SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30 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 October 31, 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 September 30,
1998, and December 31, 1997, and the related consolidated statements of
income, retained earnings and cash flows for the three, nine and twelve month
periods ended September 30, 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 September 30, 1998 and
December 31, 1997, and the results of their operations and their cash flows
for the three, nine and twelve month periods ended September 30, 1998 and
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
October 28, 1998
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
September 30, December 31,
ASSETS 1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$141,634 AND $140,534 RESPECTIVELY)
(NOTE 2):
Electric $ 4,129,914 $ 4,066,568
Gas 1,258,355 1,223,693
Common 352,846 351,350
------------ ------------
5,741,115 5,641,611
Less - Accumulated provision for
depreciation and amortization 2,754,018 2,613,352
------------ ------------
Total Utility Plant 2,987,097 3,028,259
------------ ------------
OTHER PROPERTY AND INVESTMENTS 632 1,215
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 10,644 9,800
Accounts receivable, less reserve of
$5,061 and $4,524, respectively (Note 2) 65,678 101,188
Fuel adjustment clause (Note 2) 0 2,679
Gas cost adjustment clause (Note 2) 30,012 86,520
Materials and supplies, at average cost 50,938 53,666
Electric production fuel, at average cost 17,540 18,837
Natural gas in storage, at last-in,
first-out cost (Note 2) 55,307 45,880
Prepayments and other 26,527 23,128
------------ ------------
Total Current Assets 256,646 341,698
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 195,867 205,965
Prepayments and other (Note 6) 123,468 97,777
------------ ------------
Total Other Assets 319,335 303,742
------------ ------------
$ 3,563,710 $ 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
September 30, 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 12,524 12,522
Retained earnings (see accompanying
statement) (Note 11) 146,833 146,293
------------ ------------
Common shareholder's equity 1,018,845 1,018,303
Cumulative preferred stocks (Note 8)
Series without mandatory redemption
provisions (Note 9) 81,117 81,123
Series with mandatory redemption
provisions (Note 10) 56,991 58,841
Long-term debt excluding amounts due
within one year (Note 14) 1,079,346 1,079,496
------------ ------------
Total Capitalization 2,236,299 2,237,763
------------ ------------
CURRENT LIABILITIES -
Current portion of long-term
debt (Note 15) 16,009 51,009
Short-term borrowings (Note 16) 93,400 119,000
Accounts payable 94,348 127,742
Dividends declared on common and
preferred stocks 56,113 56,198
Customer deposits 18,661 20,236
Taxes accrued 95,800 88,852
Interest accrued 18,062 7,646
Fuel adjustment clause 3,053 0
Accrued employment costs 39,661 51,095
Other accruals 24,476 34,051
------------ ------------
Total Current Liabilities 459,583 555,829
------------ ------------
OTHER:
Deferred income taxes (Note 5) 587,694 602,936
Deferred investment tax credits, being
amortized over life of related property
(Note 5) 94,506 99,853
Deferred credits 50,057 53,323
Accrued liability for postretirement
benefits (Note 7) 124,889 115,177
Other noncurrent liabilities 10,682 10,033
------------ ------------
Total Other 867,828 881,322
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 4, 17 and 18)
$ 3,563,710 $ 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 Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1998 1997 1998 1997
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 3 and 20)
Gas $ 71,773 $ 81,506 $ 389,362 $ 495,721
Electric 311,512 279,221 823,309 769,099
---------- ---------- ---------- ----------
383,285 360,727 1,212,671 1,264,820
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 39,304 49,940 217,678 302,320
Fuel for electric
generation 72,246 65,008 193,263 178,025
Power purchased 17,001 13,143 33,048 32,621
---------- ---------- ---------- ----------
128,551 128,091 443,989 512,966
---------- ---------- ---------- ----------
Operating Margin 254,734 232,636 768,682 751,854
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 64,211 69,151 188,128 209,024
Maintenance (Note 2) 15,180 15,767 50,501 50,639
Depreciation and
amortization (Note 2) 57,327 56,561 170,647 168,050
Taxes (except income) 17,901 16,372 54,500 54,029
---------- ---------- ---------- ----------
154,619 157,851 463,776 481,742
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 100,115 74,785 304,906 270,112
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 5) 28,077 19,282 86,428 74,188
---------- ---------- ---------- ----------
Operating Income 72,038 55,503 218,478 195,924
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) (1,061) (1,041) (2,937) (2,486)
---------- ---------- ---------- ----------
Interest:
Interest on long-term debt 17,403 18,221 52,714 51,400
Other interest 1,423 1,189 3,339 5,837
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 922 1,053 2,683 3,142
---------- ---------- ---------- ----------
19,748 20,463 58,736 60,379
---------- ---------- ---------- ----------
Net Income 51,229 33,999 156,805 133,059
Dividend requirements on
preferred shares 2,072 2,123 6,265 6,418
---------- ---------- ---------- ----------
Balance available
for common shares $ 49,157 $ 31,876 $ 150,540 $ 126,641
========== ========== ========== ==========
Dividends declared $ 55,000 $ 44,775 $ 150,000 $ 132,775
========== ========== ========== ==========
<CAPTION>
Twelve Months
Ended September 30,
----------------------
1998 1997
========== ==========
(Dollars in thousands)
<S> <C> <C>
Operating Revenues:
(Notes 2, 3 and 20)
Gas $ 628,940 $ 745,367
Electric 1,071,293 1,021,898
---------- ----------
1,700,233 1,767,265
---------- ----------
Cost of Energy: (Note 2)
Gas costs 367,794 462,842
Fuel for electric
generation 253,786 238,508
Power purchased 37,701 44,733
---------- ----------
659,281 746,083
---------- ----------
Operating Margin 1,040,952 1,021,182
---------- ----------
Operating Expenses and
Taxes (except income):
Operation 248,379 276,691
Maintenance (Note 2) 68,715 65,820
Depreciation and
amortization (Note 2) 225,622 219,474
Taxes (except income) 72,223 72,704
---------- ----------
614,939 634,689
---------- ----------
Operating Income Before
Utility Income Taxes 426,013 386,493
---------- ----------
Utility Income Taxes
(Note 5) 122,339 108,753
---------- ----------
Operating Income 303,674 277,740
---------- ----------
Other Income (Deductions)
(Note 2) (4,110) (2,495)
---------- ----------
Interest:
Interest on long-term debt 70,741 67,700
Other interest 4,663 9,539
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 3,794 4,186
---------- ----------
79,198 81,425
---------- ----------
Net Income 220,366 193,820
Dividend requirements on
preferred shares 8,386 8,579
---------- ----------
Balance available
for common shares $ 211,980 $ 185,241
========== ==========
Dividends declared $ 205,000 $ 185,775
========== ==========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
