SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
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 April 30, 1996, 61,357,860 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 March 31,
1996, and December 31, 1995, and the related consolidated statements of
income, common shareholders' equity and cash flows for the three and
twelve month periods ended March 31, 1996 and 1995. 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 March 31, 1996, and
December 31, 1995, and the results of their operations and their cash flows
for the three and twelve month periods ended March 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
April 26, 1996
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
March 31, December 31,
ASSETS 1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST (INCLUDING
CONSTRUCTION WORK IN PROGRESS OF
$140,073 AND $145,129, RESPECTIVELY)
(Note 2):
Electric $ 3,955,424 $ 3,935,103
Gas 1,308,998 1,301,687
Common 351,581 350,168
------------ ------------
5,616,003 5,586,958
Less - Accumulated provision for
depreciation and amortization 2,422,296 2,373,694
------------ ------------
Total Utility Plant 3,193,707 3,213,264
------------ ------------
OTHER PROPERTY AND INVESTMENTS:
Other property, at cost, less accumulated
provision for depreciation 139,765 136,006
Investments, at equity (Note 2) 50,668 47,565
Investments, at cost 24,296 22,899
Other investments 17,970 17,315
------------ ------------
Total Other Property and Investments 232,699 223,785
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 41,252 28,496
Accounts receivable, less reserve of
$6,006 and $7,264,respectively (Note 2) 165,359 120,404
Fuel adjustment clause (Note 2) 8,467 10,301
Gas cost adjustment clause (Note 2) 49,097 1,423
Materials and supplies, at average cost 64,378 65,044
Electric production fuel, at average cost 19,946 14,258
Natural gas in storage, at last-in,
first-out cost (Note 2) 11,906 60,884
Prepayments and other 23,768 15,771
------------ ------------
Total Current Assets 384,173 316,581
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 211,887 212,491
Deferred charges and other noncurrent
assets 57,796 33,399
------------ ------------
Total Other Assets 269,683 245,890
------------ ------------
$ 4,080,262 $ 3,999,520
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
March 31, December 31,
CAPITALIZATION AND LIABILITIES 1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
CAPITALIZATION:
Common shareholders' equity
(See accompanying statement) $ 1,126,350 $ 1,122,215
Cumulative preferred stocks (Note 10) -
Northern Indiana Public Service Company:
Series without mandatory redemption
provisions (Note 11) 81,325 81,325
Series with mandatory redemption
provisions (Note 12) 63,651 63,651
NIPSCO Industries Inc.:
Series with mandatory redemption
provisions (Note 12) 0 35,000
Long-term debt excluding amounts due
within one year (Note 16) 1,252,179 1,175,728
------------ ------------
Total Capitalization 2,523,505 2,477,919
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 17) 97,069 96,855
Short-term borrowings (Note 18) 191,310 260,671
Accounts payable 180,562 151,691
Sinking funds due within one year
(Notes 12 and 16) 2,621 2,621
Dividends declared on common and
preferred stocks 27,113 28,179
Customer deposits 11,854 11,361
Taxes accrued 90,720 28,952
Interest accrued 18,881 8,439
Accrued employment costs 37,902 46,695
Other accruals 46,060 33,753
------------ ------------
Total Current Liabilities 704,092 669,217
------------ ------------
OTHER:
Deferred income taxes (Note 7) 597,282 596,940
Deferred investment tax credits, being
amortized over life of related property
(Note 7) 113,996 115,666
Deferred credits 40,621 45,126
Accrued liability for postretirement
benefits (Note 9) 81,724 75,012
Regulatory income tax liability (Note 7) 7,165 9,845
Other noncurrent liabilities 11,877 9,795
------------ ------------
Total Other 852,665 852,384
------------ ------------
COMMITMENTS AND CONTINGENCIES:
(Notes 3, 4, 5, 6, 19, and 20)
$ 4,080,262 $ 3,999,520
============ ============
<FN>
The accompanying notes to consolidated financial statements are an
integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------------- ----------------------
1996 1995 1996 1995
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 5, and 22)
Gas $ 327,604 $ 284,910 $ 734,096 $ 648,239
Electric 248,424 237,588 1,041,759 985,109
---------- ---------- ---------- ----------
576,028 522,498 1,775,855 1,633,348
---------- ---------- ---------- ----------
Cost of Energy: (Note 2)
Gas costs 199,258 172,299 426,072 377,431
Fuel for electric
generation 57,202 53,785 245,754 237,775
Power purchased 11,961 10,964 44,678 34,365
---------- ---------- ---------- ----------
268,421 237,048 716,504 649,571
---------- ---------- ---------- ----------
Operating Margin 307,607 285,450 1,059,351 983,777
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 79,148 70,801 299,298 282,117
Maintenance (Note 2) 17,796 21,453 74,636 81,310
Depreciation and
amortization (Note 2) 53,456 49,117 205,476 195,755
Taxes (except income) 20,745 20,432 73,765 71,825
---------- ---------- ---------- ----------
171,145 161,803 653,175 631,007
---------- ---------- ---------- ----------
Operating Income Before
Utility Income Taxes 136,462 123,647 406,176 352,770
---------- ---------- ---------- ----------
Utility Income Taxes
(Note 7) 41,467 37,574 112,342 97,504
---------- ---------- ---------- ----------
Operating Income 94,995 86,073 293,834 255,266
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) 461 (831) (2,949) 2,451
---------- ---------- ---------- ----------
Income Before Interest
and Other Charges 95,456 85,242 290,885 257,717
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 21,469 19,661 84,463 76,804
Other interest 3,374 3,820 12,335 13,504
Allowance for borrowed
funds used during
construction and carrying
charges (Note 2) (231) (1,940) (1,969) (5,587)
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,159 1,045 4,516 4,050
Dividend requirements on
preferred stocks of
subsidiary 2,199 2,325 8,920 9,669
---------- ---------- ---------- ----------
27,970 24,911 108,265 98,440
---------- ---------- ---------- ----------
