SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 July 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
June 30, 1997, and December 31, 1996, and the related consolidated
statements of income, retained earnings and cash flows for the three, six, and
twelve month periods ended June 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 June 30, 1997 and
December 31, 1996, and the results of their operations and their cash flows
for the three, six, and twelve month periods ended June 30, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
July 29, 1997
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
June 30, December 31,
ASSETS 1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$131,019 AND $162,123, RESPECTIVELY)
(NOTE 2):
Electric $ 4,077,005 $ 4,050,084
Gas 1,195,822 1,176,871
Common 350,680 346,636
------------ ------------
5,623,507 5,573,591
Less - Accumulated provision for
depreciation and amortization 2,583,598 2,499,687
------------ ------------
Total Utility Plant 3,039,909 3,073,904
------------ ------------
OTHER PROPERTY AND INVESTMENTS 8,734 8,971
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 11,720 8,279
Accounts receivable, less reserve of
$5,962 and $4,568, respectively (Note 2) 79,754 111,866
Fuel adjustment clause (Note 2) 8,257 9,149
Gas cost adjustment clause (Note 2) 44,629 98,167
Materials and supplies, at average cost 56,348 56,796
Electric production fuel, at average cost 28,632 26,483
Natural gas in storage, at last-in,
first-out cost (Note 2) 26,263 50,409
Prepayments and other 25,384 25,826
------------ ------------
Total Current Assets 280,987 386,975
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 222,098 239,547
Prepayments and other (Note 7) 79,098 64,883
------------ ------------
Total Other Assets 301,196 304,430
------------ ------------
$ 3,630,826 $ 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
June, 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) 152,752 145,987
------------ ------------
Common shareholder's equity 1,024,762 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) 59,996 61,246
Long-term debt excluding amounts due
within one year (Note 15) 1,055,540 992,008
------------ ------------
Total Capitalization 2,221,421 2,152,376
------------ ------------
CURRENT LIABILITIES -
Current portion of long-term
debt (Note 16) 100,747 65,747
Short-term borrowings (Note 17) 80,450 272,905
Accounts payable 116,713 190,182
Sinking funds due within one year
(Notes 11 and 15) 3,328 3,328
Dividends declared on common and
preferred stocks 45,223 54,255
Customer deposits 18,691 16,768
Taxes accrued 91,158 78,806
Interest accrued 6,338 5,851
Accrued employment costs 38,965 40,915
Other accruals 35,932 26,106
------------ ------------
Total Current Liabilities 537,545 754,863
------------ ------------
OTHER:
Deferred income taxes (Note 6) 594,380 597,105
Deferred investment tax credits, being
amortized over life of related property
(Note 6) 103,472 107,058
Deferred credits 51,224 50,058
Accrued liability for postretirement
benefits (Note 8) 112,978 104,123
Other noncurrent liabilities 9,806 8,697
------------ ------------
Total Other 871,860 867,041
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5, 18, and 19)
$ 3,630,826 $ 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 Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1997 1996 1997 1996
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 4, and 21)
Gas $ 108,541 $ 108,497 $ 414,215 $ 410,382
Electric 244,054 244,232 489,878 492,656
---------- ---------- ---------- ----------
352,595 352,729 904,093 903,038
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 55,645 61,017 252,380 244,219
Fuel for electric
generation 54,609 53,184 113,017 110,386
Power purchased 10,518 14,322 19,478 26,283
---------- ---------- ---------- ----------
120,772 128,523 384,875 380,888
---------- ---------- ---------- ----------
Operating Margin 231,823 224,206 519,218 522,150
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 70,084 68,919 139,873 144,627
Maintenance (Note 2) 17,534 19,354 34,872 36,874
Depreciation and
amortization (Note 2) 56,237 53,375 111,489 105,964
Taxes (except income) 17,500 16,855 37,657 36,913
---------- ---------- ---------- ----------
161,355 158,503 323,891 324,378
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 70,468 65,703 195,327 197,772
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 6) 17,899 15,996 54,906 56,064
---------- ---------- ---------- ----------
Operating Income 52,569 49,707 140,421 141,708
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) (1,036) (953) (1,445) (1,947)
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 16,962 17,620 33,179 35,555
Other interest 1,858 2,149 4,991 4,144
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (61) (215) (343) (445)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,046 1,076 2,089 2,155
---------- ---------- ---------- ----------
19,805 20,630 39,916 41,409
---------- ---------- ---------- ----------
Net Income 31,728 28,124 99,060 98,352
