SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-4125
NORTHERN INDIANA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Indiana 35-0552990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
-------- --------
As of April 30, 1998, 73,282,258 common shares were outstanding.
<PAGE>
NORTHERN INDIANA PUBLIC SERVICE COMPANY
PART 1.
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
March 31, 1998, and December 31, 1997, and the related consolidated
statements of income, retained earnings and cash flows for the three and
twelve month periods ended March 31, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Northern
Indiana Public Service Company and subsidiaries as of March 31, 1998 and
December 31, 1997, and the results of their operations and their cash flows
for the three and twelve month periods ended March 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
April 28, 1998
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
March 31, December 31,
ASSETS 1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$142,049 AND $140,534 RESPECTIVELY)
(NOTE 2):
Electric $ 4,082,197 $ 4,066,568
Gas 1,230,779 1,223,693
Common 349,531 351,350
------------ ------------
5,662,507 5,641,611
Less - Accumulated provision for
depreciation and amortization 2,655,379 2,613,352
------------ ------------
Total Utility Plant 3,007,128 3,028,259
------------ ------------
OTHER PROPERTY AND INVESTMENTS 701 1,215
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 25,775 9,800
Accounts receivable, less reserve of
$4,919 and $4,524, respectively (Note 2) 104,910 101,188
Fuel adjustment clause (Note 2) 1,111 2,679
Gas cost adjustment clause (Note 2) 36,456 86,520
Materials and supplies, at average cost 54,980 53,666
Electric production fuel, at average cost 21,241 18,837
Natural gas in storage, at last-in,
first-out cost (Note 2) 18,317 45,880
Prepayments and other 24,972 23,128
------------ ------------
Total Current Assets 287,762 341,698
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 202,770 205,965
Prepayments and other (Note 6) 105,702 97,777
------------ ------------
Total Other Assets 308,472 303,742
------------ ------------
$ 3,604,063 $ 3,674,914
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
March 31, December 31,
CAPITALIZATION AND LIABILITIES 1998 1997
============ ============
(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 12) $ 859,488 $ 859,488
Additional paid-in capital 12,522 12,522
Retained earnings (see accompanying
statement) (Note 11) 163,951 146,293
------------ ------------
Common shareholder's equity 1,035,961 1,018,303
Cumulative preferred stocks (Note 8)
Series without mandatory redemption
provisions (Note 9) 81,122 81,123
Series with mandatory redemption
provisions (Note 10) 58,841 58,841
Long-term debt excluding amounts due
within one year (Note 14) 1,079,617 1,079,496
------------ ------------
Total Capitalization 2,255,541 2,237,763
------------ ------------
CURRENT LIABILITIES -
Current portion of long-term
debt (Note 15) 51,009 51,009
Short-term borrowings (Note 16) 18,500 119,000
Accounts payable 101,820 127,742
Dividends declared on common and
preferred stocks 47,201 56,198
Customer deposits 20,848 20,236
Taxes accrued 147,559 88,852
Interest accrued 18,508 7,646
Accrued employment costs 37,271 51,095
Other accruals 30,888 34,051
------------ ------------
Total Current Liabilities 473,604 555,829
------------ ------------
OTHER:
Deferred income taxes (Note 5) 597,604 602,936
Deferred investment tax credits, being
amortized over life of related property
(Note 5) 98,071 99,853
Deferred credits 53,150 53,323
Accrued liability for postretirement
benefits (Note 7) 115,816 115,177
Other noncurrent liabilities 10,277 10,033
------------ ------------
Total Other 874,918 881,322
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 4, 17 and 18)
$ 3,604,063 $ 3,674,914
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------------- ----------------------
1998 1997 1998 1997
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 3 and 20)
Gas $ 218,730 $ 305,674 $ 648,355 $ 735,663
Electric 240,186 245,824 1,011,445 1,019,631
---------- ---------- ---------- ----------
458,916 551,498 1,659,800 1,755,294
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 123,170 196,735 378,871 457,674
Fuel for electric
generation 55,594 58,408 235,734 234,421
Power purchased 3,647 8,960 31,961 50,750
---------- ---------- ---------- ----------
182,411 264,103 646,566 742,845
---------- ---------- ---------- ----------
Operating Margin 276,505 287,395 1,013,234 1,012,449
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 62,103 69,789 261,589 275,147
Maintenance (Note 2) 16,694 17,338 68,209 68,547
Depreciation and
amortization (Note 2) 56,520 55,252 224,293 214,208
Taxes (except income) 19,137 20,157 70,732 72,168
---------- ---------- ---------- ----------
154,454 162,536 624,823 630,070
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 122,051 124,859 388,411 382,379
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 6) 35,917 37,007 109,009 105,990
---------- ---------- ---------- ----------
Operating Income 86,134 87,852 279,402 276,389
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) (608) (409) (3,858) 825
---------- ---------- ---------- ----------
Interest:
Interest on long-term debt 17,850 16,217 71,060 67,080
Other interest 849 2,851 5,218 11,506
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,053 1,043 4,204 4,214
---------- ---------- ---------- ----------
19,752 20,111 80,482 82,800
---------- ---------- ---------- ----------
Net Income 65,774 67,332 195,062 194,414
Dividend requirements on
preferred shares 2,116 2,167 8,488 8,680
---------- ---------- ---------- ----------
Balance available
for common shares $ 63,658 $ 65,165 $ 186,574 $ 185,734
========== ========== ========== ==========
Dividends declared $ 46,000 $ 44,000 $ 189,775 $ 187,200
========== ========== ========== ==========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------- -------------------
1998 1997 1998 1997
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
BALANCE AT
BEGINNING OF
PERIOD $ 146,293 $ 145,987 $ 167,152 $ 168,618
ADD:
Net income 65,774 67,332 195,062 194,414
--------- --------- --------- ---------
212,067 213,319 362,214 363,032
--------- --------- --------- ---------
LESS:
Dividends
Cumulative
Preferred
stocks -
4-1/4% series 222 222 889 889
4-1/2% series 91 91 360 360
4.22% series 113 113 448 448
4.88% series 122 122 488 488
7.44% series 77 77 312 312
7.50% series 66 66 261 261
8.85% series 166 194 654 765
7-3/4% series 81 91 352 384
8.35% series 125 138 509 559
6.50% series 698 698 2,795 2,795
Adjustable
Rate,
Series A 355 355 1,420 1,419
Common shares 46,000 44,000 189,775 187,200
--------- --------- --------- ---------
48,116 46,167 198,263 195,880
--------- --------- --------- ---------
BALANCE AT END
OF PERIOD $ 163,951 $ 167,152 $ 163,951 $ 167,152
========= ========= ========= =========
<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 March 31,
------------------------
1998 1997
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 65,774 $ 67,332
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 56,520 55,252
Deferred federal and state operating
income taxes, net (26,666) (8,015)
Deferred investment tax credits, net (1,782) (1,794)
Advance contract payment 475 475
Change in certain assets and liabilities -
Accounts receivable, net (3,722) (5,122)
Electric production fuel (2,404) 2,351
Materials and supplies (1,314) 56
Natural gas in storage 27,563 35,585
Accounts payable (16,531) (37,618)
Taxes accrued 78,658 63,304
Fuel adjustment clause 1,568 (3,781)
Gas cost adjustment clause 50,064 13,323
Accrued employment costs (13,824) (4,353)
Other accruals (3,163) 24,169
Other, net 4,912 17,091
---------- ----------
Net cash provided by operating activities 216,128 218,255
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (33,310) (45,421)
Other, net (9,350) (464)
---------- ----------
Net cash used in investing activities (42,660) (45,885)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of short-term debt 118,160 180,400
Net change in commercial paper (53,000) (91,405)
Retirement of short-term debt (165,660) (191,900)
Retirement of preferred shares 0 (1)
Cash dividends paid on common shares (55,000) (53,000)
Cash dividends paid on preferred shares (2,114) (2,165)
Other, net 121 115
---------- ----------
Net cash used in financing activities (157,493) (157,956)
---------- ----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 15,975 14,414
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 9,800 8,279
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 25,775 $ 22,693
========== ==========
<CAPTION>
Twelve Months
Ended March 31,
------------------------
1998 1997
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 195,062 $ 194,414
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 224,293 214,208
Deferred federal and state operating
income taxes, net (27,065) 3,215
Deferred investment tax credits, net (7,193) (7,460)