------------------- ------------------- -------------------
1998 1997 1998 1997 1998 1997
========= ========= ========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
BEGINNING OF
PERIOD $ 152,676 $ 152,752 $ 146,293 $ 145,987 $ 139,853 $ 140,387
ADD:
Net income 51,229 33,999 156,805 133,059 220,366 193,820
--------- --------- --------- --------- --------- ---------
203,905 186,751 303,098 279,046 360,219 334,207
--------- --------- --------- --------- --------- ---------
LESS:
Dividends
Cumulative
Preferred
stocks -
4-1/4% series 222 222 667 667 889 889
4-1/2% series 90 90 270 270 360 360
4.22% series 113 113 337 337 448 448
4.88% series 122 122 366 366 488 488
7.44% series 77 77 233 233 312 312
7.50% series 65 65 196 196 261 261
8.85% series 138 166 433 516 599 710
7-3/4% series 82 92 243 275 330 363
8.35% series 109 122 359 397 484 534
6.50% series 699 699 2,096 2,096 2,795 2,795
Adjustable
Rate,
Series A 355 355 1,065 1,065 1,420 1,419
Common shares 55,000 44,775 150,000 132,775 205,000 185,775
--------- --------- --------- --------- --------- ---------
57,072 46,898 156,265 139,193 213,386 194,354
--------- --------- --------- --------- --------- ---------
BALANCE AT END
OF PERIOD $ 146,833 $ 139,853 $ 146,833 $ 139,853 $ 146,833 $ 139,853
========= ========= ========= ========= ========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months
Ended September 30,
------------------------
1998 1997
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 51,229 $ 33,999
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 57,327 56,561
Deferred federal and state operating
income taxes, net (6,557) (959)
Deferred investment tax credits, net (1,783) (1,793)
Advance contract payment 475 475
Change in certain assets and liabilities -
Accounts receivable, net 18,675 39,301
Electric production fuel (1,041) 11,484
Materials and supplies 1,608 526
Natural gas in storage (25,725) (31,628)
Accounts payable 3,667 (11,513)
Taxes accrued 10,801 (8,144)
Fuel adjustment clause 2,428 4,451
Gas cost adjustment clause (5,021) (12,390)
Accrued employment costs 4,178 2,764
Other accruals (264) (1,355)
Other, net (729) 20,510
---------- ----------
Net cash provided by operating activities 109,268 102,289
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (43,453) (39,838)
Other, net 973 274
---------- ----------
Net cash used in investing activities (42,480) (39,564)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 0 40,000
Issuance of short-term debt 138,680 65,175
Net change in commercial paper (3,200) 32,100
Retirement of long-term debt (500) (66,247)
Retirement of short-term debt (154,380) (86,600)
Retirement of preferred shares (600) (600)
Cash dividends paid on common shares (49,000) (44,000)
Cash dividends paid on preferred shares (2,087) (2,125)
Other, net 112 (155)
---------- ----------
Net cash used in financing activities (70,975) (62,452)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (4,187) 273
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 14,831 11,720
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 10,644 $ 11,993
========== ==========
<CAPTION>
Nine Months
Ended September 30,
------------------------
1998 1997
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 156,805 $ 133,059
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 170,647 168,050
Deferred federal and state operating
income taxes, net (46,530) (30,144)
Deferred investment tax credits, net (5,347) (5,380)
Advance contract payment 1,425 1,425
Change in certain assets and liabilities -
Accounts receivable, net 38,659 71,413
Electric production fuel 1,297 9,335
Materials and supplies 2,728 974
Natural gas in storage (9,427) (7,482)
Accounts payable (20,231) (66,578)
Taxes accrued 37,360 26,953
Fuel adjustment clause 5,732 5,343
Gas cost adjustment clause 56,508 41,148
Accrued employment costs (11,434) 814
Other accruals (9,575) 4,971
Other, net (993) 49,894
---------- ----------
Net cash provided by operating activities 367,624 403,795
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (131,178) (141,215)
Other, net (16,679) 66
---------- ----------
Net cash used in investing activities (147,857) (141,149)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 0 139,000
Issuance of short-term debt 453,040 396,655
Net change in commercial paper (3,600) (116,405)
Retirement of long-term debt (35,500) (66,247)
Retirement of short-term debt (475,040) (462,030)
Retirement of preferred shares (1,856) (1,853)
Cash dividends paid on common shares (150,000) (141,000)
Cash dividends paid on preferred shares (6,317) (6,429)
Other, net 350 (623)
---------- ----------
Net cash used in financing activities (218,923) (258,932)
---------- ----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 844 3,714
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 9,800 8,279
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 10,644 $ 11,993
========== ==========
<CAPTION>
Twelve Months
Ended September 30,
------------------------
1998 1997
========== ==========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 220,366 $ 193,820
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 225,622 219,474
Deferred federal and state operating
income taxes, net (24,800) (18,372)
Deferred investment tax credits, net (7,172) (7,412)
Advance contract payment 1,900 1,900
Change in certain assets and liabilities -
Accounts receivable, net (22,076) 10,573
Electric production fuel (392) 14,050
Materials and supplies 4,884 848
Natural gas in storage 2,584 7,731
Accounts payable (4,927) (25,361)
Taxes accrued 31,895 57,617
Fuel adjustment clause 6,859 6,001
Gas cost adjustment clause 27,007 1,549
Accrued employment costs (2,068) 4,463
Other accruals (8,429) 1,856
Other, net (29,088) 35,025
---------- ----------
Net cash provided by operating activities 422,165 503,762
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Construction expenditures (164,193) (194,866)
Other, net (19,936) 355
---------- ----------
Net cash used in investing activities (184,129) (194,511)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 0 139,000
Issuance of short-term debt 590,815 734,105
Net change in commercial paper (9,600) (10,500)
Retirement of long-term debt (36,500) (66,247)
Retirement of short-term debt (578,940) (907,180)
Retirement of preferred shares (2,411) (2,411)
Cash dividends paid on common shares (194,775) (186,200)
Cash dividends paid on preferred shares (8,444) (8,607)
Other, net 470 (509)
---------- ----------
Net cash used in financing activities (239,385) (308,549)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,349) 702
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 11,993 11,291
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 10,644 $ 11,993
========== ==========
<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 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 depreciation provision for electric utility plant, as a percentage
of the original cost, was 3.8% for the three-month, 3.7% for the nine-month
and 3.6% for the twelve-month periods ended September 30, 1998; and was 3.6%
for three-month and nine-month periods and 3.7% for the twelve-month period
ended September 30, 1997, respectively.
