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, 1997
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
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, 1997, 73,282,258 common shares were outstanding.
<PAGE>
NORTHERN INDIANA PUBLIC SERVICE COMPANY
FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
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, 1997, and December 31, 1996, and the related consolidated
statements of income, retained earnings and cash flows for the three, nine
and twelve month periods ended September 30, 1997 and 1996. 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, 1997 and
December 31, 1996, and the results of their operations and their cash flows
for the three, nine and twelve month periods ended September 30, 1997 and
1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
October 29, 1997
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
September 30, December 31,
ASSETS 1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$134,693 AND $162,123, RESPECTIVELY)
(NOTE 2):
Electric $ 4,089,701 $ 4,050,084
Gas 1,207,885 1,176,871
Common 350,432 346,636
------------ ------------
5,648,018 5,573,591
Less - Accumulated provision for
depreciation and amortization 2,628,238 2,499,687
------------ ------------
Total Utility Plant 3,019,780 3,073,904
------------ ------------
OTHER PROPERTY AND INVESTMENTS 8,729 8,971
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 11,993 8,279
Accounts receivable, less reserve of
$5,740 and $4,568, respectively (Note 2) 40,453 111,866
Fuel adjustment clause (Note 2) 3,806 9,149
Gas cost adjustment clause (Note 2) 57,019 98,167
Materials and supplies, at average cost 55,822 56,796
Electric production fuel, at average cost 17,148 26,483
Natural gas in storage, at last-in,
first-out cost (Note 2) 57,891 50,409
Prepayments and other 22,068 25,826
------------ ------------
Total Current Assets 266,200 386,975
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 212,627 239,547
Prepayments and other (Note 7) 86,880 64,883
------------ ------------
Total Other Assets 299,507 304,430
------------ ------------
$ 3,594,216 $ 3,774,280
============ ============
<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 1997 1996
============ ============
(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 12,522 12,521
Retained earnings (see accompanying
statement) (Note 12) 139,853 145,987
------------ ------------
Common shareholder's equity 1,011,863 1,017,996
Cumulative preferred stocks (Note 9)
Series without mandatory redemption
provisions (Note 10) 81,123 81,126
Series with mandatory redemption
provisions (Note 11) 59,396 61,246
Long-term debt excluding amounts due
within one year (Note 15) 1,094,885 992,008
------------ ------------
Total Capitalization 2,247,267 2,152,376
------------ ------------
CURRENT LIABILITIES -
Current portion of long-term
debt (Note 16) 35,000 65,747
Short-term borrowings (Note 17) 91,125 272,905
Accounts payable 101,318 190,182
Sinking funds due within one year
(Notes 11 and 15) 3,328 3,328
Dividends declared on common and
preferred stocks 45,985 54,255
Customer deposits 19,170 16,768
Taxes accrued 85,434 78,806
Interest accrued 16,545 5,851
Accrued employment costs 41,729 40,915
Other accruals 31,077 26,106
------------ ------------
Total Current Liabilities 470,711 754,863
------------ ------------
OTHER:
Deferred income taxes (Note 6) 592,577 597,105
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 101,678 107,058
Deferred credits 54,721 50,058
Accrued liability for postretirement
benefits (Note 8) 117,247 104,123
Other noncurrent liabilities 10,015 8,697
------------ ------------
Total Other 876,238 867,041
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5, 18 and 19)
$ 3,594,216 $ 3,774,280
============ ============
<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,
---------------------- ----------------------
1997 1996 1997 1996
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 4 and 21)
Gas $ 81,506 $ 71,846 $ 495,721 $ 482,228
Electric 279,221 276,776 769,099 769,432
---------- ---------- ---------- ----------
360,727 348,622 1,264,820 1,251,660
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 49,940 39,400 302,320 283,619
Fuel for electric
generation 65,008 62,346 178,025 172,732
Power purchased 13,143 15,356 32,621 41,639
---------- ---------- ---------- ----------
128,091 117,102 512,966 497,990
---------- ---------- ---------- ----------
Operating Margin 232,636 231,520 751,854 753,670
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 69,151 68,772 209,024 213,399
Maintenance (Note 2) 15,767 16,674 50,639 53,548
Depreciation and
amortization (Note 2) 56,561 54,157 168,050 160,121
Taxes (except income) 16,372 16,481 54,029 53,394
---------- ---------- ---------- ----------
157,851 156,084 481,742 480,462
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 74,785 75,436 270,112 273,208
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 6) 19,282 18,422 74,188 74,486
---------- ---------- ---------- ----------
Operating Income 55,503 57,014 195,924 198,722
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) (1,041) 2,196 (2,486) 249
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 18,221 16,943 51,400 52,498
Other interest 1,189 3,019 5,837 6,718
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,053 1,051 3,142 3,206
---------- ---------- ---------- ----------
20,463 21,013 60,379 62,422
---------- ---------- ---------- ----------
Net Income 33,999 38,197 133,059 136,549
Dividend requirements on
preferred shares 2,123 2,174 6,418 6,551
---------- ---------- ---------- ----------
Balance available
for common shares $ 31,876 $ 36,023 $ 126,641 $ 129,998
========== ========== ========== ==========
Dividends declared $ 44,775 $ 45,200 $ 132,775 $ 134,450
========== ========== ========== ==========
<CAPTION>
Twelve Months
Ended September 30,
----------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
Operating Revenues:
(Notes 2, 4 and 21)
Gas $ 745,367 $ 682,431
Electric 1,021,898 1,020,133
---------- ----------
1,767,265 1,702,564
---------- ----------
Cost of Energy: (Note 2)
Gas costs 462,842 397,059
Fuel for electric
generation 238,508 235,760
Power purchased 44,733 50,061
---------- ----------
746,083 682,880
---------- ----------
Operating Margin 1,021,182 1,019,684
---------- ----------
Operating Expenses and
Taxes (except income):
Operation 276,691 285,992
Maintenance (Note 2) 65,820 72,576
Depreciation and
amortization (Note 2) 219,474 211,014
Taxes (except income) 72,704 71,521
---------- ----------
634,689 641,103
---------- ----------
Operating Income Before
Utility Income Taxes 386,493 378,581
---------- ----------
Utility Income Taxes
(Note 6) 108,753 100,789
---------- ----------
Operating Income 277,740 277,792
---------- ----------
Other Income (Deductions)
(Note 2) (2,495) (836)
---------- ----------
Interest and Other Charges:
Interest on long-term debt 67,700 70,632
Other interest 9,539 9,458
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 4,186 4,287
---------- ----------
81,425 84,377
---------- ----------
Net Income 193,820 192,579
Dividend requirements on
preferred shares 8,579 8,776
---------- ----------
Balance available
for common shares $ 185,241 $ 183,803
========== ==========
Dividends declared $ 185,775 $ 182,950
========== ==========
<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,
------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996
========= ========= ========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
BEGINNING OF
PERIOD $ 152,752 $ 149,564 $ 145,987 $ 144,839 $ 140,387 $ 139,534
ADD:
Net income 33,999 38,197 133,059 136,549 193,820 192,579
--------- --------- --------- --------- --------- ---------
186,751 187,761 279,046 281,388 334,207 332,113
--------- --------- --------- --------- --------- ---------
LESS:
Dividends
Cumulative
Preferred
stocks -