Advance contract payment 1,900 1,900
Change in certain assets and liabilities -
Accounts receivable, net 12,078 3,247
Electric production fuel 2,891 (4,186)
Materials and supplies 1,760 6,051
Natural gas in storage (3,493) (3,875)
Accounts payable (30,186) (19,327)
Taxes accrued 36,842 35,649
Fuel adjustment clause 11,819 (4,463)
Gas cost adjustment clause 48,388 (33,822)
Accrued employment costs 709 (1,218)
Other accruals (21,215) (2,564)
Other, net 9,620 19,321
---------- ----------
Net cash provided by operating activities 456,210 401,090
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (162,120) (188,012)
Other, net (12,077) 2,142
---------- ----------
Net cash used in investing activities (174,197) (185,870)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 139,000 0
Issuance of short-term debt 472,190 1,079,150
Net change in commercial paper (84,000) 85,100
Retirement of long-term debt (67,247) (80,000)
Retirement of short-term debt (539,690) (1,091,750)
Retirement of preferred shares (2,407) (2,605)
Cash dividends paid on common shares (187,775) (187,450)
Cash dividends paid on preferred shares (8,505) (8,712)
Other, net (497) 489
---------- ----------
Net cash used in financing activities (278,931) (205,778)
---------- ----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 3,082 9,442
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,693 13,251
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 25,775 $ 22,693
========== ==========
<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 approximated weighted average remaining lives
for major components of each electric and gas plant are as follows:
Electric:
--------
Electric generation plant 24 years
Transmission plant 26 years
Distribution plant 25 years
Other electric plant 24 years
The provision of depreciable electric utility plant, as a percentage of
the original cost, was 3.6% for the three-month and twelve-month periods ended
March 31, 1998 and March 31, 1997.
Gas:
----
Gas storage plant 18 years
Transmission plant 34 years
Distribution plant 27 years
Other gas plant 24 years
The provision of depreciable gas utility plant, as a percentage of the
original cost, was 5.4% for the three-month and twelve-month periods ended
March 31, 1998 and 5.3% for the three-month and twelve-month periods ended
March 31, 1997.
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
retired unit is replaced or removed, the cost of such property is credited to
utility plant and such cost, together with the cost of removal less salvage,
is charged to the accumulated provision for depreciation.
AMORTIZATION OF SOFTWARE COSTS. Northern Indiana has capitalized
software relating to various technology functions. At the date of
installation, Northern Indiana estimated that the specific software will have
a useful life between five and ten years. The Federal Energy Regulatory
Commission (FERC) prescribes certain amortization periods, and Northern
Indiana's management has determined that, on average, these are reasonable
useful life estimates for the portfolio of capitalized software. Northern
Indiana includes these amortization estimates, based on useful life, in its
quarterly filings with the Indiana state regulatory commission.
COAL RESERVES. Northern Indiana has a long-term mining contract to
mine its coal reserves through the year 2001. The costs of these reserves
are being recovered through the rate-making process as such coal reserves are
used to produce electricity.
POWER PURCHASED. Power purchases and net interchange power with other
electric utilities under interconnection agreements are included in Cost of
Energy under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At March 31,1998, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which
expires May 31, 2002. The March 31, 1998 and December 31, 1997 accounts
receivable balances include approximately $3.5 million and $5.4 million,
respectively, due from associated companies.
COMPREHENSIVE INCOME. Northern Indiana adopted SFAS No. 130, Reporting
Comprehensive Income" effective January 1, 1998. This statement established
standards for reporting and display of comprehensive income and its components
in a financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS No. 130 did not impact Northern
Indiana's financial statements for the periods presented.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement
of Cash Flows, Northern Indiana considers temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest
was as follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
------------------ ------------------
1998 1997 1998 1997
======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income taxes $ 20 $ 0 $104,829 $ 73,473
Interest, net of
amounts
capitalized $ 7,534 $ 6,808 $ 75,811 $ 76,191
</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 3, FERC Order No. 636 for a discussion
of gas transition cost charges.
NATURAL GAS IN STORAGE. Natural gas in storage is valued using the
last-in, first-out (LIFO) inventory methodology. Based on the average cost of
gas purchased in March 1998 and December 1997 the estimated replacement cost
of gas in storage (current and non-current) at March 31, 1998 and December 31,
1997 exceeded the stated LIFO cost by approximately $29 million and $42
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 (NIMSC), a
wholly-owned subsidiary of Industries.
The costs of these services are charged to Northern Indiana based on
payroll and expenses incurred by NIMSC's employees for the benefit of
Northern Indiana. These costs, which totaled $7.0 million and $27.2 million
for the three-month and twelve-month periods ended March 31, 1998 and totaled
$8.6 million and $25.8 million for the three-month and twelve-month periods
ended March 31, 1997, consist primarily of employee compensation and benefits.
Northern Indiana purchased natural gas and transportation services
from affiliated companies in the amounts of $1.9 million and $9.1 million
representing 2.2% and 2% of Northern Indiana's total gas costs for the
three-month and twelve-month periods ended March 31, 1998, respectively.
Northern Indiana purchased natural gas and transportation services from
affiliated companies in the amounts of $3.0 million and $12.5 million
representing 2.2% and 2.9% of Northern Indiana's total gas costs for the
three-month and twelve-month periods ended March 31, 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 and option
contracts to hedge the impact of natural gas price fluctuations related to its
business activities. Gains and losses on these commodity-based derivative
financial instruments are deferred and recognized in income concurrent with
the related purchases and sales of natural gas.
As of March 31, 1998, Northern Indiana had open futures and option
contracts representing hedges of natural gas sales of 4.9 billion cubic feet
(Bcf) and natural gas purchases of 4.4 Bcf. The net deferred gain on these
commodity-based derivative financial instruments as of March 31, 1998 was not
material.
REGULATORY ASSETS. Northern Indiana's operations are subject to the
regulation of the Commission and FERC. Accordingly, Northern Indiana's
accounting policies are subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation." Northern Indiana monitors changes in market and
regulatory conditions and the resulting impact of such changes in order to
continue to apply the provisions of SFAS No. 71 to some or all of its
operations. As of March 31, 1998 and December 31, 1997, 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 regulatory assets might be required, unless some form of transition
cost recovery is established by the appropriate regulatory body which would
meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period.
Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
============= =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 14) $ 45,560 $ 46,426
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 65,492 66,546
Bailly scrubber carrying charges and
deferred depreciation (See below) 9,647 9,880
Deferral of SFAS No. 106 expense not
recovered (Note 7) 82,565 83,965
FERC Order No. 636
transition costs (Note 3) 25,771 28,744
Regulatory income tax asset, net (Note 5) 10,023 9,664
------------- -------------
239,058 245,225
Less: Current portion of regulatory assets 36,288 39,260
------------- -------------
$ 202,770 $ 205,965
============= =============
</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. 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, 1996 a pre-tax rate of 5.5% for all construction was
being used; effective January 1, 1997 the rate remained at 5.5% and effective
January 1, 1998, the rate increased to 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) FERC ORDER NO. 636. Since December 1993, Northern Indiana has paid
approximately $137 million of interstate pipeline transition costs to
pipeline suppliers to reflect the impact of FERC Order No. 636. 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.
