<PAGE>
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, 1995
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 1-9779
NIPSCO Industries, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1719974
(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, 1995, 62,628,628 common shares were outstanding.
<PAGE>
NIPSCO INDUSTRIES, INC.
Part I. FINANCIAL INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
NIPSCO Industries, Inc.:
We have audited the accompanying consolidated balance sheet of NIPSCO
Industries, Inc. (an Indiana corporation) and subsidiaries as of September 30,
1995, and December 31, 1994, and the related consolidated statements of
income, common shareholders' equity and cash flows for the three, nine, and
twelve month periods ended September 30, 1995, and 1994. These consolidated
financial statements are the responsibility of Industries' 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
NIPSCO Industries, Inc. and subsidiaries as of September 30, 1995, and
December 31, 1994, and the results of their operations and their cash flows
for the three, nine, and twelve month periods ended September 30, 1995, and
1994, in conformity with generally accepted accounting principles.
As discussed in Notes 7 and 9 to the consolidated financial
statements, effective January 1, 1993, NIPSCO Industries, Inc. and
subsidiaries changed their methods of accounting for income taxes and
postretirement benefits other than pensions.
Arthur Andersen LLP
Chicago, Illinois
November 6, 1995
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
September 30, December 31,
ASSETS 1995 1994
=========== ===========
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$197,401 AND $221,830, RESPECTIVELY)
(Note 2):
Electric $ 3,918,221 $ 3,858,118
Gas 1,290,304 1,258,801
Common 338,467 316,120
----------- -----------
5,546,992 5,433,039
Less - Accumulated provision for
depreciation and amortization 2,331,588 2,202,082
----------- -----------
Total Utility Plant 3,215,404 3,230,957
----------- -----------
OTHER PROPERTY AND INVESTMENTS:
Other property, at cost, less accumulated
provision for depreciation 125,825 126,632
Investments, at equity (Note 2) 39,547 27,023
Investments, at cost 21,408 10,355
Other investments 14,384 13,328
----------- -----------
Total Other Property and Investments 201,164 177,338
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 18,498 40,441
Accounts receivable, less reserve of
$6,918 and $4,899, respectively (Note 2) 55,191 86,299
Fuel adjustment clause (Note 2) 8,683 1,614
Gas cost adjustment clause (Note 2) 0 25,972
Materials and supplies, at average cost 67,496 66,397
Electric production fuel, at average cost 16,803 18,347
Natural gas in storage, at last-in,
first-out cost (Note 2) 74,064 77,794
Prepayments and other 19,522 11,081
----------- -----------
Total Current Assets 260,257 327,945
----------- -----------
OTHER ASSETS:
Regulatory assets (Note 2) 203,517 195,449
Deferred charges and other noncurrent
assets 14,620 15,449
----------- -----------
Total Other Assets 218,137 210,898
----------- -----------
$ 3,894,962 $ 3,947,138
=========== ===========
<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 1995 1994
============ ===========
(Dollars in thousands)
<S> <C> <C>
CAPITALIZATION:
Common shareholders' equity
(See accompanying statement) $ 1,117,182 $ 1,107,848
Cumulative preferred stocks (Note 11) -
Northern Indiana Public Service Company:
Series without mandatory redemption
provisions (Note 12) 81,525 86,389
Series with mandatory redemption
provisions (Note 13) 64,207 66,057
NIPSCO Industries Inc.:
Series with mandatory redemption
provisions (Note 13) 35,000 35,000
Long-term debt excluding amounts due
within one year (Note 17) 1,176,221 1,180,338
----------- -----------
Total Capitalization 2,474,135 2,475,632
----------- -----------
CURRENT LIABILITIES:
Obligations due within one year -
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper 42,300 156,500
First mortgage bonds -
Series N, 4-5/8% - due May 15, 1995 0 22,436
Medium-term notes -
Issued at interest rates of 6.19% and
6.25% with a weighted average interest
rate of 6.21% and maturities of
July 25, 1996 and July 26, 1996 80,000 0
Notes payable -
Issued at interest rates between 5.83%
and 5.96% with a weighted average
interest rate of 5.86% and various
maturities between October 4, 1995
and November 1, 1995 64,400 92,700
NIPSCO CAPITAL MARKETS, INC.:
Commercial paper 43,700 49,600
Notes payable -
5.98% - due October 23, 1995 18,800 12,700
Medium-term notes
9.95% - due June 10, 1996 7,500 0
ELM ENERGY AND RECYCLING (UK), LTD.:
Term loan facility 3,902 3,262
Standby loan facility 1,108 0
NDC DOUGLAS PROPERTIES, INC.:
Notes payable 1,577 1,013
----------- -----------
263,287 338,211
----------- -----------
OTHER CURRENT LIABILITIES -
Accounts payable 115,039 158,712
Sinking funds due within one year
(Notes 13 and 17) 2,621 2,578
Dividends declared on common and
preferred stocks 26,565 27,077
Customer deposits 10,083 9,291
Taxes accrued 39,339 43,625
Gas cost adjustment clause (Note 2) 29,037 0
Interest accrued 19,422 10,561
Accrued employment costs 41,514 43,811
Other accruals 40,255 11,158
----------- -----------
323,875 306,813
----------- -----------
Total Current Liabilities 587,162 645,024
----------- -----------
OTHER:
Deferred income taxes (Note 7) 582,666 581,866
Deferred investment tax credits, being
amortized over life of related property
(Note 7) 117,577 123,181
Deferred credits 42,548 43,621
Accrued liability for postretirement
benefits (Note 9) 67,015 48,548
Regulatory income tax liability (Note 7) 13,400 18,599
Other noncurrent liabilities 10,459 10,667
----------- -----------
Total Other 833,665 826,482
----------- -----------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 6, 19 and 20)
$ 3,894,962 $ 3,947,138
=========== ===========
<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,
---------------------- ----------------------
1995 1994 1995 1994
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 5 and 22)
Gas $ 73,648 $ 71,795 $ 473,117 $ 493,016
Electric 296,731 262,803 780,222 755,142
---------- ---------- ---------- ----------
370,379 334,598 1,253,339 1,248,158
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 38,201 36,887 275,559 291,452
Fuel for electric
generation 69,612 62,140 179,309 184,938
Power purchased 13,126 9,143 35,259 27,985
---------- ---------- ---------- ----------
120,939 108,170 490,127 504,375
---------- ---------- ---------- ----------
Operating Margin 249,440 226,428 763,212 743,783
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 73,790 69,661 215,467 218,920
Maintenance (Note 2) 18,916 18,988 58,966 60,147
Depreciation and
amortization (Note 2) 50,685 48,606 149,550 144,819
Taxes (except income) 17,420 16,890 54,989 54,866
---------- ---------- ---------- ----------
160,811 154,145 478,972 478,752
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 88,629 72,283 284,240 265,031
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 7) 24,706 19,233 81,054 72,528
---------- ---------- ---------- ----------
Operating Income 63,923 53,050 203,186 192,503
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) (1,246) (7) (2,220) (2,928)
---------- ---------- ---------- ----------
Income Before Interest
and Other Charges 62,677 53,043 200,966 189,575
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 21,061 18,965 62,170 59,189
Other interest 2,457 3,175 8,957 7,746
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (580) (1,181) (3,871) (2,869)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,150 1,029 3,252 2,839
Dividend requirements on
preferred stocks of
subsidiary 2,231 2,520 6,821 7,616
---------- ---------- ---------- ----------
26,319 24,508 77,329 74,521
---------- ---------- ---------- ----------
Net Income 36,358 28,535 123,637 115,054
Dividend requirements on
preferred shares 766 766 2,297 2,297
---------- ---------- ---------- ----------
Balance available for
common shareholders $ 35,592 $ 27,769 $ 121,340 $ 112,757
========== ========== ========== ==========
Average common shares
outstanding 63,031,729 64,513,779 63,532,590 65,089,547
Earnings per average
common share $ 0.56 $ 0.43 $ 1.90 $ 1.73
========== ========== ========== ==========
Dividends declared per
common share $ 0.39 $ 0.36 $ 1.17 $ 1.08
========== ========== ========== ==========
<PAGE>
<CAPTION>
Twelve Months
Ended September 30,
----------------------
1995 1994
========== ==========
(Dollars in thousands)
<S> <C> <C>
Operating Revenues:
(Notes 2, 5 and 22)
Gas $ 662,010 $ 723,940
Electric 1,019,572 989,110
---------- ----------
1,681,582 1,713,050
---------- ----------
Cost of Energy: (Note 2)
Gas costs 387,544 429,976
Fuel for electric
generation 241,505 246,177
Power purchased 39,777 33,221
---------- ----------
668,826 709,374
---------- ----------
Operating Margin 1,012,756 1,003,676
---------- ----------
Operating Expenses and
Taxes (except income):
Operation 284,313 288,085
Maintenance (Note 2) 78,989 83,667
Depreciation and
amortization (Note 2) 199,014 192,799
Taxes (except income) 72,350 72,153
---------- ----------
634,666 636,704
---------- ----------
Operating Income Before
Utility Income Taxes 378,090 366,972
---------- ----------
Utility Income Taxes
(Note 7) 106,258 99,502
---------- ----------
Operating Income 271,832 267,470
---------- ----------
Other Income (Deductions)
(Note 2) 2,924 (3,941)
---------- ----------
Income Before Interest
and Other Charges 274,756 263,529
---------- ----------
Interest and Other Charges:
Interest on long-term debt 81,273 80,184
Other interest 12,861 9,481
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (5,376) (3,744)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 4,310 3,734
Dividend requirements on
preferred stocks of
subsidiary 9,118 10,189
---------- ----------
102,186 99,844
---------- ----------
Net Income 172,570 163,685
Dividend requirements on
preferred shares 3,063 3,063
---------- ----------
Balance available for
common shareholders $ 169,507 $ 160,622
========== ==========
Average common shares
outstanding 63,655,520 65,309,025
Earnings per average
common share $ 2.66 $ 2.45
========== ==========
Dividends declared per
common share $ 1.56 $ 1.44
========== ==========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Dollars in Thousands
--------------------------------------------------
Additional
Common Paid-in Retained
Three Months Ended Total Shares Capital Earnings
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, July 1, 1994 $ 1,102,698 $ 870,930 $ 27,825 $ 418,983
Net income 28,535 28,535
DIVIDENDS:
Preferred shares (766) (766)
Common shares (23,073) (23,073)
Treasury shares acquired (18,503)
ISSUED:
Employee stock purchase
plan 293 135
Long-term incentive plan 222
Other 432 357 (12)
----------- ----------- ----------- -----------
Balance, September 30,
1994 $ 1,089,838 $ 870,930 $ 28,317 $ 423,667
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Three Months Ended Treasury Unearned Translation Common
(continued) Shares Compensation Adjustment Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, July 1, 1994 $ (211,790) $ (1,359) $ (1,891) 73,892,109
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (18,503)
ISSUED:
Employee stock purchase
plan 158
Long-term incentive plan 222
Other 196 (109)
----------- ----------- ----------- -----------
Balance, September 30,
1994 $ (229,913) $ (1,163) $ (2,000) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Three Months Ended Treasury
(continued) Shares
======================== ===========
<S> <C>
Balance, July 1, 1994 (9,106,152)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (642,159)
ISSUED:
Employee stock purchase
plan 9,962
Long-term incentive plan 9,350
Other
-----------
Balance, September 30,
1994 (9,728,999)
===========
<PAGE>
<CAPTION>
Dollars in Thousands
--------------------------------------------------
Additional
Three Months Ended Common Paid-in Retained
