<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1995
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
-------- --------
As of October 31, 1995, 73,282,258 common shares were outstanding.
<PAGE>
NORTHERN INDIANA PUBLIC SERVICE COMPANY
Part I. FINANCIAL INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
Northern Indiana Public Service Company:
We have audited the accompanying consolidated balance sheet of
Northern Indiana Public Service Company (an Indiana corporation and a wholly
owned subsidiary of NIPSCO Industries, Inc.) and subsidiaries as of September
30, 1995, and December 31, 1994, and the related consolidated statements of
income, retained earnings and cash flows for the three, nine, and twelve month
periods ended September 30, 1995, and 1994. These consolidated financial
statements are the responsibility of the Company's 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
Northern Indiana Public Service Company and subsidiaries as of September 30,
1995, and December 31, 1994, and the results of their operations and their
cash flows for the three, nine, and twelve month periods ended September 30,
1995, and 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 6 and 8 to the consolidated financial
statements, effective January 1, 1993, Northern Indiana Public Service Company
and subsidiaries changed their methods of accounting for income taxes and
postretirement benefits other than pensions.
Arthur Andersen LLP
Chicago, Illinois
November 6, 1995
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
September 30, December 31,
ASSETS 1995 1994
============ ===========
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$185,128 AND $201,898, RESPECTIVELY)
(NOTE 2):
Electric $ 3,918,221 $ 3,858,118
Gas 1,132,833 1,107,075
Common 338,467 316,120
----------- -----------
5,389,521 5,281,313
Less - Accumulated provision for
depreciation and amortization 2,289,288 2,162,828
----------- -----------
Total Utility Plant 3,100,233 3,118,485
----------- -----------
OTHER PROPERTY AND INVESTMENTS 9,150 10,155
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 7,776 20,994
Accounts receivable, less reserve of
$5,886 and $3,955, respectively (Note 2) 54,367 80,977
Fuel adjustment clause (Note 2) 8,683 1,614
Gas cost adjustment clause (Note 2) 0 27,844
Materials and supplies, at average cost 64,426 63,835
Electric production fuel, at average cost 16,803 18,347
Natural gas in storage, at last-in,
first-out cost (Note 2) 63,431 72,462
Prepayments and other 16,621 10,169
----------- -----------
Total Current Assets 232,107 296,242
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 202,872 194,809
Deferred charges and other noncurrent
assets 5,010 4,620
----------- -----------
Total Other Assets 207,882 199,429
----------- -----------
$ 3,549,372 $ 3,624,311
=========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
September 30, December 31,
CAPITALIZATION AND LIABILITIES 1995 1994
============ ===========
(Dollars in thousands)
<S> <C> <C>
CAPITALIZATION:
Common stock - without par value -
authorized
75,000,000 shares, issued and
outstanding
73,282,258 shares (Note 14) $ 859,488 $ 859,488
Additional paid-in capital 12,492 11,903
Retained earnings (see accompanying
statement) (Note 13) 139,534 145,289
----------- -----------
Common shareholders' equity 1,011,514 1,016,680
Cumulative preferred stocks (Note 10) -
Series without mandatory redemption
provisions (Note 11) 81,525 86,389
Series with mandatory redemption
provisions (Note 12) 64,207 66,057
Long-term debt excluding amounts due
within one year (Note 15) 1,059,352 1,065,351
----------- -----------
Total Capitalization 2,216,598 2,234,477
----------- -----------
CURRENT LIABILITIES:
Obligations due within one year -
Commercial paper 42,300 156,500
First mortgage bonds -
Series N, 4-5/8% - due May 15, 1995 0 22,436
Medium-term notes -
Issued at interest rates of 6.19% and
6.25% with a weighted average interest
rate of 6.21% and maturities of
July 25, 1996 and July 26, 1996 80,000 0
Notes payable -
Issued at interest rates between 5.83%
and 5.96% with a weighted average
interest rate of 5.86% and various
maturities between October 4, 1995 and
November 1, 1995 64,400 92,700
----------- -----------
186,700 271,636
----------- -----------
OTHER CURRENT LIABILITIES -
Accounts payable 101,541 142,018
Sinking funds due within one year
(Notes 12 and 15) 2,621 2,578
Dividends declared on common and
preferred stocks 49,868 44,758
Customer deposits 9,327 8,678
Taxes accrued 49,152 48,806
Gas cost adjustment clause (Note 2) 25,170 0
Interest accrued 18,180 10,043
Accrued employment costs 40,873 43,260
Other accruals 37,563 9,674
----------- -----------
334,295 309,815
----------- -----------
Total Current Liabilities 520,995 581,451
----------- -----------
OTHER:
Deferred income taxes (Note 6) 577,000 575,841
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 116,245 121,822
Deferred credits 36,993 41,758
Accrued liability for postretirement
benefits (Note 8) 65,870 47,718
Regulatory income tax liability (Note 6) 9,384 14,625
Other noncurrent liabilities 6,287 6,619
----------- -----------
Total Other 811,779 808,383
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 17 and 18)
$ 3,549,372 $ 3,624,311
=========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1995 1994 1995 1994
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 4 and 20)
Gas $ 66,411 $ 64,432 $ 433,152 $ 446,045
Electric 296,731 262,803 780,222 755,142
---------- ---------- ---------- ----------
363,142 327,235 1,213,374 1,201,187
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 34,996 33,329 253,047 262,931
Fuel for electric
generation 69,612 62,140 179,309 184,938
Power purchased 13,126 9,143 35,259 27,985
---------- ---------- ---------- ----------
117,734 104,612 467,615 475,854
---------- ---------- ---------- ----------
Operating Margin 245,408 222,623 745,759 725,333
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 71,007 67,548 206,090 208,479
Maintenance (Note 2) 18,551 18,662 57,925 59,190
Depreciation and
amortization (Note 2) 49,958 47,900 147,366 142,692
Taxes (except income) 17,117 16,540 53,704 53,100
---------- ---------- ---------- ----------
156,633 150,650 465,085 463,461
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 88,775 71,973 280,674 261,872
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 6) 24,946 19,308 80,271 71,955
---------- ---------- ---------- ----------
Operating Income 63,829 52,665 200,403 189,917
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) (956) (495) (2,534) (1,096)
---------- ---------- ---------- ----------
Income Before Interest
and Other Charges 62,873 52,170 197,869 188,821
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 18,127 16,731 54,205 53,873
Other interest 1,463 2,639 5,848 6,451
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (436) (1,103) (3,513) (2,625)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,078 948 3,038 2,624
---------- ---------- ---------- ----------
20,232 19,215 59,578 60,323
---------- ---------- ---------- ----------
Net Income 42,641 32,955 138,291 128,498
Dividend requirements on
preferred shares 2,231 2,520 6,821 7,616
---------- ---------- ---------- ----------
Balance available
for common shares $ 40,410 $ 30,435 $ 131,470 $ 120,882
========== ========== ========== ==========
Dividends declared $ 48,500 $ 42,042 $ 137,225 $ 125,565
========== ========== ========== ==========
<PAGE>
<CAPTION>
Twelve Months
Ended September 30,
----------------------
1995 1994
========== ==========
(Dollars in thousands)
<S> <C> <C>
Operating Revenues:
(Notes 2, 4 and 20)
Gas $ 606,610 $ 656,859
Electric 1,019,572 989,110
---------- ----------
1,626,182 1,645,969
---------- ----------
Cost of Energy: (Note 2)
Gas costs 355,927 387,871
Fuel for electric
generation 241,505 246,177
Power purchased 39,777 33,221
---------- ----------
637,209 667,269
---------- ----------
Operating Margin 988,973 978,700
---------- ----------
Operating Expenses and
Taxes (except income):
Operation 273,125 275,973
Maintenance (Note 2) 77,607 82,384
Depreciation and
amortization (Note 2) 196,100 190,094
Taxes (except income) 71,021 69,997
---------- ----------
617,853 618,448
---------- ----------
Operating Income Before