(4) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to
remain aware of laws and regulations involved with hazardous waste and other
environmental matters. It is Northern Indiana's intent to continue to
evaluate its facilities and properties with respect to these rules and
identify any sites that would require corrective action. Northern Indiana has
recorded a reserve of approximately $19 million to cover probable corrective
actions as of March 31, 1998; however, environmental regulations and
remediation techniques are subject to future change. The ultimate cost could
be significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, Northern Indiana believes that any corrective actions required,
after consideration of insurance coverages and contributions from other
potentially responsible parties, will not have a significant impact on the
results of operations or financial position of Northern Indiana.
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 specific sulfur dioxide limitations
contained in the acid deposition provisions of the Clean Air Act Amendments of
1990 (CAAA). Reflecting this compliance, on December 31, 1997, the Indiana
Department of Environmental Management (IDEM) issued the Phase II Acid
Rain permits for all four of Northern Indiana's electric generating stations.
As discussed below, however, other provisions of the CAAA impose additional
requirements on Northern Indiana.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for Phase II of the Acid Rain nitrogen oxides (NOx)reduction
program. For Phase I, during the summer of 1997, the EPA formally approved
the Acid Rain Early Election permits for the pulverized coal units at D. H.
Mitchell and R. M. Schahfer stations. The permits establish the Phase I
limits for the NOx emissions on these units until 2007. On December 23, 1997,
Northern Indiana submitted an Acid Rain Phase II NOx Compliance Plan to IDEM
which included additional controls for two cyclone fired boilers and a plan
for emission averaging to achieve the NOx limits for the system by 2000.
Northern Indiana plans a project to demonstrate a cost effective combustion
control technique on the Unit 12 cyclone fired boiler at Michigan City during
1998. The CAAA also contain other provisions that could lead to limitations
on emissions of hazardous air pollutants which may require significant capital
expenditures for control of these emissions. Northern Indiana cannot predict
what these requirements will be or the costs of complying with these potential
requirements.
On October 10, 1997, the EPA proposed a rule under the nonattainment
provisions of the CAAA to reduce emissions transported across state boundaries
that allegedly are contributing to nonattainment of the one hour ozone
standard in downwind states. Because NOx is considered a precursor or cause
of ozone formation, the EPA proposed significant NOx reductions for 22 states,
including Indiana, to address the ozone transport issue. These proposals, and
any resulting NOx emission limitations arise under different provisions of the
CAAA than the Acid Rain NOx program and can result in additional, more
restrictive emissions limitations than are imposed under the Acid Rain
Program. The EPA has encouraged states to achieve the reductions by requiring
controls on electric utilities and large boilers. Northern Indiana is
evaluating the EPA's proposal and evaluating potential requirements that could
result from any final rule.
The EPA issued final rules on July 18, 1997 revising the National
Ambient Air Quality Standards for ozone and particulate matter. The revised
standards begin a regulatory process that may lead to reductions in
particulate, NOx and possibly sulfur dioxide emissions from coal-fired boilers
(including Northern Indiana's generating stations) beyond current CAAA
requirements. Northern Indiana cannot predict the costs of complying with
future control requirements to meet these new standards. Northern Indiana
will continue to closely monitor developments in this area and anticipates
that the exact nature of the impact of the new standards on its operations
will not be known for some time.
The EPA has notified Northern Indiana that it is a "potentially
responsible party" (PRP) under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA) and may be required to share in the
cost of cleanup of several waste disposal sites identified by the EPA. The
sites are in various stages of investigation, analysis and remediation. At
each of the sites, Northern Indiana is one of several PRPs, and it is
expected that remedial costs, as provided under CERCLA, will be shared among
them. At some sites Northern Indiana and/or the other named PRPs are
presently working with the EPA to clean up the sites and avoid the imposition
of fines or added costs.
In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159
nations formally agreed to targets reducing worldwide levels of greenhouse
gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would
impose an obligation on the United States to reduce its emissions of
greenhouse gas to a level seven percent below 1990 levels during the period
2008 to 2012. The impact of this agreement on Northern Indiana is uncertain.
Northern Indiana, as a charter member of the Department of Energy's Climate
Challenge Program, the electric industries' voluntary reduction effort, has
already implemented over 21 projects to voluntarily reduce greenhouse gas
emissions. Northern Indiana continues to investigate methods to address
reduction in carbon dioxide emissions and will monitor the development of U.S.
climate change policy.
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 eight sites and remedial
measures have been selected at five 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 IDEM and the EPA and
immediately took steps to contain the material. Northern Indiana has worked
with IDEM or the EPA on investigation or remedial activities at several sites.
Three of the sites have been enrolled in the IDEM Voluntary Remediation
Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM
approval of the selection and implementation of whatever remedial measures, if
any, may be required. Northern Indiana anticipates placing additional sites
in the VRP after remedial measures have been selected.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured-gas
plant sites at which both companies or their predecessors were former
operators or owners. One of these sites is the Lafayette site which Indiana
Gas had previously notified Northern Indiana is being investigated and
remediated pursuant to an administrative order with IDEM. Northern Indiana
also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.)
that it was a former owner or operator of seven former manufactured-gas plants
at which Northern Indiana had conducted or was planning investigation or
remediation activities. In December 1996, Northern Indiana sent a written
demand to Cinergy related to one of these sites, Goshen. Northern Indiana
demanded that Cinergy pay Northern Indiana for costs Northern Indiana has
already incurred and to be incurred to implement the needed remedy at the
Goshen site. In August 1997, Northern Indiana filed suit in federal court
against Cinergy seeking recovery of those costs.
In 1994, Northern Indiana approached various companies that provided
insurance coverage which Northern Indiana believes covers costs related to
actions taken at former manufactured-gas plants. There has been litigation
between Northern Indiana and various insurance companies over covered costs.
Northern Indiana has filed claims in state court against various insurance
companies, seeking coverage for costs associated with several former
manufactured-gas plants and damages for alleged misconduct by some of the
insurance companies. The state court action is now proceeding. Northern
Indiana has received cash settlements from several of the insurance companies.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. Recently, researchers from the National
Cancer Institute and the Childhood Cancer Group reported they found no
evidence magnetic fields in homes increase the risk of childhood leukemia.
This study follows an EMF report previously released by the U.S. National
Research Council of the National Academy of Sciences, which concluded, after
examining more than 500 EMF studies spanning seventeen years, that among other
things, there was insufficient evidence to consider EMF a threat to human
health. Despite the report's findings, future research appropriations are
continuing to be dedicated to explore this issue.
