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 June 30, 1998
[ ] 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.)
801 East 86th Avenue, Merrillville, Indiana
46410 (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 July 31, 1998, 120,145,573 common shares were
outstanding.
NIPSCO Industries, Inc.
PART I.
FINANCIAL INFORMATION
Item 1. 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 June 30, 1998,
and December 31, 1997, and the related consolidated statements of income, common
shareholders' equity and cash flows for the three, six and twelve month periods
ended June 30, 1998 and 1997. 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 June 30, 1998, and December 31, 1997,
and the results of their operations and their cash flows for the three, six and
twelve month periods ended June 30, 1998 and 1997, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
July 29, 1998
Consolidated Balance Sheet
June 30, December 31,
Assets 1998 1997
========== ==========
(In thousands)
Property, Plant and Equipment:
Utility Plant, (Note 2)(including Construction Work in
Progress of $223,222 and $188,710, respectively)
Electric $ 4,106,198 $ 4,066,568
Gas 1,418,126 1,395,140
Water 634,375 604,018
Common 352,333 351,350
-------------- --------------
6,511,032 6,417,076
Less -Accumulated provision for depreciation
and amortization 2,857,453 2,759,945
-------------- --------------
Total Utility Plant 3,653,579 3,657,131
-------------- --------------
Other property, at cost, net of accumulated provision
for depreciation 80,266 96,028
-------------- --------------
Total Property, Plant and Equipment 3,733,845 3,753,159
-------------- --------------
Investments:
Investments, at equity (Note 2) 104,632 82,855
Investments, at cost 44,586 31,771
Other investments 27,144 24,499
-------------- --------------
Total Investments 176,362 139,125
-------------- --------------
Current Assets:
Cash and cash equivalents 36,684 30,780
Accounts receivable, less reserve of $5,995 and
$5,887, respectively (Note 2) 231,073 231,580
Other receivables (Note 24) 33,165 107,231
Fuel adjustment clause (Note 2) - 2,679
Gas cost adjustment clause (Note 2) 26,825 89,991
Materials and supplies, at average cost 60,625 60,085
Electric production fuel, at average cost 16,499 18,837
Natural gas in storage (Note 2) 37,576 61,436
Prepayments and other 32,787 28,089
-------------- --------------
Total Current Assets 475,234 630,708
-------------- --------------
Other Assets:
Regulatory assets (Note 2) 204,343 211,513
Intangible assets, net of accumulated amortization (Note 2) 66,179 68,175
Prepayments and other (Note 9) 158,039 134,353
-------------- --------------
Total Other Assets 428,561 414,041
-------------- --------------
$ 4,814,002 $ 4,937,033
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
Consolidated Balance Sheet
June 30, December 31,
Capitalization and Liabilities 1998 1997
========== ==========
(In thousands)
Capitalization:
Common shareholders' equity
(See accompanying statement) $ 1,203,889 $ 1,264,788
Cumulative preferred stocks (Note 11) -
Series without mandatory redemption provisions (Note 12) 85,614 85,620
Series with mandatory redemption provisions (Note 13) 57,591 58,841
Long-term debt excluding amounts due within one
year (Note 19) 1,670,852 1,667,925
-------------- --------------
Total Capitalization 3,017,946 3,077,174
-------------- --------------
Current Liabilities:
Current portion of long-term debt (Note 20) 20,733 54,621
Short-term borrowings (Note 21) 252,828 212,639
Accounts payable 201,083 226,751
Dividends declared on common and preferred stocks 30,267 30,784
Customer deposits 23,057 22,091
Taxes accrued 61,041 77,573
Interest accrued 19,197 19,124
Fuel adjustment clause 625 -
Accrued employment costs 40,854 58,799
Other accruals 39,337 47,930
-------------- --------------
Total Current Liabilities 689,022 750,312
-------------- --------------
Other:
Deferred income taxes (Note 8) 636,101 651,815
Deferred investment tax credits, being amortized over
life of related property (Note 8) 101,895 105,538
Deferred credits 82,833 73,715
Customer advances and contributions in aid of
construction (Note 2) 109,771 110,145
Accrued liability for postretirement benefits (Note 10) 136,681 132,919
Other noncurrent liabilities 39,753 35,415
-------------- --------------
Total Other 1,107,034 1,109,547
-------------- --------------
Commitments and Contingencies
(Notes 5, 7, 22, 23 and 24)
$ 4,814,002 $ 4,937,033
========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Income
(Dollars in thousands, except for per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1998 1997 1998 1997
======== ======== ======== ========
Operating Revenues: (Notes 2, 6 and 26)
Gas $ 110,345 $ 121,010 $ 353,080 $ 454,410
Electric 345,639 271,657 669,473 532,314
Water 20,857 18,795 38,566 18,795
Products and Services 175,567 111,725 370,633 177,618
---------- ---------- ---------- ----------
652,408 523,187 1,431,752 1,183,137
---------- ---------- ---------- ----------
Cost of Sales: (Note 2)
Gas costs 60,754 61,961 199,182 276,801
Fuel for electric generation 65,423 54,609 121,017 113,017
Power purchased 95,845 38,403 186,288 62,291
Products and Services 147,531 85,910 323,476 136,296
---------- ---------- ---------- ----------
369,553 240,883 829,963 588,405
---------- ---------- ---------- ----------
Operating Margin 282,855 282,304 601,789 594,732
---------- ---------- ---------- ----------
Operating Expenses and Taxes (except income):
Operation 98,048 103,450 194,219 189,154
Maintenance (Note 2) 21,011 19,844 39,958 38,328
Depreciation and amortization (Note 2) 63,643 64,415 126,917 122,759
Taxes (except income) 21,110 20,647 44,538 41,957
---------- ---------- ---------- ----------
203,812 208,356 405,632 392,198
---------- ---------- ---------- ----------
Operating Income 79,043 73,948 196,157 202,534
---------- ---------- ---------- ----------
Other Income (Deductions) (Note 2) (931) 4,308 7,517 13,711
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 27,749 27,151 55,023 46,954
Other interest 2,222 3,077 4,130 8,045
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1,144 1,200 2,292 2,333
Dividend requirements on preferred stock
of subsidiaries 2,128 2,179 4,295 4,346
---------- --------- ---------- ----------
33,243 33,607 65,740 61,678
---------- ---------- ---------- ----------
Income before income taxes 44,869 44,649 137,934 154,567
---------- ---------- ---------- ----------
Income taxes 15,424 16,413 47,767 55,493
---------- ---------- ---------- ----------
Net Income $ 29,445 $ 28,236 $ 90,167 $ 99,074
======== ======== ======== ========
Average common shares outstanding - basic 122,180,915 125,655,240 123,022,091 122,404,026
Basic Earnings per average common share $ 0.24 $ 0.22 $ 0.73 $ 0.80
======== ======== ======== ========
Diluted Earnings per average common share $ 0.24 $ 0.22 $ 0.73 $ 0.80
======== ======== ======== ========
Dividends declared per common share $ 0.240 $ 0.225 $ 0.480 $ 0.450
======== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
Consolidated Statement of Income
(Dollars in thousands, except for per share amounts)
Twelve Months
Ended June 30,
---------------------
1998 1997
======== ========
Operating Revenues: (Notes 2, 6 and 26)
Gas $ 705,909 $ 805,463
Electric 1,323,490 1,061,890
Water 80,514 18,795
Products and Services 725,243 270,775
---------- ----------
2,835,156 2,156,923
---------- ----------
Cost of Sales: (Note 2)
Gas costs 417,668 493,882
Fuel for electric generation 246,548 235,846
Power purchased 329,028 89,759
Products and Services 623,928 196,383
---------- ----------
1,617,172 1,015,870
---------- ----------
Operating Margin 1,217,984 1,141,053
---------- ----------
Operating Expenses and Taxes (except income):
Operation 395,318 360,166
Maintenance (Note 2) 78,182 72,974
Depreciation and amortization (Note 2) 253,962 241,617
Taxes (except income) 86,346 78,868
---------- ----------
813,808 753,625
---------- ----------
Operating Income 404,176 387,428
---------- ----------
Other Income (Deductions) (Note 2) 9,574 23,686
---------- ----------
Interest and Other Charges:
Interest on long-term debt 113,567 88,002
Other interest 6,476 18,155
Amortization of premium, reacquisition premium,
discount and expense on debt, net 4,677 4,613
Dividend requirements on preferred stock
of subsidiaries 8,640 8,681
---------- ----------
133,360 119,451
---------- ----------
Income before income taxes 280,390 291,663
---------- ----------
Income taxes 98,448 106,770
---------- ----------
Net Income $ 181,942 $ 184,893
======== ========
Average common shares outstanding - basic 124,156,903 121,935,166
Basic Earnings per average common share $ 1.46 $ 1.51
======== ========
Diluted Earnings per average common share $ 1.46 $ 1.51
======== ========
Dividends declared per common share $ 0.945 $ 0.885
======== ========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Consolidated Statement Of Common Shareholders' Equity
Additional
(Dollars in thousands) Common Treasury Paid-in Retained
Three Months Ended Shares Shares Capital Earnings Other
======================== ========== ========== ========== ========== ==========
Balance, April 1, 1997 $ 870,930 $(295,980) $ 88,118 $ 635,900 $ (4,128)
Comprehensive Income:
Net income 28,236
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $775)
Realized gain
Gain (loss) on foreign currency translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (29,962)
Treasury shares acquired (46,034) (34)
Issued:
IWC Resources Corporation acquisition
NEM Acquisition 4,118 1,351
Employee stock purchase plan 67 98
Long-term incentive plan 1,413 22 (92)
Amortization of unearned compensation 479
Other 1 (91)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1997 $ 870,930 $(336,416) $ 89,556 $ 634,083 $ (3,741)
========== ========== ========== ========== ==========
Balance, April 1, 1998 $ 870,930 $(384,009) $ 89,878 $ 697,928 $ (2,159)
Comprehensive Income:
Net income 29,445
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $77)
Realized gain (net of income
tax of $620)
Gain (loss) on foreign currency translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (28,708)
Treasury shares acquired (74,684)
Issued:
IWC Resources Corporation acquisition
NEM Acquisition
Employee stock purchase plan 94 237
Long-term incentive plan 2,581 587 (1,096)
Amortization of unearned compensation 293
Other 2 (32)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 $ 870,930 $(456,018) $ 90,704 $ 698,633 $ (2,962)
========== ========== ========== ========== ==========
Accumulated Shares
Other ------------------------
Three Months Ended Comprehensive Comprehensive Common Treasury
(continued) Income Total Income Shares Shares
======================== ========== ========== ========== ========== ==========
Balance, April 1, 1997 $ 2,276 $1,297,116 $ - 147,784,218 (20,363,752)
Comprehensive Income:
Net income 28,236 28,236
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $775) 1,268 1,268 1,268
Realized gain
Gain (loss) on foreign currency translation:
Unrealized 461 461 461
Realized -
----------
Total Comprehensive Income $ 29,965
Dividends: ==========
Common shares (29,962)
Treasury shares acquired (46,068) (2,325,078)
Issued:
IWC Resources Corporation acquisition
NEM Acquisition 5,469 270,064
Employee stock purchase plan 165 8,416
Long-term incentive plan 1,343 93,366
Amortization of unearned compensation 479
Other (90)
---------- ---------- ---------- ----------
Balance, June 30, 1997 $ 4,005 $1,258,417 147,784,218 (22,316,984)
========== ========== ========== ==========
Balance, April 1, 1998 $ 3,962 $1,276,530 $ - 147,784,218 (24,177,926)
Comprehensive Income:
Net income 29,445 29,445
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $77) 130 130 130
Realized gain (net of income
tax of $620) (1,016) (1,016) (1,016)
Gain (loss) on foreign currency translation:
Unrealized (660) (660) (660)
Realized 186 186 186
----------
Total Comprehensive Income $ 28,085
Dividends: ==========
Common shares (28,708)
Treasury shares acquired (74,684) (2,716,853)
Issued:
IWC Resources Corporation acquisition
NEM acquisition
Employee stock purchase plan 331 11,830
Long-term incentive plan 2,072 132,800
Amortization of unearned compensation 293
Other (30)
---------- ---------- ---------- ----------
Balance, June 30, 1998 $ 2,602 $1,203,889 147,784,218 (26,750,149)
========== ========== ========== ==========
Consolidated Statement Of Common Shareholders' Equity
Additional
(Dollars in thousands) Common Treasury Paid-in Retained
Six Months Ended Shares Shares Capital Earnings Other
======================== ========== ========== ========== ========== ==========
Balance, January 1, 1997 $ 870,930 $(392,995) $ 32,868 $ 591,370 $ (4,280)
Comprehensive Income:
Net income 99,074
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $1,033)
Realized gain
Gain (loss) on foreign currency translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (56,235)
Treasury shares acquired (102,521) 2
Issued:
IWC Resources Corporation acquisition 152,405 55,007
NEM Acquisition 4,118 1,351
Employee stock purchase plan 142 211
Long-term incentive plan 2,435 116 (443)
Amortization of unearned compensation 982
Other 1 (126)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1997 $ 870,930 $ 336,416) $ 89,556 $ 634,083 $ (3,741)
========== ========== ========== ========== ==========
Balance, January 1, 1998 $ 870,930 $(363,943) $ 89,768 $ 667,790 $ (2,624)
Comprehensive Income:
Net income 90,167
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $761)
