SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
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 April 30, 1996, 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
March 31, 1996, and December 31, 1995, and the related consolidated statements
of income, retained earnings and cash flows for the three and twelve month
periods ended March 31, 1996, and 1995. 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 March 31, 1996,
and December 31, 1995, and the results of their operations and their cash
flows for the three and twelve month periods ended March 31, 1996, and 1995,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
April 26, 1996
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$139,321 AND $145,078, RESPECTIVELY)
(NOTE 2):
Electric $ 3,955,424 $ 3,935,103
Gas 1,149,630 1,143,021
Common 351,581 350,168
------------ ------------
5,456,635 5,428,292
Less - Accumulated provision for
depreciation and amortization 2,378,320 2,330,879
------------ ------------
Total Utility Plant 3,078,315 3,097,413
------------ ------------
OTHER PROPERTY AND INVESTMENTS 8,395 8,787
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 13,251 11,478
Accounts receivable, less reserve of
$4,991 and $6,418, respectively (Note 2) 120,235 96,076
Fuel adjustment clause (Note 2) 8,467 10,301
Gas cost adjustment clause (Note 2) 51,022 4,113
Materials and supplies, at average cost 62,791 63,824
Electric production fuel, at average cost 19,946 14,258
Natural gas in storage, at last-in,
first-out cost (Note 2) 10,949 53,413
Prepayments and other 20,272 13,050
------------ ------------
Total Current Assets 306,933 266,513
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 211,074 211,859
Deferred charges and other noncurrent
assets 42,990 21,627
------------ ------------
Total Other Assets 254,064 233,486
------------ ------------
$ 3,647,707 $ 3,606,199
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
March 31, December 31,
CAPITALIZATION AND LIABILITIES 1996 1995
============ ============
(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 13) $ 859,488 $ 859,488
Additional paid-in capital 12,500 12,500
Retained earnings (see accompanying
statement) (Note 12) 168,618 144,839
------------ ------------
Common shareholders' equity 1,040,606 1,016,827
Cumulative preferred stocks (Note 9)
Series without mandatory redemption
provisions (Note 10) 81,325 81,325
Series with mandatory redemption
provisions (Note 11) 63,651 63,651
Long-term debt excluding amounts due
within one year (Note 15) 1,058,881 1,058,741
------------ ------------
Total Capitalization 2,244,463 2,220,544
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 16) 80,000 80,000
Short-term borrowings (Note 17) 97,500 163,600
Accounts payable 150,586 135,639
Sinking funds due within one year
(Notes 11 and 15) 2,621 2,621
Dividends declared on common and
preferred stocks 45,580 49,851
Customer deposits 11,226 10,230
Taxes accrued 90,842 31,247
Interest accrued 17,121 7,170
Accrued employment costs 37,780 45,771
Other accruals 43,035 30,790
------------ ------------
Total Current Liabilities 576,291 556,919
------------ ------------
OTHER:
Deferred income taxes (Note 6) 588,407 587,809
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 112,725 114,386
Deferred credits 35,556 41,038
Accrued liability for postretirement
benefits (Note 8) 80,259 73,682
Regulatory income tax liability (Note 6) 2,911 5,783
Other noncurrent liabilities 7,095 6,038
------------ ------------
Total Other 826,953 828,736
------------ ------------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 18, and 19)
$ 3,647,707 $ 3,606,199
============ ============
<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 Twelve Months
Ended March 31, Ended March 31,
---------------------- ----------------------
1996 1995 1996 1995
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 4, and 21)
Gas $ 301,885 $ 262,592 $ 672,648 $ 591,009
Electric 248,424 237,588 1,041,759 985,109
---------- ---------- ---------- ----------
550,309 500,180 1,714,407 1,576,118
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 183,202 158,388 391,301 344,651
Fuel for electric
generation 57,202 53,785 245,754 237,775
Power purchased 11,961 10,964 44,678 34,365
---------- ---------- ---------- ----------
252,365 223,137 681,733 616,791
---------- ---------- ---------- ----------
Operating Margin 297,944 277,043 1,032,674 959,327
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 75,708 67,530 286,861 270,319
Maintenance (Note 2) 17,520 21,124 73,349 79,942
Depreciation and
amortization (Note 2) 52,589 48,391 202,457 192,880
Taxes (except income) 20,058 19,836 72,053 70,208
---------- ---------- ---------- ----------
165,875 156,881 634,720 613,349
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 132,069 120,162 397,954 345,978
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 6) 40,068 36,440 110,202 95,972
---------- ---------- ---------- ----------
Operating Income 92,001 83,722 287,752 250,006
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) (994) (778) (3,835) 2,946
---------- ---------- ---------- ----------
Income Before Interest
and Other Charges 91,007 82,944 283,917 252,952
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 17,935 17,414 72,860 68,549
Other interest 1,995 2,868 7,522 10,845
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (230) (1,842) (1,708) (5,227)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,079 974 4,224 3,746
---------- ---------- ---------- ----------
20,779 19,414 82,898 77,913
---------- ---------- ---------- ----------
Net Income 70,228 63,530 201,019 175,039
Dividend requirements on
preferred shares 2,199 2,325 8,920 9,669
---------- ---------- ---------- ----------
Balance available
for common shares $ 68,029 $ 61,205 $ 192,099 $ 165,370
========== ========== ========== ==========
Dividends declared $ 44,250 $ 44,750 $ 185,225 $ 171,850
========== ========== ========== ==========
<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 Twelve Months
Ended March 31, Ended March 31,
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
BALANCE AT
BEGINNING OF
PERIOD $ 144,839 $ 145,289 $ 161,744 $ 168,224
ADD:
Net income 70,228 63,530 201,019 175,039
--------- --------- --------- ---------
215,067 208,819 362,763 343,263
--------- --------- --------- ---------
LESS:
Dividends
Cumulative
Preferred
stocks -
4-1/4% series 222 224 889 897
4-1/2% series 91 91 360 360
4.22% series 113 113 448 448
4.88% series 122 122 488 488
7.44% series 77 77 312 312
7.50% series 66 66 261 261
8.85% series 222 240 885 978
7-3/4% series 102 113 438 481
8.35% series 151 163 610 659
6.50% series 698 698 2,795 2,795
Adjustable
Rate,
Series A 335 418 1,434 1,990
Common shares 44,250 44,750 185,225 171,850
