To the Board of Directors of NIPSCO Industries, Inc.:
We have audited the accompanying consolidated balance sheet and consolidated
statements of capitalization and long-term debt of NIPSCO Industries, Inc. (an
Indiana corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, common shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Chicago, Illinois
February 5, 1999 Arthur Andersen LLP
1998 Financial Review
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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 seven 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); Harbour Water
Corporation (Harbour); and Liberty Water Company (Liberty). Industries'
regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL
and Crossroads) are referred to as "Energy Utilities"; and regulated water
subsidiaries (IWC, Harbour and Liberty) are referred to as "Water Utilities."
Industries also provides non-regulated energy/utility-related services
including gas 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). These subsidiaries are referred to collectively
as "Products and Services." NIPSCO Capital Markets, Inc. (Capital Markets)
handles financing requirements for certain subsidiaries of Industries other than
Northern Indiana.
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR's subsidiaries include the Water Utilities and five non-utility companies
providing utility-related 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 twelve months of operating results from IWCR for
the period ended December 31, 1998 and nine months of operating results from
IWCR for the period ended December 31, 1997.
Net Income
For 1998, net income of Industries increased to $193.9 million, or basic
earnings of $1.60 per average common share, compared to $190.8 million, or
basic earnings of $1.54 per average common share, for 1997. There were
approximately 3.1 million fewer average common shares outstanding in 1998 than
in 1997. In 1996, net income was $176.6 million, or basic earnings of $1.44
per average common share. See Selected Supplemental Information regarding
revenue and costs associated with delivering gas, electricity and water and
providing products and services.
Operating Revenues
In 1998, operating revenues increased $346.2 million, or 13.4%, over 1997.
Operating revenues in 1997 increased $598.6 million, or 30.1%, from 1996.
Gas revenues were $637.1 million in 1998, a decrease of $170.1 million from
1997. The decrease in gas revenues was mainly due to decreased deliveries to
residential and commercial customers, decreased gas costs per dekatherms (dth)
and decreased gas transition costs. During 1998, gas deliveries in dth, which
include transportation services, decreased 1.8%. Gas deliveries to residential
and commercial customers decreased 20.4% and 23.3%, respectively, reflecting
heating degree-days 21.3% lower than 1997. This decrease in deliveries was
partially offset by increased deliveries to industrial customers of 3.9% and
sales to other utilities. The Energy Utilities had 739,400 gas customers at
December 31, 1998.
2
Gas revenues were $807.2 million in 1997, an increase of $7.8 million from
1996. The increase in gas revenues was mainly due to increased gas costs per
dth and increased deliveries of gas transported for others, partially offset
by decreased sales to residential and commercial customers and decreased gas
transition costs. During 1997, gas deliveries in dth, which include
transportation services, increased 2.9% over 1996. Gas deliveries to
residential and commercial customers decreased 5.1% and 1.6% respectively, due
to a warmer heating season than 1996. Gas transportation services increased
4.2% mainly due to increased deliveries of gas transported for industrial
customers. The large commercial and industrial customers continue to utilize
transportation services provided by the Energy Utilities. Gas transportation
customers purchase much of their gas directly from producers and marketers and
then pay a transportation fee to have their gas delivered over the Energy
Utilities' systems. The Energy Utilities transported 216.5, 203.7 and 194.4
million dth for others in 1998, 1997 and 1996, respectively.
In 1998, electric revenues were $1.430 billion, an increase of $243.7
million from 1997. Sales of electricity in kilowatt-hours (kwh) increased
25.5% from 1997. The increase in electric revenue was mainly due to increased
sales to residential and commercial customers (increases of 7.8% and 6.3% in
kwh, respectively), reflecting a significantly warmer summer in 1998.
Wholesale power transactions also increased significantly in a rapidly
developing market. The increases were partially offset by a 2.0% kwh reduction
in sales to industrial customers, reflecting a full year of operations at two
cogeneration projects located at major industrial customers' facilities. At
December 31, 1998, Industries had 420,955 electric customers.
In 1997, electric revenues were $1.186 billion, an increase of $164.1
million from 1996. The increase was mainly due to increased sales to
residential and commercial customers and to increased revenues related to
wholesale power marketing transactions. Industrial sales decreased during the
period as a result of the two cogeneration projects located at major
industrial customers' facilities coming on line during the period. Electric
sales increased from 1996 reflecting increased wholesale power marketing
transactions partially offset by decreased sales to industrial customers.
Water revenues for 1998 were $84.0 million. Water sales to residential and
commercial customers accounted for $75.2 million of 1998 revenues. The Water
Utilities had sales in millions of gallons (m.g.) of 40,822 during 1998 and
served 253,664 customers at December 31, 1998. Water revenues for the period
April 1997 through December 1997 were $60.7 million, of which water sales to
residential and commercial customers accounted for $54.4 million. The Water
Utilities had sales of 32,504 m.g. during the last nine months of 1997 and
served 246,643 customers at December 31, 1997.
In 1998, Products and Services revenues were $781.7 million, an increase of
$249.5 million from 1997. Approximately $205.0 million of this increase is
attributable to increased gas marketing activity associated with customer
growth and additional sales to existing customers. Miller and SM&P's operating
revenues increased $31.7 million reflecting a full year of operations included
in 1998. Products and Services revenues in 1997 increased $366.0 million from
1996. The increase was mainly due to an additional $275.4 million in gas
marketing revenues resulting from increased sales to existing customers and
customer growth, and the addition of Miller and SM&P revenues for the last nine
months of 1997.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 16% of electric sales during 1998.
3
The components of the changes in operating revenues are shown in the
following table:
Year 1998 Year 1997
Compared to Compared to
Year 1997 Year 1996
----------- -----------
(In millions)
Gas Revenue Changes
Pass through of net changes in purchased gas costs,
gas storage and storage transportation costs........ $ (60.6) $ 14.8
Gas transition costs................................. (22.4) (4.3)
Changes in sales levels.............................. (95.5) (6.6)
Gas transported...................................... 8.4 3.9
------- ------
Total Gas Revenue Change............................... (170.1) 7.8
------- ------
Electric Revenue Changes
Pass through of net changes in fuel costs............ (4.8) 4.0
Changes in sales levels.............................. 63.9 (9.1)
Wholesale electric marketing......................... 184.6 169.2
------- ------
Total Electric Revenue Change.......................... 243.7 164.1
------- ------
Water Revenue Change................................... 23.2 60.7
------- ------
Products and Services Revenue Changes
Gas Marketing........................................ 205.0 275.4
Pipeline construction................................ 14.4 47.2
Locate and marking................................... 17.3 48.4
Other................................................ 12.7 (5.0)
------- ------
Total Products and Services Revenue Change............. 249.4 366.0
------- ------
Total Operating Revenue Change..................... $ 346.2 $598.6
======= ======
See "Summary of Significant Accounting Policies--Gas Cost Adjustment
Clause" in the Notes to the Consolidated Financial Statements for a discussion
of the gas cost incentive mechanism. In addition, see "FERC Order No. 636" in
the Notes to Consolidated Financial Statements regarding Federal Energy
Regulatory Commission (FERC) Order No. 636 transition costs.
Gas Costs
The Energy Utilities' gas costs decreased $137.3 million (27.7%) in 1998
due to decreased gas purchases, decreased gas transition costs and decreased
gas costs per dth. The average cost for the Energy Utilities' purchased gas in
1998, after adjustment for gas transition costs billed to transport customers,
was $2.60 per dth as compared to $3.15 per dth in 1997. Gas costs increased
$11.5 million (2.4%) in 1997 due to increased gas costs per dth, which were
partially offset by decreased gas transition costs. The average cost for the
Energy Utilities' purchased gas in 1997, after adjustment for gas transition
costs billed to transport customers, was $3.15 per dth as compared to $3.06
per dth in 1996.
Fuel and Purchased Power
Cost of fuel for electric generation in 1998 increased mainly as a result
of increased production. The average cost per kwh generated decreased 2.7%
from 1997 to 1.50 cents per kwh. The cost of fuel for electric generation in
1997 increased mainly as a result of increased production. The average cost
per kwh generated decreased 2.3% from 1996 to 1.54 cents per kwh.
4
Power purchased increased $207.9 million in 1998 as a result of increased
bulk power purchases and wholesale power marketing activities. Power purchased
increased $151.3 million in 1997 as a result of increased wholesale power
marketing activities.
Cost of Sales: Products and Services
The cost of sales for Products and Services increased $234.1 million mainly
due to increased purchases of gas of $212.0 million related to gas marketing
transactions and the cost of sales for IWCR's non-regulated subsidiaries
(including Miller and SM&P) being included for twelve months in 1998 compared
to nine months in 1997.
In 1997 cost of sales for Products and Services increased $335.5 million
mainly due to increased purchases of gas related to gas marketing transactions
and the inclusion of nine months of operations at IWCR's non-regulated
subsidiaries.
Operating Margins
Operating margins increased $29.5 million in 1998 to $1.240 billion. Gas
operating margin decreased $32.8 million in 1998 due to decreased deliveries
to residential and commercial customers reflecting the warmer heating season,
partially offset by increased sales to wholesale customers and increased
deliveries of gas transported for others. Operating margin from electric sales
increased $23.6 million due to increased sales to residential and commercial
customers, reflecting a significantly warmer summer in 1998 than in 1997, and
increased wholesale transactions, partially offset by decreased sales to
industrial customers. The Water Utilities' operating margin increased $23.2
million reflecting the inclusion of a full year of operating results in 1998.
Additionally, Miller and SM&P increased Products and Services' operating margin
$6.7 million during 1998, reflecting the inclusion of a full year of
operations. Operating margins increased $95.0 million in 1997 to $1.211
billion. Gas operating margin decreased $3.7 million in 1997 due to decreased
sales to residential and commercial customers reflecting mild weather,
partially offset by increased sales to wholesale customers and increased
deliveries of gas transported for others. Operating margin from electric sales
increased $7.5 million in 1997 due to increased sales to residential and
commercial customers and increased wholesale transactions partially offset by
decreased sales to industrial customers. The Water Utilities contributed $60.7
million to operating margin in 1997, reflecting the March 1997 acquisition of
IWCR. Additionally, inclusion of nine months of operating margins for Miller
and SM&P increased Products and Services' operating margin $28.4 million during
1997.
Operating Expenses and Taxes
Operating expenses and taxes (except income) in 1998 increased 2.3% from
1997 to $818.9 million and in 1997 increased 9.7% from 1996 to $800.4 million.
Operation expense includes an increase of $21.9 million reflecting a full
year of operations at IWCR and its subsidiaries. New operations at Primary's
subsidiaries increased lease expenses by approximately $10.2 million. These
increases were partially offset by decreased operation expenses at Northern
Indiana of $23.4 million, mainly due to decreased employee related costs of
$11.7 million, decreased sales and marketing activities of $5.7 million and
decreased electric production operating costs of $4.3 million. Operation
expenses increased $44.2 million in 1997 over 1996. The inclusion of nine
months of operations at IWCR and its subsidiaries increased operation expenses
$44.1 million in 1997. Additionally, new operations at Primary and Services
increased operation expenses $8.4 million in 1997. These increases were
partially offset by reduced pension costs, reduced environmental costs of $4.2
million and reduced pollution control facility costs of $4.1 million at
Northern Indiana.
Maintenance expenses decreased $1.9 million in 1998 from 1997 mainly
reflecting decreased maintenance activity for electric production and
distribution facilities. Maintenance expenses increased $2.5 million in 1997
from 1996 mainly reflecting the inclusion of nine months of maintenance at the
Water Utilities.
5
Depreciation and amortization expense increased $6.7 million in 1998 from
1997 as a result of plant additions and the inclusion of twelve months of
depreciation and amortization at IWCR. Depreciation and amortization expense
increased $15.8 million in 1997 from 1996 resulting from utility plant
additions and the inclusion of nine months of depreciation expenses and
amortization of plant acquisition adjustments and intangible assets at IWCR.
Other Income (Deductions) decreased $5.2 million in 1998 from 1997 mainly
reflecting a loss on the disposition of properties as compared to gains on
disposition of properties in the same period a year earlier. Other Income
(Deductions) increased $3.8 million in 1997 from 1996 mainly resulting from
the disposition of certain oil and natural gas properties during the first
quarter of 1997.
Interest and other charges increased $8.0 million and $14.9 million in 1998
and 1997, respectively. The 1998 increase reflects twelve months of interest
payments on $300 million of Capital Markets' medium-term notes and $75 million
of Capital Markets' Junior Subordinated Deferrable Interest Debentures, Series A
and the inclusion of twelve months of interest expense at IWCR. The 1997
increase reflects the issuance of $300 million of Capital Markets' medium-term
notes and the inclusion of nine months of interest expense at IWCR.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
Environmental Matters
The operations of Industries are subject to extensive and evolving federal,
state and local environmental laws and regulations intended to protect the
public health and the environment. Such environmental laws and regulations
affect Industries' operations as they relate to impacts on air, water and
land.
Refer to "Environmental Matters" in the Notes to Consolidated Financial
Statements for information regarding certain environmental issues.
Liquidity and Capital Resources
During the next few years, it is anticipated that the great majority of
earnings available for distribution of dividends will depend upon dividends
paid to Industries by Northern Indiana. See Notes to Consolidated Financial
Statements for a discussion of the Common Share Dividend.
Cash flow from operations at Northern Indiana 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
December 31, 1998 and December 31, 1997, Northern Indiana had $85.6 million
and $71.5 million of commercial paper outstanding, respectively. At December
31, 1998, the weighted average interest rate of commercial paper outstanding
was 5.62%.