Realized gain (net of income
tax of $620)
Gain (loss) on foreign currency translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (58,637)
Treasury shares acquired (97,982) 2
Issued:
IWC Resources Corporation acquisition
NEM Acquisition
Employee stock purchase plan 151 357
Long-term incentive plan 5,756 575 (1,130)
Amortization of unearned compensation 792
Other 2 (687)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 $ 870,930 $(456,018) $ 90,704 $ 698,633 $ (2,962)
========== ========== ========== ========== ==========
Accumulated Shares
Other ------------------------
Six Months Ended Comprehensive Comprehensive Common Treasury
(continued) Income Total Income Shares Shares
======================== ========== ========== ========== ========== ==========
Balance, January 1, 1997 $ 2,608 $1,100,501 $ - 147,784,218 (28,172,896)
Comprehensive Income:
Net income 99,074 99,074
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $1,033) 1,297 1,297 1,297
Realized gain
Gain (loss) on foreign currency translation:
Unrealized 100 100 100
Realized -
----------
Total Comprehensive Income $ 100,471
Dividends: ==========
Common shares (56,235)
Treasury shares acquired (102,519) (5,177,306)
Issued:
IWC Resources Corporation acquisition 207,412 10,580,764
NEM Acquisition 5,469 270,064
Employee stock purchase plan 353 17,924
Long-term incentive plan 2,108 164,466
Amortization of unearned compensation 982
Other (125)
---------- ---------- ---------- ----------
Balance, June 30, 1997 $ 4 ,005 $1,258,417 147,784,218 (22,316,984)
========== ========== ========== ==========
Balance, January 1, 1998 $ 2,867 $1,264,788 $ - 147,784,218 (23,471,554)
Comprehensive Income:
Net income 90,167 90,167
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $761) 1,249 1,249 1,249
Realized gain (net of income
tax of $620) (1,016) (1,016) (1,016)
Gain (loss) on foreign currency translation:
Unrealized (684) (684) (684)
Realized 186 186 186
----------
Total Comprehensive Income $ 89,902
Dividends: ==========
Common shares (58,637)
Treasury shares acquired (97,980) (3,627,427)
Issued:
IWC Resources Corporation acquisition
NEM Acquisition
Employee stock purchase plan 508 18,988
Long-term incentive plan 5,201 329,844
Amortization of unearned compensation 792
Other (685)
---------- ---------- ---------- ----------
Balance, June 30, 1998 $ 2,602 $1,203,889 147,784,218 (26,750,149)
========== ========== ========== ==========
Consolidated Statement Of Common Shareholders' Equity
Additional
(Dollars in thousands) Common Treasury Paid-in Retained
Twelve Months Ended Shares Shares Capital Earnings Other
======================== ========== ========== ========== ========== ==========
Balance, July 1, 1996 $ 870,930 $ 339,673) $ 32,674 $ 558,076 $ (5,662)
Comprehensive Income:
Net income 184,893
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $1,326)
Realized gain
Gain (loss) on foreign currency translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (108,738)
Treasury shares acquired (159,983) 2
Issued:
IWC Resources Corporation acquisition 152,405 55,007
NEM Acquisition 4,118 1,351
Employee stock purchase plan 283 404
Long-term incentive plan 6,434 116 (443)
Amortization of unearned compensation 2,364
Other 2 (148)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1997 $ 870,930 $(336,416) $ 89,556 $ 634,083 $ (3,741)
---------- ---------- ---------- ---------- ----------
Net income 181,942
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $1,001)
Realized gain (net income
tax of $620)
Gain (loss) on foreign currency translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (116,705)
Treasury shares acquired (128,534) 1
Issued:
IWC Resources Corporation acquisition
NEM Acquisition
Employee stock purchase plan 282 570
Long-term incentive plan 8,650 575 (1,130)
Amortization of unearned compensation 1,909
Other 2 (687)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 $ 870,930 $(456,018) $ 90,704 $ 698,633 $ (2,962)
========== ========== ========== ========== ==========
Accumulated Shares
Other ------------------------
Twelve Months Ended Comprehensive Comprehensive Common Treasury
(continued) Income Total Income Shares Shares
======================== ========== ========== ========== ========== ==========
Balance, July 1, 1996 $ (117) $1,116,228 $ - 147,784,218 (25,474,720)
Comprehensive Income:
Net income 184,893 184,893
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $1,326) 2,171 2,171 2,171
Realized gain
Gain (loss) on foreign currency translation:
Unrealized 1,951 1,951 1,951
Realized -
----------
Total Comprehensive Income $ 189,015
Dividends: ==========
Common shares (108,738)
Treasury shares acquired (159,981) (8,185,026)
Issued:
IWC Resources Corporation acquisition 207,412 10,580,764
NEM Acquisition 5,469 270,064
Employee stock purchase plan 687 35,568
Long-term incentive plan 6,107 456,366
Amortization of unearned compensation 2,364
Other (146)
---------- ---------- ---------- ----------
Balance, June 30, 1997 $ 4 ,005 $1,258,417 147,784,218 (22,316,984)
========== ========== ========== ==========
Net income 181,942 $ 181,942
Other comprehensive income, net of tax:
Unrealized gain (net of income
tax of $1,001) 1,641 1,641 1,641
Realized gain(net income
tax of $620) (1,016) (1,016) (1,016)
Gain (loss) on foreign currency translation:
Unrealized (2,214) (2,214) (2,214)
Realized 186 186 186
----------
Total Comprehensive Income $ 180,539
Dividends: ==========
Common shares (116,705)
Treasury shares acquired (128,533) (4,987,049)
Issued:
IWC Resources Corporation acquisition
NEM Acquisition
Employee stock purchase plan 852 35,440
Long-term incentive plan 8,095 518,444
Amortization of unearned compensation 1,909
Other (685)
---------- ---------- ---------- ----------
Balance, June 30, 1998 $ 2,602 $ 1,203,889 147,784,218 (26,750,149)
========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
Consolidated Statement of Cash Flows
(In thousands) Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1998 1997 1998 1997
======== ======== ======== ========
Cash flows from operating activities:
Net income $ 29,445 $ 28,236 $ 90,167 $99,074
Adjustments to reconcile net income
to net cash:
Depreciation and amortization 63,643 64,414 126,917 122,759
Deferred federal and state income
taxes, net (12,610) (20,752) (42,650) (33,095)
Deferred investment tax credits, net (1,821) (1,833) (3,642) (3,635)
Advance contract payment 475 475 950 950
Change in certain assets and liabilities -*
Accounts receivable, net 12,898 5,276 507 19,063
Other receivables 94,656 (29,341) 74,066 (69,352)
Electric production fuel 4,742 (4,500) 2,338 (2,149)
Materials and supplies 1,456 (237) (540) (17)
Natural gas in storage (16,553) (17,109) 23,860 29,966
Accounts payable (4,160) (32,816) (17,630) (60,151)
Taxes accrued (67,836) (42,513) 12,477 35,249
Fuel adjustment clause 1,736 4,673 3,304 892
Gas cost adjustment clause 11,147 40,931 63,166 53,159
Accrued employment costs (1,649) 2,896 (17,945) (1,925)
Other accruals (4,587) (12,612) (8,593) 12,899
Other, net (9,205) 5,195 (15,412) 8,829
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 101,777 (9,617) 291,340 212,516
-------- -------- -------- --------
Cash flows provided by (used in) investing activities:
Utilities construction expenditures (64,075) (62,090) (112,278) (108,671)
Acquisition of IWC Resources
Corporation, net of cash acquired - (82,985) - (288,932)
Acquisition of minority interest - (5,641) - (5,641)
Proceeds from disposition of assets 714 275 10,419 29,775
Proceeds from settlement of litigation - - - -
Other, net (15,228) (425) (41,144) 19,777)
-------- -------- -------- --------
Net cash used in investing activities (78,589) (150,866) (143,003) (393,246)
-------- -------- -------- --------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt 4 271,960 6,375 408,262
Issuance of short-term debt 610,408 321,050 887,329 575,095
Net change in commercial paper 60,600 (113,250) 20,600 (255,555)
Retirement of long-term debt (35,026) (38) (37,573) (1,507)
Retirement of short-term debt (561,023) (312,875) (867,696) (598,495)
Retirement of preferred shares (1,255) (1,252) (1,256) (1,253)
Issuance of common shares 3,499 6,847 6,839 215,333
Acquisition of treasury shares (74,684) (45,938) (97,980) (102,529)
Cash dividends paid on common shares (29,520) (28,323) (59,309) (55,095)
Other, net 117 (583) 238 (468)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (26,880) 97,598 (142,433) 183,788
-------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents (3,692) (62,885) 5,904 3,058
Cash and cash equivalents at
Beginning of period 40,376 92,276 30,780 26,333
-------- -------- -------- --------
Cash and cash equivalents at
End of period $ 6,684 $ 29,391 $ 36,684 $ 29,391
======== ======== ======== ========
*Net of effect from purchase of IWC Resources Corporation.
The accompanying notes to consolidated financial statements are an integral part
of this statement.
Consolidated Statement of Cash Flows
(In thousands)
Twelve Months
Ended June 30,
--------------------
1998 1997
======== ========
Cash flows from operating activities:
Net income $181,942 $184,893
Adjustments to reconcile net income
to net cash:
Depreciation and amortization 253,962 241,617
Deferred federal and state income
taxes, net (11,204) (24,311)
Deferred investment tax credits, net (7,383) (7,704)
Advance contract payment 1,900 1,900
Change in certain assets and liabilities -*
Accounts receivable, net (55,925) (69,118)
Other receivables 78,371 (66,779)
Electric production fuel 12,133 2,265
Materials and supplies 2,042 2,090
Natural gas in storage (2,449) (5,597)
Accounts payable 23,954 13,820
Taxes accrued (19,383) 39,543
Fuel adjustment clause 8,882 3,366
Gas cost adjustment clause 20,230 1,891
Accrued employment costs (3,885) 4,595
Other accruals (12,063) 8,163
Other, net 36,157 22,844
-------- --------
Net cash provided by(used in)
operating activities 507,281 353,478
-------- --------
Cash flows provided by (used in) investing activities:
Utilities construction expenditures (222,538) (214,650)
Acquisition of IWC Resources
Corporation, net of cash acquired - (288,932)
Acquisition of minority interest - (5,641)
Proceeds from disposition of assets 16,637 29,775
Proceeds from settlement of litigation 41,069 -
Other, net (76,187) (32,428)
-------- --------
Net cash used in investing activities (241,019) (511,876)
-------- --------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt 256,345 409,178
Issuance of short-term debt 1,341,742 1,558,897
Net change in commercial paper 51,510 (118,850)
Retirement of long-term debt (360,670) (82,562)
Retirement of short-term debt (1,311,425) (1,560,194)
Retirement of preferred shares (2,411) (2,411)
Issuance of common shares 10,072 219,635
Acquisition of treasury shares (128,528) (159,991)
Cash dividends paid on common shares (115,807) (106,292)
Other, net 203 (881)
-------- --------
Net cash provided by (used in)
financing activities (258,969) 156,529
-------- --------
Net increase (decrease) in cash and
cash equivalents 7,293 (1,869)
Cash and cash equivalents at
Beginning of period 29,391 31,260
-------- --------
Cash and cash equivalents at
End of period $ 36,684 $ 29,391
======== ========
*Net of effect from purchase 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, natural gas and
water to the public through its six wholly-owned regulated subsidiaries
(Utilities): Northern Indiana Public Service Company (Northern Indiana); Kokomo
Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc.
(NIFL); Crossroads Pipeline Company (Crossroads); Indianapolis Water Company
(IWC); and Harbour Water Corporation (Harbour). 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."
Industries also provides non-regulated energy/utility-related services
including gas marketing and trading; wholesale power marketing; power
generation; gas transmission, supply and storage; installation, repair and
maintenance of underground pipelines; utility line locating and marking; and
related products targeted at customer segments principally through the following
wholly-owned subsidiaries: NIPSCO Development Company, Inc. (Development); NI
Energy Services, Inc. (Services) (formerly known as NIPSCO Energy Services,
Inc.); Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller); and
SM&P Utility Resources, Inc. (SM&P). NIPSCO Capital Markets, Inc. (Capital
Markets) handles financing for Industries and its subsidiaries, other than
Northern Indiana. These subsidiaries, other than the wholesale power marketing
operations of Services, are referred to collectively as "Products and Services."
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's
subsidiaries include two regulated water utilities (IWC and Harbour) and five
non-utility companies including Miller and SM&P.
On December 16, 1997, the Board of Directors authorized a two-for-one split
of Industries' common stock. The stock split was paid February 20, 1998, to
shareholders of record at the close of business January 30, 1998. All references
to number of shares reported for the period including per share amounts and
stock option data of Industries' common stock reflect the two-for-one stock
split as if it had occurred at the beginning of the earliest period.
On December 18, 1997, Industries and Bay State Gas Company signed a
definitive merger agreement under which Industries will acquire all of the
common stock of Bay State Gas Company in a stock-for-stock transaction. Refer to
"Purchase of Bay State Gas Company" in Note 4 to Consolidated Financial
Statements for a more detailed discussion of the proposed acquisition.