Dividend requirements on
preferred shares 2,128 2,178 4,295 4,377
---------- ---------- ---------- ----------
Balance available
for common shares $ 29,600 $ 25,946 $ 94,765 $ 93,975
========== ========== ========== ==========
Dividends declared $ 44,000 $ 45,000 $ 88,000 $ 89,250
========== ========== ========== ==========
<CAPTION>
Twelve Months
Ended June 30,
----------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
Operating Revenues:
(Notes 2, 4, and 21)
Gas $ 735,707 $ 676,996
Electric 1,019,453 1,040,088
---------- ----------
1,755,160 1,717,084
---------- ----------
Cost of Energy: (Note 2)
Gas costs 452,302 392,655
Fuel for electric
generation 235,846 243,026
Power purchased 46,946 47,831
---------- ----------
735,094 683,512
---------- ----------
Operating Margin 1,020,066 1,033,572
---------- ----------
Operating Expenses and
Taxes (except income):
Operation 276,312 288,227
Maintenance (Note 2) 66,727 74,453
Depreciation and
amortization (Note 2) 217,070 206,815
Taxes (except income) 72,813 72,157
---------- ----------
632,922 641,652
---------- ----------
Operating Income Before
Utility Income Taxes 387,144 391,920
---------- ----------
Utility Income Taxes
(Note 6) 107,893 107,313
---------- ----------
Operating Income 279,251 284,607
---------- ----------
Other Income (Deductions)
(Note 2) 742 (3,988)
---------- ----------
Interest and Other Charges:
Interest on long-term debt 66,422 71,816
Other interest 12,072 8,154
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (703) (688)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 4,184 4,314
---------- ----------
81,975 83,596
---------- ----------
Net Income 198,018 197,023
Dividend requirements on
preferred shares 8,630 8,833
---------- ----------
Balance available
for common shares $ 189,388 $ 188,190
========== ==========
Dividends declared $ 186,200 $ 186,250
========== ==========
<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 Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996
========= ========= ========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
BEGINNING OF
PERIOD $ 167,152 $ 168,618 $ 145,987 $ 144,839 $ 149,564 $ 147,624
ADD:
Net income 31,728 28,124 99,060 98,352 198,018 197,023
--------- --------- --------- --------- --------- ---------
198,880 196,742 245,047 243,191 347,582 344,647
--------- --------- --------- --------- --------- ---------
LESS:
Dividends
Cumulative
Preferred
stocks -
4-1/4% series 223 223 445 445 889 890
4-1/2% series 89 89 180 180 360 360
4.22% series 111 111 224 224 448 448
4.88% series 122 122 244 244 488 488
7.44% series 79 79 156 156 312 312
7.50% series 65 65 131 131 261 261
8.85% series 156 184 350 406 737 848
7-3/4% series 92 102 183 204 374 427
8.35% series 137 150 275 301 546 601
6.50% series 699 699 1,397 1,397 2,795 2,795
Adjustable
Rate,
Series A 355 354 710 689 1,420 1,403
Common shares 44,000 45,000 88,000 89,250 186,200 186,250
--------- --------- --------- --------- --------- ---------
46,128 47,178 92,295 93,627 194,830 195,083
--------- --------- --------- --------- --------- ---------
BALANCE AT END
OF PERIOD $ 152,752 $ 149,564 $ 152,752 $ 149,564 $ 152,752 $ 149,564
========= ========= ========= ========= ========= =========
<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 June 30,
------------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 31,728 $ 28,124
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 56,237 53,375
Deferred federal and state operating
income taxes, net (21,170) (2,153)
Deferred investment tax credits, net (1,793) (1,660)
Advance contract payment 475 475
Change in certain assets and liabilities -
Accounts receivable, net 37,234 53,910
Electric production fuel (4,500) (10,951)
Materials and supplies 392 3,191
Natural gas in storage (11,439) (11,795)
Accounts payable (17,447) (19,681)
Taxes accrued (28,207) (35,832)
Fuel adjustment clause 4,673 (3,156)
Gas cost adjustment clause 40,215 1,916
Accrued employment costs 2,403 (179)
Other accruals (14,323) (21,801)
Other, net 8,773 (3,442)
---------- ----------
Net cash provided by operating activities 83,251 30,341
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (55,956) (43,746)
Other, net 256 1,183
---------- ----------
Net cash used in investing activities (55,700) (42,563)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 99,000 0
Issuance of short-term debt 151,080 184,600
Net change in commercial paper (57,100) 71,000
Retirement of short-term debt (183,530) (200,500)
Retirement of preferred shares (1,252) (1,446)
Cash dividends paid on common shares (44,000) (44,250)
Cash dividends paid on preferred shares (2,139) (2,193)
Other, net (583) 139
---------- ----------
Net cash provided by (used in)
financing activities (38,524) 7,350
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (10,973) (4,872)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,693 13,251
--------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,720 $ 8,379
========== ==========
<CAPTION>
Six Months
Ended June 30,