--------- --------- --------- ---------
46,449 47,075 194,145 181,519
--------- --------- --------- ---------
BALANCE AT END
OF PERIOD $ 168,618 $ 161,744 $ 168,618 $ 161,744
========= ========= ========= =========
<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 Twelve Months
Ended March 31, Ended March 31,
--------------------- ---------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 70,228 $ 63,530 $ 201,019 $ 175,039
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 52,589 48,391 202,457 192,880
Deferred federal and state
operating income taxes, net 14,887 (17,136) 28,776 (13,419)
Deferred investment tax
credits, net (1,661) (1,859) (7,238) (7,322)
Advance contract payment (18,525) 0 (18,525) 0
Change in certain assets and
liabilities -
Accounts receivable, net (24,159) (22,205) (17,053) 33,899
Electric production fuel (5,688) (6,588) 4,989 (1,482)
Materials and supplies 1,033 (1,840) 2,884 (230)
Natural gas in storage 42,464 52,200 9,313 (3,363)
Accounts payable 14,947 (17,472) 26,040 (46,929)
Taxes accrued 42,283 70,438 (39,311) 9,388
Fuel adjustment clause 1,834 1,247 (8,100) 8,910
Gas cost adjustment clause (46,909) 42,524 (65,702) 14,680
Accrued employment costs (7,991) (4,598) (882) 1,826
Other accruals 12,245 21,962 11,399 5,243
Other, net 4,732 11,926 (6,306) 24,823
--------- --------- --------- ---------
Net cash provided by
operating activities 152,309 240,520 323,760 393,943
--------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED
IN) INVESTING ACTIVITIES:
Construction expenditures (34,327) (48,695) (171,192) (193,243)
Other, net 470 102 (382) 5,802
--------- --------- --------- ---------
Net cash used in investing
activities (33,857) (48,593) (171,574) (187,441)
--------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED
IN) FINANCING ACTIVITIES:
Issuance of long-term debt 0 0 168,386 188,489
Issuance of short-term debt 273,400 267,500 949,100 1,163,026
Net change in commercial paper (27,400) (86,600) (52,500) 69,900
Retirement of long-term debt 0 (10) (120,858) (205,256)
Retirement of short-term debt (312,100) (331,800) (897,400) (1,249,626)
Retirement of preferred shares 0 (3,570) (3,525) (13,924)
Cash dividends paid on common
shares (48,500) (42,435) (186,540) (168,000)
Cash dividends paid on
preferred shares (2,219) (3,183) (8,277) (10,801)
Other, net 140 99 (243) 99
--------- --------- --------- ---------
Net cash used in financing
activities (116,679) (199,999) (151,857) (226,093)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,773 (8,072) 329 (19,591)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 11,478 20,994 12,922 32,513
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 13,251 $ 12,922 $ 13,251 $ 12,922
========= ========= ========= =========
<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:
BASIS OF PRESENTATION. 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.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions, as a percentage of the cost of
depreciable utility plant, were approximately 4.2% and 4.1%, for the
three-month and twelve-month periods ended March 31, 1996, respectively; and
4.0% and 4.1% for the three-month and twelve-month periods ended March 31,
1995. 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.
AMORTIZATION OF SOFTWARE COSTS. Northern Indiana amortizes capitalized
software costs using the straight-line method based on estimated economic
lives.
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 March 31, 1996, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which
expires May 31, 1997. The March 31, 1996 and December 31, 1995 accounts
receivable balances include approximately $5.5 million and $6.1 million,
respectively, 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 Twelve Months
Ended March 31, Ended March 31,
------------------ ------------------
1996 1995 1996 1995
======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income taxes $ 0 $ 0 $128,487 $110,087
Interest, net of
amounts
capitalized $ 8,885 $ 14,276 $ 75,244 $ 80,649
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under-recovery or over-recovery caused by variances between estimated and
actual cost in a given three-month period will be included in a future filing.
Northern Indiana records any under-recovery or over-recovery as a current
asset or current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage, and
storage transportation charges. Northern Indiana records any under-recovery
or over-recovery as a current asset or current liability until such time as it
is billed or refunded to its customers. The 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-recovery or over-recovery caused by variances
between estimated and actual cost in a given three-month period will be
included in a future filing. See Note 4, FERC Order No. 636 for a discussion
of gas transition cost charges.
NATURAL GAS IN STORAGE. Natural gas in storage is valued using the
last-in, first-out (LIFO) inventory methodology. Based on the average cost of
gas purchased in March 31, 1996 and December, 1995 the estimated replacement
cost of gas in storage (current and non-current) at March 31, 1996 and
December 31, 1995 exceeded the stated LIFO cost by approximately $28 million
and $30 million, respectively.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of 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." Northern Indiana monitors changes in
market and regulatory conditions, and the resulting impact of such changes in
order to continue to apply the provisions of SFAS No. 71 to some or all of its
operations. The regulatory assets below represent probable future revenue to
Northern Indiana associated with certain incurred costs as these costs are
recovered through the rate-making process. If a portion of Northern Indiana's
operations becomes no longer subject to the provisions of SFAS No. 71, a
write-off of certain regulatory assets below might be required. Regulatory
assets were comprised of the following items and were reflected in the
Consolidated Balance Sheet as follows:
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 15) $ 52,488 $ 53,354
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 73,926 74,981
Bailly scrubber carrying charges and
deferred depreciation (See below) 11,342 11,517
Deferral of SFAS No. 106 expense not
recovered (Note 8) 69,914 64,624
FERC Order No. 636
transition costs (Note 4) 27,601 25,038
------------ ------------
235,271 229,514
Less: Current portion of regulatory assets 24,197 17,655
------------ ------------
$ 211,074 $ 211,859
============ ============
</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 adopted this
standard on January 1, 1996 and adoption did not impact its financial
position or results of operations.