4-1/4% series 222 222 667 667 889 889
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 166 193 516 599 710 820
7-3/4% series 92 103 275 307 363 417
8.35% series 122 134 397 435 534 585
6.50% series 699 699 2,096 2,096 2,795 2,795
Adjustable
Rate,
Series A 355 356 1,065 1,045 1,419 1,401
Common shares 44,775 45,200 132,775 134,450 185,775 182,950
--------- --------- --------- --------- --------- ---------
46,898 47,374 139,193 141,001 194,354 191,726
--------- --------- --------- --------- --------- ---------
BALANCE AT END
OF PERIOD $ 139,853 $ 140,387 $ 139,853 $ 140,387 $ 139,853 $ 140,387
========= ========= ========= ========= ========= =========
<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
Ended September 30,
------------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 33,999 $ 38,197
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 56,561 54,157
Deferred federal and state operating
income taxes, net (959) 1,611
Deferred investment tax credits, net (1,793) (1,974)
Advance contract payment 475 475
Change in certain assets and liabilities -
Accounts receivable, net 39,301 15,299
Electric production fuel 11,484 (301)
Materials and supplies 526 2,930
Natural gas in storage (31,628) (42,878)
Accounts payable (11,513) (3,246)
Taxes accrued (8,144) (22,487)
Fuel adjustment clause 4,451 1,816
Gas cost adjustment clause (12,390) (9,462)
Accrued employment costs 2,764 (335)
Other accruals (1,355) (1,817)
Other, net 20,510 20,541
---------- ----------
Net cash provided by operating activities 102,289 52,526
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (39,838) (45,193)
Other, net 274 1,134
---------- ----------
Net cash used in investing activities (39,564) (44,059)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 40,000 0
Issuance of short-term debt 65,175 376,700
Net change in commercial paper 32,100 (400)
Retirement of long-term debt (66,247) (80,000)
Retirement of short-term debt (86,600) (254,200)
Retirement of preferred shares (600) (600)
Cash dividends paid on common shares (44,000) (45,000)
Cash dividends paid on preferred shares (2,125) (2,176)
Other, net (155) 121
---------- ----------
Net cash used in financing activities (62,452) (5,555)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 273 2,912
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 11,720 8,379
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,993 $ 11,291
========== ==========
<CAPTION>
Nine Months
Ended September 30,
------------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 133,059 $ 136,549
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 168,050 160,121
Deferred federal and state operating
income taxes, net (30,144) 14,345
Deferred investment tax credits, net (5,380) (5,295)
Advance contract payment 1,425 (17,575)
Change in certain assets and liabilities -
Accounts receivable, net 71,413 45,050
Electric production fuel 9,335 (16,940)
Materials and supplies 974 7,154
Natural gas in storage (7,482) (12,209)
Accounts payable (66,578) (5,701)
Taxes accrued 26,953 (16,036)
Fuel adjustment clause 5,343 494
Gas cost adjustment clause 41,148 (54,455)
Accrued employment costs 814 (8,505)
Other accruals 4,971 (11,373)
Other, net 49,894 21,831
---------- ----------
Net cash provided by operating activities 403,795 237,455
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (141,215) (125,545)
Other, net 66 2,787
---------- ----------
Net cash used in investing activities (141,149) (122,758)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 139,000 0
Issuance of short-term debt 396,655 834,700
Net change in commercial paper (116,405) 43,200
Retirement of long-term debt (66,247) (80,000)
Retirement of short-term debt (462,030) (766,800)
Retirement of preferred shares (1,853) (2,046)
Cash dividends paid on common shares (141,000) (137,750)
Cash dividends paid on preferred shares (6,429) (6,588)
Other, net (623) 400
---------- ----------
Net cash used in financing activities (258,932) (114,884)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,714 (187)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 8,279 11,478
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,993 $ 11,291
========== ==========
<CAPTION>
Twelve Months
Ended September 30,
------------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 193,820 $ 192,579
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 219,474 211,014
Deferred federal and state operating
income taxes, net (18,372) 29,014
Deferred investment tax credits, net (7,412) (7,153)
Advance contract payment 1,900 (17,575)
Change in certain assets and liabilities -
Accounts receivable, net 10,573 3,341
Electric production fuel 14,050 (14,395)
Materials and supplies 848 7,756
Natural gas in storage 7,731 (2,191)
Accounts payable (25,361) 21,630
Taxes accrued 57,617 (41,410)
Fuel adjustment clause 6,001 (1,124)
Gas cost adjustment clause 1,549 (83,738)
Accrued employment costs 4,463 (3,607)
Other accruals 1,856 (18,146)
Other, net 35,025 9,093
---------- ----------
Net cash provided by operating activities 503,762 285,088
---------- ----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Construction expenditures (194,866) (173,133)
Other, net 355 577
---------- ----------
Net cash used in investing activities (194,511) (172,556)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 139,000 0
Issuance of short-term debt 734,105 1,326,800
Net change in commercial paper (10,500) 45,700
Retirement of long-term debt (66,247) (81,124)
Retirement of short-term debt (907,180) (1,204,500)
Retirement of preferred shares (2,411) (2,802)
Cash dividends paid on common shares (186,200) (187,065)
Cash dividends paid on preferred shares (8,607) (6,565)
Other, net (509) 539
---------- ----------
Net cash used in financing activities (308,549) (109,017)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 702 3,515
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 11,291 7,776
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,993 $ 11,291
========== ==========
<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 4.3% for the three-month,
nine-month and twelve-month periods ended September 30, 1997; and 4.3%, 4.2%
and 4.2% for the three-month, nine-month and twelve-month periods ended
September 30, 1996, respectively. 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 September 30,1997, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which
expires May 31, 2002. The September 30, 1997 and December 31, 1996 accounts
receivable balances include approximately $2.7 million and $7.1 million,
respectively, due from associated companies.
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,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income taxes $ 20,700 $ 19,305 $ 70,700 $ 73,473 $ 70,858 $123,153
Interest, net of
amounts
capitalized $ 8,946 $ 11,900 $ 44,746 $ 48,751 $ 74,263 $ 79,725
</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-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 September 1997 and December 1996 the estimated replacement
cost of gas in storage (current and non-current) at September 30, 1997 and
December 31, 1996 exceeded the stated LIFO cost by approximately $54 million
and $96 million, respectively.
AFFILIATED COMPANY TRANSACTIONS. Pursuant to agreement, effective
July 1, 1996, Northern Indiana receives executive, financial, gas supply,
sales and marketing, and administrative and general services from an
affiliate, NIPSCO Industries Management Services Company (Services), a
wholly-owned subsidiary of Industries.
The costs of these services are charged to Northern Indiana based on
payroll and expenses incurred by Services' employees for the benefit of
Northern Indiana. These costs which totalled $4.1 million, $21.3 million,
and $30.3 million for the three-month, nine-month and twelve-month periods
ended September 30, 1997, respectively, consist primarily of employee
compensation and benefits.