(5) 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 March 31,
1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
============= =============
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 731,642 $ 729,153
AFUDC-equity 34,675 35,282
Adjustment clauses 14,247 33,829
Take-or-pay gas costs 384 384
Other regulatory assets 31,313 31,844
Reacquisition premium on debt 17,279 17,607
Deferred tax assets -
Deferred investment tax credits (37,186) (37,869)
Removal costs (147,209) (144,111)
Other postretirement/postemployment
benefits (43,923) (43,680)
Other, net (9,582) (5,516)
------------- -------------
591,640 616,923
Less: Deferred income taxes related to
current assets and liabilities (5,964) 13,987
------------- -------------
Deferred income taxes - noncurrent $ 597,604 $ 602,936
============= =============
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1998 1997 1998 1997
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 56,129 $ 40,745 $ 124,286 $ 95,457
State 8,236 6,071 18,981 14,778
--------- --------- --------- ---------
64,365 46,816 143,267 110,235
--------- --------- --------- ---------
Deferred income taxes, net -
Federal (24,648) (7,451) (25,195) 2,700
State (2,018) (564) (1,870) 515
--------- --------- --------- ---------
(26,666) (8,015) (27,065) 3,215
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,782) (1,794) (7,193) (7,460)
--------- --------- --------- ---------
Total utility operating income
taxes 35,917 37,007 109,009 105,990
Income tax applicable to non-
operating activities and income
of subsidiaries (405) (253) (3,688) (1,086)
--------- --------- --------- ---------
Total income taxes $ 35,512 $ 36,754 $ 105,321 $ 104,904
========= ========= ========= =========
</TABLE>
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pre-tax income is as follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1998 1997 1998 1997
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 65,774 $ 67,332 $ 195,062 $ 194,414
Add-Income taxes 35,512 36,754 105,572 104,904
--------- --------- --------- ---------
Net income before income taxes $ 101,286 $ 104,086 $ 300,634 $ 299,318
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 35,450 $ 36,430 $ 105,222 $ 104,761
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 998 1,044 4,026 4,682
Amortization of deferred
investment tax credits (1,782) (1,794) (7,193) (7,460)
State income taxes, net of
federal income tax benefit 3,310 3,364 10,193 10,086
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,271) (1,518) (3,816) (6,488)
Other, net (1,193) (772) (2,860) (677)
--------- --------- --------- ---------
Total income taxes $ 35,512 $ 36,754 $ 105,572 $ 104,904
========= ========= ========= =========
</TABLE>
(6) 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 change in the benefit obligation for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Benefit obligation at beginning $ 732,870 $ 749,869
of year (January 1,)
Service cost 13,325 15,877
Interest cost 55,920 52,787
Plan amendments 25,096 0
Actuarial (gain)loss 67,975 (39,435)
Benefits paid (52,137) (46,228)
--------- ---------
Benefit obligation at end of
the year (December 31,) $ 843,049 $ 732,870
========= =========
</TABLE>
The change in the fair value of the plan's value assets for years 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Fair value of plan assets at $ 782,162 $ 697,919
beginning of year January 1,)
Actual return on plan's assets 122,537 86,622
Employer contributions 44,388 43,850
Benefits paid (52,137) (46,229)
--------- ---------
Plan assets at fair value at
end of the year (December 31,) $ 896,950 $ 782,162
========= =========
</TABLE>
Plan assets are invested primarily in common stocks, bonds and
notes.
The plan's funded status as of January 1, 1998 and January 1, 1997 is
as follows:
<TABLE>
<CAPTION>
January 1, January 1,
1998 1997
========= =========
(Dollars in thousands)
<S> <C> <C>
Plan assets in excess of $ 53,901 $ 49,292
benefit obligation
Unrecognized net actuarial gains (51,191) (67,111)
Unrecognized prior service cost 45,502 23,736
Unrecognized transition amount
being recognized over
seventeen years 32,930 38,418
--------- ---------
Prepaid pension costs $ 81,142 $ 44,335
========= =========
</TABLE>
The benefit obligation is the present value of future pension benefit
payments and is based on a plan benefit formula which considers expected
future salary increases. Discount rates of 7.00% and 7.75% and rates of
increase in compensation levels of 4.50% and 5.5% were used to determine the
benefit obligation at January 1, 1998 and 1997, respectively. The increase
in benefit obligation at January 1, 1998 is mainly caused by the decrease in
the discount rate from 7.75% to 7.00%. Prepaid pension costs were $89.7
million as of March 31, 1998.
The following items are the components of provisions for pensions for
the three-month and twelve-month periods ended March 31, 1998 and March 31,
1997:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
------------------ ------------------
1998 1997 1998 1997
======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service costs $ 4,440 $ 4,466 $ 13,299 $ 14,198
Interest costs 18,633 16,326 58,228 50,253
Expected return
on plan assets (23,485) (20,308) (73,659) (60,721)
Amortization of
transition
obligation 1,829 1,604 5,713 5,134
Amortization of
prior service
cost 1,109 912 3,526 2,491
-------- -------- -------- --------
$ 2,526 $ 3,000 $ 7,107 $ 11,355
======== ======== ======== ========
</TABLE>
Assumptions used in the valuation and determination of 1998 and 1997
pension expense were as follows:
<TABLE>
<CAPTION>
1998 1997
===== =====
<S> <C> <C>
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 4.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00%
</TABLE>
(7) 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 as a regulatory asset until such time as the accrual cost method
could be reflected in the rate-making process.
On June 11, 1997, the Commission issued an order approving the inclusion
of accrual-based postretirement benefit costs in the rate-making process to
be effective February 1, 1997 for electric rates and March 1, 1997 for gas
rates. These costs include an amortization of the existing regulatory asset
consistent with the remaining amortization period for the transition
obligation. Northern Indiana discontinued its cost deferral and began
amortizing its regulatory asset concurrent with these dates.
The following table sets forth the plan's change in accumulated
postretirement benefit obligation (APBO) for the years 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Accumulated postretirement $ 194,937 $ 253,157
benefit obligation at
beginning of year (January 1,)
Service cost 3,068 5,853
Interest cost 14,523 17,973
Plan amendments 4,015 (9,607)
Actuarial (gain) (12,534) (66,112)
Benefits paid (9,006) (6,327)
--------- ---------
Accumulated postretirement
benefit obligation at
end of the year (December 31,) $ 195,003 $ 194,937
========= =========
</TABLE>
The change in the fair value of the plan's assets for the years 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
========= =========
(Dollars in thousands)
<S> <C> <C>
Fair value of plan assets at $ 0 $ 0
beginning of year (January 1,)
Employer contributions 11,406 6,627
Benefits paid (9,006) (6,627)
--------- ---------
Plan assets at fair value at
end of the year (December 31,) $ 2,400 $ 0
========= =========
</TABLE>
Following is the funded status for postretirement benefits as of
January 1, 1998 and January 1, 1997:
<TABLE>
<CAPTION>
January 1, January 1,
1998 1997
========= =========
(Dollars in thousands)
<S> <C> <C>
Funded status $(192,603) $(194,937)
Unrecognized actuarial gain (99,262) (88,784)
Unrecognized prior service cost 3,737 0
Unrecognized transition amount
being recognized over
twenty years 161,214 171,962
--------- ---------
Accrued liability for
postretirement benefits $(126,914) $(111,759)
========= =========
</TABLE>
A discount rate of 7.00%, a pre-Medicare medical trend rate of 8%
declining to a long-term rate of 5%, a discount rate of 7.75% and a
pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%,
were used to determine the APBO at January 1, 1998 and 1997, respectively.
The change in the APBO reflects the decrease in the discount rate from
7.75% to 7.00%, substantially offset by favorable claim experience and
reduction in the medical trend rate assumption. The accrued liability for
postretirement benefits was $127.1 million at March 31, 1998.
Net periodic postretirement benefits costs, before consideration of the
rate-making discussed previously, for the three-month and twelve-month periods
ended March 31, 1998 and March 31, 1997 include the following components:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
---------------- ----------------
1998 1997 1998 1997
======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service costs $ 737 $ 917 $ 2,888 $ 5,333
Interest costs 3,650 4,376 13,797 17,375
Expected return
on plan assets (50) 0 (50) 0
Amortization of
transition
obligation
over twenty years 2,675 2,702 10,720 11,017
Amortization of
prior service cost 75 0 354 0
Amortization of
actuarial (gain) (1,375) (993) (6,160) (911)
------- ------- ------- -------
$ 5,712 $ 7,002 $21,549 $32,814
======= ======= ======= =======
</TABLE>
Assumptions used in the valuation and determination of 1998 and 1997
net periodic postretirement benefit costs were as follows:
<TABLE>
<CAPTION>
1998 1997
===== =====
<S> <C> <C>
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 4.50% 5.50%
</TABLE>
The pre-Medicare medical trend rates used for 1998 and 1997 were 8%
declining to a long-term rate of 5% and 9% declining to a long-term rate of
6%, respectively. 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, 1998 by approximately $23.2 million, and
increase the aggregate of the service and interest cost components of plan
costs by approximately $0.6 million for the three-month period ended March 31,
1998. The effect of a 1% decrease in the assumed health care cost trend rates
for each future year would decrease the accumulated postretirement benefit
obligation at January 1, 1998 by approximately $19.2 million, and decrease the
aggregate of the service and interest cost components of plan costs by
approximately $0.5 million for the three-month period ended March 31, 1998.