(continued) Total Shares Capital Earnings
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, July 1, 1995 $ 1,116,208 $ 870,930 $ 31,950 $ 482,823
Net income 36,358 36,358
DIVIDENDS:
Preferred shares (766) (766)
Common shares (24,474) (24,474)
Treasury shares acquired (11,854)
ISSUED:
Employee stock purchase
plan 299 159
Long-term incentive plan 725
Other 686 93 (65)
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ 1,117,182 $ 870,930 $ 32,202 $ 493,876
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Three Months Ended Treasury Unearned Translation Common
(continued) Shares Compensation Adjustment Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, July 1, 1995 $ (260,485) $ (7,529) $ (1,481) 73,892,109
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (11,854)
ISSUED:
Employee stock purchase
plan 140
Long-term incentive plan 725
Other 574 84
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ (271,474) $ (6,955) $ (1,397) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Three Months Ended Treasury
(concluded) Shares
======================== ===========
<S> <C>
Balance, July 1, 1995 (10,627,573)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (363,407)
ISSUED:
Employee stock purchase
plan 8,791
Long-term incentive plan
Other 29,000
-----------
Balance, September 30,
1995 (10,953,189)
===========
<PAGE>
<CAPTION>
Dollars in Thousands
--------------------------------------------------
Additional
Common Paid-in Retained
Nine Months Ended Total Shares Capital Earnings
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $ 1,094,672 $ 870,930 $ 27,631 $ 380,888
Net income 115,054 115,054
DIVIDENDS:
Preferred shares (2,297) (2,297)
Common shares (69,913) (69,913)
Treasury shares acquired (51,133)
ISSUED:
Employee stock purchase
plan 598 293
Long-term incentive plan 1,143 29
Other 1,714 364 (65)
----------- ----------- ----------- -----------
Balance, September 30,
1994 $ 1,089,838 $ 870,930 $ 28,317 $ 423,667
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Nine Months Ended Treasury Unearned Translation Common
(continued) Shares Compensation Adjustment Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $ (180,212) $ (1,684) $ (2,881) 73,892,109
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (51,133)
ISSUED:
Employee stock purchase
plan 305
Long-term incentive plan 1,127 (13)
Other 534 881
----------- ----------- ----------- -----------
Balance, September 30,
1994 $ (229,913) $ (1,163) $ (2,000) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Nine Months Ended Treasury
(continued) Shares
======================== ===========
<S> <C>
Balance, January 1, 1994 (8,063,271)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (1,732,165)
ISSUED:
Employee stock purchase
plan 19,248
Long-term incentive plan 47,189
Other
-----------
Balance, September 30,
1994 (9,728,999)
===========
<PAGE>
<CAPTION>
Dollars in Thousands
--------------------------------------------------
Additional
Nine Months Ended Common Paid-in Retained
(concluded) Total Shares Capital Earnings
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ 1,107,848 $ 870,930 $ 29,657 $ 446,928
Net income 123,637 123,637
DIVIDENDS:
Preferred shares (2,297) (2,297)
Common shares (74,131) (74,131)
Treasury shares acquired (44,093)
ISSUED:
Employee stock purchase
plan 604 301
Long-term incentive plan 3,442 1,654
Other 2,172 590 (261)
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ 1,117,182 $ 870,930 $ 32,202 $ 493,876
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Nine Months Ended Treasury Unearned Translation Common
(concluded) Shares Compensation Adjustment Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, January 1, 1995
Net income $ (237,193) $ (970) $ (1,504) 73,892,109
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (44,093)
ISSUED:
Employee stock purchase
plan 303
Long-term incentive plan 9,509 (7,721)
Other 1,736 107
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ (271,474) $ (6,955) $ (1,397) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Nine Months Ended Treasury
(concluded) Shares
======================== ===========
<S> <C>
Balance, January 1, 1995 (9,986,720)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (1,366,741)
ISSUED:
Employee stock purchase
plan 19,022
Long-term incentive plan 381,250
Other
-----------
Balance, September 30,
1995 (10,953,189)
===========
<PAGE>
<CAPTION>
Dollars in Thousands
--------------------------------------------------
Additional
Common Paid-in Retained
Twelve Months Ended Total Shares Capital Earnings
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, October 1, 1993 $ 1,082,986 $ 870,930 $ 27,708 $ 356,562
Net income 163,685 163,685
DIVIDENDS:
Preferred shares (3,063) (3,063)
Common shares (93,590) (93,590)
Treasury shares acquired (64,055)
ISSUED:
Employee stock purchase
plan 598 293
Long-term incentive plan 2,103 (46)
Other 1,174 362 73
----------- ----------- ----------- -----------
Balance, September 30,
1994 $ 1,089,838 $ 870,930 $ 28,317 $ 423,667
----------- ----------- ----------- -----------
Net income 172,570 172,570
DIVIDENDS:
Preferred shares (3,063) (3,063)
Common shares (99,021) (99,021)
Treasury shares acquired (51,677)
ISSUED:
Employee stock purchase
plan 604 301
Long-term incentive plan 3,748 1,656
Other 4,183 1,928 (277)
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ 1,117,182 $ 870,930 $ 32,202 $ 493,876
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Twelve Months Ended Treasury Unearned Translation Common
(continued) Shares Compensation Adjustment Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, October 1, 1993 $ (168,325) $ (1,892) $ (1,997) 73,892,109
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (64,055)
ISSUED:
Employee stock purchase
plan 305
Long-term incentive plan 2,162 (13)
Other 742 (3)
----------- ----------- ----------- -----------
Balance, September 30,
1994 $ (229,913) $ (1,163) $ (2,000) 73,892,109
----------- ----------- ----------- -----------
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (51,677)
ISSUED:
Employee stock purchase
plan 303
Long-term incentive plan 9,813 (7,721)
Other 1,929 603
----------- ----------- ----------- -----------
Balance, September 30,
1995 $ (271,474) $ (6,955) $ (1,397) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Twelve Months Ended Treasury
(continued) Shares
======================== ===========
<S> <C>
Balance, October 1, 1993 (7,706,640)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (2,134,696)
ISSUED:
Employee stock purchase
plan 19,248
Long-term incentive plan 93,089
Other
-----------
Balance, September 30,
1994 (9,728,999)
-----------
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (1,637,162)
ISSUED:
Employee stock purchase
plan 19,022
Long-term incentive plan 393,950
Other
-----------
Balance, September 30,
1995 (10,953,189)
===========
<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 Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1995 1994 1995 1994
=========== =========== =========== ===========
(Dollars in thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 36,358 $ 28,535 $ 123,637 $ 115,054
ADJUSTMENTS TO
RECONCILE NET INCOME
TO NET CASH:
Depreciation and
amortization 50,685 48,606 149,550 144,819
Deferred federal and
state operating
income taxes, net 4,254 7,523 (17,700) (7,904)
Deferred investment
tax credits, net (1,869) (1,854) (5,605) (4,671)
Change in certain
assets and
liabilities* -
Accounts
receivable, net 9,215 34,928 31,108 71,945
Electric
production fuel 2,915 2,244 1,544 936
Materials and
supplies 2,380 (1,603) (1,099) (1,705)
Natural gas in
storage (35,734) (40,805) 3,730 (24,092)
Accounts payable 248 (4,530) (43,673) (44,325)
Taxes accrued (20,383) (24,174) 9,586 (46,283)
Fuel adjustment
clause (5,763) 2,445 (7,069) 1,552
Gas cost
adjustment
clause (6,114) (5,179) 55,009 56,161
Accrued employment
costs 858 2,463 (2,297) 378
Other accruals 574 (1,695) 29,144 (41)
Other, net 18,496 15,153 24,602 23,113
----------- ----------- ----------- -----------
Net cash
provided by
operating
activities 56,120 62,057 350,467 284,937
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) INVESTING
ACTIVITIES:
Utility construction
expenditures (38,731) (54,983) (135,215) (154,658)
Acquisition and
construction
expenditures
related to
Crossroads Pipeline
Company (1,548) 94 (2,480) (1,286)
Return of capital from
equity investments 0 0 0 8,000
Other, net (12,076) (7,900) (20,511) (14,880)
----------- ----------- ----------- -----------
Net cash used
in investing
activities (52,355) (62,789) (158,206) (162,824)
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of
long-term debt 7,715 187,207 181,689 213,846
Issuance of
short-term debt 68,797 295,125 476,936 741,977
Net change in
commercial paper 42,900 38,800 (120,100) 107,805
Retirement of
long-term debt (97,706) (67,546) (123,662) (258,091)
Retirement of
short-term debt (16,732) (409,903) (504,324) (782,804)
Retirement of
preferred stock (1,008) (891) (6,339) (2,050)
Issuance of common
shares 1,024 515 3,852 1,754
Acquisition of
treasury shares (11,854) (18,503) (44,093) (51,133)
Cash dividends paid
on common shares (24,550) (23,311) (74,572) (70,513)
Cash dividends paid
on preferred
shares (2,619) (766) (4,150) (2,297)
Other, net 96 0 559 0
----------- ----------- ----------- -----------
Net cash used
in financing
activities (33,937) 727 (214,204) (101,506)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (30,172) (5) (21,943) 20,607
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD 48,670 36,752 40,441 16,140
----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS AT END
OF PERIOD $ 18,498 $ 36,747 $ 18,498 $ 36,747
=========== =========== =========== ===========
<PAGE>
<CAPTION>
Twelve Months
Ended September 30,
------------------------
1995 1994
=========== ===========
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 172,570 $ 163,685
ADJUSTMENTS TO
RECONCILE NET INCOME
TO NET CASH:
Depreciation and
amortization 199,014 192,799
Deferred federal and
state operating
income taxes, net (21,284) 6,289
Deferred investment
tax credits, net (7,433) (6,567)
Change in certain
assets and
liabilities* -
Accounts
receivable, net (12,007) (817)
Electric
production fuel 3,794 4,137
Materials and
supplies 1,329 285
Natural gas in
storage 12,898 (15,453)
Accounts payable (33,428) 19,532
Taxes accrued 36,965 (30,109)
Fuel adjustment
clause (3,795) (2,565)
Gas cost
adjustment
clause 8,535 45,145
Accrued employment
costs 758 (2,080)
Other accruals 25,095 1,298
Other, net 18,911 (5,960)
----------- -----------
Net cash
provided by
operating
activities 401,922 369,619
----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) INVESTING
ACTIVITIES:
Utility construction
expenditures (181,143) (219,996)
Acquisition and
construction
expenditures
related to
Crossroads Pipeline
Company (3,153) (25,647)
Return of capital from
equity investments 0 8,000
Other, net (25,198) (18,539)
----------- -----------
Net cash used
in investing
activities (209,494) (256,182)
----------- -----------
CASH FLOWS PROVIDED BY
(USED IN) FINANCING
ACTIVITIES:
Issuance of
long-term debt 190,418 230,897
Issuance of
short-term debt 755,736 1,013,129
Net change in
commercial paper (96,700) 168,000
Retirement of
long-term debt (84,143) (322,209)
Retirement of
short-term debt (811,910) (1,031,357)
Retirement of
preferred stock (14,484) (2,580)
Issuance of common
shares 4,158 2,816
Acquisition of
treasury shares (51,677) (64,055)
Cash dividends paid
on common shares (97,637) (93,100)
Cash dividends paid
on preferred
shares (4,916) (3,063)
Other, net 478 0
----------- -----------
Net cash
provided by
(used in
financing
activities (210,677) (101,522)
----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (18,249) 11,915
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD 36,747 24,832
----------- -----------
CASH AND CASH
EQUIVALENTS AT END
OF PERIOD $ 18,498 $ 36,747
=========== ===========
<FN>
*Net of effects from purchase of Northern Indiana Fuel and Light Company, Inc.