Northern Indiana purchased natural gas and transportation services
from affiliated companies in the amounts of $3.2 million, $7.2 million,
and $10.4 million representing 5.6%, 2.6% and 2.6% of Northern Indiana's
total gas costs for the three-month, nine-month and twelve-month periods
ended September 30, 1997, respectively.
Northern Indiana subleases a portion of office facilities to
affiliated companies for a monthly fee, which includes operating expenses,
based on space utilization.
HEDGING ACTIVITIES. Northern Indiana uses commodity futures contracts
to hedge the impact of natural gas price fluctuations related to its
business activities. Gains and losses on these futures contracts are
deferred and recognized in income concurrent with the related purchases and
sales of natural gas.
As of September 30, 1997 Northern Indiana had open futures contracts
representing hedges of natural gas sales of 1.6 billion cubic feet (Bcf)
and natural gas purchases of 1.0 Bcf. The net deferred gain on these open
futures contracts as of September 30, 1997 was not material.
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. As of September 30, 1997 and December 31, 1996, the regulatory
assets identified 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 of the regulatory assets identified below might be required, unless
some form of transition cost recovery is established by the appropriate
regulatory body which would meet the requirements under generally accepted
accounting principles for continued accounting as regulatory assets during
such recovery period. Regulatory assets were comprised of the following
items:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
============= =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 15) $ 47,292 $ 49,890
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 67,600 70,763
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,114 10,816
Deferral of SFAS No. 106 expense not
recovered (Note 8) 85,364 87,005
FERC Order No. 636
transition costs (Note 4) 27,521 47,399
Regulatory income tax asset, net (Note 6) 12,773 9,002
------------- -------------
250,664 274,875
Less: Current portion of regulatory assets 38,037 35,328
------------- -------------
$ 212,627 $ 239,547
============= =============
</TABLE>
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges
and deferred depreciation in accordance with orders of the Commission until
the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each
unit.
Northern Indiana has capitalized carrying charges and deferred
depreciation and certain operating expenses relating to its scrubber service
agreement for its Bailly Generating Station in accordance with an order of the
Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying
charges is being amortized over the remaining life of the scrubber service
agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1995 a pre-tax rate of 6.0% for all construction was
being used; effective January 1, 1996 the rate decreased to 5.5%; and
effective January 1, 1997 the rate increased to 6.0%.
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) RESOLUTION OF TAX MATTER: In 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 maintained that interest paid on the Notes should have
been subject to United States tax withholding. Northern Indiana challenged
the assessment in the United States Tax Court (Tax Court) and 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. The IRS appealed
the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit
(Court of Appeals) and Northern Indiana filed a cross appeal. On June 6,
1997, the Court of Appeals issued an order affirming in full the Tax Court
order. The IRS did not appeal the decision of the Court of Appeals.
(4) FERC ORDER NO. 636. Northern Indiana has recorded approximately $133
million of interstate pipeline transition costs to reflect the impact of
FERC Order No. 636, a majority of which costs have been paid to the pipeline
suppliers. Northern Indiana expects that additional transition costs will
not be significant. The Commission has approved the recovery of these
FERC-allowed transition costs on a volumetric basis from sales and
transportation customers. Regulatory assets, in amounts corresponding to the
costs recorded but not yet collected, have been recorded to reflect the
ultimate recovery of these costs.
(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 approximately $19 million to cover probable corrective
actions as of September 30, 1997; however, environmental regulations and
remediation techniques are subject to future change. The ultimate cost could
be significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, 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
results of operations or financial position of Northern Indiana.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for the second phase of the Acid Rain nitrogen oxides
reduction program. Northern Indiana is evaluating compliance strategies to
meet the reduced emission limitations found in the final rule. Additional
controls may be needed to meet the requirements. A compliance plan must be
submitted to the EPA by December 31, 1997 with details of the plan to meet
the new limits by January 1, 2000.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be
recoverable through the rate-making process.
The EPA issued final rules on July 18, 1997 revising the National
Ambient Air Quality Standards for ozone and particulate matter. The revised
standards begin a regulatory process that may lead to reductions in sulfur
dioxide and nitrogen oxide emissions from coal-fired boilers (including
Northern Indiana's generating stations) beyond reductions required in the Acid
Rain provisions of the CAAA. Northern Indiana cannot predict the costs of
complying with future control requirements to meet these new standards.
Northern Indiana will continue to closely monitor developments in this area
and anticipates the exact nature of the impact of the new standards on its
operations will not be known for some time.
The EPA has notified Northern Indiana that it is a "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-four of these sites and made visual inspections
of these sites. Initial samplings have been conducted at fifteen sites.
Follow-up investigations have been conducted at seven sites and remedial
measures have been selected at four sites. Northern Indiana will continue its
program to assess and cleanup sites.
During the course of various investigations, Northern Indiana has
identified impacts to soil, groundwater, sediment and surface water from
former manufactured-gas plants. At three sites where residues were noted
seeping into rivers, Northern Indiana notified the Indiana Department of
Environmental Management (IDEM) and the EPA and immediately took steps to
contain the material. Northern Indiana has worked with IDEM or the EPA on
investigation or remedial activities at several sites. Three of the sites
have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal
of placing these sites in the VRP is to obtain IDEM approval of the selection
and implementation of whatever remedial measures, if any, may be required.
Northern Indiana anticipates placing additional sites in the VRP after
remedial measures have been selected.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas
plant sites at which both companies or their predecessors were former
operators or owners. One of these sites is the Lafayette site which Indiana
Gas had previously notified Northern Indiana is being investigated and
remediated pursuant to an administrative order with IDEM. Northern Indiana
also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.)
that it was a former owner or operator of seven former manufactured-gas plants
at which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site. In August 1997, Northern Indiana filed suit in Indiana state
court against Cinergy seeking recovery of those costs.
In 1994, Northern Indiana approached 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
of the insurance companies initiated a suit in Indiana state court against
Northern Indiana seeking a ruling that denied coverage. Later that same
month, Northern Indiana initiated a similar suit in federal court and the
state court action was stayed. After the dismissal of the federal court
action on procedural grounds in May 1997, Northern Indiana filed claims in the
state court action against various insurance companies, seeking coverage for
costs associated with several former manufactured-gas plants and damages for
alleged misconduct by some of the insurance companies. The state court action
is now proceeding. Northern Indiana has received cash settlements from
several of the insurance companies.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. Recently, researchers from the National
Cancer Institute and the Childhood Cancer Group reported they found no
evidence magnetic fields in homes increase the risk of childhood leukemia.
This study follows an EMF report released late last year by the U.S. National
Research Council of the National Academy of Sciences, which concluded, after
examining more than 500 EMF studies spanning seventeen years, that among other
things, there was insufficient evidence to consider EMF a threat to human
health. Despite the report's findings, future research appropriations are
continuing to be dedicated to explore this issue.
(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 established.
Regulatory assets are primarily attributable to undepreciated AFUDC-equity and
the cumulative net amount of other income tax timing differences for which
deferred taxes had not been provided in the past, when regulators did not
recognize such taxes as costs in the rate-making process. Regulatory
liabilities are primarily attributable to Northern Indiana's obligation to
credit to ratepayers deferred income taxes provided at rates higher than the
current federal tax rate currently being credited to ratepayers using the
average rate assumption method and unamortized deferred investment tax
credits.