Utility Income Taxes 371,120 360,252
---------- ----------
Utility Income Taxes
(Note 6) 104,573 97,930
---------- ----------
Operating Income 266,547 262,322
---------- ----------
Other Income (Deductions)
(Note 2) 2,288 (1,070)
---------- ----------
Income Before Interest
and Other Charges 268,835 261,252
---------- ----------
Interest and Other Charges:
Interest on long-term debt 71,103 73,357
Other interest 8,947 7,710
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (4,922) (2,675)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 4,011 3,450
---------- ----------
79,139 81,842
---------- ----------
Net Income 189,696 179,410
Dividend requirements on
preferred shares 9,118 10,189
---------- ----------
Balance available for
common shares $ 180,578 $ 169,221
========== ==========
Dividends declared $ 180,475 $ 171,845
========== ==========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
1995 1994 1995 1994 1995 1994
========= ========= ========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
BEGINNING OF
PERIOD $ 147,624 $ 151,038 $ 145,289 $ 144,114 $ 139,431 $ 142,056
ADD:
Net income 42,641 32,955 138,291 128,498 189,696 179,410
--------- --------- --------- --------- --------- ---------
190,265 183,993 283,580 272,612 329,127 321,466
--------- --------- --------- --------- --------- ---------
LESS:
Dividends
Cumulative
Preferred
stocks -
4-1/4% series 223 225 669 674 893 898
4-1/2% series 90 90 270 270 360 360
4.22% series 113 113 337 337 448 448
4.88% series 122 122 366 366 488 488
7.44% series 77 77 233 233 312 312
7.50% series 65 65 196 196 261 261
8.85% series 221 249 682 765 931 1,042
7-3/4% series 113 124 339 372 459 502
8.35% series 150 159 472 510 634 685
6.50% series 699 699 2,096 2,096 2,795 2,795
Adjustable
Rate,
series A 358 597 1,161 1,797 1,537 2,398
Common shares 48,500 42,042 137,225 125,565 180,475 171,845
Capital stock
expense 0 0 0 0 0 1
--------- --------- --------- --------- --------- ---------
50,731 44,562 144,046 133,181 189,593 182,035
--------- --------- --------- --------- --------- ---------
BALANCE AT END
OF PERIOD $ 139,534 $ 139,431 $ 139,534 $ 139,431 $ 139,534 $ 139,431
========= ========= ========= ========= ========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1995 1994 1995 1994
=========== =========== =========== ===========
(Dollars in thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 42,641 $ 32,955 $ 138,291 $ 128,498
ADJUSTMENTS TO
RECONCILE NET INCOME
TO NET CASH:
Depreciation and
amortization 49,958 47,900 147,366 142,692
Deferred federal and
state operating
income taxes, net 4,199 7,514 (17,916) (7,965)
Deferred investment
tax credits, net (1,860) (1,846) (5,578) (4,644)
Change in certain
assets and
liabilities -
Accounts
receivable, net 6,375 30,343 26,610 56,288
Electric
production fuel 2,915 2,244 1,544 936
Materials and
supplies 1,203 (518) (591) (612)
Natural gas in
storage (28,829) (38,879) 9,031 (24,539)
Accounts payable (1,142) (4,954) (40,477) (41,659)
Taxes accrued (18,497) (22,452) 14,218 (43,510)
Fuel adjustment
clause (5,763) 2,445 (7,069) 1,552
Gas cost
adjustment
clause (3,518) (3,642) 53,014 55,505
Accrued employment
costs 767 2,363 (2,387) 303
Other accruals (388) (1,171) 27,889 (439)
Other, net 11,230 7,965 13,626 9,965
----------- ----------- ----------- -----------
Net cash
provided by
operating
activities 59,291 60,267 357,571 272,371
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) INVESTING
ACTIVITIES:
Construction
expenditures (35,965) (54,003) (131,205) (151,400)
Other, net 2,162 0 1,460 153
----------- ----------- ----------- -----------
Net cash used
in investing
activities (33,803) (54,003) (129,745) (151,247)
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of
long-term debt 0 187,207 168,386 207,602
Issuance of
short-term debt 64,400 295,125 451,100 741,977
Net change in
commercial paper 42,300 19,300 (114,200) 100,305
Retirement of
long-term debt (97,298) (67,546) (119,744) (258,013)
Retirement of
short-term debt 0 (397,026) (479,400) (769,927)
Retirement of
preferred stock (1,008) (891) (6,339) (2,050)
Cash dividends paid
on common shares (43,975) (41,808) (131,160) (129,803)
Cash dividends paid
on preferred
shares (3,013) (2,521) (9,264) (7,616)
Other, net 254 0 (423) 0
---------- ----------- ----------- -----------
Net cash used
in financing
activities (38,340) (8,160) (241,044) (117,525)
---------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (12,852) (1,896) (13,218) 3,599
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD 20,628 10,674 20,994 5,179
---------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS AT END
OF PERIOD $ 7,776 $ 8,778 $ 7,776 $ 8,778
========== =========== =========== ===========
<PAGE>
<CAPTION>
Twelve Months
Ended September 30,
------------------------
1995 1994
========== ===========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 189,696 $ 179,410
ADJUSTMENTS TO
RECONCILE NET INCOME
TO NET CASH:
Depreciation and
amortization 196,100 190,094
Deferred federal and
state operating
income taxes, net (21,419) 5,941
Deferred investment
tax credits, net (7,350) (6,485)
Change in certain
assets and
liabilities* -
Accounts
receivable, net (11,432) (5,334)
Electric
production fuel 3,794 4,137
Materials and
supplies 1,330 1,066
Natural gas in
storage 17,911 (15,636)
Accounts payable (27,934) 15,648
Taxes accrued 40,983 (31,284)
Fuel adjustment
clause (3,795) (2,565)
Gas cost
adjustment
clause 5,230 43,437
Accrued employment
costs 492 (2,336)
Other accruals 25,146 1,610
Other, net 30,858 (21,806)
---------- -----------
Net cash
provided by
operating
activities 439,610 355,897
---------- -----------
CASH FLOWS PROVIDED BY
(USED IN) INVESTING
ACTIVITIES:
Construction
expenditures (176,659) (214,701)
Other, net 7,007 (248)
---------- -----------
Net cash used
in investing
activities (169,652) (214,949)
---------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of
long-term debt 169,668 207,602
Issuance of
short-term debt 692,050 915,729
Net change in
commercial paper (85,900) 113,500
Retirement of
long-term debt (71,977) (308,434)
Retirement of
short-term debt (774,700) (881,680)
Retirement of
preferred stock (14,643) (2,580)
Cash dividends paid
on common shares (173,202) (172,338)
Cash dividends paid
on preferred
shares (11,833) (10,201)
Other, net (423) 0
---------- -----------
Net cash used
in financing
activities (270,960) (138,402)
---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (1,002) 2,546
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD 8,778 6,232
---------- -----------
CASH AND CASH
EQUIVALENTS AT END
OF PERIOD $ 7,776 $ 8,778
========== ===========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) was
incorporated in Indiana on September 22, 1987, and became the parent of
Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988.
Northern Indiana is a public utility operating company supplying electricity
and gas to the public in the northern third of Indiana.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Northern Indiana and its two subsidiaries, Shore Line
Shops, Inc. and NIPSCO Exploration Company, Inc. All significant intercompany
items have been eliminated in consolidation. Certain reclassifications were
made to conform the prior years' financial statements to the current
presentation.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions as a percentage of the cost of
depreciable utility plant were approximately 4.0%, 4.1% and 4.1%, for the
three, nine, and twelve month periods ended September 30, 1995, respectively,
and 4.0% for the three, nine, and twelve month periods ended September 30,
1994. The depreciation rates for electric and gas properties were 3.55% and
4.92%, respectively.
Northern Indiana follows the practice of charging maintenance and
repairs, including the cost of renewals of minor items of property, to
maintenance expense accounts, except for repairs of transportation and service
equipment which are charged to clearing accounts and redistributed to
operating expense and other accounts. When property which represents a
retirement unit is replaced or removed, the cost of such property is credited
to utility plant, and such cost, together with the cost of removal less
salvage, is charged to the accumulated provision for depreciation.