(2) Summary of Significant Accounting Policies:
Basis of Presentation. The consolidated financial statements include the
accounts of majority-owned subsidiaries of Industries after the elimination of
significant intercompany accounts and transactions. Investments for which
Industries has at least a 20% interest and certain joint ventures are accounted
for under the equity method. Investments with less than a 20% interest are
accounted for under the cost method. 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. Utility revenues are recorded based on estimated
service rendered, but are billed to customers monthly on a cycle basis. Electric
and gas marketing revenues are recognized as the related commodity is delivered
to customers. Construction revenues are recognize on the percentage of
completion method whereby revenues are recognized in proportion to costs
incurred over the life of each project. Industries records provisions for losses
on construction contracts, if any, in the period in which such losses become
probable.
Depreciation and Maintenance. The Utilities provide depreciation on a
straight-line method over the remaining service lives of the electric, gas,
water and common properties. The approximated weighted average remaining lives
for major components of each electric, gas and water plant are as follows:
Electric:
Electric generation plant 24 years
Transmission plant 26 years
Distribution plant 25 years
Other electric plant 24 years
The depreciation provision for electric utility plant, as a percentage of
the original cost, was 3.7% for the three-month period and 3.6% for the
six-month and twelve-month periods, ended June 30, 1998, and was 3.6% for the
three-month, six-month and twelve-month periods, ended June 30, 1997.
Gas:
Gas storage plant 18 years
Transmission plant 34 years
Distribution plant 27 years
Other gas plant 24 years
The depreciation provision for gas utility plant, as a percentage of the
original cost, was 5.1% for the three-month period and 5.2% for the six-month
and twelve-month periods, ended June 30, 1998, and was 5.1% for the three-month,
six-month and twelve-month periods, ended June 30, 1997.
Water:
Water source and treatment plant 34 years
Distribution plant 68 years
Other water plant 13 years
The depreciation provision for water utility plant, as a percentage of the
original cost, was 2.0% for the three-month, six-month, and the twelve-month
periods ended June 30, 1998, and 2.0% for the three month period ended June 30,
1997.
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 retired 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.
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 being
amortized over a forty-year period from the respective dates of acquisition. The
plant acquisition adjustments net of accumulated amortization were $187.9
million and $190.4 million at June 30, 1998 and December 31, 1997, respectively.
Amortization of Software Costs. Industries has capitalized software
relating to various technology functions. At the date of installation,
Industries estimates that the specific software will have a useful life between
five and ten years. The Federal Energy Regulatory Commission (FERC) prescribes
certain amortization periods, and Industries' management has determined that, on
average, these are reasonable useful life estimates for the portfolio of
capitalized software. The Energy Utilities include these amortization estimates,
based on useful life, in their quarterly filings with the Indiana Utility
Regulatory Commission (Commission).
Intangible Assets. The excess of cost over the fair value of the net
assets of non-utility subsidiaries acquired is reported as goodwill and is being
amortized on a straight-line basis over a weighted average period of 34 years.
Other intangible assets approximating $7.7 million are being amortized over a
period of eight years. Industries assesses the recoverability of its intangible
assets on a periodic basis to confirm that expected future cash flows will be
sufficient to support the recorded intangible assets. Accumulated amortization
of intangibles at June 30, 1998 and December 31, 1997, was approximately $3.3
million and $1.6 million, respectively.
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.
Power Purchased. Power purchases and net interchange power with other
electric utilities under interconnection agreements and wholesale power
purchases are included in Cost of Sales under the caption "Power purchased."
Accounts Receivable. At June 30, 1998, Northern Indiana had sold $100
million of its accounts receivable under a sales agreement which expires May 31,
2002.
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.
Comprehensive Income. Industries adopted SFAS No. 130, "Reporting
Comprehensive Income" effective January 1, 1998. The objective of the statement
is to report comprehensive income which is a measure of all changes in equity of
an enterprise which result from transactions or other economic events during the
period other than transactions with shareholders. This information is reported
in Industries' Consolidated Statement of Common Shareholders' Equity.
Industries' components of accumulated other comprehensive income includes
unrealized gains (losses) on available for sale securities and unrealized gains
(losses) on foreign currency translation adjustments. The accumulated amounts
for these components, respectively, were $2.8 million and $(0.5) million as of
April 1, 1997; $5.6 million and $(1.6) million as of April 1, 1998; $2.7 million
and $(0.1) million as of January 1, 1997; $4.4 million and $(1.5) million as of
January 1, 1998; $1.9 million and $(2.0) million, as of July 1, 1996: and $4.0
million and $(0.1) as of July, 1, 1997.
Statement of Cash Flows. For the purposes of the Consolidated Statement of
Cash Flows, Industries considers temporary cash investments with an original
maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest was as
follows:
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
-------------------- -------------------- --------------------
(In thousands) 1998 1997 1998 1997 1998 1997
======== ======== ======== ======== ======== ========
Income taxes $ 76,100 $ 61,700 $ 76,100 $ 61,700 $131,249 $ 81,747
Interest, net of
amounts capitalized 32,637 32,544 56,186 44,655 113,892 90,988
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 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 it is
billed or refunded to 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 factor for each of
Kokomo Gas and NIFL is subject to semi-annual hearings by the Commission and
remains 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. The Northern Indiana gas
cost adjustment factor includes a gas cost incentive mechanism (GCIM) which
allows Northern Indiana to share any cost savings or cost increases with
customers based on a comparison of Northern Indiana's actual gas supply
portfolio costs to a market based benchmark price. See note 6, 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 June 1998 and December 1997 the estimated
replacement cost of gas in storage (current and non-current) at June 30, 1998
and December 31, 1997 exceeded the stated LIFO cost by approximately $41 million
and $42 million, respectively. Certain other subsidiaries of Industries have
natural gas in storage valued at average cost.
Hedging Activities. Industries utilizes a variety of commodity-based
derivative financial instruments to reduce the price risk inherent in its
natural gas and electric power marketing activities. The gains and losses on
these derivative financial instruments are deferred (Other Current Assets or
Other Current Liabilities) pursuant to an identified risk reduction strategy.
Such deferrals are recognized in income concurrent with the disposition of the
underlying physical commodity. In certain circumstances, a derivative financial
instrument will serve to hedge the acquisition cost of gas injected into
storage. In this situation, the gain or loss on the derivative financial
instrument is deferred as part of the cost basis of gas in storage and
recognized upon the ultimate disposition of the natural gas. If a derivative
financial instrument contract is terminated early because it is probable that a
transaction or anticipated transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative financial
instrument contract is terminated early for other economic reasons, any gain or
loss as of the termination date is deferred and recorded when the associated
transaction or anticipated transaction affects earnings.
Industries uses commodity futures contracts, options and swaps to hedge
the impact of natural gas price fluctuations related to its business activities,
including price risk related to the physical location of the natural gas (basis
risk). As of June 30, 1998, Industries had open derivative financial instruments
representing hedges of natural gas sales of 13.0 billion cubic feet (Bcf),
natural gas purchases of 24.2 Bcf and net basis differentials of 23.8 Bcf. The
net deferred loss on these derivative financial instruments as of June 30, 1998
was not material.
Industries utilizes options to hedge price risk associated with a portion
of its fixed price purchase and sale commitments related to electricity. The
deferred premiums on these options as of June 30, 1998 were not material.
Impact of Accounting Standards. During June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities".
This statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that a
company recognize those items as assets or liabilities in the balance sheet and
measure them at fair value. This Statement generally provides for matching of
the timing of gain or loss recognition of derivatives instruments designated as
a hedge with the recognition of changes in the fair value of the hedged asset or
liability through earnings. This Statement also provides that the effective
portion of a hedging instrument's gain or loss on a forecasted transaction be
initially reported in other comprehensive income and subsequently reclassified
into earnings when the hedged forecasted transaction affects earnings.
Industries expects to adopt this Statement on January 1, 2000, and is currently
assessing the impact of adoption on its financial position and results of
operations.
Regulatory Assets. The Utilities' operations are subject to the regulation
of the Commission and, in the case of the Energy Utilities, the 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 their operations. As of June 30, 1998 and December 31,
1997, 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 regulatory assets might be required, unless some form of
transition cost recovery is established by the appropriate regulatory body which
would meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period.
Regulatory assets were comprised of the following items:
June 30, December 31,
(In thousands) 1998 1997
========== ==========
Unamortized reacquisition premium on
debt (Note 19) $ 44,990 $ 46,748
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges and deferred
depreciation (See below) 64,437 66,546
Bailly scrubber carrying charges and
deferred depreciation (See below) 9,413 9,880
Deferred SFAS No. 106 expense not
recovered (Note 10) 84,706 87,653
FERC Order No. 636 transition costs (Note 6) 23,985 28,744
Regulatory income tax asset, net (Note 8) 7,141 6,941
Other 4,172 4,261
---------- ----------
238,844 250,773
Less: Current portion of regulatory assets 34,501 39,260
---------- ----------
$ 204,343 $ 211,513
========== ==========
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. 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, 1996, a pre-tax rate of 5.5% for all construction was being
used; effective January 1, 1997 the rate remained at 5.5%; and effective January
1, 1998, 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
other comprehensive income reflected in the Consolidated Statement of
Shareholders' Equity.
Investments in Real Estate. Development invests in a series of affordable
housing projects within 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
$35.1 million and $30.1 million relating to affordable housing projects at June
30, 1998 and December 31, 1997, 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) Purchase of IWC Resources Corporation: 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 10.6 million Industries' common shares. Industries accounted
for the acquisition as a purchase. The purchase price was allocated to the
assets and liabilities acquired based on their fair values.
(4) Purchase of Bay State Gas Company: On December 18, 1997, Industries and Bay
State Gas Company (Bay State) signed a definitive merger agreement under which
Industries will acquire all of the common stock of Bay State in a
stock-for-stock transaction valued at $40 per Bay State share. The transaction
is valued at approximately $551 million. Bay State shareholders will have the
option of taking up to 50 percent of the total purchase price in cash.
Consummation of the merger is subject to certain closing conditions, including
the approval by the Securities and Exchange Commission, FERC and state
regulatory agencies in Massachusetts, New Hampshire and Maine. The shareholders
of Bay State approved the merger on May 27, 1998, and the state regulatory
agencies in New Hampshire and Maine have also approved the merger. The
transaction is expected to be completed in late 1998.
Bay State, one of the largest natural gas utilities in New England,
provides natural gas distribution service to more than 300,000 customers in
Massachusetts, New Hampshire and Maine. The combined company will be one of the
10 largest natural gas distribution systems in the nation, servicing more than 1
million gas customers. In addition, Industries and Bay State have entered into
joint marketing agreements to expand the operation of Bay State's non-regulated
energy service companies.
(5) 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. NEMC was declared bankrupt as of December 12, 1996.
Certain creditors of NEMC have 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 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.
(6) FERC Order No. 636: Since December 1993, the Energy Utilities have paid
approximately $140.5 million of interstate pipeline transition costs to pipeline
suppliers to reflect the impact of FERC Order No. 636. The Energy Utilities
expect that additional transition costs will not be significant. 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.
(7) Environmental Matters: The Utilities have an ongoing program to remain aware
of laws and regulations involved with hazardous waste and other environmental
matters. The Utilities intend 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 approximately $17
million to cover probable corrective actions as of June 30, 1998; 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 results of operations or financial position of
Industries.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Reflecting this compliance, on December 31, 1997, the Indiana Department
of Environmental Management (IDEM) issued the Phase II Acid Rain permits for all
four of Northern Indiana's electric generating stations. As discussed below,
however, other provisions of the CAAA impose additional requirements on Northern
Indiana.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for Phase II of the Acid Rain nitrogen oxides (NOx) reduction
program. For Phase I, during the summer of 1997, the EPA formally approved the
Acid Rain Early Election permits for the pulverized coal units at D. H. Mitchell
and R. M. Schahfer stations. The permits establish the Phase I limits for the
NOx emissions on these units until 2007. On December 23, 1997, Northern Indiana
submitted an Acid Rain Phase II NOx Compliance Plan to IDEM which included
additional controls for two cyclone fired boilers and a plan for emission
averaging to achieve the NOx limits for the system by 2000. Northern Indiana
plans a project to demonstrate a cost effective combustion control technique on
the Unit 12 cyclone fired boiler at Michigan City during 1998. The CAAA also
contain other provisions that could lead to limitations on emissions of
hazardous air pollutants which may require significant capital expenditures for
control of these emissions. Northern Indiana cannot predict what these
requirements will be or the costs of complying with these potential
requirements.
On October 10, 1997, and supplemented on May 11, 1998, the EPA proposed a
rule under the nonattainment provisions of the CAAA to reduce emissions
transported across state boundaries that allegedly are contributing to
nonattainment of the one hour ozone standard in downwind states. Because NOx,
along with other factors, contributes to ozone formation, the EPA proposed
significant NOx reductions for 22 states, including Indiana, to address the
ozone transport issue. These proposals, and any resulting NOx emission
limitations, arise under different provisions of the CAAA than the Acid Rain NOx
program and can result in additional, more restrictive emission limitations than
are imposed under the Acid Rain Program. The EPA has encouraged states to
achieve the reductions by requiring controls on electric utilities and large
boilers. Northern Indiana is evaluating the EPA's proposal and evaluating
potential requirements that could result from any final rule.
The EPA issued final rules on July 18, 1997, revising the National Ambient
Air Quality Standards for ozone and particulate matter. The revised standards
begin a regulatory process that may lead to reductions in particulate, NOx
emissions and possibly sulfur dioxide emissions from many sources including
Northern Indiana's coal-fired boilers at its generating stations, beyond current
CAAA requirements. Northern Indiana cannot predict the costs of complying with
future control requirements to meet these new standards. Northern Indiana will
continue to closely monitor developments in this area and anticipates the exact
nature of the impact of the new standards on its operations will not be known
for some time.