------------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 99,060 $ 98,352
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 111,489 105,964
Deferred federal and state operating
income taxes, net (29,185) 12,734
Deferred investment tax credits, net (3,587) (3,321)
Advance contract payment 950 (18,050)
Change in certain assets and liabilities -
Accounts receivable, net 32,112 29,751
Electric production fuel (2,149) (16,639)
Materials and supplies 448 4,224
Natural gas in storage 24,146 30,669
Accounts payable (55,065) (2,454)
Taxes accrued 35,097 6,451
Fuel adjustment clause 892 (1,322)
Gas cost adjustment clause 53,538 (44,993)
Accrued employment costs (1,950) (8,170)
Other accruals 9,846 (9,556)
Other, net 25,864 1,290
---------- ----------
Net cash provided by operating activities 301,506 184,930
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (101,377) (80,353)
Other, net (208) 1,653
---------- ----------
Net cash used in investing activities (101,585) (78,700)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 99,000 0
Issuance of short-term debt 331,480 458,000
Net change in commercial paper (148,505) 43,600
Retirement of short-term debt (375,430) (512,600)
Retirement of preferred shares (1,253) (1,446)
Cash dividends paid on common shares (97,000) (92,750)
Cash dividends paid on preferred shares (4,304) (4,412)
Other, net (468) 279
---------- ----------
Net cash used in
financing activities (196,480) (109,329)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,441 (3,099)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 8,279 11,478
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,720 $ 8,379
========== ==========
<CAPTION>
Twelve Months
Ended June 30,
------------------------
1997 1996
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 198,018 $ 197,023
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 217,070 206,815
Deferred federal and state operating
income taxes, net (15,802) 31,602
Deferred investment tax credits, net (7,593) (7,039)
Advance contract payment 1,900 (18,050)
Change in certain assets and liabilities -
Accounts receivable, net (13,429) (5,583)
Electric production fuel 2,265 (11,179)
Materials and supplies 3,252 6,029
Natural gas in storage (3,519) 11,858
Accounts payable (17,094) 26,105
Taxes accrued 43,274 (37,420)
Fuel adjustment clause 3,366 (8,703)
Gas cost adjustment clause 4,477 (77,794)
Accrued employment costs 1,364 (2,172)
Other accruals 4,914 (17,050)
Other, net 31,536 (218)
---------- ----------
Net cash provided by operating activities 453,999 294,224
---------- ----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Construction expenditures (200,221) (166,276)
Other, net 1,215 1,605
---------- ----------
Net cash used in investing activities (199,006) (164,671)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 99,000 0
Issuance of short-term debt 1,045,630 1,014,500
Net change in commercial paper (43,000) 88,400
Retirement of long-term debt (80,000) (98,422)
Retirement of short-term debt (1,074,780) (950,300)
Retirement of preferred shares (2,411) (3,210)
Cash dividends paid on common shares (187,200) (186,040)
Cash dividends paid on preferred shares (8,658) (7,402)
Other, net (233) 672
---------- ----------
Net cash used in financing activities (251,652) (141,802)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,341 (12,249)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 8,379 20,628
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 11,720 $ 8,379
========== ==========
<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,
six-month, and twelve-month periods ended June 30, 1997, respectively; and
4.3%, 4.2%, and 4.1% for the three-month, six-month, and twelve-month
periods ended June 30, 1996. 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 June 30,1997, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which
expires May 31, 2002. The June 30, 1997 and December 31, 1996 accounts
receivable balances include approximately $6.9 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 Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income taxes $ 50,000 $ 54,168 $ 50,000 $ 54,168 $ 69,463 $134,348
Interest, net of
amounts
capitalized $ 28,992 $ 27,966 $ 35,800 $ 36,851 $ 77,217 $ 81,374
</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 June 1997 and December 1996 the estimated replacement
cost of gas in storage (current and non-current) at June 30, 1997 and
December 31, 1996 exceeded the stated LIFO cost by approximately $32 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 $8.6 million, $17.2 million,
and $34.6 million for the three-month, six-month, and twelve-month periods
ended June 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 $1.0 million, $4.0 million,
and $11.4 million representing 1.2%, 1.8%, and 2.5% of Northern Indiana's
total gas costs for the three-month, six-month, and twelve-month periods
ended June 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 June 30, 1997 Northern Indiana had open futures contracts
representing hedges of natural gas sales of 0.3 billion cubic feet (Bcf).
