SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
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 1-9779
NIPSCO Industries, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1719974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
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
-------- --------
As of October 31, 1996, 60,566,493 common shares were outstanding.
NIPSCO INDUSTRIES, INC.
Part I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
NIPSCO Industries, Inc.:
We have audited the accompanying consolidated balance sheet of NIPSCO
Industries, Inc. (an Indiana corporation) and subsidiaries as of September 30,
1996, and December 31, 1995, and the related consolidated statements of
income, common shareholders' equity and cash flows for the three, nine, and
twelve month periods ended September 30, 1996 and 1995. These consolidated
financial statements are the responsibility of Industries' management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
NIPSCO Industries, Inc. and subsidiaries as of September 30, 1996, and
December 31, 1995, and the results of their operations and their cash flows
for the three, nine, and twelve month periods ended September 30, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
October 23, 1996
CONSOLIDATED BALANCE SHEET
September 30, December 31,
ASSETS 1996 1995
============= ============
(Dollars in thousands)
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$144,091 AND $145,129, RESPECTIVELY)
(Note 2):
Electric $ 4,006,616 $ 3,935,103
Gas 1,334,794 1,301,687
Common 350,079 350,168
------------ ------------
5,691,489 5,586,958
Less - Accumulated provision for
depreciation and amortization 2,523,681 2,373,694
------------ ------------
Total Utility Plant 3,167,808 3,213,264
------------ ------------
OTHER PROPERTY AND INVESTMENTS:
Other property, at cost, less accumulated
provision for depreciation 142,333 136,006
Investments, at equity (Note 2) 53,550 47,565
Investments, at cost (Note 2) 29,542 22,899
Other investments 18,889 17,315
------------ ------------
Total Other Property and Investments 244,314 223,785
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 62,905 28,496
Accounts receivable, less reserve of
$7,131 and $7,264,respectively (Note 2) 59,599 108,998
Fuel adjustment clause (Note 2) 9,807 10,301
Gas cost adjustment clause (Note 2) 59,709 1,423
Materials and supplies, at average cost 59,798 65,044
Electric production fuel, at average cost 31,198 14,258
Natural gas in storage, (Note 2) 82,553 60,884
Prepayments and other 48,493 27,177
------------ ------------
Total Current Assets 414,062 316,581
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 213,527 212,491
Deferred charges and other noncurrent
assets 72,220 33,399
------------ ------------
Total Other Assets 285,747 245,890
------------ ------------
$ 4,111,931 $ 3,999,520
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
CAPITALIZATION AND LIABILITIES 1996 1995
============ ============
(Dollars in thousands)
CAPITALIZATION:
Common shareholders' equity
(See accompanying statement) $ 1,112,942 $ 1,122,215
Cumulative preferred stocks (Note 10) -
Northern Indiana Public Service Company:
Series without mandatory redemption
provisions (Note 11) 81,129 81,325
Series with mandatory redemption
provisions (Note 12) 61,801 63,651
NIPSCO Industries Inc.:
Series with mandatory redemption
provisions (Note 12) 0 35,000
Long-term debt excluding amounts due
within one year (Note 16) 1,190,684 1,175,728
------------ ------------
Total Capitalization 2,446,556 2,477,919
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 17) 76,384 96,855
Short-term borrowings (Note 18) 415,026 260,671
Accounts payable 146,144 151,691
Sinking funds due within one year
(Notes 12 and 16) 3,078 2,621
Dividends declared on common and
preferred stocks 26,843 28,179
Customer deposits 14,880 11,361
Taxes accrued 32,821 28,952
Interest accrued 18,126 8,439
Accrued employment costs 38,463 46,695
Other accruals 22,721 33,753
------------ ------------
Total Current Liabilities 794,486 669,217
------------ ------------
OTHER:
Deferred income taxes (Note 7) 603,782 596,940
Deferred investment tax credits, being
amortized over life of related property
(Note 7) 110,344 115,666
Deferred credits 46,166 45,126
Accrued liability for postretirement
benefits (Note 9) 99,772 75,012
Other noncurrent liabilities 10,825 19,640
------------ ------------
Total Other 870,889 852,384
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 4, 5, 6, 19, and 20)
$ 4,111,931 $ 3,999,520
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1996 1995 1996 1995
========== ========== ========== ==========
(Dollars in thousands, except for per share amounts)
Operating Revenues:
(Notes 2, 5, and 22)
Gas $ 79,498 $ 73,648 $ 527,840 $ 473,117
Electric 276,776 296,731 769,432 780,222
---------- ---------- ---------- ----------
356,274 370,379 1,297,272 1,253,339
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 42,784 38,201 309,480 275,559
Fuel for electric
generation 62,346 69,612 172,732 179,309
Power purchased 15,356 13,126 41,639 35,259
---------- ---------- ---------- ----------
120,486 120,939 523,851 490,127
---------- ---------- ---------- ----------
Operating Margin 235,788 249,440 773,421 763,212
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 71,910 73,790 223,185 215,467
Maintenance (Note 2) 17,019 18,916 54,510 58,966
Depreciation and
amortization (Note 2) 55,044 50,685 162,747 149,550
Taxes (except income) 16,955 17,420 55,087 54,989
---------- ---------- ---------- ----------
160,928 160,811 495,529 478,972
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 74,860 88,629 277,892 284,240
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 7) 17,961 24,706 75,489 81,054
---------- ---------- ---------- ----------
Operating Income 56,899 63,923 202,403 203,186
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) 6,741 (1,246) 8,694 (2,220)
---------- ---------- ---------- ----------
Income Before Interest
and Other Charges 63,640 62,677 211,097 200,966
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 21,166 21,061 64,534 62,170
Other interest 5,038 2,457 11,956 8,957
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (290) (580) (737) (3,871)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,142 1,150 3,468 3,252
Dividend requirements on
preferred stocks of
subsidiary 2,174 2,231 6,551 6,821
---------- ---------- ---------- ----------
29,230 26,319 85,772 77,329
---------- ---------- ---------- ----------
Net Income 34,410 36,358 125,325 123,637
Dividend requirements on
preferred shares 0 766 119 2,297
---------- ---------- ---------- ----------
Balance available for
common shareholders $ 34,410 $ 35,592 $ 125,206 $ 121,340
========== ========== ========== ==========
Average common shares
outstanding 61,061,196 63,031,729 61,451,974 63,532,590
Earnings per average
common share $ 0.56 $ 0.56 $ 2.03 $ 1.90
========== ========== ========== ==========
Dividends declared per
common share $ 0.42 $ 0.39 $ 1.26 $ 1.17
========== ========== ========== ==========
Twelve Months
Ended September 30,
----------------------
1996 1995
========== ==========
(Dollars in thousands,
except for per share amounts)
Operating Revenues:
(Notes 2, 5, and 22)
Gas $ 746,125 $ 662,010
Electric 1,020,133 1,019,572
---------- ----------
1,766,258 1,681,582
---------- ----------
Cost of Energy: (Note 2)
Gas costs 433,034 387,544
Fuel for electric
generation 235,760 241,505
Power purchased 50,061 39,777
---------- ----------
718,855 668,826
---------- ----------
Operating Margin 1,047,403 1,012,756
---------- ----------
Operating Expenses and
Taxes (except income):
Operation 298,669 284,313
Maintenance (Note 2) 73,837 78,989
Depreciation and
amortization (Note 2) 214,334 199,014
Taxes (except income) 73,550 72,350
---------- ----------
660,390 634,666
---------- ----------
Operating Income Before
Utility Income Taxes 387,013 378,090
---------- ----------
Utility Income Taxes
(Note 7) 102,884 106,258
---------- ----------
Operating Income 284,129 271,832
---------- ----------
Other Income (Deductions)
(Note 2) 6,673 2,924
---------- ----------
Income Before Interest
and Other Charges 290,802 274,756
---------- ----------
Interest and Other Charges:
Interest on long-term debt 85,019 81,273
Other interest 15,780 12,861
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (544) (5,376)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 4,618 4,310
Dividend requirements on
preferred stocks of
subsidiary 8,776 9,118
---------- ----------
113,649 102,186
---------- ----------
Net Income 177,153 172,570
Dividend requirements on
preferred shares 885 3,063
---------- ----------
Balance available for
common shareholders $ 176,268 $ 169,507
========== ==========
Average common shares
outstanding 61,724,244 63,655,520
Earnings per average
common share $ 2.85 $ 2.66
========== ==========
Dividends declared per
common share $ 1.68 $ 1.56
========== ==========
<FN>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Dollars in Thousands
-----------------------------------------------------
Additional
Common Paid-in Retained
Three Months Ended Total Shares Capital Earnings
======================== =========== =========== =========== ===========
Balance, July 1, 1995 $ 1,116,208 $ 870,930 $ 31,950 $ 482,823
Net income 36,358 36,358
Dividends:
Preferred shares (766) (766)
Common shares (24,474) (24,474)
Treasury shares acquired (11,854)
Issued:
Employee stock purchase
plan 299 159
Long-term incentive plan 725
Amortization of unearned
compensation 574
Other 112 93 (65)
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ 1,117,182 $ 870,930 $ 32,202 $ 493,876
=========== =========== =========== ===========
Balance, July 1, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076
Net income 34,410 34,410
Dividends:
Common shares (25,561) (25,561)
Treasury shares acquired (13,904)
Issued:
Employee stock purchase
plan 166 100
Long-term incentive plan 704
Amortization of unearned
compensation 560
Unrealized gain on
available for sale
securities 230
Other 109 (22)
----------- ----------- ----------- -----------
Balance, September 30,
1996 $ 1,112,942 $ 870,930 $ 32,774 $ 566,903
=========== =========== =========== ===========
Dollars in Thousands Shares
--------------------------------------- -----------
Currency
Three Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== =========== ===========
Balance, July 1, 1995 $ (260,485) $ (1,481) $ (7,529) 73,892,109
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (11,854)
Issued:
Employee stock purchase
plan 140
Long-term incentive plan 725
Amortization of unearned
compensation 574
Other 84
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ (271,474) $ (1,397) $ (6,955) 73,892,109
=========== =========== =========== ===========
Balance, July 1, 1996 $ (339,673) $ (1,991) $ (3,788) 73,892,109
Net income
Dividends:
Common shares
Treasury shares acquired (13,904)
Issued:
Employee stock purchase
plan 66
Long-term incentive plan 704
Amortization of unearned
compensation 560
Unrealized gain
on available for sale
securities 230
Other 131
----------- ----------- ----------- -----------
Balance, September 30,
1996 $ (352,807) $ (1,860) $ (2,998) 73,892,109
=========== =========== =========== ===========
Shares
-----------
Three Months Ended Treasury
(continued) Shares
======================== ===========
Balance, July 1, 1995 (10,627,573)
Net income
Dividends:
Common shares
Treasury shares acquired (363,407)
Issued:
Employee stock purchase
plan 8,791
Long-term incentive plan 29,000
Amortization of unearned
compensation
Other
-----------
Balance, September 30,
1995 (10,953,189)
===========
Balance, July 1, 1996 (12,737,360)
Net income
Dividends:
Common shares
Treasury shares acquired (377,024)
Issued:
Employee stock purchase
plan 4,118
Long-term incentive plan 26,100
Amortization of unearned
compensation
Unrealized gain
on available for sale
securities
Other
------------
Balance, September 30,
1996 (13,084,166)
============
Dollars in Thousands
----------------------------------------------------
Additional
Common Paid-in Retained
Nine Months Ended Total Shares Capital Earning
======================== =========== =========== =========== ===========
Balance, January 1, 1995 $ 1,107,848 $ 870,930 $ 29,657 $ 446,928
Net income 123,637 123,637
Dividends:
Preferred shares (2,297) (2,297)
Common shares (74,131) (74,131)
Treasury shares acquired (44,093)
Issued:
Employee stock purchase
plan 604 301
Long-term incentive plan 3,442 1,654
Amortization of unearned
compensation 1,736
Other 436 590 (261)
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ 1,117,182 $ 870,930 $ 32,202 $ 493,876
=========== =========== =========== ===========
Balance, January 1, 1996 $ 1,122,215 $ 870,930 $ 32,210 $ 518,837
Net income 125,325 125,325
Dividends:
Preferred shares (119) (119)
Common shares (77,039) (77,039)
Treasury shares acquired (61,940)
Issued:
Employee stock purchase
plan 615 361
Long-term incentive plan 1,714 184
Amortization of unearned
compensation 1,748
Unrealized gain on
available for sale
securities 435
Other (12) 19 (101)