The EPA has notified Northern Indiana that it is a Apotentially 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.
In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159
nations formally agreed to targets reducing worldwide levels of greenhouse
gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would
impose an obligation on the United States to reduce its emissions of greenhouse
gas to a level seven percent below 1990 levels during the period of 2008 to
2012. The impact of this agreement on Northern Indiana is uncertain. Northern
Indiana, as a charter member of the Department of Energy's Climate Challenge
Program, the electric industries' voluntary reduction effort, has already
implemented over 21 projects to voluntarily reduce greenhouse gas emissions.
Northern Indiana continues to investigate methods to address reduction in carbon
dioxide emissions and will monitor the development of U. S. climate change
policy.
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 eighteen
sites. Follow-up investigations have been conducted at eight sites and remedial
measures have been selected at five 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 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. Three 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. In August 1997, Northern Indiana filed suit in federal court
against Cinergy seeking recovery of those costs.
In 1994, the Energy Utilities approached various companies that provided
insurance coverage which the Energy Utilities believe covers costs related to
actions taken at former manufactured-gas plants. There has been litigation
between Northern Indiana and various insurance companies over covered costs.
Northern Indiana has filed claims in state court against various insurance
companies, seeking coverage for costs associated with several former
manufactured-gas plants and damages for alleged misconduct by some of the
insurance companies. The state court action is now proceeding. Northern Indiana
has received cash settlements from several of the insurance companies.
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, researchers from the National Cancer Institute
and the Childhood Cancer Group reported they found no evidence that magnetic
fields in homes increase the risk of childhood leukemia. This study follows an
EMF report released in 1997 by the U.S. National Research Council of the
National Academy of Sciences, which concluded, after examining more than 500 EMF
studies spanning 17 years, that, among other things, there was insufficient
evidence to consider EMF a threat to human health. A new report in June 1998
from a National Institutes of Health panel accepted the position that EMF should
be regarded as a "possible human carcinogen". Further panel comments also stated
that the risk "is possibly quite small compared to many other public health
risks."
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. Applications for renewal of any expiring permits have
been filed and are the subject of ongoing discussions with, but have not been
finalized by, IDEM. These permits continue in effect pending review of the
current applications.
Under the Federal Safe Drinking Water Act (SDWA), the Water Utilities are
subject to regulation by the EPA for the quality of water sold and treatment
techniques used to make the water potable. The EPA promulgates nationally
applicable maximum contaminant levels (MCLs) for contaminants found in drinking
water. Management believes the 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 previously required. 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 their 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.
(8) 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 June 30, 1998
and December 31, 1997, are as follows:
June 30, December 31,
(In thousands) 1998 1997
========= =========
Deferred tax liabilities -
Accelerated depreciation and other
property differences $ 785,694 $ 779,223
AFUDC-equity 34,067 35,282
Adjustment clauses 9,937 35,253
Other regulatory assets 30,800 31,862
Reacquisition premium on debt 17,647 18,335
Deferred tax assets -
Deferred investment tax credits (38,622) (40,017)
Removal costs (150,307) (144,111)
Other postretirement/postemployment benefits (47,933) (45,298)
Other, net (19,266) (3,069)
--------- ---------
622,017 667,460
Less: Deferred income taxes related to current
assets and liabilities (14,084) 15,645
--------- ---------
Deferred income taxes -noncurrent $ 636,101 $ 651,815
========= =========
Federal and state income taxes as set forth in the Consolidated Statement
of Income are comprised of the following:
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
---------------------- ---------------------- ----------------------
(In thousands) 1998 1997 1998 1997 1998 1997
========= ========= ========= ========= ========= =========
Current income taxes -
Federal $ 25,994 $ 33,940 $ 81,911 $ 80,273 $ 99,764 $ 120,506
State 3,861 5,058 12,148 11,950 17,271 18,279
--------- --------- --------- --------- --------- ---------
29,855 38,998 94,059 92,223 117,035 138,785
--------- --------- --------- --------- --------- ---------
Deferred income taxes, net -
Federal (11,694) (19,222) (39,500) (30,654) (10,618) (22,655)
State (916) (1,530) (3,150) (2,441) (586) (1,656)
--------- --------- --------- --------- --------- ---------
(12,610) (20,752) (42,650) (33,095) (11,204) (24,311)
--------- --------- --------- --------- --------- ---------
Deferred investment tax credits, net (1,821) (1,833) (3,642) (3,635) (7,383)
(7,704)
--------- --------- --------- --------- --------- ---------
Total income taxes $ 15,424 $ 16,413 $ 47,767 $ 55,493 $ 98,448 $ 106,770
========= ========= ========= ========= ========= =========
A reconciliation of total income tax expense to an amount computed by
applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
---------------------- ---------------------- ----------------------
(In thousands) 1998 1997 1998 1997 1998 1997
========= ========= ========= ========= ========= =========
Net income $ 29,445 $ 28,236 $ 90,167 $ 99,074 $ 181,942 $ 184,893
Add-Income taxes 15,424 16,413 47,767 55,493 98,448 106,770
Dividend requirements on
preferred stocks of subsidiaries 2,128 2,179 4,295 4,346 8,640 8,681
--------- --------- --------- --------- --------- ---------
Income before preferred dividend
requirements of subsidiaries and
income taxes $ 46,997 $ 46,828 $ 142,229 $ 158,913 $ 289,030 $ 300,344
========= ========= ========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the
statutory rate $ 16,449 $ 16,390 $ 49,780 $ 55,620 $ 101,161 $ 105,120
Reconciling items multiplied by the statutory rate:
Book depreciation over
related tax depreciation 998 1,044 1,996 2,088 3,980 4,696
Amortization of deferred
investment tax credits (1,821) (1,833) (3,642) (3,635) (7,383) (7,704)
State income taxes, net of
federal income tax benefit 1,594 1,758 4,746 5,327 10,640 10,225
Reversal of deferred taxes
provided at rates in excess
of the current federal
income tax rate (1,271) (1,518) (2,542) (3,036) (3,569) (6,861)
Low-income housing
credits (960) (764) (1,920) (1,528) (3,448) (1,009)
Nondeductible amounts
related to amortization of
intangible assets and plant
acquisition adjustments 629 515 1,258 611 2,287 804
Other, net (194) 821 (1,909) 46 (5,220) 1,499
--------- --------- --------- --------- --------- ---------
Total income taxes $ 15,424 $ 16,413 $ 47,767 $ 55,493 $ 98,448 $ 106,770
========= ========= ========= ========= ========= =========
(9) Pension Plans: Industries and its subsidiaries have four noncontributory,
defined benefit retirement plans covering the majority of their employees.
Benefits under the plans reflect the employees' compensation, years of service
and age at retirement.
The change in the benefit obligation for 1997 and 1996 is as follows:
(In thousands) 1997 1996
========= =========
Benefit obligation at beginning of year (January 1,) $ 743,634 $ 759,557
Service cost 14,714 16,300
Interest cost 57,938 53,477
Plan amendments 25,096 0
Actuarial (gain) loss 73,818 (39,024)
Acquisition of IWCR 15,722 0
Benefits paid (55,166) (46,676)
--------- ---------
Benefit obligation at end of the year (December 31,)$ 875,756 $ 743,634
========= =========
The change in the fair value of the plans' assets for the years 1997 and
1996 is as follows:
(In thousands) 1997 1996
======== ========
Fair value of plan assets at beginning of
year (January 1,) $ 790,978 $ 705,541
Actual return on plans' assets 126,695 87,407
Employer contributions 46,440 44,706
Acquisition of IWCR 15,910 0
Benefits paid (55,166) (46,676)
--------- ---------
Plan assets at fair value at end of the year
(December 31,) $ 924,857 $ 790,978
========= =========
The plans' assets are invested primarily in common stocks, bonds and notes.
The plans' funded status as of January 1, 1998 and January 1, 1997 is as
follows:
January 1, January 1,
(In thousands) 1998 1997
======== ========
Plan assets in excess of benefit obligation $ 49,101 $ 47,344
Unrecognized net actuarial loss (46,960) (66,976)
Unrecognized prior service cost 47,114 25,172
Unrecognized transition amount 32,107 38,062
-------- --------
Prepaid pension costs $ 81,362 $ 43,602
======== ========
The benefit obligation is the present value of future pension benefit
payments and is based on a plan benefit formula which considers expected future
salary increases. Discount rates of 7.00% and 7.75% and rates of increase in
compensation levels of 4.5% and 5.5% were used to determine the benefit
obligation at January 1, 1998 and 1997, respectively. The increase in the
benefit obligation at January 1, 1998 was impacted by the decrease in the
discount rate from 7.75% to 7.00%. Prepaid pension costs were $98.4 million as
of June 30, 1998.
The following items are the components of provisions for pensions for the
three-month, six-month and twelve-month periods ended June 30, 1998 and June 30,
1997:
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
---------------------- --------------------- -----------------------
(In thousands) 1998 1997 1998 1997 1998 1997
========= ========= ========= ========= ========= =========
Service costs $ 6,518 $ 4,809 $ 13,036 $ 9,382 $ 18,104 $ 15,094
Interest costs 21,784 16,816 43,568 33,352 67,804 54,700
Expected return on plan assets (29,253) (20,977) (58,506) (41,480) (143,272) (66,928)
Amortization of transition obligation ,833 1,765 3,666 3,353 6,531 5,512
Amortization of prior service costs 2,092 950 4,183 1,900 58,942 2,954
--------- --------- --------- --------- --------- ---------
$ 2,974 $ 3,363 $ 5,947 $ 6,507 $ 8,109 $ 11,332
========= ========= ========= ========= ========= =========
Assumptions used in the valuation and determination of 1998 and 1997
pension expense were as follows:
1998 1997
====== ======
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 4.50% 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. On July 9, 1998, a substantial portion of the plans' domestic equity
investments were hedged against significant movements in the S&P 500 Index.
The hedge will expire on December 31, 1998.
IWCR participates in several industry-wide, multi-employer pension plans
for certain of its union employees at 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. Contributions of
$0.5 million, $0.8 million and $1.9 million were made to these plans for the
three-month, six-month and twelve-month periods ended June 30, 1998,
respectively. The relative position of each employer participating in these
plans with respect to the actuarial present value of accumulated plan benefits
and net assets available for benefits is not available.
(10) Postretirement Benefits: Industries provides certain health care and life
insurance benefits for retired employees. The majority 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 had 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
AEmployers' 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
as a regulatory asset. On June 11, 1997, the Commission issued an order
approving the 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 these dates.
IWC's current rates include postretirement benefit costs on an accrual
basis, including amortization of the regulatory asset that arose prior to
inclusion of these costs in the rates. IWC currently remits to a grantor trust
amounts collected in rates.
The following table sets forth the change in the plans' accumulated
postretirement benefit obligation (APBO) for the years 1997 and 1996:
(In thousands) 1997 1996
========= =========
Accumulated postretirement benefit obligation
at beginning of year (January 1,) $ 200,790 $ 257,915
Service cost 5,034 7,352
Interest cost 16,215 18,310
Plan amendments 4,015 (10,482)
Actuarial (gain) (10,242) (65,718)
Acquisition of IWCR 18,505 0
Benefits paid (10,409) (6,587)
--------- ---------
Accumulated postretirement benefit obligation
at end of the year (December 31,) $ 223,908 $ 200,790
========= =========
The change in the fair value of the plans' assets for the years 1997 and
1996 is as follows:
(In thousands) 1997 1996
======== ========
Fair value of plan assets at beginning
of year (January 1,) $ 0 $ 0
Employer contributions 12,809 6,587
Benefits paid (10,409) (6,587)
-------- --------
Plan assets at fair value at end
of the year (December 31,) $ 2,400 $ 0
======== ========
Following is the funded status for postretirement benefits as of January 1,
1998 and January 1, 1997:
January 1, January 1,
(In thousands) 1998 1997
========= =========
Funded status $(221,508) $(200,790)
Unrecognized net actuarial gain (99,117) (89,547)
Unrecognized prior service cost 4,195 0
Unrecognized transition amount 176,464 175,012
--------- ---------
Accrued liability for postretirement benefits $(139,966) $ 115,325)
========= =========
A discount rate of 7.00%, a pre-Medicare medical trend rate of 8% declining
to a long-term rate of 5%, a discount rate of 7.75% and a pre-Medicare medical
trend rate of 9% declining to a long-term rate of 6%, were used to determine the
APBO at January 1, 1998 and 1997, respectively. The increase in the APBO at
January 1, 1998 was `primarily attributable to the inclusion of IWCR's APBO and
the decrease in the discount rate from 7.75% to 7.00%. The accrued liability for
postretirement benefits was $143.5 million at June 30, 1998.