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) is an
Indiana corporation serving as the holding company for a number of
subsidiaries, including three public utility operating companies: Northern
Indiana Public Service Company (Northern Indiana), Kokomo Gas and Fuel Company
(Kokomo Gas) and Northern Indiana Fuel and Light Company, Inc. (NIFL) and,
since October 1, 1995, Crossroads Pipeline Company (Crossroads).
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development), NIPSCO Energy Services, Inc. (Services), and
NIPSCO Capital Markets, Inc. (Capital Markets). Prior to October 1, 1995
Crossroads was a wholly owned subsidiary of Services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Industries, its utility subsidiaries Northern Indiana,
Kokomo Gas, NIFL and Crossroads (Utilities), and all non-utility subsidiaries.
Investments for which Industries has at least a 20% interest and certain joint
ventures are accounted for under the equity method of accounting. Investments
with less than a 20% interest are accounted for under the cost method of
accounting. The operating results of all non-utility subsidiaries are
included in "Other Income (Deductions)" in the Consolidated Statement of
Income. Interest on long-term debt, other interest, and amortization of debt
discount and expense are reflected as a component of "Interest and Other
Charges." All significant intercompany items have been eliminated in
consolidation. Certain reclassifications were made to conform the prior
years' financial statements to the current presentation.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions as a percentage of the cost of
depreciable utility plant were approximately 4.0%, 4.1% and 4.1%, for the
three, nine, and twelve month periods ended September 30, 1995, respectively,
and 4.0% for the three, nine, and twelve month periods ended September 30,
1994. The depreciation rates for electric and gas properties were 3.55% and
4.92%, respectively.
Kokomo Gas provides depreciation on the original cost of utility plant
in service using straight-line rates that averaged approximately 3.2% for the
three, nine, and twelve month periods ended September 30, 1995, and 3.4% for
the three, nine, and twelve month periods ended September 30, 1994.
NIFL provides depreciation on the original cost of utility plant in
service using straight-line rates that averaged approximately 2.75% for the
three, nine, and twelve month periods ended September 30, 1995, and
September 30, 1994.
The Utilities follow the practice of charging maintenance and repairs,
including the cost of renewals of minor items of property, to maintenance
expense accounts, except for repairs of transportation and service equipment
which are charged to clearing accounts and redistributed to operating expense
and other accounts. When property which represents a retirement unit is
replaced or removed, the cost of such property is credited to utility plant,
and such cost, together with the cost of removal less salvage, is charged to
the accumulated provision for depreciation.
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.
OIL AND NATURAL GAS ACCOUNTING. NIPSCO Fuel Company, Inc., a
wholly-owned subsidiary of Services, uses the full-cost method of accounting
for its oil and natural gas production activities. Under this method all
costs incurred in the acquisition, exploration and development of oil and
natural gas properties are capitalized and amortized on the
units-of-production basis.
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, 1995, Northern Indiana had sold
$100 million of certain of its accounts receivable under a sales agreement
which expires May 31, 1997.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement
of Cash Flows, Industries 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,
------------------ ------------------ ------------------
1995 1994 1995 1994 1995 1994
======== ======== ======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income taxes $ 30,500 $ 20,520 $ 80,100 $ 96,596 $104,989 $110,694
Interest, net of
amounts
capitalized $ 15,375 $ 13,078 $ 56,307 $ 57,837 $ 81,208 $ 85,299
</TABLE>
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under or overrecovery 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 or overrecovery as a current asset or
current liability until such time as it is billed or refunded to its
customers. The fuel adjustment factor is subject to a quarterly hearing by
the Commission and remains in effect for a three-month period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage and
storage transportation charges. The Utilities record any under or
overrecovery as a current asset or current liability until such time as it is
billed or refunded to their customers. The gas cost adjustment factor for
Northern Indiana is subject to a quarterly hearing by the Commission and
remains in effect for a three-month period. The gas cost adjustment factors
for Kokomo Gas and NIFL are subject to semi-annual hearings by the Commission
and remain in effect for a six-month period. If the statutory requirement
relating to the level of return is satisfied, any under or overrecovery caused
by variances between estimated and actual cost in a given three or six month
period will be included in a future filing. See Note 5, Rate Matters
(Take-or-Pay Pipeline Gas Costs) and (FERC Order No. 636) for a discussion of
take-or-pay charges and gas transition cost charges.
NATURAL GAS IN STORAGE. Based on the average cost of gas purchased
in September, 1995, and December, 1994, the estimated replacement cost of gas
in storage (current and non-current) at September 30, 1995, and December 31,
1994, exceeded the stated LIFO cost by approximately $22 million and $38
million, respectively.
HEDGING ACTIVITIES. Industries' non-regulated gas subsidiaries use
commodity futures contracts to hedge the impact of natural gas price
fluctuations related to its business activities. Gains and losses on futures
contracts are deferred and recognized in income as an adjustment to purchased
gas cost, concurrent with the related physical volumes.
REGULATORY ASSETS. The Utilities' operations are subject to the
regulation of the Commission and the Federal Energy Regulatory Commission
(FERC). Accordingly, the Utilities' accounting policies are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71
"Accounting for the Effects of Certain Types of Regulation." The regulatory
assets below represent probable future revenue to the Utilities associated
with certain incurred costs as these costs are recovered through the rate
making process. Regulatory assets were comprised of the following items, and
were reflected in the Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
============ =============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 17) $ 54,698 $ 54,265
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 76,035 79,198
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,717 7,864
Deferral of SFAS No. 106 expense not
recovered (Note 9) 57,684 43,939
FERC Order No. 636
transition costs (Note 5) 28,888 56,153
------------ -------------
228,022 241,419
------------ -------------
Less: Current portion of regulatory assets 24,505 45,970
------------ -------------
$ 203,517 $ 195,449
============ =============
</TABLE>
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement imposes stricter criteria for
retention of regulatory assets by requiring that such assets be probable of
future recovery at each balance sheet date. Northern Indiana anticipates
adopting this standard on January 1, 1996, and does not expect that adoption
will have a material impact on its financial position or results of operations
based on the current regulatory structure in which Northern Indiana operates.
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 began capitalizing carrying charges and deferring
depreciation and certain operating expenses relating to its scrubber service
agreement upon completion of the flue gas desulfurization plant in June, 1992,
at Northern Indiana's Bailly Generating Station in accordance with an order of
the Commission. Capitalization of carrying charges and deferral of
depreciation and certain operating expenses will continue until December 31,
1995. Thereafter, the accumulated balance of the deferred costs and related
carrying charges will be 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, 1993, a pretax rate of 3.7% for all construction was
being used; effective January 1, 1994, the rate increased to 5.0% and
effective January 1, 1995, the rate increased to 7.0%.
FOREIGN CURRENCY TRANSLATION. Translation gains or losses are based
upon the end-of-period exchange rate and are recorded as a separate component
of shareholders' equity.
INVESTMENTS IN REAL ESTATE. Development has invested in a series of
affordable housing projects in the Utilities' service territory. These
investments include certain tax benefits, including low-income housing tax
credits and tax deductions for operating losses of the housing projects.
Development accounts for these investments using the equity method.
Investments, at equity includes $19.0 million and $12.8 million relating to
affordable housing projects at September 30, 1995, and December 31, 1994,
respectively.
INCOME TAXES. Deferred income taxes are recognized as costs in the
rate making process by the commissions having jurisdiction over the rates
charged by the Utilities. Deferred income taxes are provided as a result of
provisions in the income tax law that either require or permit certain items
to be reported on the income tax return in a different period than they are
reported in the financial statements. These taxes are reversed by a debit or
credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income
over the life of the related property.
(3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the years
1982 through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS believes that interest paid on the Notes should have been
subject to United States tax withholding. Northern Indiana estimates this
claim to be approximately $49 million of principal and interest at
September 30, 1995. The Notes were redeemed in 1985 and Finance was
subsequently liquidated. On October 25, 1991, Northern Indiana filed its
petition challenging the assessment in the United States Tax Court (Tax
Court). The matter was tried on May 31 and June 1, 1994, and briefing was
completed September 30, 1994. On November 6, 1995, the Tax Court ruled in
favor of Northern Indiana, finding that the interest paid on the Notes was not
subject to United States tax withholding. While it is uncertain whether the
IRS will appeal the Tax Court's decision, Northern Indiana's management and
general counsel believe the ruling of the Tax Court will ultimately prevail.
(4) ELM ENERGY AND RECYCLING (UK) LTD.: Development is a 95% shareholder in
Elm Energy and Recycling (UK) Ltd. (Elm), which owns and operates a tire-
fueled electric generating plant in Wolverhampton, England (Project), that
began operating in late 1993. In 1992, Elm entered into a contract with TBV
Power Limited (TBV), a company jointly owned by affiliates of the Tarmac PLC
Group and Black & Veatch, for the design, construction and commissioning of
the Project. Pursuant to that contract and other agreements between Elm and
TBV, TBV committed to complete certain work and pass certain performance and
reliability tests for the Project no later than June 30, 1995, which would
have allowed the independent Project engineer to issue an Acceptance and
Completion Certificate by that date.
On July 3, 1995, the Project engineer notified TBV that an Acceptance
and Completion Certificate had not been issued as of June 30, 1995. Elm then
notified TBV that it was rejecting the Project in accordance with the terms of
the contract between it and TBV. As a result, on July 3, 1995 Barclays Bank,
as agent for the banks which had provided financing for the Project, issued a
notice of an event of default to Elm. On July 4, 1995, the Project engineer
notified TBV that, in accordance with the contract between Elm and TBV all
monies previously paid by Elm to TBV ( 29.6 million) were to be reimbursed by
TBV to Elm. The certificate issued by the Project engineer was adjudicated
under a procedure provided in the construction contract, and the adjudicator
confirmed the full 29.6 million as owing to Elm. TBV has filed suit in the
English courts to enjoin enforcement of the adjudicator's decision, to
challenge again the Project engineer's decision and to allege breaches of the
underlying construction contract by Elm. Elm has counterclaimed and is
aggressively pursuing its remedies.
Development believes that it and Elm have adequate remedies under the
construction contract such that rejection will not have a material effect on
Elm, Development or Industries. Elm and Development are also seeking such
additional remedies at law, in both the United States and the United Kingdom,
for further damages and/or sanctions against TBV and/or Tarmac PLC Group and
Black & Veatch. Development believes that these additional remedies, in
conjunction with Elm's rights under the construction contract, will be
sufficient to mitigate any losses which Elm and/or Development may otherwise
incur as a result of TBV's failure to complete the Project in accordance with
the contract.
(5) RATE MATTERS:
TAKE-OR-PAY PIPELINE GAS COSTS. The FERC has allowed certain interstate
pipeline suppliers to pass on to their customers a portion of costs for
contracted gas not purchased (take-or-pay), contract reformation and
associated interest charges through direct billing to their customers,
including the Utilities.
Northern Indiana records take-or-pay costs as they are billed by the
respective pipeline, and in an order dated September 28, 1988, the Commission
allowed Northern Indiana to recover these additional gas costs on a volumetric
basis from all customers, including transport customers. The Utilities have
recovered approximately $196.0 million of take-or-pay costs and interest from
their customers through September 30, 1995. As of September 30, 1995, an
additional $5.0 million was scheduled to be billed to the Utilities and
recovered from customers over a period of one to four years.
FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636
which required interstate pipelines to restructure their services. Under the
Order, existing pipeline sales services have been "unbundled" such that gas
supplies are being sold separately from interstate transportation services.
