SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
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 April 30, 1997, 62,820,977 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 March 31,
1997, and December 31, 1996, and the related consolidated statements of
income, common shareholders' equity and cash flows for the three and
twelve month periods ended March 31, 1997 and 1996. 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 March 31, 1997, and
December 31, 1996, and the results of their operations and their cash flows
for the three and twelve month periods ended March 31, 1997 and
1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
April 28, 1997
CONSOLIDATED BALANCE SHEET
March 31, December 31,
ASSETS 1997 1996
============= ============
(Dollars in thousands)
UTILITY PLANT, (INCLUDING CONSTRUCTION
WORK IN PROGRESS OF $147,860 AND
$166,812, RESPECTIVELY)
(Note 2):
Electric $ 4,063,203 $ 4,050,084
Gas 1,351,511 1,344,230
Common 348,637 346,636
Water 537,202 0
------------ ------------
6,300,553 5,740,950
Less - Accumulated provision for
depreciation and amortization 2,679,411 2,546,162
------------ ------------
Total Utility Plant 3,621,142 3,194,788
------------ ------------
OTHER PROPERTY AND INVESTMENTS:
Other property, at cost, less accumulated
provision for depreciation 158,330 147,370
Investments, at equity (Note 2) 61,233 52,260
Investments, at cost (Note 2) 30,476 30,424
Other investments 20,596 20,090
------------ ------------
Total Other Property and Investments 270,635 250,144
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 92,276 26,333
Accounts receivable, less reserve of
$6,911 and $5,569, respectively (Note 2) 180,423 165,441
Other receivables 82,195 42,184
Fuel adjustment clause (Note 2) 12,930 9,149
Gas cost adjustment clause (Note 2) 87,986 100,214
Materials and supplies, at average cost 62,430 59,859
Electric production fuel, at average cost 24,132 26,483
Natural gas in storage (Note 2) 18,018 65,093
Prepayments and other 31,930 28,491
------------ ------------
Total Current Assets 592,320 523,247
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 241,824 236,205
Intangible assets (Note 2) 80,488 0
Prepayments and other 104,164 84,499
------------ ------------
Total Other Assets 426,476 320,704
------------ ------------
$ 4,910,573 $ 4,288,883
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED BALANCE SHEET
March 31, December 31,
CAPITALIZATION AND LIABILITIES 1997 1996
============ ============
(Dollars in thousands)
CAPITALIZATION:
Common shareholders' equity
(See accompanying statement) $ 1,297,116 $ 1,100,501
Cumulative preferred stocks (Note 12) -
Series without mandatory redemption
provisions (Note 13) 85,622 81,126
Series with mandatory redemption
provisions (Note 14) 61,246 61,246
Long-term debt excluding amounts due
within one year (Note 18) 1,372,086 1,127,106
------------ ------------
Total Capitalization 2,816,070 2,369,979
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 19) 153,143 144,552
Short-term borrowings (Note 20) 273,807 425,985
Accounts payable 299,840 251,730
Sinking funds due within one year
(Notes 14 and 18) 3,328 3,328
Dividends declared on common and
preferred stocks 27,948 28,308
Customer deposits 20,196 17,580
Taxes accrued 151,607 78,723
Interest accrued 19,121 7,557
Accrued employment costs 41,843 44,186
Other accruals 62,184 30,054
------------ ------------
Total Current Liabilities 1,053,017 1,032,003
------------ ------------
OTHER:
Deferred income taxes (Note 9) 632,657 602,745
Deferred investment tax credits, being
amortized over life of related property
(Note 9) 111,111 108,258
Deferred credits 56,861 37,338
Customer advances and contributions
in aid of construction (Note 2) 101,976 15,830
Accrued liability for postretirement
benefits (Note 11) 124,041 109,429
Other noncurrent liabilities 14,840 13,301
------------ ------------
Total Other 1,041,486 886,901
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5, 6, 8, 21, 22 and 23) $ 4,910,573 $ 4,288,883
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------------- ----------------------
1997 1996 1997 1996
========== ========== ========== ==========
(Dollars in thousands, except for per share amounts)
Operating Revenues:
(Notes 2, 7, and 25)
Gas $ 333,400 $ 327,604 $ 805,191 $ 734,096
Electric 245,824 248,424 1,019,631 1,041,759
---------- ---------- ---------- ----------
579,224 576,028 1,824,822 1,775,855
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 214,840 199,258 499,359 426,072
Fuel for electric
generation 58,408 57,202 234,421 245,754
Power purchased 8,960 11,961 50,750 44,678
---------- ---------- ---------- ----------
282,208 268,421 784,530 716,504
---------- ---------- ---------- ----------
Operating Margin 297,016 307,607 1,040,292 1,059,351
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 73,510 79,148 288,602 299,298
Maintenance (Note 2) 17,622 17,796 69,849 74,636
Depreciation and
amortization (Note 2) 56,139 53,456 217,711 205,476
Taxes (except income) 20,895 20,745 74,454 73,765
---------- ---------- ---------- ----------
168,166 171,145 650,616 653,175
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 128,850 136,462 389,676 406,176
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 9) 38,268 41,467 107,796 112,342
---------- ---------- ---------- ----------
Operating Income 90,582 94,995 281,880 293,834
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) 9,304 461 14,536 (2,949)
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 20,795 21,469 84,708 84,463
Other interest 5,287 3,374 19,362 12,335
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (334) (231) (999) (1,969)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,133 1,159 4,579 4,516
Dividend requirements on
preferred stocks of
subsidiary 2,167 2,199 8,680 8,920
---------- ---------- ---------- -----------
29,048 27,970 116,330 108,265
---------- ---------- ---------- ----------
Net Income 70,838 67,486 180,086 182,620
Dividend requirements on
preferred shares 0 119 0 2,416
---------- ---------- ---------- ----------
Balance available for
common shareholders $ 70,838 $ 67,367 $ 180,086 $ 180,204
========== ========== ========== ==========
Average common shares
outstanding 59,558,343 62,064,667 60,570,358 62,776,503
Earnings per average
common share $ 1.18 $ 1.08 $ 2.97 $ 2.87
========== ========== ========== ==========
Dividends declared per
common share $ 0.45 $ 0.42 $ 1.74 $ 1.62
========== ========== ========== ==========
<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, January 1, 1996 $ 1,122,215 $ 870,930 $ 32,210 $ 518,837
Net income 67,486 67,486
Dividends:
Preferred shares (119) (119)
Common shares (25,794) (25,794)
Treasury shares acquired (38,488)
Issued:
Employee stock purchase
plan 303 177
Long-term incentive plan 335 154 Amortization of unearned
compensation 614
Unrealized gain(loss) on
available for sale
securities (53)
Other (149) (9)
----------- ----------- ----------- -----------
Balance, March 31, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401
=========== =========== =========== ===========
Balance, January 1, 1997 $ 1,100,501 $ 870,930 $ 32,868 $ 591,370
Net income 70,838 70,838
Dividends:
Preferred shares
Common shares (26,273) 26,273)
Treasury shares acquired (56,591)
Issued:
IWC Resources acquisition 207,552 55,043
Employee stock purchase
plan 188 113
Long-term incentive plan 765 94
Amortization of unearned
compensation 503
Unrealized gain (loss) on
available for sale
securities 29
Other (396) (35)
----------- ----------- ----------- -----------
Balance, March 31, 1997 $ 1,297,116 $ 870,930 $ 88,118 $ 635,900
=========== =========== =========== ===========
Dollars in Thousands Shares
--------------------------------------- -----------
Currency
Three Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== =========== ===========
Balance, January 1, 1996 $ (293,223) $ (1,930) $ (4,609) 73,892,109
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (38,488)
Issued:
Employee stock purchase
plan 126
Long-term incentive plan 643 (462)
Amortization of unearned
compensation 614
Unrealized gain (loss) on
available for sale
securities (53)
Other (140)
----------- ----------- ----------- -----------
Balance, March 31, 1996 $ (330,942) $ (2,070) $ (4,510) 73,892,109
=========== =========== =========== ===========
Balance, January 1, 1997 $ (392,995) $ (140) $ (1,532) 73,892,109
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (56,591)
Issued:
IWC Resources acquisition 152,509
Employee stock purchase
plan 75
Long-term incentive plan 1,022 (351)
Amortization of unearned
compensation 503
Unrealized gain (loss) on
available for sale
securities 29
Other (361)
----------- ----------- ----------- -----------
Balance, March 31, 1997 $ (295,980) $ (501) $ (1,351) 73,892,109
=========== =========== =========== ===========
Shares
-----------
Three Months Ended Treasury
(continued) Shares
======================== ===========
Balance, January 1, 1996 (11,512,513)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (1,023,677)
Issued:
Employee stock purchase
plan 7,927
Long-term incentive plan 24,900
Amortization of unearned
compensation
Other
-----------
Balance, March 31, 1996 (12,503,363)
===========
Balance, January 1, 1997 (14,086,448)
Net income
Dividends:
Common shares
Treasury shares acquired (1,429,607)
Issued:
IWC Resources acquisition 5,293,875
Employee stock purchase
plan 4,754
Long-term incentive plan 35,550
Amortization of unearned
compensation
Unrealized gain
on available for sale
securities
Other
------------
Balance, March 31, 1997 (10,181,876)
============
Dollars in Thousands
------------------------------------------------------
Additional
Common Paid-in Retained
Twelve Months Ended Total Shares Capital Earnings
======================== =========== =========== =========== ===========
Balance, April 1, 1995 $ 1,134,786 $ 870,930 $ 31,806 $ 481,176