Net periodic postretirement benefits costs, before consideration of the
rate-making discussed previously, for the three-month, six-month and
twelve-month periods ended June 30, 1998 and June 30, 1997 include the following
components:
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
-------------------- -------------------- --------------------
(In thousands) 1998 1997 1998 1997 1998 1997
======== ======== ======== ======== ======== ========
Service costs $ 1,487 $ 1,589 $ 2,674 $ 3,049 $ 4,529 $ 7,161
Interest costs 4,073 4,798 8,146 9,258 14,766 17,410
Expected return on plan assets (50) 0 (100) 0 (100) 0
Amortization of transition obligation 2,930 2,970 5,859 5,734 11,683 11,137
Amortization of prior service cost 75 0 150 0 429 0
Amortization of (gain) loss (1,393) (2,786) (6,608) (1,411)
-------- -------- -------- -------- -------- --------
$ 7,122 $ 8,343 $ 13,943 $ 16,019 $ 24,699 $ 34,297
======== ======== ======== ======== ======== ========
Assumptions used in the determination of 1998 and 1997 net periodic
postretirement benefit costs were as follows:
1998 1997
======= =======
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 4.50% 5.50%
The pre-Medicare medical trend rates used for 1998 and 1997 were 8%
declining to a long-term rate of 5% and 9% declining to a long-term rate of 6%,
respectively. 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, 1998 by approximately $27.1 million, and increase the
aggregate of the service and interest cost components of plan costs by
approximately $0.8 million and $1.5 million for the three-month and six-month
periods ended June 30, 1998. The effect of a 1% decrease in the assumed health
care cost trend rates for each future year would decrease the accumulated
postretirement benefit obligation at January 1, 1998 by approximately $22.2
million, and decrease the aggregate of the service and interest cost components
of plan costs by approximately $0.6 million and $1.2 million for the three-month
and six-month periods ended June 30, 1998. Amounts disclosed above could be
changed significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.
(11) Authorized Classes of Cumulative Preferred and Preference Stocks:
Industries -
20,000,000 shares -Preferred -without par value
4,000,000 of Industries' Series A Junior Participating Preferred Shares
are reserved for issuance pursuant to the Share Purchase Rights Plan described
in Note 17, 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 12 sets forth the preferred stocks which are redeemable solely at the
option of the issuer, and Note 13 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 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.
(12) Preferred Stocks, Redeemable Solely at the Option of the Issuer,
Outstanding at June 30, 1998 and December 31, 1997 :
Redemption
Price at
June 30, December 31, June 30,
(Dollars in thousands) 1998 1997 1998
=========== =========== ===========
Northern Indiana Public Service Company:
Cumulative preferred stock - $100 par value -
4-1/4% series- 209,057 and 209,118 shares
outstanding, respectively $ 20,906 $ 20,912 $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 N/A
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at June 30, 1998),
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 4,497 $100 - $105
----------- -----------
$ 85,614 $ 85,620
=========== ===========
During the period July 1, 1996 to June 30, 1998, 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.
(13) Redeemable Preferred Stocks Outstanding at June 30, 1998 and December 31,
1997 : Preferred stocks subject to mandatory redemption requirements or whose
redemption is outside the control of issuer, excluding sinking fund payments due
within one year are as follows:
June 30, December 31,
(Dollars in thousands) 1998 1997
=========== ===========
Northern Indiana Public Service Company:
Cumulative preferred stock -$100 par value -
8.85% series - 50,000 and 62,500 shares
outstanding, respectively $ 5,000 $ 6,250
7-3/4% series - 38,906 shares outstanding 3,891 3,891
8.35% series - 57,000 shares outstanding 5,700 5,700
Cumulative preferred stock -no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
----------------------------------
$ 57,591 $ 58,841
=========== ===========
The redemption prices at June 30, 1998, as well as sinking fund provisions
for the cumulative preferred stocks subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
Sinking Fund or
Series Redemption Price Per Share Mandatory Redemption Provisions
========== ========================== ======================================
Cumulative preferred stock -$100 par value -
8.85% $101.11, reduced periodically 12,500 shares on or before April 1.
8.35% $103.69, 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% $104.23, reduced periodically 2,777 shareson 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 June 30, 1998 for each of the twelve-month periods subsequent to
June 30, 1999 are as follows:
Twelve Months Ended June 30,*
==============================
2000 $1,827,700
2001 $1,827,700
2002 $1,827,700
2003 $1,827,700
* Table does not reflect redemptions made after June 30, 1998.
(14) Stock Split: On December 16, 1997, the Board of Directors authorized a
two-for-one split of Industries' common stock. The stock split was paid February
20, 1998, to shareholders of record at the close of business January 30, 1998.
All references to number of shares reported for the period including per share
amounts and stock option data of Industries' common stock reflect the
two-for-one stock split as if it had occurred at the beginning of the earliest
period.
(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 dated August 1, 1939, as amended and supplemented (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 June 30, 1998, Northern Indiana had
approximately $152.7 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) Earnings Per Share: At December 31, 1997, Industries adopted SFAS No. 128
"Earnings per Share." The adoption of this statement required Industries to
present basic earnings per share and diluted earnings per share in place of
primary earnings per share. Basic earnings per share was computed by dividing
net income, reduced for preferred dividends, by the average number of common
shares outstanding during the period. The diluted earnings per share calculation
assumes conversion of nonqualified stock options into common shares. As a result
of adopting the statement, previously reported earnings per share information
was restated. The effect of this accounting change on previously reported
earnings per share data was insignificant.
The net income, preferred dividends and shares used to compute basic and diluted
earnings per share is presented in the following table:
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------------ ------------------------ ------------------------
(Dollars in thousands, except per share amounts) 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding 122,180,915 125,655,240 123,022,091 122,404,026 124,156,903 121,935,166
=========== =========== =========== =========== =========== ===========
Net Income to be Used to Compute Basic Earnings per Share:
Net Income $ 29,445 $ 28,236 $ 90,167 $ 99,074 $ 181,942 $ 184,893
---------- ---------- ---------- ---------- ---------- ----------
Basic Earnings per Average Common Share $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51
=========== =========== =========== =========== =========== ===========
Diluted
Weighted Average Number of Shares:
Average Common Shares Outstanding 122,180,915 125,655,240 123,022,091 122,404,026 124,156,903 121,935,166
Dilutive effect for Nonqualified
Stock Options 456,722 349,514 493,845 346,256 460,905 351,628
---------- ---------- ---------- ---------- ---------- ----------
Weighted Average Shares 122,637,637 126,004,754 123,515,936 122,750,282 124,617,808 122,286,794
=========== =========== =========== =========== =========== ===========
Net Income to be Used to Compute Diluted Earnings per Share:
Net Income $ 29,445 $ 28,236 $ 90,167 $ 99,074 $ 181,942 $ 184,893
----------- ----------- ----------- ----------- ----------- -----------
Diluted Earnings per Average Common Share $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51
=========== =========== =========== =========== =========== ===========
(17) Common Shares: On April 8, 1998, shareholders approved an increase in the
number of authorized common shares without par value from 200,000,000 shares to
400,000,000 shares.
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 two-hundredth
of a Series A Junior Participating Preferred Share, without par value, of
Industries at a price of $30 per one two-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 June 30, 1998, Industries had purchased
approximately 47.7 million shares since 1989 at an average price of $15.14 per
share. Approximately 14.4 million additional common shares may be repurchased
under the Board's authorization.
(18) 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 5.0 million of Industries' common shares to key employees
through 1998 and 2004, respectively. At June 30, 1998, there were 3,847,500
shares reserved for future awards under the 1994 Plan. The 1994 Plan permits 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 June 30, 1998. Under this Plan, the exercise price of each
option equals the market price of Industries' stock on the date of grant. Each
option has a maximum term of 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' common
shares 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 1997 and 1998 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 534,666 and 542,666 restricted shares outstanding at June 30, 1998
and December 31, 1997, respectively.
The Industries Nonemployee Director Stock Incentive Plan, which was
approved by shareholders, provides for the issuance of up to 200,000 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. 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 June 30, 1998, 71,500 shares had
been 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 $0.9, $1.4 and $2.5 million for the
three-month, six-month and twelve-month periods ending June 30, 1998,
respectively. Had compensation cost for non-qualified 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 Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997
======== ======== ======== ======== ======== ========
(Dollars in thousands, except pershare data)
Net Income:
As reported $ 29,445 $ 28,236 $ 90,167 $ 99,074 $181,942 $184,893
Pro forma 29,230 28,029 89,739 98,660 181,088 184,106
Earnings Per Average Common Share:
Basic:
As reported $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51
Pro forma 0.23 0.22 0.72 0.80 1.45 1.50
Diluted:
As reported $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51
Pro forma 0.23 0.22 0.72 0.80 1.45 1.50
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, six-month and twelve-month periods ended June 30, 1998 and June
30, 1997: risk-free interest rate of 6.29% and 6.39%, respectively; expected
dividend yield per share of $0.87 and $0.84, respectively; expected option term
of five and one-quarter years and five years, respectively; and expected
volatilities of 12.7% and 13.2%, respectively.
Changes in outstanding shares under option and SARs for the three-month,
six-month and twelve-month periods ended June 30, 1998 and June 30, 1997 are as
follows:
NONQUALIFIED STOCK OPTIONS
--------------------------------------------
Weighted Weighted
Average Average
Option Option
Three Months Ended June 30, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 2,326,600 $ 16.73 2,284,100 $ 15.33
Granted 0 0
Exercised 112,800 15.45 88,700 14.12
Canceled 10,000 20.64
--------- ---------
Balance, end of period 2,203,800 16.78 2,195,400 15.38
======== ========
Shares exercisable 1,693,200 15.61 1,670,500 14.27
======== ========
NONQUALIFIED STOCK OPTIONS
--------------------------------------------
Weighted Weighted
Average Average
Option Option
Six Months Ended June 30, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 2,535,400 $ 16.41 2,360,900 $ 15.33
Granted 0 0
Exercised 313,600 13.59 141,800 14.08
Canceled 18,000 20.64 23,700 18.91
--------- ---------
Balance, end of period 2,203,800 16.78 2,195,400 15.38
======== ========
Shares exercisable 1,693,200 15.61 1,670,500 14.27
======== ========
NONQUALIFIED STOCK OPTIONS
--------------------------------------------
Weighted Weighted
Average Average
Option Option
Twelve Months Ended June 30, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 2,195,400 $ 15.38 2,092,000 $ 14.36
Granted 533,600 20.64 556,600 18.91
Exercised 502,200 14.57 417,700 14.74
Canceled 23,000 20.64 35,500 18.55
--------- ---------
Balance, end of period 2,203,800 16.78 2,195,400 15.38
======== ========
Shares exercisable 1,693,200 15.61 1,670,500 14.27
======== ========
Weighted average fair value
of options granted $ 2.66 $ 2.50
======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs
--------------------------------------------
Option Option
Three Months Ended June 30, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47
Exercised 11,200 $ 5.47 0
--------- ---------
Balance, end of period 0 11,200 5.47
======== ========
Shares exercisable 0 11,200 5.47
======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs
--------------------------------------------
Option Option
Six Months Ended June 30, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47
Exercised 11,200 $ 5.47 0
--------- ---------
Balance, end of period 0 11,200 5.47
======== ========
Shares exercisable 0 11,200 5.47
======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs
--------------------------------------------
Option Option
Twelve Months Ended June 30, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47
Exercised 11,200 5.47 0
--------- ---------
Balance, end of period 0 11,200 5.47
======== ========
Shares exercisable 0 11,200 5.47
======== ========
The following table summarizes information about non-qualified stock
options at June 30, 1998:
OPTIONS OUTSTANDING
------------------------------------------
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Option Price June 30, 1998 Contractual Life Option Price
================== =========== =========== =============
$ 5.47 to $ 8.97 91,000 1.75 years $ 8.63
$11.47 to $15.16 566,400 4.92 years $13.37
$16.22 to $20.64 1,546,400 7.73 years $18.51
- ------------------ ----------- ----------- -------------
$ 5.47 to $20.64 2,203,800 6.76 years $16.78
========
OPTIONS EXERCISABLE
------------------------------------------
Number
Range of Exercisable at Weighted Average
Option Price June 30, 1998 Option Price
================ ============== ==============
$ 5.47 to $ 8.97 91,000 $ 8.63
$11.47 to $15.16 566,400 $13.37
$16.22 to $18.91 1,035,800 $17.45
- ---------------- -------------- --------
$ 5.47 to $18.91 1,693,200 $15.61
==============
(19) Long-Term Debt: At June 30, 1998 and December 31, 1997, Industries'
outstanding long-term debt, excluding amounts due within one year, issued and
not retired or canceled was as follows:
June 30, December 31,
(Dollars in thousands) 1998 1997
========== ==========
Interest rates between 5.20% and 9.83% with a weighted
average interest rate of 7.23% and various maturities
between May 1, 2001 and September 1, 2025 $ 187,100 $ 187,100
Pollution control notes and bonds-
Interest rates between 3.60% and 5.70% with a weighted
average interest rate of 3.85% and various maturities
between October 1, 2003 and April 1, 2019 241,000 241,000
Medium-term notes -
Interest rates between 6.10% and 7.99% with a weighted
average interest rate of 7.19% and various maturities
between March 20, 2000 and August 4, 2027 1,048,025 1,048,025
Subordinated Debentures -
7-3/4%, due March 31, 2026 75,000 75,000
Senior Notes Payable -
6.78%, due December 1, 2027 75,000 75,000
Notes payable -
Interest rates between 6.31% and 9.00% with a weighted
average interest rate of 7.44% and various maturities
between August 31, 1999 and January 1, 2008 42,918 40,229
Variable bank loan -
6.66% -due August, 2003 5,600 5,600
Unamortized premium and discount on long-term debt, net (3,791) (4,029)
--------- ----------
Total long-term debt, excluding amounts due in one year $,670,852 $1,667,925
========= ==========
The sinking fund requirements of long-term debt outstanding at June 30,
1998 (including the maturity of Northern Indiana's first mortgage bonds: Series
T, 7.50%, due April 1, 2002; Northern Indiana's medium-term notes due from March
20, 2000 to April 21, 2003; NDC Douglas Properties, Inc.'s notes payable due
August 15, 1999 through April 1, 2003; IWC's first mortgage bonds: Series 5.20%,
due May 1, 2001 and Series 8.00%, due December 15, 2001; and IWCR's senior notes
payable, due March 15, 2001), for each of the twelve-month periods subsequent to
June 30, 1999 are as follows:
Twelve Months Ended June 30,
=================================
2000 $ 163,664,194
2001 34,722,639
2002 82,487,340
2003 64,128,954
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, 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.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217.7 million of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes. As
of June 30, 1998, $139.0 million of the medium-term notes had been issued with
various interest rates and maturities. The proceeds from these issuances were
used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series
N, and to pay at maturity various issues of Medium-Term Notes, Series D.