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 are included in Cost of
Energy under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At September 30, 1995, Northern Indiana had sold
$100 million of certain of its accounts receivable under a sales agreement
which expires May 31, 1997. The September 30, 1995, and December 31, 1994,
accounts receivable balances include approximately $8.6 million due from
Industries.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement
of Cash Flows, Northern Indiana considers temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
------------------ ------------------ ------------------
1995 1994 1995 1994 1995 1994
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income taxes $ 30,500 $ 25,300 $ 78,807 $ 89,874 $105,723 $108,550
Interest, net of
amounts
capitalized $ 13,549 $ 11,312 $ 49,661 $ 54,631 $ 72,013 $ 81,746
</TABLE>
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under or overrecovery 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 or overrecovery as a current asset or
current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage and
storage transportation charges. Northern Indiana records any under or
overrecovery as a current asset or current liability until such time as it is
billed or refunded to its customers. The gas cost adjustment factor is
subject to a quarterly hearing by the Commission and remains in effect for a
three-month period. If the statutory requirement relating to the level of
return is satisfied, any under or overrecovery caused by variances between
estimated and actual cost in a given three or six month period will be
included in a future filing. See Note 4, Rate Matters (Take-or-Pay Pipeline
Gas Costs) and (FERC Order No. 636) for a discussion of take-or-pay charges
and gas transition cost charges.
NATURAL GAS IN STORAGE. Based on the average cost of gas purchased
in September, 1995, and December, 1994, the estimated replacement cost of gas
in storage (current and non-current) at September 30, 1995, and December 31,
1994, exceeded the stated LIFO cost by approximately $22 million and $38
million, respectively.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of the Commission and the Federal Energy Regulatory Commission
(FERC). Accordingly, Northern Indiana's accounting policies are subject to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71
"Accounting for the Effects of Certain Types of Regulation." The regulatory
assets below represent probable future revenue to Northern Indiana associated
with certain incurred costs as these costs are recovered through the rate
making process. Regulatory assets were comprised of the following items, and
were reflected in the Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
============ =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 15) $ 54,220 $ 53,792
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 76,035 79,198
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,717 7,864
Deferral of SFAS No. 106 expense not
recovered (Note 8) 57,517 43,772
FERC Order No. 636
transition costs (Note 4) 28,888 56,153
------------ -------------
227,377 240,779
------------ -------------
Less: Current portion of regulatory assets 24,505 45,970
------------ -------------
$ 202,872 $ 194,809
============ =============
</TABLE>
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement imposes stricter criteria for
retention of regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. Northern Indiana anticipates
adopting this standard on January 1, 1996, and does not expect that adoption
will have a material impact on its financial position or results of operations
based on the current regulatory structure in which Northern Indiana operates.
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 began capitalizing carrying charges and deferring
depreciation and certain operating expenses relating to its scrubber service
agreement upon completion of the flue gas desulfurization plant in June, 1992,
at Northern Indiana's Bailly Generating Station in accordance with an order of
the Commission. Capitalization of carrying charges and deferral of
depreciation and certain operating expenses will continue until December 31,
1995. Thereafter, the accumulated balance of the deferred costs and related
carrying charges will be amortized over the remaining life of the scrubber
service agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1993, a pretax rate of 3.7% for all construction was
being used; effective January 1, 1994, the rate increased to 5.0% and
effective January 1, 1995, the rate increased to 7.0%.
INCOME TAXES. Deferred income taxes are recognized as costs in the
rate making process by the commissions having jurisdiction over the rates
charged by Northern Indiana. Deferred income taxes are provided as a result
of provisions in the income tax law that either require or permit certain
items to be reported on the income tax return in a different period than they
are reported in the financial statements. These taxes are reversed by a debit
or credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
(3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the years
1982 through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS believes that interest paid on the Notes should have been
subject to United States tax withholding. Northern Indiana estimates this
claim to be approximately $49 million of principal and interest at
September 30, 1995. The Notes were redeemed in 1985 and Finance was
subsequently liquidated. On October 25, 1991, Northern Indiana filed its
petition challenging the assessment in the United States Tax Court (Tax
Court). The matter was tried on May 31 and June 1, 1994, and briefing was
completed September 30, 1994. On November 6, 1995, the Tax Court ruled in
favor of Northern Indiana, finding that the interest paid on the Notes was not
subject to United States tax withholding. While it is uncertain whether the
IRS will appeal the Tax Court's decision, Northern Indiana's management and
general counsel believe the ruling of the Tax Court will ultimately prevail.
(4) RATE MATTERS:
TAKE-OR-PAY PIPELINE GAS COSTS. The FERC has allowed certain interstate
pipeline suppliers to pass on to their customers a portion of costs for
contracted gas not purchased (take-or-pay), contract reformation and
associated interest charges through direct billing to their customers,
including Northern Indiana.
Northern Indiana records take-or-pay costs as they are billed by the
respective pipeline, and in an order dated September 28, 1988, the Commission
allowed Northern Indiana to recover these additional gas costs on a volumetric
basis from all customers, including transport customers. Northern Indiana has
recovered approximately $187.0 million of take-or-pay costs and interest from
its customers through September 30, 1995. As of September 30, 1995, an
additional $4.0 million was scheduled to be billed to Northern Indiana and
recovered from customers over a period of one to four years.
FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636
which required interstate pipelines to restructure their services. Under the
Order, existing pipeline sales services have been "unbundled" such that gas
supplies are being sold separately from interstate transportation services.
Northern Indiana's interstate pipeline suppliers have filed new tariffs with
the FERC to implement Order No. 636, and Northern Indiana has contracted for a
mix of transportation and storage services which will allow Northern Indiana
to meet the needs of its customers. Customers of the pipelines, such as
Northern Indiana, are expected to benefit from enhanced access to
competitively priced gas supplies as well as from more flexible transportation
services. Pipelines are seeking to recover from their customers certain
transition costs associated with restructuring under the Order No. 636
regulation. Any such recovery is subject to established review procedures at
the FERC. Also, mandated changes in pipeline rate design could increase the
cost of firm transportation service on interstate pipelines. All interstate
pipelines are now operating under Order No. 636 regulation.
Northern Indiana's pipeline suppliers have made certain filings with the
FERC for the collection of their respective transition costs. Northern
Indiana expects that the total transition costs from all suppliers will
approximate $137 million. However, the ultimate level of costs will depend on
future events, including the market price of natural gas. Approximately $76
million of such costs have been recorded, a portion of which has been paid to
the pipeline suppliers, subject to refund. On November 2, 1994, the
Commission issued an order which approved the recovery of these FERC-allowed
transition costs on a volumetric basis from Northern Indiana's sales and
transportation customers (which is consistent with what the Commission
authorized for the recovery of take-or-pay pipeline gas costs). Certain
industrial customers appealed the November 2, 1994, order to the Indiana Court
of Appeals. On May 25, 1995, the Court granted Northern Indiana's motion to
dismiss the appeal for want of subject matter jurisdiction. On June 23, 1995,
the transportation customers filed a petition for rehearing and
reconsideration of the Court's order. On July 27, 1995, the Court denied the
transportation customers' petition. On August 24, 1995, the transportation
customers filed a Petition for Transfer with the Indiana Supreme Court seeking
review of the Indiana Court of Appeals' decision. Northern Indiana filed a
brief opposing the transportation customers' petition and the matter is
pending Indiana Supreme Court decision. Regulatory assets, in amounts
corresponding to the costs recorded, have been recorded to reflect the
ultimate recovery of these costs.
(5) ENVIRONMENTAL MATTERS: Because of major investments made in modern
environmental control facilities and the use of low sulfur coal, all of
Northern Indiana's electric production facilities now comply with the sulfur
dioxide limitations contained in acid deposition provisions of the Clean Air
Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of
compliance with the CAAA sulfur dioxide regulations will impact electric rates
by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants, which may require significant
capital expenditures for control of these emissions. Northern Indiana is
evaluating a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be
recoverable through the rate making process.
Northern Indiana has an ongoing program to remain aware of laws and
regulations involved with hazardous waste. It is Northern Indiana's intent to
continue to evaluate its facilities and properties with respect to these rules
and identify any sites that would require corrective action.