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges
and deferred depreciation in accordance with orders of the Commission until
the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each
unit.
Northern Indiana has capitalized carrying charges and deferred
depreciation and certain operating expenses relating to its scrubber service
agreement for its Bailly Generating Station in accordance with an order of the
Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying
charges is being amortized over the remaining life of the scrubber service
agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1994, a pre-tax rate of 5.0% for all construction was
being used; effective January 1, 1995 the rate increased to 6.0%; and
effective January 1, 1996 the rate remained at 6.0%.
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. The Notes were redeemed in 1985 and
Finance was subsequently liquidated. On October 25, 1991, Northern Indiana
challenged the assessment in the United States Tax Court (Tax Court) and the
matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor
of Northern Indiana, finding that the interest paid on the Notes was not
subject to United States tax withholding. On March 13, 1996, the IRS appealed
the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit,
and on March 25, 1996 Northern Indiana filed its cross appeal. Northern
Indiana's management and general counsel believe the ruling of the Tax Court
will prevail.
(4) FERC ORDER NO. 636. Pursuant to FERC Order No. 636, interstate
pipeline sales services have been "unbundled" such that gas supplies are being
sold separately from interstate transportation services. Northern Indiana has
contracted for a mix of transportation and storage services from their
pipeline suppliers which allows Northern Indiana to meet the needs of its
customers. Pipelines are recovering, from their customers, certain transition
costs associated with restructuring under the Order No. 636 regulation. Any
such recovery is subject to established review procedures at the FERC.
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 $93 million of such costs have been recorded, a portion of which
has been paid to the pipeline suppliers, subject to refund. The Commission
has approved the recovery of these FERC-allowed transition costs on a
volumetric basis from sales and transportation customers. Regulatory assets,
in amounts corresponding to the costs recorded but not yet collected, have
been recorded to reflect the ultimate recovery of these costs.
(5) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to remain
aware of laws and regulations involved with hazardous waste and other
environmental matters. 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
recorded a reserve of $5.1 million to cover probable corrective actions as of
March 31, 1996; however, environmental regulations and remediation techniques
are subject to future change. The ultimate cost could be significant
depending on the extent of corrective actions required. Based upon
investigations and management's understanding of current laws and regulations,
Northern Indiana believes that any corrective actions required, after
consideration of insurance coverages and contributions from other potentially
responsible parties, will not have a significant impact on the financial
position or results of operations of Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be
recoverable through the rate-making process.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites Northern Indiana and/or the
other named PRPs are presently working with the EPA to clean up the sites and
avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at
thirteen sites. Follow-up investigations have been conducted at five 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 is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by the IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated 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 that provided insurance
coverage which Northern Indiana believes covers costs related to actions taken
at former manufactured-gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured-gas plant sites. The state court action is stayed
pending resolution of the Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields emanating
from power lines, household appliances, and other electric sources may result
in adverse health effects has been the subject of public, governmental, and
media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
(6) INCOME TAXES: Northern Indiana uses the liability method of accounting
for income taxes under which deferred income taxes are recognized, at
currently enacted income tax rates, to reflect the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities.
To the extent certain deferred income taxes 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 March 31, 1996 and December 31, 1995
reflects a net regulatory income tax liability of $2.9 million and $5.8
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 March 31, 1996
and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 703,621 $ 700,137
AFUDC-equity 39,518 40,083
Adjustment clauses 22,564 5,467
Take-or-pay gas costs 1,010 1,192
Other regulatory assets 29,521 28,912
Reacquisition premium on debt 19,909 20,237
Deferred tax assets -
Deferred investment tax credits (42,751) (43,381)
Removal costs (121,062) (118,064)
FERC Order No. 636 transition costs (4,136) (4,400)
Other postretirement/postemployment
benefits (34,197) (31,633)
Regulatory income tax liability (1,104) (2,193)
Other, net (13,805) (15,179)
------------ ------------
599,088 581,178
Less: Deferred income taxes related to
current assets and liabilities 10,681 (6,631)
------------ ------------
Deferred income taxes - noncurrent $ 588,407 $ 587,809
============ ============
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 23,235 $ 48,459 $ 76,823 $ 101,515
State 3,607 6,976 11,841 15,198
--------- --------- --------- ---------
26,842 55,435 88,664 116,713
--------- --------- --------- ---------
Deferred income taxes, net -
Federal 13,666 (15,861) 26,337 (12,546)
State 1,221 (1,275) 2,439 (873)
--------- --------- --------- ---------
14,887 (17,136) 28,776 (13,419)
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,661) (1,859) (7,238) (7,322)
--------- --------- --------- ---------
Total utility operating income
taxes 40,068 36,440 110,202 95,972
Income tax applicable to non-
operating activities and income
of subsidiaries (640) (992) (2,864) (11,355)
--------- --------- --------- ---------
Total income taxes $ 39,428 $ 35,448 $ 107,338 $ 84,617
========= ========= ========= =========
</TABLE>
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pre-tax income is as follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 70,228 $ 63,530 $ 201,019 $ 175,039
Add-Income taxes 39,428 35,448 107,338 84,617
--------- --------- --------- ---------
Net income before income taxes $ 109,656 $ 98,978 $ 308,357 $ 259,656
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 38,380 $ 34,642 $ 107,926 $ 90,879
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 983 1,004 3,997 4,081
Amortization of deferred
investment tax credits (1,661) (1,859) (7,238) (7,323)
State income taxes, net of
federal income tax benefit 3,518 3,185 9,910 8,837
Fair market value of property
donated in excess of book value 0 0 0 (7,753)
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,674) (1,360) (5,979) (5,869)
Other, net (118) (164) (1,278) 1,765
--------- --------- --------- ---------
Total income taxes $ 39,428 $ 35,448 $ 107,338 $ 84,617
========= ========= ========= =========
</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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
========= =========
(Dollars in thousands)
<S> <C> <C>
Vested benefit obligation $ 542,516 $ 444,096
Nonvested benefit 104,054 96,425
--------- ---------
Accumulated benefit obligation $ 646,570 $ 540,521
========= =========
Projected benefit obligation for service
rendered to date $ 749,204 $ 605,495
Plan assets at fair market value 698,698 565,507
--------- ---------
Projected benefit obligation in excess of plan
assets 50,506 39,988
Unrecognized transition obligation at January 1,
being recognized over seventeen years (43,907) (49,395)
Unrecognized prior service cost (25,656) (28,111)
Unrecognized gains 4,808 47,147
--------- ---------
Accrued (prepaid) pension costs $ (14,249) $ 9,629
========= =========
</TABLE>
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on a plan benefit formula without
considering expected future salary increases. The projected benefit
obligation considers estimated future salary increases. Discount rates of
7.25% and 8.75% and rates of increase in compensation levels of 5.5% were used
to determine the accumulated benefit obligation and projected benefit
obligation at January 1, 1996 and 1995, respectively. The increase in the
accumulated benefit obligation as of January 1, 1996 is mainly caused by the
decrease in the discount rate from 8.75% to 7.25%.