Net Income 67,486 60,331 182,620 159,277
Dividend requirements on
preferred shares 119 766 2,416 3,063
---------- ---------- ---------- ----------
Balance available for
common shareholders $ 67,367 $ 59,565 $ 180,204 $ 156,214
========== ========== ========== ==========
Average common shares
outstanding 62,064,667 64,103,491 62,776,503 64,445,752
========== ========== ========== ==========
Earnings per average
common share $ 1.08 $ 0.92 $ 2.87 $ 2.42
========== ========== ========== ==========
Dividends declared per
common share $ 0.42 $ 0.39 $ 1.62 $ 1.50
========== ========== ========== ==========
<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, January 1,1995 $ 1,107,848 $ 870,930 $ 29,657 $ 446,928
Net income 60,331 60,331
DIVIDENDS:
Preferred shares (766) (766)
Common shares (25,146) (25,146)
Treasury shares acquired (10,448)
ISSUED:
Employee stock purchase
plan 305 142
Long-term incentive plan 1,262 1,631
Amortization of unearned
compensation 573
Other 827 376 (171)
----------- ----------- ----------- -----------
Balance, March 31, 1995 $ 1,134,786 $ 870,930 $ 31,806 $ 481,176
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Three Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ (237,193) $ (1,504) $ (970) 73,892,109
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (10,448)
ISSUED:
Employee stock purchase
plan 163
Long-term incentive plan 7,256 (7,625)
Amortization of unearned
compensation 573
Other 622
----------- ----------- ----------- -----------
Balance, March 31, 1995 $ (240,222) $ (882) $ (8,022) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Three Months Ended Treasury
(continued) Shares
======================== ===========
<S> <C>
Balance, January 1, 1995 (9,986,720)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (333,999)
ISSUED:
Employee stock purchase
plan 10,231
Long-term incentive plan 290,250
Amortization of unearned
compensation
Other
-----------
Balance, March 31, 1995 (10,020,238)
===========
<CAPTION>
Dollars in Thousands
--------------------------------------------------
Additional
Three Months Ended Common Paid-in Retained
(continued) Total Shares Capital Earnings
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ 1,122,215 $ 870,930 $ 32,210 $ 518,837
Net income 67,486 67,486
DIVIDENDS:
Preferred shares (119) (119)
Common shares (25,794) (25,794)
Treasury shares acquired (38,488)
ISSUED:
Employee stock purchase
plan 303 177
Long-term incentive plan 335 154
Amortization of unearned
compensation 614
Unrealized gain (loss) on
available for sale
securities (53)
Other (149) (9)
----------- ----------- ----------- -----------
Balance, March 31, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Three Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ (293,223) $ (1,930) $ (4,609) 73,892,109
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (38,488)
ISSUED:
Employee stock purchase
plan 126
Long-term incentive plan 643 (462)
Amortization of unearned
compensation 614
Unrealized gain (loss) on
available for sale
securities (53)
Other (140)
----------- ----------- ----------- -----------
Balance, March 31, 1996 $ (330,942) $ (2,070) $ (4,510) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Three Months Ended Treasury
(concluded) Shares
======================== ===========
<S> <C>
Balance, January 1, 1996 (11,512,513)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (1,023,677)
ISSUED:
Employee stock purchase
plan 7,927
Long-term incentive plan 24,900
Amortization of unearned
compensation
Unrealized gain (loss) on
available for sale
securities
Other
-----------
Balance, March 31, 1996 (12,503,363)
===========
<CAPTION>
Dollars in Thousands
--------------------------------------------------
Additional
Common Paid-in Retained
Twelve Months Ended Total Shares Capital Earnings
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, April 1, 1994 $ 1,122,463 $ 870,930 $ 27,750 $ 421,601
Net income 159,277 159,277
DIVIDENDS:
Preferred shares (3,063) (3,063)
Common shares (96,410) (96,410)
Treasury shares acquired (54,892)
ISSUED:
Employee stock purchase
plan 598 277
Long-term incentive plan 2,291 1,701
Amortization of unearned
compensation 1,177
Other 3,345 2,078 (229)
----------- ----------- ----------- -----------
Balance, March 31, 1995 $ 1,134,786 $ 870,930 $ 31,806 $ 481,176
----------- ----------- ----------- -----------
Net income 182,620 182,620
DIVIDENDS:
Preferred shares (2,416) (2,416)
Common shares (100,880) (100,880)
Treasury shares acquired (97,223)
ISSUED:
Employee stock purchase
plan 602 336
Long-term incentive plan 5,858 179
Amortization of unearned
compensation 2,454
Unrealized gain (loss) on
available for sale
securities 1,616
Other (1,067) 220 (99)
----------- ----------- ----------- -----------
Balance, March 31, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
------------------------------------- -----------
Currency
Twelve Months Ended Treasury Translation Common
(continued) Shares Adjustment Other Shares
======================== =========== =========== =========== ===========
<S> <C> <C> <C> <C>
Balance, April 1, 1994 $ (193,926) $ (2,378) $ (1,514) 73,892,109
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (54,892)
ISSUED:
Employee stock purchase
plan 321
Long-term incentive plan 8,275 (7,685)
Amortization of unearned
compensation 1,177
Other 1,496
----------- ----------- ----------- -----------
Balance, March 31, 1995 $ (240,222) $ (882) $ (8,022) 73,892,109
----------- ----------- ----------- -----------
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (97,223)
ISSUED:
Employee stock purchase
plan 266
Long-term incentive plan 6,237 (558)
Amortization of unearned
compensation 2,454
Unrealized gain (loss) on
available for sale
securities 1,616
Other (1,188)
----------- ----------- ----------- -----------
Balance,
March 31, 1996 $ (330,942) $ (2,070) $ (4,510) 73,892,109
=========== =========== =========== ===========
<CAPTION>
Shares
-----------
Twelve Months Ended Treasury
(continued) Shares
======================== ===========
<S> <C>
Balance, April 1, 1994 (8,506,040)
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (1,870,241)
ISSUED:
Employee stock purchase
plan
Long-term incentive plan 20,193