----------- ----------- ----------- -----------
Balance, September 30,
1996 $ 1,112,942 $ 870,930 $ 32,774 $ 566,903
=========== =========== =========== ===========
Dollars in Thousands Shares
--------------------------------------- -----------
Currency
Nine Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== =========== ===========
Balance, January 1, 1995 $ (237,193) $ (1,504) $ (970) 73,892,109
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (44,093)
Issued:
Employee stock purchase
plan 303
Long-term incentive plan 9,509 (7,721)
Amortization of unearned
compensation 1,736
Other 107
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ (271,474) $ (1,397) $ (6,955) 73,892,109
=========== =========== =========== ===========
Balance, January 1, 1996 $ (293,223) $ (1,930) $ (4,609) 73,892,109
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (61,940)
Issued:
Employee stock purchase
plan 254
Long-term incentive plan 2,102 (572)
Amortization of unearned
compensation 1,748
Unrealized gain
on available for sale
securities 435
Other 70
----------- ----------- ----------- -----------
Balance, September 30,
1996 $ (352,807) $ (1,860) $ (2,998) 73,892,109
=========== =========== =========== ===========
Shares
-----------
Nine Months Ended Treasury
(continued) Shares
======================== ===========
Balance, January 1, 1995 (9,986,720)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (1,366,741)
Issued:
Employee stock purchase
plan 19,022
Long-term incentive plan 381,250
Amortization of unearned
compensation
Other
-----------
Balance, September 30,
1995 (10,953,189)
===========
Balance, January 1, 1996 (11,512,513)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (1,666,768)
Issued:
Employee stock purchase
plan 15,965
Long-term incentive plan 79,150
Amortization of unearned
compensation
Unrealized gain
on available for sale
securities
Other
-----------
Balance, September 30,
1996 (13,084,166)
===========
Dollars in Thousands
------------------------------------------------------
Additional
Common Paid-in Retained
Twelve Months Ended Total Shares Capital Earnings
======================== =========== =========== =========== ===========
Balance, October 1, 1994 $ 1,089,838 $ 870,930 $ 28,317 $ 423,667
Net income 172,570 172,570
Dividends:
Preferred shares (3,063) (3,063)
Common shares (99,021) (99,021)
Treasury shares acquired (51,677)
Issued:
Employee stock purchase
plan 604 301
Long-term incentive plan 3,748 1,656
Amortization of unearned
compensation 1,929
Other 2,254 1,928 (277)
----------- ----------- ---------- -----------
Balance, September 30,
1995 $ 1,117,182 $ 870,930 $ 32,202 $ 493,876
----------- ----------- ---------- -----------
Net income 177,153 177,153
Dividends:
Preferred shares (885) (885)
Common shares (103,140) (103,140)
Treasury shares acquired (87,030)
Issued:
Employee stock purchase
plan 615 361
Long-term incentive plan 5,057 186
Amortization of unearned
compensation 2,425
Unrealized gain on
available for sale
securities 2,104
Other (539) 25 (101)
----------- ----------- ---------- -----------
Balance, September 30,
1996 $ 1,112,942 $ 870,930 $ 32,774 $ 566,903
=========== =========== ========== ===========
Dollars in Thousands Shares
-------------------------------------- -----------
Currency
Twelve Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== ========== ===========
Balance, October 1, 1994 $ (229,913) $ (2,000) $ (1,163) 73,892,109
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (51,677)
Issued:
Employee stock purchase
plan 303
Long-term incentive plan 9,813 (7,721)
Amortization of unearned
compensation 1,929
Other 603
----------- ----------- ---------- -----------
Balance, September 30,
1995 $ (271,474) $ (1,397) $ (6,955) 73,892,109
----------- ----------- ---------- -----------
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (87,030)
Issued:
Employee stock purchase
plan 254
Long-term incentive plan 5,443 (572)
Amortization of unearned
compensation 2,425
Unrealized gain on
available for sale
securities 2,104
Other (463)
----------- ----------- ---------- -----------
Balance, September 30,
1996 $ (352,807) $ (1,860) $ (2,998) 73,892,109
=========== =========== ========== ===========
Shares
-----------
Twelve Months Ended Treasury
(continued) Shares
======================== ===========
Balance, October 1, 1994 (9,728,999)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (1,637,162)
Issued:
Employee stock purchase
plan 19,022
Long-term incentive plan 393,950
Amortization of unearned
compensation
Other
-----------
Balance, September 30,
1995 (10,953,189)
-----------
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (2,357,692)
Issued:
Employee stock purchase
plan 15,965
Long-term incentive plan 210,750
Amortization of unearned
compensation
Unrealized gain
on available for sale
securities
Other
-----------
Balance, September 30,
1996 (13,084,166)
===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months
Ended September 30,
-----------------------
1996 1995
========= =========
(Dollars in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 34,410 $ 36,358
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 55,044 50,685
Deferred federal and state operating
income taxes, net 1,998 4,254
Deferred investment tax credits, net (1,984) (1,869)
Advance contract payment 475 0
Change in certain assets and liabilities -
Accounts receivable, net 20,234 9,215
Electric production fuel (301) 2,915
Materials and supplies 2,168 2,380
Natural gas in storage (53,023) (35,734)
Accounts payable (10,235) 248
Taxes accrued (22,354) (20,383)
Fuel adjustment clause 1,816 (5,763)
Gas cost adjustment clause (10,763) (6,114)
Accrued employment costs 797 858
Other accruals (2,265) 574
Other, net 41,088 18,496
--------- ---------
Net cash provided by operating activities 57,105 56,120
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Utility construction expenditures (44,506) (38,731)
Construction expenditures related to
Crossroads Pipeline Company (1,007) (1,548)
Other, net (8,491) (12,076)
--------- ---------
Net cash used in investing activities (54,004) (52,355)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 0 7,715
Issuance of short-term debt 519,050 68,797
Net change in commercial paper 3,500 42,900
Retirement of long-term debt (80,434) (97,706)
Retirement of short-term debt (374,350) (16,732)
Retirement of preferred shares (600) (1,008)
Issuance of common shares 853 1,024
Acquisition of treasury shares (13,904) (11,854)
Cash dividends paid on common shares (25,692) (24,550)
Cash dividends paid on preferred shares 0 (2,619)
Other, net 121 96
--------- ---------
Net cash provided by (used in)
financing activities 28,544 (33,937)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 31,645 (30,172)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 31,260 48,670
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 62,905 $ 18,498
========= =========
Nine Months
Ended September 30,
-----------------------
1996 1995
========= =========
(Dollars in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 125,325 $ 123,637
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 162,747 149,550
Deferred federal and state operating
income taxes, net 14,939 (17,700)
Deferred investment tax credits, net (5,322) (5,605)
Advance contract payment (17,575) 0
Change in certain assets and liabilities -
Accounts receivable, net 49,399 31,108
Electric production fuel (16,940) 1,544
Materials and supplies 5,246 (1,099)
Natural gas in storage (21,669) 3,730
Accounts payable (5,547) (43,673)
Taxes accrued (16,174) 9,586
Fuel adjustment clause 494 (7,069)
Gas cost adjustment clause (58,286) 55,009
Accrued employment costs (8,232) (2,297)
Other accruals (11,032) 29,144
Other, net 18,401 24,602
--------- ---------
Net cash provided by operating activities 215,774 350,467
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Utility construction expenditures (124,664) (135,215)
Construction expenditures related to
Crossroads Pipeline Company (1,371) (2,480)
Other, net (23,060) (20,511)
--------- ---------
Net cash used in investing activities (149,095) (158,206)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 77,450 181,689
Issuance of short-term debt 1,117,458 476,936
Net change in commercial paper 58,500 (120,100)
Retirement of long-term debt (89,171) (123,662)
Retirement of short-term debt (1,022,385) (504,324)
Retirement of preferred shares (37,046) (6,339)
Issuance of common shares 2,267 3,852
Acquisition of treasury shares (61,940) (44,093)
Cash dividends paid on common shares (77,685) (74,572)
Cash dividends paid on preferred shares (119) (4,150)
Other, net 401 559
--------- ---------
Net cash provided by (used in)
financing activities (32,270) (214,204)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 34,409 (21,943)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 28,496 40,441
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 62,905 $ 18,498
========= =========
Twelve Months
Ended September 30,
-----------------------
1996 1995
========= =========
(Dollars in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 177,153 $ 172,570
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 214,334 199,014
Deferred federal and state operating
income taxes, net 29,958 (21,284)
Deferred investment tax credits, net (7,232) (7,433)
Advance contract payment (17,575) 0
Change in certain assets and liabilities -
Accounts receivable, net (15,814) (12,007)
Electric production fuel (14,395) 3,794
Materials and supplies 6,731 1,329
Natural gas in storage (8,489) 12,898
Accounts payable 31,105 (33,428)
Taxes accrued (34,962) 36,965
Fuel adjustment clause (1,124) (3,795)
Gas cost adjustment clause (88,746) 8,535
Accrued employment costs (3,051) 758
Other accruals (17,453) 25,095
Other, net 6,359 18,911
--------- ---------
Net cash provided by operating activities 256,799 401,922
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Utility construction expenditures (179,203) (181,143)
Construction expenditures related to
Crossroads Pipeline Company (2,103) (3,153)
Other, net (54,298) (25,198)
--------- ---------
Net cash used in investing activities (235,604) (209,494)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 75,316 190,418
Issuance of short-term debt 1,931,495 755,736
Net change in commercial paper 94,000 (96,700)
Retirement of long-term debt (87,614) (84,143)
Retirement of short-term debt (1,770,311) (811,910)
Retirement of preferred shares (37,802) (14,484)
Issuance of common shares 5,804 4,158
Acquisition of treasury shares (87,030) (51,677)
Cash dividends paid on common shares (102,156) (97,637)
Cash dividends paid on preferred shares 968 (4,916)
Other, net 542 478
--------- ---------
Net cash provided by (used in)
financing activities 23,212 (210,677)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 44,407 (18,249)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 18,498 36,747
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 62,905 $ 18,498
========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) is an
Indiana corporation serving as the holding company for a number of
subsidiaries, including four regulated companies: Northern Indiana Public
Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas);
Northern Indiana Fuel and Light Company, Inc. (NIFL); and Crossroads
Pipeline Company (Crossroads). Northern Indiana is a public utility operating
company supplying natural gas and electric energy to the public. Kokomo Gas
and NIFL are public utility operating companies supplying natural gas to the
public, and Crossroads is an interstate natural gas transmission company.
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development); NIPSCO Energy Services, Inc. (Services); Primary
Energy, Inc. (Primary); and NIPSCO Capital Markets, Inc. (Capital Markets).
Development makes various investments, including real estate and venture
capital investments. Services coordinates the energy-related diversification
ventures of Industries. Primary arranges energy-related projects with large
industrial customers. Capital Markets handles financing for Industries and
its subsidiaries, other than Northern Indiana.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements include
the accounts of Industries; its regulated subsidiaries Northern Indiana,
Kokomo Gas, NIFL and Crossroads (Utilities); and all non-utility subsidiaries.
Investments for which Industries has at least a 20% interest and certain joint
ventures are accounted for under the equity method of accounting. Investments
with less than a 20% interest are accounted for under the cost method of
accounting. The operating results of the non-utility subsidiaries, as well
as the non-operating results of the Utilities, are included under the caption
"Other Income (Deductions)" in the Consolidated Statement of Income. Interest
on long-term debt, other interest, and amortization of debt discount and
expense are reflected as a component of "Interest and Other Charges." All
significant intercompany items have been eliminated in consolidation.
Certain reclassifications were made to conform the prior years' financial
statements to the current presentation.