The following items are the components of provisions for pensions for
the three-month and twelve-month periods ended March 31, 1996 and March 31,
1995:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
------------------ ------------------
1996 1995 1996 1995
======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service costs $ 6,145 $ 3,195 $ 14,815 $ 13,282
Interest costs 18,861 13,180 57,515 48,760
Estimated return on
plan assets (22,431) (12,736) (143,488) 14,592
Amortization of
transition obligation 1,958 1,372 6,074 5,488
Other net amortization
and deferral 876 614 85,386 (61,601)
-------- -------- -------- --------
$ 5,409 $ 5,625 $ 20,302 $ 20,521
======== ======== ======== ========
</TABLE>
Assumptions used in the valuation and determination of 1996 and 1995
pension expenses were as follows:
<TABLE>
<CAPTION>
1996 1995
===== =====
<S> <C> <C>
Discount rate 7.25% 8.75%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00%
</TABLE>
Plan assets are invested primarily in common stocks, bonds, and
notes.
(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. The expected cost of
such benefits is accrued during the employees' years of service.
Northern Indiana's current rate-making includes the cost of providing
these benefits based on the related insurance premiums. On December 30, 1992,
the Commission authorized the accrual method of accounting for postretirement
benefits for rate-making purposes consistent with SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and authorized
the deferral of the differences between the net periodic postretirement
benefit costs and the insurance premiums paid for such benefits as a
regulatory asset until such time as the accrual cost method may be reflected
in the rate-making process. The Commission stated that a deferral period of
four years or less would be rebuttably presumed to be reasonable and also
indicated each utility would have to demonstrate its postretirement benefit
costs were prudent and reasonably incurred at the time such costs were
proposed to be recovered in the rate-making process. Northern Indiana will
request 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 standard. This conclusion could change as
competitive factors influence pricing decisions.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1996 and 1995:
<TABLE>
<CAPTION>
January 1, January 1,
1996 1995
========== ==========
(Dollars in thousands)
<S> <C> <C>
Retirees $ 97,693 $ 94,913
Fully eligible active plan participants 21,760 18,796
Other active plan participants 133,205 103,559
---------- ----------
Accumulated postretirement benefit obligation 252,658 217,268
Unrecognized transition obligation at January 1,
being recognized over twenty years (192,917) (204,265)
Unrecognized actuarial gain 23,168 44,905
---------- ----------
Accrued liability for postretirement benefits $ 82,909 $ 57,908
========== ==========
</TABLE>
A discount rate of 7.25% and a pre-Medicare medical trend rate of 10%
declining to a long-term rate of 6% and a discount rate of 8.75%, and a
pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%
were used to determine the accumulated postretirement benefit obligation at
January 1, 1996 and 1995, respectively.
Net periodic postretirement benefits costs for the three-month and
twelve-month periods ended March 31, 1996 and March 31, 1995 include the
following components:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
---------------- ----------------
1996 1995 1996 1995
======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service costs $ 1,437 $ 1,366 $ 5,454 $ 7,065
Interest costs 4,974 4,651 18,929 19,328
Amortization of
transition
obligation
over twenty years 3,033 2,837 11,544 11,348
Amortization of
unrecognized
actuarial (gain) (579) (541) (2,202) (541)
------- ------- ------- -------
$ 8,865 $ 8,313 $33,725 $37,200
======= ======= ======= =======
</TABLE>
The net periodic postretirement benefit costs for 1996 were determined
assuming a 7.25% discount rate, a 5% rate of compensation increase, and a
pre-Medicare medical trend rate of 10% declining to a long-term rate of 6%.
The effect of a 1% increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation at January 1, 1996 by approximately $40.6 million, and increase the
aggregate of the service and interest cost components of plan costs by
approximately $1.1 million for the three-month period ended March 31, 1996.
Amounts disclosed above could be changed significantly in the future by
changes in health care costs, work force demographics, interest rates, or plan
changes.
(9) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS
OF NORTHERN INDIANA:
2,400,000 shares - Cumulative Preferred - $100 par value
3,000,000 shares - Cumulative Preferred - no par value
2,000,000 shares - Cumulative Preference - $50 par value
(none outstanding)
3,000,000 shares - Cumulative Preference - no par value
(none issued)
Note 10 sets forth the preferred stocks which are redeemable solely at
the option of Northern Indiana, and Note 11 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.