Amounts disclosed above could be changed significantly in the future by
changes in health care costs, work force demographics, interest rates, or plan
changes.
(8) 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 9 sets forth the preferred stocks which are redeemable solely at
the option of Northern Indiana and Note 10 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.
(9) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF NORTHERN INDIANA,
OUTSTANDING AT MARCH 31, 1998 AND DECEMBER 31, 1997 (SEE NOTE 8):
<TABLE>
<CAPTION>
Redemption
Price at
March 31, December 31, March 31,
1998 1997 1998
============ ============ ============
(Dollars in thousands)
<S> <C> <C> <C>
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,107 and
209,118 shares outstanding,
respectively $ 20,911 $ 20,912 $101.20
4-1/2% series - 79,996 shares
outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares
outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares
outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares
outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares
outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at
March 31, 1998), Series A
(stated value $50 per share)
473,285 shares outstanding 23,664 23,664 $50.00
------------ ------------
$ 81,122 $ 81,123
============ ============
</TABLE>
During the period April 1, 1996 to March 31, 1998 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.
(10) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1998 AND
DECEMBER 31, 1997 (SEE NOTE 8):
Preferred stocks subject to mandatory redemption requirements or whose
redemption is outside the control of Northern Indiana are as follow:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
============ ============
(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 shares outstanding,
excluding sinking fund payments due within
one year $ 6,250 $ 6,250
7-3/4% series - 38,906 shares outstanding,
excluding sinking fund payments due within
one year 3,891 3,891
8.35% series - 57,000 shares outstanding,
excluding sinking fund payments due within
one year 5,700 5,700
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
------------ ------------
$ 58,841 $ 58,841
============ ============
</TABLE>
The redemption prices at March 31, 1998, as well as sinking fund
provisions for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
<TABLE>
<CAPTION>
Sinking Fund Or
Mandatory Redemption
Series Redemption Price Per Share Provisions
====== ========================== =============================
<S> <C> <C>
Cumulative preferred stock - $100 par value -
8.85% $101.11, reduced periodically 12,500 shares on or before
April 1.
8.35% $103.69, reduced periodically 3,000 shares on or before
July 1; increasing to 6,000
shares beginning in 2004;
noncumulative option
to double amount each
year.
7-3/4% $104.23, 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 March 31, 1998 for each of the twelve-month periods
subsequent to March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,*
==================================
<S> <C>
2000 $1,827,700
2001 $1,827,700
2002 $1,827,700
2003 $1,827,700
<FN>
* Table does not reflect redemptions made after March 31, 1998.
</TABLE>
(11) COMMON SHARE DIVIDEND: Northern Indiana's Indenture dated August 1,
1939, as amended and supplemented (Indenture), provides that it will not
declare or pay any dividends on any class of capital stock (other than
preferred or preference stock) except out of earned surplus or net
profits of Northern Indiana. At March 31, 1998, Northern Indiana had
approximately $164.0 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.
(12) COMMON SHARES: Effective with the exchange of common shares on March 3,
1988 Northern Indiana's common shares are wholly-owned by Industries.
On December 16, 1997, the Industries Board of Directors authorized a
two-for-one stock split of Industries' common stock. The stock split was paid
February 20, 1998, to shareholders of record at the close of business on
January 30, 1998. All references to number of common shares reported for the
period including per share amounts and stock option data of Industries' common
stock reflect the two-for-one stock split as if it had occurred at the
beginning of the earliest period.
(13) 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 5.0 million
of Industries' common shares to key employees through 1998 and 2004,
respectively. At March 31, 1998, there were 12,912 shares and 3,837,500
shares reserved for future awards under the 1988 Plan and 1994 Plan,
respectively. The 1988 Plan and 1994 Plan permit the following types of
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights and
performance units. No incentive stock options or performance units were
outstanding at March 31, 1998. Under both Plans, the exercise price of
each option equals the market price of Industries' stock on the date of grant.
Each option has a maximum term of 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 1997 and 1998 lapse two years from date of
grant and vesting is variable from 0% to 100% of the number awarded, subject
to specific performance goals. If a participant's employment is terminated
prior to vesting other than by reason of death, disability or retirement,
restricted shares are forfeited. There were 558,666 and 542,666 restricted
shares outstanding at March 31, 1998 and December 31, 1997, 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 and $0.7 million for the three-month and
twelve-month periods ending March 31, 1998, respectively. Had compensation
cost for non-qualified stock options been determined consistent with SFAS No.
123 "Accounting for Stock-Based Compensation," Northern Indiana's net income
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
------------------ ------------------
1998 1997 1998 1997
======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income:
As reported $ 65,774 $ 67,332 $195,062 $194,414
Pro forma $ 65,553 $ 67,033 $194,198 $193,668
</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 and twelve-month periods ended March 31, 1998 and
March 31, 1997: risk-free interest rate of 6.29% and 6.39%, respectively;
expected dividend yield per share of $0.87 and $0.84, respectively; expected
option term of five and one-quarter years and five years, respectively; and
expected volatilities of 12.7% and 13.2%, respectively. The weighted average
fair value of options granted to all plan participants was $2.66 and $2.50 for
the twelve-month period ended March 31, 1998 and March 31, 1997, respectively.
There were 533,600 and 556,600 non-qualified stock options granted to all plan
participants for the twelve-month periods ended March 31, 1998 and March 31,
1997, respectively.
(14) LONG-TERM DEBT: At March 31, 1998 and December 31, 1997, 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
---------------------------
March 31, December 31,
1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
First mortgage bonds -
Series T, 7-1/2%, due April 1, 2002 $ 39,500 $ 39,500
Series NN, 7.10%, due July 1, 2017 55,000 55,000
------------ ------------
Total 94,500 94,500
------------ ------------
Pollution control notes and bonds -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 18,000 18,000
Series 1988 Bonds - Jasper County -
Series A, B and C - 3.61% weighted
average at March 31, 1998, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.58% weighted average at
March 31, 1998, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 3.80% at March 31, 1998,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 3.80% at March 31, 1998,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 3.80% at March 31, 1998,
due April 1, 2019 41,000 41,000
------------ ------------
Total 241,000 241,000
------------ ------------
Medium-term notes -
Interest rates between 6.10% and 7.69% with
a weighted average interest rate of 7.00%
and various maturities between
April 5, 2000 and August 4, 2027 748,025 748,025
------------ ------------
Unamortized premium and discount
on long-term debt, net (3,908) (4,029)
------------ ------------
Total long-term debt excluding
amounts due in one year $ 1,079,617 $ 1,079,496
============ ============
</TABLE>
The sinking fund requirements of long-term debt outstanding at
March 31, 1998 (including the maturity of first mortgage bonds: Series T,
7-1/2%, due April 1, 2002; and medium-term notes due from March 20, 2000 to
March 31, 2003) for each of the twelve-month periods subsequent to March 31,
1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
=================================
<S> <C>
2000 $ 8,000,000
2001 $152,000,000
2002 $ 19,000,000
2003 $ 79,000,000
</TABLE>
Unamortized debt expense, premium and discount on long-term debt
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized. These
premiums are not earning a return during the recovery period.