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,
1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
============= =============
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 723,865 $ 719,197
AFUDC-equity 35,903 37,713
Adjustment clauses 23,027 40,700
Take-or-pay gas costs 384 765
Other regulatory assets 30,252 39,440
Reacquisition premium on debt 17,935 18,921
Deferred tax assets -
Deferred investment tax credits (38,561) (40,602)
Removal costs (141,305) (131,718)
FERC Order No. 636 transition costs (10,437) (8,144)
Other postretirement/postemployment
benefits (48,136) (42,434)
Other, net 5,634 (10,433)
------------- -------------
598,561 623,405
Less: Deferred income taxes related to
current assets and liabilities 5,984 26,300
------------- -------------
Deferred income taxes - noncurrent $ 592,577 $ 597,105
============= =============
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 19,003 $ 16,109 $ 95,423 $ 56,409
State 3,031 2,676 14,289 9,027
--------- --------- --------- ---------
22,034 18,785 109,712 65,436
--------- --------- --------- ---------
Deferred income taxes, net -
Federal (942) 1,412 (27,984) 13,015
State (17) 199 (2,160) 1,330
--------- --------- --------- ---------
(959) 1,611 (30,144) 14,345
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,793) (1,974) (5,380) (5,295)
--------- --------- --------- ---------
Total utility operating income
taxes 19,282 18,422 74,188 74,486
Income tax applicable to non-
operating activities and income
of subsidiaries 2,696 1,352 1,664 95
--------- --------- --------- ---------
Total income taxes $ 21,978 $ 19,774 $ 75,852 $ 74,581
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended September 30,
--------------------
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Current income taxes -
Federal $ 116,961 $ 68,003
State 17,576 10,925
--------- ---------
134,537 78,928
--------- ---------
Deferred income taxes, net -
Federal (17,182) 26,500
State (1,190) 2,514
--------- ---------
(18,372) 29,014
--------- ---------
Deferred investment tax credits,
net (7,412) (7,153)
--------- ---------
Total utility operating income
taxes 108,753 100,789
Income tax applicable to non-
operating activities and income
of subsidiaries 633 (556)
--------- ---------
Total income taxes $ 109,386 $ 100,233
========= =========
</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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 33,999 $ 38,197 $ 133,059 $ 136,549
Add-Income taxes 21,978 19,774 75,852 74,581
--------- --------- --------- ---------
Net income before income taxes $ 55,977 $ 57,971 $ 208,911 $ 211,130
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 19,592 $ 20,290 $ 73,119 $ 73,896
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 1,021 1,007 3,109 3,020
Amortization of deferred
investment tax credits (1,793) (1,974) (5,380) (5,295)
State income taxes, net of
federal income tax benefit 1,889 2,025 7,000 7,190
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,033) (1,409) (4,069) (4,228)
Other, net 2,302 (165) 2,073 (2)
--------- --------- --------- ---------
Total income taxes $ 21,978 $ 19,774 $ 75,852 $ 74,581
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended September 30,
--------------------
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Net income $ 193,820 $ 192,579
Add-Income taxes 109,386 100,233
--------- ---------
Net income before income taxes $ 303,206 $ 292,812
========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 106,122 $ 102,485
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 4,710 4,024
Amortization of deferred
investment tax credits (7,412) (7,153)
State income taxes, net of
federal income tax benefit 10,050 9,549
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (6,485) (5,814)
Other, net 2,401 (2,858)
--------- ---------
Total income taxes $ 109,386 $ 100,233
========= =========
</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, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Vested benefit obligation $(534,416) $(542,516)
Nonvested benefit (103,284) (104,054)
--------- ---------
Accumulated benefit obligation $(637,700) $(646,570)
========= =========
Projected benefit obligation for service
rendered to date $(732,870) $(749,204)
Plan assets at fair market value 782,162 698,698
--------- ---------
Plan assets in excess of (or less than)
projected benefit obligation 49,292 (50,506)
Unrecognized transition obligation at January 1,
being recognized over seventeen years 38,418 43,907
Unrecognized prior service cost 23,736 25,656
Unrecognized gains (67,111) (4,808)
--------- ---------
Prepaid pension costs $ 44,335 $ 14,249
========= =========
</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
7.75% and 7.25% and rates of increase in compensation levels of 5.50% were
used to determine the accumulated benefit obligation and projected benefit
obligation at January 1, 1997 and 1996, respectively.
The following items are the components of provisions for pensions for
the three-month, nine-month and twelve-month periods ended September 30, 1997
and September 30, 1996:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 6,271 $ 4,423 $ 15,203 $ 14,766 $ 16,314 $ 17,044
Interest costs 31,156 17,345 63,807 49,094 67,501 61,388
Estimated return
on plan assets (39,806) (20,689) (80,422) (58,447) (108,597) (154,030)
Amortization of
transition
obligation 3,055 1,808 6,263 5,104 6,647 6,476
Other net
amortization
and deferral 1,974 809 3,799 2,284 27,748 85,566
-------- -------- -------- -------- -------- --------
$ 2,650 $ 3,696 $ 8,650 $ 12,801 $ 9,613 $ 16,444
======== ======== ======== ======== ======== ========
</TABLE>
Assumptions used in the valuation and determination of 1997 and 1996
pension expenses were as follows:
<TABLE>
<CAPTION>
1997 1996
===== =====
<S> <C> <C>
Discount rate 7.75% 7.25%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00%
</TABLE>
Plan assets are invested primarily in common stocks, bonds and
notes. On July 22, 1997, a substantial portion of the plan's domestic equity
investments were hedged against substantial movements in the S&P 500 Index.
The hedge will expire on December 31, 1997.
(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 rate-making has historically included the cost of
providing these benefits based on the related insurance premiums. On
December 30, 1992, the Commission authorized the accrual method of accounting
for postretirement benefits for rate-making purposes consistent with SFAS No.
106 "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and authorized the deferral of the differences between the net periodic
postretirement benefit costs and the insurance premiums paid for such
benefits (OPRB) as a regulatory asset until such time as the accrual cost
method could be reflected in the rate-making process.
On June 11, 1997, the Commission issued an order approving the inclusion
of accrual-based postretirement benefit costs in the rate-making process to
be effective February 1, 1997 for electric rates and March 1, 1997 for gas
rates. These costs include an amortization of the existing regulatory asset
consistent with the remaining amortization period for the transition
obligation. Northern Indiana discontinued its cost deferral and began
amortizing its regulatory asset concurrent with these dates.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1997 and 1996:
<TABLE>
<CAPTION>
January 1, January 1,
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
Postretirement Benefit Obligation for:
Retirees $ (74,786) $ (97,693)
Fully eligible active plan participants (18,441) (21,760)
Other active plan participants (101,710) (133,205)
---------- ----------
Accumulated postretirement benefit obligation (194,937) (252,658)
Unrecognized transition obligation at January 1,
being recognized over twenty years 171,962 192,917
Unrecognized actuarial gain (88,784) (23,168)
---------- ----------
Accrued liability for postretirement benefits $ (111,759) $ (82,909)
========== ==========
</TABLE>
A discount rate of 7.75%, a pre-Medicare medical trend rate of 9%
declining to a long-term rate of 6%, a discount rate of 7.25% and a
pre-Medicare medical trend rate of 10% declining to a long-term rate of 6%,
were used to determine the accumulated postretirement benefit obligation at
January 1, 1997 and 1996, respectively.