Net income 182,620 182,620
Dividends:
Preferred shares (2,416) (2,416)
Common shares (100,880) (100,880)
Treasury shares acquired (97,223)
Issued:
Employee stock purchase
plan 602 336
Long-term incentive plan 5,858 179
Amortization of unearned
compensation 2,454
Unrealized gain (loss) on
available for sale
securities 1,616
Other (1,067) 220 (99)
----------- ----------- ---------- -----------
Balance, March 31, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401
----------- ----------- ---------- -----------
Net income 180,086 180,086
Dividends:
Preferred shares 0 0
Common shares (104,460) (104,460)
Treasury shares acquired (123,601)
Issued:
IWC Resources acquisition 207,552 55,043
Employee stock purchase
plan 668 390
Long-term incentive plan 5,441 126
Amortization of unearned
compensation 2,459
Unrealized gain (loss) on
available for sale
securities 1,161
Other 1,460 18 (127)
----------- ----------- ---------- -----------
Balance, March 31, 1997 $ 1,297,116 $ 870,930 $ 88,118 $ 635,900
=========== =========== ========== ===========
Dollars in Thousands Shares
-------------------------------------- -----------
Currency
Twelve Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== ========== ===========
Balance, April 1, 1995 $ (240,222) $ (882) $ (8,022) 73,892,109
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (97,223)
Issued:
Employee stock purchase
plan 266
Long-term incentive plan 6,237 (558)
Amortization of unearned
compensation 2,454
Unrealized gain on
available for sale
securities 1,616
Other (1,188)
----------- ----------- ---------- -----------
Balance, March 31, 1996 $ (330,942) $ (2,070) $ (4,510) 73,892,109
----------- ----------- ---------- -----------
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (123,601)
Issued:
IWC Resources acquisition 152,509
Employee stock purchase
plan 278
Long-term incentive plan 5,776 (461)
Amortization of unearned
compensation 2,459
Unrealized gain (loss) on
available for sale
securities 1,161
Other 1,569
----------- ----------- ---------- -----------
Balance, March 31, 1997 $ (295,980) $ (501) $ (1,351) 73,892,109
=========== =========== ========== ===========
Shares
-----------
Twelve Months Ended Treasury
(continued) Shares
======================== ===========
Balance, April 1, 1995 (10,020,238)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (2,747,343)
Issued:
Employee stock purchase
plan 16,718
Long-term incentive plan 247,500
Amortization of unearned
compensation
Other
-----------
Balance, March 31, 1996 (12,503,363)
-----------
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (3,199,534)
Issued:
IWC Resources acquisition 5,293,875
Employee stock purchase
plan 17,496
Long-term incentive plan 209,650
Amortization of unearned
compensation
Unrealized gain
on available for sale
securities
Other
-----------
Balance, March 31, 1997 (10,181,876)
===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months
Ended March 31,
-----------------------
1997 1996
========= =========
(Dollars in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 70,838 $ 67,486
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 56,139 53,456
Deferred federal and state operating
income taxes, net (7,838) 14,991
Deferred investment tax credits, net (1,802) (1,670)
Advance contract payment 475 (18,525)
Change in certain assets and liabilities - *
Accounts receivable, net (26,224) (44,955)
Electric production fuel 2,351 (5,688)
Materials and supplies 220 666
Natural gas in storage 47,075 48,978
Accounts payable 55,650 31,150
Taxes accrued 71,234 44,456
Fuel adjustment clause (3,781) 1,834
Gas cost adjustment clause 12,228 (47,674)
Accrued employment costs (4,821) (8,793)
Other accruals 25,511 12,307
Other, net 7,863 9,081
--------- ---------
Net cash provided by operating activities 305,118 157,100
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Utility construction expenditures (46,396) (37,308)
Construction expenditures related to
Crossroads Pipeline Company (185) (85)
Acquisition of IWC Resources Corporation,
net of cash acquired (288,932) 0
Proceeds from disposition of assets 29,500 0
Other, net (19,352) (13,917)
--------- ---------
Net cash used in investing activities (325,365) (51,310)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 136,302 76,297
Issuance of short-term debt 254,045 339,688
Net change in commercial paper (142,305) (24,100)
Retirement of long-term debt (1,469) (1,117)
Retirement of short-term debt (285,620) (384,735)
Retirement of preferred shares (1) (35,000)
Issuance of common shares 208,486 608
Acquisition of treasury shares (56,591) (38,488)
Cash dividends paid on common shares (26,772) (26,209)
Cash dividends paid on preferred shares 0 (119)
Other, net 115 141
--------- ---------
Net cash provided by (used in)
financing activities 86,190 (93,034)
--------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 65,943 12,756
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 26,333 28,496
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 92,276 $ 41,252
========= =========
<FN>
*Net of effect from purchase of IWC Resources Corporation.
Twelve Months
Ended March 31,
-----------------------
1997 1996
========= =========
(Dollars in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 180,086 $ 182,620
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 217,711 205,476
Deferred federal and state operating
income taxes, net 4,590 29,367
Deferred investment tax credits, net (7,540) (7,317)
Advance contract payment 1,900 (18,525)
Change in certain assets and liabilities - *
Accounts receivable, net (37,712) (48,106)
Electric production fuel (4,186) 4,989
Materials and supplies 4,739 4,402
Natural gas in storage (6,112) 10,122
Accounts payable 105,513 32,859
Taxes accrued 43,780 (35,661)
Fuel adjustment clause (4,463) (8,100)
Gas cost adjustment clause (38,889) (70,443)
Accrued employment costs 1,463 (960)
Other accruals (299) 12,436
Other, net (10,578) 8,594
--------- ---------
Net cash provided by operating activities 450,003 301,753
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Utility construction expenditures (193,187) (173,102)
Construction expenditures related to
Crossroads Pipeline Company (4,856) (3,083)
Acquisition of IWC Resources Corporation,
net of cash acquired (288,932) 0
Proceeds from disposition of assets 29,500 0
Other, net (32,655) (57,630)
--------- ---------
Net cash used in investing activities (490,130) (233,815)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 138,371 251,501
Issuance of short-term debt 1,496,567 1,359,800
Net change in commercial paper 73,500 (15,700)
Retirement of long-term debt (90,144) (122,358)
Retirement of short-term debt (1,510,619) (1,304,585)
Retirement of preferred shares (2,605) (38,525)
Issuance of common shares 213,594 6,601
Acquisition of treasury shares (123,601) (97,223)
Cash dividends paid on common shares (103,753) (100,106)
Cash dividends paid on preferred shares (647) (2,416)
Other, net 488 168
--------- ---------
Net cash provided by (used in)
financing activities 91,151 (62,843)
--------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 51,024 5,095
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 41,252 36,157
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 92,276 $ 41,252
========= =========
<FN>
*Net of effect of IWC Resources Corporation.
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
energy/utility based holding company providing electric energy and natural gas
to the public through its four regulated subsidiaries: 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). Industries' non-utility businesses are
primarily energy or utility related. These include energy marketing and
trading; power generation; oil and gas exploration and development; gas
transmission, supply and storage; and related products targeted at customer
segments.
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR's subsidiaries currently include two regulated water utilities and
non-regulated companies providing utility-related services including utility
line locating and marking and installation, and repair and maintenance of
underground pipelines.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements include
the accounts of Industries; its regulated subsidiaries and all non-utility
subsidiaries. Industries' regulated subsidiaries, including Indianapolis
Water Company (IWC) and Harbour Water Company (Harbour), are referred to as
"Utilities". Industries' regulated gas and electric subsidiaries (Northern
Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy
Utilities"; and regulated water subsidiaries (IWC and Harbour) are referred
to as "Water Utilities". 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% for the three-month and
twelve-month periods ended March 31, 1997, respectively; and 4.2% and 4.1%
for the three-month and twelve-month periods ended March 31, 1996. 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 3.2% for the
three-month and twelve-month periods ended March 31, 1997; and 3.1% for the
three-month and twelve-month periods ended March 31, 1996.
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 and twelve-month periods ended March 31, 1997 and March 31, 1996.
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 and twelve-month periods ended March 31, 1997 and March 31, 1996.
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. Industries amortizes capitalized
software costs using the straight-line method based on estimated economic
lives.
PLANT ACQUISITION ADJUSTMENTS. Utility plant includes amounts
representing the excess of purchase price over underlying book values
associated with the acquisitions of Kokomo Gas, NIFL, IWC and Harbour.
These amounts are $171.2 million (see Note 4) and $40.6 million at March 31,
1997 and December 31, 1996, respectively, and are being amortized over a
forty-year period from their respective dates of acquisition.
