company’s focus. Following the industry trend toward underground storage, Indiana Gas & Water developed three underground fields capable of storing more than three billion cubic feet of gas. The newfound gas supplies also allowed the company to take more gas from its suppliers, upping its daily take from 52.5 million to 140 million cubic feet of gas between 1959 and 1961.

With the upgraded distribution system, the addition of new storage fields, and the greatly increased gas supply, Indiana Gas & Water was poised for expansion. The company entered the 1960s with a growth strategy that quickly played out. Projecting that population growth in central Indiana would be concentrated in the suburban areas around Indianapolis, the company started the decade by installing distribution lines to three new communities in the Indianapolis region. (This decision proved to be both foresighted and pivotal. As predicted, the size of these new communities did increase dramatically: in the years between 1960 and 1990, their population would more than double.) Indiana Gas & Water followed this expansion with further growth as the decade progressed—to include more than 20 new communities in its service area. The strategy paid off almost immediately. By 1965, the company was one of the state’s fastest-growing utilities, with a service area of 76 communities throughout southern, central, and north-central sections of Indiana.

The second half of the 1960s was marked by a series of acquisitions and one major divestiture. Between 1965 and 1968, Indiana Gas & Water purchased four existing gas utility companies, expanding its service territory to include more than 20 new communities. The company also made the decision to sell off its remaining water utilities to three Chicago investors for the price of $13.4 million. With the divestiture of the water companies, a name change was necessary—and Indiana Gas & Water became Indiana Gas Company. In 1970, the company was listed on the New York Stock Exchange under the ticker symbol IGC.

The Gas Shortage Years

Leaving the boom years of the late 1950s and 1960s behind, the gas industry fell on hard times again in the 1970s with the onset of the fuel shortage. The gas that had been so abundant in the previous decade was suddenly in short supply. A main factor behind the shortage was the Federal regulation of natural gas prices. Under this regulation, gas producers were unable to command high enough prices to make feasible the costly exploration and drilling for new gas sources. As a result, domestic exploration and drilling had declined, and the U.S. gas industry had become increasingly dependent upon foreign sources.

In 1970, Texas Eastern, one of Indiana Gas’s suppliers, announced that it would begin curtailing gas shipments to some of its customers. Indiana Gas responded by dividing its customers into “firm” and “interruptible” categories, informing its industrial customers to be prepared to switch to other fuels in case of curtailment. A few months later, the company was notified by its suppliers that they could provide no further volume increases under contract. Gas supplies got even tighter in 1973, with the OPEC Oil Embargo, instituted by the Arab nations to protest U.S. support of Israel. To partially ameliorate the crunch, Indiana Gas built a propane storage installation, and purchased 840,000 gallons of liquid propane from Texas Eastern. By mixing the propane with 48 percent air, the company was able to produce a gas similar in quality to natural gas.

Despite the continued gas shortage, Indiana Gas broadened its base in the mid-1970s by purchasing the Muncie-based Central Indiana Gas Company. Central Indiana Gas Company was a company of substantial size, with 538 employees and more than 100,000 customers in 62 east central Indiana communities. The purchase, when completed in 1976, made Indiana Gas Company the state’s second largest gas-distribution utility, with more than 292,000 customers.

Company Perspectives:

Indiana Energy is committed to maximizing returns to investors, commensurate with business risk, and to providing long-term value to our customers by delivering high-quality, competitively priced products and services. All this we accomplish through our most important assets, our employees, and through supporting the communities where we live and work.

The shortage that plagued Indiana Gas throughout the first part of the 1970s was aggravated near the end of the decade by some of the worst winter weather of the century. Contending with increased customer demand for gas for heating purposes, Indiana Gas announced curtailments for 234 large-volume customers in December 1975. Along with the shortages and curtailments came price hikes. By 1977, the company was paying its suppliers more than 150 percent more for gas than it had been paying only four years earlier. At the same time, the cost of virtually everything else was increasing. Inflation, which had been held at bay during the early postwar years, was climbing steadily. In 1977, to offset its increased expenses, Indiana Gas asked the Public Service Commission to approve a rate adjustment. The approved 9.8 percent increase allowed the company to recover approximately $15.25 million per year.

Deregulation, High Prices, and the Gas Bubble

The last years of the 1970s marked the beginning of a new and turbulent era for Indiana Gas. In 1977, President Jimmy Carter proposed a sweeping package of energy legislation that was to completely alter the way gas companies did business. When Congress passed the bill in 1978, the piece of legislation that had the greatest impact on the gas industry was the Natural Gas Policy Act. This act provided for a steady increase in gas prices for producers at the wellhead between the years of 1978 and 1985. On January 1, 1985, under the same legislation, the natural gas industry would be completely deregulated. There were to be further price regulations on gas discovered after 1977. In addition, the new policy enabled gas companies, and even large industrial and commercial customers to purchase gas directly from the producers. Until this time, the pipelines had purchased gas from the producers, and in turn sold it to the distributors. The Natural Gas Policy Act was designed to encourage domestic exploration for new gas sources by creating a more competitive marketplace and allowing producers to command higher prices—and it worked. Gas producers all across North America stepped up exploratory drilling, and new gas sources were made available. The gas shortage began to ease late in 1978.

The reversal came at a high price, however. In 1978, the CEO of Indiana Gas, John Kavanagh, cautioned gas customers of what was likely to come. “All of the activities to provide additional gas require very large capital outlays, and it appears that high inflation will affect costs in the 1980s,” he noted in an essay for the Indianapolis News. ’ Therefore, efforts to obtain gas supplies for present and future consumers will be reflected in higher delivered prices,” he cautioned. Kavanagh was correct in his prediction. With the loosening of price controls, natural gas pipeline suppliers increased their rates rapidly and recklessly. In 1982, Indiana Gas’ major supplier raised its gas price by 40 percent in just one adjustment.