Northern Indiana has received notices from the Environmental Protection
Agency (EPA) that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and the Superfund Amendment and Reauthorization Act (SARA) and may be required
to share in the cost of cleanup of several waste disposal sites identified by
the EPA. The sites are in various stages of investigation, analysis and
remediation. At each of the sites, Northern Indiana is one of several PRPs,
and it is expected that remedial costs, as provided under CERCLA and SARA,
will be shared among them. At some sites Northern Indiana and/or the other
named PRPs are presently working with the EPA to clean up the sites and avoid
the imposition of fines or added costs. While all of the remedial costs at
these sites are not determinable, Northern Indiana's analysis indicates its
share of such costs with other PRPs should not have a significant impact on
its financial position or the results of future operations.
Northern Indiana has instituted a program to investigate former
manufactured gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual
inspections of these sites. Northern Indiana has conducted initial samplings
at ten sites. Follow-up investigations have been conducted at four sites and
potential remedial measures are being evaluated. Northern Indiana will
continue its program to assess sites. During the follow-up investigation of
the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted
the presence of hydrocarbons in the Elkhart River. Northern Indiana reported
this finding to the Indiana Department of Environmental Management (IDEM) and
the EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP will be to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by the IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
Northern Indiana has met with various companies who provided insurance
coverage which Northern Indiana believe covers costs related to actions taken
at former manufactured gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured gas plant sites.
The possibility that exposure to electric and magnetic fields emanating
from power lines, household appliances and other electric sources may result
in adverse health effects has been the subject of public, governmental and
media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
(6) INCOME TAXES: Effective January 1, 1993, Northern Indiana adopted SFAS
No. 109, "Accounting for Income Taxes," which requires the use of the
liability method of accounting for income taxes. Under the liability method,
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 implement SFAS No. 109, certain adjustments were made to deferred
income taxes. To the extent such income taxes are recoverable or payable
through future rates, regulatory assets and liabilities have been recorded in
the Consolidated Balance Sheet. These adjustments include the amounts
reflecting Northern Indiana's obligation to credit to ratepayers deferred
income taxes provided at rates higher than the current federal tax rate which
are currently being credited to ratepayers using the average rate assumption
method required by the Tax Reform Act of 1986 and the Commission. The
Consolidated Balance Sheet at September 30, 1995, and December 31, 1994,
reflects a net regulatory income tax liability of $9.4 million and $14.6
million, respectively. The net regulatory income tax liability is derived from
regulatory assets 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, and regulatory
liabilities primarily attributable to deferred taxes provided at rates in
excess of the current statutory rate, as discussed above, and unamortized
deferred investment tax credits.
Northern Indiana joins in the filing of consolidated tax returns with
Industries and currently pays to Industries its separate return tax liability
as defined in the Tax Sharing Agreement between Industries and its
subsidiaries.
The components of the net deferred income tax liability at September 30,
1995, and December 31, 1994, are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
============ ===========
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 694,417 $ 684,887
AFUDC-equity 40,704 42,447
Adjustment clauses 0 11,173
Take-or-pay gas costs 1,212 1,687
Other regulatory assets 25,078 22,062
Reacquisition premium on debt 20,565 20,401
Deferred tax assets -
Deferred investment tax credits (44,086) (46,201)
Removal costs (114,446) (105,671)
Adjustment clauses (6,254) 0
FERC Order No. 636 transition costs (3,262) (5,461)
Other postretirement benefits (29,010) (22,253)
Regulatory income tax liability (3,559) (5,547)
Other, net (18,459) (21,911)
----------- -----------
562,900 575,613
Less: Deferred income taxes related to
current assets and liabilities (14,100) (228)
----------- -----------
Deferred income taxes - noncurrent $ 577,000 $ 575,841
=========== ===========
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1995 1994 1995 1994
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 19,616 $ 11,705 $ 90,453 $ 73,346
State 2,991 1,935 13,312 11,218
--------- --------- --------- ---------
22,607 13,640 103,765 84,564
--------- --------- --------- ---------
Deferred income taxes, net -
Federal and State -
Accelerated depreciation and
other property differences 2,012 3,277 6,036 9,832
Removal costs (2,851) (2,808) (8,553) (8,425)
Adjustment clauses 8,239 458 (2,932) (21,003)
FERC Order No. 636
transition costs (2,211) 3,718 (10,486) 11,873
Take-or-pay gas costs (158) (363) (477) (1,833)
Reacquisition premium on debt (313) 1,382 (940) 2,451
Other (519) 1,850 (564) (860)
--------- --------- --------- ---------
4,199 7,514 (17,916) (7,965)
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,860) (1,846) (5,578) (4,644)
--------- --------- --------- ---------
Total utility operating income
taxes 24,946 19,308 80,271 71,955
Income tax applicable to non-
operating activities and income
of subsidiaries (656) (292) (2,565) (202)
--------- --------- --------- ---------
Total income taxes $ 24,290 $ 19,016 $ 77,706 $ 71,753
========= ========= ========= =========
<PAGE>
<CAPTION>
Twelve Months
Ended September 30,
--------------------
1995 1994
========= =========
(Dollars in thousands)
<S> <C> <C>
Current income taxes -
Federal $ 116,109 $ 85,156
State 17,233 13,318
--------- ---------
133,342 98,474
--------- ---------
Deferred income taxes, net -
Federal and State -
Accelerated depreciation and
other property differences 4,485 13,374
Removal costs (12,221) (9,234)
Adjustment clauses (722) (14,845)
FERC Order No. 636
transition costs (10,966) 11,873
Take-or-pay gas costs (308) (326)
Reacquisition premium on debt (779) 2,503
Other (908) 2,596
--------- ---------
(21,419) 5,941
--------- ---------
Deferred investment tax credits,
net (7,350) (6,485)
--------- ---------
Total utility operating income
taxes 104,573 97,930
Income tax applicable to non-
operating activities and income
of subsidiaries (12,654) (172)
--------- ---------
Total income taxes $ 91,919 $ 97,758
========= =========
</TABLE>
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1995 1994 1995 1994
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $ 42,641 $ 32,955 $ 138,291 $ 128,498
Add-Income taxes 24,290 19,016 77,706 71,753
--------- --------- --------- ---------
Net income before income taxes $ 66,931 $ 51,971 $ 215,997 $ 200,251
========= ========= ========= =========
Amount derived by multiplying
pretax income by the statutory
rate $ 23,426 $ 18,190 $ 75,599 $ 70,088
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 1,005 967 3,014 2,902
Amortization of deferred
investment tax credits (1,860) (1,846) (5,578) (5,610)
State income taxes, net of
federal income tax benefit 2,269 1,845 7,218 6,755
Fair market value of property
donated in excess of book value 0 0 0 0
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,360) (1,298) (4,079) (3,895)
Other, net 810 1,158 1,532 1,513
--------- --------- --------- ---------
Total income taxes $ 24,290 $ 19,016 $ 77,706 $ 71,753
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended September 30,
--------------------
1995 1994
========= =========
(Dollars in thousands)
<S> <C> <C>
Net Income $ 189,696 $ 179,410
Add-Income taxes 91,919 97,758
--------- ---------
Net income before income taxes $ 281,615 $ 277,168
========= =========
Amount derived by multiplying
pretax income by the statutory
rate $ 98,565 $ 97,073
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 4,156 3,875
Amortization of deferred
investment tax credits (7,351) (7,451)
State income taxes, net of
federal income tax benefit 9,478 9,241
Fair market value of property
donated in excess of book value (7,753) 0
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (5,991) (5,069)
Other, net 815 89
--------- ---------
Total income taxes $ 91,919 $ 97,758
========= =========
</TABLE>
(7) PENSION PLANS: Industries has a noncontributory, defined benefit
retirement plan covering substantially all employees of Northern Indiana.
Benefits under the plan reflect the employees' compensation, years of service
and age at retirement.