(10) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF NORTHERN INDIANA,
OUTSTANDING AT MARCH 31, 1996 AND DECEMBER 31, 1995 (SEE NOTE 9):
<TABLE>
<CAPTION>
Redemption
Price at
March 31, December 31, March 31,
1996 1995 1996
============ ============ ============
(Dollars in thousands)
<S> <C> <C> <C>
Cumulative preferred stock -
$100 par value -
4-1/4% series -209,188 and
209,190 shares outstanding,
respectively $ 20,919 $ 20,919 $101.20
4-1/2% series - 79,996 shares
outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares
outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares
outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares
outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares
outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at
March 31, 1996), Series A
(stated value $50 per share)
477,185 shares outstanding 23,859 23,859 $50.00
------------ -----------
$ 81,325 $ 81,325
============ ===========
</TABLE>
During the period April 1, 1994 to March 31, 1996 there were no
additional issuances of the above preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at
any time upon thirty days' notice at the option of Northern Indiana at the
redemption prices shown.
(11) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1996 AND
DECEMBER 31, 1995 (SEE NOTE 9):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(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 shares outstanding,
excluding sinking fund payments due within
one year $ 8,750 $ 8,750
7-3/4% series - 50,014 shares outstanding,
excluding sinking fund payments due within
one year 5,001 5,001
8.35% series - 69,000 shares outstanding,
excluding sinking fund payments due within
one year 6,900 6,900
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
----------- ------------
$ 63,651 $ 63,651
=========== ============
</TABLE>
The redemption prices at March 31, 1996, as well as sinking fund
provisions for the cumulative preferred stock of Northern Indiana 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% $101.85, 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% $104.58, 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 March 31, 1996 for each of the twelve-month periods
subsequent to March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,*
===============================
<S> <C>
1998 $ 1,827,700
1999 $ 1,827,700
2000 $ 1,827,700
2001 $ 1,827,700
<FN>
* Table does not reflect redemptions made after March 31, 1996.
</TABLE>
(12) 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 March 31, 1996, Northern Indiana had
approximately $168.6 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.
(13) COMMON SHARES: Effective with the exchange of common shares on
March 3, 1988, Northern Indiana's common shares are wholly-owned by
Industries.
(14) LONG-TERM INCENTIVE PLAN: Industries has two Long-Term Incentive
Plans for key management employees, including management of Northern Indiana,
that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13,
1994 (1994 Plan), each of which provides for the issuance of up to 2.5 million
of Industries' common shares to key employees through 1998 and 2004,
respectively. At March 31, 1996, there were 140,461 shares and 2,332,550
shares reserved for future awards under the 1988 Plan and 1994 Plan,
respectively. The 1988 Plan and 1994 Plan permit the following types of
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights, and
performance units. No incentive stock options or performance units were
outstanding at March 31, 1996. Under both Plans, the exercise price of each
option equals the market price of Industries' stock on the date of grant.
Each option's maximum term is ten years and vests one year from the date of
grant.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries
stock, or a combination thereof. Restricted stock awards are restricted as to
transfer and are subject to forfeiture for specific periods from the date of
grant. Restrictions on the shares awarded during 1991 lapse five years from
date of grant and vest subject to specific share price appreciation
conditions. Restrictions on shares awarded in 1995 lapse five years from date
of grant and vesting is variable from 0% to 200% of the number awarded and are
subject to specific earnings per share and stock appreciation goals.
Restrictions on shares awarded in 1996 lapse two years from date of grant and
are variable from 0% to 100% of the number awarded and are subject to specific
performance goals. If a participant's employment is terminated other than by
reason of death, disability or retirement, restricted shares are forfeited.
There were 342,500 and 330,500 restricted shares outstanding at March 31,
1996 and December 31, 1995, respectively.
Northern Indiana accounts for its allowable portion of these plans
under Accounting Principles Board Opinion No. 25, under which no comparison
cost has been recognized for non-qualified stock options. The compensation
cost that has been recognized in the Consolidated Statement of Income for
restricted stock awards was $0.265 and $1.193 million for the three-month and
twelve-month periods ending March 31, 1996. Had compensation cost for stock
options been determined consistent with SFAS No. 123 "Accounting for Stock-
Based Compensation," Northern Indiana's net income would have been reduced
to the following pro forma amounts:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
1996 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
Net Income:
As reported $ 70,228 $ 201,019
Pro forma $ 70,082 $ 200,655
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation costs may not be representative of that to be expected in future
years.
The fair value of each option granted used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the three-month and twelve-month periods ended March 31, 1996: risk-free
interest rate of 6.24%, expected dividend yield of $1.56 per share, expected
option term of five years, and expected volatility of 13%. The weighted
average fair value of options granted to all plan participants was $3.87 for
the twelve-month period ended March 31, 1996. No options were granted for
the three-month period ended March 31, 1996.