Amortization of unearned
compensation
Other 335,850
-----------
Balance, March 31, 1995 (10,020,238)
-----------
Net income
DIVIDENDS:
Preferred shares
Common shares
Treasury shares acquired (2,747,343)
ISSUED:
Employee stock purchase
plan 16,718
Long-term incentive plan 247,500
Amortization of unearned
compensation
Unrealized gain (loss) on
available for sale
securities
Other
-----------
Balance, March 31, 1996 (12,503,363)
===========
<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 Twelve Months
Ended March 31, Ended March 31,
--------------------- ---------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 67,486 $ 60,331 $ 182,620 $ 159,277
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 53,456 49,117 205,476 195,755
Deferred federal and state
operating income taxes, net 14,991 (17,057) 29,367 (13,477)
Deferred investment tax
credits, net (1,670) (1,868) (7,317) (7,405)
Advanced contract payment (18,525) 0 (18,525) 0
Change in certain assets and
liabilities -
Accounts receivable, net (44,955) (30,954) (48,106) 34,622
Electric production fuel (5,688) (6,588) 4,989 (1,482)
Materials and supplies 666 (3,350) 4,402 (2,265)
Natural gas in storage 48,978 55,766 10,122 (3,899)
Accounts payable 28,871 (12,751) 34,601 (56,365)
Taxes accrued 44,456 70,915 (35,661) 7,205
Fuel adjustment clause 1,834 1,247 (8,100) 8,910
Gas cost adjustment clause (47,674) 47,318 (70,443) 18,514
Accrued employment costs (8,793) (4,949) (960) 1,846
Other accruals 12,307 22,594 12,436 4,366
Other, net 9,081 13,047 8,594 16,632
--------- --------- --------- ---------
Net cash provided by
operating activities 154,821 242,818 303,495 362,234
--------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED
IN) INVESTING ACTIVITIES:
Utility construction
expenditures (35,029) (49,939) (174,844) (197,703)
Construction expenditures
related to Crossroads
Pipeline Company (85) (214) (3,083) (1,106)
Return of capital from equity
investments 0 0 0 8,000
Other, net (13,917) (8,036) (57,630) (27,798)
--------- --------- --------- ---------
Net cash used in investing
activities (49,031) (58,189) (235,557) (218,607)
--------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED
IN) FINANCING ACTIVITIES:
Issuance of long-term debt 76,297 4,351 251,501 206,531
Issuance of short-term debt 339,688 270,861 1,359,800 1,204,237
Net change in commercial paper (24,100) (93,000) (15,700) 81,100
Retirement of long-term debt (1,117) (864) (122,358) (214,394)
Retirement of short-term debt (384,735) (332,400) (1,304,585) (1,275,389)
Retirement of preferred shares (35,000) (3,570) (38,525) (13,765)
Issuance of common shares 608 1,396 6,601 2,771
Acquisition of treasury shares (38,488) (10,448) (97,223) (54,892)
Cash dividends paid on common
shares (26,209) (25,146) (100,106) (95,048)
Cash dividends paid on
preferred shares (119) (766) (2,416) (3,063)
Other, net 141 673 168 592
--------- --------- --------- ---------
Net cash used in financing
activities (93,034) (188,913) (62,843) (161,320)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 12,756 (4,284) 5,095 (17,693)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 28,496 40,441 36,157 53,850
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 41,252 $ 36,157 $ 41,252 $ 36,157
========= ========= ========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) is an
Indiana corporation serving as the holding company for a number of
subsidiaries, including four regulated companies: Northern Indiana Public
Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas);
Northern Indiana Fuel and Light Company, Inc. (NIFL); and Crossroads
Pipeline Company (Crossroads). Northern Indiana is a public utility operating
company supplying natural gas and electric energy to the public. Kokomo Gas
and NIFL are public utility operating companies supplying natural gas to the
public, and Crossroads is an interstate natural gas transmission company.
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development); NIPSCO Energy Services, Inc. (Services); Primary
Energy, Inc. (Primary); and NIPSCO Capital Markets, Inc. (Capital Markets).
Development makes various investments, including real estate and venture
capital investments. Services coordinates the energy-related diversification
ventures of Industries. Primary arranges energy-related projects with large
industrial customers. Capital Markets handles financing for Industries and
its subsidiaries other than Northern Indiana.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements include
the accounts of Industries; its regulated 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 the non-utility subsidiaries, as well
as the non-operating results of the utilities, are included under the caption
"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 inter-company items have been eliminated in consolidation.
Certain reclassifications were made to conform the prior years' financial
statements to the current presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
OPERATING REVENUES. Revenues are recorded based on estimated service
rendered, but are billed to customers monthly on a cycle basis.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation
on a straight-line method over the remaining service lives of the electric,
gas, and common properties. The provisions, as a percentage of the cost of
depreciable utility plant, were approximately 4.2% and 4.1% for the three-
month and twelve-month periods ended March 31, 1996, respectively; and 4.0%
and 4.1% for the three-month and twelve-month periods ended March 31, 1995.
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 3.1% for the
three-month and twelve-month periods ended March 31, 1996; and 3.2% for
the three-month and twelve-month periods ended March 31, 1995.
NIFL provides depreciation on the original cost of utility plant in
service using straight-line rates that averaged approximately 2.75% for the
three-month and twelve-month periods ended March 31, 1996 and March 31, 1995.
Crossroads provides depreciation on the original cost of utility plant
in service using straight-line rates that averaged approximately 2.5% for the
three-month and twelve-month periods ended March 31, 1996 and March 31, 1995.