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 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.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions, as a percentage of the cost of
depreciable utility plant, were approximately 4.3%, 4.2%, and 4.2% for the
three-month, nine-month, and twelve-month periods ended September 30, 1996,
respectively; and 4.0%, 4.1%, and 4.1% for the three-month, nine-month, and
twelve-month periods ended September 30, 1995. The depreciation rates for
electric and gas properties were 3.55% and 4.92%, respectively.
Kokomo Gas provides depreciation on the original cost of utility plant
in service using straight-line rates that averaged approximately 3.1% for the
three-month, nine-month, and twelve-month periods ended September 30, 1996;
and 3.2% for the three-month, nine-month, and twelve-month periods ended
September 30, 1995.
NIFL provides depreciation on the original cost of utility plant in
service using straight-line rates that averaged approximately 2.75% for the
three-month, nine-month, and twelve-month periods ended September 30, 1996 and
September 30, 1995.
Crossroads provides depreciation on the original cost of utility plant
in service using straight-line rates that averaged approximately 2.5% for the
three-month, nine-month, and twelve-month periods ended September 30, 1996 and
September 30, 1995.
The Utilities follow the practice of charging maintenance and repairs,
including the cost of renewals of minor items of property, to maintenance
expense accounts, except for repairs of transportation and service equipment
which are charged to clearing accounts and redistributed to operating expense
and other accounts. When property which represents a retirement unit is
replaced or removed, the cost of such property is credited to utility plant,
and such cost, together with the cost of removal less salvage, is charged to
the accumulated provision for depreciation.
AMORTIZATION OF SOFTWARE COSTS. Northern Indiana amortizes capitalized
software costs using the straight-line method based on estimated economic
lives.
PLANT ACQUISITION ADJUSTMENTS. Industries' costs in excess of the
underlying book values of the acquired NIFL and Kokomo Gas subsidiaries have
been recorded as plant acquisition adjustments which are being amortized
over forty-year periods from their respective dates of acquisition.
COAL RESERVES. Northern Indiana has a long-term mining contract to
mine its coal reserves through the year 2001. The costs of these reserves
are being recovered through the rate-making process as such coal reserves are
used to produce electricity.
OIL AND NATURAL GAS ACCOUNTING. NIPSCO Fuel Company, Inc., a
wholly-owned subsidiary of Services, uses the full-cost method of accounting
for its oil and natural gas production activities. Under this method, all
costs incurred in the acquisition, exploration, and development of oil and
natural gas properties are capitalized and amortized on the
units-of-production basis.
POWER PURCHASED. Power purchases and net interchange power with other
electric utilities under interconnection agreements are included in Cost of
Energy under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At September 30, 1996, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which expires
May 31, 1997.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement
of Cash Flows, Industries considers temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
------------------- ------------------- -------------------
1996 1995 1996 1995 1996 1995
======== ======== ======== ======== ======== ========
(Dollars in thousands)
Income taxes $ 20,047 $ 30,500 $ 75,795 $ 80,100 $113,635 $104,989
Interest, net
of amounts
capitalized $ 15,141 $ 15,375 $ 56,089 $ 56,307 $ 89,103 $ 81,208
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under-recovery or over-recovery caused by variances between estimated
and actual cost in a given three-month period will be included in a future
filing. Northern Indiana records any under-recovery or over-recovery as
a current asset or current liability until such time as it is billed
or refunded to its customers. The fuel adjustment factor is subject to a
quarterly hearing by the Commission and remains in effect for a three-month
period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage, and
storage transportation charges. The Utilities record any under-recovery or
over-recovery as a current asset or current liability until such time as it is
billed or refunded to their customers. The gas cost adjustment factor for
Northern Indiana is subject to a quarterly hearing by the Commission and
remains in effect for a three-month period. The gas cost adjustment factors
for Kokomo Gas and NIFL are subject to semi-annual hearings by the Commission
and remain in effect for a six-month period. If the statutory requirement
relating to the level of return is satisfied, any under-recovery or over-
recovery caused by variances between estimated and actual cost in a given
three-month or six-month period will be included in a future filing. See
Note 5, FERC Order No. 636 for a discussion of gas transition cost charges.
NATURAL GAS IN STORAGE. Northern Indiana's natural gas in storage is
valued using the last-in, first-out (LIFO) inventory methodology. Based on the
average cost of gas purchased in September 1996 and December 1995 the
estimated replacement cost of gas in storage (current and non-current) at
September 30, 1996 and December 31, 1995 exceeded the stated LIFO cost by
approximately $20 million and $30 million, respectively. Certain other
subsidiaries of Industries have natural gas in storage valued at average cost.
HEDGING ACTIVITIES. Industries' gas subsidiaries use commodity futures
contracts, options and swap (derivative financial instruments) to hedge the
impact of natural gas price fluctuations related to its business activities.
Gains and losses on these derivative financial instruments are deferred and
recognized in income concurrent with the related purchases and sales of
natural gas.
As of September 30, 1996, Industries had open derivative financial
instruments representing hedges of natural gas sales of 4.4 billion cubic feet
(Bcf) and natural gas purchases of 3.1 Bcf. The deferred gain on these
derivative financial instruments totalled $0.6 million. This gain will be
included in the margin on the related natural gas transactions.
REGULATORY ASSETS. The Utilities' operations are subject to the
regulation of the Commission and the Federal Energy Regulatory Commission
(FERC). Accordingly, the Utilities' accounting policies are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." The Utilities
monitor changes in market and regulatory conditions and the resulting impact
of such changes in order to continue to apply the provisions of SFAS No. 71
to some or all of its operations. The regulatory assets identified below
represent probable future revenue to the Utilities associated with certain
incurred costs as these costs are recovered through the rate-making process.
If a portion of the Utilities' operations becomes no longer subject to the
provisions of SFAS No. 71, a write-off of certain of the regulatory assets
identified below might be required. Regulatory assets were comprised of the
following items and were reflected in the Consolidated Balance Sheet as
follows:
September 30, December 31,
1996 1995
============= ============
(Dollars in thousands)
Unamortized reacquisition premium on
debt (Note 16) $ 51,140 $ 53,776
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 71,818 74,981
Bailly scrubber carrying charges and
deferred depreciation (See below) 11,050 11,517
Deferral of SFAS No. 106 expense not
recovered (Note 9) 82,327 64,834
FERC Order No. 636
transition costs (Note 5) 31,579 25,038
------------- ------------
247,914 230,146
Less: Current portion of regulatory assets 34,387 17,655
------------- ------------
$ 213,527 $ 212,491
============= ============
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement imposes stricter criteria for
retention of regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. The Utilities adopted this
standard on January 1, 1996, and adoption did not impact their financial
position or results of operations.
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges
and deferred depreciation in accordance with orders of the Commission until
the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each
unit.
Northern Indiana has capitalized carrying charges and deferred
depreciation and certain operating expenses relating to its scrubber service
agreement for its Bailly Generating Station in accordance with an order of the
Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying
charges is being amortized over the remaining life of the scrubber service
agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1994, a pre-tax rate of 5.0% for all construction was
being used; effective January 1, 1995 the rate increased to 6.0%; and for 1996
the rate remained at 6.0%.
FOREIGN CURRENCY TRANSLATION. Translation gains or losses are based
upon the end-of-period exchange rate and are recorded as a separate component
of common shareholders' equity.
INVESTMENTS IN REAL ESTATE. Development has invested in a series of
affordable housing projects in the Utilities' service territory. These
investments include certain tax benefits, including low-income housing tax
credits and tax deductions for operating losses of the housing projects.
Development accounts for these investments using the equity method.
Investments, at equity, include $24.2 million and $21.9 million relating to
affordable housing projects at September 30, 1996 and December 31, 1995,
respectively.
INCOME TAXES. Deferred income taxes are recognized as costs in the
rate-making process by the commissions having jurisdiction over the rates
charged by the Utilities. Deferred income taxes are provided as a result of
provisions in the income tax law that either require or permit certain items
to be reported on the income tax return in a different period than they are
reported in the financial statements. These taxes are reversed by a debit or
credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
(3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the years
1982 through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS believes that interest paid on the Notes should have been
subject to United States tax withholding. The Notes were redeemed in 1985
and Finance was subsequently liquidated. On October 25, 1991, Northern
Indiana challenged the assessment in the United States Tax Court (Tax Court)
and the matter was tried in 1994. On November 6, 1995, the Tax Court ruled
in favor of Northern Indiana, finding that the interest paid on the Notes was
not subject to United States tax withholding. On March 13, 1996, the IRS
appealed the Tax Court's decision to the U. S. Court of Appeals for the
Seventh Circuit, and on March 25, 1996 Northern Indiana filed its cross
appeal. Northern Indiana's management and general counsel believe the ruling
of the Tax Court will prevail.
(4) ELM ENERGY AND RECYCLING (UK) LTD.: Development, a wholly-owned
subsidiary of Industries, is a 95% shareholder in Elm Energy and Recycling
(UK) Ltd. (Elm), which owns and operates a tire-fueled electric generating
plant in Wolverhampton, England (Project), that began operating in late 1993.
In 1992, Elm entered into a contract with TBV Power Limited (TBV), a company
jointly owned by affiliates of the Tarmac PLC Group and Black & Veatch, for
the design, construction, and commissioning of the Project. Pursuant to that
contract and other agreements between Elm and TBV, TBV committed to complete
certain work and pass certain performance and reliability tests for the
Project no later than June 30, 1995, which would have allowed the independent
Project engineer to issue an Acceptance and Completion Certificate by that
date.
On July 3, 1995, the Project engineer notified TBV that an Acceptance
and Completion Certificate had not been issued as of June 30, 1995. Elm then
notified TBV that it was rejecting the Project in accordance with the terms of
the contract between it and TBV. As a result, on July 3, 1995 Barclays Bank,
as agent for the banks which had provided financing for the Project, issued a
notice of an event of default to Elm. On July 4, 1995, the Project engineer
notified TBV that, in accordance with the contract between Elm and TBV, all
monies previously paid by Elm to TBV (29.6 million Pounds Sterling) were to be
reimbursed by TBV to Elm. The certificate issued by the Project engineer was
adjudicated under a procedure provided in the construction contract, and the
adjudicator confirmed the full 29.6 million Pounds Sterling as owing to Elm.
TBV has filed suit in the English courts to enjoin enforcement of the
adjudicator's decision, to challenge again the Project engineer's decision
and to allege breaches of the underlying construction contract and
misrepresentations by Elm. Elm has counterclaimed and is aggressively
pursuing its remedies.
Elm and Development are also seeking additional remedies at law, in both
the United States and the United Kingdom, for further damages and/or sanctions
against TBV and/or Tarmac PLC Group and Black & Veatch. In response to the
claims brought by Elm and Development in the United States, Black & Veatch
has brought a counterclaim against Elm and Development alleging breach of
contract, negligence, misrepresentation and promissory estoppel. Development
believes that the claims made against it and Elm are meritless and that its
remedies, in conjunction with Elm's rights under the construction contract,
will be sufficient to mitigate any losses which Elm and/or Development may
otherwise incur as a result of TBV's failure to complete the Project in
accordance with the contract.
Development believes that it and Elm have sustainable and adequate
remedies under the construction contract such that rejection will not have
a material adverse effect on Industries. Elm is continuing to operate the
plant. The banks which provided the financing for the plant are continuing to
support its operations and to provide working capital under an uncommitted
loan facility which is repayable on demand or, in any event, May 31, 1997
(unless extended). However, because of the ongoing defaults under the Project
financing and the demand nature of the uncommitted working capital loan
facility, the banks have the right to ask that the operation of the plant be
terminated and the assets sold. In that event, some or all of Industries'
investments in Elm may be at risk. Industries' investments in Elm were
approximately $12.4 million at September 30, 1996.
(5) FERC ORDER NO. 636. Pursuant to FERC Order No. 636, interstate
pipeline sales services have been "unbundled" such that gas supplies are being
sold separately from interstate transportation services. The Utilities have
contracted for a mix of transportation and storage services from their
pipeline suppliers which allows them to meet the needs of their customers.