INTANGIBLE ASSETS. The excess of cost over the fair value of the net
assets of non-utility subsidiaries acquired as part of the IWCR acquisition
(see Note 4) has been recorded as goodwill and is being amortized over a
forty-year period from the date 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 March 31, 1997, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which expires
May 31, 1997, and is expected to be renewed.
CUSTOMER ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION. IWC allows
developers to install and provide for the installation of water main
extensions, which are to be transferred to IWC upon completion. The cost
of the main extensions and the amount of any funds advanced for the cost of
water mains installed are included in customer advances for construction and
are generally refundable to the customer over a period of ten years. Advances
not refunded within ten years are permanently transferred to contributions in
aid of construction.
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 Twelve Months
Ended March 31, Ended March 31,
------------------- -------------------
1997 1996 1997 1996
======== ======== ======== ========
(Dollars in thousands)
Income taxes $ 0 $ 0 $ 75,795 $117,940
Interest, net
of amounts
capitalized $ 12,111 $ 10,404 $ 88,988 $ 83,816
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 Energy 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 7, 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 March 1997 and December 1996 the estimated
replacement cost of gas in storage (current and non-current) at March 31,
1997 and December 31, 1996 exceeded the stated LIFO cost by approximately
$20 million and $96 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 swaps (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 March 31, 1997, Industries had open derivative financial
instruments representing hedges of natural gas sales of 5.5 billion cubic
feet (Bcf) and net basis differentials of 3.3 Bcf. The deferred gain on
these derivative financial instruments at March 31, 1997 was not material.
NESI Power Marketing, Inc., a subsidiary of Services, uses options to
hedge price risk associated with a portion of its fixed price purchase and
sale commitments related to electricity. Unrealized gains (losses) on
these option contracts at March 31, 1997 are not material.
IMPACT OF ACCOUNTING STANDARDS. In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share". This statement specifies
the computation, presentation, and disclosure requirements for earnings per
share for entities with publicly held common stock. Its objective is to
simplify the computation of earnings per share and to make the U.S. standard
for computing earnings per share more compatible with the standards of other
countries and with that of the International Accounting Standards Committee.
This statement is effective for fiscal years ending after December 15, 1997.
Industries will adopt this statement at year-end 1997 and does not expect
adoption of the statement to have a significant impact on its current earnings
per share calculation.
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 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. As of
March 31, 1997 and December 31, 1996, 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:
March 31, December 31,
1997 1996
============= ============
(Dollars in thousands)
Unamortized reacquisition premium on
debt (Note 18) $ 49,384 $ 50,262
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 69,709 70,763
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,582 10,816
Deferral of SFAS No. 106 expense not
recovered (Note 11) 91,965 87,557
FERC Order No. 636
transition costs (Note 7) 40,357 47,399
Regulatory income tax asset (Note 9) 7,728 4,736
Other 4,456 0
------------- ------------
274,181 271,533
Less: Current portion of regulatory assets 32,357 35,328
------------- ------------
$ 241,824 $ 236,205
============= ============
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, 1995, a pre-tax rate of 6.0% for all construction was
being used; effective January 1, 1996 the rate decreased to 5.5%; and
effective January 1, 1997, the rate increased to 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. NIPSCO Development Company, Inc.
(Development), a wholly-owned subsidiary of Industries, has invested in a
series of affordable housing projects in the Utilities' service territories.
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 $31.3 million and $24.1 million relating to
affordable housing projects at March 31, 1997 and December 31, 1996,
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. The case was argued on February 20, 1997. Northern Indiana's
management and general counsel believe the favorable ruling of the Tax Court
will prevail.
(4) PURCHASE OF IWC RESOURCES CORPORATION: On March 25, 1997, Industries
acquired all the outstanding common stock of IWC Resources Corporation (IWCR)
for $290.5 million. Industries financed this transaction with debt of
approximately $83.0 million and issuance of approximately 5.3 million
Industries' common shares. Industries accounted for the acquisition as a
purchase, and the purchase price was allocated to the assets and liabilities
acquired based on their estimated fair values. The accompanying consolidated
financial statements reflect a preliminary allocation of the purchase price
(see Note 2) as the purchase price allocation has not been finalized.
Following is a summary of the assets acquired and liabilities assumed in
the acquisition of IWCR:
(Dollars in thousands)
Assets acquired:
Utility plant (net of
accumulated depreciation) $ 448,387
Other property and investments 26,526
Other current assets 34,826
Intangible assets 80,020
Other noncurrent assets 22,350
---------
612,109
Less:
Liabilities assumed:
Long-term debt 112,185
Preferred stock 4,497
Short-term debt 28,329
Other current liabilities 23,315
Customer advances and contributions
in aid of construction 86,175
Other noncurrent liabilities 67,071
---------
321,572
---------
Net assets acquired $ 290,537
=========
On a pro forma basis, the acquisition of IWCR would not have a
significant effect on Industries' consolidated results of operations.
(5) ELM ENERGY AND RECYCLING (UK) LTD.: Development 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). In
1995, the Project failed certain performance and reliability tests which had
been established under a contract between Elm and TBV Power Limited (TBV), a
company jointly owned by subsidiaries of the Tarmac PLC Group and Black &
Veatch. Elm "rejected" the Project in accordance with the contract, and the
independent Project engineer then certified that 29.6 million British Pounds
Sterling (approximately $48.5 million at March 31, 1997) were to be reimbursed
by TBV to Elm. TBV filed suit in the English courts to enjoin enforcement of
the decision and to allege certain breaches of the underlying construction
contract.
Elm has counterclaimed, and Elm and Development are also seeking
additional remedies at law, in both the United States and the United Kingdom,
for damages and/or sanctions against TBV, Tarmac PLC Group, Black & Veatch and
its chairman. Black & Veatch has counterclaimed against Elm and Development.
Development believes that the claims made against it and Elm are meritless and
that 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.
Elm is continuing to operate the Project, and the banks which provide the
non-recourse financing for the Project are continuing to support its
operations. However, because of ongoing defaults under the Project financing
(resulting from the Project's poor performance and the pending litigation),
and the uncommitted nature of a working capital facility provided by the
banks, the banks have the right to ask that the operation of the Project be
terminated at any time. In that event, some or all of Industries' investment
in Elm may be at risk. Industries' investment in Elm, however, was not
material at March 31, 1997.
(6) NESI ENERGY MARKETING CANADA LTD. LITIGATION: On October 31, 1996,
Services' wholly-owned subsidiary NIPSCO Energy Services Canada Ltd.(NESI
Canada) acquired 70% of the outstanding shares of Chandler Energy Inc., a gas
marketing and trading company located in Calgary, Alberta, and subsequently
renamed it NESI Energy Marketing Canada Ltd.(NEMC). Between November 1 and
November 27, 1996, gas prices in the Calgary market increased dramatically.
As a result, NEMC was selling gas, pursuant to contracts entered into prior to
the acquisition date, at prices substantially below its costs to acquire such
gas. On November 27, 1996, NEMC ceased doing business and sought protection
from its creditors under the Companies' Creditors Arrangement Act, a Canadian
corporate reorganization statute.
In December 1996 and January 1997, certain creditors of NEMC filed
claims against Industries, Services, Capital Markets and NESI Canada,
alleging certain misrepresentations relating to NEMC's financial condition
and claiming damages. Industries and its affiliates intend to vigorously
defend against such claims and any other claims seeking to assert that any
party other than NEMC is responsible for NEMC's liabilities. Industries has
fully reserved its equity investment in NEMC. Management believes that any
additional loss relating to NEMC would not be material to the results of
operations or financial position of Industries.
(7) FERC ORDER NO. 636. The Energy Utilities have recorded approximately
$135 million of interstate pipeline transition costs to reflect the impact of
FERC Order No. 636, a majority of which costs have been paid to the pipeline
suppliers. The Energy Utilities expect that additional transition costs will
not be significant; however, the ultimate level of costs will depend on future
events, including the market price of natural gas. 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.
(8) 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 $16.9 million to cover probable corrective actions as of
March 31, 1997; 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.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for the second phase of the Acid Rain nitrogen oxides
reduction program. Northern Indiana is evaluating compliance strategies to
meet the reduced emission limitations found in the final rule. Additional
controls may be needed to meet the requirements. A compliance plan must be
submitted to the EPA by December 31, 1997 with details of the plan to meet
the new limits by January 1, 2000.
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 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 Energy Utilities have instituted a program to investigate former
manufactured-gas plants where one of them is the current or former owner.
The Energy Utilities have identified twenty-eight 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 seven sites
and remedial measures have been selected at four sites. The Energy Utilities
will continue their program to assess and cleanup sites.
During the course of various investigations, the Energy Utilities have
identified impacts to soil, groundwater, sediment and surface water from
former manufactured-gas plants. At three sites where residues were
noted seeping into rivers, Northern Indiana notified the Indiana Department
of Environmental Management (IDEM) and the EPA and immediately took steps to
contain the material. The Energy Utilities have worked with IDEM or the EPA
on investigation or remedial activities at several sites. Two of the sites
have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal
of placing these sites in the VRP is to obtain IDEM approval of the selection
and implementation of whatever remedial measures, if any, may be required.