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.
AMORTIZATION OF SOFTWARE COSTS. Northern Indiana amortizes capitalized
software costs using the straight-line method based on estimated economic
lives.
PLANT ACQUISITION ADJUSTMENTS. Industries' costs, in excess of the
underlying book values of the acquired NIFL and Kokomo Gas subsidiaries, have
been recorded as plant acquisition adjustments which are being amortized
over forty-year periods from their respective dates of acquisition.
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 March 31, 1996, Northern Indiana had sold
$100 million 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 Twelve Months
Ended March 31, Ended March 31,
------------------ ------------------
1996 1995 1996 1995
======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income taxes $ 0 $ 0 $117,940 $119,050
Interest, net of
amounts capitalized $ 10,404 $ 15,909 $ 83,816 $ 87,291
</TABLE>
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision
for adjustment in charges for electric energy to reflect increases and
decreases in the cost of fuel and the fuel cost of purchased power through
operation of a fuel adjustment clause. As prescribed by order of the Indiana
Utility Regulatory Commission (Commission) applicable to metered retail rates,
the adjustment factor has been calculated based on the estimated cost of fuel
and the fuel cost of purchased power in a future three-month period. If two
statutory requirements relating to expense and return levels are satisfied,
any under-recovery or over-recovery caused by variances between estimated
and actual cost in a given three-month period will be included in a future
filing. Northern Indiana records any under-recovery or over-recovery as
a current asset or current liability until such time as it is billed
or refunded to its customers. The fuel adjustment factor is subject to a
quarterly hearing by the Commission and remains in effect for a three-month
period.
GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage, and
storage transportation charges. The Utilities record any under-recovery or
over-recovery 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-recovery or over-
recovery caused by variances between estimated and actual cost in a given
three-month or six-month period will be included in a future filing. See
Note 5, FERC Order No. 636 for a discussion of gas transition cost charges.
NATURAL GAS IN STORAGE. Northern Indiana's natural gas in storage is
valued using the last-in, first-out (LIFO) inventory methodology. Based on the
average cost of gas purchased in March 1996 and December 1995, the estimated
replacement cost of gas in storage (current and non-current) at March 31,
1996 and December 31, 1995 exceeded the stated LIFO cost by approximately
$28 million and $30 million, respectively. Certain other subsidiaries of
Industries have natural gas in storage valued at average cost.
HEDGING ACTIVITIES. Industries' non-regulated gas subsidiaries use
commodity futures contracts and swaps 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 offset to purchased gas
cost concurrent with the related natural gas volumes.
As of March 31, 1996, Industries had open futures contracts representing
hedges of natural gas purchases of 0.4 million British thermal units (MMBtu)
and natural gas sales of 1.2 MMBtu. The deferred loss on these open contracts
totalled $0.2 million. This loss will be offset by the margin on the related
natural gas transactions.
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 Utilities
monitor changes in market and regulatory conditions and the resulting impact
of such changes in order to continue to apply the provisions of SFAS No. 71
to some or all of its operations. 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. If a
portion of the Utilities' operations becomes no longer subject to the
provisions of SFAS No. 71, a write-off of certain regulatory assets below
might be required. Regulatory assets were comprised of the following items
and were reflected in the Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 16) $ 52,898 $ 53,776
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges
and deferred depreciation (See below) 73,926 74,981
Bailly scrubber carrying charges and
deferred depreciation (See below) 11,342 11,517
Deferral of SFAS No. 106 expense not
recovered (Note 9) 70,317 64,834
FERC Order No. 636
transition costs (Note 5) 27,601 25,038
------------ ------------
236,084 230,146
Less: Current portion of regulatory assets 24,197 17,655
------------ ------------
$ 211,887 $ 212,491
============ ============
</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. The Utilities adopted this
standard on January 1, 1996, and adoption did not impact their financial
position or results of operations.
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges
and deferred depreciation in accordance with orders of the Commission until
the cost of each unit was allowed in rates. Such carrying charges and
deferred depreciation are being amortized over the remaining life of each
unit.
Northern Indiana has capitalized carrying charges and deferred
depreciation and certain operating expenses relating to its scrubber service
agreement for its Bailly Generating Station in accordance with an order of the
Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying
charges is being amortized over the remaining life of the scrubber service
agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds
used during construction (AFUDC) is charged to construction work in progress
during the period of construction and represents the net cost of borrowed
funds used for construction purposes and a reasonable rate upon other (equity)
funds. Under established regulatory rate practices, after the construction
project is placed in service, Northern Indiana is permitted to include in the
rates charged for utility services (a) a fair return on and (b) depreciation
of such AFUDC included in plant in service.
At January 1, 1994, a pre-tax rate of 5.0% for all construction was
being used; effective January 1, 1995 the rate increased to 6.0%; and
effective January 1, 1996 the rate remained at 6.0%.
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, include $23.3 million and $21.9 million relating to
affordable housing projects at March 31, 1996 and December 31, 1995,
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. The Notes were redeemed in 1985
and Finance was subsequently liquidated. On October 25, 1991, Northern
Indiana challenged the assessment in the United States Tax Court (Tax Court)
and the matter was tried in 1994. On November 6, 1995, the Tax Court ruled
in favor of Northern Indiana, finding that the interest paid on the Notes was
not subject to United States tax withholding. On March 13, 1996, the IRS
appealed the Tax Court's decision to the U. S. Court of Appeals for the
Seventh Circuit, and on March 25, 1996 Northern Indiana filed its cross
appeal. Northern Indiana's management and general counsel believe the ruling
of the Tax Court will prevail.
(4) ELM ENERGY AND RECYCLING (UK) LTD.: Development, a wholly-owned
subsidiary of Industries, 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 and misrepresentations by Elm. Elm has
counterclaimed and is aggressively pursuing its remedies.