Gas:
----
Gas storage plant 18 years
Transmission plant 34 years
Distribution plant 27 years
Other gas plant 24 years
The depreciation provision for gas utility plant, as a percentage of the
original cost, was 5.4% for the three-month, nine-month and twelve-month
periods ended September 30, 1998; and was 5.5% for the three-month, 5.4% for
the nine-month and 5.3% for the twelve-month period ended September 30, 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 estimates 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 Utility Regulatory Commission (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 September 30, 1998, Northern Indiana had sold
$100 million of its accounts receivable under a sales agreement which
expires on May 31, 2002. The September 30, 1998 and December 31, 1997
accounts receivable balances include approximately $4.0 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 consolidated 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 Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
------------------ ------------------ ------------------
1998 1997 1998 1997 1998 1997
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income taxes $ 17,500 $ 20,700 $ 90,840 $ 70,700 $ 124,949 $ 70,858
Interest, net of
amounts
capitalized $ 10,524 $ 8,946 $ 44,794 $ 44,746 $ 75,133 $ 74,263
</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
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 sales rates contain an
adjustment factor which reflects the increases and decreases in 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 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.
The gas cost adjustment clause includes a gas cost incentive mechanism (GCIM)
that allows Northern Indiana to share any cost savings or cost increases with
customers based on a comparison of Northern Indiana's actual gas supply
portfolio costs to a market based benchmark price. 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 September 1998 and December 1997 the estimated replacement
cost of gas in storage (current and non-current) at September 30, 1998 and
December 31, 1997 exceeded the stated LIFO cost by approximately $15 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 $4.3 million, $15.9 million
and $20.5 million for the three-month, nine-month and twelve-month periods
ended September 30, 1998, respectively, and totaled $7.0 million, $24.2
million and $33.0 million for the three-month, nine-month and twelve-month
periods ended September 30, 1997, respectively, consist primarily of employee
compensation and benefits.
Northern Indiana purchased natural gas and transportation services
from affiliated companies in the amounts of $9.8 million, $18.4 million and
$21.4 million representing 18.2%, 8.7% and 5.9% of Northern Indiana's total
gas costs for the three-month, nine-month and twelve-month periods ended
September 30, 1998, respectively. Northern Indiana purchased natural gas and
transportation services from affiliated companies in the amounts of $3.2
million, $7.2 million and $10.4 million representing 5.6%, 2.6% and 2.6% of
Northern Indiana's total gas costs for the three-month, nine-month and
twelve-month periods ended September 30, 1997, respectively.
Northern Indiana subleases a portion of its 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 September 30, 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 5.1 Bcf. The net deferred gain on these
commodity-based derivative financial instruments as of September 30, 1998 was
not material.
IMPACT OF ACCOUNTING STANDARDS. During June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring that a company recognize those items as assets or
liabilities in the balance sheet and measure them at fair value. This
Statement generally provides for matching of the timing of gain or loss
recognition of derivatives instruments designated as a hedge with the
recognition of changes in the fair value of the hedged asset or liability
through earnings. This Statement also provides that the effective portion
of a hedging instrument's gain or loss on a forecasted transaction be
initially reported in other comprehensive income and subsequently reclassified
into earnings when the hedged forecasted transaction affects earnings.
Northern Indiana expects to adopt this Statement on January 1, 2000, and is
currently assessing the impact of adoption on its financial position and
results of operations.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance for the capitalization of certain costs related to computer software
developed or obtained for internal use. Northern Indiana expects to adopt SOP
98-1 on January 1, 1999 and estimates that adoption will not have a
significant impact on its financial position or results of operations.
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 SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation." Northern Indiana monitors
changes in market and regulatory conditions and the resulting impact of such
changes in order to continue to apply the provisions of SFAS No. 71 to some or
all of its operations. As of September 30, 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>
September 30, December 31,
1998 1997
============= =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 14) $ 43,828 $ 46,426
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 63,383 66,546
Bailly scrubber carrying charges and
deferred depreciation (See below) 9,179 9,880
Deferral of SFAS No. 106 expense not
recovered (Note 7) 79,767 83,965
FERC Order No. 636
transition costs (Note 3) 23,126 28,744
Regulatory income tax asset, net (Note 5) 10,227 9,664
------------- -------------
229,510 245,225
Less: Current portion of regulatory assets 33,643 39,260
------------- -------------
$ 195,867 $ 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 $138 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 $15.5 million to cover probable corrective
actions as of September 30, 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 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 (N0x)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 is conducting tests 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 and other air pollutants as discussed
below, 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 September 24, 1998, the EPA Administrator signed the final
rulemaking requiring certain states to reduce NOx levels to lower regional
transport of ozone under the non-attainment provisions of the CAAA. Because
NOx, along with other factors, contributes to ozone formation, the EPA
requires significant NOx reductions for 22 states, including Indiana, to
address the ozone transport issue. According to the rule, the state of
Indiana now has one year to develop an ozone control plan. Any resulting NOx
emissions limitations could be more restrictive than those imposed on electric
utilities under the Acid Rain NOx 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 final rule and evaluating
potential requirements that could result from the 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 emissions and possibly sulfur dioxide emissions from many
sources (including Northern Indiana's coal-fired boilers at its 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 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 seventeen sites.
Follow-up investigations have been conducted at eleven 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. Northern Indiana and
Cinenergy are discussing settlement of that litigation.
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 that magnetic fields in homes increase the risk of childhood
leukemia. This study follows an EMF report released in 1997 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. A new report in June 1998 from a National Institute of
Health panel accepted the position that EMF should be regarded as a "possible
human carcinogen." Further panel comments also stated that the risk "is
possibly quite small compared to many other public health risks."