Pipelines are recovering, from their customers, certain transition costs
associated with restructuring under the Order No. 636 regulation. Any such
recovery is subject to established review procedures at the FERC.
The Utilities expect that the total transition costs from all suppliers
will approximate $139 million; however, the ultimate level of costs will
depend on future events, including the market price of natural gas.
Approximately $106 million of such costs have been recorded, a portion of
which has been paid to the pipeline suppliers, subject to refund. The
Commission has approved the recovery of these FERC-allowed transition costs on
a volumetric basis from sales and transportation customers. Regulatory assets,
in amounts corresponding to the costs recorded but not yet collected, have
been recorded to reflect the ultimate recovery of these costs.
(6) ENVIRONMENTAL MATTERS: The Utilities have an ongoing program to remain
aware of laws and regulations involved with hazardous waste and other
environmental matters. It is the Utilities' intent to continue to evaluate
their facilities and properties with respect to these rules and identify
any sites that would require corrective action. The Utilities have recorded
a reserve of $8.4 million to cover probable corrective actions as of
September 30, 1996; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, the Utilities believe that any corrective actions required, after
consideration of insurance coverages and contributions from other potentially
responsible parties, will not have a significant impact on the financial
position or results of operations of Industries.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be
recoverable through the rate-making process.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites Northern Indiana and/or
the other named PRPs are presently working with the EPA to clean up the
sites and avoid the imposition of fines or added costs.
The Utilities have instituted a program to investigate former
manufactured-gas plants where one of them is the current or former owner.
The Utilities have identified twenty-seven of these sites and made visual
inspections of these sites. Initial samplings have been conducted at
seventeen sites. Follow-up investigations have been conducted at five sites
and potential remedial measures are being evaluated. The Utilities will
continue their program to assess sites. During the follow-up investigation of
the former manufactured-gas plant in Elkhart, Indiana, Northern Indiana noted
the presence of hydrocarbons in the Elkhart River. Northern Indiana reported
this finding to the Indiana Department of Environmental Management (IDEM) and
the EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by the IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated parts of the Fort
Wayne site. The remainder of the site is being evaluated to determine what
further remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted
the presence of manufactured-gas plant residuals in the St. Mary's River in
Fort Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana
notified the IDEM and the EPA and immediately took steps to contain the
material at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured-gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
The Utilities have met with various companies that provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured-gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured-gas plant sites. The state court action is stayed
pending resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields emanating
from power lines, household appliances, and other electric sources may result
in adverse health effects has been the subject of public, governmental, and
media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
(7) INCOME TAXES: Industries uses the liability method of accounting for
income taxes under which deferred income taxes are recognized, at currently
enacted income tax rates, to reflect the tax effect of temporary differences
between the financial statement and tax bases of assets and liabilities.
To the extent certain deferred income taxes of the Utilities are
recoverable or payable through future rates, regulatory assets and
liabilities have been established. Regulatory assets are primarily
attributable to undepreciated AFUDC-equity and the cumulative net amount of
other income tax timing differences for which deferred taxes had not
been provided in the past, when regulators did not recognize such taxes as
costs in the rate-making process. Regulatory liabilities are primarily
attributable to the Utilities' obligation to credit to ratepayers deferred
income taxes provided at rates higher than the current federal tax rate
currently being credited to ratepayers using the average rate assumption
method and unamortized deferred investment tax credits.
The components of the net deferred income tax liability at
September 30, 1996 and December 31, 1995 are as follows:
September 30, December 31,
1996 1995
============= ============
(Dollars in thousands)
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 717,801 $ 706,715
AFUDC-equity 38,389 40,083
Adjustment clauses 25,772 4,613
Take-or-pay gas costs 985 1,550
Other regulatory assets 31,893 28,930
Reacquisition premium on debt 19,398 20,397
Deferred tax assets -
Deferred investment tax credits (41,835) (43,854)
Removal costs (123,858) (118,064)
FERC Order No. 636 transition costs (2,501) (4,400)
Other postretirement/postemployment
benefits (40,755) (32,512)
Other, net (7,521) (12,575)
------------- ------------
617,768 590,883
Less: Deferred income taxes related to
current assets and liabilities 13,986 (6,057)
------------- ------------
Deferred income taxes - noncurrent $ 603,782 $ 596,940
============= ============
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
Current income taxes -
Federal $ 15,362 $ 19,344 $ 56,767 $ 90,919
State 2,585 2,977 9,105 13,440
--------- --------- --------- ---------
17,947 22,321 65,872 104,359
--------- --------- --------- ---------
Deferred income taxes, net -
Federal 1,767 3,876 13,557 (16,482)
State 231 378 1,382 (1,218)
--------- --------- --------- ---------
1,998 4,254 14,939 (17,700)
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,984) (1,869) (5,322) (5,605)
--------- --------- --------- ---------
Total utility operating income
taxes 17,961 24,706 75,489 81,054
Income tax applicable to non-
operating activities and income
of non-utility subsidiaries 2,116 (1,008) 40 (6,021)
--------- --------- --------- ---------
Total income taxes $ 20,077 $ 23,698 $ 75,529 $ 75,033
========= ========= ========= =========
Twelve Months
Ended September 30,
--------------------
1996 1995
========= =========
(Dollars in thousands)
Current income taxes -
Federal $ 69,072 $ 117,456
State 11,086 17,519
--------- ---------
80,158 134,975
--------- ---------
Deferred income taxes, net -
Federal 27,395 (19,809)
State 2,563 (1,475)
--------- ---------
29,958 (21,284)
--------- ---------
Deferred investment tax credits,
net (7,232) (7,433)
--------- ---------
Total utility operating income
taxes 102,884 106,258
Income tax applicable to non-
operating activities and income
of non-utility subsidiaries (3,189) (17,577)
--------- ---------
Total income taxes $ 99,695 $ 88,681
========= =========
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pre-tax income is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
Net income $ 34,410 $ 36,358 $ 125,325 $ 123,637
Add-Income taxes 20,077 23,698 75,529 75,033
Dividend requirements on
preferred stocks of subsidiary 2,174 2,231 6,551 6,821
--------- --------- --------- ---------
Income before preferred dividend
requirements of subsidiary and
income taxes $ 56,661 $ 62,287 $ 207,405 $ 205,491
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 19,832 $ 21,801 $ 72,592 $ 71,922
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 1,007 1,005 3,020 3,014
Amortization of deferred
investment tax credits (1,984) (1,869) (5,322) (5,605)
State income taxes, net of
federal income tax benefit 1,946 2,269 7,337 7,218
Fair market value of property
donated in excess of book value 0 0 0 0
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,409) (1,360) (4,228) (4,079)
Other, net 685 1,852 2,130 2,563
--------- --------- --------- ---------
Total income taxes $ 20,077 $ 23,698 $ 75,529 $ 75,033
========= ========= ========= =========
Twelve Months
Ended September 30,
--------------------
1996 1995
========= =========
(Dollars in thousands)
Net income $ 177,153 $ 172,570
Add-Income taxes 99,695 88,681
Dividend requirements on
preferred stocks of subsidiary 8,776 9,118
--------- ---------
Income before preferred dividend
requirements of subsidiary and
income taxes $ 285,624 $ 270,369
========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 99,969 $ 94,630
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 4,024 4,156
Amortization of deferred
investment tax credits (7,232) (7,433)
State income taxes, net of
federal income tax benefit 9,598 9,399
Fair market value of property
donated in excess of book value 0 (7,753)
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (5,814) (5,991)
Other, net (850) 1,673
--------- ---------
Total income taxes $ 99,695 $ 88,681
========= =========
(8) PENSION PLANS: Industries and its subsidiaries have three
noncontributory, defined benefit retirement plans covering substantially all
employees. Benefits under the plans reflect the employees' compensation,
years of service, and age at retirement.
The plans' funded status as of January 1, 1996 and 1995 are as follows:
1996 1995
========= =========
(Dollars in thousands)
Vested benefit obligation $ 549,234 $ 449,043
Nonvested benefit 104,814 97,138
--------- ---------
Accumulated benefit obligation $ 654,048 $ 546,181
========= =========
Projected benefit obligation for service
rendered to date $ 759,681 $ 613,094
Plan assets at fair market value 706,320 571,624
--------- ---------
Projected benefit obligation in excess of plan
assets 53,361 41,470
Unrecognized transition obligation at January 1,
being recognized over seventeen years (43,484) (48,906)
Unrecognized prior service cost (27,242) (29,847)
Unrecognized gains 4,217 47,788
--------- ---------
Accrued (prepaid) pension costs $ (13,148) $ 10,505
========= =========
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on a plan benefit formula without
considering expected future salary increases. The projected benefit
obligation considers estimated future salary increases. Discount rates of
7.25% and 8.75% and rates of increase in compensation levels of 5.5% were used
to determine the accumulated benefit obligation and projected benefit
obligation at January 1, 1996 and 1995, respectively. The increase in the
accumulated benefit obligation as of January 1, 1996 is mainly caused by the
decrease in the discount rate from 8.75% to 7.25%.
The following items are the components of provisions for pensions for
the three-month, nine-month, and twelve-month periods ended September 30,
1996 and September 30, 1995:
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
------------------ ------------------- ------------------
1996 1995 1996 1995 1996 1995
======== ======== ======== ======== ======== ========
(Dollars in thousands)
Service costs $ 4,495 $ 3,264 $ 15,083 $ 9,861 $ 17,453 $ 12,108
Interest costs 17,482 13,371 49,611 40,047 62,075 51,985
Estimated return
on plan assets (20,874) (12,899) (58,977) (38,627) (155,593) 13,334
Amortization of
transition
obligation 1,791 1,355 5,054 4,066 6,410 5,447
Other net
amortization
and deferral 846 636 2,396 1,954 86,607 (61,331)
-------- -------- -------- -------- -------- --------
$ 3,740 $ 5,727 $ 13,167 $ 17,301 $ 16,952 $ 21,543
======== ======== ======== ======== ======== ========
Assumptions used in the valuation and determination of 1996 and 1995
pension expenses were as follows:
1996 1995
===== =====
Discount rate 7.25% 8.75%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00%
The plans' assets are invested primarily in common stocks, bonds, and
notes.
(9) POSTRETIREMENT BENEFITS: Industries provides certain health care and
life insurance benefits for retired employees. Substantially all of
Industries' employees may become eligible for those benefits if they reach
retirement age while working for Industries. The expected cost of such
benefits is accrued during the employees' years of service.
Northern Indiana's current rate-making includes the cost of providing
these benefits based on the related insurance premiums. On December 30, 1992,
the Commission authorized the accrual method of accounting for postretirement
benefits for rate-making purposes consistent with SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and authorized
the deferral of the differences between the net periodic postretirement
benefits costs and the insurance premiums paid for such benefits as a
regulatory asset until such time as the accrual cost method may be reflected
in the rate-making process. The Commission stated that a deferral period of
four years or less would be rebuttably presumed to be reasonable and also
indicated each utility would have to demonstrate its postretirement benefit
costs were prudent and reasonably incurred at the time such costs were
proposed to be recovered in the rate-making process. Northern Indiana has
been deferring as a regulatory asset the difference between the amount
that would have been charged to expense under pay-as-you-go accounting and the
amount accrued in accordance with the standard in anticipation of approval for
these costs in the rate-making process.
Northern Indiana has taken the initial steps to seek regulatory approval
for inclusion of postretirement benefit costs in the rate-making process.
These costs would include an amortization of the existing regulatory asset
consistent with the remaining amortization period for the transition
obligation. Management believes that Northern Indiana will ultimately be
successful in obtaining such approval.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1996 and 1995:
January 1, January 1,
1996 1995
========== ==========
(Dollars in thousands)
Retirees $ 99,453 $ 96,676
Fully eligible active plan participants 23,084 20,008
Other active plan participants 136,322 105,991
---------- ----------
Accumulated postretirement benefit obligation 258,859 222,675
Unrecognized transition obligation at January 1,
being recognized over twenty years (197,088) (208,681)
Unrecognized actuarial gain 23,439 45,496
---------- ----------
Accrued liability for postretirement benefits $ 85,210 $ 59,490
========== ==========
A discount rate of 7.25% and a pre-Medicare medical trend rate of 10%
declining to a long-term rate of 6% and a discount rate of 8.75%, and a
pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%
were used to determine the accumulated postretirement benefit obligation at
January 1, 1996 and 1995, respectively.