The decrease in the accumulated postretirement benefit obligation
(APBO) and the related increase in unrecognized actuarial gain at January 1,
1997 were primarily attributable to favorable claim experience and the
increase in the discount rate to 7.75%. Additionally, Northern Indiana
implemented a 3% cap on its share of retiree cost increases for pre-Medicare
benefits for certain non-bargaining retirees who retire after February 1,
1997. This plan amendment reduced the APBO and the unrecognized transition
obligation by $9.6 million at January 1, 1997.
Net periodic postretirement benefits costs for the three-month, nine-
month and twelve-month periods ended September 30, 1997 and September 30, 1996
include the following components:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
---------------- ---------------- ----------------
1997 1996 1997 1996 1997 1996
======= ======= ======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 931 $ 1,209 $ 2,789 $ 3,913 $ 4,729 $ 5,198
Interest costs 4,376 4,973 13,128 14,920 16,181 19,573
Amortization of
transition
obligation
over twenty years 2,702 3,033 8,106 9,099 10,355 11,936
Amortization of
unrecognized
actuarial gain (993) (579) (2,979) (1,736) (1,740) (2,277)
------- ------- ------- ------- ------- -------
$ 7,016 $ 8,636 $21,044 $26,196 $29,525 $34,430
======= ======= ======= ======= ======= =======
</TABLE>
The net periodic postretirement benefit costs for 1997 were determined
assuming a 7.75% discount rate, a 5% rate of compensation increase and a
pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%.
The effect of a 1% increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation at January 1, 1997 by approximately $28.5 million, and increase the
aggregate of the service and interest cost components of plan costs by
approximately $1.1 million and $3.3 million for the three-month and nine-month
periods ended September 30, 1997, respectively. 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 SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 9):
<TABLE>
<CAPTION>
Redemption
Price at
September 30, December 31, September 30,
1997 1996 1997
============ ============ ============
(Dollars in thousands)
<S> <C> <C> <C>
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,123 and
209,145 shares outstanding,
respectively $ 20,912 $ 20,915 $101.20
4-1/2% series - 79,996 shares
outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares
outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares
outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares
outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares
outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at
September 30, 1997), Series A
(stated value $50 per share)
473,285 shares outstanding 23,664 23,664 $50.00
------------ ------------
$ 81,123 $ 81,126
============ ============
</TABLE>
During the period October 1, 1995 to September 30, 1997 there were no
additional issuances of the above preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at
any time upon thirty days' notice at the option of Northern Indiana at the
redemption prices shown.
(11) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT SEPTEMBER 30, 1997 AND
DECEMBER 31, 1996 (SEE NOTE 9):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
============ ============
(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 - 62,500 and 75,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year $ 6,250 $ 7,500
7-3/4% series - 44,460 shares outstanding,
excluding sinking fund payments due within
one year 4,446 4,446
8.35% series - 57,000 and 63,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year 5,700 6,300
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
------------ ------------
$ 59,396 $ 61,246
============ ============
</TABLE>
The redemption prices at September 30, 1997, as well as sinking fund
provisions for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
<TABLE>
<CAPTION>
Sinking Fund Or
Mandatory Redemption
Series Redemption Price Per Share Provisions
====== ========================== =============================
<S> <C> <C>
Cumulative preferred stock - $100 par value -
8.85% $101.48, reduced periodically 12,500 shares on or before
April 1.
8.35% $103.69, reduced periodically 3,000 shares on or before
July 1; increasing to 6,000
shares beginning in 2004;
noncumulative option
to double amount each
year.
7-3/4% $104.41, reduced periodically 2,777 shares on or
before December 1;
noncumulative option
to double amount each
year.
Cumulative preferred stock - no par value -
6.50% $100.00 on October 14, 2002 430,000 shares on October 14,
2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at September 30, 1997 for each of the twelve-month periods
subsequent to September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,*
==================================
<S> <C>
1999 $1,827,700
2000 $1,827,700
2001 $1,827,700
2002 $1,827,700
<FN>
* Table does not reflect redemptions made after September 30, 1997.
</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 September 30, 1997, Northern Indiana had
approximately $139.9 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: 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 September 30, 1997, there were 4,578 shares and 1,939,750
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 September 30, 1997. Under both Plans, the exercise price of
each option equals the market price of Industries' stock on the date of grant.
Each option's maximum term is ten years and vests one year from the date of
grant.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries
common shares, or a combination thereof. Restricted stock awards are
restricted as to transfer and are subject to forfeiture for specific periods
from the date of grant. Restrictions on shares awarded in 1995 lapse five
years from date of grant and vesting is variable from 0% to 200% of the number
awarded, subject to specific earnings per share and stock appreciation goals.
Restrictions on shares awarded in 1996 and 1997 lapse two years from date of
grant and vesting is variable from 0% to 100% of the number awarded, subject
to specific performance goals. If a participant's employment is terminated
prior to vesting other than by reason of death, disability or retirement,
restricted shares are forfeited. There were 271,333 and 262,000 restricted
shares outstanding at September 30, 1997 and December 31, 1996, respectively.
Northern Indiana accounts for its allocable portion of these plans
under Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized for non-qualified stock options. The compensation
cost that has been recognized in the Consolidated Statement of Income for
restricted stock awards was $0.2, $0.5 and $0.7 million for the three-month,
nine-month and twelve-month periods ending September 30, 1997, respectively.
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 Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income:
As reported $ 33,999 $ 38,197 $133,059 $136,549 $193,820 $192,579
Pro forma $ 33,783 $ 38,025 $132,430 $136,062 $192,984 $191,929
</TABLE>
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, nine-month and twelve-month periods ended September 30,
1997 and September 30, 1996: risk-free interest rate of 6.29% and 6.39%,
respectively; expected dividend yield per share of $1.74 and $1.68,
respectively; expected option term of five and one-quarter years and five
years, respectively; and expected volatilities of 12.7% and 13.2%,
respectively. The weighted average fair value of options granted to all plan
participants was $5.32 for the twelve-month period ended September 30, 1997
and $5.00 for twelve-month period ended September 30, 1996. There were
266,800 non-qualified stock options granted to all plan participants for the
twelve-month period ended September 30, 1997.