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 June 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
and were reflected in the Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
============= =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 15) $ 48,158 $ 49,890
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 68,655 70,763
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,348 10,816
Deferral of SFAS No. 106 expense not
recovered (Note 8) 86,764 87,005
FERC Order No. 636
transition costs (Note 4) 30,386 47,399
Regulatory income tax asset (Note 6) 11,360 9,002
------------- -------------
255,671 274,875
Less: Current portion of regulatory assets 33,573 35,328
------------- -------------
$ 222,098 $ 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) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the years
1982 through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS maintained that interest paid on the Notes should have been
subject to United States tax withholding. The Notes were redeemed in 1985 and
Finance was subsequently liquidated. On October 25, 1991, Northern Indiana
challenged the assessment in the United States Tax Court (Tax Court) and the
matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor
of Northern Indiana, finding that the interest paid on the Notes was not
subject to United States tax withholding. On March 13, 1996, the IRS appealed
the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit
(Court of Appeals), and on March 25, 1996 Northern Indiana filed its cross
appeal. On June 6, 1997, the Court of Appeals issued an order affirming in
full the Tax Court order. The IRS has until September 4, 1997 to appeal the
decision of the Court of Appeals. Northern Indiana's management and general
general counsel do expect the IRS to appeal. However, if the IRS does appeal,
Northern Indiana's management and general counsel believe the Tax Court's
decision will prevail.
(4) FERC ORDER NO. 636. Northern Indiana has recorded approximately $128
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 $17 million to cover probable corrective
actions as of June 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
financial position or results of operations 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 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. Two 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 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. The U.S. National Research Council of the
National Academy of Sciences concluded in a report, after examining more than
500 EMF studies spanning seventeen years, that among other things, there is
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 June 30,
1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
============= =============
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 722,309 $ 719,197
AFUDC-equity 36,506 37,713
Adjustment clauses 20,057 40,700
Take-or-pay gas costs 489 765
Other regulatory assets 33,562 39,440
Reacquisition premium on debt 18,264 18,921
Deferred tax assets -
Deferred investment tax credits (39,242) (40,602)
Removal costs (138,109) (131,718)
FERC Order No. 636 transition costs (2,780) (8,144)
Other postretirement/postemployment
benefits (42,847) (42,434)
Other, net (10,265) (10,433)
------------- -------------
597,944 623,405
Less: Deferred income taxes related to
current assets and liabilities 3,564 26,300
------------- -------------
Deferred income taxes - noncurrent $ 594,380 $ 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 Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1997 1996 1997 1996
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 35,675 $ 17,065 $ 76,420 $ 40,300
State 5,187 2,744 11,258 6,351
--------- --------- --------- ---------
40,862 19,809 87,678 46,651
--------- --------- --------- ---------
Deferred income taxes, net -
Federal (19,591) (2,063) (27,042) 11,603
State (1,579) (90) (2,143) 1,131
--------- --------- --------- ---------
(21,170) (2,153) (29,185) 12,734
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,793) (1,660) (3,587) (3,321)
--------- --------- --------- ---------
Total utility operating income
taxes 17,899 15,996 54,906 56,064
Income tax applicable to non-
operating activities and income
of subsidiaries (612) (617) (1,032) (1,257)
--------- --------- --------- ---------
Total income taxes $ 17,287 $ 15,379 $ 53,874 $ 54,807
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended June 30,
--------------------
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Current income taxes -
Federal $ 114,067 $ 71,510
State 17,221 11,240
--------- ---------
131,288 82,750
--------- ---------
Deferred income taxes, net -
Federal (14,828) 28,916
State (974) 2,686
--------- ---------
(15,802) 31,602
--------- ---------
Deferred investment tax credits,
net (7,593) (7,039)
--------- ---------
Total utility operating income
taxes 107,893 107,313
Income tax applicable to non-
operating activities and income
of subsidiaries (711) (2,564)
--------- ---------
Total income taxes $ 107,182 $ 104,749
========= =========
</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 Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1997 1996 1997 1996
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 31,728 $ 28,124 $ 99,060 $ 98,352
Add-Income taxes 17,287 15,379 53,874 54,807
--------- --------- --------- ---------
Net income before income taxes $ 49,015 $ 43,503 $ 152,934 $ 153,159
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 17,155 $ 15,226 $ 53,527 $ 53,606
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 1,044 1,030 2,088 2,013
Amortization of deferred
investment tax credits (1,793) (1,660) (3,587) (3,321)
State income taxes, net of