Net periodic postretirement benefits costs for the three-month, nine-
month, and twelve-month periods ended September 30, 1996 and September 30,
1995 include the following components:
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995
======== ======== ======== ======== ======== ========
(Dollars in thousands)
Service costs $ 1,621 $ 1,526 $ 4,861 $ 4,578 $ 6,359 $ 6,715
Interest costs 5,079 4,745 15,238 14,235 20,034 19,294
Amortization of
transition
obligation
over twenty
years 3,095 2,899 9,285 8,697 12,181 11,644
Amortization of
unrecognized
actuarial
gain (583) (541) (1,748) (1,623) (2,304) (1,623)
-------- -------- -------- -------- -------- --------
$ 9,212 $ 8,629 $ 27,636 $ 25,887 $ 36,270 $ 36,030
======== ======== ======== ======== ======== ========
The net periodic postretirement benefit costs for 1996 were determined
assuming a 7.25% discount rate, a 5% rate of compensation increase, and a
pre-Medicare medical trend rate of 10% declining to a long-term rate of 6%.
The effect of a 1% increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation at January 1, 1996 by approximately $40.9 million, and increase the
aggregate of the service and interest cost components of plan costs by
approximately $1.3 million and $3.9 million for the three-month and nine-month
period ended September 30, 1996. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.
(10) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS:
INDUSTRIES -
20,000,000 shares - Preferred - without par value
Effective March 2, 1990, 2,000,000 of Industries' Series A
Junior Participating Preferred Shares were reserved for issuance pursuant to
the Share Purchase Rights Plan described in Note 14, Common Shares.
NORTHERN INDIANA -
2,400,000 shares - Cumulative Preferred - $100 par value
3,000,000 shares - Cumulative Preferred - no par value
2,000,000 shares - Cumulative Preference - $50 par value
(none outstanding)
3,000,000 shares - Cumulative Preference - no par value
(none issued)
Note 11 sets forth the preferred stocks which are redeemable solely at
the option of the issuer, and Note 12 sets forth the preferred stocks which
are subject to mandatory redemption requirements or whose redemption is
outside the control of the issuer.
The Preferred shareholders of Industries and Northern Indiana have no
voting rights, except in the event of default on the payment of four
consecutive quarterly dividends, or as required by Indiana law to authorize
additional preferred shares, or by the Articles of Incorporation in the event
of certain merger transactions.
(11) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER,
OUTSTANDING AT SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (SEE NOTE 10):
Redemption
Price at
September 30, December 31, September 30,
1996 1995 1996
============= ============= =============
(Dollars in thousands)
NORTHERN INDIANA PUBLIC
SERVICE COMPANY:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,176 and
209,190 shares outstanding,
respectively $ 20,918 $ 20,919 $101.20
4-1/2% series - 79,996 shares
outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares
outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares
outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares
outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares
outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at
September 30, 1996), Series A
(stated value $50 per share)
473,285 and 477,185 shares
outstanding, respectively 23,664 23,859 $50.00
------------ ------------
$ 81,129 $ 81,325
============ ============
During the period October 1, 1994 to September 30, 1996, there were no
additional issuances of the above preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at
any time upon thirty days' notice at the option of Northern Indiana at the
redemption prices shown.
(12) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT SEPTEMBER 30, 1996 AND
DECEMBER 31, 1995 (SEE NOTE 10):
September 30, December 31,
1996 1995
============= =============
(Dollars in thousands)
Preferred stocks subject to mandatory redemption
requirements or whose redemption is outside the
control of issuer:
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Cumulative preferred stock - $100 par value -
8.85% series - 75,000 and 87,500 shares
outstanding, respectively, excluding sinking
fund payments due within one year $ 7,500 $ 8,750
7-3/4% series - 50,014 shares outstanding,
excluding sinking fund payments due within
one year 5,001 5,001
8.35% series - 63,000 and 69,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year 6,300 6,900
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
------------- ------------
61,801 63,651
------------- ------------
NIPSCO INDUSTRIES, INC.:
Cumulative preferred shares - without par
value - 8.75% series (stated value - $100
per share), 0 and 350,000 shares
outstanding, respectively 0 35,000
------------- ------------
$ 61,801 $ 98,651
============= ============
Pursuant to mandatory redemption provisions, all 350,000 shares of 8.75%
Series Cumulative Preferred Shares were redeemed by Industries on
January 12, 1996 for $100 per share plus accrued dividends.
The redemption prices at September 30, 1996, as well as sinking fund
provisions for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
Sinking Fund Or
Mandatory Redemption
Series Redemption Price Per Share Provisions
====== ========================== ===========================
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Cumulative preferred stock - $100 par value -
8.85% $101.85, reduced periodically 12,500 shares on or before
April 1.
8.35% $103.93, reduced periodically 3,000 shares on or before
July 1; increasing to
6,000 shares beginning
in 2004; noncumulative
option to double amount
each year.
7-3/4% $104.58, reduced periodically 2,777 shares on or
before December 1;
noncumulative option
to double amount each
year.
Cumulative preferred stock - no par value -
6.50% $100.00 on October 14, 2002 430,000 shares on October 14,
2002.
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at September 30, 1996 for each of the twelve-month periods
subsequent to September 30, 1997 are as follows:
Twelve Months Ended September 30,*
==================================
1998 $1,827,700
1999 $1,827,700
2000 $1,827,700
2001 $1,827,700
<FN>
* Table does not reflect redemptions made after September 30, 1996.
(13) COMMON SHARE DIVIDEND: During the next few years, Industries
expects that the great majority of earnings available for distribution of
dividends will depend upon dividends paid to Industries by Northern Indiana.
Northern Indiana's Indenture provides that it will not declare or pay any
dividends on any class of capital stock (other than preferred or preference
stock) except out of earned surplus or net profits of Northern Indiana. At
September 30, 1996, Northern Indiana had approximately $140.4 million of
retained earnings (earned surplus) available for the payment of dividends.
Future dividends will depend upon adequate retained earnings, adequate future
earnings, and the absence of adverse developments.
(14) COMMON SHARES: Industries has 200,000,000 common shares authorized
without par value.
SHARE PURCHASE RIGHTS PLAN. On February 27, 1990, the Board of
Directors of Industries (Board) declared a dividend distribution of one Right
for each outstanding common share of Industries to shareholders of record on
March 12, 1990. The Rights are not currently exercisable. Each Right, when
exercisable, would initially entitle the holder to purchase from Industries
one one-hundredth of a Series A Junior Participating Preferred Share, without
par value, of Industries at a price of $60 per one one-hundredth of a share.
In certain circumstances, if an acquirer obtained 25% of Industries'
outstanding shares, or merged into Industries or merged Industries into the
acquirer, the Rights would entitle the holders to purchase Industries' or the
acquirer's common shares for one-half of the market price. The Rights will
not dilute Industries' common shares nor affect earnings per share unless they
become exercisable for common shares. The Plan was not adopted in response to
any specific attempt to acquire control of Industries.
COMMON SHARE REPURCHASES. The Board has authorized the repurchase of
common shares. At September 30, 1996, Industries had purchased approximately
17.6 million shares at an average price of $25.39 per share since 1990.
Including 3.5 million shares authorized on March 26, 1996, approximately 3.4
million additional common shares may be repurchased under the Board's
authorization.
(15) LONG-TERM INCENTIVE PLAN: Industries has two Long-Term Incentive
Plans for key management employees that were approved by shareholders on
April 13, 1988 (1988 Plan) and April 13, 1994 (1994 Plan), each of which
provides for the issuance of up to 2.5 million of Industries' common shares to
key employees through 1998 and 2004, respectively. At September 30, 1996,
there were 12,011 shares and 2,189,700 shares reserved for future awards under
the 1988 Plan and 1994 Plan, respectively. The 1988 Plan and 1994 Plan permit
the following types of grants, separately or in combination: nonqualified
stock options, incentive stock options, restricted stock awards, stock
appreciation rights, and performance units. No incentive stock options or
performance units were outstanding at September 30, 1996. Under both Plans,
the exercise price of each option equals the market price of Industries' stock
on the date of grant. Each option's maximum term is ten years and vests one
year from the date of grant.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries
stock, or a combination thereof. Restricted stock awards are restricted as to
transfer and are subject to forfeiture for specific periods from the date of
grant. Restrictions on shares awarded in 1995 lapse five years from date
of grant and vesting is variable from 0% to 200% of the number awarded,
subject to specific earnings per share and stock appreciation goals.
Restrictions on shares awarded in 1996 lapse two years from date of grant and
vesting is variable from 0% to 100% of the number awarded, subject to
specific performance goals. If a participant's employment is terminated prior
to vesting other than by reason of death, disability or retirement, restricted
shares are forfeited. There were 262,000 and 330,500 restricted shares
outstanding at September 30, 1996 and December 31, 1995, respectively.
The Industries Nonemployee Director Stock Incentive Plan, which was
approved by shareholders, provides for the issuance of up to 100,000 of
Industries' common shares to nonemployee directors of Industries. The Plan
provides for awards of common shares which vest in 20% per year increments,
with full vesting after five years. The Plan also allows the award of
nonqualified stock options in the future. If a director's service on the
Board is terminated for any reason other than death or disability, any common
shares not vested as of the date of termination are forfeited. As of
September 30, 1996, 30,750 shares were issued under the Plan.
Industries accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized for non-
qualified stock options. The compensation cost that has been charged against
income for restricted stock awards was $0.6, $1.7, and $2.2 million for the
three-month, nine-month, and twelve-month periods ending September 30, 1996.
Had compensation cost for stock options been determined consistent with SFAS
No. 123 "Accounting for Stock-Based Compensation," Industries' net income and
earnings per share would have been reduced to the following pro forma amounts:
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
1996 1996 1996
============= ============= =============
Net Income:
(Dollars in thousands)
As reported $ 34,410 $ 125,325 $ 177,153
Pro forma $ 34,238 $ 124,838 $ 176,503
Earnings Per Share:
As reported $ 0.56 $ 2.03 $ 2.85
Pro forma $ 0.56 $ 2.03 $ 2.85
</TABLE/
Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation costs may not be representative of that to be expected in future
years.
The fair value of each option granted used to determine pro forma
net income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the three-month, nine-month, and twelve-month periods ended September 30,
1996: risk-free interest rate of 6.39%, expected dividend yield of $1.68 per
share, expected option term of five years, and expected volatility of 13.2%.