Northern Indiana's Indenture, 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 March 31, 1998, $139.0 million of the medium-term notes had been issued
with various interest rates and maturities. The proceeds from these issuances
were used to pay short-term debt incurred to redeem its First Mortgage Bonds,
Series N, and to pay at maturity various issues of Medium-Term Notes, Series
D.
(15) CURRENT PORTION OF LONG-TERM DEBT: At March 31, 1998 and December 31,
1997, Northern Indiana's current portion of long-term debt due within one year
was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
First mortgage bonds -
Series P, 6-7/8% - due October 1, 1998 $ 14,509 $ 14,509
Medium-term notes -
Interest rate of 5.83% and 5.95% with
a weighted average interest rate of
5.86% and various maturities between
April 6, 1998 and April 13, 1998 35,000 35,000
Sinking funds due within one year 1,500 1,500
------------ ------------
Total current portion of long-term debt $ 51,009 $ 51,009
============ ============
</TABLE>
(16) SHORT-TERM BORROWINGS: Northern Indiana uses commercial paper to fund
short-term working capital requirements.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of March 31, 1998, 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
March 31, 1998, 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 March 31, 1998 there were no borrowings outstanding under
these lines of credit. As of December 31, 1997, there was $47.5 million of
borrowings outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1998, there were no borrowings outstanding under this facility.
At March 31, 1998 and December 31, 1997, Northern Indiana's short-
term borrowings were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
Commercial paper -
Interest rate of 5.60% at
March 31, 1998 $ 18,500 $ 71,500
Notes payable -
Issued at interest rates between 6.03%
and 6.38 % with a weighted average
interest rate of 5.86% and various
maturities between January 9,1998 and
January 23, 1998 0 47,500
------------ ------------
Total short-term borrowings $ 18,500 $ 119,000
============ ============
</TABLE>
(17) 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 March 31, 1998:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
=============================
(Dollars in thousands)
<S> <C>
1999 $ 5,076
2000 3,055
2001 3,055
2002 3,055
2003 3,055
Later years 32,379
--------
Total minimum
payments required $ 49,675
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 2,148 $ 2,090
Twelve months ended $ 7,733 $ 8,729
</TABLE>
(18) COMMITMENTS: Northern Indiana estimates that approximately $762
million will be expended for construction purposes for the period from
January 1, 1998 to December 31, 2002. Substantial commitments have been made
by Northern Indiana in connection with this program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber
services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992
with annual charges approximating $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.
Northern Indiana has entered into an agreement with IBM to perform all
data center, application development and maintenance, and desktop management
of Northern Indiana.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair
value because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based on
market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for
the same or similar issues or on the rates offered to Northern
Indiana for securities of the same remaining maturities. Certain
premium costs associated with the early settlement of long-term debt
are not taken into consideration in determining fair value.
The carrying values and estimated fair values of Northern Indiana's
financial instruments are as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 25,775 $ 25,775 $ 9,800 $ 9,800
Investments $ 256 $ 256 $ 256 $ 256
Long-term debt (including
current portion) $1,130,626 $1,148,921 $1,130,505 $1,128,851
Preferred stock $ 141,791 $ 132,317 $ 141,792 $ 135,317
</TABLE>
Northern Indiana is subject to regulation, and gains or losses may be
included in rates over a prescribed amortization period, if in fact settled at
amounts approximating those above.
(20) CUSTOMER CONCENTRATIONS: Northern Indiana is a public utility
operating company supplying natural gas and electrical energy in the northern
third of Indiana. Although Northern Indiana has a diversified base of
residential and commercial customers, a substantial portion of its electric
and gas industrial deliveries are dependent upon the basic steel industry.
The basic steel industry accounted for 3% of gas revenues (including
transportation services) and 19% of electric revenue for the twelve months
ended March 31, 1998 as compared to 4% and 22%, respectively, for the
twelve months ended March 31, 1997.
(21) BUSINESS SEGMENTS: Northern Indiana adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information" during the first
quarter of 1998. SFAS No. 131 established standards for reporting information
about operating segments in financial statements and disclosures about
products and services, and geographic areas. Operating segments are defined
as components of an enterprise for which separate financial information is
available and is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Northern Indiana's reportable operating segments include regulated gas
and electric services. Northern Indiana supplies gas and electric services to
residential, commercial and industrial customers. The other category includes
gas exploration, real estate transactions, non-utility revenues and expenses,
and other corporate assets.
Northern Indiana's reportable segments are operations that are managed
separately and meet the quantitative thresholds required by SFAS No. 131.
Revenues for each of Northern Indiana's segments are attributable to
customers in the United States.
The following tables provide information about Northern Indiana's
business segments. Northern Indiana uses income before interest and income
taxes as its primary measurement for each of the reported segments.
Adjustments have been made to the segment information to arrive at information
included in the results of operations and financial position of Northern
Indiana. The accounting policies of the operating segments are the same as
those described in Note 2, "Summary of Significant Accounting Policies.
<TABLE>
<CAPTION>
For the Three Months Adjust-
Ended March 31, 1998 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $218,730 $ 240,186 $ 0 $ 0 $ 458,916
Other income (deductions)$ 582 $ 85 $ (839) $ (436) $ (608)
Depreciation and
amortization $ 17,753 $ 38,767 $ 0 $ 0 $ 56,520
Income before interest
and utility income
taxes $ 45,309 $ 77,409 $ (903) $ (372) $ 121,443
Assets $745,236 $2,494,907 $363,920 $ 0 $3,604,063
<CAPTION>
For the Three Months Adjust-
Ended March 31, 1997 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $305,674 $ 245,824 $ 0 $ 0 $ 551,498
Other income (deductions)$ 466 $ 197 $ (526) $ (546) $ (409)
Depreciation and
amortization $ 16,970 $ 38,282 $ 0 $ 0 $ 55,252
Income before interest
and utility income
taxes $ 55,090 $ 70,432 $ (553) $ (519) $ 124,450
Assets $804,111 $2,562,141 $363,887 $ 0 $3,730,139
<CAPTION>
For the Twelve Months Adjust-
Ended March 31, 1998 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $648,355 $1,011,445 $ 0 $ 0 $1,659,800
Other income (deductions)$ 938 $ 506 $ (1,723) $ (3,579) $ (3,858)
Depreciation and
amortization $ 69,964 $ 154,329 $ 0 $ 0 $ 224,293
Income before interest
and utility income
taxes $ 70,473 $ 319,382 $ (1,849) $ (3,453) $ 384,553
Assets $745,236 $2,494,907 $363,920 $ 0 $3,604,063
<CAPTION>
For the Twelve Months Adjust-
Ended March 31, 1997 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $735,663 $1,019,631 $ 0 $ 0 $1,755,294
Other income (deductions)$ 873 $ 1,046 $ 722 $ (1,816) $ 825
Depreciation and
amortization $ 65,865 $ 148,343 $ 0 $ 0 $ 214,208
Income before interest
and utility income
taxes $ 78,616 $ 305,682 $ 756 $ (1,850) $ 383,204
Assets $804,111 $2,562,141 $363,887 $ 0 $3,730,139
</TABLE>
<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 March 31,1998
decreased $95.5 million as compared to the twelve months ended March 31,
1997. Gas revenues decreased $87.3 million and electric revenues decreased
$8.2 million as compared to the same period in 1997. The decrease in gas
revenues was mainly due to decreased sales to residential and commercial
customers reflecting unusually warm weather during the first quarter of 1998,
decreased industrial sales, decreased gas transition costs and decreased gas
cost per dekatherm (dth), partially offset by increased wholesale sales and
increased deliveries of gas transported for others. The decrease in electric
revenues was mainly due to decreased sales to industrial customers and
decreased fuel costs per kilowatt hour (kWh), partially offset by increased
sales to residential and commercial customers.