federal income tax benefit 1,747 1,647 5,111 5,165
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,518) (1,145) (3,036) (2,819)
Other, net 652 281 (229) 163
--------- --------- --------- ---------
Total income taxes $ 17,287 $ 15,379 $ 53,874 $ 54,807
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended June 30,
--------------------
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Net income $ 198,018 $ 197,023
Add-Income taxes 107,182 104,749
--------- ---------
Net income before income taxes $ 305,200 $ 301,772
========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 106,820 $ 105,621
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 4,696 4,022
Amortization of deferred
investment tax credits (7,593) (7,039)
State income taxes, net of
federal income tax benefit 10,186 9,793
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (6,861) (5,765)
Other, net (66) (1,883)
--------- ---------
Total income taxes $ 107,182 $ 104,749
========= =========
</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, six-month, and twelve-month periods ended June 30, 1997 and
June 30, 1996:
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 4,466 $ 4,198 $ 8,932 $ 10,343 $ 14,466 $ 15,817
Interest costs 16,325 12,888 32,651 31,749 53,690 57,223
Estimated return
on plan assets (20,308) (15,327) (40,616) (37,758) (89,480) (146,078)
Amortization of
transition
obligation 1,604 1,338 3,208 3,296 5,400 6,040
Other net
amortization
and deferral 913 599 1,825 1,475 26,583 85,371
-------- -------- -------- -------- -------- --------
$ 3,000 $ 3,696 $ 6,000 $ 9,105 $ 10,659 $ 18,373
======== ======== ======== ======== ======== ========
</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 may 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 the 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>
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% and a pre-Medicare medical trend rate of 9%
declining to a long-term rate of 6%, and 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, six-
month, and twelve-month periods ended June 30, 1997 and June 30, 1996 include
the following components:
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
---------------- ---------------- ----------------
1997 1996 1997 1996 1997 1996
======= ======= ======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 941 $ 1,267 $ 1,858 $ 2,704 $ 5,007 $ 5,365
Interest costs 4,376 4,973 8,752 9,947 16,778 19,251
Amortization of
transition
obligation
over twenty years 2,702 3,033 5,404 6,066 10,686 11,740
Amortization of
unrecognized
actuarial gain (993) (578) (1,986) (1,157) (1,326) (2,239)
------- ------- ------- ------- ------- -------
$ 7,026 $ 8,695 $14,028 $17,560 $31,145 $34,117
======= ======= ======= ======= ======= =======
</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 $2.2 million for the three-month and six-month
periods ended June 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 JUNE 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 9):
<TABLE>
<CAPTION>
Redemption
Price at
June 30, December 31, June 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
June 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 July 1, 1995 to June 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 JUNE 30, 1997 AND
DECEMBER 31, 1996 (SEE NOTE 9):
<TABLE>
<CAPTION>
June 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 - 63,000 shares outstanding,
excluding sinking fund payments due within
one year 6,300 6,300
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
------------ ------------
$ 59,996 $ 61,246
============ ============
</TABLE>
The redemption prices at June 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% $103.93, 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 June 30, 1997 for each of the twelve-month periods subsequent
to June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended June 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 June 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 June 30, 1997, Northern Indiana had
approximately $152.8 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 June 30, 1997, there were 4,578 shares and 2,206,550 shares
reserved for future awards under the 1988 Plan and 1994 Plan, respectively.
The 1988 Plan and 1994 Plan permit the following types of grants, separately
or in combination: nonqualified stock options, incentive stock options,
restricted stock awards, stock appreciation rights, and performance units. No
incentive stock options or performance units were outstanding at June 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 271,000 and 262,000 restricted
shares outstanding at June 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, $0.3, and $0.8 million for the three-month,
six-month, and twelve-month periods ending June 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 Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income:
As reported $ 31,728 $ 28,124 $ 99,060 $ 98,352 $198,018 $197,023
Pro forma $ 31,521 $ 27,962 $ 98,646 $ 98,027 $197,228 $196,454
</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, six-month, and twelve-month periods ended June 30, 1997
and June 30, 1996, respectively: risk-free interest rate of 6.39% and 6.24%,
respectively; expected dividend yield of $1.68 and $1.56 per share,
respectively; expected option term of five years; and expected volatility of
13.2% and 13.0%, respectively. The weighted average fair value of options
granted to all plan participants was $5.00 for the twelve-month period ended
June 30, 1997 and $3.87 for twelve-month period ended June 30, 1996. There
were 278,300 non-qualified stock options granted to all plan participants for
the twelve-month period ended June 30, 1997.