The plan's funded status as of January 1, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
========= =========
(Dollars in thousands)
<S> <C> <C>
Vested benefit obligation $ 444,096 $ 473,280
Nonvested benefit 96,425 85,954
--------- ---------
Accumulated benefit obligation $ 540,521 $ 559,234
========= =========
Projected benefit obligation for service
rendered to date $ 605,495 $ 644,788
Plan assets at fair market value 565,507 595,621
--------- ---------
Projected benefit obligation in excess of plan
assets 39,988 49,167
Unrecognized transition obligation at January 1,
being recognized over 17 years (49,395) (54,883)
Unrecognized prior service cost (28,111) (31,101)
Unrecognized gains 47,147 53,723
--------- ---------
Accrued pension costs $ 9,629 $ 16,906
========= =========
</TABLE>
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on the plan benefit formula without
considering expected future salary increases. The projected benefit
obligation considers estimated future salary increases. Discount rates of
8.75% and 7.50% and rates of increase in compensation levels of 5.5% were used
to determine the accumulated benefit obligation and projected benefit
obligation at January 1, 1995, and 1994, respectively. The decrease in the
accumulated benefit obligation as of January 1, 1995, is mainly caused by the
increase in the discount rate to 8.75% and was partially offset by changes in
other plan assumptions.
The following items are the components of provisions for pensions for
the three and nine month periods ended September 30, 1995:
<TABLE>
<CAPTION>
Three Nine
Months Months
========= =========
(Dollars in thousands)
<S> <C> <C>
Service costs $ 3,196 $ 9,587
Interest costs 13,180 39,540
Estimated return on plan assets (12,737) (38,210)
Amortization of transition obligation 1,372 4,116
Other net amortization and deferral 614 1,842
--------- ---------
$ 5,625 $ 16,875
========= =========
</TABLE>
Assumptions used in the valuation and determination of 1995 and 1994
pension expenses were as follows:
<TABLE>
<CAPTION>
1995 1994
===== =====
<S> <C> <C>
Discount rate 8.75% 7.50%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 8.25%
</TABLE>
Plan assets are invested primarily in common stocks, bonds and
notes.
Northern Indiana recorded provisions for pension costs as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 5,625 $ 5,475
Nine months ended $ 16,875 $ 16,725
Twelve months ended $ 20,671 $ 22,403
</TABLE>
(8) POSTRETIREMENT BENEFITS: Northern Indiana provides certain health care
and life insurance benefits for retired employees. Substantially all of
Northern Indiana's employees may become eligible for those benefits if they
reach retirement age while working for Northern Indiana. Those and similar
benefits for active employees are provided through insurance plans whose
premiums are based on the benefits to active employees and retirees paid
during the year. Prior to January 1, 1993, Northern Indiana recognized the
cost of providing those benefits by expensing insurance premiums, which is
consistent with current rate making practices.
Effective January 1, 1993, Northern Indiana adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
establishes accounting and reporting standards for such postretirement
benefits. This standard requires the accrual of the expected cost of such
benefits during the employee's years of service.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1995, and January 1, 1994:
<TABLE>
<CAPTION>
January 1, January 1,
1995 1994
========== ==========
(Dollars in thousands)
<S> <C> <C>
Retirees $ 94,913 $ 88,034
Fully eligible active plan participants 18,796 29,006
Other active plan participants 103,559 147,687
---------- ----------
Accumulated postretirement benefit obligation 217,268 264,727
Unrecognized transition obligation at January 1,
being recognized over 20 years (204,265) (215,613)
Unrecognized actuarial gain (loss) 44,905 (20,815)
---------- ----------
Accrued liability for postretirement benefits $ 57,908 $ 28,299
========== ==========
</TABLE>
A discount rate of 8.75% and a pre-Medicare medical trend rate of 11%
declining to a long-term rate of 7% and a discount rate of 7.5% and a
pre-Medicare medical trend rate of 12% declining to a long-term rate of 7%
were used to determine the accumulated postretirement benefit obligation at
January 1, 1995, and 1994, respectively.
The transition obligation at January 1, 1993, for accumulated
postretirement benefits earned and not recognized is being amortized over
twenty years as allowed by SFAS No. 106.
Net periodic postretirement benefits costs for the three, nine, and
twelve month periods ended September 30, 1995, and September 30, 1994, include
the following components:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
---------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994
======= ======= ======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 1,376 $ 1,922 $ 4,098 $ 5,766 $ 5,953 $ 7,432
Interest costs 4,651 4,893 13,953 14,679 18,844 18,738
Amortization of
transition
obligation
over 20 years 2,837 2,837 8,511 8,511 11,348 11,348
Amortization of
unrecognize
actuarial (gain) (541) 0 (1,623) 0 (1,623) 0
------- ------- ------- ------- ------- -------
$ 8,323 $ 9,652 $24,939 $28,956 $34,522 $37,518
======= ======= ======= ======= ======= =======
</TABLE>
The net periodic postretirement benefit costs for 1995 were determined
assuming an 8.75% discount rate, a 5% rate of compensation increase and a
pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%.
The effect of a 1% increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation at January 1, 1995, by approximately $32.0 million and increase the
aggregate of the service and interest cost components of plan costs by
approximately $1.2 million and $3.6 million for the three and nine month
periods ended September 30, 1995. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates or plan changes.
On December 30, 1992, the Commission authorized the accrual method of
accounting for postretirement benefits for rate making purposes and authorized
the deferral, as a regulatory asset to be recovered through future revenues,
of the net increase in cost until such time as the new accrual cost method may
be reflected in the rate making process. The Commission stated that a
deferral period of four years or less would be rebuttably presumed to be
reasonable and also indicated each utility would have to demonstrate its
postretirement benefit costs were prudent and reasonably incurred at the time
such costs were incurred at the time such costs were proposed to be recovered
in the rate making process. Northern Indiana currently anticipates requesting
the recovery of such costs within that period and, accordingly, is deferring
as a regulatory asset the difference between the amount that would have been
charged to expense under pay-as-you-go accounting and the amount accrued in
accordance with the new standard. This conclusion could change as competitive
factors influence pricing decisions.
(9) POSTEMPLOYMENT BENEFITS: Effective January 1, 1994, Northern Indiana
adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits,"
which requires Northern Indiana to accrue the estimated cost of benefits
provided to former or inactive employees after employment but before
retirement. Adoption of SFAS No. 112 did not have a material impact on
Northern Indiana's financial position or results of operations.
(10) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS:
2,400,000 shares - Cumulative Preferred - $100 par value
3,000,000 shares - Cumulative Preferred - no par value
2,000,000 shares - Cumulative Preference - $50 par value (none
outstanding)
3,000,000 shares - Cumulative Preference - no par value (none
issued)
Note 11 sets forth the preferred stocks which are redeemable solely at
the option of Northern Indiana, and Note 12 sets forth the preferred stocks
which are subject to mandatory redemption requirements or whose redemption is
outside the control of Northern Indiana.
The Preferred shareholders of Northern Indiana have no voting rights,
except in the event of default on the payment of four consecutive quarterly
dividends, or as required by Indiana law to authorize additional preferred
shares, or by the Articles of Incorporation in the event of certain merger
transactions.
(11) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF NORTHERN INDIANA,
OUTSTANDING AT SEPTEMBER 30, 1995, AND DECEMBER 31, 1994 (SEE NOTE 10):
<TABLE>
<CAPTION>
Redemption
Price at
September 30, December 31, September 30,
1995 1994 1995
============ =========== ============
(Dollars in thousands)
<S> <C> <C> <C>
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,190 and
211,266 shares outstanding,
respectively $ 20,919 $ 21,127 $ 101.20
4-1/2% series - 79,996 shares
outstanding 8,000 8,000 100.00
4.22% series - 106,198 and
106,200 shares outstanding,
respectively 10,620 10,620 101.60
4.88% series - 100,000 shares
outstanding 10,000 10,000 102.00
7.44% series - 41,890 and
41,900 shares outstanding,
respectively 4,189 4,190 101.00
7.50% series - 34,842 shares
outstanding 3,484 3,484 101.00
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at
September 30, 1995), Series A
(stated value $50 per share)
481,185 and 574,285 shares
outstanding, respectively 24,059 28,714 50.00
------------ -----------
$ 81,525 $ 86,389
============ ===========
</TABLE>
During the period October 1, 1993, to September 30, 1995, there were no
issuances of the above preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at
any time upon 30 days notice at the option of Northern Indiana at the
redemption prices shown.