(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 September 30,
1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
============= =============
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 736,621 $ 729,153
AFUDC-equity 33,460 35,282
Adjustment clauses 10,224 33,829
Other regulatory assets 30,252 31,844
Reacquisition premium on debt 16,622 17,607
Deferred tax assets -
Deferred investment tax credits (35,820) (37,869)
Removal costs (153,405) (144,111)
Other postretirement/postemployment
benefits (47,364) (43,680)
Other, net (19,321) (5,132)
------------- -------------
571,269 616,923
Less: Deferred income taxes related to
current assets and liabilities (16,425) 13,987
------------- -------------
Deferred income taxes - noncurrent $ 587,694 $ 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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1998 1997 1998 1997
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 31,551 $ 19,003 $ 120,298 $ 95,423
State 4,866 3,031 18,007 14,289
--------- --------- --------- ---------
36,417 22,034 138,305 109,712
--------- --------- --------- ---------
Deferred income taxes, net -
Federal (6,090) (942) (43,057) (27,984)
State (467) (17) (3,473) (2,160)
--------- --------- --------- ---------
(6,557) (959) (46,530) (30,144)
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,783) (1,793) (5,347) (5,380)
--------- --------- --------- ---------
Total utility operating income
taxes 28,077 19,282 86,428 74,188
Income tax applicable to non-
operating activities and income
of subsidiaries (620) (620) (1,852) (1,491)
--------- --------- --------- ---------
Total income taxes $ 27,457 $ 18,662 $ 84,576 $ 72,697
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended September 30,
--------------------
1998 1997
========= =========
(Dollars in thousands)
<S> <C> <C>
Current income taxes -
Federal $ 133,777 $ 116,961
State 20,534 17,576
--------- ---------
154,311 134,537
--------- ---------
Deferred income taxes, net -
Federal (23,071) (17,182)
State (1,729) (1,190)
--------- ---------
(24,800) (18,372)
--------- ---------
Deferred investment tax credits,
net (7,172) (7,412)
--------- ---------
Total utility operating income
taxes 122,339 108,753
Income tax applicable to non-
operating activities and income
of subsidiaries (3,646) (2,795)
--------- ---------
Total income taxes $ 118,693 $ 105,958
========= =========
</TABLE>
A reconciliation of total income tax expense to an amount computed by
applying the statutory federal income tax rate to pre-tax income is as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1998 1997 1998 1997
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 51,229 $ 33,999 $ 156,805 $ 133,059
Add-Income taxes 27,457 18,662 84,576 72,697
--------- --------- --------- ---------
Net income before income taxes $ 78,686 $ 52,661 $ 241,381 $ 205,756
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 27,540 $ 18,431 $ 84,483 $ 72,015
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 1,996 1,021 3,992 3,109
Amortization of deferred
investment tax credits (1,783) (1,793) (5,347) (5,380)
State income taxes, net of
federal income tax benefit 2,648 1,889 8,091 7,000
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (2,543) (1,033) (5,085) (4,069)
Other, net (401) 147 (1,558) 22
--------- --------- --------- ---------
Total income taxes $ 27,457 $ 18,662 $ 84,576 $ 72,697
========= ========= ========= =========
<CAPTION>
Twelve Months,
Ended September 30,
--------------------
1998 1997
========= =========
(Dollars in thousands)
<S> <C> <C>
Net income $ 220,366 $ 193,820
Add-Income taxes 118,693 105,958
--------- ---------
Net income before income taxes $ 339,059 $ 299,778
========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 118,671 $ 104,922
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 4,955 4,710
Amortization of deferred
investment tax credits (7,172) (7,412)
State income taxes, net of
federal income tax benefit 11,338 10,050
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (5,079) (6,485)
Other, net (4,020) 173
--------- ---------
Total income taxes $ 118,693 $ 105,958
========= =========
</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 $ 749,870
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) (46,229)
--------- ---------
Benefit obligation at end of
the year (December 31,) $ 843,049 $ 732,870
========= =========
</TABLE>
The change in the fair value of the plan's 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>
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 loss (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 the benefit obligation at January 1, 1998 was impacted by the decrease in
the discount rate from 7.75% to 7.00%. Prepaid pension costs were $112.6
million as of September 30, 1998.
The following items are the components of provisions for pensions for
the three-month, nine-month and twelve-month periods ended September 30, 1998
and September 30, 1997:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
------------------ ------------------ ------------------
1998 1997 1998 1997 1998 1997
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 4,234 $ 6,271 $ 16,227 $ 15,203 $ 14,349 $ 16,314
Interest costs 14,883 31,156 57,029 63,807 49,143 67,501
Expected return
on plan assets (19,754) (39,806) (75,695) (80,422) (65,755) (108,597)
Amortization of
transition
obligation 1,344 3,055 5,148 6,263 4,373 6,647
Amortization of
prior service
cost 1,077 1,974 4,127 3,799 3,657 27,748
-------- -------- -------- -------- -------- --------
$ 1,784 $ 2,650 $ 6,836 $ 8,650 $ 5,767 $ 9,613
======== ======== ======== ======== ======== ========
</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>
Plan assets are invested primarily in common stocks, bonds and notes.
A substantial portion of the plan's domestic equity investments are hedged
against significant movements in the S&P 500 Index. The hedge will expire on
December 31, 1998.
(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.
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 6,327
Benefits paid (9,006) (6,327)
--------- ---------
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 $133.9 million at September 30, 1998.
Net periodic postretirement benefits costs, before consideration of the
rate-making discussed previously, for the three-month, nine-month and
twelve-month periods ended September 30, 1998 and September 30, 1997 include
the following components:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
---------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997
======= ======= ======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 1,084 $ 931 $ 2,890 $ 2,789 $ 3,169 $ 4,729
Interest costs 3,650 4,376 10,950 13,128 12,345 16,181
Expected return
on plan assets (50) 0 (150) 0 (150) 0
Amortization of
transition
obligation
over twenty years 2,675 2,702 8,025 8,106 10,666 10,355
Amortization of
prior service cost 75 0 225 0 504 0
Amortization of
actuarial (gain) (1,375) (993) (4,125) (2,979) (6,924) (1,740)
------- ------- ------- ------- ------- -------
$ 6,059 $ 7,016 $17,815 $21,044 $19,610 $29,525
======= ======= ======= ======= ======= =======
</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 and $1.9 million for the three-month and
nine-month periods ended September 30, 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 $0.6 million and $1.6
million for the three-month and nine-month periods ended September 30, 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 SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (SEE NOTE 8):
<TABLE>
<CAPTION>
Redemption
Price at
September 30, December 31, September 30,
1998 1997 1998
============ ============ ============
(Dollars in thousands)
<S> <C> <C> <C>
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,056 and
209,118 shares outstanding,
respectively $ 20,906 $ 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
September 30, 1998), Series A
(stated value $50 per share)
473,285 shares outstanding 23,664 23,664 $50.00
------------ ------------
$ 81,117 $ 81,123
============ ============
</TABLE>
During the period October 1, 1996 to September 30, 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 SEPTEMBER 30, 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 follows:
<TABLE>
<CAPTION>
September 30, 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 - 50,000 and 62,500 shares
outstanding, respectively, excluding sinking
fund payments due within one year $ 5,000 $ 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 - 51,000 and 57,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year 5,100 5,700
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
------------ ------------
$ 56,991 $ 58,841
============ ============
</TABLE>
The redemption prices at September 30, 1998, as well as sinking fund
provisions for the cumulative preferred stocks 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% $103.44, 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 September 30, 1998 for each of the twelve-month periods
subsequent to September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,*
==================================
<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 September 30, 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 September 30, 1998, Northern Indiana had
approximately $146.8 million of retained earnings (earned surplus) available
for the payment of dividends. Future dividends will depend upon adequate
retained earnings, adequate future earnings and the absence of adverse
developments.