Changes in outstanding shares under option and SARs for the three-month,
nine-month, and twelve-month periods ended September 30, 1996 and 1995 are as
follows:
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Three Months Ended Option Option
September 30, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
Balance beginning of period 1,062,700 $ 28.62 995,900 $ 27.07
Granted 278,300 $ 37.81 277,450 $ 32.44
Exercised (26,100) $ 27.15 (29,000) $ 22.74
Canceled 0 (2,000) $ 32.44
--------- ---------
Balance end of period 1,314,900 $ 30.59 1,242,350 $ 28.36
========= =========
Shares exercisable 1,036,600 $ 28.66 961,900 $ 27.18
========= =========
Weighted average fair value
of options granted $ 5.00 $ 3.87
========= =========
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Nine Months Ended Option Option
September 30, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
Balance beginning of period 1,107,750 $ 28.55 1,097,550 $ 26.59
Granted 278,300 $ 37.81 282,450 $ 32.40
Exercised (64,150) $ 26.42 (128,250) $ 22.61
Canceled (7,000) $ 32.44 (9,400) $ 21.86
--------- ---------
Balance end of period 1,314,900 $ 30.59 1,242,350 $ 28.36
========= =========
Shares exercisable 1,036,600 $ 28.66 961,900 $ 27.18
========= =========
Weighted average fair value
of options granted $ 5.00 $ 3.89
========= =========
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Twelve Months Ended Option Option
September 30, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
Balance beginning of period 1,242,350 $ 28.36 1,112,250 $ 26.55
Granted 278,300 $ 37.81 282,450 $ 32.40
Exercised (195,750) $ 26.60 (140,950) $ 22.61
Canceled (10,000) $ 32.44 (11,400) $ 23.07
--------- ---------
Balance end of period 1,314,900 $ 30.59 1,242,350 $ 28.36
========= =========
Shares exercisable 1,036,600 $ 28.66 961,900 $ 27.18
========= =========
Weighted average fair value
of options granted $ 5.00 $ 3.89
========= =========
NONQUALIFIED STOCK OPTIONS WITH SARs
-------------------------------------------
Three Months Ended Option Option
September 30, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
Balance beginning of period 5,600 $ 10.94 5,600 $ 10.94
Granted 0 0
Exercised 0 0
Canceled 0 0
--------- ---------
Balance end of period 5,600 $ 10.94 5,600 $ 10.94
========= =========
Shares exercisable 5,600 $ 10.94 5,600 $ 10.94
========= =========
NONQUALIFIED STOCK OPTIONS WITH SARs
-------------------------------------------
Nine Months Ended Option Option
September 30, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
Balance beginning of period 5,600 $ 10.94 9,900 $ 10.94
Granted 0 0
Exercised 0 (4,300) $ 10.94
Canceled 0 0
--------- ---------
Balance end of period 5,600 $ 10.94 5,600 $ 10.94
========= =========
Shares exercisable 5,600 $ 10.94 5,600 $ 10.94
========= =========
NONQUALIFIED STOCK OPTIONS WITH SARs
-------------------------------------------
Twelve Months Ended Option Option
September 30, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
Balance beginning of period 5,600 $ 10.94 9,900 $ 10.94
Granted 0 0
Exercised 0 (4,300) $ 10.94
Canceled 0 0
--------- ---------
Balance end of period 5,600 $ 10.94 5,600 $ 10.94
========= =========
Shares exercisable 5,600 $ 10.94 5,600 $ 10.94
========= =========
The following table summarizes information about non-qualified stock
options at September 30, 1996:
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Option Price Sept. 30, 1996 Contractual Life Option Price
================ ============== ================== =================
$10.94 to $17.73 94,400 3.33 years $16.73
$22.94 to $28.75 443,700 6.60 years $26.58
$30.31 to $37.81 776,800 8.65 years $34.58
- ---------------- --------- ---------- ------
$10.94 to $37.81 1,314,900 7.57 years $30.59
=========
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------
Number
Range of Exercisable at Weighted Average
Option Price September 30, 1996 Option Price
================ ================== =================
$10.94 to $17.73 94,400 $16.73
$22.94 to $28.75 443,700 $26.58
$30.31 to $33.19 498,500 $32.77
- ---------------- --------- ------
$10.94 to $33.19 1,036,600 $28.66
=========
(16) LONG-TERM DEBT: At September 30, 1996 and December 31, 1995,
Industries' long-term debt, excluding amounts due within one year, issued and
not retired or canceled was as follows:
AMOUNT OUTSTANDING
---------------------------
September 30, December 31,
1996 1995
============= ============
(Dollars in thousands)
NORTHERN INDIANA PUBLIC SERVICE COMPANY
First mortgage bonds -
Series O, 6-3/8%, due September 1, 1997 $ 0 $ 25,747
Series P, 6-7/8%, due October 1, 1998 14,509 14,509
Series T, 7-1/2%, due April 1, 2002 40,000 40,500
Series NN, 7.10%, due July 1, 2017 55,000 55,000
------------ ------------
Total 109,509 135,756
------------ ------------
Pollution control notes and bonds -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 20,000 20,000
Series 1988 Bonds - Jasper County -
Series A, B, and C - 3.67% weighted
average at September 30, 1996, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.60% weighted average at
September 30, 1996, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 3.80% at September 30, 1996,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 3.80% at September 30, 1996,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 3.80% at September 30, 1996,
due April 1, 2019 41,000 41,000
------------ ------------
Total 243,000 243,000
------------ ------------
Medium-term notes -
Interest rates between 5.83% and 7.64% with
a weighted average interest rate of 6.85%
and various maturities between April 6, 1998
and January 19, 2024 644,025 684,025
------------ ------------
Unamortized premium and discount
on long-term debt, net (3,640) (4,040)
------------ ------------
Total long-term debt of
Northern Indiana Public
Service Company 992,894 1,058,741
------------ ------------
NIPSCO CAPITAL MARKETS, INC.
Subordinated Debentures -
Series A, 7-3/4%, due March 31, 2026 75,000 0
Zero Coupon Notes - 7.57%, $72,500 at
maturity, due December 1, 1997 66,487 62,875
------------ ------------
Total long-term debt of
NIPSCO Capital Markets, Inc. 141,487 62,875
------------ ------------
NIPSCO DEVELOPMENT COMPANY, INC.
LAKE ERIE LAND COMPANY -
Notes payable -
8.25% - due June 30, 1998 100 389
ELM ENERGY AND RECYCLING (UK), LTD.
Term Loan Facility-weighted average interest
rate of 7.70% at September 30, 1996, due
December 31, 2004 36,443 34,516
NDC DOUGLAS PROPERTIES, INC.
Notes Payable -
Interest rates between 6.72% and 8.15% with
a weighted average interest rate of 7.76%
and maturities through April 1, 2006 19,760 19,207
------------ ------------
Total long-term debt of
NIPSCO Development Company,Inc. 56,303 54,112
------------ ------------
Total long-term debt, excluding
amounts due in one year $ 1,190,684 $ 1,175,728
============ ============
The sinking fund requirements of long-term debt outstanding at
September 30, 1996 (including the maturity of Northern Indiana's first
mortgage bonds: Series P, 6-7/8%, due October 1, 1998; Northern Indiana's
medium-term notes due from April 6, 1998 to August 15, 2001; Capital Markets'
Zero Coupon Notes due December 1, 1997; Lake Erie Land Company's notes payable
due June 30, 1998; and NDC Douglas Properties, Inc. notes payable due
December 22, 1999), for each of the twelve-month periods subsequent to
September 30, 1997 are as follows:
Twelve Months Ended September 30,
=================================
1998 $ 118,755,072
1999 $ 25,434,923
2000 $ 166,163,628
2001 $ 26,636,878
Unamortized debt expense, premium and discount on long-term debt
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
In 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from one year to
thirty years, for purposes of refinancing certain first mortgage bonds and
medium-term notes. During 1994, $120.0 million of the Medium-Term
Notes, Series D, were issued to refinance certain first mortgage bonds.
On June 12, 1995, the remaining $169,275,000 of Medium-Term Notes, Series D,
were issued and part of the proceeds were used to redeem all of the
outstanding First Mortgage Bonds, Series U and Z aggregating $94.8 million, on
July 3, 1995.
On February 13, 1996, Capital Markets issued $75 million of 7-3/4%
Junior Subordinated Deferrable Interest Debentures, Series A, due
March 31, 2026 (Debentures) pursuant to an underwritten public offering.
Proceeds from the sale of the Debentures were used to pay short-term debt
incurred to redeem on January 12, 1996 Industries' $35 million of 8.75%
Preferred Shares, pursuant to mandatory redemption, and to pay other
short-term debt of Capital Markets.
The obligations of Capital Markets are subject to a Support Agreement
between Industries and Capital Markets, under which Industries has committed
to make payments of interest and principal on Capital Markets' securities in
the event of a failure to pay by Capital Markets. Restrictions in the
Support Agreement prohibit recourse on the part of Capital Markets' investors
against the stock and assets of Northern Indiana. Under the terms of the
Support Agreement, in addition to the cash flow of cash dividends paid to
Industries by any of its consolidated subsidiaries, the assets of Industries,
other than the stock and assets of Northern Indiana, are available as recourse
to holders of Capital Markets' securities. The carrying value of those assets
(other than Northern Indiana), reflected in the consolidated financial
statements of Industries, is approximately $482.4 million at September 30,
1996.
(17) CURRENT PORTION OF LONG-TERM DEBT: At September 30, 1996 and
December 31, 1995, Industries' current portion of long-term debt due within
one year was as follows:
September 30, December 31,
1996 1995
============= ============
(Dollars in thousands)
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
First mortgage bonds -
Series O, 6-3/8% - due September 1, 1997 $ 25,747 $ 0
Medium-term notes -
Interest rates of 5.78% and 5.82% with
a weighted average interest rate of
5.80% and maturities of July 25, 1997
and July 28, 1997 40,000 80,000
NIPSCO CAPITAL MARKETS, INC.:
Medium-term notes -
9.95% - due June 10, 1996 0 7,500
LAKE ERIE LAND COMPANY:
Notes payable 3,081 2,961
ELM ENERGY AND RECYCLING (UK), LTD.:
Term loan facility 5,321 4,554
NDC DOUGLAS PROPERTIES, INC.:
Notes payable 2,235 1,840
------------ ------------
Total current portion of long-term debt $ 76,384 $ 96,855
============ ============
(18) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1998 unless
extended by its terms. As of September 30, 1996, there were no borrowings
outstanding under this agreement. In addition, Northern Indiana has $14.2
million in lines of credit which run to May 31, 1997. The credit pricing of
each of the lines varies from either the lending banks' commercial prime or
market rates. Northern Indiana has agreed to compensate the participating
banks with arrangements that vary from no commitment fees to a combination of
fees which are mutually satisfactory to both parties. As of September 30,
1996, there were no borrowings under these lines of credit. The Credit
Agreement and lines of credit are also available to support the issuance of
commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1996 and December 31, 1995, there were $186.7
million and $118.8 million of borrowings, respectively, outstanding under
these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1996, there were no borrowings outstanding under this facility.
Northern Indiana and Capital Markets make use of commercial paper to
fund short-term working capital requirements.
Capital Markets has a $150 million revolving Credit Agreement which
will terminate August 19, 1998, unless extended by its terms. This facility
provides short-term financing flexibility to Industries and also serves as the
backup instrument for a commercial paper program. As of September 30, 1996,
there were no borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit.
As of September 30, 1996 and December 31, 1995, $44.3 million and $17.4
million, respectively, of borrowings were outstanding under these lines of
credit.
At September 30, 1996 and December 31, 1995, Industries' short-term
borrowings were as follows:
September 30, December 31,
1996 1995
============= ============
(Dollars in thousands)
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of
5.45% at September 30, 1996 $ 88,000 $ 44,800
Notes payable -
Issued at interest rates between 5.38%
and 5.55% with a weighted average
interest rate of 5.45% and various
maturities between October 1, 1996
and November 13, 1996 186,700 118,800
NIPSCO CAPITAL MARKETS, INC.:
Commercial paper -
Weighted average interest rate of
5.59% at September 30, 1996 92,000 76,700
Notes payable -
Issued at interest rates between 5.57%
and 6.25% with a weighted average
interest rate of 5.68% and maturities
of October 1, 1996 and October 21, 1996 44,300 17,400
LAKE ERIE LAND COMPANY:
Notes payable - 299 1,239
ELM ENERGY AND RECYCLING (UK), LTD.:
Standby loan facility 3,727 1,732
------------ ------------
Total short-term borrowings $ 415,026 $ 260,671
============ ============
(19) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
twenty-year agreement for the rental of office facilities from Development at
a current annual rental payment of approximately $3.3 million.
The following is a schedule, by years, of future minimum rental
payments, excluding those to associated companies, required under operating
leases that have initial or remaining noncancelable lease terms in excess of
one year as of September 30, 1996:
Twelve Months Ended September 30,
=================================
(Dollars in thousands)
1997 $ 8,226
1998 7,537
1999 6,595
2000 5,640
2001 5,544
Later years 77,464
--------
Total minimum
payments required $111,006
========
The consolidated financial statements include rental expense for all
operating leases as follows:
September 30, September 30,
1996 1995
============= =============
(Dollars in thousands)
Three months ended $ 1,762 $ 2,189
Nine months ended $ 5,486 $ 6,176
Twelve months ended $ 7,760 $ 7,784
(20) COMMITMENTS: The Utilities estimate that approximately $794
million will be expended for construction purposes for the period from
January 1, 1996 to December 31, 2000. Substantial commitments have been made
by the Utilities in connection with their program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber
services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992
with annual charges approximating $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.