(12) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT SEPTEMBER 30, 1995, AND
DECEMBER 31, 1994 (SEE NOTE 10):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
============ ============
(Dollars in thousands)
<S> <C> <C>
Preferred stocks subject to mandatory redemption
requirements or whose redemption is outside the
control of Northern Indiana:
Cumulative preferred stock - $100 par value -
8.85% series - 87,500 and 100,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year $ 8,750 $ 10,000
7-3/4% series - 55,568 shares outstanding,
excluding sinking fund payments due within
one year 5,557 5,557
8.35% series - 69,000 and 75,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year 6,900 7,500
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
---------- ------------
$ 64,207 $ 66,057
========== ============
</TABLE>
The redemption prices at September 30, 1995, 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:
<TABLE>
<CAPTION>
Sinking Fund or
Mandatory Redemption
Series Redemption Price Per Share Provisions
====== ========================== =============================
Cumulative preferred stock - $100 par value -
<S> <C> <C>
8.85% $102.22, reduced periodically 12,500 shares on or before
April 1.
8.35% $104.18, reduced periodically 3,000 shares on or before
July 1; increasing to 6,000
shares beginning in 2004;
noncumulative option
to double amount each
year.
7-3/4% $104.76, reduced periodically 2,777 shares on or
before December 1;
noncumulative option
to double amount each
year.
<CAPTION>
Cumulative preferred stock - no par value -
<S> <C> <C>
6.50% $100.00 on October 14, 2002 430,000 shares on October 14,
2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at September 30, 1995, for each of the twelve month periods
subsequent to September 30, 1996, are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30:*
=================================
<S> <C>
1997 $ 1,827,700
1998 $ 1,827,700
1999 $ 1,827,700
2000 $ 1,827,700
<FN>
* Table does not reflect redemptions made after September 30, 1995.
</TABLE>
(13) COMMON SHARE DIVIDEND: Northern Indiana's Indenture provides that it
will not declare or pay any dividends on any class of capital stock (other
than preferred or preference stock) except out of earned surplus or net
profits of Northern Indiana. At September 30, 1995, Northern Indiana had
approximately $139.5 million of retained earnings (earned surplus) available
for the payment of dividends. Future dividends will depend upon adequate
retained earnings, adequate future earnings and the absence of adverse
developments.
(14) COMMON SHARES: Effective with the exchange of common shares on
March 3, 1988, Northern Indiana's common shares are wholly-owned by
Industries.
(15) LONG-TERM DEBT: At September 30, 1995, and December 31, 1994, the
long-term debt of Northern Indiana, excluding amounts due within one year,
issued and not retired or cancelled was as follows:
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
-----------------------------
September 30, December 31,
1995 1994
============= ============
(Dollars in thousands)
<S> <C> <C>
First mortgage bonds -
Series O, 6-3/8%, due September 1, 1997 $ 25,747 $ 25,747
Series P, 6-7/8%, due October 1, 1998 14,509 14,509
Series T, 7-1/2%, due April 1, 2002 40,500 40,543
Series U, 8-1/8%, due July 15, 2003 0 55,239
Series Z, 8-1/8%, due August 15, 2007 0 39,569
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 135,756 230,607
----------- -----------
Pollution control notes and bonds -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 20,750 20,750
Series 1988 Bonds - Jasper County -
Series A, B and C 3.76% weighted
average at September 30, 1995, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D 3.72% weighted average at
September 30, 1995, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 4.50% at September 30, 1995,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 4.50% at September 30, 1995,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 4.50% at September 30, 1995,
due April 1, 2019 41,000 41,000
----------- -----------
Total 243,750 243,750
----------- -----------
Medium-term notes -
Issued at interest rates between 5.83%
and 7.64% with a weighted average interest
rate of 6.82% and various maturities between
July 25, 1997 and January 19, 2024 684,025 594,750
----------- -----------
Unamortized premium and discount
on long-term debt, net (4,179) (3,756)
----------- -----------
Total long-term debt excluding
amounts due in one year $ 1,059,352 $ 1,065,351
=========== ===========
</TABLE>
The sinking fund requirements of long-term debt outstanding at
September 30, 1995, (including the maturity of first mortgage bonds: Series O,
6-3/8%, due September 1, 1997; and Series P, 6-7/8%, due October 1, 1998; and
medium-term notes due from April 6, 1998 to June 1, 2000; for each of the
twelve month periods subsequent to June 30, 1996, are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
==================================
<S> <C>
1997 $ 66,997,000
1998 $ 36,500,000
1999 $ 16,009,000
2000 $157,000,000
</TABLE>
Unamortized debt expense, premium and discount on long-term debt,
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem
all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating
$125.5 million, through the use of working capital and the proceeds of
short-term debt. During 1994, $120.0 million of the Medium-Term Notes, Series
D, were issued to complete the permanent refinancing of those first
mortgage bonds. As of June 12, 1995, the remaining $169,275,000 of Medium-
Term Notes, Series D, were issued and part of the proceeds were used to
redeem all of the outstanding First Mortgage Bonds, Series U and Z aggregating
$94.8 million on July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company
Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A
Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due June 1,
2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The proceeds
of these issuances were loaned to Northern Indiana under similar terms. The
initial interest rate on Series 1994 Bonds was 3.10%, which resets daily. The
proceeds of the Series 1994A and Series 1994C were used to retire on
October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due
October 15, 2004 and $41 million of Series LL First Mortgage Bonds, 7-1/2%,
due October 15, 2014. The proceeds of the Series 1994B Bonds were used to
retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994. The
Series 1994 Bonds are secured by Letters of Credit from Union Bank of
Switzerland.
(16) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1998, unless
extended by its terms. As of September 30, 1995, there were no borrowings
outstanding under this agreement. In addition, Northern Indiana has $14.2
million in lines of credit which run to May 31, 1996. 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 fee to a combination of
fees which are mutually satisfactory to both parties. As of September 30,
1995, there were no borrowings under these lines of credit. The Credit
Agreement and lines of credit are also available to support the issuances of
commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1995, there were $64.4 million of borrowings
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1995, there were no borrowings outstanding under this facility.
Northern Indiana uses commercial paper to fund short-term working
capital requirements. As of September 30, 1995, Northern Indiana had $42.3
million in commercial paper outstanding, having a weighted average interest
rate of 5.85%.
(17) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
20-year agreement for the rental of office facilities from NIPSCO Development
Company, Inc., a subsidiary of Industries, at a current annual rental payment
of approximately $3.2 million.
The following is a schedule, by years, of future minimum rental
payments, excluding those to associated companies, required under operating
leases that have initial or remaining noncancelable lease terms in excess of
one year as of September 30, 1995:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
================================
(Dollars in thousands)
<S> <C>
1996 $ 7,262
1997 5,389
1998 4,111
1999 3,161
2000 3,055
Later years 40,017
--------
Total minimum
payments required $ 62,995
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 2,844 $ 2,653
Nine months ended $ 7,981 $ 8,067
Twelve months ended $ 10,124 $ 10,542
</TABLE>
(18) COMMITMENTS: Northern Indiana estimates that approximately $774
million will be expended for construction purposes for the period from
January 1, 1995, to December 31, 1999. Substantial commitments have been made
by Northern Indiana in connection with this program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air will provide 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 20-year contract period.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair
value because of the short maturity of those instruments.
Investments: The fair value of investments are estimated based on
market prices for those of similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock are estimated based on the quoted market prices for the same
or similar issues or on the rates offered to Northern Indiana 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 Northern Indiana's
financial instruments are as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
=========== =========== =========== ===========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and
cash equivalents $ 7,776 $ 7,776 $ 20,994 $ 20,994
Investments $ 646 $ 646 $ 1,038 $ 1,038
Long-term debt
(including current
portion) $ 1,140,145 $ 1,141,799 $ 1,088,537 $ 998,393
Preferred stock $ 147,560 $ 127,257 $ 154,274 $ 120,891
</TABLE>
Northern Indiana is 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.
(20) CUSTOMER CONCENTRATIONS: Northern Indiana is a public utility
operating company supplying natural gas and electrical energy in the northern
third of Indiana. Although Northern Indiana has a diversified base of
residential and commercial customers, a substantial portion of its electric
and gas industrial deliveries are dependent upon the basic steel industry. The
basic steel industry accounted for 5% of gas revenues (including
transportation services) and 23% of electric revenue for the twelve months
ended September 30, 1995, as compared to 2% and 25%, respectively, for the
twelve months ended September 30, 1994.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES -
Total operating revenues for the twelve months ended September 30,
1995, decreased $19.8 million as compared to the twelve months ended
September 30, 1994. Gas revenues decreased $50.2 million and electric
revenues increased $30.4 million.