In September 1998, Northern Indiana entered into a five-year $100 million
revolving credit agreement and a 364-day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Northern
Indiana and agreement by the banks. Under these agreements, Northern Indiana
may borrow funds at a floating rate of interest or, at Northern Indiana's
request under certain circumstances, a fixed rate of interest for short term
periods. These agreements provide financing flexibility to Northern Indiana
and may be used to support the issuance of commercial paper. At December 31,
1998, there were no borrowings outstanding under either of these agreements.
Concurrently with entering into such agreements, Northern Indiana terminated
its then existing revolving credit agreement which would otherwise have
terminated on August 19, 1999.
6
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 December 31, 1998, there were no borrowings under these lines of
credit. The 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 December 31, 1998 there was $40.5 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
December 31, 1998, there were no borrowings outstanding under this facility.
Capital Markets provides financing for Industries' subsidiaries other than
Northern Indiana and, in certain respects, IWCR and its subsidiaries. As of
December 31, 1998 and December 31, 1997, Capital Markets had $108.1 million
and $17.0 million, respectively, of commercial paper outstanding. The weighted
average interest rate of commercial paper outstanding was 5.99% at December
31, 1998.
In September, 1998, Capital Markets entered into a five-year $100 million
revolving credit agreement and a 364 day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Capital
Markets and agreement by the banks. Under these agreements, Capital Markets
may borrow, repay and reborrow funds at a floating rate of interest or, at
Capital Market's request under certain circumstances, at a fixed rate of
interest for short term periods. These agreements provide financing
flexibility to Capital Markets and may be used to support the issuance of
commercial paper. At December 31, 1998, there were no borrowings outstanding
under either of these agreements. Concurrently with entering into such
agreements, Capital Markets terminated its then existing revolving credit
agreement which would otherwise have terminated on August 19, 1999.
Capital Markets also has $130 million of money market lines of credit. As
of December 31, 1998 and December 31, 1997, $86.8 million and $20.1 million of
borrowings were outstanding, respectively, under these lines of credit.
The financial 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 as reflected in the consolidated financial
statements of Industries, was approximately $1.3 billion at December 31, 1998.
IWCR and its subsidiaries have lines of credit with banks aggregating $92.4
million. At December 31, 1998, and December 31, 1997, $84.1 million and $48.9
million were outstanding under these lines of credit, respectively.
IWC issued Refunding Revenue Bonds, Series 1998, on July 15, 1998, in the
amount of $40 million. The proceeds from the Series 1998 Bonds were 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 bear
interest at 5.05% per annum and mature on July 15, 2028. In February 1999, IWC
issued $35 million of ten-year medium term notes at a rate of 5.99% and $45
million of twenty-year medium term notes at a rate of 6.61%. The majority of
the proceeds will be used to reduce IWC's existing credit facilities and the
remaining proceeds will be used for general corporate purposes.
7
Utility construction expenditures for 1998, 1997 and 1996 were approximately
$245 million, $219 million and $208 million, respectively. Industries' total
utility plant investment on December 31, 1998, was $6.6 billion. During recent
years, Industries has been able to finance its construction program with
internally generated funds and expects to be able to meet future commitments
through such funds.
The Energy Utilities do not anticipate the need to file for retail gas and
electric base rate increases in the near future. IWC has agreed to a
moratorium on water rate increases until 2002.
During 1998, Industries' non-utility subsidiaries acquired interests in other
properties and investments totaling approximately $43 million.
In February 1999, Industries completed its acquisition of Bay State Gas
Company (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. Capital Markets issued $345 million of premium income
equity securities, each consisting of a trust preferred security and a purchase
contract for Industries' common shares, to pay the cash portion of the
consideration payable in the Bay State acquisition and to repay short-term
indebtedness incurred in connection with the acquisition.
On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural
gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned
subsidiary of PacifiCorp., holds a 66% ownership stake in Market Hub Partners,
L.P., which stores natural gas in salt caverns. Services currently owns
approximately 12% of Market Hub Partners, L.P. The proposed acquisition is part
of Industries' strategy to build a system of assets to serve the natural gas
market. The transaction is expected to close in March or April 1999.
Market Risk Sensitive Instruments and Positions
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 supply and related
purchase and sales commitments of energy, as well as anticipated transactions.
As part of this commodity price risk, Industries is exposed to geographic
price differentials due primarily to transportation costs and local supply-
demand factors. Industries may use 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 sales price and varying volumes which are ultimately dependent upon the
customer's supply requirements. Industries utilizes derivative financial
instruments to reduce the commodity price risk based on modeling techniques to
anticipate these future supply requirements. Industries continues to be
exposed to 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 full collection of fuel and gas costs
in rates. Consequently, there is limited commodity price risk 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 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 other
than monitoring the degree of convergence between the derivative and cash
markets are deemed necessary.
Industries' daily net commodity position consists of natural gas
inventories, commodity purchase and sales contracts and derivative financial
and commodity instruments. The fair value of such positions is a summation of
8
the fair values calculated for each commodity by valuing each net position at
quotes from exchanges and over-the-counter markets and includes location
differentials. Based on Industries' net commodity position at fair value at
December 31, 1998, a 10% adverse movement in electric and natural gas market
prices would have reduced net income by approximately $0.4 million. However,
any such movements in prices are not indicative of actual results and are
subject to change.
Industries utilizes long-term debt as a primary source of capital in its
business. A significant portion of Industries' long-term debt consists of
medium-term notes. In addition, the 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 Consolidated Statement
of Long-term Debt for detailed information related to Industries' long-term
debt outstanding and "Fair Value of Financial Instruments" in Notes to
Consolidated Financial Statements for current market valuation of long-term
debt. Refer to "Summary of Significant Accounting Policies-Hedging Activities"
in Notes to Consolidated Financial Statements for further discussion of
Industries' hedging policies.
Year 2000 Costs
Risks. Year 2000 issues address the ability of electronic processing
equipment to process date sensitive information and recognize the last two
digits of a date as occurring in or after the year 2000. Any failure in one of
Industries' systems may result in material operational and financial risks.
Possible scenarios include a system failure in one of Industries' generating
plants, an operating disruption or delay in transmission or distribution, or
an inability to interconnect with the systems of other utilities. In addition,
while Industries currently anticipates that its own mission-critical systems
will be year 2000 compliant in a timely fashion, it cannot guarantee the
compliance of systems operated by other companies upon which it depends. For
example, the ability of an electric company to provide electricity to its
customers depends upon a regional electric transmission grid, which connects
the systems of neighboring utilities to support the reliability of electric
power within the region. If one company's system is not year 2000 compliant,
then a failure could affect the reliability of all providers within the grid,
including Industries. Similarly, Industries' gas operations depend on natural
gas pipelines that it does not own or control, and any non-compliance by a
company owning or controlling those pipelines may affect Industries' ability
to provide gas to its customers. Failure to achieve year 2000 readiness could
have a material adverse affect on Industries' results of operations, financial
position and cash flows.
Industries is continuing its program to address risks associated with the
year 2000. Industries' year 2000 program focuses on both its information
technology (IT) and non-IT systems, and Industries has been making substantial
progress in preparing these systems for proper functioning in the year 2000.
State of Readiness. Industries' year 2000 program consists of four phases:
inventory (identifying systems potentially affected by the year 2000),
assessment (testing identified systems), remediations (correcting or replacing
non-compliant systems) and validation (evaluating and testing remediated
systems to confirm compliance). By second quarter 1997, Industries had
completed the inventory and assessment phases for all of its mission-critical
IT systems. Industries also has completed the remediation and validation
phases for four of its six major IT components. The remediation and validation
phases for the remaining two components are expected to be completed within
the next few months, so that Industries expects to conclude the year 2000
program for its mission-critical systems by first quarter 1999. Industries has
completed the inventory and assessment phases for all of its non-IT mission-
critical systems. Industries has scheduled remediation (including replacement)
and validation for its non-IT mission-critical systems throughout 1999.
Industries expects to substantially complete its mission-critical year 2000
efforts by June 30, 1999, and to conclude the year 2000 program in the fourth
quarter 1999.
Because Industries depends on outside suppliers and vendors with similar
year 2000 issues, Industries is assessing the ability of those suppliers and
vendors to provide it with an uninterrupted supply of goods and services.
Industries has contacted its critical vendors and suppliers in order to
investigate their year 2000 efforts. In addition, Industries is working with
electricity and gas industry groups such as North American Electric
9
Reliability Council, Electric Power Research Institute, and the American Gas
Association to discuss and evaluate the potential impact of year 2000 problems
upon the electric grid systems and pipeline networks that interconnect within
each of those industries.
Costs. Industries currently estimates that the total cost of its year 2000
program will be between $17 million and $26 million. These costs have been,
and will continue to be, funded from operations. Costs related to the
maintenance or modification of Industries' existing systems are expensed as
incurred. Costs related to the acquisition of replacement systems are
capitalized in accordance with Industries' accounting policies. Industries
does not anticipate these costs to have a material impact on its results of
operations.
Contingency Plans. Industries currently is in the process of structuring
its contingency plans to address the possibility that any mission-critical
system upon which it depends, including those controlled by outside parties,
will be non-compliant. This includes identifying alternate suppliers and
vendors, conducting staff training and developing communication plans. In
addition, Industries is evaluating both its ability to maintain or restore
service in the event of a power failure or operating disruption or delay, and
its limited ability to mitigate the effects of a network failure by isolating
its own network from the non-compliant segments of the greater network.
Industries expects to complete these contingency plans during the second
quarter of 1999; however, the contingency plans will be under review during
the third and fourth quarters of 1999.
Competition and Regulatory Changes
The regulatory frameworks applicable to the Energy Utilities, at both the
state and federal levels, are in the midst of a period of fundamental change.
These changes have and will continue to impact the operation, structure and
profitability of Industries. At the same time, competition within the electric
and gas industries will create opportunities for Industries' subsidiaries to
compete for new customers and revenues. Industries' management has taken steps
to make the company more competitive and profitable in this changing
environment, including partnering on energy projects with major industrial
customers, converting some of its generating units to allow use of lower cost,
low sulfur coal, providing its gas customers with increased customer choice
for new products and services throughout Northern Indiana's service territory,
and establishing subsidiaries which provide gas and develop new energy-related
products for residential, commercial and industrial customers.
The Electric Industry. At the Federal level, FERC issued Order No. 888-A in
1996 which required all public utilities owning, controlling or operating
transmission lines to file non-discriminatory open-access tariffs and offer
wholesale electricity suppliers and marketers the same transmission service
they provide themselves. In 1997, FERC approved Northern Indiana's open-access
transmission tariff. Although wholesale customers currently represent a small
portion of Northern Indiana's electricity sales, Northern Indiana intends to
continue its efforts to retain and add wholesale customers by offering
competitive rates and also intends to expand the customer base for which it
provides transmission services.
At the state level, Industries announced in 1997 that if consensus could be
reached regarding electric utility restructuring legislation, Industries would
support a restructuring bill during the 1999 session of the Indiana General
Assembly. During 1998, Northern Indiana held discussions with the other
investor-owned utilities in Indiana regarding the technical and economic
aspects of possible legislation leading to greater customer choice. A
consensus was not reached. Therefore, Industries does not anticipate that it
will be supporting any legislation regarding electric restructuring during the
1999 session of the Indiana General Assembly. However, during 1999, Northern
Indiana anticipates continued discussions with all segments of the Indiana
electric industry in an attempt to reach a consensus on electric restructuring
legislation for introduction during the 2000 Session of the Indiana General
Assembly.
The Gas Industry. At the Federal level, gas industry deregulation began in
the mid 1980s when FERC required interstate pipelines to provide
nondiscriminatory transportation services pursuant to unbundled rates. This
regulatory change permitted large industrial and commercial customers to
purchase their gas supplies either from the Energy Utilities or directly from
competing producers and marketers which would then use the Energy
10
Utilities' facilities to transport the gas. More recently, the focus of
deregulation in the gas industry has shifted to the states.
At the state level, the Indiana Utility Regulatory (Commission) approved in
1997 Northern Indiana's Alternative Regulatory Plan (ARP) which implemented new
rates and services that included, among other things, unbundling of services for
additional customer classes (primarily residential and commercial users),
negotiated services and prices, a gas cost incentive mechanism and a price
protection program. The gas cost incentive mechanism allows Northern Indiana to
share any cost savings or cost increases with its customers based upon a
comparison of Northern Indiana's actual gas supply portfolio cost to a market-
based benchmark price. Phase I of Northern Indiana's Customer Choice Pilot
Program will end March 31, 1999. This pilot program offered a limited number of
residential and commercial customers within the South Bend metropolitan area the
right to choose alternative gas suppliers. Phase II of Northern Indiana's
Customer Choice Pilot Program will commence April 1, 1999 and continue for a
one-year period. During this phase, Northern Indiana plans to offer customer
choice to a significantly expanded eligible customer base throughout its gas
service territory. The Commission order allows Industries' natural gas marketing
subsidiary to participate as a supplier of choice to Northern Indiana customers.
In addition, as Northern Indiana has allowed residential and commercial
customers to designate alternative gas suppliers, it has also offered new
services to all classes of customers including, but not limited to, price
protection, negotiated sales and services, gas lending and parking, and new
storage services.
To date, the Energy Utilities have not been materially affected by
competition and management does not foresee substantial adverse affects in the
near future unless the current regulatory structure is substantially altered.
Industries believes the steps that it has taken to deal with increased
competition has had and will continue to have significant positive effects in
the next few years.
Impact of Accounting Standards
Refer to "Summary of Significant Accounting Policies--Impact of Accounting
Standards" in the Notes to Consolidated Financial Statements for information
regarding impact of accounting standards not yet adopted.
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, year
2000 issues, 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.