(15) LONG-TERM DEBT: At June 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
---------------------------
June 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 40,000 40,000
Series NN, 7.10%, due July 1, 2017 55,000 55,000
------------ ------------
Total 109,509 109,509
------------ ------------
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 - 3.79% weighted
average at June 30, 1997, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.78% weighted average at
June 30, 1997, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 4.05% at June 30, 1997,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 4.05% at June 30, 1997,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 4.05% at June 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 June 27, 2027 708,025 644,025
------------ ------------
Unamortized premium and discount
on long-term debt, net (3,994) (3,526)
------------ ------------
Total long-term debt excluding
amounts due in one year $ 1,055,540 $ 992,008
============ ============
</TABLE>
The sinking fund requirements of long-term debt outstanding at June 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 June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
=================================
<S> <C>
1999 $ 16,009,000
2000 $157,000,000
2001 $ 3,000,000
2002 $ 73,500,000
</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 June 30, 1997, $99.0 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 June 30, 1997 and December 31,
1996, Northern Indiana's current portion of long-term debt due within one
year was as follows:
<TABLE>
<CAPTION>
June 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 $ 25,747 $ 25,747
Medium-term notes -
Interest rate of 5.83% and 5.95% with
a weighted average interest rate of
5.85% and various maturities between
July 25, 1997 and April 13, 1998 75,000 40,000
------------ ------------
Total current portion of long-term debt $ 100,747 $ 65,747
============ ============
</TABLE>
(17) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1999 unless
extended by its terms. As of June 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 June 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 June 30, 1997 and December 31, 1996, there were $35.1
million and $79.0 million of borrowings, respectively, outstanding under
these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
June 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 June 30, 1997 and December 31, 1996, Northern Indiana's short-
term borrowings were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of
5.60% at June 30, 1997 $ 45,400 $ 193,905
Notes payable -
Issued at interest rates between 5.62%
and 6.10% with a weighted average
interest rate of 5.73% and various
maturities between July 7, 1997
and July 18, 1997 35,050 79,000
------------ ------------
Total short-term borrowings $ 80,450 $ 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 June 30, 1997:
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
=================================
(Dollars in thousands)
<S> <C>
1998 $ 4,148
1999 3,718
2000 3,055
2001 3,055
2002 3,055
Later years 34,671
--------
Total minimum
payments required $ 51,702
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 1,937 $ 2,282
Six months ended $ 4,027 $ 4,892
Twelve months ended $ 8,384 $10,579
</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 Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC
to perform all data center, application development and maintenance, and
desktop management of Northern Indiana.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair
value because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based on
market prices for those of similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for
the same or similar issues or on the rates offered to Northern
Indiana for securities of the same remaining maturities. Certain
premium costs associated with the early settlement of long-term debt
are not taken into consideration in determining fair value.
The carrying values and estimated fair values of Northern Indiana's
financial instruments are as follows:
<TABLE>
<CAPTION>
June 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 $ 11,720 $ 11,720 $ 8,279 $ 8,279
Investments $ 256 $ 256 $ 256 $ 256
Long-term debt (including
current portion) $1,157,787 $1,128,539 $1,059,255 $1,026,743
Preferred stock $ 142,947 $ 126,097 $ 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 22% of electric revenue for the twelve months
ended June 30, 1997 as compared to 3% and 22%, respectively, for the
twelve months ended June 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 June 30, 1997
increased $38.1 million as compared to the twelve months ended June 30,
1996. Gas revenues increased $58.7 million and electric revenues decreased
$20.6 million as compared to the same period in 1996. The increase in gas
revenues was largely attributable to increased sales to wholesale customers,
increased deliveries of gas transported for others, and increased gas costs
per dekatherm (dth) partially offset by decreased gas transition costs. The
decrease in electric revenues was mainly due to decreased sales to residential
customers resulting from the cooler summer in 1996 and decreased sales to
industrial and wholesale customers.
Total operating revenues for the six months ended June 30, 1997
increased $1.0 million as compared to the six months ended June 30, 1996.