The Utilities' interstate pipeline suppliers have filed new tariffs with the
FERC to implement Order No. 636, and the Utilities have contracted for a mix
of transportation and storage services which allows them to meet the needs
of their customers. Customers of the pipelines, such as the Utilities, are
expected to benefit from enhanced access to competitively priced gas supplies
as well as from more flexible transportation services. Pipelines are seeking
to recover from their customers certain transition costs associated with
restructuring under the Order No. 636 regulation. Any such recovery is
subject to established review procedures at the FERC. Also, mandated changes
in pipeline rate design could increase the cost of firm transportation service
on interstate pipelines. All interstate pipelines are now operating under
Order No. 636 regulation.
The Utilities' pipeline suppliers have made certain filings with the
FERC for the collection of their respective transition costs. The Utilities
expect that the total transition costs from all suppliers will approximate
$139 million. However, the ultimate level of costs will depend on future
events, including the market price of natural gas. Approximately $78 million
of such costs have been recorded, a portion of which has been paid to the
pipeline suppliers, subject to refund. On November 2, 1994, the Commission
issued an order which approved the recovery of these FERC-allowed transition
costs on a volumetric basis from Northern Indiana's sales and transportation
customers (which is consistent with what the Commission authorized for the
recovery of take-or-pay pipeline gas costs). Certain industrial customers
appealed the November 2, 1994, order to the Indiana Court of Appeals. On
May 25, 1995, the Court granted Northern Indiana's motion to dismiss the
appeal for want of subject matter jurisdiction. On June 23, 1995, the
transportation customers filed a petition for rehearing and reconsideration of
the Court's order. On July 27, 1995, the Court denied the transportation
customers' petition. On August 24, 1995, the transportation customers filed a
Petition for Transfer with the Indiana Supreme Court seeking review of the
Indiana Court of Appeals' decision. Northern Indiana filed a brief opposing
the transportation customers' petition and the matter is pending Indiana
Supreme Court decision. Regulatory assets, in amounts corresponding to
the costs recorded, have been recorded to reflect the ultimate recovery of
these costs.
(6) ENVIRONMENTAL MATTERS: 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 acid deposition provisions of the Clean Air
Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of
compliance with the CAAA sulfur dioxide regulations will impact electric rates
by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants, which may require significant
capital expenditures for control of these emissions. Northern Indiana is
evaluating a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be
recoverable through the rate making process.
The Utilities have an ongoing program to remain aware of laws and
regulations involved with hazardous waste. It is the Utilities' intent to
continue to evaluate their facilities and properties with respect to these
rules and identify any sites that would require corrective action.
Northern Indiana has received notices from the Environmental Protection
Agency (EPA) that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and the Superfund Amendment and Reauthorization Act (SARA) 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 and SARA,
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. While all of the remedial costs at
these sites are not determinable, Northern Indiana's analysis indicates its
share of such costs with other PRPs should not have a significant impact on
its financial position or the results of future operations.
The Utilities have instituted a program to investigate former
manufactured gas plants where one of them is the current or former owner.
The Utilities have identified twenty-seven of these sites and made visual
inspections of these sites. The Utilities have conducted initial samplings at
thirteen sites. Follow-up investigations have been conducted at four sites and
potential remedial measures are being evaluated. The Utilities will continue
their program to assess sites. During the follow-up investigation of the
former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted the
presence of hydrocarbons in the Elkhart River. Northern Indiana reported this
finding to the Indiana Department of Environmental Management (IDEM) and the
EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary
Remediation Program (VRP). The goal of placing the site in the VRP will be to
obtain IDEM approval of the determination and subsequent implementation of
what remedial measures, if any, may be needed.
Northern Indiana was notified by the IDEM of the release of a petroleum
substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a
former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
The Utilities have met with various companies who provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured gas plant sites.
The possibility that exposure to electric and magnetic fields emanating
from power lines, household appliances and other electric sources may result
in adverse health effects has been the subject of public, governmental and
media attention. A considerable amount of scientific research has been
conducted on this topic without definitive results. Research is continuing to
resolve scientific uncertainties.
(7) INCOME TAXES: Effective January 1, 1993, Industries adopted SFAS No.
109, "Accounting for Income Taxes," which requires the use of the liability
method of accounting for income taxes. Under the liability method, 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 implement SFAS No. 109, certain adjustments were made to deferred
income taxes. To the extent such income taxes are recoverable or payable
through future rates, regulatory assets and liabilities have been recorded in
the Consolidated Balance Sheet. These adjustments include the amounts
reflecting the Utilities' obligation to credit to ratepayers deferred income
taxes provided at rates higher than the current federal tax rate which are
currently being credited to ratepayers using the average rate assumption
method required by the Tax Reform Act of 1986 and the Commission. The
Consolidated Balance Sheet at September 30, 1995, and December 31, 1994,
reflects a net regulatory income tax liability of $13.4 million and $18.6
million, respectively. The net regulatory income tax liability is derived from
regulatory assets primarily attributable to undepreciated AFUDC-equity and the
cumulative net amount of other income tax timing differences for which
deferred taxes had not been provided in the past, when regulators did not
recognize such taxes as costs in the rate making process, and regulatory
liabilities primarily attributable to deferred taxes provided at rates in
excess of the current statutory rate, as discussed above, and unamortized
deferred investment tax credits.
The components of the net deferred income tax liability at
September 30, 1995, and December 31, 1994, are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
============ ===========
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 700,849 $ 691,319
AFUDC-equity 40,704 42,447
Adjustment clauses 0 10,596
Take-or-pay gas costs 1,570 2,045
Other regulatory assets 25,141 22,125
Reacquisition premium on debt 20,746 20,580
Deferred tax assets -
Deferred investment tax credits (44,578) (46,703)
Removal costs (114,446) (105,671)
Adjustment clauses (7,347) 0
FERC Order No. 636 transition costs (3,262) (5,461)
Other postretirement benefits (29,469) (22,712)
Regulatory income tax liability (5,082) (7,054)
Other, net (16,618) (20,231)
----------- -----------
568,208 581,280
Less: Deferred income taxes related to
current assets and liabilities (14,458) (586)
----------- -----------
Deferred income taxes - noncurrent $ 582,666 $ 581,866
=========== ===========
</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,
-------------------- --------------------
1995 1994 1995 1994
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 19,344 $ 11,625 $ 90,919 $ 73,784
State 2,977 1,939 13,440 11,319
--------- --------- --------- ---------
22,321 13,564 104,359 85,103
--------- --------- --------- ---------
Deferred income taxes, net -
Federal and State -
Accelerated depreciation and
other property differences 2,012 3,277 6,036 9,832
Removal costs (2,851) (2,808) (8,553) (8,425)
Adjustment clauses 8,239 458 (2,932) (21,003)
FERC Order No. 636
transition costs (2,211) 3,718 (10,486) 11,873
Take-or-pay gas costs (158) (363) (477) (1,833)
Reacquisition premium on debt (313) 1,382 (940) 2,451
Other (464) 1,859 (348) (799)
--------- --------- --------- ---------
4,254 7,523 (17,700) (7,904)
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,869) (1,854) (5,605) (4,671)
--------- --------- --------- ---------
Total utility operating income
taxes 24,706 19,233 81,054 72,528
Income tax applicable to non-
operating activities and income
of non-utility subsidiaries (1,008) (1,600) (6,021) (4,777)
--------- --------- --------- ---------
Total income taxes $ 23,698 $ 17,633 $ 75,033 $ 67,751
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended September 30,
--------------------
1995 1994
========= =========
(Dollars in thousands)
<S> <C> <C>
Current income taxes -
Federal $ 117,456 $ 86,232
State 17,519 13,548
--------- ---------
134,975 99,780
--------- ---------
Deferred income taxes, net -
Federal and State -
Accelerated depreciation and
other property differences 4,532 13,696
Removal costs (12,221) (9,234)
Adjustment clauses 1,046 (14,845)
FERC Order No. 636
transition costs (10,966) 11,873
Take-or-pay gas costs (833) 555
Reacquisition premium on debt (604) 2,503
Other (2,238) 1,741
--------- ---------
(21,284) 6,289
--------- ---------
Deferred investment tax credits,
net (7,433) (6,567)
--------- ---------
Total utility operating income
taxes 106,258 99,502
Income tax applicable to non-
operating activities and income
of non-utility subsidiaries (17,577) (5,156)
--------- ---------
Total income taxes $ 88,681 $ 94,346
========= =========
</TABLE>
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1995 1994 1995 1994
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $ 36,358 $ 28,535 $ 123,637 $ 115,054
Add-Income taxes 23,698 17,633 75,033 67,751
Dividend requirements on
preferred stocks of subsidiary 2,231 2,520 6,821 7,616
--------- --------- --------- ---------
Income before preferred dividend
requirements of subsidiary and
income taxes $ 62,287 $ 48,688 $ 205,491 $ 190,421
========= ========= ========= =========
Amount derived by multiplying
pretax income by the statutory
rate $ 21,801 $ 17,040 $ 71,922 $ 66,647
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 1,005 967 3,014 2,902
Amortization of deferred
investment tax credits (1,869) (1,854) (5,605) (5,637)
State income taxes, net of
federal income tax benefit 2,269 1,849 7,218 6,654
Fair market value of property
donated in excess of book
value 0 0 0 0
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,360) (1,298) (4,079) (3,895)
Other, net 1,852 929 2,563 1,080
--------- --------- --------- ---------
Total income taxes $ 23,698 $ 17,633 $ 75,033 $ 67,751
========= ========= ========= =========
<CAPTION>
Twelve Months
Ended September 30,
--------------------
1995 1994
========= =========
(Dollars in thousands)
<S> <C> <C>
Net Income $ 172,570 $ 163,685
Add-Income taxes 88,681 94,346
Dividend requirements on
preferred stocks of subsidiary 9,118 10,189
--------- ---------
Income before preferred dividend
requirements of subsidiary and
income taxes $ 270,369 $ 268,220
========= =========
Amount derived by multiplying
pretax income by the statutory
rate $ 94,630 $ 93,940
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 4,156 3,875
Amortization of deferred
investment tax credits (7,434) (7,533)
State income taxes, net of
federal income tax benefit 9,399 9,227
Fair market value of property
donated in excess of book
value (7,753) 0
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (5,991) (5,069)
Other, net 1,674 (94)
--------- ---------
Total income taxes $ 88,681 $ 94,346
========= =========
</TABLE>
(8) PENSION PLANS: Industries and its subsidiaries have three
noncontributory, defined benefit retirement plans covering substantially all
employees. Benefits under the plans reflect the employees' compensation,
years of service and age at retirement.
The plans' funded status as of January 1, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
========= =========
(Dollars in thousands)
<S> <C> <C>
Vested benefit obligation $ 449,043 $ 481,755
Nonvested benefit 97,138 86,373
--------- ---------
Accumulated benefit obligation $ 546,181 $ 568,128
========= =========
Projected benefit obligation for service
rendered to date $ 613,094 $ 657,068
Plan assets at fair market value 571,624 605,379
--------- ---------
Projected benefit obligation in excess of plan
assets 41,470 51,689
Unrecognized transition obligation at January 1,
being recognized over 17 years (48,906) (54,055)
Unrecognized prior service cost (29,847) (31,464)
Unrecognized gains 47,788 51,154
--------- ---------
Accrued pension costs $ 10,505 $ 17,324
========= =========
</TABLE>
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on the plan benefit formula without
considering expected future salary increases. The projected benefit
obligation considers estimated future salary increases. Discount rates of
8.75% and 7.50% and rates of increase in compensation levels of 5.5% were used
to determine the accumulated benefit obligation and projected benefit
obligation at January 1, 1995, and 1994, respectively. The decrease in the
accumulated benefit obligation as of January 1, 1995, is mainly caused by the
increase in the discount rate to 8.75% and was partially offset by changes in
other plan assumptions.