(15) LONG-TERM DEBT: At September 30, 1997 and December 31, 1996, the
long-term debt of Northern Indiana, excluding amounts due within one year,
issued and not retired or canceled was as follows:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
---------------------------
September 30, December 31,
1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
First mortgage bonds -
Series P, 6-7/8%, due October 1, 1998 $ 14,509 $ 14,509
Series T, 7-1/2%, due April 1, 2002 39,500 40,000
Series NN, 7.10%, due July 1, 2017 55,000 55,000
------------ ------------
Total 109,009 109,509
------------ ------------
Pollution control notes and bonds -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 19,000 19,000
Series 1988 Bonds - Jasper County -
Series A, B and C - 3.77% weighted
average at September 30, 1997, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.77% weighted average at
September 30, 1997, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 3.80% at September 30, 1997,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 3.80% at September 30, 1997,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 3.80% at September 30, 1997,
due April 1, 2019 41,000 41,000
------------ ------------
Total 242,000 242,000
------------ ------------
Medium-term notes -
Interest rates between 6.10% and 7.69% with
a weighted average interest rate of 7.00%
and various maturities between
April 5, 2000 and August 4, 2027 748,025 644,025
------------ ------------
Unamortized premium and discount
on long-term debt, net (4,149) (3,526)
------------ ------------
Total long-term debt excluding
amounts due in one year $ 1,094,885 $ 992,008
============ ============
</TABLE>
The sinking fund requirements of long-term debt outstanding at
September 30, 1997 (including the maturity of first mortgage bonds: Series P,
6-7/8%, due October 1, 1998 and Series T, 7.50%, due April 1, 2002; and
medium-term notes due from March 20, 2000 to June 12, 2002 for each of the
twelve-month periods subsequent to September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
=================================
<S> <C>
1999 $ 16,009,000
2000 $157,000,000
2001 $ 18,000,000
2002 $ 58,000,000
</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. These
premiums are not earning a return during the recovery period.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes.
As of September 30, 1997, $139.0 million of the medium-term notes had been
issued with various interest rates and maturities. The proceeds from these
issuances were used to pay short-term debt incurred to redeem its First
Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term
Notes, Series D.
(16) CURRENT PORTION OF LONG-TERM DEBT: At September 30, 1997 and
December 31, 1996, Northern Indiana's current portion of long-term debt due
within one year was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
First mortgage bonds -
Series O, 6-3/8% - due September 1, 1997 $ 0 $ 25,747
Medium-term notes -
Interest rate of 5.83% and 5.95% with
a weighted average interest rate of
5.86% and various maturities between
April 6, 1998 and April 13, 1998 35,000 40,000
------------ ------------
Total current portion of long-term debt $ 35,000 $ 65,747
============ ============
</TABLE>
(17) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1999. As of
September 30, 1997, there were no borrowings outstanding under this agreement.
In addition, Northern Indiana has $14.2 million in lines of credit which run
to May 31, 1998. 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 September 30, 1997, there were no borrowings under these
lines of credit. The Credit Agreement and lines of credit are also available
to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1997 and December 31, 1996, there were $13.6
million and $79.0 million of borrowings, respectively, outstanding under
these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1997, there were no borrowings outstanding under this facility.
Northern Indiana makes use of commercial paper to fund short-term
working capital requirements.
At September 30, 1997 and December 31, 1996, Northern Indiana's short-
term borrowings were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of
5.59% at September 30, 1997 $ 77,500 $ 193,905
Notes payable -
5.67% - due October 20, 1997 13,625 79,000
------------ ------------
Total short-term borrowings $ 91,125 $ 272,905
============ ============
</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 $3.4 million.
The following is a schedule, by years, of future minimum rental
payments, excluding those to associated companies, required under operating
leases that have initial or remaining noncancelable lease terms in excess of
one year as of September 30, 1997:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
=================================
(Dollars in thousands)
<S> <C>
1998 $ 4,357
1999 3,497
2000 3,055
2001 3,055
2002 3,055
Later years 33,907
--------
Total minimum
payments required $ 50,926
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 1,810 $ 2,196
Nine months ended $ 5,837 $ 7,088
Twelve months ended $ 7,998 $ 9,931
</TABLE>
(19) COMMITMENTS: Northern Indiana estimates that approximately $750
million will be expended for construction purposes for the period from
January 1, 1997 to December 31, 2001. 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 IBM 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 or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for
the same or similar issues or on the rates offered to 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, 1997 December 31, 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 11,993 $ 11,993 $ 8,279 $ 8,279
Investments $ 256 $ 256 $ 256 $ 256
Long-term debt (including
current portion) $1,131,385 $1,124,985 $1,059,255 $1,026,743
Preferred stock $ 142,347 $ 127,749 $ 144,200 $ 126,379
</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 5% of gas revenues (including
transportation services) and 21% of electric revenue for the twelve months
ended September 30, 1997 as compared to 2% and 22%, respectively, for the
twelve months ended September 30, 1996.
<PAGE>
Item 2. 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, 1997
increased $64.7 million as compared to the twelve months ended September 30,
1996. Gas revenues increased $62.9 million and electric revenues increased
$1.8 million as compared to the same period in 1996. The increase in gas
revenues was largely attributable to increased gas costs per dekatherm (dth)
and increased sales to wholesale customers, partially offset by decreased gas
transition costs. The increase in electric revenues was mainly due to
increased sales to residential customers, increased fuel cost per kilowatt-
our (kwh), partially offset by decreased sales to industrial and wholesale
customers.
Total operating revenues for the nine months ended September 30, 1997
increased $13.2 million as compared to the nine months ended September 30,
1996. Gas revenues increased $13.5 million and electric revenues decreased
$0.3 million as compared to the same period in 1996. The increase in gas
revenues was mainly due to increased gas costs per dth, increased sales to
wholesale customers and increased deliveries of gas transported for others,
partially offset by decreased sales to residential and commercial customers
and decreased gas transition costs. The decrease in electric revenues was
mainly due to decreased sales to industrial and wholesale customers, partially
offset by increased sales to residential customers and increased fuel cost per
kwh.
Total operating revenues for the three months ended September 30, 1997
increased $12.1 million as compared to the three months ended September 30,
1996. Gas revenues increased $9.7 million and electric revenues increased
$2.4 million as compared to the same period in 1996. The increase in gas
revenues was mainly due to increased gas costs per dth, increased sales to
wholesale customers and increased deliveries of gas transported for others,
partially offset by decreased gas transition costs. The increase in electric
revenues was mainly due to increased sales to residential customers and
increased fuel costs per kwh, partially offset by decreased sales to
commercial, industrial and wholesale customers.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 34% of electric sales during the twelve
months ended September 30, 1997.
The components of the variations in gas and electric revenues are
shown in the following table:
<TABLE>
<CAPTION>
Variations
from
Prior Periods
---------------------------------
September 30, 1997
Compared to
September 30, 1996
Three Nine Twelve
Months 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 $ 9,288 $ 20,551 $ 64,755
Gas transition costs (1,874) (833) (5,503)
Changes in sales levels 1,668 (8,188) 1,712
Gas transported 578 1,963 1,972
--------- --------- ---------
Gas Revenue Change $ 9,660 $ 13,493 $ 62,936
--------- --------- ---------
Electric Revenue -
Pass through of net changes in
fuel costs $ 7,075 $ 8,468 $ 8,769
Changes in sales levels (4,630) (8,801) (7,004)
--------- --------- ---------
Electric Revenue Change $ 2,445 $ (333) $ 1,765
--------- --------- ---------
Total Revenue Change $ 12,105 $ 13,160 $ 64,701
========= ========= =========
</TABLE>
See Note 4 to Notes to Consolidated Financial Statements regarding
FERC Order No. 636 transition costs.
GAS COSTS -
Gas costs increased $10.5, $18.7 and $65.8 million for the three-month,
nine-month and twelve-month periods ended September 30, 1997, respectively.