The Energy Utilities anticipate placing additional sites in the VRP after
remedial measures have been selected.
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
Cinergy Services, Inc. (Cinergy) (formerly 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. In December 1996, Northern Indiana sent a written demand to
Cinergy related to one of these sites, Goshen. Northern Indiana demanded that
Cinergy pay Northern Indiana for costs Northern Indiana has already incurred
and to be incurred to implement the needed remedy at the Goshen site.
The Energy Utilities have met with various companies that provided
insurance coverage which the Energy 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. Both sides
have motions pending in the Federal Court lawsuit that would be dispositive of
the case. Northern Indiana has obtained cash settlements from some of its
insurers.
The possibility that exposure to electric and magnetic fields emanating
(EMF) 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. Recently, the U.S. National Research Council of the
National Academy of Sciences concluded in a report, after examining more than
500 EMF studies spanning 17 years, that among other things, there is
insufficient evidence to consider EMF a threat to human health. Despite the
report's findings, future research appropriations are continuing to be
dedicated to explore this issue.
The Water Utilities are subject to pollution control and water quality
control regulations, including those issued by the EPA, IDEM, the Indiana
Water Pollution Control Board, and the Indiana Department of Natural
Resources. Under the Federal Clean Water Act and Indiana's regulations,
IWC must obtain National Pollutant Discharge Elimination System (NPDES)
permits for discharges from its water treatment stations. Application for
renewal of any expiring permits have been filed and are the subject of ongoing
discussions with, but not finalized by, IDEM. These permits continue in
effect pending review of the applications.
Under the Federal Safe Drinking Water Act (SWDA), the Water Utilities
are subject to regulation by the EPA for the quality of water sold and
treatment techniques used to make the water portable. The EPA promulgates
nationally applicable maximum contaminant levels (MCLs) for contaminants found
in drinking water. Management believes its water utilities are currently in
compliance with all MCLs promulgated to date. The EPA has continuing
authority, however, to issue additional regulations under the SDWA. In August
1996, Congress amended the SDWA to allow the EPA more authority to weigh the
costs and benefits of regulations being considered in some (but not all)
cases. The 1996 amendments do not, however, reduce the number of new
standards required by the 1986 amendments. Such standards promulgated could
be costly and require substantial changes in the Water Utilities' operations.
The Water Utilities would expect to recover the costs of such changes through
its water rates; however, such recovery may not necessarily be timely.
Under a 1991 law enacted by the Indiana Legislature, a water utility may
petition the Commission for prior approval of its plans and estimated
expenditures required to comply with provisions of, and regulations under, the
Federal Clean Water Act and SDWA. Upon obtaining such approval, a water
utility may include, to the extent of its estimated costs as approved by the
Commission, such costs in its rate base for rate-making purposes and recover
its costs of developing and implementing the approved plans if statutory
standards are met. The capital costs for such new systems, equipment or
facilities or modifications of existing facilities may be included in a
water utility's rate base upon completion of construction of the project or
any part thereof. While use of this statute is voluntary on the part
of a water utility, if utilized, it should allow water utilities a greater
degree of confidence in recovering major costs incurred to comply with
environmentally related laws on a timely basis.
(9) 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 March 31,
1997 and December 31, 1996, are as follows:
March 31, December 31,
1997 1996
============= ============
(Dollars in thousands)
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 768,283 $ 727,528
AFUDC-equity 37,109 37,713
Adjustment clauses 37,562 41,181
Take-or-pay gas costs 737 877
Other regulatory assets 40,476 39,458
Reacquisition premium on debt 19,346 19,041
Deferred tax assets -
Deferred investment tax credits (42,131) (41,046)
Removal costs (134,914) (131,718)
FERC Order No. 636 transition costs (7,022) (8,144)
Other postretirement/postemployment
benefits (48,585) (43,446)
Other, net (16,370) (11,987)
------------- ------------
654,491 629,457
Less: Deferred income taxes related to
current assets and liabilities 21,834 26,712
------------- ------------
Deferred income taxes - noncurrent $ 632,657 $ 602,745
============= ============
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1997 1996 1997 1996
========= ========= ========= =========
(Dollars in thousands)
Current income taxes -
Federal $ 41,698 $ 24,374 $ 95,857 $ 78,220
State 6,210 3,772 14,889 12,072
--------- --------- --------- ---------
47,908 28,146 110,746 90,292
--------- --------- --------- ---------
Deferred income taxes, net -
Federal (7,289) 13,760 3,966 26,906
State (549) 1,231 624 2,461
--------- --------- --------- ---------
(7,838) 14,991 4,590 29,367
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,802) (1,670) (7,540) (7,317)
--------- --------- --------- ---------
Total utility operating income
taxes 38,268 41,467 107,796 112,342
Income tax applicable to non-
operating activities and income
of non-utility subsidiaries 645 (1,625) (1,807) (8,819)
--------- --------- --------- ---------
Total income taxes $ 38,913 $ 39,842 $ 105,989 $ 103,523
========= ========= ========= =========
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 Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1997 1996 1997 1996
========= ========= ========= =========
(Dollars in thousands)
Net income $ 70,838 $ 67,486 $ 180,086 $ 182,620
Add-Income taxes 38,913 39,842 105,989 103,523
Dividend requirements on
preferred stocks of subsidiary 2,167 2,199 8,680 8,920
--------- --------- --------- ---------
Income before preferred dividend
requirements of subsidiary and
income taxes $ 111,918 $ 109,527 $ 294,755 $ 295,063
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 39,171 $ 38,334 $ 103,164 $ 103,272
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 1,044 983 4,682 3,997
Amortization of deferred
investment tax credits (1,802) (1,670) (7,540) (7,317)
State income taxes, net of
federal income tax benefit 3,567 3,683 10,424 9,812
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,518) (1,674) (6,488) (5,979)
Other, net (1,549) 186 1,747 (262)
--------- --------- --------- ---------
Total income taxes $ 38,913 $ 39,842 $ 105,989 $ 103,523
========= ========= ========= =========
(10) PENSION PLANS: Industries and its subsidiaries have four
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, 1997 and 1996 are as follows:
1997 1996
========= =========
(Dollars in thousands)
Vested benefit obligation $(550,151) $(549,234)
Nonvested benefit (105,339) (104,814)
--------- ---------
Accumulated benefit obligation $(655,490) $(654,048)
========= =========
Projected benefit obligation for service
rendered to date $(759,406) $(759,681)
Plan assets at fair market value 806,888 706,320
--------- ---------
Plan assets in excess of (or less than)
projected benefit obligation 47,482 (53,361)
Unrecognized transition obligation at January 1,
being recognized over seventeen years 37,401 43,484
Unrecognized prior service cost 25,528 27,242
Unrecognized gains (66,611) (4,217)
--------- ---------
Prepaid pension costs $ 43,800 $ 13,148
========= =========
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.
Rates used to determine the accumulated benefit obligation and
projected benefit obligation at January 1, 1997 and January 1, 1996
were as follows:
1997 1996
===== =====
Discount rate 7.75% 7.25%
Rate of increase in compensation levels 5.50% 5.50%
The following items are the components of provisions for pensions for
the three-month and twelve-month periods ended March 31, 1997 and March 31,
1996 excluding IWCR and its subsidiaries:
Three Months Twelve Months
Ended Ended
March 31, March 31,
------------------ -------------------
1997 1996 1997 1996
======== ======== ======== ========
(Dollars in thousands)
Service costs $ 4,573 $ 6,267 $ 14,606 $ 15,199
Interest costs 16,536 19,051 50,962 58,224
Estimated return
on plan assets (20,503) (22,604) (85,306) (144,983)
Amortization of
transition
obligation 1,588 1,942 5,068 6,009
Other net
amortization
and deferral 950 914 26,496 86,420
-------- -------- -------- --------
$ 3,144 $ 5,570 $ 11,826 $ 20,869
======== ======== ======== ========
Assumptions used in the valuation and determination of 1997 and 1996
pension expenses were as follows:
1997 1996
===== =====
Discount rate 7.75% 7.25%
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.
IWCR participates in several industry-wide, multi-employer pension
plans for certain of its union employees at Miller Pipeline Corporation
(Miller). These plans provide for monthly benefits based on length of
service. Specified amounts per compensated hour for each employee are
contributed to the trustees of these plans.
(11) 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 rate-making has historically included 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 benefit costs and the insurance premiums paid for such benefits
(OPRB) 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.
On November 20, 1996, Northern Indiana filed with the Commission for
inclusion of accrual-based postretirement benefit costs in the rate-making
process to be effective February 1, 1997 for electric rates and March 1, 1997
for gas rates. These costs include an amortization of the existing regulatory
asset consistent with the remaining amortization period for the transition
obligation. Northern Indiana discontinued its cost deferral and began
amortizing its regulatory asset concurrent with the dates above and consistent
with its original proposal. Hearings were held during March 1997 and the
matter is pending before the Commission for decision. Northern Indiana
expects a decision during the second quarter of 1997. Management believes
that Northern Indiana will ultimately be successful in obtaining such
approval.