Gas revenues increased $3.8 million and electric revenues decreased $2.8
million as compared to the same period in 1996. The increase in gas
revenues was mainly due to increased sales to wholesale customers, increased
deliveries of gas transported for others, increased gas transition costs, and
increased gas costs per dth. The decrease in electric revenues was mainly due
to decreased sales to industrial and wholesale customers.
Total operating revenues for the three months ended June 30, 1997
decreased $0.1 million as compared to the three months ended June 30, 1996.
Gas and electric revenues were consistent with the levels for the same period
ended June 30, 1996.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 35% of electric sales during the twelve
months ended June 30, 1997.
The components of the variations in gas and electric revenues are
shown in the following table:
<TABLE>
<CAPTION>
Variations
from
Prior Periods
---------------------------------
June 30, 1997
Compared to
June 30, 1996
Three Six 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 $ (14,852) $ 11,263 $ 56,200
Gas transition costs (656) 1,041 (8,474)
Changes in sales levels 14,442 (9,856) 9,448
Gas transported 1,110 1,385 1,537
--------- --------- ---------
Gas Revenue Change $ 44 $ 3,833 $ 58,711
--------- --------- ---------
Electric Revenue -
Pass through of net changes in
fuel costs $ 152 $ 1,393 $ (21)
Changes in sales levels (330) (4,171) (20,614)
--------- --------- ---------
Electric Revenue Change $ (178) $ (2,778) $ (20,635)
--------- --------- ---------
Total Revenue Change $ (134) $ 1,055 $ 38,076
========= ========= =========
</TABLE>
See Note 4 to Notes to Consolidated Financial Statements regarding
FERC Order No. 636 transition costs.
GAS COSTS -
Gas costs decreased $5.4 million for the three-month period ended
June 30. 1997. Gas costs increased $8.2 and $59.6 million for the six-month
and twelve-month periods ended June 30, 1997, respectively. Gas costs
decreased for the three-month period due to decreased gas costs per dth
partially offset by increased purchases. Gas costs increased for the six-
month and twelve-month periods due to increased gas costs per dth, increased
gas transition costs, and increased purchases. The average cost of purchased
gas for the three-month, six-month, and twelve-month periods ended June 30,
1997, after adjustment for gas transition costs billed to transport customers,
was $2.54 $3.03, and $3.08 per dth, respectively, as compared to $2.78, $2.91,
and $2.69 per dth for the same periods in 1996.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation decreased for the twelve-month
period ended June 30, 1997, compared to 1996 period, mainly as a result of
decreased production of electricity.
Power purchased decreased $3.8 and $6.8 million for the three-month
and six-month periods ended June 30, 1997, respectively, as a result of
decreased bulk power purchases.
OPERATING MARGINS -
Operating margins for the twelve months ended June 30, 1997 decreased
$13.5 million from the same period a year ago. The operating margin from
gas deliveries decreased $0.9 million. The operating margin from electric
sales decreased $12.6 million due to decreased sales to residential customers,
reflecting milder 1996 summer weather, and decreased sales to industrial and
wholesale customers.
Operating margins for the six-months ended June 30, 1997 decreased
$2.9 million from the same period a year ago. Gas operating margin
decreased $4.3 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 $1.4 million as a result of
increased wholesale energy transactions.
Operating margins for the three-months ended June 30, 1997 increased
$7.6 million from the same period a year ago. Gas operating margin
increased $5.4 million due to increased sales to residential and commercial
customers reflecting colder weather during the period, increased sales to
wholesale customers, and increased deliveries of gas transported for others,
partially offset by decreased sales to industrial customers. Operating margin
from electric sales increased $2.2 million due to increased sales to
residential and commercial customers, which were partially offset by decreased
sales to industrial and wholesale customers.
OPERATING EXPENSES AND TAXES -
Operation expenses decreased $11.9 million for the twelve-month period
ended June 30, 1997 mainly reflecting decreased employee related costs of
$7.2 million and decreased electric production pollution control facility
costs of $4.7 million. Operation expenses decreased $4.8 million for the
six-month period ended June 30, 1997 mainly reflecting decreased electric
production pollution control facility costs of $3.7 million. Operation
expenses increased $1.2 million for the three-month period ended June 30,
1997 reflecting increased employee costs of $1.1 million, partially offset by
decreased electric production pollution control facility costs, and
environmental cleanup costs.