(12) COMMON SHARES: Effective with the exchange of common shares on March 3,
1988, all of Northern Indiana's common shares are 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
on 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 April 1998 and April
2004, respectively. At September 30, 1998, there were 3,242,700 shares
reserved for future awards under the 1994 Plan. The 1994 Plan permits the
following types of grants, separately or in combination: nonqualified stock
options, incentive stock options, restricted stock awards, stock appreciation
rights and performance units. No incentive stock options or performance units
were outstanding at September 30, 1998. Under this Plan, 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. There were no SARs outstanding at
September 30, 1998 and 11,200 SARs outstanding at September 30, 1997.
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 534,666 and 542,666 restricted shares outstanding at September 30, 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 charged against income for restricted stock awards was
$0.2, $0.6 and $0.7 million and $0.2, $0.5 and $0.7 million for the
three-month, nine-month and twelve-month periods ending September 30, 1998
and September 30, 1997, 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 Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Income:
As reported $ 51,229 $ 33,999 $156,805 $133,059 $220,366 $193,820
Pro forma $ 50,941 $ 33,791 $156,091 $132,437 $219,439 $192,988
</TABLE>
The fair value of each option granted used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the three-month, nine-month and twelve-month periods ended September 30,
1998 and September 30, 1997: risk-free interest rate of 5.70% and 6.29%,
respectively; expected dividend yield per share of $0.67 and $0.87,
respectively; expected option term of five and one-quarter years and five
years, respectively; and expected volatilities of 12.7% for both periods.
The weighted average fair value of options granted to all plan participants
was $4.28 and $2.66 for the twelve-month periods ended September 30, 1998 and
September 30, 1997, respectively. There were 607,000 and 533,600
non-qualified stock options granted to all plan participants for
the twelve-month periods ended September 30, 1998 and September 30, 1997,
respectively.
(14) LONG-TERM DEBT: At September 30, 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
---------------------------
September 30, December 31,
1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
First mortgage bonds -
Series T, 7-1/2%, due April 1, 2002 $ 39,000 $ 39,500
Series NN, 7.10%, due July 1, 2017 55,000 55,000
------------ ------------
Total 94,000 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 - 3.50% weighted
average at September 30, 1998, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.59% weighted average at
September 30, 1998, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 4.00% at September 30, 1998,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 4.00% at September 30, 1998,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 4.00 at September 30, 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
March 20, 2000 and August 4, 2027 748,025 748,025
------------ ------------
Unamortized premium and discount
on long-term debt, net (3,679) (4,029)
------------ ------------
Total long-term debt excluding
amounts due in one year $ 1,079,346 $ 1,079,496
============ ============
</TABLE>
The sinking fund requirements of long-term debt outstanding at
September 30, 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
July 8, 2003) for each of the twelve-month periods subsequent to September 30,
1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
=================================
<S> <C>
2000 $157,000,000
2001 $ 18,000,000
2002 $ 58,000,000
2003 $128,500,000
</TABLE>
Unamortized debt expense, premium and discount on long-term debt
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized. These
premiums are not earning a return during the recovery period.
Northern Indiana's Indenture, securing the first mortgage bonds issued
by Northern Indiana, constitutes a direct first mortgage lien upon
substantially all property and franchises, other than expressly excepted
property, owned by Northern Indiana.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes.
As of September 30, 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 September 30, 1998 and
December 31, 1997, Northern Indiana's current portion of long-term debt due
within one year was as follows:
<TABLE>
<CAPTION>
September 30, 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 between 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 0 35,000
Sinking funds due within one year 1,500 1,500
------------ ------------
Total current portion of long-term debt $ 16,009 $ 51,009
============ ============
</TABLE>
(16) SHORT-TERM BORROWINGS: Northern Indiana uses commercial paper to fund
short-term working capital requirements.
In September 1998, Northern Indiana entered into a five-year $100
million credit agreement and a 364-day $100 million revolving credit agreement
with several banks. These agreements terminate on September 23, 2003 and
September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364-days upon the request of Northern
Indiana and agreements by the banks. Under these agreements, Northern Indiana
may borrow funds at a floating rate of interest or, at Northern Indiana's
request under certain circumstances, a fixed rate of interest for a short
term period. These agreements provide financial financing flexibility to
Northern Indiana and may be used to support the issuance of commercial paper.
At September 30, 1998, there were no borrowings outstanding under either of
these agreements. Concurrently with entering into such agreements, Northern
Indiana terminated its then existing revolving credit agreement which would
otherwise have terminated on August 19, 1999.
In addition, Northern Indiana has $14.2 million in lines of credit which
run to May 31, 1999. The credit pricing of each of the lines varies from
either the lending banks' commercial prime or market rates. Northern Indiana
has agreed to compensate the participating banks with arrangements that vary
from no commitment fees to a combination of fees which are mutually
satisfactory to both parties. As of September 30, 1998, there were no
borrowings under these lines of credit. The credit agreements and lines of
credit are also available to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1998 and December 31, 1997, $25.5 million and
$47.5 million, respectively, were outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1998, there were no borrowings outstanding under this facility.
At September 30, 1998 and December 31, 1997, Northern Indiana's short-
term borrowings were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
Commercial paper -
Weighted average interest rate of 5.58%
at September 30, 1998 $ 67,900 $ 71,500
Notes payable -
Issued at interest rates between 5.61%
and 5.68% with a weighted average
interest rate of 5.63% and various
maturities between October 7, 1998 and
October 26, 1998 25,500 47,500
------------ ------------
Total short-term borrowings $ 93,400 $ 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 September 30, 1998:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
=============================
(Dollars in thousands)
<S> <C>
1999 $ 4,595
2000 3,401
2001 3,055
2002 3,055
2003 3,055
Later years 30,852
--------
Total minimum
payments required $ 48,013
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 2,485 $ 1,810
Nine months ended $ 6,964 $ 5,837
Twelve months ended $ 8,802 $ 7,998
</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.
During the fourth quarter of 1995, Northern Indiana entered into a ten
year agreement with IBM to perform all data center, application development
and maintenance, and desktop management. Annual fees under this agreement are
estimated at $20.6 million.
(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: Investments are carried at cost, which approximates
market value.