11
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands, except per
share amounts)
Operating Revenues:
Gas...................................... $ 637,098 $ 807,239 $ 799,395
Electric................................. 1,429,986 1,186,331 1,022,231
Water.................................... 83,979 60,743 --
Products and Services.................... 781,715 532,228 166,322
----------- ----------- -----------
2,932,778 2,586,541 1,987,948
----------- ----------- -----------
Cost of Sales:
Gas costs................................ 357,939 495,287 483,777
Fuel for electric generation............. 250,649 238,548 233,215
Power purchased.......................... 412,949 205,031 53,751
Products and Services.................... 670,830 436,748 101,240
----------- ----------- -----------
1,692,367 1,375,614 871,983
----------- ----------- -----------
Operating Margin........................... 1,240,411 1,210,927 1,115,965
----------- ----------- -----------
Operating Expenses and Taxes (except
income):
Operation................................ 399,594 390,253 346,059
Maintenance.............................. 74,630 76,552 74,101
Depreciation and amortization............ 256,474 249,804 233,993
Taxes (except income).................... 88,207 83,765 75,504
----------- ----------- -----------
818,905 800,374 729,657
----------- ----------- -----------
Operating Income........................... 421,506 410,553 386,308
----------- ----------- -----------
Other Income (Deductions).................. 10,584 15,768 11,241
----------- ----------- -----------
Interest and Other Charges:
Interest on long-term debt............... 111,420 102,842 84,255
Other interest........................... 12,794 13,047 16,863
Amortization of premium, reacquisition
premium, discount and expense on debt,
net..................................... 4,590 4,718 4,605
Dividend requirements on preferred stocks
of subsidiaries......................... 8,538 8,691 8,712
----------- ----------- -----------
137,342 129,298 114,435
----------- ----------- -----------
Income before income taxes................. 294,748 297,023 283,114
----------- ----------- -----------
Income Taxes............................... 100,862 106,174 106,380
----------- ----------- -----------
Net Income................................. 193,886 190,849 176,734
----------- ----------- -----------
Dividend requirements on preferred shares.. -- -- 119
----------- ----------- -----------
Balance available for common shareholders.. $ 193,886 $ 190,849 $ 176,615
=========== =========== ===========
Average common shares outstanding--basic... 120,778,077 123,849,126 122,381,500
Basic earnings per average common share.... $ 1.60 $ 1.54 $ 1.44
=========== =========== ===========
Diluted earnings per average common share.. $ 1.59 $ 1.53 $ 1.43
=========== =========== ===========
Dividends declared per common share........ $ 0.975 $ 0.915 $ 0.855
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
12
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands)
Cash flows from operating activities:
Net income............................ $ 193,886 $ 190,849 $ 176,734
Adjustments to reconcile net income to
net cash:
Depreciation and amortization......... 256,474 249,804 233,993
Deferred federal and state operating
income taxes, net.................... (21,941) (1,649) 21,126
Deferred investment tax credits, net.. (7,361) (7,376) (7,408)
Advance contract payment.............. 1,900 1,900 (17,100)
Change in certain assets and
liabilities--*
Accounts receivable, net............ (21,137) (37,369) (45,037)
Other receivables................... 75,451 (65,047) (30,778)
Electric production fuel............ (13,565) 7,646 (12,225)
Natural gas in storage.............. (8,204) 3,657 (4,209)
Accounts payable.................... 19,785 (18,567) 81,013
Taxes accrued....................... (9,833) 3,389 17,002
Fuel adjustment clause.............. 8,958 6,470 1,152
Gas cost adjustment clause.......... 44,253 10,223 (98,791)
Accrued employment costs............ (6,678) 12,135 (2,509)
Other accruals...................... (11,641) 11,994 (13,503)
Other, net............................ (16,215) 66,498 5,971
----------- ----------- -----------
Net cash provided by operating
activities....................... 484,132 434,557 305,431
----------- ----------- -----------
Cash flows provided by (used in)
investing activities:
Utility construction expenditures..... (245,825) (218,931) (207,881)
Acquisition of IWC Resources, net of
cash acquired........................ -- (288,932) --
Proceeds from disposition of assets... 12,588 35,993 11,049
Proceeds from settlement of
litigation........................... -- 41,069 --
Other, net............................ (57,638) (66,561) (22,689)
----------- ----------- -----------
Net cash used in investing
activities....................... (290,875) (497,362) (219,521)
----------- ----------- -----------
Cash flows provided by (used in)
financing activities:
Issuance of long-term debt............ 47,380 658,232 78,366
Issuance of short-term debt........... 2,512,640 1,029,508 1,582,210
Net change in commercial paper........ 105,200 (224,645) 191,705
Retirement of long-term debt.......... (95,631) (324,604) (89,792)
Retirement of short-term debt......... (2,420,822) (1,042,224) (1,609,734)
Retirement of preferred shares........ (2,413) (2,408) (37,604)
Issuance of common shares............. 10,356 218,566 5,716
Acquisition of treasury shares........ (203,976) (133,073) (105,498)
Cash dividends paid on common shares.. (116,386) (111,593) (103,190)
Cash dividends paid on preferred
shares............................... -- -- (766)
Other, net............................ 463 (507) 514
----------- ----------- -----------
Net cash provided by (used in)
financing activities............. (163,189) 67,252 (88,073)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 30,068 4,447 (2,163)
Cash and cash equivalents at beginning
of period.............................. 30,780 26,333 28,496
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 60,848 $ 30,780 $ 26,333
=========== =========== ===========
- --------
*Net of effect from purchase of IWC Resources Corporation.
The accompanying notes to consolidated financial statements are an integral
part of this statement.
13
NIPSCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in thousands)
Assets
Property, Plant and Equipment:
Utility Plant (including construction work in progress
of $197,112 and $188,710, respectively):
Electric.............................................. $ 4,154,060 $ 4,066,568
Gas................................................... 1,447,945 1,395,140
Water................................................. 663,355 603,013
Common................................................ 364,822 351,350
----------- -----------
6,630,182 6,416,071
Less--Accumulated provision for depreciation and
amortization......................................... 2,968,078 2,759,945
----------- -----------
Total utility plant................................... 3,662,104 3,656,126
----------- -----------
Other property, at cost, less accumulated provision for
depreciation.......................................... 86,565 96,028
----------- -----------
Total Property, Plant and Equipment.............. 3,748,669 3,752,154
----------- -----------
Investments:
Investments, at equity................................ 111,340 82,855
Investments, at cost.................................. 41,609 31,771
Other investments..................................... 28,702 24,499
----------- -----------
Total Investments................................ 181,651 139,125
----------- -----------
Current Assets:
Cash and cash equivalents............................. 60,848 30,780
Accounts receivable, less reserve of $8,984 and
$5,887, respectively................................. 261,971 231,580
Other receivables..................................... 31,780 107,231
Fuel adjustment clause................................ -- 2,679
Gas cost adjustment clause............................ 45,738 89,991
Materials and supplies, at average cost............... 62,818 60,085
Electric production fuel, at average cost............. 32,402 18,837
Natural gas in storage................................ 69,640 61,436
Prepayments and other................................. 41,670 28,089
----------- -----------
Total current assets............................. 606,867 630,708
----------- -----------
Other Assets:
Regulatory assets..................................... 209,059 211,513
Intangible assets, less accumulated provision for
amortization......................................... 65,039 68,175
Prepayments and other................................. 175,218 135,358
----------- -----------
Total other assets............................... 449,316 415,046
----------- -----------
$4,986,503 $ 4,937,033
=========== ===========
Capitalization and Liabilities
Capitalization:
Common shareholders' equity........................... $ 1,149,708 $ 1,264,788
Preferred stocks--
Northern Indiana Public Service Company:
Series without mandatory redemption provisions.... 81,116 81,123
Series with mandatory redemption provisions....... 56,435 58,841
Indianapolis Water Company:
Series without mandatory redemption provisions.... 4,497 4,497
Long-term debt, excluding amounts due within one
year............................................... 1,667,965 1,667,925
----------- -----------
Total capitalization............................. 2,959,721 3,077,174
----------- -----------
Current Liabilities:
Current portion of long-term debt..................... 6,790 54,621
Short-term borrowings................................. 411,040 212,639
Accounts payable...................................... 251,399 226,751
Dividends declared on common and preferred stocks..... 31,072 30,784
Customer deposits..................................... 22,199 22,091
Taxes accrued......................................... 44,939 77,573
Interest accrued...................................... 21,202 19,124
Fuel adjustment clause................................ 6,279 --
Accrued employment costs.............................. 52,121 58,799
Other accruals........................................ 39,022 47,930
----------- -----------
Total current liabilities........................ 886,063 750,312
----------- -----------
Other:
Deferred income taxes................................. 667,167 651,815
Deferred investment tax credits, being amortized over
life of related property............................. 98,177 105,538
Deferred credits...................................... 68,046 73,715
Customer advances and contributions in aid of
construction......................................... 118,778 110,145
Accrued liability for postretirement benefits......... 143,870 132,919
Other noncurrent liabilities.......................... 44,681 35,415
----------- -----------
Total other...................................... 1,140,719 1,109,547
----------- -----------
Commitments and Contingencies (see notes)
$4,986,503 $ 4,937,033
=========== ===========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
14
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CAPITALIZATION
December 31,
----------------------------------
1998 1997
---------------- ----------------
(Dollars in thousands)
Common shareholders' equity............... $1,149,708 38.8% $1,264,788 41.1%
---------- ----------
Preferred Stocks, which are redeemable
solely at option of issuer:
Northern Indiana Public Service
Company--
Cumulative preferred stock--$100 par
value--
4 1/4% series--209,051 and 209,118
shares outstanding, respectively... 20,905 20,912
4 1/2% series--79,996 shares
outstanding........................ 8,000 8,000
4.22% series--106,198 shares
outstanding........................ 10,620 10,620
4.88% series--100,000 shares
outstanding........................ 10,000 10,000
7.44% series--41,890 shares
outstanding........................ 4,189 4,189
7.50% series--34,842 shares
outstanding........................ 3,484 3,484
Premium on preferred stock.......... 254 254
Cumulative preferred stock--no par
value--
Adjustable Rate Series A (stated
value--$50 per share), 473,285
shares outstanding................. 23,664 23,664
---------- ----------
81,116 2.7% 81,123 2.6%
---------- ----------
Redeemable Preferred Stocks, subject to
mandatory redemption requirements or
whose redemption is outside the control
of issuer:
Northern Indiana Public Service
Company--
Cumulative preferred stock--$100 par
value--
8.85% series--50,000 and 62,500
shares outstanding, respectively... 5,000 6,250
7 3/4% series--33,352 and 38,906
shares outstanding, respectively... 3,335 3,891
8.35% series--51,000 and 57,000
shares outstanding, respectively... 5,100 5,700
Cumulative preferred stock--no par
value--
6.50% series--430,000 shares
outstanding........................ 43,000 43,000
---------- ----------
56,435 1.9% 58,841 1.9%
---------- ----------
Indianapolis Water Company--
Cumulative preferred stock--$100 par
value--
4 1/2% Series
44,966 shares outstanding......... 4,497 0.2% 4,497 0.2%
---------- ----------
Long-term debt............................ 1,667,965 56.4% 1,667,925 54.2%
---------- ----- ---------- -----
Total capitalization.............. $2,959,721 100.0% $3,077,174 100.0%
========== ===== ========== =====
The accompanying notes to consolidated financial statements are an integral
part of this statement.
15
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF LONG-TERM DEBT
December 31,
------------------------
1998 1997
----------- -----------
(Dollars in thousands)
Northern Indiana Public Service Company:
First mortgage bonds--
Series T, 7 1/2% --due April 1, 2002.............. $ 39,000 $ 39,500
Series NN, 7.10% --due July 1, 2017............... 55,000 55,000
----------- -----------
Total........................................... 94,000 94,500
----------- -----------
Pollution control notes and bonds--
Series A note--City of Michigan City--
5.70% due October 1, 2003........................ 16,500 18,000
Series 1988 Bonds--Jasper County--Series A, B and
C
3.05% weighted average at December 31, 1998, due
November 1, 2016................................. 130,000 130,000
Series 1988 Bonds--Jasper County--Series D
3.13% weighted average at December 31, 1998, due
November 1, 2007................................. 24,000 24,000
Series 1994 Bonds--Jasper County--Series A
5.15% at December 31, 1998, due August 1, 2010... 10,000 10,000
Series 1994 Bonds--Jasper County--Series B
5.15% at December 31, 1998, due June 1, 2013..... 18,000 18,000
Series 1994 Bonds--Jasper County--Series C
5.15% at December 31, 1998, due April 1, 2019.... 41,000 41,000
----------- -----------
Total........................................... 239,500 241,000
----------- -----------
Medium-term notes--
Issued at interest rates between 6.10% and 7.69%,
with a weighted average interest rate of 7.00%
and various maturities between March 20, 2000 and
August 4, 2027................................... 748,025 748,025
----------- -----------
Unamortized premium and discount on long-term debt,
net................................................ (3,567) (4,029)
----------- -----------
Total long-term debt of Northern Indiana Public
Service Company................................ 1,077,958 1,079,496
----------- -----------
Indianapolis Water Company:
First mortgage bonds--
Series 5.20%--due May 1, 2001..................... 11,600 11,600
Series 8.00%--due December 15, 2001............... 3,000 3,000
Series 7 7/8%--due March 1, 2019.................. -- 40,000
Series 9.83%--due June 15, 2019................... 5,000 5,000
Series 6.10%--due December 1, 2022................ 5,000 5,000
Series 8.19%--due December 1, 2022................ 10,000 10,000
Series 5.85%--due September 1, 2025............... 18,000 18,000
Series 5.05%--due July 15, 2028................... 40,000 --
----------- -----------
Total long-term debt of Indianapolis Water
Company........................................ 92,600 92,600
----------- -----------
IWC Resources Corporation:
Senior Note Payable--6.31% due March 15, 2001....... 14,000 14,000
Variable Bank Loan--6.62% due August 7, 2003........ 5,600 5,600
----------- -----------
Total long-term debt of IWC Resources
Corporation.................................... 19,600 19,600
----------- -----------
NIPSCO Capital Markets, Inc.:
Subordinated Debentures--Series A, 7 3/4%, due
March 31, 2026..................................... 75,000 75,000
Senior Notes Payable--6.78%, due December 1, 2027... 75,000 75,000
Medium-term notes--
Issued at interest rates between 7.38% and 7.99%,
with a weighted average interest rate of 7.66%
and various maturities between April 1, 2004 and
May 5, 2027...................................... 300,000 300,000
----------- -----------
Total long-term debt of NIPSCO Capital Markets,
Inc............................................ 450,000 450,000
----------- -----------
NIPSCO Development Company, Inc.:
Lake Erie Land Company--Notes Payable--9.00%--due
July 7, 2004....................................... 2,533 2,637
NDC Douglas Properties, Inc.--Notes Payable--
Interest rates between 6.72% and 8.38% with a
weighted average interest rate of 7.87% and
maturities through January 1, 2008............... 25,274 23,592
----------- -----------
Total long-term debt of NIPSCO Development
Company, Inc................................... 27,807 26,229
----------- -----------
Total long-term debt, excluding amounts due
within one year................................ $ 1,667,965 $ 1,667,925
=========== ===========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
16
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Additional Accum.