Elm and Development are also seeking 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. In response to the
claims brought by Elm and Development in the United States, Black & Veatch
has brought a counterclaim against Elm and Development alleging breach of
contract, negligence, misrepresentation and promissory estoppel. Development
believes that the claims made against it and Elm are meritless and that its
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.
Development believes that it and Elm have sustainable and adequate
remedies under the construction contract such that rejection will not have
a material adverse effect on Industries. Elm is continuing to operate the
plant. The banks which provided the financing for the plant are continuing to
support its operations and to provide working capital under an uncommitted
loan facility which is repayable on demand or, in any event, May 31, 1997,
(unless extended). However, because of the ongoing defaults under the Project
financing and the demand nature of the uncommitted working loan facility, the
banks have the right to ask that the operation of the plant be terminated
and the assets sold. In that event, some or all of Industries' investments in
Elm may be at risk. Industries' investments in Elm were approximately $16
million at March 31, 1996.
(5) FERC ORDER NO. 636. Pursuant to FERC Order No. 636, interstate
pipeline sales services have been "unbundled" such that gas supplies are being
sold separately from interstate transportation services. The Utilities have
contracted for a mix of transportation and storage services from their
pipeline suppliers which allows them to meet the needs of their customers.
Pipelines are recovering, 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.
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 $95 million of such costs have been recorded, a portion of
which has been paid to the pipeline suppliers, subject to refund. The
Commission has approved the recovery of these FERC-allowed transition costs on
a volumetric basis from sales and transportation customers. Regulatory assets,
in amounts corresponding to the costs recorded but not yet collected, have
been recorded to reflect the ultimate recovery of these costs.
(6) ENVIRONMENTAL MATTERS: The Utilities have an ongoing program to remain
aware of laws and regulations involved with hazardous waste and other
environmental matters. 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. The Utilities have recorded
a reserve of $5.3 million to cover probable corrective actions as of
March 31, 1996; however, environmental regulations and remediation techniques
are subject to future change. The ultimate cost could be significant
depending on the extent of corrective actions required. Based upon
investigations and management's understanding of current laws and regulations,
the Utilities believe that any corrective actions required, after
consideration of insurance coverages and contributions from other potentially
responsible parties, will not have a significant impact on the financial
position or results of operations of Industries.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on emissions
of nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements.
Northern Indiana cannot predict the costs of complying with CAAA requirements,
but Northern Indiana believes that any such mandated costs would be
recoverable through the rate-making process.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under
CERCLA, will be shared among them. At some sites Northern Indiana and/or
the other named PRPs are presently working with the EPA to clean up the
sites and avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at
thirteen sites. Follow-up investigations have been conducted at five 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 is 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 that 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 state court action is stayed
pending resolution of the Northern Indiana suit in Federal Court.
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: Industries uses the liability method of accounting for
income taxes under which deferred income taxes are recognized, at currently
enacted income tax rates, to reflect the tax effect of temporary differences
between the financial statement and tax bases of assets and liabilities.
To the extent certain deferred income taxes are recoverable or payable
through future rates, regulatory assets and liabilities have been 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 March 31, 1996 and December 31, 1995 reflects a
net regulatory income tax liability of $7.2 million and $9.8 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 March 31,
1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 710,199 $ 706,715
AFUDC-equity 39,518 40,083
Adjustment clauses 21,764 4,613
Take-or-pay gas costs 1,245 1,550
Other regulatory assets 29,539 28,930
Reacquisition premium on debt 20,065 20,397
Deferred tax assets -
Deferred investment tax credits (43,221) (43,854)
Removal costs (121,062) (118,064)
FERC Order No. 636 transition costs (4,136) (4,400)
Other postretirement/postemployment
benefits (35,076) (32,512)
Regulatory income tax liability (2,718) (3,734)
Other, net (7,580) (8,841)
------------ ------------
608,537 590,883
Less: Deferred income taxes related to
current assets and liabilities 11,255 ( 6,057)
------------ ------------
Deferred income taxes - noncurrent $ 597,282 $ 596,940
============ ============
</TABLE>
Federal and state income taxes as set forth in the Consolidated
Statement of Income are comprised of the following:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 24,374 $ 49,378 $ 78,220 $ 102,902
State 3,772 7,121 12,072 15,484
--------- --------- --------- ---------
28,146 56,499 90,292 118,386
--------- --------- --------- ---------
Deferred income taxes, net -
Federal 13,760 (15,790) 26,906 (12,501)
State 1,231 (1,267) 2,461 (976)
--------- --------- --------- ---------
14,991 (17,057) 29,367 (13,477)
--------- --------- --------- ---------
Deferred investment tax credits,
net (1,670) (1,868) (7,317) (7,405)
--------- --------- --------- ---------
Total utility operating income
taxes 41,467 37,574 112,342 97,504
Income tax applicable to non-
operating activities and income
of non-utility subsidiaries (1,625) (2,056) (8,819) (16,712)
--------- --------- --------- ---------
Total income taxes $ 39,842 $ 35,518 $ 103,523 $ 80,792
========= ========= ========= =========
</TABLE>
A reconciliation of total tax expense to an amount computed by applying
the statutory federal income tax rate to pre-tax income is as follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------------------- --------------------
1996 1995 1996 1995
========= ========= ========= =========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 67,486 $ 60,331 $ 182,620 $ 159,277
Add-Income taxes 39,842 35,518 103,523 80,792
Dividend requirements on
preferred stocks of subsidiary 2,199 2,325 8,920 9,669