IWC's first mortgage bonds are secured by its utility plant. Provisions
of trust indentures related to the 8% Series Bonds require annual sinking fund
or improvement fund 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 July 15, 1998, IWC issued Refunding Revenue Bonds, Series 1998 in the
aggregate principal amount of $40 million. The proceeds form the Series 1998
Bonds are to be used to redeem the City of Indianapolis, Indiana 7-7/8% Economic
Development Water Facilities Revenue Bonds and the Town of Fishers, Indiana
7-7/8% Economic Development Water Facilities Revenue Bonds. The Series 1998
bonds will bear interest from July 15, 1998, at the rate of 5.05% per annum and
will mature on July 15, 2028.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes 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.
In December 1997, Capital Markets issued and sold $75 million of 6.78%
senior notes payable which mature December 1, 2027. The holders of the notes
have the right to require Capital Markets to repurchase all or a portion of the
notes on December 1, 2007 at a purchase price of the principal amount plus
accrued interest thereon. The proceeds from these issuances were primarily used
for the payment of Capital Markets Zero Coupon Notes which matured December 1,
1997. The remaining net proceeds were used for general corporate purposes.
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' obligations in the
event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' creditors against
the stock and assets of Northern Indiana which are owned by Industries. 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 for the benefit of Capital Markets' creditors. The
carrying value of the assets of Industries, other than the assets of Northern
Indiana, reflected in the consolidated financial statements of Industries, was
approximately $1.2 billion at June 30, 1998.
(20) Current Portion of Long-Term Debt: At June 30, 1998 and December 31, 1997,
Industries' current portion of long-term debt due within one year was as
follows:
June 30, December 31,
(Dollars in thousands) 1998 1997
=========== ==========
First Mortgage Bonds $ 14,509 $ 14,509
Medium-term notes -
Interest rates of 5.83% and 5.95% with a weighted
average interest rate of 5.86% and various
maturities between April 6, 1998 and April 13, 1998 0 35,000
Notes payable -
Interest rates of 6.72% and 9.00% with a weighted
average interest rate of 7.87% and various
maturities between August 15, 1998 and January 29, 1999 4,724 3,612
Sinking funds due within one year 1,500 1,500
----------- ------------
Total current portion of long-term debt $ 20,733 $ 54,621
=========== ============
(21) Short-Term Borrowings: Northern Indiana and Capital Markets make use of
commercial paper to fund short-term working capital requirements. As of June 30,
1998 and December 31, 1997, Northern Indiana had $71.1 million and $71.5 million
of commercial paper outstanding, respectively. At June 30, 1998, the weighted
average interest rate of commercial paper outstanding was 5.66%. As of June 30,
1998 and December 31, 1997, Capital Markets had $38.0 million and $17.0 million
of commercial paper outstanding. At June 30, 1998, the weighted average interest
rate of commercial paper outstanding was 5.86%.
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999. As of June 30, 1998, 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, 1999. 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 June 30, 1998, 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 June 30, 1998, there was $41.2 million outstanding under these lines of
credit. At December 31, 1997, there was $47.5 million outstanding under these
lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At June
30, 1998, there were no borrowings outstanding under this facility.
Capital Markets has a $150 million revolving Credit Agreement, which will
terminate August 19, 1999. This facility provides short-term financing
flexibility to Industries and also serves as the back-up instrument for a
commercial paper program. As of June 30, 1998, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of June 30, 1998 and December , 1997, $19.0 million and $20.1 million,
respectively, were outstanding under these lines of credit.
IWCR and its subsidiaries have lines of credit with banks aggregating
$93.7 million. As of June 30, 1998 and December 31, 1997, $77.5 million and
$48.9 million were outstanding under these lines of credit, respectively.
At June 30, 1998 and December 31, 1997, Industries' short-term borrowings
were as follows:
June 30, December 31,
(In thousands) 1998 1997
======== ========
Commercial paper $109,100 $ 88,500
Notes payable 143,728 116,469
Revolving loan facility 0 7,670
-------- --------
Total short-term borrowings $252,828 $212,639
======== ========
(22) 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 $3.4 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
June 30, 1998:
Twelve Months Ended June 30,
==============================
(In thousands)
1999 $ 15,452
2000 13,793
2001 13,471
2002 51,458
2003 10,532
Later years 76,088
--------
Total minimum
payments required $180,794
=======
The consolidated financial statements include rental expense for all
operating leases as follows:
June 30, June 30,
(In thousands) 1998 1997
======= =======
Three months ended $ 6,583 $ 2,292
Six months ended 11,532 4,540
Twelve months ended 15,831 8,937
(23) Commitments: The Utilities estimate that approximately $1.019 billion will
be expended for construction purposes for the period from January 1, 1998 to
December 31, 2002. Substantial commitments have been made by the Utilities in
connection with their programs.
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.
During the fourth quarter of 1995, Northern Indiana entered into a ten
year agreement with IBM to perform all data center, application development and
maintenance, and desktop management. Annual fees under the agreement are
estimated at $20.6 million.
(24) Primary Energy: Primary arranges energy-related projects for large
energy-intensive facilities and has entered into certain commitments in
connection with these projects. Primary offers large energy customers,
nationwide, expertise in managing the engineering, construction, operation and
maintenance of these energy-related projects. Primary is the parent of the
following subsidiaries: Harbor Coal Company (Harbor Coal); North Lake Energy
Corporation (North Lake); Lakeside Energy Corporation (LEC); Portside Energy
Corporation (Portside); and Cokenergy, Inc. (CE).
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 (Inland Steel) 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. 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
located at USS Gary Works. The facility processes high-pressure steam into
electricity and low-pressure steam for delivery to USX Corporation-US Steel
Group. The fifteen-year tolling agreement with US Steel commenced on April 16,
1997 when the facility was placed in commercial operation. Capital Markets
guarantees LEC's security deposit obligations relative to the lease and certain
limited LEC obligations to the lessor.
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 has entered into a lease with a third-party
lessor for use of the facility. Industries has guaranteed certain Portside
obligations to the lessor. Construction of the project began in June 1996 and
the facility began commercial operation on September 26, 1997.
CE has entered into a fifteen-year service agreement with Inland Steel 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 Steel's Indiana Harbor Works to scrub flue gases and recover waste heat
from Harbor Coke's coke facility and produce process steam and electricity from
the recovered heat which will be delivered to Inland Steel. CE has entered into
a lease for the use of these facilities with a third party lessor. Capital
Markets guarantees certain CE obligations relative to the lease. Construction of
the project began in January 1997. The facility is now conducting startup
operations with commercial operation being anticipated before December 31, 1998.
Primary has advanced approximately $33 million and $107 million, at June
30, 1998 and December 31, 1997, 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 as a component of operating
activities in the Consolidated Statement of Cash Flows.
Primary is evaluating other potential projects with Northern Indiana
customers as well as with potential customers outside of Northern Indiana's
service territory. Projects under consideration include those which use
industrial by-product fuels and natural gas to produce electricity.
(25) 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 the majority of investments is 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:
June 30, 1998 December 31, 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
========== ========== ========== ==========
Cash and cash equivalents $ 36,684 $ 36,684 $ 30,780 $ 30,780
Investments 44,868 44,160 32,625 32,886
Long-term debt (including
current portion) 1,691,585 1,734,806 1,722,546 1,718,897
Preferred stock 144,777 136,896 146,289 139,814
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.
(26) 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 2% and 4% of gas revenue (including
transportation services) and 15% and 21% of electric revenue for the twelve
months ended June 30, 1998 and June 30, 1997, respectively.
(27) Business Segments: Industries adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" during the first quarter of
1998. SFAS No. 131 establishes standards for reporting information about
operating segments in financial statements and disclosures about products and
services, and geographic areas. Operating segments are defined as components of
an enterprise for which separate financial information is available and is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Industries has four reportable operating segments: Gas, Electric, Water and
Gas Marketing. The Gas segment includes regulated gas utilities which provide
natural gas distribution and transportation services. The Electric segment is
comprised principally of Northern Indiana, a regulated electric utility, which
generates, transmits and distributes electricity. In addition, the Electric
segment includes a wholesale power marketing operation which markets wholesale
power to other utilities and electric power marketers. The Water segment
includes regulated water utilities which provide distribution of water supply to
the public. The Gas Marketing segment provides natural gas marketing and sales
to wholesale and industrial customers. The Other Products and Services category
includes a variety of energy-related businesses, such as installation, repair
and maintenance of underground pipelines; utility line locating and marking;
transmission of natural gas through pipelines; the arrangement of energy-related
projects for large energy-intensive facilities; and other energy-related
products.
Industries' reportable segments are operations that are managed separately
and meet the quantitative thresholds required by SFAS No. 131.
Revenues for each of Industries' segments are principally attributable to
customers in the United States. Additional revenues, which are insignificant to
Industries' consolidated revenues, are attributable to customers in Canada and
the United Kingdom.
The following tables provides information about Industries' business
segments. Industries uses income before interest and other charges and income
taxes as its primary measurement for each of the reported segments. Adjustments
have been made to the segment information to arrive at information included in
the results of operations and financial position of Industries. Such adjustments
include unallocated corporate revenues and expenses and the elimination of
intercompany transactions, a majority of which are intercompany receivables. The
accounting policies of the operating segments are the same as those described in
Note 2, "Summary of Significant Accounting Policies."
Other
(In thousands) Gas Products
For the three months ended June 30, 1998 Gas Electric Water Marketing &Services Adjustments Total
- -------------------------------------------------------------------------------------------------------------------
Operating revenues $ 110,345 $ 345,639 $ 20,857 $139,931 $ 65,252 $ (29,616) $ 652,408
Other Income (Deductions) $ 369 $ 84 $ 118 $ 654 $ 7,567 $ (9,723) $ (931)
Depreciation and amortization $ 18,808 $ 38,956 $ 1,874 $ 51 $ 3,901 $ 53 $ 63,643
Income before Interest and Other
Charges and Income Taxes $ (2,712) $ 77,018 $ 6,966 $ 2,022 $ 6,723 $ (11,905) $ 78,113
Assets $ 890,340 $2,522,108 $585,706 $ 79,619 $1,367,838 $(631,609) $4,814,002
Other
(In thousands) Gas Products
For the three months ended June 30, 1997 Gas Electric Water Marketing &Services Adjustments Total
- -------------------------------------------------------------------------------------------------------------------
Operating revenues $ 121,010 $ 271,657 $ 18,795 $81,587 $ 62,370 $ (32,232) $ 523,187
Other Income (Deductions) $ 146 $ 44 $ 456 $ 1,477 $ 1,827 $ 358 $ 4,308
Depreciation and amortization $ 18,345 $ 38,823 $ 2,567 $ 100 $ 4,223 $ 356 $ 64,414
Income before Interest and Other
Charges and Income Taxes $ 3,067 $ 68,104 $ 5,918 $ 2,726 $ 1,172 $ (2,731) $ 78,256
Assets $ 917,942 $2,570,068 $531,972 $56,329 $1,218,763 $(438,727) $4,856,347
Other
(In thousands) Gas Products
For the six months ended June 30, 1998 Gas Electric Water Marketing &Services Adjustments Total
- -------------------------------------------------------------------------------------------------------------------
Operating revenues $ 353,080 $ 669,473 $ 38,566 $314,797 $ 119,098 $ (63,262) $1,431,752
Other Income (Deductions) $ 975 $ 174 $ 219 $ 1,171 $ 25,503 $ (20,525) $ 7,517
Depreciation and amortization $ 37,522 $ 77,724 $ 3,690 $ 117 $ 7,758 $ 106 $ 126,917
Income before Interest and Other
Charges and Income Taxes $ 46,015 $ 150,778 $ 11,858 $ 2,133 $ 19,014 $ (26,126) $ 203,674
Assets $ 890,340 $2,522,108 $585,706 $ 79,619 $ 1,367,838 $(631,609) $4,814,002
Other
(In thousands) Gas Products
For the six months ended June 30, 1997 Gas Electric Water Marketing &Services Adjustments Total
- -------------------------------------------------------------------------------------------------------------------
Operating revenues $ 454,410 $ 532,314 $ 18,795 $170,373 $ 87,710 $ (80,465) $1,183,137
Other Income (Deductions) $ 565 $ 251 $ 456 $ 2,354 $ 11,045 $ (960) $ 13,711
Depreciation and amortization $ 36,203 $ 77,104 $ 2,567 $ 114 $ 6,363 $ 408 $ 122,759
Income before Interest and Other
Charges and Income Taxes $ 62,102 $ 138,003 $ 5,918 $ 6,180 $ 9,367 $ (5,325) $ 216,245
Assets $ 917,942 $2,570,068 $ 531,972 $ 56,329 $ 1,218,763 $(438,727) $4,856,347
Other
(In thousands) Gas Products
For the twelve months ended June 30,1998 Gas Electric Water Marketing &Services Adjustments Total
- -------------------------------------------------------------------------------------------------------------------
Operating revenues $ 705,909 $1,323,490 $ 80,514 $625,410 $ 243,383 $(143,550) $2,835,156
Other Income (Deductions) $ 1,231 $ 559 $ 1,228 $ 2,166 $ 46,020 $ (41,630) $ 9,574
Depreciation and amortization $ 74,166 $ 154,465 $ 7,245 $ 235 $ 14,731 $ 3,121 $ 253,962
Income before Interest and Other
Charges and Income Taxes $ 72,777 $ 325,019 $ 28,826 $ 3,124 $ 43,664 $ (59,659) $ 413,751
Assets $ 890,340 $2,522,108 $ 585,706 $ 79,619 $ 1,367,838 $(631,609) $4,814,002
Other
(In thousands) Gas Products
For the twelve months ended June 30, 1997 Gas Electric Water Marketing &Services Adjustments Total
- -------------------------------------------------------------------------------------------------------------------
Operating revenues $ 805,463 $1,061,890 $ 18,795 $285,140 $ 140,655 $(155,020) $2,156,923
Other Income (Deductions) $ 1,025 $ 1,041 $ 456 $ 3,786 $ 18,893 $ (1,515) $ 23,686
Depreciation and amortization $ 70,583 $ 150,048 $ 2,567 $ 135 $ 20,637 $ (2,353) $ 241,617
Income before Interest and Other
Charges and Income Taxes $ 89,282 $ 306,328 $ 5,918 $ 11,462 $ 4,255 $ (8,976) $ 408,269
Assets $ 917,942 $2,570,068 $ 531,972 $ 56,329 $ 1,218,763 $(438,727) $4,856,347
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, natural gas and water to the public through
its six wholly-owned regulated subsidiaries (Utilities): Northern Indiana Public
Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas);
Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline
Company (Crossroads); Indianapolis Water Company (IWC); and Harbour Water
Corporation (Harbour). 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."