Common Treasury Paid-In Retained Other Comp. Comp. Common
Shares Shares Capital Earnings Other Income Total Income Shares
-------- --------- ---------- -------- ------- ----------- ---------- -------- -----------
(Dollars in Thousands)
Balance, January 1,
1996................. $870,930 $(293,223) $32,210 $518,837 $(6,278) $ (261) $1,122,215 147,784,218
-------- --------- ------- -------- ------- ------- ---------- -----------
Comprehensive Income
Net income.......... 176,734 176,734 176,734
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $691).... 1,079 1,079 1,079
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized...... 1,790 1,790 1,790
--------
Realized........
Total Comprehensive
Income............... $179,603
========
Dividends:
Preferred shares.... (119) (119)
Common shares....... (103,981) (103,981)
Treasury shares
acquired............. (105,498) -- (105,498)
Issued:
Employee stock
purchase plan....... 329 454 783
Long-term incentive
plan................ 5,397 186 (572) 5,011
Amortization of
unearned
compensation......... 2,570 2,570
Other................ 18 (101) (83)
-------- --------- ------- -------- ------- ------- ---------- -----------
Balance, December 31,
1996................. $870,930 $(392,995) $32,868 $591,370 $(4,280) $ 2,608 $1,100,501 147,784,218
======== ========= ======= ======== ======= ======= ========== ===========
Comprehensive Income
Net income.......... 190,849 190,849 $190,849
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $1,033).. 1,689 1,689 1,689
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized...... (1,430) (1,430) (1,430)
--------
Realized........
Total Comprehensive
Income............... $191,108
========
Dividends:
Preferred shares....
Common shares....... (114,303) (114,303)
Treasury shares
acquired............. (133,073) 1 (133,072)
Issued:
Employee stock
purchase plan....... 273 424 697
Long-term incentive
plan................ 5,329 116 (443) 5,002
IWC Resources
Corporation
acquisition......... 152,405 55,007 207,412
Acquisition of
minority interest... 4,118 1,351 5,469
Amortization of
unearned
compensation......... 2,099 2,099
Other................ 1 (126) (125)
-------- --------- ------- -------- ------- ------- ---------- -----------
Balance, December 31,
1997................. $870,930 $(363,943) $89,768 $667,790 $(2,624) $ 2,867 $1,264,788 147,784,218
======== ========= ======= ======== ======= ======= ========== ===========
Treasury
Shares
------------
Balance, January 1,
1996................. (23,025,026)
------------
Comprehensive Income
Net income..........
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $691)....
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized......
Realized........
Total Comprehensive
Income...............
Dividends:
Preferred shares....
Common shares.......
Treasury shares
acquired............. (5,587,208)
Issued:
Employee stock
purchase plan....... 41,338
Long-term incentive
plan................ 398,000
Amortization of
unearned
compensation.........
Other................
------------
Balance, December 31,
1996................. (28,172,896)
============
Comprehensive Income
Net income..........
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $1,033)..
Realized........
Gain (loss) on
foreign currency
translation:
Unrealized......
Realized........
Total Comprehensive
Income...............
Dividends:
Preferred shares....
Common shares....... (6,536,928)
Treasury shares
acquired.............
Issued:
Employee stock
purchase plan....... 34,376
Long-term incentive
plan................ 353,066
IWC Resources
Corporation
acquisition......... 10,580,764
Acquisition of
minority interest... 270,064
Amortization of
unearned
compensation.........
Other................
------------
Balance, December 31,
1997................. (23,471,554)
============
17
NIPSCO INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Additional Accum.
Common Treasury Paid-In Retained Other Comp. Comp. Common
Shares Shares Capital Earnings Other Income Total Income Shares
-------- --------- ---------- -------- ------- ----------- ---------- -------- -----------
(Dollars in Thousands)
Balance, December 31,
1997................. $870,930 $(363,943) $89,768 $667,790 $(2,624) $2,867 $1,264,788 147,784,218
======== ========= ======= ======== ======= ====== ========== ===========
Comprehensive Income.
Net income.......... 193,886 193,886 193,886
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $873).... 1,429 1,429 1,429
Realized gain
(net of income
tax of $1,340).. (2,195) (2,195) (2,195)
Gain (loss) on
foreign currency
translation:
Unrealized...... (1,157) (1,157) (1,157)
Realized........ 186 186 186
--------
Total Comprehensive
Income............... $192,149
========
Dividends:
Preferred shares....
Common shares....... (116,596) (116,596)
Treasury shares
acquired............. (203,976) 2 (203,974)
Issued:
Employee stock
purchase plan....... 341 889 1,230
Long-term incentive
plan................ 8,551 575 (1,084) 8,042
Amortization of
unearned
compensation......... 1,893 1,893
Other................ 2,947 (771) 2,176
-------- --------- ------- -------- ------- ------ ---------- -----------
Balance, December 31,
1998................. $870,930 $(559,027) $94,181 $744,309 $(1,815) $1,130 $1,149,708 147,784,218
======== ========= ======= ======== ======= ====== ========== ===========
Treasury
Shares
------------
Balance, December 31,
1997................. (23,471,554)
============
Comprehensive Income.
Net income..........
Other comprehensive
income, net of tax:
Gain/loss on
available for sale
securities:
Unrealized gain
(net of income
tax of $873)....
Realized gain
(net of income
tax of $1,340)..
Gain (loss) on
foreign currency
translation:
Unrealized......
Realized........
Total Comprehensive
Income...............
Dividends:
Preferred shares....
Common shares.......
Treasury shares
acquired............. (7,309,906)
Issued:
Employee stock
purchase plan....... 42,796
Long-term incentive
plan................ 485,144
Amortization of
unearned
compensation.........
Other................
------------
Balance, December 31,
1998................. (30,253,520)
============
18
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 seven 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); Harbour Water
Corporation (Harbour) and Liberty Water Company (Liberty). Industries' regulated
gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and
Crossroads) are referred to as "Energy Utilities"; and its regulated water
subsidiaries (IWC, Harbour and Liberty) are referred to as "Water Utilities."
Industries also provides non-regulated energy/utility-related services
including gas 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). These non-regulated subsidiaries are referred to
collectively as "Products and Services." NIPSCO Capital Markets, Inc. (Capital
Markets) handles financing requirements for certain subsidiaries of Industries
other than Northern Indiana.
On March 25, 1997 Industries acquired IWC Resources Corporation (IWCR).
Industries' results of operations include twelve months of operating results
from IWCR for the period ended December 31, 1998 and nine months for the period
ended December 31, 1997.
In February 1999, Industries completed its acquisition of Bay State in a
stock-for-stock transaction. Refer to Purchase of Bay State Gas Company below
for a more detailed discussion of the acquisition.
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 recognized 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.
19
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
approximate weighted average remaining lives for major components of 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
Gas:
Gas storage plant.............................................. 18 years
Transmission plant............................................. 34 years
Distribution plant............................................. 27 years
Other gas plant................................................ 24 years
Water:
Water source and treatment plant............................... 34 years
Distribution plant............................................. 68 years
Other water plant.............................................. 13 years
The depreciation provision for electric utility plant, as a percentage of
the original cost, was 3.7% for 1998, 3.6% for 1997 and 3.7% for 1996.
The depreciation provision for gas utility plant, as a percentage of the
original cost, was 5.1% for 1998 and 1997, and 5.0% for 1996.
The depreciation provision for water utility plant, as a percentage of the
original cost, was 2.1% for 1998 and 1997.
The Utilities follow the practice of charging maintenance and repairs,
including the cost of removal 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.
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).
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 $185.4 million and $197.7 million at
December 31, 1998 and December 31, 1997, respectively, and are being amortized
over a forty-year period from the respective dates of acquisition.
20
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 1998 and December 31, 1997 was approximately
$4.6 million and $1.1 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 December 31, 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 $3.6 million and $(2.5) million as of December
31, 1998; $4.4 million and $(1.6) million as of December 31, 1997; $2.7
million and $(0.1) million as of December 31, 1996 and $1.6 million and $(1.9)
million as of January 1, 1996.
Statement of Cash Flows
For 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.
21
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash paid during the periods reported for income taxes and interest was as
follows:
1998 1997 1996
-------- -------- -------
(In thousands)
Income taxes................................... $127,713 $116,849 $75,795
Interest, net of amounts capitalized........... 118,079 102,361 87,281
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 sales rates contain an adjustment factor, which reflects
the increases and decreases in the cost of purchased gas, contracted gas
storage and storage transportation charges. The gas cost adjustment factor for
Northern Indiana is subject to a quarterly hearing by the Commission and
remains in effect for a three-month period. The gas cost adjustment factors
for Kokomo Gas and NIFL are subject to semi-annual hearings by the Commission
and remain in effect for a six-month period. If the statutory requirement
relating to the level of return is satisfied, any under-recovery or over-
recovery caused by variances between estimated and actual cost in a given
three-month or six-month period will be included in a future filing. 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.
Northern Indiana's 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 cost to a market-based benchmark price. See 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 December 1998 and 1997 the estimated replacement cost of gas in
storage (current and non-current) at December 31, 1998 and 1997 exceeded the
stated LIFO cost by approximately $34 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 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 ultimately recognized in
earnings when the associated transaction or anticipated transaction affects
earnings.
22
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 1998, Industries had open derivative
financial instruments representing hedges of natural gas sales of 31.5 billion
cubic feet (Bcf), and natural gas purchases of 7.2 Bcf. The net deferred loss
on these derivative financial instruments as of December 31, 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.
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.
In December 1998, the Emerging Issues Task Force reached consensus on Issue
No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities" (EITF Issue 98-10). EITF Issue 98-10 requires energy
trading contracts to be recorded at fair value on the balance sheet, with the
changes in fair value included in earnings. Industries adopted EITF Issue 98-
10 on January 1, 1999 and the adoption did not have a significant impact on
its financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance for the capitalization of certain costs related to computer software
developed or obtained for internal use. Industries adopted SOP 98-1 on January
1, 1999 and the adoption did not have a significant impact on its financial
position or 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 December 31, 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
23
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
Unamortized reacquisition premium on debt (See
Long-Term Debt note).......................... $ 43,233 $ 46,748
Unamortized R. M. Schahfer Unit 17 and Unit 18
carrying charges and deferred depreciation.... 62,329 66,546
Bailly scrubber carrying charges and deferred
depreciation.................................. 8,945 9,880
Deferral of SFAS No. 106 expense not recovered
(See Postretirement Benefits note)............ 81,339 87,653
FERC Order No. 636 transition costs (See FERC
Order No. 636 note)........................... 22,093 28,744
Regulatory income tax asset, net............... 18,793 6,941
Other.......................................... 4,936 4,261
-------- --------
241,668 250,773
-------- --------
Less: Current portion of regulatory assets..... 32,609 39,260
-------- --------
$209,059 $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, the Utilities are 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 pretax 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 5.75%.
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.
24
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments In Real Estate
Development invests in a series of affordable housing projects within the
Utilities' service territory. These investments include certain tax benefits,
including low-income housing tax credits and tax deductions for operating
losses of the housing projects. Development accounts for these investments
using the equity method. Investments, at equity, include $34.0 million and
$30.1 million relating to affordable housing projects at December 31, 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.
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.
Purchase of Bay State Gas Company
In February 1999, Industries completed its acquisition 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. Bay
State, one of the largest natural gas utilities in New England, provides natural
gas distribution services to more than 300,000 customers in Massachusetts, New
Hampshire and Maine. The combined company will be the 10th largest natural gas
distribution company in the nation, servicing more than 1 million gas customers.
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.
25
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain creditors of NEMC have filed claims in the Canadian courts 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 financial position or results of operations
of Industries.
FERC Order No. 636
Since December 1993, the Energy Utilities have paid approximately $140.6
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.
Environmental Matters
General
The operations of Industries are subject to extensive and evolving federal,
state and local environmental laws and regulations intended to protect the
public health and the environment. Such environmental laws and regulations
affect Industries' operations as they relate to impacts on air, water and
land.