The following items are the components of provisions for pensions for
the three and nine month periods ended September 30, 1995:
<TABLE>
<CAPTION>
Three Nine
Months Months
========= =========
(Dollars in thousands)
<S> <C> <C>
Service costs $ 3,264 $ 9,861
Interest costs 13,371 40,047
Estimated return on plan assets (12,899) (38,627)
Amortization of transition obligation 1,355 4,066
Other net amortization and deferral 636 1,954
--------- ---------
$ 5,727 $ 17,301
========= =========
</TABLE>
Assumptions used in the valuation and determination of 1995 and 1994
pension expenses were as follows:
<TABLE>
<CAPTION>
1995 1994
===== =====
<S> <C> <C>
Discount rate 8.75% 7.50%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 8.25%
</TABLE>
The plans' assets are invested primarily in common stocks, bonds and
notes.
Industries recorded provisions for pension costs as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 5,727 $ 5,564
Nine months ended $ 17,301 $ 16,992
Twelve months ended $ 21,543 $ 22,820
</TABLE>
(9) POSTRETIREMENT BENEFITS: Industries provides certain health care and
life insurance benefits for retired employees. Substantially all of
Industries' employees may become eligible for those benefits if they reach
retirement age while working for Industries. Those and similar benefits
for active employees are provided through insurance plans whose premiums are
based on the benefits to active employees and retirees paid during the year.
Prior to January 1, 1993, the Utilities recognized the cost of providing those
benefits by expensing insurance premiums, which is consistent with current
rate making practices.
Effective January 1, 1993, Industries adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which establishes
accounting and reporting standards for such postretirement benefits. This
standard requires the accrual of the expected cost of such benefits during the
employee's years of service.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1995, and January 1, 1994.
<TABLE>
<CAPTION>
January 1, January 1,
1995 1994
========== ==========
(Dollars in thousands)
<S> <C> <C>
Retirees $ 96,676 $ 89,650
Fully eligible active plan participants 20,008 30,501
Other active plan participants 105,991 150,215
---------- ----------
Accumulated postretirement benefit obligation 222,675 270,366
Unrecognized transition obligation at January 1,
being recognized over 20 years (208,681) (220,274)
Unrecognized actuarial gain (loss) 45,496 (20,737)
---------- ----------
Accrued liability for postretirement benefits $ 59,490 $ 29,355
========== ==========
</TABLE>
A discount rate of 8.75% and a pre-Medicare medical trend rate of 11%
declining to a long-term rate of 7% and a discount rate of 7.5% and a
pre-Medicare medical trend rate of 12% declining to a long-term rate of 7%
were used to determine the accumulated postretirement benefit obligation at
January 1, 1995, and 1994, respectively.
The transition obligation at January 1, 1993, for accumulated
postretirement benefits earned and not recognized is being amortized over
twenty years as allowed by SFAS No. 106.
Net periodic postretirement benefits costs for the three, nine, and
twelve months ended September 30, 1995, and September 30, 1994, include the
following components:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
---------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994
======= ======= ======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 1,526 $ 2,045 $ 4,578 $ 6,135 $ 6,715 $ 7,895
Interest costs 4,745 4,962 14,235 14,886 19,294 19,514
Amortization of
transition
obligation
over 20 years 2,899 2,882 8,697 8,646 11,644 11,600
Amortization of
unrecognized
actuarial (gain) (541) 0 (1,623) 0 (1,623) 0
------- ------- ------- ------- ------- -------
$ 8,629 $ 9,889 $25,887 $29,667 $36,030 $39,009
======= ======= ======= ======= ======= =======
</TABLE>
The net periodic postretirement benefit costs for 1995 were determined
assuming an 8.75% discount rate, a 5% rate of compensation increase and a
pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%.
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, 1995, by approximately $32.0 million and increase the
aggregate of the service and interest cost components of plan costs by
approximately $1.2 million and $3.6 million for the three and nine month
period ended September 30, 1995. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates or plan changes.
On December 30, 1992, the Commission authorized the accrual method
of accounting for postretirement benefits for rate making purposes and
authorized the deferral, as a regulatory asset to be recovered through future
revenues, of the net increase in cost until such time as the new accrual cost
method may be reflected in the rate making process. The Commission stated
that a deferral period of four years or less would be rebuttably presumed to
be reasonable and also indicated each utility would have to demonstrate its
postretirement benefit costs were prudent and reasonably incurred at the time
such costs were proposed to be recovered in the rate making process. Northern
Indiana currently anticipates requesting the recovery of such costs within
that period and, accordingly, is deferring as a regulatory asset the
difference between the amount that would have been charged to expense under
pay-as-you-go accounting and the amount accrued in accordance with the new
standard. This conclusion could change as competitive factors influence
pricing decisions.
(10) POSTEMPLOYMENT BENEFITS: Effective January 1, 1994, Industries adopted
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which
requires Industries to accrue the estimated cost of benefits provided to
former or inactive employees after employment but before retirement. Adoption
of SFAS No. 112 did not have a material impact on Industries' financial
position or results of operations.
(11) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS:
Industries -
20,000,000 shares - Preferred - without par value
Effective March 2, 1990, 2,000,000 shares of Industries' Series A Junior
Participating Preferred Shares were reserved for issuance pursuant to the
Share Purchase Rights Plan described in Note 15, Common Shares.
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 12 sets forth the preferred stocks which are redeemable solely at
the option of the issuer, and Note 13 sets forth the preferred stocks which
are subject to mandatory redemption requirements or whose redemption is
outside the control of the issuer.
The Preferred shareholders of Industries and 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.
(12) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER,
OUTSTANDING AT SEPTEMBER 30, 1995, AND DECEMBER 31, 1994 (SEE NOTE 11):
<TABLE>
<CAPTION>
Redemption
Price at
September 30, December 31, September 30,
1995 1994 1995
============ =========== ============
(Dollars in thousands)
<S> <C> <C> <C>
NORTHERN INDIANA PUBLIC
SERVICE COMPANY:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,190 and
211,266 shares outstanding,
respectively $ 20,919 $ 21,127 $ 101.20
4-1/2% series - 79,996 shares
outstanding 8,000 8,000 100.00
4.22% series - 106,198 and
106,200 shares outstanding,
respectively 10,620 10,620 101.60
4.88% series - 100,000 shares
outstanding 10,000 10,000 102.00
7.44% series - 41,890 and
41,900 shares outstanding,
respectively 4,189 4,190 101.00
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, 1995), Series A
(stated value $50 per share)
- 481,185 and 574,285 shares
outstanding, respectively 24,059 28,714 50.00
------------ -----------
$ 81,525 $ 86,389
============ ===========
</TABLE>
During the period October 1, 1993, to September 30, 1995, there were no
issuances of the above preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at
any time upon 30 days notice at the option of Northern Indiana at the
redemption prices shown.
(13) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT SEPTEMBER 30, 1995, AND
DECEMBER 31, 1994 (SEE NOTE 11):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
============ =============
(Dollars in thousands)
<S> <C> <C>
Preferred stocks subject to mandatory redemption
requirements or whose redemption is outside the
control of issuer:
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Cumulative preferred stock - $100 par value -
8.85% series - 87,500 and 100,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year $ 8,750 $ 10,000
7-3/4% series - 55,568 shares outstanding,
excluding sinking fund payments due within
one year 5,557 5,557
8.35% series - 69,000 and 75,000 shares
outstanding, respectively, excluding sinking
fund payments due within one year 6,900 7,500
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
---------- -------------
64,207 66,057
---------- -------------
NIPSCO INDUSTRIES, INC.:
Cumulative preferred shares - without par
value - 8.75% series (stated value - $100
per share), 350,000 shares outstanding 35,000 35,000
---------- -------------
$ 99,207 $ 101,057
========== =============
</TABLE>
The redemption prices at September 30, 1995, as well as sinking fund
provisions for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana
and Industries are as follows:
<TABLE>
<CAPTION>
Sinking Fund or
Mandatory Redemption
Series Redemption Price Per Share Provisions
====== ========================== ===========================
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Cumulative preferred stock - $100 par value -
<S> <C> <C>
8.85% $102.22, reduced periodically 12,500 shares on or before
April 1.
8.35% $104.18, reduced periodically 3,000 shares on or before
July 1; increasing to
6,000 shares beginning
in 2004; noncumulative
option to double amount
each year.
7-3/4% $104.76, reduced periodically 2,777 shares on or
before December 1;
noncumulative option
to double amount each
year.
<CAPTION>
Cumulative preferred stock - no par value -
<S> <C> <C>
6.50% $100.00 on October 14, 2002 430,000 shares on October 14,
2002.
<CAPTION>
NIPSCO INDUSTRIES, INC.:
Cumulative preferred shares - without par
value -
<S> <C> <C>
8.75% $100.00 on January 14, 1996 350,000 shares on January 14,
1996.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at September 30, 1995, for each of the twelve month periods
subsequent to September 30, 1996, are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30:*
==================================
<S> <C>
1997 $ 1,827,700
1998 $ 1,827,700
1999 $ 1,827,700
2000 $ 1,827,700
<FN>
* Table does not reflect redemptions made after September 30, 1995.
</TABLE>
(14) COMMON SHARE DIVIDEND: During the next few years, Industries expects
that the great majority of earnings available for distribution of dividends
will depend upon dividends paid to Industries by Northern Indiana. Northern
Indiana's Indenture provides that it will not declare or pay any dividends on
any class of capital stock (other than preferred or preference stock) except
out of earned surplus or net profits of Northern Indiana. At September 30,
1995, Northern Indiana had approximately $139.5 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.
(15) COMMON SHARES: Industries has 200,000,000 common shares authorized
without par value.
SHARE PURCHASE RIGHTS PLAN. On February 27, 1990, the Board of
Directors of Industries declared a dividend distribution of one Right for each
outstanding common share of Industries to shareholders of record on March 12,
1990. The Rights are not currently exercisable. Each Right, when
exercisable, would initially entitle the holder to purchase from Industries
one one-hundredth of a share of Series A Junior Participating Preferred
Shares, without par value, of Industries at a price of $60 per one
one-hundredth of a share. In certain circumstances, if an acquirer obtained
25% of Industries' outstanding shares, or merged itself into Industries or
Industries into the acquirer, the Rights would entitle the holders to purchase
Industries' or the acquirer's common shares for one-half of the market price.
The Rights will not dilute Industries' common shares nor affect earnings per
share unless they become exercisable for common shares. The Plan was not
adopted in response to any specific attempt to acquire control of Industries.
COMMON SHARE REPURCHASES. The Board of Directors of Industries has
authorized the repurchase of approximately 17.5 million common shares which
includes those common shares required for the acquisitions of Kokomo Gas
and NIFL. At September 30, 1995, Industries had purchased approximately 15.3
million shares at an average price of $23.61 per share of which 1,848,588
shares and 1,112,862 shares were reissued in connection with the Kokomo Gas
and NIFL acquisitions, respectively. Approximately 2.3 million additional
common shares may be repurchased under the Board's authorization.
(16) LONG-TERM INCENTIVE PLAN: Industries' Long-Term Incentive Plan
(1988 Plan) for key management employees, which was approved by shareholders
on April 13, 1988, provides for the issuance of up to 2.5 million of
Industries' common shares to key employees through 1998. On April 13, 1994,
shareholders adopted Industries' 1994 Long-Term Incentive Plan (1994 Plan).