--------- --------- --------- ---------
Income before preferred dividend
requirements of subsidiary and
income taxes $ 109,527 $ 98,174 $ 295,063 $ 249,738
========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the statutory
rate $ 38,334 $ 34,361 $ 103,272 $ 87,409
Reconciling items multiplied by
the statutory rate:
Book depreciation over related
tax depreciation 983 1,004 3,997 4,081
Amortization of deferred
investment tax credits (1,670) (1,868) (7,317) (7,406)
State income taxes, net of
federal income tax benefit 3,683 3,185 9,977 8,643
Fair market value of property
donated in excess of book value 0 0 0 (7,753)
Reversal of deferred taxes
provided at rates in excess
of the current federal income
tax rate (1,674) (1,360) (5,979) (5,869)
Other, net 186 196 (427) 1,687
--------- --------- --------- ---------
Total income taxes $ 39,842 $ 35,518 $ 103,523 $ 80,792
========= ========= ========= =========
</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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
========= =========
(Dollars in thousands)
<S> <C> <C>
Vested benefit obligation $ 549,234 $ 449,043
Nonvested benefit 104,814 97,138
--------- ---------
Accumulated benefit obligation $ 654,048 $ 546,181
========= =========
Projected benefit obligation for service
rendered to date $ 759,681 $ 613,094
Plan assets at fair market value 706,320 571,624
--------- ---------
Projected benefit obligation in excess of plan
assets 53,361 41,470
Unrecognized transition obligation at January 1,
being recognized over seventeen years (43,484) (48,906)
Unrecognized prior service cost (27,242) (29,847)
Unrecognized gains 4,217 47,788
--------- ---------
Accrued (prepaid) pension costs $ (13,148) $ 10,505
========= =========
</TABLE>
The accumulated benefit obligation is the present value of future
pension benefit payments and is based on a plan benefit formula without
considering expected future salary increases. The projected benefit
obligation considers estimated future salary increases. Discount rates of
7.25% and 8.75% 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, 1996 and 1995, respectively. The increase in the
accumulated benefit obligation as of January 1, 1996 is mainly caused by the
decrease in the discount rate from 8.75% to 7.25%.
The following items are the components of provisions for pensions for
the three-months and twelve-month periods ended March 31, 1996 and March 31,
1995:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
------------------ ------------------
1996 1995 1996 1995
======== ======== ======== ========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service costs $ 6,267 $ 3,299 $ 15,199 $ 13,771
Interest costs 19,051 13,338 58,224 49,346
Estimated return on
plan assets (22,604) (12,864) (144,983) 14,144
Amortization of transition
obligation 1,942 1,355 6,009 5,430
Other net amortization
and deferral 914 659 86,420 (61,384)
-------- -------- -------- --------
$ 5,570 $ 5,787 $ 20,869 $ 21,307
======== ======== ======== ========
</TABLE>
Assumptions used in the valuation and determination of 1996 and 1995
pension expenses were as follows:
<TABLE>
<CAPTION>
1996 1995
===== =====
<S> <C> <C>
Discount rate 7.25% 8.75%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00%
</TABLE>
The plans' assets are invested primarily in common stocks, bonds, and
notes.
(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. The expected cost of such
benefits is accrued during the employees' years of service.
Northern Indiana's current rate-making includes the cost of providing
these benefits based on the related insurance premiums. On December 30, 1992,
the Commission authorized the accrual method of accounting for postretirement
benefits for rate-making purposes consistent with SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and authorized
the deferral of the differences between the net periodic postretirement
benefits costs and the insurance premiums paid for such benefits as a
regulatory asset until such time as the 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 will
request 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 standard. This conclusion could change as
competitive factors influence pricing decisions.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1996 and 1995:
<TABLE>
<CAPTION>
January 1, January 1,
1996 1995
========== ==========
(Dollars in thousands)
<S> <C> <C>
Retirees $ 99,453 $ 96,676
Fully eligible active plan participants 23,084 20,008
Other active plan participants 136,322 105,991
---------- ----------
Accumulated postretirement benefit obligation 258,859 222,675
Unrecognized transition obligation at January 1,
being recognized over twenty years (197,088) (208,681)
Unrecognized actuarial gain 23,439 45,496
---------- ----------
Accrued liability for postretirement benefits $ 85,210 $ 59,490
========== ==========
</TABLE>
A discount rate of 7.25% and a pre-Medicare medical trend rate of 10%
declining to a long-term rate of 6% and a discount rate of 8.75%, and a
pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%
were used to determine the accumulated postretirement benefit obligation at
January 1, 1996 and 1995, respectively.
Net periodic postretirement benefits costs for the three-month and
twelve-month periods ended March 31, 1996 and March 31, 1995 include the
following components:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
---------------- ----------------
1996 1995 1996 1995
======= ======= ======= =======
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service costs $ 1,620 $ 1,526 $ 6,170 $ 7,753
Interest costs 5,080 4,745 19,366 19,728
Amortization of
transition
obligation
over twenty years 3,095 2,899 11,789 11,610
Amortization of
unrecognized
actuarial (gain) (583) (541) (2,221) (541)
------- ------- ------- -------
$ 9,212 $ 8,629 $35,104 $38,550
======= ======= ======= =======
</TABLE>
The net periodic postretirement benefit costs for 1996 were determined
assuming a 7.25% discount rate, a 5% rate of compensation increase, and a
pre-Medicare medical trend rate of 10% declining to a long-term rate of 6%.
The effect of a 1% increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation at January 1, 1996 by approximately $40.9 million, and increase the
aggregate of the service and interest cost components of plan costs by
approximately $1.3 million for the three-month period ended March 31, 1996.
Amounts disclosed above could be changed significantly in the future by
changes in health care costs, work force demographics, interest rates, or plan
changes.
(10) 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 the Industries' Series A
Junior Participating Preferred Shares were reserved for issuance pursuant to
the Share Purchase Rights Plan described in Note 14, 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 11 sets forth the preferred stocks which are redeemable solely at
the option of the issuer, and Note 12 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.