The decrease in gas revenues was largely attributable to decreased
sales to residential and commercial customers due to milder weather, decreased
gas costs partially offset by increased gas transition charges and deliveries
of gas transported for others. 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 Northern Indiana's system. Northern
Indiana had approximately 632,100 gas customers at September 30, 1995.
The increase in electric revenues for the twelve months ended
September 30, 1995, was mainly due to increased sales to residential and
commercial customers as a result of warmer weather in the third quarter of
1995, and increased sales to industrial and wholesale customers, and was
partially offset by decreased fuel cost per kilowatt-hour (kwh) and
transitional rate adjustments to industrial customers signing new five year
contracts.
Total operating revenue for the nine months ended September 30, 1995
increased $12.2 million as compared to the nine months ended September 30,
1994. Gas revenues decreased $12.9 million and electric revenues increased
$25.1 million as compared to the same period in 1994. The decrease in gas
revenues was mainly due to decreased sales to residential and commercial
customers as a result of warmer weather during the first quarter of 1995 and
decreased gas costs partially offset by increased gas transition charges. The
increase in electric revenue for the nine months ended September 30, 1995, was
mainly due to increased sales to residential and commercial customers as a
result of warmer weather in the third quarter and increased sales to wholesale
customers, and was partially offset by lower fuel costs per kwh and to
transitional rate adjustments to industrial customers.
Total operating revenue for the three months ended September 30, 1995
increased $35.9 million as compared to the three months ended September 30,
1994. Gas revenues increased $2.0 million and electric revenues increased
$33.9 million as compared to the same period in 1994. The increase in gas
revenues was mainly due to increased revenues per dth of gas transported for
others and was partially offset by decreased sales to residential customers.
The increase in electric revenue for the three months ended September 30,
1995, was mainly due to increased sales to residential and commercial
customers as a result of warmer weather partially offset by transitional rate
adjustments to industrial customers.
The basic steel industry accounted for 40% of natural gas delivered
(including volumes transported) and 37% of electric sales during the twelve
months ended September 30, 1995.
The components of the variations in gas and electric revenues are
shown in the following tables:
<TABLE>
<CAPTION>
Variations from Prior Periods
--------------------------------------
September 30, 1995
Compared to
September 30, 1994
Three Nine Twelve
Months Months Months
========== ============ ===========
(Dollars in thousands)
<S> <C> <C> <C>
Gas Revenue -
Pass through of net changes
in purchased gas costs, gas
storage and storage
transportation costs $ (8,839) $ (43,407) $ (61,839)
Take-or-pay costs and transition
costs 11,706 46,603 62,351
Changes in sales levels (162) (16,102) (51,229)
Gas transport levels (726) 13 468
---------- ------------ -----------
Gas Revenue Change $ 1,979 $ (12,893) $ (50,249)
---------- ------------ -----------
Electric Revenue -
Pass through of net changes
in fuel $ 276 $ (13,948) $ (17,717)
Changes in sales levels 33,652 39,028 48,179
---------- ------------ -----------
Electric Revenue Change $ 33,928 $ 25,080 $ 30,462
---------- ------------ -----------
Total Revenue Change $ 35,907 $ 12,187 $ (19,787)
========== ============ ===========
<FN>
See Note 4 to the consolidated financial statements (Rate Matters), regarding
gas take-or-pay and FERC Order No. 636 transition costs.
</TABLE>
GAS COSTS -
Gas costs decreased $31.9 million for the twelve month period ended
September 30, 1995, due to decreased purchases, lower sales and lower
gas costs per dth. The average cost of purchased gas for the three, nine and
twelve month periods ended September 30, 1995, after adjustment for
take-or-pay and transition charges billed to transport customers was $2.60,
$2.79 and $2.77 per dth, respectively, as compared to $2.83, $2.96 and $2.98
per dth for the same periods in 1994.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation decreased for the nine and
twelve month periods ended September 30, 1995, compared to 1994 periods,
mainly as a result of lower cost for coal. The cost of fuel for electric
generation increased for the three month period ended September 30, 1995,
mainly as a result of increased generation.
Power purchased increased $4.0, $7.3 and $6.6 million for the three,
nine, and twelve month periods ended September 30, 1995, respectively, as a
result of increased bulk power purchases with other utilities due to increased
sales.
OPERATING MARGINS -
Operating margins increased $10.3 million for the twelve months ended
September 30, 1995, from the same period a year ago. The operating margin
from gas deliveries decreased $18.3 million, due to decreased sales to
residential and commercial customers as a result of milder weather and
decreased sales to industrial customers which were partially offset by
increased deliveries of gas transported for others, compared to the twelve
month period ended September 30, 1994. The operating margins from electric
sales increased $28.6 million, due to increased sales to residential and
commercial customers as a result of warmer weather in the third quarter of
1995, and increased sales to industrial and wholesale customers.
Operating margins increased $20.4 million for the nine months ended
September 30, 1995, from the same period a year ago. Gas operating margin
decreased $3.0 million due to decreased sales to residential and commercial
customers due to warmer weather during the first quarter of 1995. Operating
margins on electric sales increased $23.4 million due to increased sales to
residential and commercial customers as a result of warmer weather in the
third quarter of 1995 and increased sales to wholesale customers, partially
offset by transitional rate adjustments to industrial customers.
Operating margins increased $22.8 million for the three months ended
September 30, 1995, over the same period a year ago. The operating margins
from gas increased $0.3 million due to increased revenues per dth of gas
transported for others. Operating margins on electric sales increased $22.5
million reflecting increased sales to residential and commercial customers as
a result of warmer weather, partially offset by transitional rate adjustments
to industrial customers.
OPERATING EXPENSES AND TAXES -
Operation expenses decreased $2.4 and $2.8 million for the nine and
twelve month periods ended September 30, 1995, respectively, due to decreased
employment related costs. Operation expenses increased $3.5 million for the
three month period ended September 30, 1995, mainly due to increased electric
production operating costs.
Maintenance expenses decreased $1.3 and $4.8 million for the nine and
twelve month periods ended September 30, 1995, respectively, mainly reflecting
decreased maintenance activity at the electric production facilities.
Depreciation and amortization expense increased for the three, nine,
and twelve month periods ended September 30, 1995, as a result of net plant
additions.
Utility income taxes increased for the three, nine, and twelve month
periods ended September 30, 1995, as a result of higher pre-tax income.
The after tax effects of the Northern Indiana land donation to the
Shafer and Freeman Lakes Environmental Conservation Corporation are included
in "Other Income (Deductions)" for the twelve month period ended September 30,
1995.
Interest charges (net) increased for the three month period ended
September 30, 1995, reflecting the issuance of $169,275,000 of Medium-Term
Notes, Series D, partially offset by decreased short-term borrowing rates.
Interest charges (net) decreased for the nine months ended September 30, 1995,
reflecting a decrease in short-term borrowings. Interest charges (net)
decreased for the twelve months ended September 30, 1995, reflecting the
refinancing of long-term debt at favorable rates, partially offset by an
increase in short-term borrowing rates.
See Note 2 to Notes to Consolidated Financial Statements (Summary of
Significant Accounting Policies) for a discussion of Regulatory Assets,
Carrying Charges and Deferred Depreciation and Allowance for Funds Used During
Construction. Also, see Notes 4, 6, 8 and 9 for a discussion of FERC Order
No. 636, Income Taxes, Postretirement Benefits, and Postemployment Benefits,
respectively.
NET INCOME -
Net income for the twelve month period ended September 30, 1995, was
$189.7 million compared to $179.4 million for the twelve month period ended
September 30, 1994.
Net income for the nine months ended September 30, 1995, was $138.3
million compared to $128.5 million for the nine months ended September 30,
1994.
Net income for the three months ended September 30, 1995, was $42.6
million compared to $33.0 million for the three months ended September 30,
1994.
ENVIRONMENTAL MATTERS -
Because of major investments made in modern environmental control
facilities and the use of low sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA).