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 (excluding derivatives) are as follows:
<TABLE>
<CAPTION>
September 30, 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 $ 10,644 $ 10,644 $ 9,800 $ 9,800
Investments $ 250 $ 250 $ 256 $ 256
Long-term debt (including
current portion) $1,095,355 $1,148,382 $1,130,505 $1,128,851
Preferred stock $ 139,936 $ 134,336 $ 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 17% of electric revenue for the twelve months
ended September 30, 1998 as compared to 5% and 21%, respectively, for the
twelve months ended September 30, 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 September 30, 1998 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 71,773 $ 311,512 $ 0 $ 0 $ 383,285
Other income (deductions)$ 56 $ 180 $ (1,267) $ (30) $ (1,061)
Depreciation and
amortization $ 17,890 $ 39,437 $ 0 $ 0 $ 57,327
Income before interest
and utility income
taxes $(15,350) $ 115,701 $ (1,341) $ 44 $ 99,054
Assets $767,388 $2,469,194 $327,128 $ 0 $3,563,710
<CAPTION>
For the Three Months Adjust-
Ended September 30, 1997 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 81,506 $ 279,221 $ 0 $ 0 $ 360,727
Other income (deductions)$ (86) $ 100 $ (1,035) $ (20) $ (1,041)
Depreciation and
amortization $ 17,479 $ 39,082 $ 0 $ 0 $ 56,561
Income before interest
and utility income
taxes $(18,141) $ 92,940 $ (1,031) $ (24) $ 73,744
Assets $802,231 $2,514,470 $277,515 $ 0 $3,594,216
<CAPTION>
For the Nine Months Adjust-
Ended September 30, 1998 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $389,362 $ 823,309 $ 0 $ 0 $1,212,671
Other income (deductions)$ 809 $ 350 $ (4,013) $ (83) $ (2,937)
Depreciation and
amortization $ 53,488 $ 117,159 $ 0 $ 0 $ 170,647
Income before interest
and utility income
taxes $ 25,991 $ 280,074 $ (4,124) $ 28 $ 301,969
Assets $767,388 $2,469,194 $327,128 $ 0 $3,563,710
<CAPTION>
For the Nine Months Adjust-
Ended September 30, 1997 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $495,721 $ 769,099 $ 0 $ 0 $1,264,820
Other income (deductions)$ 488 $ 341 $ (2,961) $ (354) $ (2,486)
Depreciation and
amortization $ 51,863 $ 116,187 $ 0 $ 0 $ 168,050
Income before interest
and utility income
taxes $ 38,715 $ 232,226 $ (2,992) $ (323) $ 267,626
Assets $802,231 $2,514,470 $277,515 $ 0 $3,594,216
<CAPTION>
For the Twelve Months Adjust-
Ended September 30, 1998 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $628,940 $1,071,293 $ 0 $ 0 $1,700,233
Other income (deductions)$ 1,144 $ 627 $ (5,747) $ (134) $ (4,110)
Depreciation and
amortization $ 70,807 $ 154,815 $ 0 $ 0 $ 225,622
Income before interest
and utility income
taxes $ 67,532 $ 360,252 $ (5,929) $ 48 $ 421,903
Assets $767,388 $2,469,194 $327,128 $ 0 $3,563,710
<CAPTION>
For the Twelve Months Adjust-
Ended September 30, 1997 Gas Electric Other ments Total
- ------------------------ -------- ---------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $745,367 $1,021,898 $ 0 $ 0 $1,767,265
Other income (deductions)$ 889 $ 596 $ (3,626) $ (354) $ (2,495)
Depreciation and
amortization $ 68,060 $ 151,414 $ 0 $ 0 $ 219,474
Income before interest
and utility income
taxes $ 78,806 $ 309,172 $ (3,557) $ (423) $ 383,998
Assets $802,231 $2,514,470 $277,515 $ 0 $3,594,216
</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 September 30,1998
decreased $67.0 million as compared to the twelve months ended September 30,
1997. Gas revenues decreased $116.4 million and electric revenues increased
$49.4 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 cost per dekatherm (dth) and
decreased gas transition costs, partially offset by increased wholesale
sales and increased deliveries of gas transported for others. The increase in
electric revenues was mainly due to increased sales to residential and
commercial customers due to warmer weather during the second and third quarter
of 1998 and increased wholesale transactions partially offset by decreased
sales to industrial customers and decreased fuel costs per kilowatt-hour
(kwh).
Total operating revenues for the nine months ended September 30, 1998
decreased $52.1 million as compared to the nine months ended September 30,
1997. Gas revenues decreased $106.3 million and electric revenues increased
$54.2 million. The decrease in gas revenues resulted from decreased sales to
residential and commercial customers due to unusually warm weather during the
first quarter of 1998, decreased sales to industrial customers, decreased gas
costs per dth and decreased gas transition costs, partially offset by
increased wholesale sales and increased deliveries of gas transported for
others. The increase in electric revenues was mainly due to increased sales
to residential and commercial customers as a result of warmer weather during
the second and third quarter of 1998 and increased wholesale transactions,
partially offset by decreased fuel costs per kwh.
Total operating revenues for the three months ended September 30, 1998
increased $22.6 million as compared to the three months ended September 30,
1997. Gas revenues decreased $9.7 million and electric revenues increased
$32.3 million. The decrease in gas revenues was mainly attributable to
decreased sales to residential and commercial customers as a result of warmer
weather during the period, decreased gas costs per dth and decreased gas
transition costs, partially offset by increased sales to wholesale customers.
The increase in electric revenues was mainly attributable to increased sales
to residential and commercial customers due to warmer weather and increased
wholesale transactions, partially offset by decreased industrial sales and
decreased fuel cost per kwh.
The basic steel industry accounted for 41% of natural gas delivered
(including volumes transported) and 30% of electric sales during the twelve
months ended September 30, 1998.
The components of the variations in gas and electric revenues are
shown in the following table:
<TABLE>
<CAPTION>
Variations
from
Prior Periods
---------------------------------
September 30, 1998
Compared to
September 30, 1997
Three Nine Twelve
Months Months Months
========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C>
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ (5,711) $ (33,276) $ (42,150)
Gas transition costs (5,042) (18,004) (21,812)
Changes in sales levels 971 (56,249) (53,803)
Gas transported 49 1,170 1,338
--------- --------- ---------
Gas Revenue Change $ (9,733) $(106,359) $(116,427)
--------- --------- ---------
Electric Revenue -
Pass through of net changes in
fuel costs $ (4,033) $ (5,094) $ (6,458)
Changes in sales levels 36,324 59,304 55,853
--------- --------- ---------
Electric Revenue Change $ 32,291 $ 54,210 $ 49,395
--------- --------- ---------
Total Revenue Change $ 22,558 $ (52,149) $ (67,032)
========= ========= =========
</TABLE>
See "Summary of Significant Accounting Policies - Gas Cost Adjustment
Clause" in the Notes to Consolidated Financial Statements for a discussion of
the gas cost incentive mechanism. Also, see Note 3 to Notes to Consolidated
Financial Statements regarding FERC Order No. 636 transition costs.