IWC's current rate-making process includes postretirement benefit costs
on an accrual basis, including amortization of the regulatory asset that arose
prior to inclusion of these costs in the rate-making process. IWC currently
remits to a grantor trust amounts collected in the rate-making process in
excess of current cash requirements.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1997 and 1996:
January 1, January 1,
1997 1996
========== ==========
(Dollars in thousands)
Retirees $ (85,308) $ (99,453)
Fully eligible active plan participants (19,448) (23,084)
Other active plan participants (115,383) (136,322)
---------- ----------
Accumulated postretirement benefit obligation (220,139) (258,859)
Unrecognized transition obligation at January 1,
being recognized over twenty years 188,229 197,088
Unrecognized actuarial gain (91,023) (23,439)
---------- ----------
Accrued liability for postretirement benefits $ (122,933) $ (85,210)
========== ==========
A discount rate of 7.75% and a pre-Medicare medical trend rate of 9%
declining to a long-term rate of 6% and a discount rate of 7.25%, and a
pre-Medicare medical trend rate of 10% declining to a long-term rate of 6%
were used to determine the accumulated postretirement benefit obligation at
January 1, 1997 and 1996, respectively.
The decrease in the accumulated postretirement benefit obligation (APBO)
and the related increase in unrecognized actuarial gain at January 1, 1997
were primarily attributable to favorable claim experience and the increase in
the discount rate to 7.75%. Additionally, Industries implemented a 3% cap on
its share of retiree cost increases for pre-Medicare benefits for certain non-
bargaining retirees who retire after February 1, 1997. This plan amendment
reduced the APBO and the unrecognized transition obligation by $9.6 million at
January 1, 1997.
Net periodic postretirement benefits costs for the three-month and
twelve-month periods ended March 31, 1997 and March 31, 1996 include the
following components:
Three Months Twelve Months
Ended Ended
March 31, March 31,
------------------ ------------------
1997 1996 1997 1996
======== ======== ======== ========
(Dollars in thousands)
Service costs $ 1,460 $ 1,620 $ 7,192 $ 6,170
Interest costs 4,460 5,080 17,691 19,366
Amortization of
transition
obligation
over twenty
years 2,764 3,095 11,262 11,789
Amortization of
unrecognized
actuarial
gain (1,008) (583) (979) (2,221)
-------- -------- -------- --------
$ 7,676 $ 9,212 $ 35,166 $ 35,104
======== ======== ======== ========
The net periodic postretirement benefit costs for 1997 were determined
assuming a 7.75% discount rate, a 5% rate of compensation increase, and a
pre-Medicare medical trend rate of 9% 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, 1997 by approximately $31.4 million, and increase the
aggregate of the service and interest cost components of plan costs by
approximately $1.1 million for the three-month period ended March 31, 1997.
Amounts disclosed above could be changed significantly in the future by
changes in health care costs, work force demographics, interest rates, or
plan changes.
(12) 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 16, 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)
INDIANAPOLIS WATER COMPANY -
300,000 shares - Cumulative Preferred - $100 par value
Note 13 sets forth the preferred stocks which are redeemable solely at
the option of the issuer, and Note 14 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, Northern Indiana and IWC
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.
(13) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER,
OUTSTANDING AT MARCH 31, 1997 AND DECEMBER 31, 1996 (SEE NOTE 12):
Redemption
Price at
March 31, December 31, March 31,
1997 1996 1997
============= ============= =============
(Dollars in thousands)
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,141 and
209,145 shares outstanding,
respectively $ 20,914 $ 20,915 $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
March 31, 1997), Series A
(stated value $50 per share)
473,285 shares outstanding 23,664 23,664 $50.00
INDIANAPOLIS WATER COMPANY:
Cumulative preferred stock -
$100 par value -
Rates ranging from 4.00% to
5.00%, 44,966 shares
outstanding 4,497 - $100 - $105
------------ ------------
$ 85,622 $ 81,126
============ ============
During the period April 1, 1995 to March 31, 1997, 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 the issuer at the
redemption prices shown.
(14) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1997 AND
DECEMBER 31, 1996 (SEE NOTE 12):
March 31, December 31,
1997 1996
============= =============
(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 shares outstanding,
excluding sinking fund payments due
within one year $ 7,500 $ 7,500
7-3/4% series - 44,460 shares outstanding,
excluding sinking fund payments due within
one year 4,446 4,446
8.35% series - 63,000 shares outstanding,
excluding sinking fund payments due within
one year 6,300 6,300
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
------------- ------------
$ 61,246 $ 61,246
============= ============
The redemption prices at March 31, 1997, 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
====== ========================== ===========================
Cumulative preferred stock - $100 par value -
8.85% $101.48, 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% $104.41, 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 March 31, 1997 for each of the twelve-month periods subsequent
to March 31, 1998 are as follows:
Twelve Months Ended March 31,*
==================================
1999 $1,827,700
2000 $1,827,700
2001 $1,827,700
2002 $1,827,700
<FN>
* Table does not reflect redemptions made after March 31, 1997.
(15) COMMON SHARE DIVIDEND: During the next few years, Industries
expects that the 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
March 31, 1997, Northern Indiana had approximately $167.2 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.
(16) 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
Industries' common shares. At March 31, 1997, Industries had purchased
approximately 20.2 million shares at an average price of $27.14 per share
since 1989. Including 5.0 million shares authorized on April 9, 1997,
approximately 5.9 million additional common shares may be repurchased under
the Board's authorization.
(17) 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 March 31, 1997, there
were 4,911 shares and 2,205,550 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 March 31, 1997. 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 and 1997 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 271,000 and 262,000
restricted shares outstanding at March 31, 1997 and December 31, 1996,
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
March 31, 1997, 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 $0.5, and $2.0 million for the
three-month and twelve-month periods ending March 31, 1997, respectively. 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 Twelve Months
Ended Ended
March 31, March 31,
------------------ --------------------
1997 1996 1997 1996
================== ====================
(Dollars in thousands, except per share data)
Net Income:
As reported $ 70,838 $ 67,486 $ 180,086 $ 182,620
Pro forma $ 70,539 $ 67,319 $ 179,340 $ 182,204
Earnings Per Share:
As reported $ 1.18 $ 1.08 $ 2.97 $ 2.87
Pro forma $ 1.18 $ 1.08 $ 2.96 $ 2.86
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 and twelve-month periods ended March 31, 1997 and March 31,
1996, respectively: risk-free interest rate of 6.39% and 6.24%; expected
dividend yield of $1.68 and $1.56 per share; expected option term of five
years; and expected volatility of 13.2% and 13.0%.
Changes in outstanding shares under option and SARs for the three-month,
and twelve-month periods ended March 31, 1997 and 1996 are as follows:
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Three Months Ended Option Option
March 31, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
Balance beginning of period 1,187,150 $ 30.58 1,107,750 $ 28.55
Exercised (26,550) $ 28.03 (12,900) $ 28.96
Canceled (10,850) $ 37.81 (3,000) $ 32.69
--------- ---------
Balance end of period 1,149,750 $ 30.57 1,091,850 $ 28.53
========= =========
Shares exercisable 886,300 $ 28.42 821,400 $ 27.25
========= =========
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Twelve Months Ended Option Option
March 31, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
Balance beginning of period 1,091,850 $ 28.53 1,059,700 $ 26.86
Granted 278,300 $ 37.81 277,450 $ 32.44
Exercised (197,650) $ 28.90 (232,500) $ 25.76
Canceled (22,750) $ 35.83 (12,800) $ 25.13
--------- ---------
Balance end of period 1,149,750 $ 30.57 1,091,850 $ 28.53
========= =========
Shares exercisable 886,300 $ 28.42 821,400 $ 27.25
========= =========
Weighted average fair value
of options granted $ 5.00 $ 3.87
========= =========
NONQUALIFIED STOCK OPTIONS WITH SARs
-------------------------------------------
Three Months Ended Option Option
March 31, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
Balance beginning of period 5,600 $ 10.94 5,600 $ 10.94
Exercised 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
March 31, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
Balance beginning of period 5,600 $ 10.94 9,900 $ 10.94
Exercised 0 (4,300) $ 10.94
--------- ---------
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 March 31, 1997:
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Option Price March 31, 1997 Contractual Life Option Price
================ ============== ================== =================
$10.94 to $17.94 90,800 2.80 years $16.62
$22.94 to $28.75 382,750 6.07 years $26.53
$30.31 to $37.81 676,200 8.21 years $34.73
- ---------------- --------- ---------- ------
$10.94 to $37.81 1,149,750 7.07 years $30.57
=========
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------
Number
Range of Exercisable at Weighted Average
Option Price March 31, 1997 Option Price
================ ================== =================
$10.94 to $17.94 90,800 $16.62
$22.94 to $28.75 382,750 $26.53
$30.31 to $33.19 412,750 $32.76
- ---------------- --------- ------
$10.94 to $33.19 886,300 $28.42
=========
(18) LONG-TERM DEBT: At March 31, 1997 and December 31, 1996, Industries'
long-term debt, excluding amounts due within one year, issued and
not retired or canceled was as follows:
AMOUNT OUTSTANDING
---------------------------
March 31, December 31,
1997 1996
============= ============
(Dollars in thousands)
First mortgage bonds -
Interest rates between 5.20% and 9.83% with
a weighted average interest rate of 7.21%
and various maturities between October 1, 1998
and December 1, 2022 $ 202,109 $ 109,509
Pollution control notes and bonds -
Interest rates between 3.47% and 5.70% with
a weighted average interest rate of 3.75%
and various maturities between October 1, 2003
and April 1, 2019 242,000 242,000
Medium-term notes -
Interest rates between 5.83% and 7.99% with
a weighted average interest rate of 6.99%
and various maturities between April 6, 1998
and January 19, 2024 772,025 644,025
Subordinated Debentures -
7-3/4%, due March 31, 2026 75,000 75,000
Notes payable -
Interest rates between 6.31% and 8.25% with
a weighted average interest rate of 7.24%
and various maturities between June 30, 1998
and April 1, 2006 39,010 19,522
Variable bank loan -
6.44% - due August, 2003 5,600 -
Term Loan Facility-weighted average interest
rate of 8.12% at March 31, 1997, due
December 31, 2004 39,753 40,576
Unamortized premium and discount
on long-term debt, net (3,411) (3,526)
------------ -----------
Total long-term debt, excluding
amounts due in one year $ 1,372,086 $ 1,127,106
============ ===========
The sinking fund requirements of long-term debt outstanding at
March 31, 1997 (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; Lake Erie Land
Company's notes payable due June 30, 1998; NDC Douglas Properties, Inc.'s
notes payable due December 22, 1999; IWC's first mortgage bonds: Series 5.20%,
due May 1, 2001 and Series 8.00%, due December 15, 2001;and IWCR's senior note
payable, due March 15, 2001), for each of the twelve-month periods subsequent
to March 31, 1998 are as follows:
Twelve Months Ended March 31,
================================
1999 $ 62,469,026
2000 $ 19,007,933
2001 $ 176,321,825
2002 $ 43,745,375
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. These
premiums are not earning a return during the recovery period.