It is similar to the 1988 Plan and provides an additional 2.5 million common
shares available for issuance to key employees through 2004. At September 30,
1995, there were 152,461 shares and 2,328,550 shares reserved for future
awards under the 1988 Plan and 1994 Plan, respectively. The 1988 Plan and
1994 Plan permit the following types of grants, separately or in combination:
nonqualified stock options, incentive stock options, restricted stock awards,
stock appreciation rights and performance units. No incentive stock options
or performance units were outstanding at September 30, 1995.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries
stock or a combination thereof. Restricted stock awards are restricted as to
transfer and subject to forfeiture for specific periods from the date of
grant. Restrictions on the shares awarded during 1990 and 1991 lapse five
years from date of grant and vest subject to specific share price appreciation
conditions. Restrictions on shares awarded in 1995 vest five years from date
of grant and will vest subject to specific earnings per share and stock
appreciation goals. If a participant's employment is terminated other than by
reason of death, disability or retirement, restricted shares are forfeited.
There were 400,500 and 150,500 restricted shares outstanding at September 30,
1995, and December 31, 1994, respectively.
Changes in outstanding shares under option and SARs for the three,
nine, and twelve month periods ended September 30, 1995, and 1994, are as
follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
----------------------------------------------------
Three Months Ended Option Option
September 30, 1995 Price 1994 Price
================== ========================= =========================
<S> <C> <C>
Balance beginning
of period 996,400 $10.94-$33.19 832,700 $10.94-$33.19
Granted 277,450 $32.44 294,650 $28.75
Exercised (29,000) $10.94-$28.75 (9,350) $17.06-$26.06
Canceled (2,500) $32.44 (5,750) $28.75-$33.19
--------- ---------
Balance end of
period 1,242,350 $10.94-$33.19 1,112,250 $10.94-$33.19
========= =========
Shares exercisable 961,900 $10.94-$33.19 819,850 $10.94-$33.19
<CAPTION>
NONQUALIFIED STOCK OPTIONS
----------------------------------------------------
Nine Months Ended Option Option
September 30, 1995 Price 1994 Price
================== ========================= =========================
<S> <C> <C>
Balance beginning
of period 1,097,550 $10.94-$33.19 890,800 $10.94-$33.19
Granted 282,450 $30.31-$32.44 294,650 $28.75
Exercised (128,250) $10.94-$33.19 (49,150) $10.94-$26.06
Canceled (9,400) $10.94-$33.19 (24,050) $28.75-$33.19
--------- ---------
Balance end of
period 1,242,350 $10.94-$33.19 1,112,250 $10.94-$33.19
========= =========
Shares exercisable 961,900 $10.94-$33.19 819,850 $10.94-$33.19
<CAPTION>
NONQUALIFIED STOCK OPTIONS
----------------------------------------------------
Twelve Months Ended Option Option
September 30, 1995 Price 1994 Price
================== ========================= ========================
<S> <C> <C> <C> <C>
Balance beginning
of period 1,112,250 $10.94-$33.19 936,700 $10.94-$33.19
Granted 282,450 $30.31-$32.44 294,650 $28.75
Exercised (140,950) $10.94-$33.19 (95,050) $10.94-$26.06
Canceled (11,400) $10.94-$33.19 (24,050) $28.75-$33.19
--------- ---------
Balance end of
period 1,242,350 $10.94-$33.19 1,112,250 $10.94-$33.19
========= =========
Shares exercisable 961,900 $10.94-$33.19 819,850 $10.94-$33.19
<CAPTION>
NONQUALIFIED STOCK OPTIONS
WITH SARs
----------------------------------------------------
Three Months Ended Option Option
September 30, 1995 Price 1994 Price
================== ========================= ========================
<S> <C> <C> <C> <C>
Balance beginning
of period 5,600 $10.94 9,900 $10.94
Granted 0 0
Exercised 0 0
Canceled 0 0
--------- --------
Balance end of
period 5,600 $10.94 9,900 $10.94
========= ========
Shares exercisable 5,600 $10.94 9,900 $10.94
<CAPTION>
NONQUALIFIED STOCK OPTIONS
WITH SARs
----------------------------------------------------
Nine Months Ended Option Option
September 30, 1995 Price 1994 Price
================== ========================= =========================
<S> <C> <C> <C> <C>
Balance beginning
of period 9,900 $10.94 9,900 $10.94
Granted 0 0
Exercised (4,300) $10.94 0
Canceled 0 0
--------- --------
Balance end of
period 5,600 $10.94 9,900 $10.94
========= ========
Shares exercisable 5,600 $10.94 9,900 $10.94
<CAPTION>
NONQUALIFIED STOCK OPTIONS
WITH SARs
----------------------------------------------------
Twelve Months Ended Option Option
September 30, 1995 Price 1994 Price
================== ========================= =========================
<S> <C> <C> <C> <C>
Balance beginning
of period 9,900 $10.94 9,900 $10.94
Granted 0 0
Exercised (4,300) $10.94 0
Canceled 0 0
--------- --------
Balance end of
period 5,600 $10.94 9,900 $10.94
========= ========
Shares exercisable 5,600 $10.94 9,900 $10.94
</TABLE>
The Industries Nonemployee Director Stock Incentive Plan, which was
approved by shareholders, provides for the issuance of up to 100,000 of
Industries' common shares to nonemployee directors of Industries. The Plan
provides for awards of common shares which vest in 20% per year increments,
with full vesting after five years. The Plan also allows the award of
nonqualified stock options in the future. If a director's service on the
Board is terminated for any reason other than death or disability, any common
shares not vested as of the date of termination are forfeited. As of
September 30, 1995, 27,750 shares were issued under the Plan.
(17) LONG-TERM DEBT: At September 30, 1995, and December 31, 1994,
Industries' long-term debt, excluding amounts due within one year, issued and
not retired or canceled was as follows:
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
-----------------------------
September 30, December 31,
1995 1994
============= =============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY
First mortgage bonds -
Series O, 6-3/8%, due September 1, 1997 $ 25,747 $ 25,747
Series P, 6-7/8%, due October 1, 1998 14,509 14,509
Series T, 7-1/2%, due April 1, 2002 40,500 40,543
Series U, 8-1/8%, due July 15, 2003 0 55,239
Series Z, 8-1/8%, due August 15, 2007 0 39,569
Series NN, 7.10%, due July 1, 2017 55,000 55,000
----------- -----------
Total 135,756 230,607
----------- -----------
Pollution control notes and bonds -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 20,750 20,750
Series 1988 Bonds - Jasper County -
Series A, B and C 3.76% weighted
average at September 30, 1995, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D 3.72% weighted average at
September 30, 1995, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 4.50% at September 30, 1995,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 4.50% at September 30, 1995,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 4.50% at September 30, 1995,
due April 1, 2019 41,000 41,000
----------- -----------
Total 243,750 243,750
----------- -----------
Medium-term notes -
Issued at interest rates between 5.83%
and 7.64% with a weighted average interest
rate of 6.82% and various maturities between
July 25, 1997 and January 19, 2024 684,025 594,750
----------- -----------
Unamortized premium and discount
on long-term debt, net (4,179) (3,756)
----------- -----------
Total long-term debt of
Northern Indiana Public
Service Company 1,059,352 1,065,351
----------- -----------
NIPSCO CAPITAL MARKETS, INC.
Medium-term note - 9.95% - due June 10, 1996 0 7,500
Unamortized discount (5) (9)
Zero coupon notes - 7.57%, $72,500 at
maturity, due December 1, 1997 61,724 58,373
----------- -----------
Total long-term debt of
NIPSCO Capital Markets, Inc. 61,719 65,864
----------- -----------
NIPSCO DEVELOPMENT COMPANY, INC.
LAKE ERIE LAND COMPANY - NOTES PAYABLE -
Interest rates between 8.00% and 9.25%
with a weighted average interest rate
of 9.13% and various maturities between
November 30, 1996 and June 30, 1998 3,201 3,155
ELM ENERGY AND RECYCLING (UK), LTD.
Term Loan Facility - 6.79% - due
December 31, 2004 35,277 34,606
METALS TECHNOLOGY CORPORATION -
Notes Payable -
Mortgage note, 9.25% -
due September 25, 2005 0 98
NDC DOUGLAS PROPERTIES, INC.
Notes Payable -
Interest rates of 6.72% and 7.94% with
a weighted average interest rate of 7.69%
and maturities through January 1, 2006 16,672 11,264
----------- -----------
Total long-term debt of
NIPSCO Development Company,Inc. 55,150 49,123
----------- -----------
Total long-term debt, excluding
amounts due in one year $ 1,176,221 $ 1,180,338
=========== ===========
</TABLE>
The sinking fund requirements of long-term debt outstanding at
September 30, 1995, (including the maturity of Northern Indiana's first
mortgage bonds: Series O, 6-3/8%, due September 1, 1997; and Series P, 6-7/8%,
due October 1, 1998; Northern Indiana's medium-term notes due from April 6,
1998 to June 1, 2000; Capital Markets' Zero Coupon Notes due December 1, 1997;
Lake Erie Land Company's notes payable due November 30, 1996 to June 30, 1998;
and NDC Douglas Properties, Inc. notes payable due December 22, 1999), for
each of the twelve month periods subsequent to September 30, 1996, are as
follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
==================================
<S> <C>
1997 $ 78,610,113
1998 $ 118,134,679
1999 $ 24,520,514
2000 $ 165,298,554
</TABLE>
Unamortized debt expense, premium and discount on long-term debt,
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem
all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating
$125.5 million, through the use of working capital and the proceeds of
short-term debt. During 1994, $120.0 million of the Medium-Term Notes, Series
D, were issued to complete the permanent refinancing of those first mortgage
bonds. As of June 12, 1995, the remaining $169,275,000 of Medium-Term Notes,
Series D, were issued and part of the proceeds were used to redeem all of the
outstanding First Mortgage Bonds, Series U and Z aggregating $94.8 million on
July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company
Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A
Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due June 1,
2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The proceeds
of these issuances were loaned to Northern Indiana under similar terms. The
initial interest rate on Series 1994 Bonds was 3.10%, which resets daily. The
proceeds of the Series 1994A and Series 1994C were used to retire on
October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due
October 15, 2004 and $41 million of Series LL First Mortgage Bonds, 7-1/2%,
due October 15, 2014. The proceeds of the Series 1994B Bonds were used to
retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994. The
Series 1994 Bonds are secured by Letters of Credit from Union Bank of
Switzerland.
The obligations of Capital Markets are subject to a Support Agreement
between Industries and Capital Markets, under which Industries has committed
to make payments of interest and principal on Capital Markets' securities in
the event of a failure to pay by Capital Markets. Restrictions in the
Support Agreement prohibit recourse on the part of Capital Markets' investors
against the stock and assets of Northern Indiana which are owned by
Industries. Under the terms of the Support Agreement, in addition to the cash
flow of cash dividends paid to Industries by any of its consolidated
subsidiaries, the assets of Industries, other than the stock and assets of
Northern Indiana, are available as recourse to holders of Capital Markets'
securities. The carrying value of those assets other than Northern Indiana,
reflected in the consolidated financial statements of Industries, is
approximately $345.6 million at September 30, 1995.
(18) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving
Credit Agreement with several banks which terminates August 19, 1998, unless
extended by its terms. As of September 30, 1995, there were no borrowings
outstanding under this agreement. In addition, Northern Indiana has $14.2
million in lines of credit which run to May 31, 1996. 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 fee to a combination of
fees which are mutually satisfactory to both parties. As of September 30,
1995, there were no borrowings under these lines of credit. The Credit
Agreement and lines of credit are also available to support the issuances of
commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1995, there were $64.4 million of borrowings
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1995, there were no borrowings outstanding under this facility.
Northern Indiana uses commercial paper to fund short-term working
capital requirements. As of September 30, 1995, Northern Indiana had $42.3
million in commercial paper outstanding, having a weighted average interest
rate of 5.85%.
Capital Markets has a $150 million revolving Credit Agreement which
will terminate August 19, 1998, unless extended by its terms. This facility
provides short-term financing flexibility to Industries and also serves as the
back-up instrument for a commercial paper program. As of September 30, 1995,
there were no borrowings outstanding under this agreement.