GAS COSTS -
Gas costs decreased $10.6, $84.6 and $95.0 million for the three-month,
nine-month and twelve-month periods ended September 30, 1998, respectively.
Gas costs decreased for the three-month, nine-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,
nine-month and twelve-month periods ended September 30, 1998, after adjustment
for gas transition costs billed to transport customers, was $2.45, $2.55 and
$2.76 per dth, respectively, as compared to $3.03, $3.03 and $3.16 per dth for
the same periods in 1997.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation decreased $7.2, $15.2 and
$15.3 million for the three-month, nine-month and twelve-month periods ended
September 30, 1998, respectively, compared to 1997 periods, mainly as a result
of increased production of electricity.
Power purchased increased $3.9 for the three-month period ended
September 30, 1998 reflecting increased power purchases and increased cost per
megawatt-hour (mwh). Purchased power decreased $7.0 million for the twelve-
month period ended September 30, 1998 reflecting decreased power purchases
partially offset by decreased cost per mwh.
OPERATING MARGINS -
Operating margins for the twelve months ended September 30,1998
increased $19.8 million from the same period a year ago. The operating margin
from gas deliveries decreased $21.4 million due to decreased sales to
residential and commercial customers reflecting unusually warm weather during
the first quarter of 1998 and decreased industrial sales, partially offset by
increased sales to wholesale customers and increased deliveries of gas
transported for others. Electric operating margin increased $41.1 million due
to increased sales to residential and commercial customers due to warmer
weather during the second and third quarter of 1998 and increased wholesale
transactions, partially offset by decreased sales to industrial customers.
Operating margins for the nine months ended September 30, 1998 increased
$16.8 million from the same period a year ago. Gas operating margin decreased
$21.7 million reflecting decreased residential and commercial sales due to
warmer weather during the first half of 1998 and decreased industrial sales,
partially offset by increased wholesale sales and increased deliveries of
gas transported for others. Electric operating margin increased $38.5 million
as a result of increased sales to residential and commercial customers due to
warmer weather during the second and third quarter of 1998 and increased
wholesale transactions, partially offset by decreased sales to industrial
customers.
Operating margins for the three months ended September 30, 1998
increased $22.1 million from the same period a year ago. Gas operating margin
increased $0.9 million due to increased sales to wholesale customers and
increased deliveries of gas transported for others, partially offset by
decreased sales to sales to residential and commercial customers reflecting
milder weather during the period and decreased industrial sales. Electric
operating margin increased $21.2 million as a result of increased sales to
residential and commercial customers due to warmer weather and increased
wholesale transactions.
OPERATING EXPENSES AND TAXES -
Operation expenses decreased $28.3 million for the twelve-month period
ended September 30, 1998 mainly as a result of decreased employee related
costs of $11.1 million, decreased marketing costs of $10.3 million and
decreased property insurance costs of $1.8 million. Operation expenses
decreased $20.9 million for the nine-month period mainly reflecting decreased
employee related costs of $9.4 million, decreased marketing activities of $6.9
million and decreased property insurance costs of $1.3 million. Operation
expenses decreased $4.9 million for the three-month period mainly reflecting
decreased employee related costs.
Maintenance expenses increased $2.9 million for the twelve-month period
reflecting increased maintenance activity on electric production and electric
distribution facilities.
Depreciation and amortization expenses increased $0.7 and $2.6 million
for the three-month and nine-month periods, respectively, resulting from plant
additions. Depreciation and amortization expenses increased $6.1 million for
the twelve-month period resulting from plant additions, increased amortization
related to deferred postretirement benefits and an increase related to a gain
on the disposition of property that had been held for future use in December,
1996.
Other Income (Deductions) decreased $1.6 million for the twelve-month
period ended September 30, 1998 mainly due to a loss on the disposition of
property and increased donations during the period.
INTEREST CHARGES -
Interest charges decreased for the twelve-month period ended
September 30, 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 months ended September 30, 1998 was $220.4
million compared to $193.8 million for the twelve months ended September 30,
1997.
Net income for the nine months ended September 30, 1998 was $156.8
million compared to $133.1 million for the nine months ended September 30,
1997.
Net income for the three months ended September 30, 1998 was $51.2
million compared to $34.0 million for the three months ended September 30,
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 $15.5 million to cover probable corrective actions as of
September 30, 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" of Notes to Consolidated
Financial Statements 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 September 30,
1998 and December 31,1997, Northern Indiana had $67.9 million and $71.5
million in commercial paper outstanding, respectively. As of September 30,
1998, the weighted average interest rate of commercial paper was 5.58%.
In September 1998, Northern Indiana entered into a five-year $100
million credit agreement and a 364-day $100 million revolving credit agreement
with several banks. These agreements terminate on September 23, 2003 and
September 23, 1999, respectively. The 364-day agreement may be extended at
expiration for additional periods of 364-days upon the request of Northern
Indiana and agreements by the banks. Under these agreements, Northern Indiana
may borrow funds at a floating rate of interest or, at Northern Indiana's
request under certain circumstances, a fixed rate of interest for a short
term period. These agreements provide financial financing flexibility to
Northern Indiana and may be used to support the issuance of commercial paper.
At September 30, 1998, there were no borrowings outstanding under either of
these agreements. Concurrently with entering into such agreements, Northern
Indiana terminated its then existing revolving credit agreement which would
otherwise have terminated on August 19, 1999.
In addition, Northern Indiana has $14.2 million in lines of credit which
run to May 31, 1999. The credit pricing of each of the lines varies from
either the lending banks' commercial prime or market rates. Northern Indiana
has agreed to compensate the participating banks with arrangements that vary
from no commitment fees to a combination of fees which are mutually
satisfactory to both parties. As of September 30, 1998, there were no
borrowings under these lines of credit. The credit agreements and lines of
credit are also available to support the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1998, $25.5 million were outstanding under these
lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 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 its 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 -
RISKS. Year 2000 issues address the ability of electronic processing
equipment to process date sensitive information and to recognize the last two
digits of a date as occurring in or after the year 2000. Any failure in one
of Northern Indiana's systems may result in material operational and financial
risks. Possible scenarios include a system failure in one of Northern
Indiana's generating plants, an operating disruption or delay in transmission
or distribution, or an inability to interconnect with the systems of other
utilities. In addition, while Northern Indiana currently anticipates that
its own mission-critical systems will by year 2000 compliant in a timely
fashion, it cannot guarantee the compliance of systems operated by other
companies upon which it depends. For example, the ability of an electric
company to provide electricity to its customers depends upon a regional
electric transmission grid, which connects the systems of neighboring
utilities to support the reliability of electric power within the region. If
one company's system is not year 2000 compliant, then such a failure will
affect the reliability of all providers within the grid, including Northern
Indiana. Similarly, Northern Indiana's gas operations depend on natural gas
pipelines that it does not own or control, and any non-compliance by a company
owning or controlling those pipelines may affect Northern Indiana's ability to
provide gas to its customers. Failure to achieve year 2000 readiness could
have a material adverse affect on Northern Indiana's results of operations,
financial position and cash flows.