Northern Indiana has entered into an agreement with Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC to
perform all data center, application development and maintenance, and desktop
management of Northern Indiana.
Primary is the parent of subsidiaries including Harbor Coal
Company (Harbor Coal), North Lake Energy Corporation (North Lake),
Lakeside Energy Corporation (LEC) and Portside Energy Corporation (Portside).
Primary arranges energy-related projects with large industrial customers and
has entered into certain commitments in connection with these projects.
Harbor Coal has invested in a partnership to finance, construct, own,
and operate a $65 million pulverized coal injection facility which began
commercial operation in August, 1993. The facility receives raw coal,
pulverizes it and delivers it to Inland Steel Company for use in the operation
of its blast furnaces. Harbor Coal is a 50% partner in the project with an
Inland Steel affiliate. Industries has guaranteed the payment and performance
of the partnership's obligations under a sale and leaseback of a 50% undivided
interest in the facility.
North Lake has entered into a lease for the use of a 75-megawatt
energy facility to be located at Inland Steel Company. The facility uses
steam generated by Inland Steel to produce electricity which is delivered to
Inland Steel. The facility began commercial operation in May 1996.
Industries has guaranteed North Lake's obligations relative to the lease and
certain obligations to Inland Steel relative to the project.
LEC has entered into an agreement with USX Corporation - US Steel
Group to utilize a new 161 megawatt energy facility at USS Gary Works to
process high-pressure steam into electricity and low-pressure process steam
for a fifteen-year period. LEC has entered into an agreement to lease this
facility, once constructed, from a third party. Under this agreement LEC is
acting as the agent for the lessor to design, construct, and start up the
energy facility. Capital Markets has guaranteed LEC obligations to the lessor
during the construction period. Capital Markets also guarantees LEC's
security deposit obligations relative to the lease and certain limited LEC
obligations to the lessor. Construction of the project began in January 1996.
The facility is scheduled to be operational in May 1997.
Portside has entered into an agreement with National Steel Corporation
(National) to utilize a new 63-megawatt energy facility at National's Midwest
Division to process natural gas into electricity, process steam and heated
water for a fifteen-year period. Portside will lease this facility, once
constructed, from a third party. Additionally, Portside has entered into an
interim agreement, which expires when the lease is established with the third-
party lessor, under which Portside is acting as agent for the lessor to
design, construct, and start up the energy facility. Industries has
guaranteed certain Portside obligations to the lessor during construction.
Capital Markets anticipates guaranteeing certain Portside obligations relative
to the anticipated lease. Construction of the project began in June 1996.
The facility is scheduled to be operational in August 1997.
Primary has advanced approximately $29 million and $11 million, at
September 30, 1996 and December 31, 1995, respectively, to the lessors of the
energy related projects discussed above. These net advances are included in
"Prepayments and other" in the Consolidated Balance Sheet and "Other, net"
as a component of operating activities in the Consolidated Statement of
Cash Flows.
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates
fair value because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based
on market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt
and preferred stock is estimated based on the quoted market prices
for the same or similar issues or on the rates offered to Industries
for securities of the same remaining maturities. Certain premium
costs associated with the early settlement of long-term debt are not
taken into consideration in determining fair value.
The carrying values and estimated fair values of Industries'
financial instruments are as follows:
September 30, 1996 December 31, 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
Cash and cash equivalents $ 62,905 $ 62,905 $ 28,496 $ 28,496
Investments $ 27,520 $ 29,715 $ 25,893 $ 27,045
Long-term debt (including
current portion) $1,268,318 $1,196,986 $1,273,376 $1,274,079
Preferred stock $ 144,758 $ 123,360 $ 181,804 $ 164,306
The majority of the long-term debt relates to utility operations.
The Utilities are subject to regulation, and gains or losses may be included
in rates over a prescribed amortization period, if in fact settled at amounts
approximating those above.
(22) CUSTOMER CONCENTRATIONS: Industries' public utility subsidiaries
supply natural gas and electrical energy in the northern third of Indiana.
Although these public utilities have a diversified base of residential and
commercial customers, a substantial portion of their electric and gas
industrial deliveries are dependent upon the basic steel industry. The basic
steel industry accounted for 2% of gas revenue (including transportation
services) and 22% of electric revenue for the twelve months ended
September 30, 1996 as compared to 5% and 23%, respectively, for the twelve
months ended September 30, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
HOLDING COMPANY -
NIPSCO Industries, Inc. (Industries) is an Indiana corporation serving
as the holding company for a number of subsidiaries, including four regulated
companies: Northern Indiana Public Service Company (Northern Indiana); Kokomo
Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company,
Inc. (NIFL); and Crossroads Pipeline Company (Crossroads). Northern Indiana
is a public utility operating company supplying natural gas and electric
energy to the public. Kokomo Gas and NIFL are public utility operating
companies supplying natural gas to the public, and Crossroads is an interstate
natural gas transmission company.
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development); NIPSCO Energy Services, Inc. (Services); Primary
Energy, Inc. (Primary); and NIPSCO Capital Markets, Inc. (Capital Markets).
Development makes various investments, including real estate and
venture capital investments. Services coordinates the energy-related
diversification ventures of Industries. Primary arranges energy-related
projects with large industrial customers. Capital Markets handles financing
for Industries and its subsidiaries, other than Northern Indiana.
The following discussion, except where noted, is attributable to the
operations of Northern Indiana, Kokomo Gas, NIFL, and Crossroads (Utilities).
REVENUES -
Total operating revenues for the twelve months ended September 30, 1996
increased $84.7 million as compared to the twelve months ended September 30,
1995. Gas revenues increased $84.1 million and electric revenues increased
$0.6 million as compared to the same period in 1995. The increase in gas
revenues was largely attributable to increased sales to residential and
commercial customers due to colder winter weather, increased sales to
industrial and wholesale customers, increased deliveries of gas transported
for others, and increased gas transition costs, which were partially offset by
decreased gas costs per dekatherm (dth). The increase in electric revenues
was mainly due to increased sales to commercial and wholesale customers, which
were partially offset by decreased sales to residential customers due to the
cooler summer this year and decreased sales to industrial customers.
Total operating revenues for the nine months ended September 30, 1996
increased $43.9 million as compared to the nine months ended September 30,
1995. Gas revenues increased $54.7 million and electric revenues decreased
$10.8 million as compared to the same period in 1995. The increase in gas
revenues was mainly due to increased sales to residential and commercial
customers as a result of colder weather, increased sales to industrial and
wholesale customers, and increased gas costs per dth, which were partially
offset by decreased gas transition costs. The decrease in electric revenues
was mainly due to decreased sales to residential customers due to cooler
summer weather in the third quarter of 1996, and decreased sales to industrial
customers due to operational difficulties at several major industrial
customers, which were partially offset by increased sales to commercial and
wholesale customers.
Total operating revenues for the three months ended September 30, 1996
decreased $14.1 million as compared to the three months ended September 30,
1995. Gas revenues increased $5.9 million and electric revenues decreased
$20.0 million as compared to the same period in 1995. The increase in gas
revenues was mainly due to increased sales to wholesale customers partially
offset by decreased gas transition costs. The decrease in electric
revenues was mainly due to decreased sales to residential and commercial
customers reflecting cooler summer weather and decreased sales to industrial
customers which were partially offset by increased sales to wholesale
customers.
The basic steel industry accounted for 30% of natural gas delivered
(including volumes transported) and 36% of electric sales during the twelve
months ended September 30, 1996.
The components of the variations in gas and electric revenues are
shown in the following table:
Variations
from
Prior Periods
---------------------------------
September 30, 1996
Compared to
September 30, 1995
Three Nine Twelve
Months Months Months
========= ========= =========
(Dollars in thousands)
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ 646 $ 13,292 $ (67,137)
Gas transition costs (4,627) (28,259) 35,512
Changes in sales levels 9,512 69,256 114,680
Gas transport levels 319 434 1,060
--------- --------- ---------
Gas Revenue Change 5,850 54,723 84,115
--------- --------- ---------
Electric Revenue -
Pass through of net changes in fuel (2,706) 1,516 841
Changes in sales levels (17,249) (12,306) (280)
--------- --------- ---------
Electric Revenue Change (19,955) (10,790) 561
--------- --------- ---------
Total Revenue Change $ (14,105) $ 43,933 $ 84,676
========= ========= =========
See Note 5 to Notes to Consolidated Financial Statements regarding
FERC Order No. 636 transition costs.
GAS COSTS -
The Utilities' gas costs increased $4.6, $33.9, and $45.5 million for
the three-month, nine-month, and twelve-month periods ended September 30,
1996, respectively. Gas costs increased for the three-month and nine-month
periods due to increased purchases and increased gas costs per dth, which were
partially offset by decreased gas transition costs. Gas costs increased for
the twelve-month period due to increased purchases partially offset by
decreased gas costs per dth. The average cost for the Utilities' purchased
gas for the three-month, nine-month, and twelve-month periods ended
September 30, 1996, after adjustment for gas transition costs billed to
transport customers, was $2.77, $2.89, and $2.74 per dth, respectively, as
compared to $2.70, $2.83, and $2.81 per dth for the same periods in 1995.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation decreased for the
three-month, nine-month, and twelve-month periods ended September 30, 1996,
compared to 1995 periods, mainly as a result of decreased production of
electricity.
Power purchased increased $2.2, $6.4, and $10.3 million for the three-
month, nine-month, and twelve-month periods ended September 30, 1996 as a
result of increased bulk power purchases.
OPERATING MARGINS -
Operating margins increased $34.6 million for the twelve months ended
September 30, 1996 from the same period a year ago. The operating margin from
gas deliveries increased $38.6 million due to increased sales to residential
and commercial customers reflecting colder winter weather, increased sales to
industrial and wholesale customers, and increased deliveries of gas
transported for others. The operating margin from electric sales decreased
$4.0 million reflecting decreased sales to residential customers due to cooler
summer weather in the third quarter of 1996 partially offset by increased
sales to commercial and wholesale customers.
Operating margins increased $10.2 million for the nine-months ended
September 30, 1996 from the same period a year ago. Gas operating margin
increased $20.8 million due to increased sales to residential and commercial
customers reflecting colder weather during the period, increased sales to
industrial and wholesale customers, and increased deliveries of gas
transported for others. Operating margin from electric sales decreased $10.6
million due to decreased sales to residential customers reflecting cooler
summer weather in the third quarter of 1996, and decreased sales to
industrial customers due to plant operational difficulties at several major
customers, which were partially offset by increased sales to commercial and
wholesale customers.
Operating margins decreased $13.7 million for the three-months ended
September 30, 1996 over the same period a year ago. The operating margin from
gas deliveries increased $1.2 million due to increased sales for resale and
increased deliveries of gas transported for others. Operating margin from
electric sales decreased $14.9 million due to decreased sales to residential
and commercial customers reflecting cooler summer weather and decreased sales
to industrial customers, which were partially offset by increased sales to
wholesale customers.
OPERATING EXPENSES AND TAXES -
Operation expenses increased $7.7 and $14.4 million for the
nine-month and twelve-month periods ended September 30, 1996,
respectively. Operation expenses increased for the nine-month period
reflecting increased electric production costs of $2.7 million resulting from
increased pollution control facility costs, environmental costs of $4.3
million, and other various increased operating costs. Operation expenses
increased for the twelve-month period reflecting a December 1995 Indiana
Utility Regulatory Commission (Commission) order to refund $3.4 million to
electric customers related to a 1992 insurance settlement previously credited
to operation and maintenance expenses, increased electric production costs of
$4.8 million mainly resulting from pollution control facilities costs,
employee-related costs of $3.3 million, environmental costs of $3.3 million,
and various other increased operation expenses. Operation expenses decreased
$1.9 million for the three-month period ended September 30, 1996 mainly due to
lower employee related costs.