Capital Markets also has $105 million of money market lines of credit.
As of September 30, 1995, $18.8 million of borrowings were outstanding under
these lines of credit.
As of September 30, 1995, Capital Markets had $43.7 million in
commercial paper outstanding, having a weighted average interest rate of
6.04%.
(19) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
20-year agreement for the rental of office facilities from Development at a
current annual rental payment of approximately $3.2 million.
The following is a schedule, by years, of future minimum rental
payments, excluding those to associated companies, required under operating
leases that have initial or remaining noncancelable lease terms in excess of
one year as of September 30, 1995:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
===============================
(Dollars in thousands)
<S> <C>
1996 $ 7,750
1997 8,235
1998 6,790
1999 5,790
2000 5,651
Later years 78,204
--------
Total minimum
payments required $112,420
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 4,177 $ 2,058
Nine months ended $ 8,164 $ 6,282
Twelve months ended $ 9,772 $ 8,163
</TABLE)
(20) COMMITMENTS: Northern Indiana estimates that approximately $774
million will be expended for construction purposes for the period from
January 1, 1995, to December 31, 1999. 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 will provide 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 20-year contract period.
Harbor Coal Company (Harbor Coal), a wholly-owned subsidiary of
Development, has invested in a partnership to finance, construct, own and
operate a $65 million pulverized coal injection facility which began
commercial operation in August, 1993. The facility receives raw coal,
pulverizes it and delivers it to Inland Steel Company for use in the operation
of its blast furnaces. Harbor Coal is a 50% partner in the project with an
Inland Steel affiliate. Industries has guaranteed the payment and performance
of the partnership's obligations under a sale and leaseback of a 50% undivided
interest in the facility.
North Lake Energy Corporation (North Lake), a wholly-owned subsidiary
of Industries, has entered into a lease for the use of a 75 megawatt energy
facility to be located at Inland Steel Company. The facility will use steam
generated by Inland Steel to produce electricity which is delivered to Inland
Steel. The facility is expected to begin operations in late summer of 1996.
Industries has guaranteed North Lake's obligations relative to the lease and
certain obligations to Inland Steel relative to the project.
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair
value because of the short maturity of those instruments.
Investments: The fair value of investments are estimated based on
market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock are estimated based on the quoted market prices for the same
or similar issues or on the rates offered to Industries 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 Industries' financial
instruments are as follows:
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
=========== =========== =========== ===========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and
cash equivalents $ 18,498 $ 18,498 $ 40,441 $ 40,441
Investments $ 35,792 $ 38,912 $ 23,683 $ 24,612
Long-term debt
(including current
portion) $ 1,270,163 $ 1,256,863 $ 1,207,936 $ 1,102,019
Preferred stock $ 182,560 $ 162,432 $ 189,274 $ 156,591
</TABLE>
The majority of the long-term debt relates to utility operations.
The Utilities are 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.
(22) CUSTOMER CONCENTRATIONS: Northern Indiana is a public utility
operating company supplying natural gas and electrical energy in the northern
third of Indiana. Although Northern Indiana has a diversified base of
residential and commercial customers, a substantial portion of its electric
and gas industrial deliveries are dependent upon the basic steel industry. The
basic steel industry accounted for 5% of gas revenue (including transportation
services) and 23% of electric revenue for the twelve months ended
September 30, 1995, as compared to 2% and 25%, respectively, for the twelve
months ended September 30, 1994.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
HOLDING COMPANY -
NIPSCO Industries, Inc. (Industries), an Indiana corporation, became a
holding company on March 3, 1988. Northern Indiana Public Service Company
(Northern Indiana), Northern Indiana Fuel and Light Company, Inc. (NIFL),
Kokomo Gas and Fuel Company (Kokomo Gas), NIPSCO Development Company, Inc.,
(Development), NIPSCO Energy Services, Inc. (Services), NIPSCO Capital
Markets, Inc. (Capital Markets) and, since October 1, 1995, Crossroads
Pipeline Company (Crossroads) are subsidiaries of Industries. NIPSCO Fuel
Company, Inc. (Fuel), NI-TEX Inc. (NI-TEX) and NIPSCO Energy Trading Corp.
(NETCO) are direct subsidiaries of Services, as was Crossroads prior to
October 1, 1995. The following discussion, except where noted, is
attributable to the utility operations of Northern Indiana, Kokomo Gas, NIFL
and Crossroads (Utilities).
REVENUES -
Total operating revenues for the twelve months ended September 30,
1995, decreased $31.5 million as compared to the twelve months ended
September 30, 1994. Gas revenues decreased $61.9 million and electric revenues
increased $30.4 million.
The decrease in gas revenues was largely attributable to decreased
sales to residential and commercial customers due to milder weather, decreased
gas costs partially offset by increased gas transition charges and deliveries
of gas transported for others. Gas transportation customers purchase much of
their gas directly from producers and marketers and then pay a transportation
fee to have their gas delivered over the Utilities' systems. The Utilities had
approximately 693,900 gas customers at September 30, 1995.
The increase in electric revenues for the twelve months ended
September 30, 1995, was mainly due to increased sales to residential and
commercial customers as a result of warmer weather in the third quarter of
1995, and increased sales to industrial and wholesale customers, and was
partially offset by decreased fuel cost per kilowatt-hour (kwh) and
transitional rate adjustments to industrial customers signing new five year
contracts.
Total operating revenue for the nine months ended September 30, 1995
increased $5.2 million as compared to the nine months ended September 30,
1994. Gas revenues decreased $19.9 million and electric revenues increased
$25.1 million as compared to the same period in 1994. The decrease in gas
revenues was mainly due to decreased sales to residential and commercial
customers as a result of warmer weather during the first quarter of 1995 and
decreased gas costs partially offset by increased gas transition charges. The
increase in electric revenue for the nine months ended September 30, 1995, was
mainly due to increased sales to residential and commercial customers as a
result of warmer weather in the third quarter and increased sales to wholesale
customers, and was partially offset by lower fuel costs per kwh and to
transitional rate adjustments to industrial customers.
Total operating revenue for the three months ended September 30, 1995
increased $35.8 million as compared to the three months ended September 30,
1994. Gas revenues increased $1.9 million and electric revenues increased
$33.9 million as compared to the same period in 1994. The increase in gas
revenues was mainly due to increased revenues per dth of gas transported for
others and was partially offset by decreased sales to residential customers.
The increase in electric revenue for the three months ended September 30,
1995, was mainly due to increased sales to residential and commercial
customers as a result of warmer weather partially offset by transitional rate
adjustments to industrial customers.
The basic steel industry accounted for 36% of natural gas delivered
(including volumes transported) and 37% of electric sales during the twelve
months ended September 30, 1995.
The components of the variations in gas and electric revenues are
shown in the following tables:
<TABLE>
<CAPTION>
Variations from Prior Periods
------------------------------------
September 30, 1995
Compared to
September 30, 1994
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 $ (8,183) $ (43,581) $ (63,817)
Take-or-pay costs and transition
costs 11,604 45,949 61,859
Changes in sales levels (759) (22,019) (61,207)
Gas transport levels (809) (248) 1,235
---------- ---------- ----------
Gas Revenue Change $ 1,853 $ (19,899) $ (61,930)
---------- ---------- ----------
Electric Revenue -
Pass through of net changes
in fuel $ 276 $ (13,948) $ (17,717)
Changes in sales levels 33,652 39,028 48,179
---------- ---------- ----------
Electric Revenue Change $ 33,928 $ 25,080 $ 30,462
---------- ---------- ----------
Total Revenue Change $ 35,781 $ 5,181 $ (31,468)
========== ========== ==========
<FN>
See Note 5 to the consolidated financial statements (Rate Matters),
regarding gas take-or-pay and FERC Order No. 636 transition costs.
</TABLE>
GAS COSTS -
The Utilities' gas costs decreased $42.4 million for the twelve
month period ended September 30, 1995, due to decreased purchases, lower
sales and lower gas costs per dth. The average cost for the Utilities
purchased gas for the three, nine, and twelve month periods ended
September 30, 1995, after adjustment for take-or-pay and transition charges
billed to transport customers, was $2.70, $2.83 and $2.81 per dth,
respectively, as compared to $2.93, $3.01 and $3.03 per dth for the same
periods in 1994.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation decreased for the nine and
twelve month periods ended September 30, 1995, compared to 1994 periods,
mainly as a result of lower cost for coal. The cost of fuel for electric
generation increased for the three month period ended September 30, 1995,
mainly as a result of increased generation.
Power purchased increased $4.0, $7.3 and $6.6 million for the three,
nine, and twelve month periods ended September 30, 1995, respectively, as a
result of increased bulk power purchases with other utilities due to increased
sales.
OPERATING MARGINS -
Operating margins increased $9.1 million for the twelve months ended
September 30, 1995, from the same period a year ago. The operating margin
from gas deliveries decreased $19.5 million, due to decreased sales to
residential and commercial customers as a result of milder weather and
decreased sales to industrial customers which were partially offset by
increased deliveries of gas transported for others, compared to the twelve
month period ended September 30, 1994. The operating margins from electric
sales increased $28.6 million, due to increased sales to residential and
commercial customers as a result of warmer weather in the third quarter of
1995, and increased sales to industrial and wholesale customers.
Operating margins increased $19.4 million for the nine months ended
September 30, 1995, from the same period a year ago. Gas operating margin
decreased $4.0 million due to decreased sales to residential and commercial
customers due to warmer weather during the first quarter of 1995. Operating
margins on electric sales increased $23.4 million due to increased sales to
residential and commercial customers as a result of warmer weather in the
third quarter of 1995, and increased sales to wholesale customers, partially
offset by transitional rate adjustments to industrial customers.
Operating margins increased $23.0 million for the three months ended
September 30, 1995, over the same period a year ago. The operating margins
from gas increased $0.5 million due to increased revenues per dth of gas
transported for others. Operating margins on electric sales increased $22.5
million reflecting increased sales to residential and commercial customers as
a result of warmer weather partially offset by transitional rate adjustments
to industrial customers.
OPERATING EXPENSES AND TAXES -
Operation expenses decreased $3.5 and $3.8 million for the nine and
twelve month periods ended September 30, 1995, respectively, due to decreased
employment related costs. Operation expenses increased $4.1 million for the
three month period ended September 30, 1995, mainly due to increased electric
production operating costs.
Maintenance expenses decreased $1.2 and $4.7 million for the nine and
twelve month periods ended September 30, 1995, respectively, mainly reflecting
decreased maintenance activity at the electric production facilities.
Depreciation and amortization expense increased for the three, nine,
and twelve month periods ended September 30, 1995, as a result of net plant
additions.
Utility income taxes increased for the three, nine and twelve month
periods ended September 30, 1995, as a result of higher pre-tax income.
The after tax effects of the Northern Indiana land donation to the
Shafer and Freeman Lakes Environmental Conservation Corporation are included
in "Other Income (Deductions)" for the twelve month period ended September 30,
1995. The operating results of all non-utility subsidiaries are included in
"Other Income (Deductions)."
Interest charges (net) increased for the nine and twelve month periods
ended September 30, 1995, reflecting an increase in short-term borrowing rates
and long-term debt outstanding. Interest charges (net) increased for the three
month period ending September 30, 1995, reflecting the issuance of
$169,275,000 of Medium-Term Notes, Series D, partially offset by decreased
short-term borrowing rates.
See Note 2 to Notes to Consolidated Financial Statements (Summary of
Significant Accounting Policies) for a discussion of Regulatory Assets,
Carrying Charges and Deferred Depreciation and Allowance for Funds Used During
Construction. Also,see Notes 5, 7, 9, and 10 for a discussion of FERC Order
No. 636, Income Taxes, Postretirement Benefits, and Postemployment Benefits,
respectively.