(11) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER,
OUTSTANDING AT MARCH 31, 1996 AND DECEMBER 31, 1995 (SEE NOTE 10):
<TABLE>
<CAPTION>
Redemption
Price at
March 31, December 31, March 31,
1996 1995 1996
============ ============ ============
(Dollars in thousands)
<S> <C> <C> <C>
NORTHERN INDIANA PUBLIC
SERVICE COMPANY:
Cumulative preferred stock -
$100 par value -
4-1/4% series - 209,188 and
209,190 shares outstanding,
respectively $ 20,919 $ 20,919 $101.20
4-1/2% series - 79,996 shares
outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares
outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares
outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares
outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares
outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at
March 31, 1996), Series A
(stated value $50 per share)
477,185 shares outstanding 23,859 23,859 $50.00
------------ ------------
$ 81,325 $ 81,325
============ ============
</TABLE>
During the period April 1, 1994 to March 31, 1996 there were no
additional issuances of the above preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at
any time upon thirty days' notice at the option of Northern Indiana at the
redemption prices shown.
(12) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1996 AND
DECEMBER 31, 1995 (SEE NOTE 10):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(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 shares outstanding
excluding sinking fund payments due within
one year $ 8,750 $ 8,750
7-3/4% series - 50,014 shares outstanding,
excluding sinking fund payments due within
one year 5,001 5,001
8.35% series - 69,000 shares outstanding,
excluding sinking fund payments due within
one year 6,900 6,900
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
------------ ------------
63,651 63,651
------------ ------------
NIPSCO INDUSTRIES, INC.:
Cumulative preferred shares - without par
value - 8.75% series (stated value - $100
per share), 0 and 350,000 shares outstanding,
respectively 0 35,000
------------ ------------
$ 63,651 $ 98,651
============ ============
</TABLE>
Pursuant to mandatory redemption provisions, 350,000 shares of 8.75%
Series Cumulative Preferred Shares were redeemed in whole by Industries on
January 12, 1996 for $100 per share plus accrued dividends.
The redemption prices at March 31, 1996, as well as sinking fund
provisions for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
<TABLE>
<CAPTION>
Sinking Fund Or
Mandatory Redemption
Series Redemption Price Per Share Provisions
====== ========================== ===========================
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Cumulative preferred stock - $100 par value -
<S> <C> <C>
8.85% $101.85, 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% $104.58, reduced periodically 2,777 shares on or
before December 1;
noncumulative option
to double amount each
year.
Cumulative preferred stock - no par value -
6.50% $100.00 on October 14, 2002 430,000 shares on October 14,
2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at March 31, 1996 for each of the twelve-month periods subsequent
to March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,*
==============================
<S> <C>
1998 $ 1,827,700
1999 $ 1,827,700
2000 $ 1,827,700
2001 $ 1,827,700
<FN>
* Table does not reflect redemptions made after March 31, 1996.
</TABLE>
(13) 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 March 31, 1996,
Northern Indiana had approximately $168.6 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.
(14) 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 (Board) 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 Series A Junior Participating Preferred Share, 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 into Industries or merged 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 has authorized the repurchase of
common shares which includes 3.5 million authorized on March 26, 1996. At
March 31, 1996, Industries had purchased approximately 17.0 million shares at
an average price of $24.97 per share. Approximately 4.0 million additional
common shares may be repurchased under the Board's authorization.
(15) LONG-TERM INCENTIVE PLAN: Industries has two Long-Term Incentive
Plans for key management employees that were approved by shareholders on
April 13, 1988 (1988 Plan) and April 13, 1994 (1994 Plan), each of which
provides for the issuance of up to 2.5 million of Industries' common shares to
key employees through 1998 and 2004, respectively. At March 31, 1996, there
were 140,461 shares and 2,332,550 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 March 31, 1996. Under both Plans, the
exercise price of each option equals the market price of Industries' stock on
the date of grant. Each option's maximum term is ten years and vests one year
from the date of grant.
The stock appreciation rights (SARs) may be exercised only in tandem
with stock options on a one-for-one basis and are payable in cash, Industries
stock, or a combination thereof. Restricted stock awards are restricted as to
transfer and are subject to forfeiture for specific periods from the date of
grant. Restrictions on the shares awarded during 1991 lapse five years from
date of grant and vest subject to specific share price appreciation
conditions. Restrictions on shares awarded in 1995 lapse five years from date
of grant and vesting is variable from 0% to 200% of the number awarded and are
subject to specific earnings per share and stock appreciation goals.
Restrictions on shares awarded in 1996 lapse two years from date of grant and
are variable from 0% to 100% of the number awarded and are subject to specific
performance goals. If a participant's employment is terminated other than by
reason of death, disability or retirement, restricted shares are forfeited.
There were 342,500 and 330,500 restricted shares outstanding at March 31,
1996 and December 31, 1995, respectively.
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
April 10, 1996, 30,750 shares were issued under the Plan.
Industries accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized for non-
qualified stock options. The compensation cost that has been charged against
income for restricted stock awards was $0.6 and $2.3 million for the three-
month and twelve-month periods ending March 31, 1996. Had compensation cost
for stock options been determined consistent with SFAS No. 123 "Accounting for
Stock - Based Compensation," Industries' net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
March 31, March 31,
1996 1996
============= =============
<S> <C> <C>
Net Income:
(Dollars in thousands)
As reported $ 67,486 $ 182,620
Pro forma $ 67,319 $ 182,204
Earnings Per Share:
As reported $ 1.08 $ 2.87
Pro forma $ 1.08 $ 2.86
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation costs may not be representative of that to be expected in future
years.
The fair value of each option granted used to determine pro forma
net income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in the three-month and twelve-month periods ended March 31, 1996: risk-free
interest rate of 6.24%, expected dividend yield of $1.56 per share, expected
option term of five years, and expected volatility of 13%.