Superfund
Because Industries is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
at several waste disposal sites, as well as at former manufactured-gas plant
sites which it, or its corporate predecessors, own or owned or operated, it
may be required to share in the cost of clean up of such sites. Industries
instituted a program to investigate former manufactured-gas plant sites where
it is the current or former owner which investigation has identified twenty-
eight of these sites. Initial sampling has been conducted at twenty sites.
Follow-up investigations have been conducted at thirteen sites and remedial
measures have been selected at seven sites. Industries intends to continue to
evaluate its facilities and properties with respect to environmental laws and
regulations and take any required corrective action.
In an effort to recover a portion of the remedial costs to be incurred at
the manufactured gas plants, Industries approached various companies that
provided insurance coverage which Industries believed covered costs related to
actions taken and to be taken at former manufactured-gas plant sites.
Industries has filed claims in Indiana state court against various insurance
companies, seeking coverage for costs associated with several manufactured-gas
plant sites and damages for alleged misconduct by some of the insurance
companies. Industries has received cash settlements from several insurance
companies. Additionally, Industries has settled other actions against other
companies relating to cost sharing and management of the investigation and
remediation of several former manufactured-gas plant sites at which Industries
and such companies or their predecessors were operators or owners.
As of December 31, 1998, Industries has recorded a reserve of approximately
$19 million to cover probable corrective actions. Industries' ultimate
liability in connection with those sites will depend upon many factors,
including the volume of material contributed to the site, the number of other
PRPs and their financial viability, and the extent of corrective actions
required. Based upon investigations and management's understanding of current
environmental laws and regulations, Industries believes that any corrective
actions required, after consideration of insurance coverages and contributions
from other PRPs, will not have a significant impact on its financial position
or results of operations.
26
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Clean Air Act
The Clean Air Act Amendments of 1990 (CAAA) imposed limits to control acid
rain on the emission of sulfur dioxide and nitrogen oxides (NOx) which become
fully effective in 2000. All of Northern Indiana's facilities are already in
compliance with the sulfur dioxide limits. Northern Indiana has already taken
most of the steps necessary to meet the nitrogen oxide limits.
The CAAA also contain other provisions that could lead to limitations on
emissions of hazardous air pollutants and other air pollutants (including
nitrogen oxides as discussed below), which may require significant capital
expenditures for control of these emissions. Until specific rules have been
issued that affect Industries' facilities, Industries cannot predict what
these requirements will be or the costs of complying with these potential
requirements.
Nitrogen Oxides
During 1998, the EPA issued a final rulemaking, the NOx State
Implementation Plan (SIP) call, requiring certain states, including Indiana,
to reduce NOx levels from industrial and utility boilers to lower regional
transport of ozone under the non-attainment provisions of the CAAA. According
to the rule, the State of Indiana has until September 1999 to issue
regulations implementing the control program. The State of Indiana, as well as
some other states, filed a legal challenge in December 1998 to the EPA NOx SIP
call rule. Lawsuits have also been filed against the rule by various groups,
including industry, labor, cities and towns and chambers of commerce.
Industries will participate in the legal challenge as a member of a utility
industry group. Any resulting NOx emission limitations could be more
restrictive than those imposed on electric utilities under the Acid Rain NOx
reduction program described above. Industries is evaluating the EPA's final
rule and any potential requirements that could result from the final rule as
implemented by the State of Indiana. Industries believes that the costs
relating to compliance with the new standards may be substantial, but such
costs are dependent upon the outcome of the current litigation and the
ultimate control program agreed to by the targeted states and the EPA.
Industries will continue to closely monitor developments in this area.
The EPA issued final rules revising the National Ambient Air Quality
Standards for ozone and particulate matter in July 1997. The revised standards
could require additional reductions in sulfur dioxide, particulate matter and
NOx emissions from coal-fired boilers (including Industries' generating
stations) beyond measures discussed above. Certain implementation proposals,
which are not yet final, would target coal-fired utilities in the Midwest and
South, including Indiana, for more substantial reductions than other areas and
other sources of emissions. Final implementation methods will be set by the
EPA as well as state regulatory authorities. Industries believes that the
costs relating to compliance with the new standards may be substantial but are
dependent upon the ultimate control program agreed to by the targeted states
and the EPA. Industries 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.
Carbon Dioxide
Initiatives are being discussed both in the United States and worldwide to
reduce so-called "greenhouse gases" such as carbon dioxide and other by-
products of burning fossil fuels. Reduction of such emissions could result in
significant capital outlays or operating expenses to Industries.
27
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Clean Water Act and Related Matters
Industries' wastewater and water operations are subject to pollution
control and water quality control regulations, including those issued by the
EPA and the State of Indiana.
Under the Federal Clean Water Act and Indiana's regulations, Industries
must obtain National Discharge Elimination System (NPDES) permits for water
discharges from various facilities, including electric generating and water
treatment stations. These facilities either have permits for their water
discharge or they have applied for a permit renewal of any expiring permits.
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. In December 1998, EPA promulgated two National Primary Drinking Water
rules, the Interim Enhanced Surface Water Treatment Rule and the Disinfectants
and Disinfection Byproducts Rule. The Water Utilities must comply with these
rules by December 2001. Management does not believe that significant changes
will be required to the Water Utilities' operations to comply with these
rules; however, some cost expenditures for equipment modifications or
enhancements may be necessary to comply with the Interim Enhanced Surface
Water Treatment Rule. Additional rules are anticipated to be promulgated under
the 1996 amendments. Such standards promulgated could be costly and require
substantial changes in the Water Utilities' operations.
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 the 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. Such an addition to rate base, however, would effect a change in
water rates and IWC, Industries' principal water utility, has agreed to a
moratorium on water rate increases until 2002. Therefore, recovery of any
increased costs discussed above may not be timely for IWC.
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 income tax rate currently being credited to
ratepayers using the average rate assumption method and unamortized deferred
investment tax credits.
28
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the net deferred income tax liability at December 31,
1998 and 1997, are as follows:
December 31,
------------------
1998 1997
-------- --------
(In thousands)
Deferred tax liabilities--
Accelerated depreciation and other property
differences....................................... $818,748 $779,223
AFUDC-equity....................................... 33,029 35,282
Adjustment clauses................................. 14,965 35,253
Other regulatory assets............................ 29,739 31,862
Reacquisition premium on debt...................... 17,311 18,335
Deferred tax assets--
Deferred investment tax credits.................... (37,236) (40,017)
Removal costs...................................... (157,728) (144,111)
Other postretirement/postemployment benefits....... (51,754) (45,298)
Other, net......................................... (7,783) (3,069)
-------- --------
659,291 667,460
-------- --------
Less: Deferred income taxes related to current assets
and liabilities..................................... (7,876) 15,645
-------- --------
Deferred income taxes--noncurrent.................... $667,167 $651,815
======== ========
Federal and state income taxes as set forth in the Consolidated Statement
of Income are comprised of the following:
1998 1997 1996
-------- -------- --------
(In thousands)
Current income taxes--
Federal................................... $113,680 $ 98,126 $ 79,938
State..................................... 16,484 17,073 12,724
-------- -------- --------
130,164 115,199 92,662
-------- -------- --------
Deferred income taxes, net--
Federal................................... (20,426) (1,772) 19,282
State..................................... (1,515) 123 1,844
-------- -------- --------
(21,941) (1,649) 21,126
-------- -------- --------
Deferred investment tax credits, net........ (7,361) (7,376) (7,408)
-------- -------- --------
Total income taxes........................ $100,862 $106,174 $106,380
======== ======== ========
29
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of total income tax expense to an amount computed by
applying the statutory federal income tax rate to pretax income is as follows:
1998 1997 1996
-------- -------- --------
(In thousands)
Net income................................. $193,886 $190,849 $176,734
Add--Income taxes.......................... 100,862 106,174 106,380
Dividend requirements on preferred stocks
of subsidiaries........................... 8,538 8,691 8,712
-------- -------- --------
Income before preferred dividend
requirements of subsidiaries and income
taxes..................................... $303,286 $305,714 $291,826
======== ======== ========
Amount derived by multiplying pretax income
by statutory rate......................... $106,150 $107,000 $102,139
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation............................ 3,992 4,072 4,621
Amortization of deferred investment tax
credits................................. (7,361) (7,376) (7,408)
State income taxes, net of federal income
tax benefit............................. 9,200 11,220 10,115
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate......................... (4,384) (6,151) (6,644)
Low-income housing credits............... (3,840) (3,056) (2,303)
Nondeductible amounts related to
amortization of intangible assets and
plant acquisition adjustments........... 2,516 1,640 385
Other, net................................. (5,411) (1,175) 5,475
-------- -------- --------
Total income taxes..................... $100,862 $106,174 $106,380
======== ======== ========
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 1998 and 1997 is as follows:
1998 1997
-------- --------
(In thousands)
Benefit obligation at beginning of year (January
1,)................................................ $875,756 $743,634
Service cost........................................ 17,093 14,714
Interest cost....................................... 60,686 57,938
Plan amendments..................................... 14,655 25,096
Actuarial loss...................................... 38,773 73,768
Acquisition of IWCR................................. -- 15,772
Benefits paid....................................... (57,924) (55,166)
-------- --------
Benefit obligation at end of the year (December
31,)............................................... $949,039 $875,756
======== ========
30
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The change in the fair value of the plans' assets for the years 1998 and
1997 is as follows:
1998 1997
-------- --------
(In thousands)
Fair value of plan assets at beginning of year
(January 1,)....................................... $924,857 $790,978
Actual return on plan assets........................ 85,254 126,695
Employer contributions.............................. 34,843 46,440
Acquisition of IWCR................................. -- 15,910
Benefits paid....................................... (57,924) (55,166)
-------- --------
Plan assets at fair value at end of the year
(December 31,)..................................... $987,030 $924,857
======== ========
The plans' assets are invested primarily in common stocks, bonds and notes.
The plans' funded status as of December 31, 1998 and December 31, 1997 is
as follows:
1998 1997
-------- --------
(In thousands)
Plan assets in excess of benefit obligation........... $ 37,991 $ 49,101
Unrecognized net actuarial loss....................... (10,938) (46,959)
Unrecognized prior service cost....................... 57,193 47,114
Unrecognized transition amount........................ 26,813 32,107
-------- --------
Prepaid pension costs................................. $111,059 $ 81,363
======== ========
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 rates of increase in
compensation levels of 4.5% were used to determine the benefit obligations at
December 31, 1998 and 1997.
The long-term portion of prepaid pension cost amounts for 1998 and 1997 are
included in "Prepayments and other" in the Consolidated Balance Sheet.
The following items are the components of provisions for pensions for the
years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
-------- -------- --------
(In thousands)
Service costs............................... $ 17,092 $ 14,438 $ 16,300
Interest costs.............................. 60,686 57,645 53,477
Expected return on plan assets.............. (82,671) (72,253) (63,551)
Amortization of transition obligation....... 5,294 5,326 5,422
Amortization of prior service costs......... 4,746 3,501 2,604
-------- -------- --------
$ 5,147 $ 8,657 $ 14,252
======== ======== ========
Assumptions used in the valuation and determination of 1998, 1997 and 1996
pension expense were as follows:
1998 1997 1996
----- ----- -----
Discount rate........................................... 7.00% 7.75% 7.25%
Rate of increase in compensation levels................. 4.50% 5.50% 5.50%
Expected long-term rate of return on assets............. 9.00% 9.00% 9.00%
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 $2.0 million and $1.7 million were made to these plans for
the year ended December 31, 1998 and 1997 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.
31
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Postretirement Benefits
Industries provides certain health care and life insurance benefits for
retired employees. The majority of Industries' employees may become eligible
for these 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
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
authorized the deferral of the differences between the net periodic
postretirement benefit costs and the insurance premiums paid for such benefits
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 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) as of December 31, 1998 and 1997:
1998 1997
-------- --------
(In thousands)
Accumulated postretirement benefit obligation at
beginning of year (January 1,)...................... $223,908 $200,790
Service cost......................................... 5,249 5,034
Interest cost........................................ 15,793 16,215
Plan amendments...................................... (283) 4,015
Actuarial (gain) loss................................ 8,453 (10,242)
Acquisition of IWCR.................................. -- 18,505
Benefits paid........................................ (12,519) (10,409)
-------- --------
Accumulated postretirement benefit obligation at end
of the year (December 31,).......................... $240,601 $223,908
======== ========
The change in the fair value of the plan assets for the years 1998 and 1997
is as follows:
1998 1997
-------- --------
(In thousands)
Fair value of plan assets at beginning of year
(January 1,)........................................ $ 2,400 $ --
Actual return of plan assets ........................ 1,103 --
Employer contributions............................... 10,637 12,809
Participant contributions............................ 1,282 --
Benefits paid........................................ (12,519) (10,409)
-------- --------
Plan assets at fair value at end of the year
(December 31,)...................................... $ 2,903 $ 2,400
======== ========
32
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is the funded status for postretirement benefits as of December
31, 1998 and 1997:
1998 1997
--------- ---------
(In thousands)
Funded status...................................... $(237,698) $(221,508)
Unrecognized net actuarial gain.................... (87,087) (99,117)
Unrecognized prior service cost.................... 3,873 4,195
Unrecognized transition amount..................... 164,436 176,464
--------- ---------
Accrued liability for postretirement benefits...... $(156,476) $(139,966)
========= =========
A discount rate of 7%, a pre-Medicare medical trend rate of 7% declining to
a long-term rate of 5%; a discount rate of 7%, and a pre-Medicare medical
trend rate of 8% declining to a long-term rate of 5%, were used to determine
the APBO at December 31, 1998 and 1997, respectively.