(15) LONG-TERM DEBT: At March 31, 1996 and December 31, 1995, the
long-term debt of Northern Indiana, excluding amounts due within one year,
issued and not retired or cancelled was as follows:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
---------------------------
March 31, December 31,
1996 1995
============ ============
(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 40,500
Series NN, 7.10%, due July 1, 2017 55,000 55,000
------------ ------------
Total 135,756 135,756
------------ ------------
Pollution control notes and bonds -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 20,000 20,000
Series 1988 Bonds - Jasper County -
Series A, B, and C - 3.36% weighted
average at March 31, 1996, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.36% weighted average at
March 31, 1996, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 3.85% at March 31, 1996,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 3.85% at March 31, 1996,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 3.85% at March 31, 1996,
due April 1, 2019 41,000 41,000
------------ ------------
Total 243,000 243,000
------------ ------------
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 684,025 684,025
------------ ------------
Unamortized premium and discount
on long-term debt, net (3,900) (4,040)
------------ ------------
Total long-term debt excluding
amounts due in one year $ 1,058,881 $ 1,058,741
============ ============
</TABLE>
The sinking fund requirements of long-term debt outstanding at
March 31, 1996 (including the maturity of first mortgage bonds: Series O,
6-3/8%, due September 1, 1997; 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 March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
============================
<S> <C>
1998 $ 67,247,000
1999 $ 51,009,000
2000 $ 8,000,000
2001 $152,000,000
</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 one year to
thirty 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. On June 12, 1995, the remaining $169,275,000 of
Medium-Term Notes, Series D, were issued and part of the proceeds were used to
redeem all of the outstanding First Mortgage Bonds, Series U and Z aggregating
$94.8 million on July 3, 1995.
(16) CURRENT PORTION OF LONG-TERM DEBT: At March 31, 1996 and December 31,
1995, Northern Indiana's current portion of long-term debt due within one
year was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Medium-term notes -
Issued at interest rates of 6.27% and
6.31% with a weighted average interest
rate of 6.30% and maturities of
July 25, 1996 and July 26, 1996 $ 80,000 $ 80,000
____________ ____________
Total current portion of long-term debt $ 80,000 $ 80,000
============ ============
</TABLE>
(17) 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 March 31, 1996, there were no borrowings
outstanding under this agreement. In addition, Northern Indiana has $14.2
million in lines of credit which run to May 31, 1996, which are expected
to be renewed for the subsequent twelve-month period. The credit pricing of
each of the lines varies from either the lending banks' commercial prime or
market rates. Northern Indiana has agreed to compensate the participating
banks with arrangements that vary from no commitment fees to a combination of
fees which are mutually satisfactory to both parties. As of March 31, 1996,
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 $268.5 million of money market lines of
credit. As of March 31, 1996 and December 31, 1995, there were $80 million
and $118.8 million of borrowings, respectively, outstanding under these lines
of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1996, there were no borrowings outstanding under this facility.
Northern Indiana makes use of commercial paper to fund short-term
working capital requirements.
At March 31, 1996 and December 31, 1995, Northern Indiana's short-
term borrowings were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of
5.36% at March 31, 1996 $ 17,400 $ 44,800
Notes payable -
Issued at interest rates between 5.28%
and 5.62% with a weighted average
interest rate of 5.42% and various
maturities between April 2, 1996 and
April 22, 1996 80,100 118,800
____________ ____________
Total short-term borrowings $ 97,500 $ 163,600
============ ============
</TABLE>
(18) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
twenty-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 March 31, 1996:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
=============================
(Dollars in thousands)
<S> <C>
1997 $ 7,776
1998 5,602
1999 4,461
2000 3,055
2001 3,055
Later years 38,489
--------
Total minimum
payments required $ 62,438
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 2,610 $ 2,404
Twelve months ended $ 11,030 $ 10,162
</TABLE>
(19) COMMITMENTS: Northern Indiana estimates that approximately $764
million will be expended for construction purposes for the period from
January 1, 1996 to December 31, 2000. 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 provides scrubber
services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992
with annual charges approximating $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.
Northern Indiana has entered into an agreement with Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC
to perform all data center, application development and maintenance, and
desktop management of Northern Indiana.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair
value because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based on
market prices for those of similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for
the same or similar issues or on the rates offered to 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>
March 31, 1996 December 31, 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,251 $ 13,251 $ 11,478 $ 11,478
Investments $ 256 $ 256 $ 256 $ 256
Long-term debt (including
current portion) $1,139,674 $1,112,785 $1,139,534 $1,151,471
Preferred stock $ 146,804 $ 125,891 $ 146,804 $ 128,518
</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.
(21) 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 4% of gas revenues (including
transportation services) and 22% of electric revenue for the twelve months
ended March 31, 1996 as compared to 4% and 25%, respectively, for the
twelve months ended March 31, 1995.
<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 March 31 1996
increased $138.3 million as compared to the twelve months ended March 31,
1995. Gas revenues increased $81.7 million and electric revenues increased
$56.6 million.
The increase in gas revenues for the twelve months ended March 31,
1996 was largely attributable to increased sales to residential and commercial
customers due to colder weather in the fourth quarter of 1995 and first
quarter of 1996 and increased sales to industrial and wholesale customers.
The increase in electric revenues for the twelve months ended
March 31, 1996 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 wholesale customers, and was partially offset by
decreased fuel cost per kilowatt-hour (kwh).
Total operating revenue for the three months ended March 31, 1996
increased $50.1 million as compared to the three months ended March 31, 1995.
Gas revenues increased $39.3 million and electric revenues increased $10.8
million as compared to the same period in 1995. The increase in gas revenues
was mainly due to increased sales to residential and commercial customers
reflecting colder weather, increased sales to industrial and wholesale
customers, and increased gas transition costs which were offset by reduced
purchased gas costs per dekatherm (dth). The increase in electric revenue was
mainly due to increased sales to residential and commercial customers.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 36% of electric sales during the twelve
months ended March 31, 1996.
The components of the variations in gas and electric revenues are
shown in the following tables:
<TABLE>
<CAPTION>
Variations
from
Prior Periods
-------------------
March 31, 1996
Compared to
March 31, 1995
Three Twelve
Months Months
======== ========
(Dollars in thousands)
<S> <C> <C>
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ 7,979 $(62,258)
Gas transition costs (14,752) 49,273
Changes in sales levels 46,290 96,715
Gas transport levels (224) (2,091)
-------- --------
Gas Revenue Change 39,293 81,639
-------- --------
Electric Revenue -
Pass through of net changes in fuel 1,472 (4,759)
Changes in sales levels 9,364 61,409
-------- --------
Electric Revenue Change 10,836 56,650
-------- --------
Total Revenue Change $ 50,129 $138,289
======== ========
<FN>
See Note 4 to the consolidated financial statements regarding FERC Order
No. 636 transition costs.