Northern Indiana is continuing its program to address risks associated
with the year 2000. Northern Indiana's year 2000 program focuses on both its
information technology (IT) and non-IT systems, and Northern Indiana has been
making substantial progress in preparing these systems for proper functioning
in the year 2000.
STATE OF READINESS. Northern Indiana's year 2000 program consists of
four phases: inventory (identifying systems potentially affected by the year
2000), assessment (testing identified systems), remediation (correcting or
replacing non-compliant systems) and validation (evaluating and testing
remediated systems to confirm compliance). By second quarter 1997, Northern
Indiana had completed the inventory and assessment phases for all of its
mission-critical IT systems. Northern Indiana also has completed the
remediation and validation phases for four of its six major IT components.
The remediation and validation phases for the remaining two components are
expected to be completed within the next few months, so that Northern Indiana
expects to conclude the year 2000 program for its mission-critical systems by
first quarter of 1999. Northern Indiana completed the inventory and
assessment phases for all of its non-IT systems in April 1998. Northern
Indiana has scheduled remediation (including replacement) and validation for
its non-IT systems throughout 1999. Northern Indiana expects to conclude the
year 2000 program for its non-IT systems by fourth quarter 1999.
Because Northern Indiana depends on outside suppliers and vendors with
similar year 2000 issues, Northern Indiana is assessing the ability of those
suppliers and vendors to provide it with an uninterrupted supply of goods and
services. Northern Indiana has contacted its critical vendors and suppliers
in order to investigate their year 2000 efforts. In addition, Northern
Indiana is working with electricity and gas industry groups such as North
American Electric Reliability Council, Electric Power Research Institute and
the American Gas Association to discuss and evaluate the potential impact of
year 2000 problems upon the electric grid systems and pipeline networks that
interconnect constituents within each of those industries.
COSTS. Northern Indiana currently estimates that the total cost of its
year 2000 program will be between $13 million and $19 million. These costs
have been, and will continue to be, funded through operating cash flows.
Costs related to the maintenance or modification of Northern Indiana's
existing systems are expensed as incurred. Costs related to the acquisition
of replacement systems are capitalized in accordance with Northern Indiana's
accounting policies. Northern Indiana does not anticipate these costs to have
a material impact on its results of operations.
CONTINGENCY PLANS. Northern Indiana currently is in the process of
structuring its contingency plans to address the possibility that any mission-
critical system upon which it depends, including those controlled by outside
parties, will be non-compliant. This includes identifying alternative
suppliers and vendors, conducting staff training and developing communication
plans. In addition, Northern Indiana is evaluating its ability to maintain or
restore service in the event of a power failure or operating disruption or
delay, and its limited ability to mitigate the effects of a network failure by
isolating its own network from the non-compliant segments of the greater
network. Northern Indiana expects to establish these contingency plans by
second quarter 1999.
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 recovery of stranded
costs - that is, costs that were prudently incurred to serve wholesale 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 January 1997 and January 1998 legislation was introduced in the
Indiana General Assembly addressing electric utility competition and
deregulation. Neither bill was passed. Northern Indiana is participating in
discussions with other utilities and its largest customers on the technical
and economic aspects of possible legislation to allow customer choice. If
Northern Indiana believes that consensus legislation is possible, Northern
Indiana would support a deregulation bill in the January 1999 Indiana General
Assembly.
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.
The Commission has approved Northern Indiana's Alternative Regulatory
Plan (ARP) which implements new rates and services that 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, a gas cost incentive mechanism and a price protection
program. The gas cost incentive mechanism allows Northern Indiana to share
any cost savings or cost increases with its customers based on a comparison of
Northern Indiana's actual gas supply portfolio costs to a market based
benchmark price. 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. Northern Indiana offers customers a price protection service (PPS),
which allows residential customers to purchase gas at a fixed price or capped
price for a specific period of time.
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, year 2000 issues, 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 industry, 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 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 gas 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 are deemed necessary other than monitoring the degree of
convergence between the derivative and cash markets.
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 significantly 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.
None
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 23 - Consent of Arthur Andersen LLP
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Northern Indiana Public Service Company
(Registrant)
/s/ David J. Vajda
---------------------------------------
David J. Vajda,
Controller and Chief Accounting Officer
Date November 9, 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
November 9, 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 September 30, 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> JUL-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,987,097
<OTHER-PROPERTY-AND-INVEST> 632
<TOTAL-CURRENT-ASSETS> 256,646
<TOTAL-DEFERRED-CHARGES> 123,468
<OTHER-ASSETS> 195,867
<TOTAL-ASSETS> 3,563,710
<COMMON> 859,488
<CAPITAL-SURPLUS-PAID-IN> 12,524
<RETAINED-EARNINGS> 146,833
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,018,845
56,991
81,117
<LONG-TERM-DEBT-NET> 313,321
<SHORT-TERM-NOTES> 25,500
<LONG-TERM-NOTES-PAYABLE> 766,025
<COMMERCIAL-PAPER-OBLIGATIONS> 67,900
<LONG-TERM-DEBT-CURRENT-PORT> 16,009
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,216,174
<TOT-CAPITALIZATION-AND-LIAB> 3,563,710
<GROSS-OPERATING-REVENUE> 383,285
<INCOME-TAX-EXPENSE> 28,077
<OTHER-OPERATING-EXPENSES> 283,170
<TOTAL-OPERATING-EXPENSES> 311,247
<OPERATING-INCOME-LOSS> 72,038
<OTHER-INCOME-NET> (1,061)
<INCOME-BEFORE-INTEREST-EXPEN> 70,977
<TOTAL-INTEREST-EXPENSE> 19,748
<NET-INCOME> 51,229
2,072
<EARNINGS-AVAILABLE-FOR-COMM> 49,157
<COMMON-STOCK-DIVIDENDS> 55,000
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 109,268
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