Net periodic postretirement benefit costs, before consideration of the
rate-making discussed previously, for the years ended December 31, 1998, 1997
and 1996 include the following components:
1998 1997 1996
------- ------- -------
(In thousands)
Service costs.................................. $ 5,249 $ 4,904 $ 7,352
Interest costs................................. 15,793 15,878 18,311
Expected return on plan assets................. (216) -- --
Amortization of prior service cost............. 322 279 --
Amortization of transition obligation.......... 11,745 11,558 11,593
Amortization of (gain) loss.................... (5,747) (5,844) (554)
------- ------- -------
$27,146 $26,775 $36,702
======= ======= =======
Assumptions used in the determination of 1998, 1997 and 1996 net periodic
postretirement benefit costs were as follows:
1998 1997 1996
---- ---- ----
Discount rate.......................................... 7.00% 7.75% 7.25%
Rate of increase in compensation levels................ 4.50% 5.50% 5.00%
Assumed annual rate of increase in health care
benefits.............................................. 8.00% 8.00% 9.00%
Assumed ultimate trend rate............................ 5.00% 6.00% 6.00%
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 December 31, 1998 by approximately $30.6 million, and increase
the aggregate of the service and interest cost components of plan costs by
approximately $3.0 million for the year ended December 31, 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 December
31, 1998 by approximately $23.9 million, and decrease the aggregate of the
service and interest cost components of plan costs by approximately $2.3
million. Amounts disclosed above could be changed significantly in the future
by changes in health care costs, work force demographics, interest rates, or
plan changes.
Preferred and Preference Shares
Industries is authorized to issue 20,000,000 shares of Preferred Shares,
without par value. Four million shares are designated Series A Junior
Participating Preferred Shares and are reserved for issuance pursuant to the
Share Purchase Rights Plan described in Common Shares.
33
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The authorized classes of par value and no par value cumulative preferred
and preference stocks of Northern Indiana are as follows: Cumulative
Preferred--$100 par value--2,400,000 shares; Cumulative Preferred--no par
value--3,000,000 shares; Cumulative Preference--$50 par value--2,000,000
shares (none outstanding); and Cumulative Preference--no par value--3,000,000
shares (none outstanding).
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.
The redemption prices at December 31, 1998 for the cumulative preferred
stock, which is redeemable solely at the option of Northern Indiana and IWC,
in whole or in part, at any time upon thirty days' notice, are as follows:
Redemption
Price Per
Series Share
------ ----------
Northern Indiana Public Service Company:
Cumulative preferred stock--$100 par value-- 4 1/4% $101.20
4 1/2% $100.00
4.22% $101.60
4.88% $102.00
7.44% $101.00
7.50% $101.00
Cumulative preferred stock--no par value-- adjustable
rate (6.00% at December 31, 1998), Series A (stated
value $50 per share)................................ $ 50.00
Indianapolis Water Company:
Cumulative preferred stock--$100 par value--rates
ranging from 4% to 5%............................... $100-$105
The redemption prices at December 31, 1998, as well as sinking fund
provisions, for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
Series Redemption Price Per Share Sinking Fund Or Mandatory Redemption
------- ---------------------------------- -------------------------------------
Cumulative preferred stock--$100 par value--
8.85% $100.74, reduced periodically 12,500 shares on or before April 1.
8.35% $103.44, 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.
7.75% $104.06, reduced periodically 2,777 shares on or before December 1;
noncumulative option to double amount
each year.
Cumulative preferred stock--no par value--
6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
34
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1998 for each of the four years subsequent to
December 31, 1999 are as follows:
Year Ending December 31,
------------------------
2000......................................................... $1,827,700
2001......................................................... $1,827,700
2002......................................................... $1,827,700
2003......................................................... $1,827,700
Stock Split
On December 16, 1997, the Board of Directors authorized a two-for-one split
of Industries' common shares. 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 common shares reported, including per share amounts
and stock option data of Industries' common shares, reflect the two-for-one
stock split as if it had occurred at the beginning of the earliest period.
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 December 31, 1998, Northern Indiana had approximately
$146.1 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.
Earnings Per Share
Industries determines earnings per share in accordance with the provisions
of SFAS No. 128 "Earnings per Share," which requires Industries to present
basic earning per share and diluted earnings per share.
Basic earnings per share is 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.
35
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net income, preferred dividends and shares used to compute basic and
diluted earnings per share is presented in the following table:
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands, except per
share amounts)
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding.... 120,778,077 123,849,126 122,381,500
============ ============ ============
Net Income to be Used to Compute Basic
Earnings per Average Common Share:
Net Income........................... $ 193,886 $ 190,849 $ 176,734
Dividend requirements on Preferred
Shares.............................. -- -- 119
------------ ------------ ------------
Balance Available for Common
Shareholders........................ $ 193,886 $ 190,849 $ 176,615
============ ============ ============
Basic Earnings per Average Common
Share................................. $ 1.60 $ 1.54 $ 1.44
============ ============ ============
Diluted
Weighted Average Number of Shares:
Average Common Shares Outstanding.... 120,778,077 123,849,126 122,381,500
Dilutive effect for Nonqualified
Stock Options....................... 556,799 374,344 323,367
------------ ------------ ------------
Weighted Average Shares............ 121,334,876 124,223,470 122,704,867
Net Income to be Used to Compute
Diluted Earnings per Average Common
Share:
Net Income........................... $ 193,886 $ 190,849 $ 176,734
Dividend requirements on Preferred
Shares.............................. -- -- 119
------------ ------------ ------------
Balance Available for Common
Shareholders........................ $ 193,886 $ 190,849 $ 176,615
============ ============ ============
Diluted Earnings per Average Common
Share................................. $ 1.59 $ 1.53 $ 1.43
============ ============ ============
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 share of 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,
subject to certain limits. At December 31, 1998, Industries had purchased
approximately 51.3 million shares since 1989 at an average price of $16.12 per
share. Approximately 10.7 million additional common shares may be repurchased
under the Board's authorization.
36
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Incentive Plans
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 April 1998 and April
2004, respectively. At December 31, 1998, there were 3,244,700 shares reserved
for future awards under the 1994 Plan. The Plans permit the following types of
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights and
performance units. No incentive stock options or performance units were
outstanding at December 31, 1998. Under the Plans, the exercise price of each
option equals the market price of Industries' common stock on the date of
grant. Each option has a maximum term of ten years and vests one year from the
date of grant.
Stock appreciation rights (SARs) may be granted only in tandem with stock
options on a one-for-one basis and are payable in cash, Industries' common
shares, or a combination thereof. There were no SARs outstanding at December
31, 1998. 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, 542,666 and 524,000 restricted
shares outstanding at December 31, 1998, 1997 and 1996, 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 December 31, 1998, 71,500
shares were issued under the Plan.
Industries accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized for
nonqualified stock options. The compensation cost that was charged against net
income for restricted stock awards was $2.7 million, $1.8 million and $2.1
million for the years ending December 31, 1998, 1997 and 1996 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 average common share would have been
reduced to the following pro forma amounts:
Year Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(In thousands,
except per share amounts)
Net Income:
As reported................................. $193,886 $190,849 $176,734
Pro forma................................... 192,764 189,999 176,087
Earnings Per Average Common Share:
Basic:
As reported............................... $ 1.60 $ 1.54 $ 1.44
Pro forma................................. 1.59 1.53 1.43
Diluted:
As reported............................... $ 1.59 $ 1.53 $ 1.43
Pro forma................................. 1.59 1.52 1.43
37
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option granted as 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 years ended December 31, 1998, 1997 and 1996 respectively: Risk-free
interest rate of 5.70%, 6.29%, and 6.39%; expected dividend yield of $0.67,
$0.87 and $0.84 per share; expected option term of five and one-quarter years
for 1998 and 1997 and five years for 1996; and expected volatility of 12.7%
for 1998 and 1997 and 13.2% for 1996.
Changes in outstanding shares under option and SARs for 1996, 1997 and
1998, are as follows:
Nonqualified
Nonqualified Stock Options
Stock Options with SARs
------------------- ----------------
Weighted
Average
Option Option
Year Ended December 31, 1996 Options Price Options Price
---------------------------- --------- -------- -------- ------
Balance at beginning of year........ 2,202,100 $14.31 11,200 $5.47
Granted........................... 556,600 $18.91 --
Exercised......................... (368,000) $14.51 --
Cancelled......................... (29,800) $16.88 --
--------- ------ -------- -----
Balance at end of year.............. 2,360,900 $15.33 11,200 $5.47
========= ====== ======== =====
Shares exercisable.................. 1,812,300 $14.25 11,200 $5.47
========= ====== ======== =====
Weighted average fair value of
options granted.................... $2.50
=========
Weighted
Average
Option Option
Year Ended December 31, 1997 Options Price Options Price
---------------------------- --------- -------- -------- ------
Balance at beginning of year........ 2,360,900 $15.33 11,200 $5.47
Granted........................... 533,600 $20.64 --
Exercised......................... (330,400) $15.29 --
Cancelled......................... (28,700) $19.21 --
--------- ------ -------- -----
Balance at end of year.............. 2,535,400 $16.41 11,200 $5.47
========= ====== ======== =====
Shares exercisable.................. 2,006,800 $15.30 11,200 $5.47
========= ====== ======== =====
Weighted average fair value of
options granted.................... $2.66
=========
Weighted
Average
Option Option
Year Ended December 31, 1998 Options Price Options Price
---------------------------- --------- -------- -------- ------
Balance at beginning of year........ 2,535,400 $16.41 11,200 $5.47
Granted........................... 607,000 $29.22 --
Exercised......................... (457,700) $14.88 (11, 200) 5.47
Cancelled......................... (33,400) $16.07 --
--------- ------ -------- -----
Balance at end of year.............. 2,651,300 $19.61 -- --
========= ====== ======== =====
Shares exercisable.................. 2,046,300 $16.77 -- --
========= ====== ======== =====
Weighted average fair value of
options granted.................... $4.28
=========
38
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about non-qualified stock
options at December 31, 1998:
OPTIONS OUTSTANDING
Weighted
Average Weighted
Range Number Remaining Average
of Option Outstanding at Contractual Option
Price December 31, 1998 Life Price
---------------- ----------------- ----------- --------
$ 8.53 to $ 8.97 88,000 1.52 years $ 8.62
$11.47 to $18.91 1,488,100 7.91 years $16.03
$20.64 to $29.22 1,075,200 9.47 years $25.47
---------------- --------- ---------- ------
$ 8.53 to $29.22 2,651,300 7.29 years $19.61
================ ========= ========== ======
OPTIONS EXERCISABLE
Average
Range Number Remaining
of Option Exercisable at Option
Price December 31, 1998 Price
---------------- ----------------- ---------
$ 8.53 to $ 8.97 88,000 $ 8.62
$11.47 to $18.91 1,488,100 $16.03
$20.64 470,200 $20.64
---------------- --------- ------
$ 8.53 to $20.64 2,046,300 $16.77
================ ========= ======
Long-Term Debt
The sinking fund requirements and maturities of long-term debt outstanding
at December 31, 1998 (including the maturity of Northern Indiana's first
mortgage bonds: Series T, 7 1/2%, due April 1, 2002; Northern Indiana's
medium-term notes due from March 20, 2000 to July 8, 2003; Northern Indiana's
Pollution Control Note, Series A, City of Michigan City 5.70% due October 1,
2003; and NDC Douglas Properties, Inc.'s notes payable due January 1, 2000
through October 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 and August 7, 2003), for each of the four years subsequent
to December 31, 1999 are as follows:
Year Ending December 31,
------------------------
2000........................ $164,150,865
2001........................ $ 53,718,777
2002........................ $ 64,988,989
2003........................ $140,913,520
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 owned by Northern Indiana, other than expressly
excepted property.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes. As
of December 31, 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.
39
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
IWC's first mortgage bonds are secured by its utility plant. Provisions of
trust indentures related to the 8% Series Bonds require annual sinking or
improvement payments amounting to .50% of the maximum aggregate amount
outstanding. As permitted, this requirement has been satisfied by substituting
a portion of permanent additions to utility plant.
IWC issued Refunding Revenue Bonds, Series 1998 on July 15, 1998, in the
amount of $40 million. The proceeds from the Series 1998 Bonds were 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 bear
interest at 5.05% per annum and mature on July 15, 2028. In February 1999, IWC
issued $35 million of ten-year medium term notes at a rate of 5.99% and $45
million of twenty-year medium term notes at a rate of 6.61%. The majority of
the proceeds will be used to reduce IWC's existing credit facilities and the
remaining proceeds will be used for general corporate purposes.
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 outstanding short-term obligations of Capital Markets.
In December 1997, Capital Markets issued and sold $75 million of 6.78%
senior notes 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. Proceeds from the sale of these notes were primarily used to
pay Capital Markets' Zero Coupon Notes which matured December 1, 1997. The
remaining proceeds were used for Industries' general corporate purposes.
The financial 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 as reflected in the consolidated financial
statements of Industries, was approximately $1.3 billion at December 31, 1998.
40
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Current Portion of Long-Term Debt
At December 31, 1998 and 1997, Industries' current portion of long-term
debt due within one year was as follows:
December 31, December 31,
1998 1997
------------ ------------
(Dollars in thousands)
First mortgage bonds........................... $ -- $14,509
Medium-term notes--
Interest rates between 5.83% and 5.95% with a
weighted average interest rate of 5.86% and
maturities between April 6, 1998 and April
13, 1998.................................... -- 35,000
Notes payable--
Interest rates between 6.72% and 9.00% with a
weighted average interest rate of 7.87% and
maturities between January 1, 1999 and
December 22, 1999........................... 4,790 3,612
Sinking funds due within one year.............. 2,000 1,500
------ -------
Total current portion of long-term debt.... $6,790 $54,621
====== =======
Short-Term Borrowings
Northern Indiana and Capital Markets make use of commercial paper to fund
short-term working capital requirements. As of December 31, 1998 and December
31, 1997, Northern Indiana had $85.6 million and $71.5 million of commercial
paper outstanding, respectively. At December 31, 1998, the weighted average
interest rate of commercial paper outstanding was 5.62%. As of December 31,
1998 and December 31, 1997, Capital Markets had $108.1 million and $17.0
million of commercial paper outstanding. At December 31, 1998, the weighted
average interest rate of commercial paper outstanding was 5.99%.