Industries also provides non-regulated energy/utility-related products and
services including gas marketing and trading; wholesale electric marketing;
power generation; gas transmission, supply and storage; installation, repair and
maintenance of underground pipelines; utility line locating and marking; and
related products targeted at customer segments principally through the following
wholly-owned subsidiaries: NIPSCO Development Company, Inc. (Development); NI
Energy Services, Inc. (Services); Primary Energy, Inc. (Primary); Miller
Pipeline Corporation (Miller); and SM&P Utility Resources, Inc.(SM&P). NIPSCO
Capital Markets, Inc. (Capital Markets) handles financing for Industries and its
subsidiaries, other than Northern Indiana. These subsidiaries, other than the
wholesale power marketing operations of Services, are referred to collectively
as "Products and Services."
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR's subsidiaries include two regulated water utilities (IWC and Harbour) and
five non-utility companies providing utility-related products and services
including installation, repair and maintenance of underground pipelines and
utility line locating and marking. The two primary non-utility subsidiaries are
Miller and SM&P. Industries' results of operations include three, six and twelve
months of operating results from IWCR for the three-month, six-month and
twelve-month periods ended June 30, 1998, and three months for the three-month,
six-month, and twelve-month periods ended June 30, 1997. The discussion below
excludes the comparative results of IWCR operations for the six-month and
twelve-month periods as such discussion would not be meaningful.
Revenues -
Total operating revenues for the twelve months ended June 30, 1998
increased $678.2 million as compared to the twelve months ended June 30, 1997.
The increase includes $153.9 million reflecting twelve months of operating
revenues from IWCR for the period. Gas revenues decreased $99.6 million,
electric revenues increased $261.6 million and Products and Services revenues,
excluding IWCR, increased $362.3 million, as compared to the same period in
1997. The decrease in gas revenues was mainly due to decreased sales to
residential and commercial customers reflecting unusually warm weather during
the first quarter of 1998, decreased industrial sales, decreased gas transition
costs and decreased gas cost per dekatherm (dth), partially offset by increased
wholesale sales and increased deliveries of gas transported for others. The
increase in electric revenues was mainly due to increased sales to residential
and commercial customers due to warmer weather during the second quarter of
1998, and increased wholesale electric marketing volumes, partially offset by
decreased sales to industrial customers. Increased volumes in gas marketing to
existing and new customers resulted in an increase of $358.1 million in Products
and Services revenues for the twelve-month period ended June 30, 1998. For the
twelve months ended June 30, 1998, volumes in gas marketing were 224.3 million
dth, an increase of 141.0 million dth over the same period in 1997.
Total operating revenues for the six months ended June 30, 1998 increased
$248.6 million as compared to the six months ended June 30, 1997. The increase
includes $45.8 million reflecting six months of operating revenues from IWCR for
the period. Gas revenues decreased $101.3 million, electric revenues increased
$137.1 million and Products and Services revenues, excluding IWCR, increased
$167.0 million, as compared to the same period in 1997. The decrease in gas
revenues was largely attributable to decreased sales to residential and
commercial customers due to unusually warm weather during the first quarter of
1998, decreased gas costs per dekatherm (dth), decreased sales to industrial
customers and decreased gas transition costs which were partially offset by
increased wholesale sales and increased deliveries of gas transported for
others. The increase in electric revenues was mainly due to increased wholesale
electric marketing activities and wholesale transactions, and increased sales to
residential and commercial customers due to warmer weather during second quarter
of 1998. Increased volumes in gas marketing to existing and new customers
resulted in an increase of $165.0 million in Products and Services revenues for
the six-month period ended June 30, 1998. For the six months ended June 30,
1998, volumes in gas marketing were 126.9 million dth, an increase of 78.6
million dth over the same period in 1997.
Total operating revenues for the three months ended June 30, 1998 increased
$129.2 million as compared to the three months ended June 30, 1997. Gas revenues
decreased $10.7 million, electric revenues increased $74.0 million, water
revenues increased $2.1 million, and Products and Services revenues, increased
$63.8 million compared to the same period in 1997. The decrease in gas revenues
was mainly attributable to decreased sales to residential and commercial
customers as a result of warmer weather during the second quarter of 1998,
decreased sales to industrial customers and decreased gas transition costs
partially offset by increased sales to wholesale customers and incerased gas
cost per dth. The increase in electric revenues was mainly attributable to
increased sales to residential and commercial customers due to warmer weather,
increased sales to industrial customers and increased wholesale electric
marketing activities. Increased volumes in gas marketing resulted in an increase
of $58.2 million in Products and Services revenues for the three-month period
ended June 30, 1998. For the three months ended June 30, 1998, gas marketing
volumes were 68.1 million dth, an increase of 60.0 million dth compared to the
three months ended June 30, 1997.
The basic steel industry accounted for 33% of natural gas delivered
(including volumes transported) and 18% of electric sales for the Energy
Utilities for the twelve months ended June 30, 1998.
The components of the variations in gas, electric, water and Products and
Services revenues are shown in the following table:
Variations from Prior Periods
-----------------------------------------
June 30, 1998 Compared to June 30, 1997
-----------------------------------------
Three Six Twelve
(In thousands) Months Months Months
========= ========= =========
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ 19,564 $ (24,889) $ (22,241)
Gas transition costs (6,103) (13,586) (19,164)
Changes in sales levels (24,584) (64,303) (61,435)
Gas transported 458 1,448 3,286
--------- --------- ---------
Gas Revenue Change (10,665) (101,330) (99,554)
--------- --------- ---------
Electric Revenue --
Pass through of net changes
in fuel costs 3,899 (1,061) 2,540
Changes in sales levels 23,658 22,980 17,009
Wholesale electric marketing 46,425 115,240 242,051
--------- --------- ---------
Electric Revenue Change 73,982 137,159 261,600
--------- --------- ---------
Water Revenue Change 2,062 19,771 61,719
--------- --------- ---------
Products and Services Revenues -
Gas marketing 59,984 164,980 358,077
Pipeline construction (558) 10,592 43,134
Locate and marking 1,978 13,264 44,414
Other 2,438 4,179 8,843
--------- --------- ---------
Products and Services Revenue Change 63,842 193,015 454,468
--------- --------- ---------
Total Revenue Change $ 129,221 $ 248,615 $ 678,233
========= ========= =========
See "Summary of Significant Accounting Policies - Gas Cost Adjustment Clause" in
the Notes to Consolidated Financial Statements for a discussion of gas cost
incentive mechanism. Also, see Note 6 to Notes to Consolidated Financial
Statements regarding FERC Order No. 636 transition costs.
Gas Costs -
The Energy Utilities' gas costs decreased $1.2 million, $77.6 million and
$76.2 million for the three-month, six-month and twelve-month periods ended June
30, 1998, respectively. Gas costs decreased for the six-month and twelve-month
periods due to decreased gas purchases, decreased gas transition costs and
decreased gas costs per dth. The average cost for the Energy Utilities'
purchased gas for the three-month, six-month and twelve-month periods ended June
30, 1998, after adjustment for gas transition costs billed to transport
customers, was $2.87, $2.71 and $2.96 per dth, respectively, as compared to
$2.60, $3.10 and $3.14 per dth for the same periods in 1997.
Fuel and Purchased Power -
The cost of fuel for electric generation increased $10.8 million, $8.0
million and $10.7 million for the three-month, six-month and twelve-month
periods ended June 30, 1998, compared to the 1997 periods, mainly as a result of
increased production of electricity.
Power purchased increased $57.4 million, $124.0 million and $239.3 million
for the three-month, six-month and twelve-month periods ended June 30, 1998,
respectively, reflecting increased purchases of wholesale power for
non-regulated marketing activities which were partially offset by decreased bulk
power purchases at Northern Indiana.
Cost of Products and Services -
The cost of sales for Products and Services increased $427.5 million for
the twelve months ended June 30, 1998. The increase includes $65.5 million
reflecting twelve months of cost of sales from IWCR for the period. Increased
volumes in gas marketing activities increased cost of sales $372.2 million for
the twelve-months ended June 30, 1998, compared to June 30, 1997.
The cost of sales for Products and Services increased $187.1 million for
the six-months ended June 30, 1998, compared to the 1997 period. The increase
includes $20.5 million related to the cost of sales for IWCR in the current
period. Increased volumes in gas marketing activities increased cost of sales
$171.6 million for the six months ended June 30, 1998, compared to June 30,
1997.
The cost of sales for Products and Services increased $61.6 million for
the three-months ended June 30, 1998, compared to the 1997 period mainly due to
increased volumes in gas marketing activities, which increased cost of sales
$62.2 million for the three months ended June 30, 1998, compared to June 30,
1997.
Operating Margins -
Operating margins for the twelve months ended June 30, 1998 increased
$76.9 million from the same period a year ago. The increase in operating margins
includes $88.4 million related to twelve months of IWCR operations in the
period. The operating margin from gas deliveries decreased $23.0 million due to
decreased sales to residential and commercial customers reflecting unusually
warm weather in the first quarter of 1998 and decreased industrial sales which
were partially offset by increased sales to wholesale customers, and increased
deliveries of gas transported for others. Electric operating margin increased
$11.7 million mainly as a result of increased sales to residential and
commercial customers due to warmer weather and increased wholesale transactions,
which were partially offset by additional wholesale power marketing costs
incurred during the final week of June 1998. The operating margin for Products
and Services, excluding IWCR, decreased $0.2 million.
Operating margins for the six months ended June 30, 1998 increased $7.1
million from the same period a year ago. The increase in operating margins
includes $25.3 million related to six months of IWCR operations in the current
period. Gas operating margin decreased $23.7 million due to decreased sales to
residential and commercial customers reflecting unusually warm weather during
the first half of 1998 and decreased industrial sales, partially offset by
increased wholesale sales and increased deliveries of gas transported for
others. Electric operating margin increased $5.2 million mainly as a result of
increased sales to residential and commercial customers due to warmer weather
and increased wholesale transactions, which were partially offset by additional
wholesale power marketing costs incurred during the final week of June 1998. The
operating margin for Products and Services, excluding IWCR, increased $0.3
million.
Operating margins for the three months ended June 30, 1998 increased $0.6
million from the same period a year ago. Gas operating margin decreased $9.5
million due to decreased sales to residential and commercial customers
reflecting mild weather during the period and decreased industrial sales,
partially offset by increased wholesale sales and increased delivery of gas
transported for others. Electric operating margin increased $5.7 million mainly
as a result of warmer weather and increased wholesale transactions, which were
partially offset by additional wholesale power marketing costs incurred during
the final week of June 1998. Water operating margin increased $2.1 million in
the current period due to increased volumes sold and increased water rates for
Indianapolis Water Company effective April 8, 1998. The operating margin for
Products and Services increased $2.3 million, primarily reflecting increased
operating margin from Primary Energy subsidiaries.
Operating Expenses and Taxes -
Operation expenses increased $35.1 million for the twelve-month period
ended June 30, 1998. Operation expense includes an increase of $62.4 million
reflecting a full year of operations of IWCR for the twelve-month period ended
June 30, 1998. New operations at Primary Energy subsidiaries increased lease
expenses by approximately $11.0 million. This increase was partially offset by
decreased operation expenses at Northern Indiana of $23.0 million for the
twelve-month period ended June 30, 1998, mainly as a result of decreased
marketing activity of $10.0 million, decreased environmental costs of $3.1
million, and decreased insurance costs of $1.7 million. Operation expenses,
excluding IWCR, for the six months ended June 30, 1998 decreased $10.4 million.