Gas costs increased for the three-month, nine-month and twelve-month
periods due to increased gas costs per dth, partially offset by decreased gas
transition costs. The average cost of purchased gas for the three-month,
nine-month and twelve-month periods ended September 30, 1997, after adjustment
for gas transition costs billed to transport customers, was $3.03, $3.03 and
$3.16 per dth, respectively, as compared to $2.63, $2.83, and $2.69 per dth
for the same periods in 1996.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation increased $2.7, $5.3 and $2.7
million for the three-month, nine-month and twelve-month periods ended
September 30, 1997, respectively, compared to 1996 periods, mainly as a result
of increased production of electricity.
Power purchased decreased $2.2, $9.0 and $5.3 million for the three-
month, nine-month and twelve-month periods ended September 30, 1997,
respectively, as a result of decreased bulk power purchases.
OPERATING MARGINS -
Operating margins for the twelve months ended September 30, 1997
increased $1.5 million from the same period a year ago. The operating margin
from gas deliveries decreased $2.8 million due to decreased sales to
residential and commercial customers reflecting milder weather, partially
offset by increased sales to wholesale customers. The operating margin from
electric sales increased $4.3 million due to increased sales to residential
customers, partially offset by decreased sales to industrial and wholesale
customers.
Operating margins for the nine-months ended September 30, 1997 decreased
$1.8 million from the same period a year ago. Gas operating margin decreased
$5.2 million due to decreased sales to residential and commercial customers
reflecting milder weather, partially offset by increased sales to wholesale
customers and increased deliveries of gas transported for others. Operating
margin from electric sales increased $3.4 million as a result of increased
sales to residential customers, partially offset by decreased sales to
industrial and wholesale customers.
Operating margins for the three-months ended September 30, 1997
increased $1.1 million from the same period a year ago. Gas operating margin
decreased $0.9 million due to decreased sales to residential customers,
partially offset by increased sales to wholesale customers and increased
deliveries of gas transported for others. Operating margin from electric
sales increased $2.0 million due to increased sales to residential customers,
which were partially offset by decreased sales to commercial, industrial and
wholesale customers.
OPERATING EXPENSES AND TAXES -
Operation expenses decreased $9.3 million for the twelve-month period
ended September 30, 1997 mainly reflecting decreased electric production
pollution control facility costs of $5.2 million and decreased environmental
cleanup costs of $4.4 million partially offset by increased employee related
costs. Operation expenses decreased $4.4 million for the nine-month period
ended September 30, 1997 mainly reflecting decreased electric production
pollution control facility costs of $4.3 million and decreased environmental
cleanup costs of $5.3 million partially offset by increased employee related
costs. Operation expenses increased $0.3 million for the three-month period
ended September 30, 1997.
Maintenance expenses decreased $6.8 million for the twelve-month period
ended September 30, 1997 mainly reflecting decreased maintenance activity at
the electric production facilities of $5.7 million and decreased maintenance
of $0.9 million on the gas transmission and distribution facilities.
Maintenance expenses decreased $2.9 million for the nine-month period
reflecting decreased maintenance on electric production facilities.
Maintenance expenses decreased $0.9 million for the three-month period
reflecting decreased maintenance on electric production facilities, partially
offset by increased maintenance activity on transmission and distribution
facilities.
Depreciation and amortization expense increased $2.4, $7.9 and $8.5,
million for the three-month, nine-month and twelve-month periods ended
September 30, 1997, respectively, resulting from plant additions, increased
amortization of computer software, amortization of deferred costs related to
scrubber services provided by Pure Air at the Bailly Generating Station and
the amortization of SFAS No. 106 costs effective February 1, 1997.
Utility income taxes increased for the twelve-month period ended
September 30, 1997 mainly as a result of increased pretax income and increased
effective tax rate. Utility income taxes decreased for the nine-month period
ended September 30, 1997 mainly as a result of decreased pretax income.
Utility income taxes increased for the three-month period ended September 30,
1997 mainly as a result of increased effective tax rate.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) decreased for the three-month, nine-month,
and twelve-month periods ended September 30, 1997 mainly as a result of
the sale of Cresent Dunes Lakeshore property to the National Park Service
during the third quarter of 1996.
INTEREST CHARGES -
Interest charges decreased for the nine-month period ended September 30,
1997 reflecting decreased long-term debt outstanding and short-term borrowings
during the period. For the twelve-month period ended September 30, 1997
interest charges decreased reflecting decreased long-term debt outstanding
during the period. Interest charges decreased for the three-month period
ended September 30, 1997 reflecting decreased short-term borrowings, partially
offset by increased long-term debt.
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 September 30, 1997 was
$193.8 million compared to $192.6 million for the twelve-month period ended
September 30, 1996.
Net income for the nine months ended September 30, 1997 was $133.1
million compared to $136.5 million for the nine months ended September 30,
1996.
Net income for the three months ended September 30, 1997 was $34.0
million compared to $38.2 million for the three months ended September 30,
1996.
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
approximately $19 million to cover probable corrective actions as of
September 30, 1997; however, environmental regulations and remediation
techniques are subject to future change. The ultimate cost could be
significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, 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
results of operations or financial position of Northern Indiana.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for the second phase of the Acid Rain nitrogen oxides
reduction program. Northern Indiana is evaluating compliance strategies to
meet the reduced emission limitations found in the final rule. Additional
controls may be needed to meet the requirements. A compliance plan must be
submitted to the EPA by December 31, 1997 with details of the plan to meet
the new limits by January 1, 2000.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be
recoverable through the rate-making process.
The EPA issued final rules on July 18, 1997 revising the National
Ambient Air Quality Standards for ozone and particulate matter. The revised
standards begin a regulatory process that may lead to reductions in sulfur
dioxide and nitrogen oxide emissions from coal-fired boilers (including
Northern Indiana's generating stations) beyond reductions required in the Acid
Rain provisions of the CAAA. Northern Indiana cannot predict the costs of
complying with future control requirements to meet these new standards.
Northern Indiana will continue to closely monitor developments in this area
and anticipates the exact nature of the impact of the new standards on its
operations will not be known for some time.
The EPA has notified Northern Indiana that it is a "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-four of these sites and made visual
inspections of these sites. Initial samplings have been conducted at
fifteen sites. Follow-up investigations have been conducted at seven sites and
remedial measures have been selected at four sites. Northern Indiana will
continue its program to assess and cleanup sites.
During the course of various investigations, Northern Indiana has
identified impacts to soil, groundwater, sediment and surface water from
former manufactured-gas plants. At three sites where residues were noted
seeping into rivers, Northern Indiana notified the Indiana Department of
Environmental Management (IDEM) and the EPA and immediately took steps to
contain the material. Northern Indiana has worked with IDEM or the EPA on
investigation or remedial activities at several sites. Three of the sites
have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal
of placing these sites in the VRP is to obtain IDEM approval of the selection
and implementation of whatever remedial measures, if any, may be required.