In September 1998, Northern Indiana entered into a five-year $100 million
revolving credit agreement and a 364-day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Northern
Indiana and agreement by the banks. Under these agreements, Northern Indiana
may borrow funds at a floating rate of interest or, at Northern Indiana's
request under certain circumstances, a fixed rate of interest for short term
periods. These agreements provide financing flexibility to Northern Indiana
and may be used to support the issuance of commercial paper. At December 31,
1998, there were no borrowings outstanding under either of these agreements.
Concurrently with entering into such agreements, Northern Indiana terminated
its then existing revolving credit agreement which would otherwise have
terminated on August 19, 1999.
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 December 31, 1998, there were no borrowings under these lines of
credit. The 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 December 31, 1998 and 1997, $40.5 million and $47.5 million of
borrowings respectively, were outstanding under these lines of credit.
41
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1998 and 1997, there were no borrowings outstanding under this
facility.
In September 1998, Capital Markets entered into a five-year $100 million
revolving credit agreement and a 364-day $100 million revolving credit
agreement with several banks. These agreements terminate on September 23, 2003
and September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364 days upon the request of Capital
Markets and agreement by the banks. Under these agreements, Capital Markets
may borrow funds at a floating rate of interest or, at Capital Market's
request under certain circumstances, a fixed rate of interest for a short term
period. These agreements provide financing flexibility to Capital Markets and
may be used to support the issuance of commercial paper. At December 31, 1998,
there were no borrowings outstanding under either of these agreements.
Concurrently with entering into such agreements, Capital Markets terminated
its then existing revolving credit agreement which would otherwise have
terminated on August 19, 1999.
Capital Markets also has $130 million of money market lines of credit. As
of December 31, 1998 and 1997, $86.8 million and $20.1 million, respectively,
of borrowings were outstanding under these lines of credit.
IWCR and its subsidiaries have lines of credit with banks aggregating $92.4
million. At December 31, 1998, $84.1 million and $48.9 million, respectively,
were outstanding under these lines of credit.
At December 31, 1998 and 1997, Industries' short-term borrowings were as
follows:
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
Commercial paper--
Weighted average interest rate of 5.83% at
December 31, 1998........................... $193,700 $ 88,500
Notes payable--
Issued at interest rates between 4.96% and
6.50% with a weighted average interest rate
of 5.85% and various maturities between
January 11, 1999 and December 31, 1999...... 217,340 116,469
Revolving loan facility........................ -- 7,670
-------- --------
Total short-term borrowings................ $411,040 $212,639
======== ========
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 December 31, 1998:
Year Ending December 31, (In thousands)
------------------------ --------------
1999....................................................... $ 29,804
2000....................................................... 29,466
2001....................................................... 29,154
2002....................................................... 59,590
2003....................................................... 75,464
Later years................................................ 237,108
--------
Total minimum payments required............................ $460,586
========
42
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consolidated financial statements include rental expense for all
operating leases as follows:
Year Ending December 31, (In thousands)
------------------------ --------------
1998..................................................... $23,700
1997..................................................... 8,839
1996..................................................... 8,121
Commitments
Industries estimates that approximately $1.283 billion will be expended for
construction purposes for the period from January 1, 1999 to December 31,
2003. 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 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 million.
Primary arranges energy-related projects for large energy-intensive
customers and offers such customers, nationwide expertise in managing the
engineering, construction, operation and maintenance of such projects. Primary
through its subsidiaries Harbor Coal Company, North Lake Energy Corporation,
Lakeside Energy Corporation, Portside Energy Corporation, and Cokenergy, Inc.,
has entered into partnering arrangements with several of Industries' largest
industrial customers, principally steel mills, to service a portion of their
energy needs. In order to serve its customers under the partnering
arrangements, Primary, through its subsidiaries, has or expects to enter into
certain operating lease commitments to lease these energy-related projects
which have a combined capacity of 393 megawatts Industries, principally
through its subsidiary Capital Markets, guarantees certain of Primary's
obligations under each lease, which are included in the Operating Leases table
above.
Primary has advanced approximately $31.8 million and $107.2 million, at
December 31, 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.
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.
43
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments: The fair value of some investments is estimated based on
market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for the same or
similar issues or on the rates offered to Industries for securities of the
same remaining maturities. Certain premium costs associated with the early
settlement of long-term debt are not taken into consideration in determining
fair value.
The carrying values and estimated fair values of Industries' financial
instruments are as follows:
December 31, 1998 December 31, 1997
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
Cash and cash equivalents.... $ 60,848 $ 60,848 $ 30,780 $ 30,780
Investments.................. 36,594 36,028 32,625 32,886
Long-term debt (including
current portion)............ 1,674,755 1,769,934 1,722,546 1,718,897
Preferred stock.............. 143,876 140,420 146,289 139,814
A substantial portion 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.
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
following table shows the basic steel industry percentage of gas revenue
(including transportation services) and electric revenue for 1998, 1997 and
1996:
Basic Steel Industry 1998 1997 1996
-------------------- ---- ---- ----
Gas revenue percent........................................ 3% 4% 1%
Electric revenue percent................................... 13% 17% 22%
44
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarterly Financial Data(a)
The following data summarize certain operating results for each of the
quarters of 1998 and 1997:
1998 Quarters Ended
------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(Dollars in thousands, except per
share amounts)
Operating revenues................ $779,344 $652,408 $747,792 $753,234
Operating expenses................ 662,230 573,365 650,844 624,833
-------- -------- -------- --------
Operating income.................. 117,114 79,043 96,948 128,401
Other income (deductions)......... 8,448 (931) 2,870 197
Interest and other charges........ 32,497 33,243 35,199 36,403
Income taxes...................... 32,343 15,424 21,492 31,603
-------- -------- -------- --------
Net income........................ 60,722 29,445 43,127 60,592
Dividend requirements on preferred
shares........................... -- -- -- --
-------- -------- -------- --------
Balance available for common
shareholders..................... $ 60,722 $ 29,445 $ 43,127 $ 60,592
======== ======== ======== ========
Basic earnings per average common
share(a)......................... $ 0.49 $ 0.24 $ 0.36 $ 0.51
======== ======== ======== ========
Diluted earnings per average
common share(a).................. $ 0.48 $ 0.24 $ 0.35 $ 0.51
======== ======== ======== ========
Market price for the quarter:
High............................. $ 28.375 $ 28.313 $ 32.875 $ 33.625
Low.............................. $ 24.750 $ 25.813 $ 26.625 $ 28.875
1997 Quarters Ended
------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(Dollars in thousands, except per
share amounts)
Operating revenues................ $659,950 $523,187 $596,315 $807,089
Operating expenses................ 531,364 449,239 509,905 685,480
-------- -------- -------- --------
Operating income.................. 128,586 73,948 86,410 121,609
Other income (deductions)......... 9,403 4,308 3,764 (1,707)
Interest and other charges........ 28,071 33,607 34,084 33,536
Income taxes...................... 39,080 16,413 20,221 30,460
-------- -------- -------- --------
Net income........................ 70,838 28,236 35,869 55,906
Dividend requirements on preferred
shares........................... -- -- -- --
-------- -------- -------- --------
Balance available for common
shareholders..................... $ 70,838 $ 28,236 $ 35,869 $ 55,906
======== ======== ======== ========
Basic earnings per average common
share(a)......................... $ 0.59 $ 0.22 $ 0.28 $ 0.44
======== ======== ======== ========
Diluted earnings per average
common share(a).................. $ 0.59 $ 0.22 $ 0.28 $ 0.44
======== ======== ======== ========
Market price for the quarter:
High............................. $ 20.125 $ 21.125 $ 21.282 $ 49.875
Low.............................. $ 19.000 $ 19.438 $ 20.344 $ 42.125
- --------
(a) Because of the combined mathematical effect of common shares repurchased
and issued and the cyclical nature of net income during the year, the sum
of earnings per share data for any four quarterly periods may vary
slightly from the earnings per share data for the equivalent twelve-month
period.
Segments of Business
Industries adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" during 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.
45
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
46
NIPSCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables provide 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. In
addition, adjustments have been made to the segment information to arrive at
information included in the results of operations and financial position of
Industries. These adjustments include unallocated corporate assets, revenues
and expenses and the elimination of intercompany receivables and payables. The
accounting policies of the operating segments are the same as those described
in "Summary of Significant Accounting Policies."
Other
Gas Products Adjust-
1998 Gas Electric Water Marketing & Services ments Total
- ---- ---------- ---------- -------- --------- ---------- --------- ----------
(In thousands)
Operating revenues...... $ 637,098 $1,429,986 $ 83,979 $657,692 $263,069 $(139,046) $2,932,778
Other Income
(Deductions)........... $ 1,720 $ 553 $ 712 $ 2,017 $ 4,877 $ 705 $ 10,584
Depreciation and
amortization........... $ 75,547 $ 156,844 $ 11,589 $ 332 $ 11,954 $ 208 $ 256,474
Income before Interest
and Other Charges and
Income Taxes........... $ 67,217 $ 341,433 $ 23,460 $ 5,006 $ 6,614 $ (11,640) $ 432,090
Assets.................. $ 930,240 $2,514,791 $619,505 $121,574 $483,243 $ 317,150 $4,986,503
Capital Expenditures.... $ 62,981 $ 124,044 $ 59,265 $ 24 $ 11,325 $ -- $ 257,639
Investment in equity--
method investees....... $ -- $ -- $ -- $ 6,707 $104,633 $ -- $ 111,340
Other
Gas Products Adjust-
1997 Gas Electric Water Marketing & Services ments Total
- ---- ---------- ---------- -------- --------- ---------- --------- ----------
(In thousands)
Operating revenues...... $ 807,239 $1,186,331 $ 60,743 $480,986 $211,996 $(160,754) $2,586,541
Other Income
(Deductions)........... $ 821 $ 637 $ 1,465 $ 3,349 $ 10,936 $ (1,440) $ 15,768
Depreciation and
amortization........... $ 73,017 $ 153,843 $ 8,241 $ 233 $ 13,336 $ 1,134 $ 249,804
Income before Interest
and Other Charges and
Income Taxes........... $ 88,950 $ 312,243 $ 19,363 $ 7,085 $ 13,121 $ (14,441) $ 426,321
Assets.................. $ 965,473 $2,507,905 $565,717 $ 94,690 $500,706 $ 302,542 $4,937,033
Capital Expenditures.... $ 64,009 $ 115,012 $ 39,910 -- -- -- $ 218,931
Investment in equity--
method investees....... $ -- $ -- $ -- $ 6,710 $ 76,145 $ -- $ 82,855
Other
Gas Products Adjust-
1996 Gas Electric Water Marketing & Services ments Total
- ---- ---------- ---------- -------- --------- ---------- --------- ----------
(In thousands)
Operating revenues...... $ 799,395 $1,022,231 $ N/A $229,922 $ 81,851 $(145,451) $1,987,948
Other Income
(Deductions)........... $ 479 $ 897 $ N/A $ 2,790 $ 8,927 $ (1,852) $ 11,241
Depreciation and
amortization........... $ 68,584 $ 146,444 $ N/A $ 34 $ 18,773 $ 158 $ 233,993
Income before Interest
and Other Charges and
Income Taxes........... $ 97,139 $ 301,525 $ N/A $ 12,964 $ (4,427) $ (9,652) $ 397,549
Assets.................. $1,006,270 $2,575,995 $ N/A $ 87,209 $355,243 $ 264,166 $4,288,883
Capital Expenditures.... $ 61,221 $ 146,660 $ N/A -- -- -- $ 207,881
Investment in equity--
method investees....... $ -- $ -- $ N/A $ 6,462 $ 45,798 $ -- $ 52,260
The following table reconciles total reportable segment income before
interest and other charges and income taxes to Industries' consolidated net
income for each of the years ending 1998, 1997 and 1996 as follows:
1998 1997 1996
-------- -------- --------
Income before Interest and Other Charges and
Income Taxes................................ $432,090 $426,321 $397,549
Interest and Other Charges................... 137,342 129,298 114,435
Income Taxes................................. 100,862 106,174 106,380
-------- -------- --------
Net Income................................. $193,886 $190,849 $176,734
======== ======== ========
EVENT (Unaudited) Subsequent to Date of Auditors' Report
On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural
gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned
subsidiary of PacifiCorp., holds a 66% ownership stake in Market Hub Partners,
L.P., which stores natural gas in salt caverns. Services currently owns
approximately 12% of Market Hub Partners, L.P. The transaction is expected to
close in March or April 1999.