</TABLE>
GAS COSTS -
Gas costs increased $24.8 and $46.7 million for the three-month
and twelve-month periods ended March 31, 1996, respectively. Gas costs
increased for the three-month period due to increased purchases. Gas costs
increased for the twelve-month period due to increased purchases and were
partially offset by lower gas costs per dekatherm (dth). The average cost of
purchased gas for the three-month and twelve-month periods ended March 31,
1996, after adjustment for gas transition costs billed to transport customers,
was $2.98 and $2.65 per dth, respectively, as compared to $2.98 and $2.86 per
dth for the same periods in 1995.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation increased for the three-
month and twelve-month periods ended March 31, 1996, compared to 1995 periods
mainly as a result of increased production of electricity.
Power purchased increased $10.3 million for the twelve-month period
ended March 31, 1996 as a result of increased bulk power purchases with other
utilities due to increased sales. Purchased power costs increased $1.0
million for the three months ended as a result of higher costs per megawatt
purchased.
OPERATING MARGINS -
Operating margins increased $73.3 million for the twelve months ended
March 31, 1996 from the same period a year ago. The operating margin
from gas deliveries increased $34.9 million, due to increased sales to
residential and commercial customers reflecting colder weather in the
fourth quarter of 1995 and first quarter of 1996, and increased sales to
industrial and wholesale customers compared to the twelve-month period
ended March 31, 1995. The operating margin from electric sales increased
$38.4 million reflecting increased sales to residential and commercial
customers due to warmer weather in the third quarter of 1995 and increased
sales to wholesale customers.
Operating margins increased $20.9 million for the three months ended
March 31, 1996 over the same period a year ago. The operating margins
from gas deliveries increased $14.5 million due to increased sales to
residential and commercial customers reflecting colder weather, and increased
sales to industrial and wholesale customers. Operating margin on electric
sales increased $6.4 million reflecting increased sales to residential and
commercial customers and increased sales to wholesale customers.
OPERATING EXPENSES AND TAXES -
Operation expenses increased $8.2 and $16.5 million for the three-
month and twelve-month periods ended March 31, 1996, respectively. Operation
expenses increased for the three-month period reflecting increased electric
production costs of $2.2 million, increased employee-related costs of $1.6
million, and other increased operating costs. Operations expenses increased
for the twelve-month period reflecting a December 1995 Indiana Utility
Regulatory Commission (Commission) order to refund $3.4 million to electric
customers related to a 1992 insurance settlement previously credited to
operation and maintenance expenses, increased electric production costs of
$9.0 million resulting from the pollution control facilities costs,
increased marketing activities, and increased employee-related costs.
Maintenance expenses decreased $3.6 and $6.6 million for the three-
month and twelve-month periods ended March 31, 1996, respectively, mainly
reflecting decreased maintenance activity at the electric production
facilities.
Depreciation and amortization expense increased for the three-
month and twelve-month periods ended March 31, 1996 as a result of net plant
additions.
Utility income taxes increased for the three-month and twelve-month
periods ended March 31, 1996 as a result of higher pre-tax income.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) decreased $6.8 million for the twelve-month
period ended March 31, 1996 as the result of the inclusion in the prior period
of a $5.6 million after-tax benefit for the Northern Indiana land donation to
the Shafer and Freeman Lakes Environmental Conservation Corporation. The
operating results of all non-utility subsidiaries are included in "Other
Income (Deductions)."
INTEREST CHARGES -
Interest charges increased for the three-month and twelve-month
periods ended March 31, 1996 reflecting the issuance of $169,275,000
of Medium-Term Notes, Series D, and $75 million of Junior Subordinated
Deferrable Interest Debentures, Series A, and the discontinuance of carrying
charges on deferred charges related to the Bailly Generating Station scrubber
service agreement.
See Note 2 to Notes to Consolidated Financial Statements (Summary of
Significant Accounting Policies) for a discussion of Regulatory Assets,
Carrying Charges and Deferred Depreciation and Allowance for Funds Used
During Construction. Also, see Notes 4, 6, and 8 for a discussion of FERC
Order No. 636, Income Taxes and Postretirement Benefits.
NET INCOME -
Net income for the twelve-month period ended March 31, 1996 was
$201.0 million compared to $175.0 million for the twelve-month period ended
March 31, 1995.
Net income for the three months ended March 31, 1996, was $70.2
million compared to $63.5 million for the three months ended March 31, 1995.
ENVIRONMENTAL MATTERS -
Northern Indiana has an ongoing program to remain aware of laws and
regulations involved with hazardous waste and other environmental matters.
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 recorded a reserve of $5.1
million to cover probable corrective actions as of March 31, 1996; however,
environmental regulations and remediation techniques are subject to future
change. The ultimate cost could be significant depending on the extent
of corrective actions required. Based upon investigations and management's
understanding of current laws and regulations, Northern Indiana believes that
any corrective actions required, after consideration of insurance coverages
and contributions from other potentially responsible parties, will not have a
significant impact on the financial position or results of operations of
Northern Indiana.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements, but Northern Indiana believes that any such mandated costs
would be recoverable through the rate-making process.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste disposal
sites identified by the EPA. The sites are in various stages of
investigation, analysis, and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs, as
provided under CERCLA, will be shared among them. At some sites, Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at thirteen
sites. Follow-up investigations have been conducted at five 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 is to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of
a former manufactured-gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated 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 that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured-gas plants. In September 1995, certain
insurance companies initiated a suit in Indiana state court against Northern
Indiana to deny coverage. Later, in September 1995, Northern Indiana filed a
more comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured-gas plant sites. The state court action is stayed
pending resolution of Northern Indiana suit in Federal Court.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances, and other electric sources
may result in adverse health effects has been the subject of public,
governmental, and media attention. A considerable amount of scientific
research has been conducted on this topic without definitive results. Research
is continuing to resolve scientific uncertainties.