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.
IWC's first mortgage bonds are secured by its utility plant. Provisions
of trust indentures related to the 5-7/8% Series Bonds and the 8% Series Bonds
require annual sinking or improvement payments amounting to 1/2% of the
maximum aggregate amount outstanding. As permitted, this requirement has been
satisfied by substituting a portion of permanent additions to utility plant.
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.
On February 14, 1997, Capital Markets was authorized to issue and sell
up to $300 million of medium-term notes. As of March 31, 1997, $128 million
of the medium-term notes had been issued with various interest rates and
maturities. The proceeds from these issuances were used for the purchase of
IWCR and to pay other outstanding short-term obligations of Capital Markets.
As of April 25, 1997, an additional $118 million of medium-term notes were
issued.
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, was approximately $1.2 billion at March 31, 1997.
(19) CURRENT PORTION OF LONG-TERM DEBT: At March 31, 1997 and December 31,
1996, Industries' current portion of long-term debt due within one year was
as follows:
March 31, December 31,
1997 1996
============= ============
(Dollars in thousands)
First Mortgage Bonds -
Interest rates of 5-7/8% and 6-3/8% with a
weighted average interest rate of 6.27% and
maturities of August 1, 1997 and
September 1, 1997 $ 32,522 $ 25,747
Medium-term notes -
Interest rate of 5.85% and maturities
of July 25, 1997 and July 28, 1997 40,000 40,000
Zero Coupon notes -
7.57%, $72,500 at maturity -
due December 1, 1997 69,005 67,731
Notes payable -
Interest rates between 6.72% and 9.00% with a
a weighted average interest rate of 8.32%
and maturities between April 1, 1997 and
March 1, 1998 5,833 5,033
Term loan facility -
Interest rate of 8.12% 5,783 6,041
------------ ------------
Total current portion of long-term debt $ 153,143 $ 144,552
============ ============
Capital Markets expects to refinance its 7.57% Zero Coupon Notes maturing
in the amount of $72.5 million on December 1, 1997.
Northern Indiana expects to refinance certain maturities of its Medium-
term Notes, Series B and Series D, and First Mortgage Bonds, Series N, Series
O, and Series P during the second quarter of 1997.
(20) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1999 unless
extended by its terms. As of March 31, 1997, 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 which are expected to be
renewed for the subsequent twelve-month period. 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 March 31, 1997,
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 March 31, 1997 and December 31, 1996, there were $67.5
million and $79.0 million of borrowings, respectively, outstanding under
these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1997, 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.
As of March 31, 1997 and December 31, 1996, Northern Indiana had
$102.5 million and $193.9 million of commercial paper outstanding,
respectively. At March 31, 1997, the weighted average interest rate of
commercial paper outstanding was 5.41%.
Capital Markets has a $150 million revolving Credit Agreement which
will terminate August 19, 1999, unless extended by its terms. This facility
provides short-term financing flexibility to Industries and also serves as the
back-up instrument for a commercial paper program. As of March 31, 1997,
there were no borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit.
As of March 31, 1997 and December 31, 1996, $6.9 million and $27.0 million,
respectively, of borrowings were outstanding under these lines of credit.
As of March 31, 1997 and December 31, 1996, Capital Markets had
$68.4 million and $119.3 million of commercial paper outstanding,
respectively. At March 31, 1997, the weighted average interest rate of
commercial paper outstanding was 5.49%.
As of March 31, 1997, IWCR and its subsidiaries had lines of credit
with banks aggregating $47.9 million. As of March 31, 1997, $21.6 million
of borrowings were outstanding under these lines of credit.
At March 31, 1997 and December 31, 1996, Industries' short-term
borrowings were as follows:
March 31, December 31,
1997 1996
============= ============
(Dollars in thousands)
Commercial paper $ 170,900 $ 313,205
Notes payable 96,012 106,000
Standby loan facility 5,302 4,949
Revolving loan facility 1,593 1,831
----------- -----------
Total short-term borrowings $ 273,807 $ 425,985
=========== ===========
(21) 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 March 31, 1997:
Twelve Months Ended March 31,
=================================
(Dollars in thousands)
1998 $ 14,862
1999 14,731
2000 13,655
2001 13,464
2002 13,409
Later years 129,722
--------
Total minimum
payments required $199,843
========
The consolidated financial statements include rental expense for all
operating leases as follows:
March 31, March 31,
1997 1996
============= =============
(Dollars in thousands)
Three months ended $ 2,248 $ 2,031
Twelve months ended $ 8,338 $ 8,653
(22) COMMITMENTS: The Utilities estimate that approximately $974 million
will be expended for construction purposes for the period from January 1, 1997
to December 31, 2001. Substantial commitments have been made by the Utilities
in connection with their programs. The Water Utilities will use a major
portion of their budgeted capital expenditures for new mains and distribution
and plant facilities and other operating equipment.
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.
(23) PRIMARY ENERGY: Primary Energy, a wholly-owned subsidiary of
Industries, is the parent of subsidiaries including Harbor Coal Company
(Harbor Coal), North Lake Energy Corporation (North Lake), Lakeside Energy
Corporation (LEC), Portside Energy Corporation (Portside), and Cokenergy,
Inc (CE). 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 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 a lease for the use of a 161-megawatt energy
facility to be located at USS Gary Works. The facility will process
high-pressure steam into electricity and low-pressure steam to be
delivered to USX Corporation-US Steel Group. The fifteen-year lease with
a third-party lessor will commence once the facility is fully constructed.
LEC is currently 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 intends to 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.
CE has entered into a fifteen-year service agreement with Inland Steel
Company and the Indiana Harbor Coke Company, LP (Harbor Coke), a subsidiary of
Sun Company, Inc. This agreement provides that CE will utilize a new energy
facility at Inland's Indiana Harbor Works to scrub flue gases and recover
waste heat from the coke facility being constructed by Harbor Coke and produce
process steam and electricity from the recovered heat which will be delivered
to Inland. CE intends to lease these facilities, once constructed, from a
third party. Additionally, CE has entered into an interim agreement, which
expires when the lease is established with the third party lessor, under which
CE is acting as agent to design, construct and start up the facilities.
Capital Markets anticipates guaranteeing certain CE obligations relative to
the anticipated lease. Construction of the project began January, 1997. The
facility is scheduled to be operational in July, 1998.
Primary has advanced approximately $82 million and $42 million, at
March 31, 1997 and December 31, 1996, respectively, to the lessors of the
energy related projects discussed above. These net advances are included in
"Other Receivables" in the Consolidated Balance Sheet and "Other, net"
as a component of operating activities in the Consolidated Statement of
Cash Flows.
(24) 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 (excluding derivatives) are as follows:
March 31, 1997 December 31, 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
Cash and cash equivalents $ 92,276 $ 92,276 $ 26,333 $ 26,333
Investments $ 30,507 $ 33,649 $ 30,003 $ 33,019
Long-term debt (including
current portion) $1,526,729 $1,385,856 $1,273,158 $1,220,492
Preferred stock $ 148,696 $ 128,272 $ 144,200 $ 126,379
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.