Northern Indiana estimates that total costs of compliance with the CAAA sulfur
dioxide regulations will impact electric rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is evaluating a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements, but Northern Indiana believes that any such mandated costs
would be recoverable through the rate making process.
Northern Indiana has an ongoing program to remain aware of the laws
and regulations involved with hazardous waste. It is Northern Indiana's
intent to continue to evaluate its facilities and properties with respect to
these rules and identify any sites that would require corrective action.
Northern Indiana has received notices from the Environmental
Protection Agency (EPA) that it is a "potentially responsible party" (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis, and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under CERCLA
and SARA, will be shared among them. At some sites Northern Indiana and/or
the other named PRPs are presently working with the EPA to clean up the sites
and avoid the imposition of fines or added costs. While all of the remedial
costs at these sites are not determinable, Northern Indiana's analysis
indicates its share of such costs with other PRPs should not have a
significant impact on its financial position or the results of future
operations.
Northern Indiana has instituted a program to investigate former
manufactured gas plants where it is the current or former owner. Northern
Indiana has identified twenty-three of these sites and made visual inspections
of these sites. Northern Indiana has conducted initial samplings at ten
sites. Follow-up investigations have been conducted at four sites and
potential remedial measures are being evaluated. Northern Indiana will
continue its program to assess sites. During the follow-up investigation of
the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted
the presence of hydrocarbons in the Elkhart River. Northern Indiana reported
this finding to the Indiana Department of Environmental Management (IDEM) and
the EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP will be to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by the IDEM of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the
site of a former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
Northern Indiana has met with various companies who provided insurance
coverage which Northern Indiana believe covers costs related to actions taken
at former manufactured gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured gas plant sites.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. A considerable amount of scientific
research has been conducted on this topic without definitive results. Research
is continuing to resolve scientific uncertainties.
LIQUIDITY AND CAPITAL RESOURCES -
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem
all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating
$125.5 million, through the use of working capital and the proceeds of
short-term debt. During 1994, $120.0 million of the Medium-Term Notes, Series
D, were issued to complete the permanent refinancing of those first mortgage
bonds. As of June 12, 1995, the remaining $169,275,000 of Medium-Term
Notes, Series D, were issued and part of the proceeds were used to redeem all
of the outstanding First Mortgage Bonds, Series U and Z aggregating $94.8
million on July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company
Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A
Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due June 1,
2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The proceeds
of these issuances were loaned to Northern Indiana under similar terms. The
initial interest rate on Series 1994 Bonds was 3.10%, which resets daily. The
proceeds of the Series 1994A and Series 1994C were used to retire on
October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due
October 15, 2004 and $41 million of Series LL First Mortgage Bonds, 7-1/2%,
due October 15, 2014. The proceeds of the Series 1994B Bonds were used to
retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994. The
Series 1994 Bonds are secured by Letters of Credit from Union Bank of
Switzerland.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the utility
business and the construction program, Northern Indiana makes use of
commercial paper intermittently as short-term financing. As of September 30,
1995, Northern Indiana had $42.3 million in commercial paper outstanding,
having a weighted average interest of 5.85%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998, unless extended by its terms.
As of September 30, 1995, there were no borrowings outstanding under this
agreement. In addition, Northern Indiana has $14.2 million in lines of credit
which run to May 31, 1996. 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 fee to a combination of fees which are mutually
satisfactory to both parties. As of September 30, 1995, there were no
borrowings under these lines of credit. The Credit Agreement and lines of
credit are also available to support the issuances of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1995, there were $64.4 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1995, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
Northern Indiana does not expect the effects of inflation at current
levels to have a significant impact on their results of operations, ability to
contain cost increases or need to seek timely and adequate rate relief.
Northern Indiana does not anticipate the need to file for gas or electric base
rate increases in the near future.
COMPETITION
The Energy Policy Act of 1992 (Energy Act) allows FERC to order
electric utilities to grant access to transmission systems by third party
power producers. The Energy Act specifically prohibits federally mandated
wheeling of power for retail customers. That authority lies with the
individual states, several of which are considering opening the transmission
network to retail customers. The Energy Act will stimulate greater competition
in the wholesale electric markets. This competition will create opportunities
to compete for new customers and revenues, as well as increase the risk of the
loss of customers. Although wholesale customers represent a relatively small
portion of Northern Indiana's sales (4% for 1994), Northern Indiana will
continue its efforts to retain and add customers by offering competitive
rates. Competitive forces have also begun to influence retail pricing in the
industry. In some instances,industrial customers, threatening to pursue
cogeneration, self-generation, retail wheeling, or relocation to other service
territories, have obtained price concessions from utilities.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to apply
more stringent guidelines in making credit rating determinations.
Northern Indiana's management has taken steps to make the company more
competitive and profitable in the changing utility environment, including
utilizing new rate and contract flexibility to retain and attract customers as
well as conversions of some of its generating units to allow use of lower cost
low sulfur coal.
FERC Order No. 636 effective in late 1993 shifted primary
responsibility for gas acquisition, transportation and peak days' supply from
pipelines to local gas distribution companies, such as Northern Indiana.
Although pipelines continue to transport gas, they no longer provide sale
service. Northern Indiana believes it has taken appropriate steps to insure
the continued acquisition of adequate gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services, has
changed significantly over the past several years. The deregulation of the gas
industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
Northern Indiana's facilities to transport the gas. Transportation customers
pay Northern Indiana only for transporting their gas from the pipeline to the
customers' premises.
To date, Northern Indiana's system has not been materially affected by
competition, and management does not foresee substantial adverse effects in
the near future, unless the current regulatory structure is substantially
altered. Northern Indiana believes the steps it is taking to deal with
increased competition will have significant, positive effects in the next few
years.
<PAGE>
Item 1. LEGAL PROCEEDINGS.
Northern Indiana is party to various legal or administrative
proceedings before courts and agencies with respect to matters occurring in
the ordinary course of business. Although management of Northern Indiana
cannot predict the ultimate outcome of these matters,it believes the final
disposition of these matters will not have a material adverse effect on the
financial position or results of operations of Northern Indiana.
Information regarding various matters involving federal and state
environmental laws and regulations and a pending tax matter is included in
Notes 5 and 3, respectively, of Northern Indiana's financial statements under
Part I, Item 1 of this Report on Form 10-Q.
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 23-Consent of Arthur Andersen LLP
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Indiana Public Service Company
(Registrant)
/s/Jerry M. Springer
Vice President, Finance and Accounting
/s/Arthur A. Paquin
Controller and Chief Accounting Officer
Date November 13, 1995
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-Q into Northern Indiana Public Service
Company's previously filed Form S-3 Registration Statement, No. 33-77046.
Arthur Andersen LLP
Chicago, Illinois
November 13, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements of Northern Indiana Public Service Company for three
months ended September 30, 1995, and is qualified in its entirety by
reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,100,233
<OTHER-PROPERTY-AND-INVEST> 9,150
<TOTAL-CURRENT-ASSETS> 232,107
<TOTAL-DEFERRED-CHARGES> 5,010
<OTHER-ASSETS> 202,872
<TOTAL-ASSETS> 3,549,372
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,492
<RETAINED-EARNINGS> 139,534
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,011,514
64,207
81,525
<LONG-TERM-DEBT-NET> 354,577
<SHORT-TERM-NOTES> 64,400
<LONG-TERM-NOTES-PAYABLE> 704,775
<COMMERCIAL-PAPER-OBLIGATIONS> 42,300
<LONG-TERM-DEBT-CURRENT-PORT> 80,793
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,143,453
<TOT-CAPITALIZATION-AND-LIAB> 3,549,372
<GROSS-OPERATING-REVENUE> 363,142
<INCOME-TAX-EXPENSE> 24,946
<OTHER-OPERATING-EXPENSES> 274,367
<TOTAL-OPERATING-EXPENSES> 299,313
<OPERATING-INCOME-LOSS> 63,829
<OTHER-INCOME-NET> (956)
<INCOME-BEFORE-INTEREST-EXPEN> 62,873
<TOTAL-INTEREST-EXPENSE> 20,232
<NET-INCOME> 42,641
2,231
<EARNINGS-AVAILABLE-FOR-COMM> 40,410
<COMMON-STOCK-DIVIDENDS> 48,500
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 59,291
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