Total operating revenues for the three months ended March 31, 1998
decreased $92.6 million as compared to the three months ended March 31, 1997.
Gas revenues decreased $87.0 million and electric revenues decreased $5.6
million. The decrease in gas revenues was mainly attributable to decreased
sales to residential and commercial customers as a result of unusually warm
weather during the first quarter of 1998, decreased sales to industrial
customers, decreased gas transition costs, and decreased sales to wholesale
customers. The decrease in electric revenues was mainly attributable to
decreased sales to industrial customers and decreased fuel cost per kwh,
partially offset by increased wholesale transactions.
The basic steel industry accounted for 37% of natural gas delivered
(including volumes transported) and 32% of electric sales during the twelve
months ended March 31, 1998.
The components of the variations in gas and electric revenues are
shown in the following table:
<TABLE>
<CAPTION>
Variations
from
Prior Periods
---------------------------------
March 31, 1998
Compared to
March 31, 1997
Three Twelve
Months Months
========= =========
(Dollars in thousands)
<S> <C> <C>
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ (45,063) $ (57,542)
Gas transition costs (7,102) (12,728)
Changes in sales levels (35,622) (19,558)
Gas transported 843 2,520
--------- ---------
Gas Revenue Change $ (86,944) $ (87,308)
--------- ---------
Electric Revenue -
Pass through of net changes in
fuel costs $ (4,960) $ (3,339)
Changes in sales levels (678) (4,847)
--------- ---------
Electric Revenue Change $ (5,638) $ (8,186)
--------- ---------
Total Revenue Change $ (92,582) $ (95,494)
========= =========
</TABLE>
See Note 3 to Notes to Consolidated Financial Statements regarding
FERC Order No. 636 transition costs.
GAS COSTS -
Gas costs decreased $73.6 and $78.8 million for the three-month and
twelve-month periods ended March 31, 1998, respectively. Gas costs decreased
for the three-month and twelve-month periods due to decreased gas purchases,
decreased gas costs per dth and decreased gas transition costs. The average
cost of purchased gas for the three-month and twelve-month periods ended
March 31, 1998, after adjustment for gas transition costs billed to transport
customers, was $2.46 and $2.81 per dth, respectively, as compared to $3.40
and $3.14 per dth for the same periods in 1997.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation increased $1.3 million for the
twelve-month period ended March 31, 1998, compared to 1997 period, mainly as a
result of increased production of electricity. The cost of fuel for electric
generation decreased $2.8 million for the three-months ended March 31, 1998
compared to the three-months ended March 31, 1997 due to decreased production
of electricity.
Power purchased decreased $5.3 and $18.8 million for the three-month and
twelve-month periods ended March 31, 1998, respectively, as a result of
decreased bulk power purchases.
OPERATING MARGINS -
Operating margins for the twelve-months ended March 31,1998 increased
$0.8 million from the same period a year ago. The operating margin from gas
deliveries decreased $8.5 million due to decreased sales to residential and
commercial customers reflecting unusually warm weather and decreased
industrial sales, partially offset by increased sales to wholesale customers
and deliveries of gas transported for others. Electric operating margin
increased $9.3 million due to increased sales to commercial and wholesale
customers.
Operating margins for the three-months ended March 31, 1998 decreased
$10.9 million from the same period a year ago. Gas operating margin
decreased $13.4 million due to decreased sales to residential customers
reflecting unusually mild weather during the period and decreased industrial
sales, partially offset by increased sales to wholesale customers and gas
transported for others. Electric operating margin increased $2.5 million
mainly as a result increased wholesale transactions.
OPERATING EXPENSES AND TAXES -
Operation expenses decreased $13.6 million for the twelve-month period
ended March 31, 1998 mainly reflecting decreased environmental cleanup costs
of $4.2 million, decreased employee costs of $3.8 million and decreased
pollution control facility costs of $2.2 million. Operation expenses
decreased $7.7 million for the three-month period ended March 31, 1998 mainly
reflecting decreased employee costs of $4.3 million and various
other decreased operation costs.
Depreciation and amortization expense increased $1.3 and $10.1 million
for the three-month and twelve-month periods ended March 31, 1998,
respectively, resulting from plant additions, partially offset by the gain on
disposition of utility plant in December 1996.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) decreased $4.7 million for the twelve-month
period ended March 31, 1998 due to a loss on disposition of property during
the twelve months ended March 31, 1998 offset by a gain on the disposition of
of property during the same period a year ago.
INTEREST CHARGES -
Interest charges decreased for the twelve-month period ended March 31,
1998 reflecting decreased short-term borrowings, partially offset by increased
long-term debt outstanding during the period.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
NET INCOME -
Net income for the twelve-month period ended March 31, 1998 was $195.1
million compared to $194.4 million for the twelve-month period ended March 31,
1997.
Net income for the three-months ended March 31, 1998 was $65.8 million
compared to $67.3 million for the three-months ended March 31, 1997.
ENVIRONMENTAL MATTERS -
Northern Indiana has an ongoing program to remain aware of laws and
regulations involved with hazardous waste and other environmental matters.
It is Northern Indiana's intent to continue to evaluate its facilities and
properties with respect to these rules and identify any sites that would
require corrective action. Northern Indiana has recorded a reserve of
approximately $19 million to cover probable corrective actions as of March 31,
1998; however, environmental regulations and remediation techniques are
subject to future change. The ultimate cost could be significant, depending
on the extent of corrective actions required. Based upon investigations and
management's understanding of current laws and regulations, Northern Indiana
believes that any corrective actions required, after consideration of
insurance coverages and contributions from other potentially responsible
parties, will not have a significant impact on the results of operations or
financial position of Northern Indiana.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste
disposal sites identified by the EPA. The sites are in various stages of
investigation, analysis and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites, Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
Refer to Note 4 "Environmental Matters" for a more detailed discussion
of the status of certain environmental issues.
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 March 31,
1998 and December 31,1998, Northern Indiana had $18.5 million and $71.5
million in commercial paper outstanding, respectively. As of March 31, 1998,
the interest rate of commercial paper was 5.60%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of March 31, 1998, 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
March 31, 1998, 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 March 31, 1998, there were no borrowings outstanding under
these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1998, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
Northern Indiana does not expect the effects of inflation at current
levels to have a significant impact on their results of operations, ability to
contain cost increases, or need to seek timely and adequate rate relief.
Northern Indiana does not anticipate the need to file for gas and electric
base rate increases in the near future.
YEAR 2000 COSTS -
Northern Indiana has several major projects underway to modify portions
of its systems for proper functioning in the year 2000. These include a
project to evaluate Northern Indiana's proprietary software and to work with
each of Northern Indiana's software vendors to assure that appropriate steps
are being taken to mitigate the problem in each vendor's software or, in some
cases, to replace software with year 2000 compliant software; a project to
identify and mitigate problems wherever they exist in Northern Indiana's
systems ranging from equipment used in Northern Indiana's generating stations
to Northern Indiana's phone system that have date information within them;
and an initiative to assure that each entity that electronically receives
information from Northern Indiana or sends information to Northern Indiana is
aware of the steps that Northern Indiana is taking and is taking appropriate
steps of its own to address the problem. Consistent with its plan, Northern
Indiana expects to be year 2000 compliant with some systems as early as third
quarter 1998 and other systems no later than the third quarter of 1999.