(25) CUSTOMER CONCENTRATIONS: Industries' utility subsidiaries supply
natural gas, electric energy and water. Natural gas and electric
energy are supplied to the northern third of Indiana. The water utilities
serve Indianapolis, Indiana and surrounding areas. Although the Energy
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 4% of gas revenue (including transportation services) and 22% of electric
revenue for the twelve months ended March 31, 1997 and March 31, 1996.
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 energy/utility based holding
company providing electric energy and natural gas to the public through its
four regulated subsidiaries: 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). Industries' non-utility businesses are primarily energy or
utility based. These include energy marketing and trading; power generation;
oil and gas exploration and development; gas transmission, supply and storage;
and related products targeted at customer segments.
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR's subsidiaries currently include two regulated water utilities and
non-regulated companies providing utility-related services including utility
line locating and marking and installation, and repair and maintenance of
underground pipelines.
The following discussion, except where noted, is attributable to the
operations of Northern Indiana, Kokomo Gas, NIFL, and Crossroads (Energy
Utilities).
REVENUES -
Total operating revenues for the twelve months ended March 31, 1997
increased $49.0 million as compared to the twelve months ended March 31,
1996. Gas revenues increased $71.1 million and electric revenues decreased
$22.1 million as compared to the same period in 1996. The increase in gas
revenues was largely attributable to increased sales to industrial and
wholesale customers, increased deliveries of gas transported for others,
increased gas transition costs, and increased gas costs per dekatherm (dth).
The decrease in electric revenues was mainly due to decreased sales to
residential customers resulting from the cooler summer in 1996 and
decreased sales to industrial and wholesale customers.
Total operating revenues for the three months ended March 31, 1997
increased $3.2 million as compared to the three months ended March 31, 1996.
Gas revenues increased $5.8 million and electric revenues decreased
$2.6 million as compared to the same period in 1996. The increase in gas
revenues was mainly due to increased gas costs per dth and increased gas
transition costs, partially offset by decreased sales to residential and
commercial customers as a result of milder weather. The decrease in electric
revenues was mainly due to decreased sales to industrial and wholesale
customers.
The basic steel industry accounted for 31% of natural gas delivered
(including volumes transported) and 35% of electric sales during the twelve
months ended March 31, 1997.
The components of the variations in gas and electric revenues are
shown in the following table:
Variations from Prior Periods
---------------------------------
March 31, 1997
Compared to
March 31, 1996
Three Twelve
Months Months
========= =========
(Dollars in thousands)
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ 28,432 $ 29,497
Gas transition costs 3,114 32,591
Changes in sales levels (26,165) 8,172
Gas transported 415 835
--------- ---------
Gas Revenue Change 5,796 71,095
--------- ---------
Electric Revenue -
Pass through of net changes
in fuel costs 1,241 3,058
Changes in sales levels (3,841) (25,186)
--------- ---------
Electric Revenue Change (2,600) (22,128)
--------- ---------
Total Revenue Change $ 3,196 $ 48,967
========= =========
See Note 7 to Notes to Consolidated Financial Statements regarding
FERC Order No. 636 transition costs.
GAS COSTS -
The Energy Utilities' gas costs increased $15.6 and $73.3 million for
the three-month and twelve-month periods ended March 31, 1997, respectively.
Gas costs increased for the three-month period due to increased gas costs
per dth, and increased gas transition costs, partially offset by decreased
purchases. Gas costs increased for the twelve-month period due to
increased gas costs per dth, increased gas transition costs, and increased
purchases. The average cost for the Energy Utilities' purchased gas for the
three-month and twelve-month periods ended March 31, 1997, after adjustment
for gas transition costs billed to transport customers, was $3.45 and $3.19
per dth, respectively, as compared to $3.00 and $2.72 per dth for the same
periods in 1996.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation decreased for the twelve-month
period ended March 31, 1997, compared to the 1996 period, mainly as a result
of decreased production of electricity.
Power purchased increased $6.1 million for the twelve-month period ended
March 31, 1997 as a result of increased bulk power purchases. Power purchases
decreased $3.0 million for the three-month period.
OPERATING MARGINS -
Operating margins for the twelve months ended March 31, 1997 decreased
$19.1 million from the same period a year ago. The operating margin from
gas deliveries decreased $2.2 million due to decreased sales to residential
and commercial customers reflecting milder weather, partially offset by
increased sales to wholesale customers and increased deliveries of gas
transported for others. The operating margin from electric sales decreased
$16.9 million due to decreased sales to residential customers, reflecting
milder 1996 summer weather, and decreased sales to industrial and wholesale
customers.
Operating margins for the three-months ended March 31, 1997 decreased
$10.6 million from the same period a year ago. Gas operating margin
decreased $9.8 million due to decreased sales to residential and commercial
customers reflecting milder weather during the period, and decreased sales to
industrial and wholesale customers, partially offset by increased deliveries
of gas transported for others. Operating margin from electric sales decreased
$0.8 million due to decreased sales to industrial and wholesale customers,
which were partially offset by increased sales to residential and commercial
customers.
OPERATING EXPENSES AND TAXES -
Operation expenses decreased $10.7 million for the twelve-month period
ended March 31, 1997 reflecting decreased employee costs and decreased
electric production pollution control facility costs, partially offset by
increased environmental costs. Operation expenses decreased $5.6 million for
the three-month period mainly reflecting decreased employee related costs,
decreased electric production pollution control facility costs, and various
other decreased operating costs.
Maintenance expenses decreased $4.8 million for the twelve-month period
ended March 31, 1997 mainly reflecting decreased maintenance activity at the
electric production facilities and decreased maintenance on the transmission
and distribution facilities.
Depreciation and amortization expense increased $2.7 and $12.2
million for the three-month and twelve-month periods ended March 31, 1997,
respectively, resulting from plant additions, increased amortization of
computer software, amortization of deferred costs related to scrubber
services provided by Pure Air at the Bailly Generating Station, and
amortization of SFAS No. 106 costs effective February 1, 1997.
Utility income taxes decreased for the three-month and twelve-month
periods ended March 31, 1997 mainly as a result of decreased pre-tax income.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) for the twelve-month period increased $17.5
million mainly resulting from improved results from non-regulated operations,
the disposition of certain oil and natural gas properties, and the sale of
Crescent Dunes Lakeshore property to the National Park Service. Other Income
(Deductions) increased $8.8 million for the three-month period ended March 31,
1997 due to improved results for non-regulated operations and the disposition
of certain oil and natural gas properties.
INTEREST AND OTHER CHARGES -
Interest and other charges increased for the three-month and
twelve-month periods ended March 31, 1997 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.
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 7, 9, and 11 for a discussion of FERC
Order No. 636, Income Taxes and Postretirement Benefits.
NET INCOME-
Industries' net income for the twelve-month period ended March 31, 1997
was $180.1 million compared to $182.6 million for the twelve-month period
ended March 31, 1996.
Net income for the three months ended March 31, 1997 was $70.8 million
compared to $67.4 million for the three months ended March 31, 1996.
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 $16.9
million to cover probable corrective actions as of March 31, 1997; 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.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for the second phase of the Acid Rain nitrogen oxides
reduction program. Northern Indiana is evaluating compliance strategies to
meet the reduced emission limitations found in the final rule. Additional
controls may be needed to meet the requirements. A compliance plan must be
submitted to the EPA by December 31, 1997 with details of the plan to meet
the new limits by January 1, 2000.
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 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 Energy Utilities have instituted a program to investigate former
manufactured-gas plants where one of them is the current or former owner.
The Energy Utilities have identified twenty-eight 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 seven sites
and remedial measures have been selected at four sites. The Energy Utilities
will continue their program to assess and cleanup sites.
During the course of various investigations, the Energy Utilities have
identified impacts to soil, groundwater, sediment and surface water from
former manufactured-gas plants. At three sites where residues were
noted seeping into rivers, Northern Indiana notified the Indiana Department
of Environmental Management (IDEM) and the EPA and immediately took steps to
contain the material. The Energy Utilities have worked with IDEM or the EPA
on investigation or remedial activities at several sites. Two of the sites
have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal
of placing these sites in the VRP is to obtain IDEM approval of the selection
and implementation of whatever remedial measures, if any, may be required.
The Energy Utilities anticipate placing additional sites in the VRP after
remedial measures have been selected.
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
Cinergy Services, Inc. (Cinergy) (formerly 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. In December 1996, Northern Indiana sent a written demand to
Cinergy related to one of these sites, Goshen. Northern Indiana demanded that
Cinergy pay Northern Indiana for costs Northern Indiana has already incurred
and to be incurred to implement the needed remedy at the Goshen site.
The Energy Utilities have met with various companies that provided
insurance coverage which the Energy 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. Both sides
have motions pending in the Federal Court lawsuit that would be dispositive of
the case. Northern Indiana has obtained cash settlements from some of its
insurers.
The possibility that exposure to electric and magnetic fields (EMF)
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. Recently, the U.S. National Research
Council of the National Academy of Sciences concluded in a report, after
examining more than 500 EMF studies spanning 17 years, that among other
things, there is insufficient evidence to consider EMF a threat to human
health. Despite the report's findings, future research appropriations are
continuing to be dedicated to explore this issue.