Maintenance expenses decreased $7.7 million for the twelve-month period
ended June 30, 1997 mainly reflecting decreased maintenance activity at the
electric production facilities of $4.3 million and decreased maintenance of
$2.6 million on the transmission and distribution facilities. Maintenance
expenses decreased $2.0 million for the six-month period reflecting decreased
maintenance on distribution facilities. Maintenance expenses decreased $1.8
million for the three-month period reflecting decreased maintenance on
electric production and distribution facilities.
Depreciation and amortization expense increased $2.9, $5.5, and $10.3,
million for the three-month, six-month, and twelve-month periods ended
June 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 decreased for the six-month period ended June 30,
1997 mainly as a result of decreased pretax income and lower effective tax
rate. Utility income taxes increased for the three-month period ended
June 30, 1997 mainly as a result of increased pretax income.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) increased for the twelve-month period ended
June 30, 1997 reflects the sales of Crescent Dunes Lakeshore property to the
National Park Service.
INTEREST CHARGES -
Interest charges decreased for the three-month, six-month, and twelve-
month periods ended June 30, 1997 reflecting decreased long-term debt
outstanding during the periods partially offset by increased short-term
borrowings during the periods.
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 June 30, 1997 was
$198.0 million compared to $197.0 million for the twelve-month period ended
June 30, 1996.
Net income for the six months ended June 30, 1997 was $99.1
million compared to $98.4 million for the three months ended June 30, 1996.
Net income for the three months ended June 30, 1997 was $31.7
million compared to $28.1 million for the three months ended June 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 $17 million to cover probable corrective actions as of June 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 financial position or
results of operations 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 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. Two 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 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. The U.S. National Research Council of the
National Academy of Sciences concluded in a report, after examining more than
500 EMF studies spanning seventeen years, that among other things, there is
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 June 30,
1997, Northern Indiana had $45.4 million in commercial paper outstanding,
having a weighted average interest of 5.60%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999 unless extended by its terms.
As of June 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 June 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 June 30, 1997, $35.1 million of borrowings were outstanding
under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
June 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 June 30, 1997, $99.0 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 June 30, 1997, approximately 73% 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. Employees are currently working
without a contract. Northern Indiana continues to negotiate new agreements
with the two local unions, but cannot predict the timing or terms of new
agreements.
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 sale service. Northern Indiana believes it has
taken appropriate steps to ensure the continued acquisition of adequate gas
supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services has
changed significantly over the past several years. The deregulation of the gas
industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
Northern Indiana's facilities to transport the gas. Transportation customers
pay Northern Indiana only for transporting their gas from the pipeline to the
customers' premises.
Northern Indiana filed 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
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 and storage cost mechanisms, and a price
protection program. The Commission held hearings a hearing on the ARP on
June 12, 1997. Action by the Commission is expected during the third quarter
of 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 3
(Pending Tax Matter) and Note 5 (Environmental Matters), in the Notes to
Consolidated Financial Statements under Part I, Item 1 of this Report on
Form 10-Q.
To the knowledge of Northern Indiana no other material legal
proceedings against Northern Indiana or its subsidiaries are contemplated by
governmental authorities and other parties.
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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 August 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
August 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 June 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> APR-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,039,909
<OTHER-PROPERTY-AND-INVEST> 8,734
<TOTAL-CURRENT-ASSETS> 280,987
<TOTAL-DEFERRED-CHARGES> 79,098
<OTHER-ASSETS> 222,098
<TOTAL-ASSETS> 3,630,826
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,522
<RETAINED-EARNINGS> 152,752
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,024,762
59,996
81,123
<LONG-TERM-DEBT-NET> 328,515
<SHORT-TERM-NOTES> 35,050
<LONG-TERM-NOTES-PAYABLE> 727,025
<COMMERCIAL-PAPER-OBLIGATIONS> 45,400
<LONG-TERM-DEBT-CURRENT-PORT> 100,747
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,226,380
<TOT-CAPITALIZATION-AND-LIAB> 3,630,826
<GROSS-OPERATING-REVENUE> 352,595
<INCOME-TAX-EXPENSE> 17,899
<OTHER-OPERATING-EXPENSES> 282,127
<TOTAL-OPERATING-EXPENSES> 300,026
<OPERATING-INCOME-LOSS> 52,569
<OTHER-INCOME-NET> (1,036)
<INCOME-BEFORE-INTEREST-EXPEN> 51,533
<TOTAL-INTEREST-EXPENSE> 19,805
<NET-INCOME> 31,728
2,128
<EARNINGS-AVAILABLE-FOR-COMM> 29,600
<COMMON-STOCK-DIVIDENDS> 44,000
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 83,251
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