Northern Indiana anticipates placing additional sites in the VRP after
remedial measures have been selected.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas
plant sites at which both companies or their predecessors were former
operators or owners. One of these sites is the Lafayette site which Indiana
Gas had previously notified Northern Indiana is being investigated and
remediated pursuant to an administrative order with IDEM. Northern Indiana
also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.)
that it was a former owner or operator of seven former manufactured-gas plants
at which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site. In August 1997, Northern Indiana filed suit in Indiana state
court against Cinergy seeking recovery of those costs.
In 1994, Northern Indiana approached 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
of the insurance companies initiated a suit in Indiana state court against
Northern Indiana seeking a ruling that denied coverage. Later that same
month, Northern Indiana initiated a similar suit in federal court and the
state court action was stayed. After the dismissal of the federal court
action on procedural grounds in May 1997, Northern Indiana filed claims in the
state court action against various insurance companies, seeking coverage for
costs associated with several former manufactured-gas plants and damages for
alleged misconduct by some of the insurance companies. The state court action
is now proceeding. Northern Indiana has received cash settlements from
several of the insurance companies.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. Recently, researchers from the National
Cancer Institute and the Childhood Cancer Group reported they found no
evidence magnetic fields in homes increase the risk of childhood leukemia.
This study follows an EMF report released late last year by the U.S. National
Research Council of the National Academy of Sciences, which concluded, after
examining more than 500 EMF studies spanning seventeen years, that among other
things, there was insufficient evidence to consider EMF a threat to human
health. Despite the report's findings, future research appropriations are
continuing to be dedicated to explore this issue.
LIQUIDITY AND CAPITAL RESOURCES -
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,
1997, Northern Indiana had $77.5 million in commercial paper outstanding,
having a weighted average interest of 5.59%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of September 30, 1997,
there were no borrowings outstanding under this agreement. In addition,
Northern Indiana has $14.2 million in lines of credit which run to May 31,
1998. 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 September 30, 1997, there were no borrowings under these
lines of credit. The Credit Agreement and lines of credit are also available
to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1997, $13.6 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1997, there were no borrowings outstanding under this facility.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes.
As of September 30, 1997, $139.0 million of the medium-term notes had been
issued with various interest rates and maturities. The proceeds from these
issuances were used to pay short-term debt incurred to redeem its First
Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term
Notes, Series D.
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.
EMPLOYEE RELATIONS -
At September 30, 1997, approximately 74% of Northern Indiana's employees
(physical and clerical worker) were represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC. The bargaining unit employees'
current contracts expired May 31, 1997. New contracts were ratified in
October 1997. The new contracts have a term of two years, from June 1, 1997
thru May 31, 1999.
YEAR 2000 COSTS -
Northern Indiana has completed an assessment of its information systems
to determine what modifications, if any, are necessary for proper functioning
of these systems in the year 2000. Costs related to maintenance or
modification of these systems will be expensed as incurred. Northern Indiana
does not anticipate the related costs to have a material impact on its results
of operations.
COMPETITION -
The Energy Policy Act of 1992 (Energy Act) allowed FERC to order
electric utilities to grant access to transmission systems by third-party
power producers. The Energy Act specifically prohibits federally mandated
wheeling of power for retail customers. On April 24, 1996, the FERC issued
its Order No. 888 which opens wholesale power sales to competition and
requires public utilities owning, controlling, or operating transmission lines
to file non-discriminatory open access tariffs that offer others the same
transmission service they provide themselves. Order No. 888 also provides
for the full recovery of stranded costs - that is, costs that were prudently
incurred to serve power customers and that could go unrecovered if these
customers use open access to move to another supplier. FERC expects this rule
will accelerate competition and bring lower prices and more choices to
wholesale energy customers. Although wholesale customers represent a
relatively small portion of Northern Indiana's sales, Northern Indiana will
continue its efforts to retain and add customers by offering competitive
rates.
In January 1997, legislation was introduced to the Indiana General
Assembly addressing electric utility competition and deregulation. This
proposed legislation has not been adopted, however, a study commission on
electric competition and deregulation was established by the Indiana General
Assembly. Northern Indiana has begun discussions with its largest customers
on the technical and economic aspects of possible legislation to allow
customer choice.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to apply
more stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create
opportunities to compete for new customers and revenues, as well as increase
the risk of the loss of customers. Northern Indiana's management has taken
steps to make the company more competitive and profitable in the changing
utility environment, including 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 sales 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 a petition for an Alternative Regulatory Plan
(ARP) with the Commission on November 29, 1995. The purpose of the ARP is to
create a business and regulatory environment and structure which will permit
increased choice for gas customers, competition among suppliers and improved
natural gas service. On May 9, 1997, Northern Indiana filed an Amended
Stipulation and Agreement which proposed a modified ARP. Northern Indiana's
proposal was supported by numerous parties including the Office of Utility
Consumer Counselor, Citizens Action Coalition of Indiana, Inc. and major
industrial customers of Northern Indiana. In its modified ARP, Northern
Indiana proposes to implement new rates and services that would include, among
other things, further unbundling of services for additional customer classes,
increased customer choice for sources of natural gas supply, negotiated
services and prices, an incentive gas cost mechanism and a price protection
program. The Commission held a hearing on the ARP on June 12, 1997. On
October 9, 1997, the Commission issued an order approving, in all respects,
the modified ARP which became effective November 1, 1997.
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>
Part II. OTHER INFORMATION
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 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.
None
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 23 - Consent of Arthur Andersen LLP
Exhibit 27 - Financial Data Schedule
(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
---------------------------------------
Jerry M. Springer,
Vice President, Finance and Accounting
/s/ David J. Vajda
---------------------------------------
David J. Vajda,
Controller and Chief Accounting Officer
Date November 13, 1997
<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. 333-26847.
/s/ Arthur Andersen LLP
Chicago, Illinois
November 13, 1997
<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, 1997 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-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,019,780
<OTHER-PROPERTY-AND-INVEST> 8,729
<TOTAL-CURRENT-ASSETS> 266,200
<TOTAL-DEFERRED-CHARGES> 86,880
<OTHER-ASSETS> 212,627
<TOTAL-ASSETS> 3,594,216
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,522
<RETAINED-EARNINGS> 139,853
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,011,863
59,396
81,123
<LONG-TERM-DEBT-NET> 327,860
<SHORT-TERM-NOTES> 13,625
<LONG-TERM-NOTES-PAYABLE> 767,025
<COMMERCIAL-PAPER-OBLIGATIONS> 77,500
<LONG-TERM-DEBT-CURRENT-PORT> 36,500
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,217,496
<TOT-CAPITALIZATION-AND-LIAB> 3,594,216
<GROSS-OPERATING-REVENUE> 360,727
<INCOME-TAX-EXPENSE> 19,282
<OTHER-OPERATING-EXPENSES> 285,942
<TOTAL-OPERATING-EXPENSES> 305,224
<OPERATING-INCOME-LOSS> 55,503
<OTHER-INCOME-NET> (1,041)
<INCOME-BEFORE-INTEREST-EXPEN> 54,462
<TOTAL-INTEREST-EXPENSE> 20,463
<NET-INCOME> 33,999
2,123
<EARNINGS-AVAILABLE-FOR-COMM> 31,876
<COMMON-STOCK-DIVIDENDS> 44,775
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 102,289
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