Maintenance expenses decreased $1.9, $4.5, and $5.2 million for the
three-month, nine-month, and twelve-month periods ended September 30, 1996,
respectively, mainly reflecting decreased maintenance activity at the electric
production facilities and the gas underground storage facilities.
Depreciation and amortization expense increased $4.4, $13.2, and $15.3
million for the three-month, nine-month, and twelve-month periods ended
September 30, 1996, respectively, resulting from plant additions, increased
amortization of computer software, and the amortization of deferred costs
related to scrubber services provided by Pure Air at the Bailly Generating
Station.
Utility income taxes decreased for the three-month, nine-month, and
twelve-month periods ended September 30, 1996 mainly as a result of decreased
pre-tax income.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) increased $8.0 and $10.9 million for the
three-month and nine-month periods ended September 30, 1996, respectively,
mainly reflecting improved results from non-regulated operations. Other
Income (Deductions) for the twelve-month period increased $3.7 million mainly
resulting from improved results from non-regulated operations partially
offset by the inclusion in the prior period of a $5.6 million after-tax
benefit for the Northern Indiana land donation to the Shafer and Freeman
Lakes Environmental Conservation Corporation.
INTEREST AND OTHER CHARGES -
Interest and other charges increased for the three-month, nine-month,
and twelve-month periods ended September 30, 1996 reflecting the issuance of
$169,275,000 of Northern Indiana's Medium-Term Notes, Series D, and $75
million of Capital Markets' Junior Subordinated Deferrable Interest
Debentures, Series A, and the discontinuance of carrying charges on deferred
charges related to the Bailly Generating Station scrubber service agreement.
See Note 2 to Notes to Consolidated Financial Statements (Summary of
Significant Accounting Policies) for a discussion of Regulatory Assets,
Carrying Charges and Deferred Depreciation, and Allowance for Funds Used
During Construction. Also see Notes 5, 7, and 9 for a discussion of FERC
Order No. 636, Income Taxes and Postretirement Benefits.
NET INCOME-
Industries' net income for the twelve-month period ended September 30,
1996 was $177.2 million compared to $172.6 million for the twelve-month
period ended September 30, 1995.
Net income for the nine months ended September 30, 1996 was $125.3
million compared to $123.6 million for the nine months ended September 30,
1995.
Net income for the three months ended September 30, 1996 was $34.4
million compared to $36.4 million for the three months ended September 30,
1995.
ENVIRONMENTAL MATTERS -
The Utilities have an ongoing program to remain aware of laws and
regulations involved with hazardous waste and other environmental matters.
It is the Utilities' intent to continue to evaluate their facilities and
properties with respect to these rules and identify any sites that would
require corrective action. The Utilities have recorded a reserve of $8.4
million to cover probable corrective actions as of September 30, 1996;
however, environmental regulations and remediation techniques are subject to
future change. The ultimate cost could be significant, depending on the
extent of corrective actions required. Based upon investigations and
management's understanding of current laws and regulations, the Utilities
believe that any corrective actions required, after consideration of insurance
coverages and contributions from other potentially responsible parties, will
not have a significant impact on the financial position or results of
operations of Industries.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements, but Northern Indiana believes that any such mandated costs
would be recoverable through the rate-making process.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste disposal
sites identified by the EPA. The sites are in various stages of
investigation, analysis, and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs, as
provided under CERCLA, will be shared among them. At some sites, Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
The Utilities have instituted a program to investigate former
manufactured-gas plants where one of them is the current or former owner.
The Utilities have identified twenty-seven of these sites and made visual
inspections of these sites. Initial samplings have been conducted at
seventeen sites. Follow-up investigations have been conducted at five sites
and potential remedial measures are being evaluated. The Utilities will
continue their program to assess sites. During the follow-up investigation
of the former manufactured-gas plant in Elkhart, Indiana, Northern Indiana
noted the presence of hydrocarbons in the Elkhart River. Northern Indiana
reported this finding to the Indiana Department of Environmental Management
(IDEM) and the EPA. Northern Indiana has placed the Elkhart site in the IDEM
Voluntary Remediation Program (VRP). The goal of placing the site in the VRP
is to obtain IDEM approval of the determination and subsequent implementation
of what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of
a former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated parts of the Fort
Wayne site. The remainder of the site is being evaluated to determine what
further remedial measures, if any, may be needed.
During the course of investigation activities, Northern Indiana noted
the presence of manufactured-gas plant residuals in the St. Mary's River in
Fort Wayne, Indiana and the Wabash River in Peru, Indiana. Northern Indiana
notified the IDEM and the EPA and immediately took steps to contain the
material at both sites.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured-gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
The Utilities have met with various companies that provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured-gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later, in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured-gas plant sites. The state court action is stayed
pending resolution of the Northern Indiana suit in Federal court.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances, and other electric sources
may result in adverse health effects has been the subject of public,
governmental, and media attention. A considerable amount of scientific
research has been conducted on this topic without definitive results. Research
is continuing to resolve scientific uncertainties.
LIQUIDITY AND CAPITAL RESOURCES -
During the next few years, it is anticipated that the great majority
of earnings available for distribution of dividends will depend upon dividends
paid to Industries by Northern Indiana. See Note 13 to Notes to Consolidated
Financial Statements for a discussion of the Common Share dividend.
In 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from one year to
thirty years, for purposes of refinancing certain first mortgage bonds and
medium-term notes. During 1994, $120.0 million of the Medium-Term
Notes, Series D, were issued to refinance certain first mortgage bonds. On
June 12, 1995, the remaining $169,275,000 of Medium-Term Notes, Series D,
were issued and part of the proceeds were used to redeem all of the
outstanding First Mortgage Bonds, Series U and Z, aggregating $94.8 million,
on July 3, 1995.
On February 13, 1996, Capital Markets issued $75 million of 7-3/4%
Junior Subordinated Deferrable Interest Debentures, Series A, due March 31,
2026 (Debentures), pursuant to an underwritten public offering. Proceeds from
the sale of the Debentures were used to pay short-term debt incurred to redeem
on January 12, 1996 Industries' $35 million of 8.75% Preferred Shares,
pursuant to mandatory redemption, and to pay other short-term debt of Capital
Markets.
Capital Markets has a $150 million revolving Credit Agreement which
will terminate August 19, 1998, unless extended by its terms. This facility
provides short-term financing flexibility to Industries and also serves as
the backup instrument for a commercial paper program. As of September 30,
1996, there were no borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit.
As of September 30, 1996, $44.3 million of borrowings were outstanding under
these lines of credit.
As of September 30, 1996, Capital Markets had $92.0 million in
commercial paper outstanding, having a weighted average interest rate of
5.59%.
The obligations of Capital Markets are subject to a Support Agreement
between Industries and Capital Markets, under which Industries has committed
to make payments of interest and principal on Capital Markets' securities in
the event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' investors against
the stock and assets of Northern Indiana. Under the terms of the Support
Agreement, in addition to the cash flow of cash dividends paid to Industries
by any of its consolidated subsidiaries, the assets of Industries, other than
the stock and assets of Northern Indiana, are available as recourse to holders
of Capital Markets' securities. The carrying value of those assets (other
than Northern Indiana), reflected in the consolidated financial statements of
Industries, is approximately $482.4 million at September 30, 1996.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the utility
business and the construction program, Northern Indiana makes use of
commercial paper to fund short-term working capital requirements. As of
September 30, 1996, Northern Indiana had $88.0 million in commercial paper
outstanding, having a weighted average interest rate of 5.45%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998 unless extended by its terms.
As of September 30, 1996, there were no borrowings outstanding under this
agreement. In addition, Northern Indiana has $14.2 million in lines of credit
which run to May 31, 1997. The credit pricing of each of the lines varies
from either the lending banks' commercial prime or market rates. Northern
Indiana has agreed to compensate the participating banks with arrangements
that vary from no commitment fees to a combination of fees which are mutually
satisfactory to both parties. As of September 30, 1996, there were no
borrowings under these lines of credit. The Credit Agreement and lines of
credit are also available to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1996, there were $186.7 million of borrowings
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1996, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
The Utilities do not expect the effects of inflation at current levels
to have a significant impact on their results of operations, ability to
contain cost increases, or need to seek timely and adequate rate relief. The
Utilities do not anticipate the need to file for gas and electric base rate
increases in the near future.
COMPETITION
The Energy Policy Act of 1992 (Energy Act) allowed FERC to order
electric utilities to grant access to transmission systems by third-party
power producers. The Energy Act specifically prohibits federally mandated
wheeling of power for retail customers. On April 24, 1996, the FERC issued
its Order No. 888 which opens wholesale power sales to competition and
requires public utilities owning, controlling, or operating transmission lines
to file non-discriminatory open access tariffs that offer others the same
transmission service they provide themselves. Order No. 888 also provides
for the full recovery of stranded costs - that is, costs that were prudently
incurred to serve power customers and that could go unrecovered if these
customers use open access to move to another supplier. FERC expects
this rule will accelerate competition and bring lower prices and more choices
to wholesale energy customers. This competition will create opportunities to
compete for new customers and revenues, as well as increase the risk of the
loss of customers. Although wholesale customers represent a relatively small
portion of Northern Indiana's sales, Northern Indiana will continue its
efforts to retain and add customers by offering competitive rates.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to apply
more stringent guidelines in making credit rating determinations.
Industries' management has taken steps to make the company more
competitive and profitable in the changing utility environment, including
partnering on energy projects with major industrial customers and conversions
of some of its generating units to allow use of lower cost, low-sulfur coal.
FERC Order No. 636 shifted primary responsibility for gas
acquisition, transportation, and peak days' supply from pipelines to local gas
distribution companies such as the Utilities. Although pipelines continue to
transport gas, they no longer provide sale service. The Utilities believe they
have taken appropriate steps to ensure the continued acquisition of adequate
gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services has
changed significantly over the past several years. The deregulation of the gas
industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use the
Utilities' facilities to transport the gas. Transportation customers pay the
Utilities only for transporting their gas from the pipeline to the customers'
premises.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with the
Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit increased
choice for gas customers, competition among suppliers, and improved natural
gas service. In its petition, Northern Indiana stated it would propose to
implement new rates and services that would include, but not be limited to,
further unbundling of services for additional customer classes which would
include increased customer choice for sources of natural gas supply,
negotiated services and prices, and incentive gas and storage cost mechanisms.
The Commission will hold hearings during first quarter of 1997.
To date, the Utilities' system has not been materially affected by
competition, and management does not foresee substantial adverse effects in
the near future, unless the current regulatory structure is substantially
altered. The Utilities believe the steps they are taking to deal with
increased competition will have significant, positive effects in the next few
years.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Industries and Northern Indiana are parties to various pending
proceedings, including suits and claims against them for personal injury,
death and property damage, but, in the opinion of their counsel, the nature of
such proceedings and suits, and the amounts involved, do not depart from the
ordinary routine litigation and proceedings incidental to the kind of business
conducted by Industries and Northern Indiana, except as described under Note 3
(Pending Tax Matter), Note 4 (Elm Energy and Recycling (UK) Ltd.), and Note 6
(Environmental Matters) in the Notes to Consolidated Financial Statements
under Part I, Item 1 of this report on Form 10-Q.
To the knowledge of Industries no other material legal proceedings
against Industries, Northern Indiana or their subsidiaries are contemplated by
governmental authorities and other parties.
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 3 - By-laws effective August 27, 1996.
Exhibit 11.1 - Computation of Per Share Earnings
Three-Month, Nine-Month, and Twelve-Month Periods
Ended September 30, 1996.
Exhibit 11.2 - Computation of Per Share Earnings
Three-Month, Nine-Month, and Twelve-Month Periods
Ended September 30, 1995.
Exhibit 23 - Consent of Arthur Andersen LLP
(b) Reports on Form 8-K.
None
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.
NIPSCO Industries, Inc.
(Registrant)
/s/Jerry M. Springer
Controller
and Chief Accounting Officer
Date November 13, 1996