LIQUIDITY AND CAPITAL RESOURCES -
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 one year to
thirty 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. On June 12, 1995, the remaining $169,275,000 of
Medium-Term Notes, Series D, were issued and part of the proceeds were used to
redeem all of the outstanding First Mortgage Bonds, Series U and Z,
aggregating $94.8 million on July 3, 1995.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the utility
business and the construction program, Northern Indiana makes use of
commercial paper to fund short-term working capital requirements. As of
March 31, 1996, Northern Indiana had $17.4 million in commercial paper
outstanding, having a weighted average interest of 5.36%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998 unless extended by its terms.
As of March 31, 1996, there were no borrowings outstanding under this
agreement. In addition, Northern Indiana has $14.2 million in lines of credit
which run to May 31, 1996 which are expected to be renewed for the subsequent
twelve-month period. The credit pricing of each of the lines varies
from either the lending banks' commercial prime or market rates. Northern
Indiana has agreed to compensate the participating banks with arrangements
that vary from no commitment fees to a combination of fees which are mutually
satisfactory to both parties. As of March 31, 1996, 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 $268.5 million of money market lines of
credit. As of March 31, 1996, there were $80.1 million of borrowings
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1996, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
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 and electric
base rate increases in the near future.
COMPETITION
The Energy Policy Act of 1992 (Energy Act) allowed FERC to order
electric utilities to grant access to transmission systems by third-party
power producers. The Energy Act specifically prohibits federally mandated
wheeling of power for retail customers. On April 24, 1996, the FERC issued
its Order No. 888 which opens wholesale power sales to competition and
requires public utilities owning, controlling, or operating transmission lines
to file non-discriminatory open access tariffs that offer others the same
transmission service they provide themselves. Order No. 888 also provides
for the full recovery of stranded costs - that is, costs that were
prudently incurred to serve power customers and that could go unrecovered
if these customers use open access to move to another supplier. FERC expects
this rule will accelerate competition and bring lower prices and more choices
to wholesale energy customers. This competition will create opportunities to
compete for new customers and revenues, as well as increase the risk of the
loss of customers. Although wholesale customers represent a relatively small
portion of Northern Indiana's sales, Northern Indiana will continue its
efforts to retain and add customers by offering competitive rates.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to apply
more stringent guidelines in making credit rating determinations.
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 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 ensure the continued acquisition of adequate
gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services has
changed significantly over the past several years. The deregulation of the gas
industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
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.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with the
Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit increased
choice for gas customers, competition among suppliers, and improved natural
gas service. In its petition, Northern Indiana stated it would propose to
implement new rates and services that would include, but not be limited to
further unbundling of services for additional customer classes which would
include increased customer choice for sources of natural gas supply,
negotiated services and prices, and incentive gas and storage cost mechanisms.
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 pending proceedings, including
suits and claims against it for personal injury, death and property damage,
but in the opinion of counsel for Northern Indiana, the nature of such
proceedings and suits, and the amounts involved, do not depart from the
ordinary routine litigation and proceedings incidental to the kind of
business conducted by Northern Indiana, except as described under Note 3
Pending Tax Matter and Note 5 Environmental Matters, in the Notes to
Consolidated Financial Statements under Part I, Item 1 of this Report on
Form 10-Q.
To the knowledge of Northern Indiana no other material legal
proceedings against Northern Indiana or its subsidiaries are contemplated by
governmental authorities and other parties.
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 10, 1996, by written consent in lieu of the Annual Meeting
of Shareholders of the registrant, the sole shareholder of the registrant
elected Ian M. Rolland, Edmund A. Schroer and John W. Thompson as directors
to serve until the 1999 Annual Meeting of Shareholders. Directors whose terms
of office as director continue after the 1996 Annual Meeting of Shareholders
are Arthur J. Decio, Gary L. Neale, and Robert J. Welsh, whose terms expire at
the 1997 Annual Meeting of Shareholders, and Steven C. Beering, Ernestine M.
Raclin, and Denis E. Ribordy, whose terms expire at the 1998 Annual Meeting of
Shareholders.
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(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 May 13, 1996
<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 March 31, 1996, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,078,315
<OTHER-PROPERTY-AND-INVEST> 8,395
<TOTAL-CURRENT-ASSETS> 306,933
<TOTAL-DEFERRED-CHARGES> 42,990
<OTHER-ASSETS> 211,074
<TOTAL-ASSETS> 3,647,707
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,500
<RETAINED-EARNINGS> 168,618
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,040,606
63,651
81,325
<LONG-TERM-DEBT-NET> 354,856
<SHORT-TERM-NOTES> 80,100
<LONG-TERM-NOTES-PAYABLE> 704,025
<COMMERCIAL-PAPER-OBLIGATIONS> 17,400
<LONG-TERM-DEBT-CURRENT-PORT> 80,000
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,223,916
<TOT-CAPITALIZATION-AND-LIAB> 3,647,707
<GROSS-OPERATING-REVENUE> 550,309
<INCOME-TAX-EXPENSE> 40,068
<OTHER-OPERATING-EXPENSES> 418,240
<TOTAL-OPERATING-EXPENSES> 458,308
<OPERATING-INCOME-LOSS> 92,001
<OTHER-INCOME-NET> (994)
<INCOME-BEFORE-INTEREST-EXPEN> 91,007
<TOTAL-INTEREST-EXPENSE> 20,779
<NET-INCOME> 70,228
2,199
<EARNINGS-AVAILABLE-FOR-COMM> 68,029
<COMMON-STOCK-DIVIDENDS> 44,250
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 152,309
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