47
SELECTED SUPPLEMENTAL INFORMATION
Year Ended December 31,
--------------------------------
Gas Statistics 1998 1997 1996
- -------------- ---------- ---------- ----------
Operating Revenues ($000's):
Residential (including home heating)......... $ 385,030 $ 479,461 $ 422,646
Commercial................................... 124,903 164,359 141,193
Industrial................................... 62,003 78,531 70,062
Gas transported for others................... 45,035 43,226 33,536
Gas marketing................................ 657,692 480,986 229,922
Other*....................................... 20,127 41,662 131,958
---------- ---------- ----------
Total...................................... $1,294,790 $1,288,225 $1,029,317
========== ========== ==========
Volumes in dth (000's):
Residential (including home heating)......... 63,514 79,816 84,146
Commercial................................... 24,256 31,640 32,164
Industrial................................... 12,824 16,989 17,732
Gas transported for others................... 216,505 203,728 194,397
Gas marketing................................ 279,282 148,728 59,598
Other........................................ 23,090 14,201 8,263
---------- ---------- ----------
Total...................................... 619,471 495,102 396,300
========== ========== ==========
Customers Served--End of Year:
Residential (including home heating)......... 678,989 669,833 659,742
Commercial................................... 55,918 55,124 54,300
Industrial................................... 4,414 4,408 4,234
Other........................................ 79 84 80
---------- ---------- ----------
Total...................................... 739,400 729,449 718,356
========== ========== ==========
* Includes deferred gas cost revenue of $(42,055), $(11,075) and $95,843,
respectively.
Year Ended December 31,
--------------------------------
Electric Statistics 1998 1997 1996
- ------------------- ---------- ---------- ----------
Operating Revenues ($000's):
Residential.................................. $ 290,738 $ 272,619 $ 269,906
Commercial................................... 267,996 253,299 247,808
Industrial................................... 405,302 416,741 428,273
Street lighting.............................. 8,740 8,697 8,549
Wholesale.................................... 430,420 214,206 43,272
Other**...................................... 26,790 20,769 24,423
---------- ---------- ----------
Total...................................... $1,429,986 $1,186,331 $1,022,231
========== ========== ==========
Sales in kilowatt-hours (000's):
Residential.................................. 2,936,762 2,723,990 2,700,234
Commercial................................... 3,162,511 2,974,703 2,886,940
Industrial................................... 8,794,481 8,971,926 9,318,353
Street lighting.............................. 57,607 57,764 56,413
Wholesale.................................... 14,480,608 8,688,014 1,678,346
Other........................................ 64,037 84,935 100,265
---------- ---------- ----------
Total...................................... 29,496,006 23,501,332 16,740,551
========== ========== ==========
Customers Served--End of Year:
Residential.................................. 372,383 368,907 365,011
Commercial................................... 44,961 43,802 42,911
Industrial................................... 2,737 2,764 2,725
Other........................................ 874 885 874
---------- ---------- ----------
Total...................................... 420,955 416,358 411,521
========== ========== ==========
- --------
** Includes deferred fuel cost revenue of $(8,880), $(5,223) and $1,980,
respectively.
Year Ended December 31,
--------------------------------
Water Statistics 1998 1997*** 1996
- ---------------- ---------- ---------- ----------
Operating Revenues ($000's):
Residential.................................. $ 55,281 $ 39,570 $ --
Commercial................................... 19,942 14,763 --
Industrial................................... 4,227 3,015 --
Other........................................ 4,529 3,395 --
---------- ---------- ----------
Total...................................... $ 83,979 $ 60,743 $ --
========== ========== ==========
Sales in millions of gallons (000's):
Residential.................................. 22,454 18,095 --
Commercial................................... 13,029 10,345 --
Industrial................................... 4,392 3,310 --
Other........................................ 947 754 --
---------- ---------- ----------
Total...................................... 40,822 32,504 --
========== ========== ==========
Customers Served--End of Year:
Residential.................................. 232,333 225,627 --
Commercial................................... 17,265 17,083 --
Industrial................................... 348 347 --
Other........................................ 3,718 3,586 --
---------- ---------- ----------
Total...................................... 253,664 246,643 --
========== ========== ==========
***Amounts are for the period April 1997 through December 1997.
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------- ---------- ----------
Operating Revenues
Gas (000's)............................................................... $ 637,098 $ 807,239 $ 799,395
Electric ($000's)......................................................... 1,429,986 1,186,331 1,022,231
Water ($000's)............................................................ 83,979 60,743 --
Products and Services ($000's)............................................ 781,715 532,228 166,322
----------- ----------- -----------
Total Operating Revenues................................................ $ 2,932,778 $ 2,586,541 $ 1,987,948
Operating Margin ($000's).................................................. $ 1,240,411 $ 1,210,927 $ 1,115,965
Operating Income ($000's).................................................. $ 421,506 $ 410,553 $ 386,308
Net Income ($000's)........................................................ $ 193,886 $ 190,849 $ 176,734
Shares outstanding at year end............................................. 117,530,698 124,312,664 119,611,322
Number of common shareholders.............................................. 36,277 37,373 35,339
Basic earnings per average common share.................................... $ 1.60 $ 1.54 $ 1.44
Diluted earnings per average common share.................................. $ 1.59 $ 1.53 $ 1.43
Return on average common equity............................................ 16.1% 16.1% 15.9%
Times interest earned (pre-tax)............................................ 3.13 3.43 3.62
Dividends paid per share................................................... $ 0.96 $ 0.90 $ 0.84
Dividend payout ratio...................................................... 60.0% 58.4% 58.3%
Market values during the year:
High..................................................................... $ 33.625 $ 24.938 $ 20.125
Low...................................................................... $ 24.750 $ 19.000 $ 17.625
Close.................................................................... $ 30.437 $ 24.719 $ 19.813
Book value of common shares................................................ $ 9.78 $ 10.17 $ 9.20
Market-to-book ratio at year end........................................... 311.2% 243.1% 215.4%
Total Assets ($000's)...................................................... $ 4,986,503 $ 4,937,033 $ 4,288,883
Utility construction expenditures ($000's)................................. $ 245,825 $ 218,931 $ 207,881
Capitalization:
Common shareholders' equity ($000's)..................................... $ 1,149,708 $ 1,264,788 $ 1,100,501
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 81,116 $ 81,123 $ 81,126
Series with mandatory redemption provisions ($000's)................. $ 56,435 $ 58,841 $ 61,246
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ -- $ -- $ --
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ 4,497 $ 4,497 $ --
Long-Term debt ($000's).................................................... $ 1,667,965 $ 1,667,925 $ 1,127,106
----------- ----------- -----------
Total Capitalization ($000's).......................................... $ 2,959,721 $ 3,077,174 $ 2,369,979
Number of employees........................................................ 6,035 5,984 4,168
Year Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------- ---------- ----------
........................................................................
Operating Revenues
Gas (000's)............................................................... $ 691,402 $ 681,909 $ 714,229
Electric ($000's)......................................................... 1,030,923 994,492 963,643
Water ($000's)............................................................ -- -- --
Products and Services ($000's)............................................ 46,983 91,628 59,387
----------- ----------- -----------
Total Operating Revenues................................................ $ 1,769,308 $ 1,768,029 $ 1,737,259
Operating Margin ($000's).................................................. $ 1,074,820 $ 1,014,566 $ 1,001,542
Operating Income ($000's).................................................. $ 381,877 $ 353,452 $ 355,918
Net Income ($000's)........................................................ $ 175,465 $ 163,987 $ 156,140
Shares outstanding at year end............................................. 124,759,192 127,810,778 131,657,676
Number of common shareholders.............................................. 37,299 39,172 41,038
Basic earnings per average common share.................................... $ 1.36 $ 1.24 $ 1.15
Diluted earnings per average common share.................................. $ 1.35 $ 1.23 $ 1.15
Return on average common equity............................................ 15.5% 14.6% 14.6%
Times interest earned (pre-tax)............................................ 3.72 3.61 3.61
Dividends paid per share................................................... $ 0.78 $ 0.72 $ 0.72
Dividend payout ratio...................................................... 57.4% 58.1% 58.1%
Market values during the year:
High..................................................................... $ 19.250 $ 16.500 $ 17.438
Low...................................................................... $ 14.625 $ 13.063 $ 13.063
Close.................................................................... $ 19.125 $ 14.875 $ 16.438
Book value of common shares................................................ $ 9.00 $ 8.67 $ 8.31
Market-to-book ratio at year end........................................... 212.5% 171.6% 197.8%
Total Assets ($000's)...................................................... $ 3,999,520 $ 3,947,138 $ 3,912,324
Utility construction expenditures ($000's)................................. $ 192,966 $ 202,545 $ 180,852
Capitalization:
Common shareholders' equity ($000's)..................................... $ 1,122,215 $ 1,107,848 $ 1,094,672
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 81,325 $ 86,389 $ 97,753
Series with mandatory redemption provisions ($000's)................. $ 63,651 $ 66,057 $ 68,462
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ 35,000 $ 35,000 $ 35,000
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ -- $ -- $ --
Long-Term debt ($000's).................................................... $ 1,175,728 $ 1,180,338 $ 1,192,500
----------- ----------- -----------
Total Capitalization ($000's).......................................... $ 2,477,919 $ 2,475,632 $ 2,488,387
Number of employees........................................................ 4,356 4,441 4,602
Year Ended December 31, 1992 1991 1990
- ------------------------------------------------------------------------------------------- ---------- ----------
........................................................................
Operating Revenues
Gas (000's)............................................................... $ 666,221 $ 601,920 $ 625,159
Electric ($000's)......................................................... 916,135 933,241 895,836
Water ($000's)............................................................ -- -- --
Products and Services ($000's)............................................ -- -- --
----------- ----------- -----------
Total Operating Revenues................................................ $ 1,582,356 $ 1,535,161 $ 1,520,995
Operating Margin ($000's).................................................. $ 927,089 $ 919,951 $ 885,262
Operating Income ($000's).................................................. $ 246,217 $ 254,354 $ 247,777
Net Income ($000's)........................................................ $ 136,648 $ 133,388 $ 125,361
Shares outstanding at year end............................................. 131,516,700 133,343,230 137,748,458
Number of common shareholders.............................................. 38,097 39,346 41,285
Basic earnings per average common share.................................... $ 1.00 $ 0.97 $ 0.90
Diluted earnings per average common share.................................. $ 0.99 $ 0.96 $ 0.89
Return on average common equity............................................ 13.1% 12.9% 12.7%
Times interest earned (pre-tax)............................................ 3.17 2.93 2.81
Dividends paid per share................................................... $ 0.62 $ 0.58 $ 0.52
Dividend payout ratio...................................................... 62.0% 59.8% 57.8%
Market values during the year:
High..................................................................... $ 13.313 $ 13.500 $ 9.625
Low...................................................................... $ 11.250 $ 9.250 $ 7.825
Close.................................................................... $ 13.250 $ 12.875 $ 9.438
Book value of common shares................................................ $ 7.87 $ 7.59 $ 7.30
Market-to-book ratio at year end........................................... 168.4% 169.6% 129.3%
Total Assets ($000's)...................................................... $ 3,807,941 $ 3,647,557 $ 3,625,181
Utility construction expenditures ($000's)................................. $ 172,329 $ 168,958 $ 152,280
Capitalization:
Common shareholders' equity ($000's)..................................... $ 1,034,530 $ 1,011,666 $ 1,005,982
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 97,917 $ 98,710 $ 99,374
Series with mandatory redemption provisions ($000's)................. $ 70,668 $ 53,978 $ 59,358
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ 35,000 $ 35,000 $ 35,000
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ -- $ -- $ --
Long-Term debt ($000's).................................................... $ 1,054,454 $ 1,068,708 $ 1,165,682
----------- ----------- -----------
Total Capitalization ($000's).......................................... $2,292,569 $ 2,268,062 $ 2,365,396
Number of employees........................................................ 4,648 4,600 4,547
Year Ended December 31, 1989 1988
- ------------------------------------------------------------------------------------------- ----------
........................................................................
Operating Revenues
Gas (000's)............................................................... $ 677,262 $ 620,723
Electric ($000's)......................................................... 882,303 903,461
Water ($000's)............................................................ -- --
Products and Services ($000's)............................................ -- --
----------- -----------
Total Operating Revenues................................................ $ 1,559,565 $ 1,524,184
Operating Margin ($000's).................................................. $ 900,035 $ 863,213
Operating Income ($000's).................................................. $ 252,807 $ 257,923
Net Income ($000's)........................................................ $ 72,112/b/ $ 103,449
Shares outstanding at year end............................................. 138,738,984 146,620,420
Number of common shareholders.............................................. 43,763 47,324
Basic earnings per average common share.................................... $ 0.50/b/ $ 0.70
Diluted earnings per average common share.................................. $ 0.49/b/ $ 0.70
Return on average common equity............................................ 7.2%/b/ 10.4%
Times interest earned (pre-tax)............................................ 2.02 2.38
Dividends paid per share................................................... $ 0.42 $ 0.30
Dividend payout ratio...................................................... 84.0% 42.9%
Market values during the year:
High..................................................................... $ 9.813 $ 7.063
Low...................................................................... $ 6.563 $ 4.313
Close.................................................................... $ 9.688 $ 6.938
Book value of common shares................................................ $ 6.96 $ 7.02
Market-to-book ratio at year end........................................... 139.2% 98.9%
Total Assets ($000's)...................................................... $ 3,657,718 $ 3,684,721
Utility construction expenditures ($000's)................................. $ 150,786 $ 116,874
Capitalization:
Common shareholders' equity ($000's)..................................... $ 965,437 $ 1,028,554
Preferred and preference stock--
Northern Indiana Public Service Company:
Series without mandatory redemption provision ($000's)............... $ 99,874 $ 99,937
Series with mandatory redemption provisions ($000's)................. $ 66,309 $ 75,189
NIPSCO Industries, Inc.:
Series with mandatory redemption provision ($000's).................. $ -- $ --
Indianapolis Water Company:
Series without mandatory redemption provision ($000's)............... $ -- $ --
Long-Term debt ($000's).................................................... $ 1,261,760 $ 1,308,303
----------- -----------
Total Capitalization ($000's).......................................... $ 2,393,380 $ 2,511,983
Number of employees........................................................ 4,825 4,946
/b/Earnings per share were reduced by $0.72 due to the $82.0 million refund,
less associated tax benefits of $30.3 million, related to the Bailly N1
generating unit.
48