Operation costs at Northern Indiana decreased $16.0 million for the six months
ended June 30, 1998 mainly reflecting decreased employee related costs of $7.7
million and decreased marketing activity of $5.6 million, partially offset by
increased operating expenses of Primary Energy subsidiaries. Operating expenses
decreased $5.4 million for the three month period ended June 30, 1998 compared
to the same period in 1997 primarily due to decreased employee related costs at
Northern Indiana.
Maintenance expenses increased $5.2 million for the twelve-month period
ended June 30, 1998, mainly reflecting maintenance expenses of the Water
Utilities and increased maintenance activity at Northern Indiana. Maintenance
expenses increased $1.6 million for the six-month period ended June 30, 1998,
mainly reflecting maintenance expenses of the Water Utilities and increased
maintenance activity at Northern Indiana. Maintenance expenses increased $1.2
million for the three-month period ended June 30, 1998 mainly reflecting
increased electric production maintenance activity at Northern Indiana.
Depreciation and amortization expense increased $4.1 million and $12.3
million for the six-month and twelve-month periods ended June 30, 1998,
respectively, primarily reflecting depreciation and amortization at IWCR.
Depreciation and amortization expense decreased $0.8 million for the three-month
period ended June 30, 1998, primarily as a result of a reclassification of oil
and gas properties partially offset by increased utility plant depreciation.
Other Income (Deductions) -
Other Income (Deductions) decreased $5.2 million, $6.2 million and $14.1
million for the three-month, six-month and twelve-month periods ended June 30,
1998, respectively. Other Income (Deductions) for the three-month and six-month
periods decreased primarily as a result of lower equity earnings in certain oil
and gas investments. Other Income (Deductions) for the twelve-month period ended
June 30, 1998 decreased primarily as a result of the above mentioned items as
well as a loss on the disposition of property during the current period as
compared to gains on disposition of properties in the same period a year ago.
Interest and Other Charges -
Interest and other charges increased for the three-month, six-month and
twelve-month periods ended June 30, 1998 reflecting the issuance of $300 million
of Capital Markets' medium-term notes, $75 million of Capital Markets' Junior
Subordinated Deferrable Interest Debentures, Series A and interest expense at
IWCR.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
Net Income -
Industries' net income for the twelve-month period ended June 30, 1998 was
$181.9 million compared to $184.9 million for the twelve-month period ended June
30, 1997.
Net income for the six months ended June 30, 1998 was $90.1 million
compared to $99.1 million for the six months ended June 30, 1997.
Net income for the three months ended June 30, 1998 was $29.4 million
compared to $28.2 million for the three months ended June 30, 1997.
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 approximately $17 million to
cover probable corrective actions as of June 30, 1998; 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
results of operations or financial position of Industries.
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.
Refer to Note 7 "Environmental Matters" for a more detailed discussion of
the status of certain environmental issues.
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.
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 June 30, 1998 and December 31,
1997, Northern Indiana had $71.1 million and $71.5 million of commercial paper
outstanding, respectively. At June 30, 1998, the weighted average interest rate
of commercial paper outstanding was 5.66%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of June 30, 1998, there were
no borrowings outstanding under this agreement. In addition, Northern Indiana
has $14.2 million in lines of credit. 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 June 30, 1998, 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 June 30, 1998 there was $41.2 million outstanding under these lines of
credit.
Northern Indiana has a $50 million uncommitted finance facility. At June
30, 1998, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
As of June 30, 1998 and December 31, 1997, Capital Markets had $38.0
million and $17.0 million of commercial paper outstanding. At June 30, 1998, the
weighted average interest rate of commercial paper outstanding was 5.86%.
Capital Markets has a $150 million revolving Credit Agreement which will
terminate August 19, 1999. This facility provides short-term financing
flexibility to Industries and also serves as the backup instrument for a
commercial paper program. As of June 30, 1998, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of June 30, 1998 and December 31, 1997, $19.0 million and $20.1 million,
respectively, of borrowings were outstanding under these lines of credit.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes 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.
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' obligations in the
event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' creditors against
the stock and assets of Northern Indiana which are owned by Industries. 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 for the benefit of Capital Markets' creditors. The
carrying value of the assets of Industries, other than the assets of Northern
Indiana, reflected in the consolidated financial statements of Industries, was
approximately $1.2 billion at June 30, 1998.
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 10.6 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 fair values.
IWCR and its subsidiaries have lines of credit with banks aggregating $93.7
million. At June 30, 1998, $77.5 million of borrowings were outstanding under
these lines of credit.
Industries does not expect the effects of inflation at current levels to
have a significant impact on its results of operations, ability to contain cost
increases, or the Utilities' 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.
Year 2000 Costs-
Industries has several major projects underway to modify portions of its
systems for proper functioning in the year 2000. These include a project to
evaluate Industries' proprietary software and to work with each of Industries'
software vendors to assure that appropriate steps are being take to mitigate the
problem in each vendor's software or, in some cases, to replace software with
year 2000 compliant software; a project to identify and mitigate any problems
wherever they exist in Industries' systems ranging from equipment used in
Northern Indiana's generating stations to Industries' phone system that have
date information embedded within them; and an initiative to assure that each
entity that electronically receives information from Industries or sends
information to Industries is aware of the steps that Industries is taking and is
taking appropriate steps of its own to address the problem. Consistent with its
plan, Industries expects to be year 2000 compliant with some systems as early as
the third quarter 1998 and other systems no later than the third quarter of
1999. Industries is currently in the process of structuring its contingency
plans with respect to the potential nonperformance of certain of its information
systems and embedded systems as a result of year 2000 problems, and estimates
that those plans will be complete by the third quarter of 1999. Industries is
currently working with utility industry groups to evaluate the potential impact
of the Year 2000 computer problems on the interconnected national electric grid
and pipeline network.
Industries estimates that costs to become year 2000 compliant will be
approximately $17-$26 million, including acquisition costs of new systems which
will be capitalized consistent with Industries' accounting policies. Costs
related to maintenance or modification of Industries' systems have been and will
be expensed as incurred. Industries does not anticipate the related costs will
have a material impact on its results of operations, nor does Industries
currently anticipate any disruption of its ability to deliver service as a
result of the year 2000 issue.
Competition -
The Energy Policy Act of 1992 (Energy Act) allows 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, FERC issued its Order No. 888-A
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. Northern Indiana filed its tariff as did virtually all other
transmission owners subject to FERC jurisdiction. Order No. 888-A also provides
for the recovery of stranded costs - that is, costs that were prudently incurred
to serve wholesale 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. On November 25, 1997, FERC issued Order No. 888-B on
rehearing, affirming in all important respects its earlier Order No. 888-A.
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 and January 1998, legislation was introduced in the
Indiana General Assembly addressing electric utility competition and
deregulation. Neither bill was passed. Northern Indiana has begun discussions
with other utilities and its largest customers on the technical and economic
aspects of possible legislation to allow customer choice. If Industries believes
that consensus legislation is possible, Industries would support a deregulation
bill in the January 1999 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 sales 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-1980s, 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.
The Commission has approved Northern Indiana's Alternative Regulatory Plan
(ARP) which implements new rates and services that include, among other things,
further unbundling of services for additional customer classes, increased
customer choice for sources of natural gas supply, negotiated services and
prices, gas cost incentive mechanism and a price protection program. The gas
cost incentive mechanism allows Northern Indiana to share any gas cost savings
or cost increases with its customers based on a comparison of Northern Indiana's
actual gas supply portfolio costs to a market based benchmark price. The first
pilot program was launched in January 1998 and the first gas volumes flowed
under this program in April 1998. The Commission order allows the natural gas
marketing affiliate of Northern Indiana to participate as a supplier of choice
to customers on the Northern Indiana system. Northern Indiana offers customers a
price protection service (PPS) which allows residential customers to purchase
gas at a fixed price or capped price for a specific period of time.
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.
Forward Looking Statements -
This report contains forward looking statements within the meaning of the
securities laws. Forward looking statements include terms such as "may", "will",
"expect", "believe", "plan" and other similar terms. Industries cautions that,
while it believes such statements to be based on reasonable assumptions and
makes such statements in good faith, there can be no assurance that the actual
results will not differ materially from such assumptions or that the
expectations set forth in the forward looking statements derived from such
assumptions will be realized. Investors should be aware of important factors
that could have a material impact on future results. These factors include, but
are not limited to, weather, the federal and state regulatory environment, the
economic climate, regional, commercial, industrial and residential growth in the
service territories served by Industries' subsidiaries, customers' usage
patterns and preferences, the speed and degree to which competition enters the
utility industry, the timing and extent of changes in commodity prices, changing
conditions in the capital and equity markets and other uncertainties, all of
which are difficult to predict, and many of which are beyond the control of
Industries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risks to which Industries is exposed and in connection
with which Industries uses market risk sensitive instruments are commodity price
risk and interest rate risk.
Industries engages in price risk management activities related to
electricity and natural gas. Price risk arises from fluctuations in energy
commodity prices due to changes in supply and demand. Industries actively
monitors and limits its exposure to commodity price risk. Industries' price risk
management policy allows the use of derivative financial and commodity
instruments to reduce (hedge) exposure to price risk of its commodity supplies
and related purchase and sales commitments of energy, as well as related
anticipated transactions. Industries utilitizes contracts for the forward
purchase of natural gas and electricity and natural gas futures and options to
manage its power and gas marketing businesses. As part of its commodity price
risk, Industries is exposed to geographic price differentials due primarily to
transportation costs and local supply-demand factors. Industries uses basis
swaps to hedge a portion of this exposure. For economic reasons or otherwise,
Industries does not hedge all of its basis exposure.
Industries enters into certain sales contracts with customers based upon a
fixed commodity sales price and varying volumes which are ultimately dependent
upon the customer's supply requirements. Industries utilizes financial
instruments to reduce the commodity price risk based on modeling techniques that
anticipate these future supply requirements. Industries continues to be exposed
to commodity price risk for the difference between the ultimate supply
requirements and those modeled.
Although the Energy Utilities are subject to commodity price risk as part
of their traditional operations, the current regulatory framework within which
the Energy Utilities operate allows for collection of fuel and gas costs in
rate-making. Consequently, there is limited commodity price risk for the Energy
Utilities after consideration of the related rate-making. However, as the
utility industry deregulates, the Energy Utilities will be providing services
without the benefit of the traditional rate-making allowances and will therefore
be more exposed to commodity price risk.
Because the commodities covered by Industries' derivative financial and
commodity instruments are substantially the same commodities that Industries
buys and sells in the physical market, no special correlation studies are deemed
necessary other than monitoring the degree of convergence between the derivative
and cash markets.
Industries' daily net commodity position consists of natural gas
inventories, natural gas and power purchase and sales contracts and derivative
financial and commodity instruments. The fair value of such positions is a
summation of the fair values calculated for each commodity by valuing each net
position at quotes from exchanges and over-the-counter counterparties and
includes location differentials. Based on Industries' net commodity position at
fair value at June 30, 1998, a 10% adverse movement in electric and natural gas
market prices would have reduced net income by approximately $2.0 million.
However, any such movement in prices is not indicative of actual results and is
subject to change. Refer to Summary of Significant Accounting Policies-Hedging
Activities for further discussion of Industries' hedging policies.
Industries utilizes long-term debt as a primary source of capital in its
business. A significant portion of the total debt portfolio includes a
medium-term note program, the interest component of which resets on a periodic
basis to reflect current market conditions. The Energy Utilities utilize longer
term fixed price debt instruments which have been and will be refinanced at
lower interest rates if Industries deems it to be economical. Refer to Notes to
Consolidated Financial Statements for detailed information related to
Industries' long-term debt outstanding and the fair value of financial
instruments for the current market valuation of long-term debt.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
Industries and its subsidiaries are parties to various pending
proceedings, including suits and claims against them for personal injury, death
and property damage. Such proceedings and suits, and the amounts involved are
routine litigation and proceedings for the kinds of businesses conducted by
Industries and its subsidiaries, except as described under Note 5 (NESI Energy
Marketing Canada Ltd. Litigation) and Note 7 (Environmental Matters) in the
Notes to Consolidated Financial Statements under Part I, Item 1 of this report
on Form 10-Q, which notes are incorporated by reference. No other material legal
proceedings against Industries or its subsidiaries are pending or, to the
knowledge of Industries, contemplated by governmental authorities or other
parties.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Any shareholder proposal submitted outside the processes of Rule 14a-8
under the Securities Exchange Act of 1934 for presentation to Industries' 1999
Annual Meeting of Shareholders will be considered untimely for purposes of Rules
14a-4 and 14a-5 if notice thereof is received by Industries after November 9,
1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 23 - Consent of Arthur Andersen LLP
Exhibit 27 - Financial Data Schedule
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Industries hereby
agrees to furnish the Commission, upon request, any instrument
defining the rights of holders of long-term debt of Industries not
filed as an exhibit herein. No such instrument authorizes long-term
debt securities in excess of 10% of the total assets of Industries and
its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K.
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NIPSCO Industries, Inc.
(Registrant)
/s/ STEPHEN P. ADIK
--------------------------------------------------
Stephen P. Adik
Executive Vice President, Chief Financial Officer,
Treasurer and Chief Accounting Officer
Date: August , 1998