The sudden jump in gas prices at the supplier level sent Indiana Gas to the Public Service Commission to petition for a series of rate increases. A 7.8 percent increase in 1980 was followed by an 11.1 increase in 1982 and a 5.2 percent hike in 1983. The company was finally able to access enough gas to service all of its customers—but both the customers and the company were paying exorbitant amounts for it. The high prices led to two natural reactions from gas customers: dissatisfaction and conservation. Faced with prices that were going through the roof, both residential and commercial customers began conserving gas. Many commercial customers switched to alternative fuels, such as electricity, coal, and propane. Indiana Gas was faced with a problem that was the polar opposite of the gas crunch: it had more supply than demand.

The gas surplus, called “the gas bubble” by industry economists, was by no means limited to Indiana Gas or to the state of Indiana. Eventually, this so-called bubble affected the price of gas at the supplier level, and in 1983, the pendulum swung back the other way. Indiana Gas received a reduction in purchase costs from pipeline suppliers, and was able to lower its rates for the first time since 1978. Gas prices continued dropping throughout the 1980s.

Meeting the Challenges of the New Marketplace

In the wake of the turbulent gas shortage and facing the challenges of deregulation, Indiana Gas moved into a period of change and reorganization. The first major change came in 1985, when Indiana Energy, Inc. (IEI) was created as a holding company for Indiana Gas. Then CEO Duane Amundson said the purpose of the reorganization was “to establish a more flexible corporate structure that will position us to diversify our income sources and to expand our energy-related operations.”

The second half of the 1980s was taken up with revamping, both major and minor. The company’s materials distribution and dispatching functions were centralized in a former Indianapolis warehouse. The company’s 27 commercial officers were consolidated into six regional offices, and meter-reading routes were reorganized to improve efficiency and save time. The marketing department kicked off a major new campaign to both win new and retain existing customers. Along with these restructuring projects, the corporate culture changed to become more in keeping with the tenets of the 1985 mission statement. The company became more customer-focused, and the management style slowly evolved from a top-down to an employee-participation approach.

With the task of restructuring largely behind it, Indiana Energy began the processes it was created for: expansion and diversification. In 1990, the company acquired Richmond Gas Corporation and Terre Haute Gas, adding about 47,000 customers. With the two new additions, Indiana Gas had a customer base of 391,000 customers and annual revenues of about $390 million. To begin diversification, IEI formed the subsidiary IEI Investments, Inc., which served as a holding company for all non-regulated businesses. This structure in place, IEI began to invest in businesses that were outside the gas distribution industry—such as flexible gas piping and real estate.

IEI took a major step in 1996, with the formation of ProLiance Energy L.L.C., a strategic alliance of IEI Investments subsidiary IGC Energy, Inc. and a subsidiary of Citizens Gas and Coke Utility. The alliance was formed to supply gas, power, and marketing services to both Indiana Gas and Citizens Gas, as well as other companies. As the sole supplier for these companies, ProLiance had the ability to negotiate favorable prices for gas supplies. It was this fact, however, that led 18 Indiana businesses to protest the ProLiance-Indiana Gas gaspurchasing agreement, claiming that it gave ProLiance a monopoly over gas supplies and prices. Although the Indiana Utility Regulatory Commission upheld the agreement, the Indiana Court of Appeals reversed the decision in 1998. IEI petitioned for the case to be transferred to the Indiana Supreme Court.

Two similar alliances were formed in 1997, again between IEI and a subsidiary of Citizens Gas and Coke. CIGMA L.L.C., was designed to combine the purchasing power of the companies to obtain better pricing, reduce combined inventory, and allow for quick inventory turnover. Energy Systems Group L.L.C. evaluated institutional and industrial customers’ use of energy, and designs, finances, and installed upgrades to maximize energy efficiency and operational performance. A fourth alliance, Reliant Services L.L.C., was formed in 1998 with Indiana electric company, Cinergy Corp. Reliant Services offered locating and trenching services to gas, electric, water, and cable companies.

The year 1998 also brought changes to lEI’s corporate structure. The company divided into separate and distinct business units: Indiana Gas, IEI Investments, and a new, third division, IEI Services. IEI Services served as the company’s administrative arm, providing human relations, information technology, accounting, tax, and building and fleet management services to the IEI companies.

Moving into the 21st Century

In 1997, Indiana Energy’s Board of Directors approved a growth strategy to support the company’s transition into the more competitive deregulated market between the years of 1998 and 2003. The twin goals of the plan were for IEI to become a “leading regional provider of energy products and services” and to increase its consolidated earnings per share by an average of ten percent annually through 2003. Achievement of this goal would likely mean earnings of $2.40 per share by the end of the five-year period. lEI’s strategy relies largely upon growing the earnings from its non-regulated businesses to more than 25 percent of total annual earnings. Increased earnings and customer base for Indiana Gas was another key tenet of the strategy. Indiana Gas earnings were projected to increase five percent yearly for the foreseeable future. IEI also pledged to reduce costs during the five-year plan period. In June 1997, the company announced its intent to reduce the number of full-time employees from 1,025 to approximately 800 by the end of the year 2002. It also committed to selling, abandoning, or otherwise disposing of certain assets, including buildings and gas storage fields.

Principal Subsidiaries

Indiana Gas Company, Inc.; IEI Services L.L.C.; IEI Investments, Inc.; IGC Energy, Inc.; Energy Realty, Inc.; Indiana Energy Services, Inc.; Energy Financial Group, Inc.; IEI Financial Services L.L.C.; ProLiance Energy L.L.C. (50%); Reliant Services L.L.C. (50%).