NET INCOME-
Industries' net income for the twelve month period ended September 30,
1995, was $172.6 million compared to $163.7 million for the twelve month
period ended September 30, 1994.
Net income for the nine months ended September 30, 1995, was $123.6
million compared to $115.1 million for the nine months ended September 30,
1994.
Net income for the three months ended September 30, 1995, was $36.4
million compared to $28.5 million for the three months ended September 30,
1994.
ENVIRONMENTAL MATTERS -
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 acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA).
Northern Indiana estimates that total costs of compliance with the CAAA sulfur
dioxide regulations will impact electric rates by less than 5% in the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants, which may require
significant capital expenditures for control of these emissions. Northern
Indiana is evaluating a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements, but Northern Indiana believes that any such mandated costs
would be recoverable through the rate making process.
The Utilities have an ongoing program to remain aware of the laws and
regulations involved with hazardous waste. It is the Utilities' intent to
continue to evaluate their facilities and properties with respect to these
rules and identify any sites that would require corrective action.
Northern Indiana has received notices from the Environmental
Protection Agency (EPA) that it is a "potentially responsible party" (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) 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
and SARA, 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. While all of the remedial
costs at these sites are not determinable, Northern Indiana's analysis
indicates its share of such costs with other PRPs should not have a
significant impact on its financial position or the results of future
operations.
The Utilities have instituted a program to investigate former
manufactured gas plants where one of them is the current or former owner. The
Utilities have identified twenty-seven of these sites and made visual
inspections of these sites. The Utilities have conducted initial samplings at
thirteen sites. Follow-up investigations have been conducted at four sites
and potential remedial measures are being evaluated. The Utilities will
continue their program to assess sites. During the follow-up investigation
of the former manufactured gas plant in Elkhart, Indiana, Northern Indiana
noted the presence of hydrocarbons in the Elkhart River. Northern Indiana
reported this finding to the Indiana Department of Environmental Management
(IDEM) and the EPA. Northern Indiana has placed the Elkhart site in the IDEM
Voluntary Remediation Program (VRP). The goal of placing the site in the VRP
will be to obtain IDEM approval of the determination and subsequent
implementation of what remedial measures, if any, may be needed.
Northern Indiana was notified by the IDEM of the release of a
petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the
site of a former manufactured gas plant formerly owned by Northern Indiana. In
cooperation with IDEM, Northern Indiana has taken steps to investigate and
contain the substance. Northern Indiana has remediated part of the Fort Wayne
site. The remainder of the site is being evaluated to determine what further
remedial measures, if any, may be needed.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have
entered into an agreement covering cost sharing and management of
investigation and remediation programs at five former manufactured gas plant
sites at which both companies or their predecessors were former operators or
owners. One of these sites is the Lafayette site which Indiana Gas had
previously notified Northern Indiana is being investigated and remediated
pursuant to an administrative order with IDEM. Northern Indiana also notified
PSI Energy, Inc. that it was a former owner or operator of seven former
manufactured gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities.
The Utilities have met with various companies who provided insurance
coverage which the Utilities believe covers costs related to actions taken at
former manufactured gas plants. In September 1995, certain insurance
companies initiated a suit in Indiana state court against Northern Indiana to
deny coverage. Later in September 1995, Northern Indiana filed a more
comprehensive suit in Federal Court in Indiana against those insurers and
several other insurance companies, seeking coverage for costs associated with
several former manufactured gas plant sites.
The possibility that exposure to electric and magnetic fields
emanating from power lines, household appliances and other electric sources
may result in adverse health effects has been the subject of public,
governmental and media attention. A considerable amount of scientific
research has been conducted on this topic without definitive results. Research
is continuing to resolve scientific uncertainties.
LIQUIDITY AND CAPITAL RESOURCES -
During the next few years, it is anticipated that the great majority
of earnings available for distribution of dividends will depend upon dividends
paid to Industries by Northern Indiana. See Note 14 to Notes to Consolidated
Financial Statements for a discussion of the Common Share Dividend.
On March 4, 1994, the Commission authorized Northern Indiana to issue
up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30
years, for purposes of refinancing certain first mortgage bonds and paying
short-term debt used to pay at maturity medium-term notes due in January and
April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem
all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating
$125.5 million, through the use of working capital and the proceeds of
short-term debt. During 1994, $120.0 million of the Medium-Term Notes, Series
D, were issued to complete the permanent refinancing of those first mortgage
bonds. As of June 12, 1995, the remaining $169,275,000 of Medium-Term
Notes, Series D, were issued and part of the proceeds were used to redeem all
of the outstanding First Mortgage Bonds, Series U and Z aggregating $94.8
million on July 3, 1995.
On August 25, 1994, Jasper County, Indiana issued Pollution Control
Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company
Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A
Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due
June 1, 2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The
proceeds of these issuances were loaned to Northern Indiana under similar
terms. The initial interest rate on Series 1994 Bonds was 3.10%, which resets
daily. The proceeds of the Series 1994A and Series 1994C were used to retire
on October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%,
due October 15, 2004 and $41 million of Series LL First Mortgage Bonds,
7-1/2%, due October 15, 2014. The proceeds of the Series 1994B Bonds were
used to retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994.
The Series 1994 Bonds are secured by Letters of Credit from Union Bank of
Switzerland.
Capital Markets has a $150 million revolving Credit Agreement which
terminates August 19, 1998, unless extended by its terms. This facility
provides short-term financing flexibility at the holding company level and
also serves as the back-up instrument for a commercial paper program. As of
September 30, 1995, there were no borrowings outstanding under this agreement.
Capital Markets also has $105 million of money market lines of credit.
As of September 30, 1995, $18.8 million of borrowings were outstanding under
these lines of credit.
As of September 30, 1995, Capital Markets had $43.7 million in
commercial paper outstanding, having a weighted average interest rate of
6.04%.
The obligations of Capital Markets are subject to a Support Agreement
between Industries and Capital Markets, under which Industries has committed
to make payments of interest and principal on Capital Markets securities in
the event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' investors against
the stock and assets of Northern Indiana which are owned by Industries. Under
the terms of the Support Agreement, in addition to the cash flow of cash
dividends paid to Industries by any of its consolidated subsidiaries, the
assets of Industries, other than the stock and assets of Northern Indiana, are
available as recourse to holders of Capital Markets' securities. The
carrying value of those assets other than Northern Indiana, reflected in the
consolidated financial statements of Industries, is approximately $345.6
million at September 30, 1995.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the utility
business and the construction program, Northern Indiana makes use of
commercial paper intermittently as short-term financing. As of September 30,
1995, Northern Indiana had $42.3 million in commercial paper outstanding,
having a weighted average interest rate of 5.85%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998, unless extended by its terms.
As of September 30, 1995, there were no borrowings outstanding under this
agreement. In addition, Northern Indiana has $14.2 million in lines of credit
which run to May 31, 1996. 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 fee to a combination of fees which are mutually
satisfactory to both parties. As of September 30, 1995, there were no
borrowings under these lines of credit. The Credit Agreement and lines of
credit are also available to support the issuances of commercial paper.
Northern Indiana also has $273.5 million of money market lines of
credit. As of September 30, 1995, there were $64.4 million of borrowings were
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1995, 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.
The Utilities do not expect the effects of inflation at current levels
to have a significant impact on their results of operations, ability to
contain cost increases or need to seek timely and adequate rate relief. The
Utilities do not anticipate the need to file for gas or electric base rate
increases in the near future.
COMPETITION
The Energy Policy Act of 1992 (Energy Act) allows 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. That authority lies with the
individual states, several of which are considering opening the transmission
network to retail customers. The Energy Act will stimulate greater competition
in the wholesale electric markets. This competition will create opportunities
to compete for new customers and revenues, as well as increase the risk of the
loss of customers. Although wholesale customers represent a relatively small
portion of Northern Indiana's sales (4% for 1994), Northern Indiana will
continue its efforts to retain and add customers by offering competitive
rates. Competitive forces have also begun to influence retail pricing in the
industry. In some instances,industrial customers, threatening to pursue
cogeneration, self-generation, retail wheeling, or relocation to other service
territories, have obtained price concessions from utilities.
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.
Industries's management has taken steps to make the company more
competitive and profitable in the changing utility environment, including
partnering on energy projects with major industrial customers and conversions
of some of its generating units to allow use of lower cost low sulfur coal.
FERC Order No. 636 effective in late 1993 shifted primary
responsibility for gas acquisition, transportation and peak days' supply from
pipelines to local gas distribution companies, such as the Utilities. Although
pipelines continue to transport gas, they no longer provide sale service. The
Utilities believe they have taken appropriate steps to insure 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 the
Utilities' facilities to transport the gas. Transportation customers pay the
Utilities only for transporting their gas from the pipeline to the customers'
premises.
To date, the Utilities' system has not been materially affected by
competition, and management does not foresee substantial adverse effects in
the near future, unless the current regulatory structure is substantially
altered. Northern Indiana believes the steps it is taking to deal with
increased competition will have significant, positive effects in the next few
years.
<PAGE>
Item 1. LEGAL PROCEEDINGS.
Industries and Northern Indiana are parties to various legal or
administrative proceedings before courts and agencies with respect to matters
occurring in the ordinary course of business. Although management of
Industries cannot predict the ultimate outcome of these matters,it believes
the final disposition of these matters will not have a material adverse effect
on the financial position or results of operations of Industries.
Information regarding various matters involving federal and state
environmental laws and regulations and a pending tax matter is included in
Notes 6 and 3, respectively, of Industries' financial statements under Part I,
Item 1 of this Report on Form 10-Q.
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
(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.
NIPSCO Industries, Inc.
(Registrant)
/s/Jerry M. Springer
-----------------------------
Jerry M. Springer,
Controller
and Chief Accounting Officer
Date November 13, 1995
<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 Industries' previously filed
Form S-8 Registration Statement, No. 33-30619; and Form S-8 Registration
Statement, No. 33-30621.
Arthur Andersen LLP
Chicago, Illinois
November 13, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements of NIPSCO Industries, Inc. for three months ended
September 30, 1995, 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-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,215,404
<OTHER-PROPERTY-AND-INVEST> 201,164
<TOTAL-CURRENT-ASSETS> 260,257
<TOTAL-DEFERRED-CHARGES> 14,620
<OTHER-ASSETS> 203,517
<TOTAL-ASSETS> 3,894,962
<COMMON> 599,456
<CAPITAL-SURPLUS-PAID-IN> 25,247
<RETAINED-EARNINGS> 492,479
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,117,182
99,207
81,525
<LONG-TERM-DEBT-NET> 354,577
<SHORT-TERM-NOTES> 85,547
<LONG-TERM-NOTES-PAYABLE> 821,644
<COMMERCIAL-PAPER-OBLIGATIONS> 86,000
<LONG-TERM-DEBT-CURRENT-PORT> 93,942
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,153,510
<TOT-CAPITALIZATION-AND-LIAB> 3,894,962
<GROSS-OPERATING-REVENUE> 370,379
<INCOME-TAX-EXPENSE> 24,706
<OTHER-OPERATING-EXPENSES> 281,750
<TOTAL-OPERATING-EXPENSES> 306,456
<OPERATING-INCOME-LOSS> 63,923
<OTHER-INCOME-NET> (1,246)
<INCOME-BEFORE-INTEREST-EXPEN> 62,677
<TOTAL-INTEREST-EXPENSE> 26,319
<NET-INCOME> 36,358
766
<EARNINGS-AVAILABLE-FOR-COMM> 35,592
<COMMON-STOCK-DIVIDENDS> 24,474
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 56,120
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