Northern Indiana estimates that costs to become year 2000 compliant will
be approximately $13-$19 million, including acquisition costs of new
systems which will be capitalized consistent with Northern Indiana's
accounting policies. Costs related to maintenance or modification of Northern
Indiana's systems have been and will be expensed as incurred. Northern Indiana
does not anticipate the related costs will have a material impact on its
results of operations, nor does Northern Indiana currently anticipate any
disruption of its ability to deliver service as a result of the year 2000
issue.
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-A 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. Northern Indiana filed
its tariff as did virtually all other transmission owners subject to FERC
jurisdiction. Order No. 888-A 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. On
November 25, 1997, FERC issued Order No. 888-B on rehearing, affirming in all
important respects its earlier Order No. 888-A. 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 both January 1997 and January 1998 legislation was introduced in the
Indiana General Assembly addressing electric utility competition and
deregulation. Neither proposed legislation was adopted. Northern Indiana has
begun discussions with other utilities and its largest customers on the
technical and economic aspects of possible legislation to allow customer
choice.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to
apply more stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create
opportunities to compete for new customers and revenues, as well as increase
the risk of the loss of customers. Northern Indiana's management has taken
steps to make the company more competitive and profitable in the changing
utility environment, including conversions of some of its generating units
to allow use of lower cost, low sulfur coal.
FERC Order No. 636 shifted primary responsibility for gas
acquisition, transportation, and peak days' supply from pipelines to local
gas distribution companies, such as Northern Indiana. Although pipelines
continue to transport gas, they no longer provide sales service. Northern
Indiana believes it has taken appropriate steps to ensure the continued
acquisition of adequate gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services has
changed significantly over the past several years. The deregulation of the
gas industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use
Northern Indiana's facilities to transport the gas. Transportation
customers pay Northern Indiana only for transporting their gas from the
pipeline to the customers' premises.
On October 8, 1997, the Commission approved Northern Indiana's
Alternative Regulatory Plan (ARP) which implemented new rates and services
that would include, among other things, further unbundling of services for
additional customer classes, increased customer choice for sources of natural
gas supply, negotiated services and prices, an incentive gas cost mechanism
and a price protection program. The gas cost incentive mechanism, which gives
Northern Indiana the opportunity to share any cost savings (or losses) with
its customers based on a comparison of Northern Indiana's actual gas supply
portfolio costs to a market based benchmark price, went into effect on
Northern Indiana's system November 1, 1997. The first pilot program was
launched in January 1998 and the first gas volumes flowed under this program
in April 1998. The Commission order allows the natural gas marketing
affiliate of Northern Indiana to participate as a supplier of choice to
customers on the Northern Indiana system.
To date, Northern Indiana's system has not been materially adversely
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.
FORWARD LOOKING STATEMENTS -
This report contains forward looking statements within the meaning of
the securities laws. Forward looking statements include terms such as "may",
"will", "expect", "believe", "plan" and other similar terms. Northern Indiana
cautions that, while it believes such statements to be based on reasonable
assumptions and makes such statements in good faith, there can be no assurance
that the actual results will not differ materially from such assumptions or
that the expectations set forth in the forward looking statements derived from
such assumptions will be realized. Investors should be aware of important
factors that could have a material impact on future results. These factors
include, but are not limited to, weather, the federal and state regulatory
environment, the economic climate, regional, commercial, industrial and
residential growth in the service territories served by Northern Indiana,
customers' usage patterns and preferences, the speed and degree to which
competition enters the utility industries, the timing and extent of changes in
commodity prices, changing conditions in the capital and equity markets and
other uncertainties, all of which are difficult to predict, and many of which
are beyond the control of Northern Indiana.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risks to which Northern Indiana is exposed and in
connection with which Northern Indiana uses market risk sensitive instruments
are commodity price risk and interest rate risk.
Although Northern Indiana is subject to commodity price risk as part of
its traditional operations, the current regulatory framework within which
Northern Indiana operates allows for full collection of fuel and gas costs in
rate-making. Consequently, there is limited commodity price risk after
consideration of the related rate-making. However, as the utility industry
deregulates, Northern Indiana will be providing services without the benefit
of the traditional rate-making allowances and will therefore be more exposed
to commodity price risk.
Northern Indiana utilizes commodity futures and option contracts to
minimize the impact of price changes to a small portion of its supply
portfolio. The Commission issued an order approving the inclusion of any
gains or losses associated with the use of derivative financial and commodity
instruments into Northern Indiana's gas cost adjustment clause.
Because the commodities covered by Northern Indiana's derivative
financial and commodity instruments are substantially the same commodities
that Northern Indiana buys and sells in the physical market, no special
correlation studies other than monitoring the degree of convergence between
the derivative and cash market are deemed necessary.
Due to the provisions of the gas cost adjustment clause and the fuel
adjustment clause, movements in the natural gas and electric market prices
would not impact net income.
Northern Indiana utilizes long-term debt as a primary source of capital
in its business. A significant portion of Northern Indiana's long-term debt
consists of fixed price debt instruments which have been and will be
refinanced at lower interest rates if Northern Indiana deems it to be
economical. Refer to Notes to Consolidated Financial Statements for detailed
information related to Northern Indiana's long-term debt outstanding and Fair
Value of Financial Instruments.
<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.
Such proceedings and suits, and the amounts involved are routine litigation
and proceedings for the kind of business conducted by Northern Indiana, except
as described under Note 4 (Environmental Matters), in the Notes to
Consolidated Financial Statements under Part I, Item 1 of this Report on Form
10-Q. To the knowledge of Northern Indiana no other material legal
proceedings against Northern Indiana or its subsidiaries are contemplated by
governmental authorities and other parties.
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 8, 1998, by written consent in liew of the Annual Meeting
of Shareholders of the registrant, the sole shareholder of the registrant
elected Steven C. Beering, Denis E. Ribordy and Carolyn Y. Woo as directors
to serve until the 2001 Annual Meeting of Shareholders. Directors whose
terms of office as director continue after the 1998 Annual Meeting of
Shareholders are Ian M. Rolland, Edmund A. Schroer and John W. Thompson,
whose terms expire at the 1999 Annual Meeting of Shareholders, and Arthur J.
Decio, Gary L. Neale, and Robert W. Welsh, whose terms expire at 2000 Annual
Meeting of Shareholders.
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/ David J. Vajda
---------------------------------------
David J. Vajda,
Controller and Chief Accounting Officer
Date May 14, 1998
<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
May 14, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Northern Indiana Public Service Company for three
months ended March 31, 1998 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-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,007,128
<OTHER-PROPERTY-AND-INVEST> 701
<TOTAL-CURRENT-ASSETS> 287,762
<TOTAL-DEFERRED-CHARGES> 105,702
<OTHER-ASSETS> 202,770
<TOTAL-ASSETS> 3,604,063
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,522
<RETAINED-EARNINGS> 163,951
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,035,961
58,841
81,122
<LONG-TERM-DEBT-NET> 313,592
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 766,025
<COMMERCIAL-PAPER-OBLIGATIONS> 18,500
<LONG-TERM-DEBT-CURRENT-PORT> 51,009
1,828
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<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,277,185
<TOT-CAPITALIZATION-AND-LIAB> 3,604,063
<GROSS-OPERATING-REVENUE> 458,916
<INCOME-TAX-EXPENSE> 35,917
<OTHER-OPERATING-EXPENSES> 336,865
<TOTAL-OPERATING-EXPENSES> 372,782
<OPERATING-INCOME-LOSS> 86,134
<OTHER-INCOME-NET> (608)
<INCOME-BEFORE-INTEREST-EXPEN> 85,526
<TOTAL-INTEREST-EXPENSE> 19,752
<NET-INCOME> 65,774
2,116
<EARNINGS-AVAILABLE-FOR-COMM> 63,658
<COMMON-STOCK-DIVIDENDS> 46,000
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 70,077
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