The Water Utilities are subject to pollution control and water quality
control regulations, including those issued by the EPA, IDEM, the Indiana
Water Pollution Control Board, and the Indiana Department of Natural
Resources. Under the Federal Clean Water Act and Indiana's regulations,
IWC must obtain National Pollutant Discharge Elimination System (NPDES)
permits for discharges from its water treatment stations. Application for
renewal of any expiring permits have been filed and are the subject of ongoing
discussions with, but not finalized by, IDEM. These permits continue in
effect pending review of the applications.
Under the Federal Safe Drinking Water Act (SWDA), the Water Utilities
are subject to regulation by the EPA for the quality of water sold and
treatment techniques used to make the water portable. The EPA promulgates
nationally applicable maximum contaminant levels (MCLs) for contaminants found
in drinking water. Management believes its' water utilities are currently in
compliance with all MCLs promulgated to date. The EPA has continuing
authority, however, to issue additional regulations under the SDWA. In August
1996, Congress amended the SDWA to allow the EPA more authority to weigh the
costs and benefits of regulations being considered in some (but not all)
cases. The 1996 amendments do not, however, reduce the number of new
standards required by the 1986 amendments. Such standards promulgated could
be costly and require substantial changes in the Water Utilities' operations.
The Water Utilities would expect to recover the costs of such changes through
its water rates; however, such recovery may not necessarily be timely.
Under a 1991 law enacted by the Indiana Legislature, a water utility may
petition the Commission for prior approval of its plans and estimated
expenditures required to comply with provisions of, and regulations under, the
Federal Clean Water Act and SDWA. Upon obtaining such approval, a water
utility may include, to the extent of its estimated costs as approved by the
Commission, such costs in its rate base for ratemaking purposes and recover
its costs of developing and implementing the approved plans if statutory
standards are met. The capital costs for such new systems, equipment or
facilities or modifications of existing facilities may be included in a
water utility's rate base upon completion of construction of the project or
any part thereof. While use of this statute is voluntary on the part
of a water utility, if utilized, it should allow water utilities a greater
degree of confidence in recovering major costs incurred to comply with
environmentally related laws on a timely basis.
LIQUIDITY AND CAPITAL RESOURCES -
During the next few years, it is anticipated that the majority of
earnings available for distribution of dividends will depend upon dividends
paid to Industries by Northern Indiana. See Note 15 of Notes to Consolidated
Financial Statements for a discussion of the Common Share dividend.
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.
On February 14, 1997, Capital Markets was authorized to issue and
sell up to $300 million of medium-term notes. As of March 31, 1997, $128
million of the medium-term notes had been issued with various interest rates
and maturities. The proceeds from these issuances were used for the purchase
of IWCR and to pay other outstanding short-term obligations of Capital
Markets. As of April 25, 1997, an additional $118 million of medium-term
notes were issued.
Capital Markets expects to refinance its 7.57% Zero Coupon Notes
maturing in the amount of $72.5 million on December 1, 1997.
On March 25, 1997, Industries acquired all the outstanding common stock
of IWCR for $290.5 million. Industries financed this transaction with debt of
approximately $83.0 million and issuance of approximately 5.3 million
Industries' common shares. Industries accounted for the acquisition as a
purchase, and the purchase price was allocated to the assets and liabilities
acquired based on their estimated fair values. See Note 2 of Notes to
Consolidated Financial Statements for a discussion of the preliminary
allocation of the purchase price.
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 March 31, 1997,
there were no borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit.
As of March 31, 1997, $6.9 million of borrowings were outstanding under
these lines of credit.
As of March 31, 1997 and December 31, 1996, Capital Markets had
$68.4 million and $119.3 million of commercial paper outstanding,
respectively. At March 31, 1997, the weighted average interest rate of
commercial paper outstanding was 5.49%.
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 $1.2 billion at March 31, 1997.
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 intermittently as short-term financing. As of March 31,
1997 and December 31, 1996, Northern Indiana had $102.5 million and $193.9
million of commercial paper outstanding, respectively. At March 31, 1997,
the weighted average interest rate of commercial paper outstanding was 5.41%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999 unless extended by its terms.
As of March 31, 1997, 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, which are expected to be renewed for the
subsequent twelve-month period. 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 March 31, 1997, 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 March 31, 1997, $67.5 million of borrowings were outstanding
under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1997, there were no borrowings outstanding under this facility.
Northern Indiana expects to refinance certain maturities of its Medium-
term Notes, Series B and Series D, and First Mortgage Bonds, Series N, Series
O, and Series P during the second quarter of 1997.
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.
As of March 31, 1997, IWCR and its subsidiaries had lines of credit
with banks aggregating $47.9 million. As of March 31, 1997, $21.6 million
of borrowings were outstanding under these lines of credit.
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
Energy Utilities do not anticipate the need to file for gas and electric base
rate increases in the near future.
EMPLOYEE RELATIONS
At March 31, 1997, approximately 74% of Northern Indiana's employees
(physical and clerical workers) were represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC. The bargaining unit employees'
current contracts expire May 31, 1997. Northern Indiana has begun to
negotiate new agreements with the two local unions, but cannot predict the
timing or terms of new agreements.
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. 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.
In January 1997, legislation was introduced to the Indiana General
Assembly addressing electric utility competition and deregulation. Under the
proposed legislation, an electric utility would be required to separate its
production and marketing functions from the transmission and distribution
functions to eliminate a competitive market advantage related to
organizational structure. There would be a transition period from October 1,
1999 through June 30, 2004, during which an electric utility's cost of service
rates would transition to a target price based upon Indiana utility averages.
Amounts collected by an electric utility above the target price during the
transition period would provide for recovery of transition costs. Under the
proposed legislation, each electric utility company would be required to file
a proposed distribution comparability tariff for unbundled electric service.
Customers would have the right to choose their electricity supplier effective
with the transition period. During the transition period, access charges
would be billed to those customers choosing a new supplier. Regulatory assets
not recovered during the transition period and not included as part of the
cost-based transmission and distribution function would not be recoverable
from customers. After the transition period, customers would be required to
make an affirmative election as to their electricity supplier; if no election
is made, the Commission would assign a supplier. This proposed legislation has
not been adopted, however a study commission on electric competition and
deregulation was established by the Indiana General Assembly.
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.
Competition within the electric utility industry will create
opportunities to compete for new customers and revenues, as well as
increase the risk of the loss of customers. 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 Energy Utilities. Although pipelines continue to
transport gas, they no longer provide sale service. The Energy 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
Energy Utilities' facilities to transport the gas. Transportation customers
pay the Energy Utilities only for transporting their gas from the pipeline to
the customers' premises.
Northern Indiana filed a petition for 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 ARP, Northern Indiana proposes 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 on the ARP during the second quarter of 1997.
To date, the Energy 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 Energy 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 5 (Elm Energy and Recycling (UK) Ltd.), Note 6
(NESI Energy Marketing Canada Ltd.) and Note 8 (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.
On April 9, 1997, at the Annual Meeting of Shareholders of the
registrant, shareholders of the registrant elected Arthur J. Decio, Gary L.
Neale, and Robert J. Welsh as directors to serve until the 2000 Annual Meeting
of Shareholders. Directors whose terms of office as director continue after
the 1997 Annual Meeting of Shareholders are Steven C. Beering, Ernestine M.
Raclin, and Denis E. Ribordy, whose terms expire at the 1998 Annual Meeting of
Shareholders, and Ian M. Rolland, John W. Thompson and Edmund A. Schroer,
whose terms expire at the 1999 Annual Meeting of Shareholders.
There were no abstentions or broker non-votes for any of the nominees
for directors. The number of votes cast for, or withheld, for each nominee
for director was as follows:
Votes Votes
Received Withheld
========== ==========
Arthur J. Decio 47,228,178 1,678,164
Gary L. Neale 47,202,010 1,704,332
Robert J. Welsh 47,241,299 1,665,043
Additionally at the Annual Meeting of Shareholders, shareholders of
the registrant approved an amendment to the Articles of Incorporation to
increase the number of directors from nine to ten. The number of votes cast
for, or withheld, was as follows:
Votes Votes Votes
For Against Abstain
========== ========== ==========
46,920,431 1,596,638 389,273
At the meeting of the Board of Directors of Industries following the
Annual Meeting of the Shareholders, the Directors elected James T. Morris,
Chairman, Chief Executive Officer, and President of IWCR, to fill the newly
created position as a Director, for a term to expire in 1998.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 3(a) - Articles of Incorporation
Exhibit 3(b) - By-laws of Registrant effective April 9, 1997
Exhibit 11.1 - Computation of Per Share Earnings
Three-Month and Twelve-Month Periods Ended
March 31, 1997.
Exhibit 11.2 - Computation of Per Share Earnings
Three-Month and Twelve-Month Periods Ended
March 31, 1997.
Exhibit 23 - Consent of Arthur Andersen LLP
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed under the date of February 14,
1997. All events were reported under Item 5, Other Events.
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 May 13, 1997