Changes in outstanding shares under option and SARs for the three-
month and twelve-month periods ended March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Three Months Ended Option Option
March 31, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
<S> <C> <C> <C> <C>
Balance beginning of period 1,107,750 $28.55 1,097,550 $26.59
Granted 0 $ 0 5,000 $30.13
Exercised (12,900) $28.96 (40,250) $19.74
Canceled (1,000) $32.44 (2,600) $30.46
--------- ---------
Balance end of period 1,093,850 $28.54 1,059,700 $26.86
========= =========
Shares exercisable 822,400 $27.26 765,900 $26.13
========= =========
Weighted average fair value
of options granted N/A $4.74
========= =========
<CAPTION>
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Twelve Months Ended Option Option
March 31, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
<S> <C> <C> <C> <C>
Balance beginning of period 1,059,700 $26.86 864,250 $25.78
Granted 277,450 $32.44 299,650 $28.78
Exercised (232,500) $25.76 (83,850) $21.30
Canceled (10,800) $23.71 (20,350) $31.91
--------- ---------
Balance end of period 1,093,850 $28.54 1,059,700 $26.86
========= =========
Shares exercisable 822,400 $27.26 765,900 $26.13
========= =========
Weighted average fair value
of options granted $3.87 *
========= =========
<CAPTION>
NONQUALIFIED STOCK OPTIONS WITH SARs
-------------------------------------------
Three Months Ended Option Option
March 31, 1996 Price 1995 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
-------------------------------------------
Twelve Months Ended Option Option
March 31, 1996 Price 1995 Price
=========================== ========= ======== ========= ========
<S> <C> <C> <C> <C>
Balance beginning of period 9,900 $10.94 9,900 $10.94
Granted 0 0
Exercised (4,300) $10.04 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
========= =========
<FN>
* The weighted average option price of nonqualified stock options granted
in January 1995 is $4.74.
</TABLE>
The following table summarizes information about non-qualified stock
options at March 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Option Price March 31, 1996 Contractual Life Option Price
================ ============== ================== =================
<S> <C> <C> <C>
$10.94 to $17.73 102,700 3.87 years $16.77
$22.94 to $28.75 473,900 7.06 years $26.49
$30.31 to $33.19 517,250 8.46 years $32.77
- ---------------- --------- ---------- ------
$10.94 to $33.19 1,093,850 7.42 years $28.54
=========
<CAPTION>
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------
Number
Range of Exercisable at Weighted Average
Option Price March 31, 1996 Option Price
================ =============== =================
<S> <C> <C>
$10.94 to $17.73 102,700 $16.77
$22.94 to $28.75 473,900 $26.49
$30.31 to $33.19 245,800 $33.13
- ---------------- ------- ------
$10.94 to $33.19 822,400 $27.26
=======
</TABLE>
(16) LONG-TERM DEBT: At March 31, 1996 and December 31, 1995, Industries'
long-term debt, excluding amounts due within one year, issued and not retired
or canceled was as follows:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
---------------------------
March 31, December 31,
1996 1995
============ ============
(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 40,500
Series NN, 7.10%, due July 1, 2017 55,000 55,000
------------ ------------
Total 135,756 135,756
------------ ------------
Pollution control notes and bonds -
Series A Note -
City of Michigan City, 5.70% due
October 1, 2003 20,000 20,000
Series 1988 Bonds - Jasper County -
Series A, B, and C - 3.36% weighted
average at March 31, 1996, due
November 1, 2016 130,000 130,000
Series 1988 Bonds - Jasper County -
Series D - 3.36% weighted average at
March 31, 1996, due November 1, 2007 24,000 24,000
Series 1994 Bonds - Jasper County -
Series A - 3.85% at March 31, 1996,
due August 1, 2010 10,000 10,000
Series 1994 Bonds - Jasper County -
Series B - 3.85% at March 31, 1996,
due June 1, 2013 18,000 18,000
Series 1994 Bonds - Jasper County -
Series C - 3.85% at March 31, 1996,
due April 1, 2019 41,000 41,000
------------ ------------
Total 243,000 243,000
------------ ------------
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 684,025 684,025
------------ ------------
Unamortized premium and discount
on long-term debt, net (3,900) (4,040)
------------ ------------
Total long-term debt of
Northern Indiana Public
Service Company 1,058,881 1,058,741
------------ ------------
NIPSCO CAPITAL MARKETS, INC.
Subordinated Debentures -
Series A, 7-3/4%, due March 31, 2026 75,000 0
Zero Coupon Notes - 7.57%, $72,500 at
maturity, due December 1, 1997 64,060 62,875
------------ ------------
Total long-term debt of
NIPSCO Capital Markets, Inc. 139,060 62,875
------------ ------------
NIPSCO DEVELOPMENT COMPANY, INC.
LAKE ERIE LAND COMPANY -
Notes payable -
Interest rates between 8.00% and 8.25%
with a weighted average interest rate
of 8.19% and various maturities between
May 23, 1997 and June 30, 1998 389 389
ELM ENERGY AND RECYCLING (UK), LTD.
Term Loan Facility-weighted average interest
rate of 7.84% at March 31, 1996, due
December 31, 2004 34,750 34,516
NDC DOUGLAS PROPERTIES, INC.
Notes Payable -
Interest rates of 6.72% and 8.15% with
a weighted average interest rate of 7.76%
and maturities through March 1, 2006 19,099 19,207
------------ ------------
Total long-term debt of
NIPSCO Development Company,Inc. 54,238 54,112
------------ ------------
Total long-term debt, excluding
amounts due in one year $ 1,252,179 $ 1,175,728
============ ============
</TABLE>
The sinking fund requirements of long-term debt outstanding at
March 31, 1996 (including the maturity of Northern Indiana's first
mortgage bonds: Series O, 6-3/8%, due September 1, 1997; 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 May 23, 1997 to June 30, 1998;
and NDC Douglas Properties, Inc. notes payable due December 22, 1999), for
each of the twelve-month periods subsequent to March 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
=============================
<S> <C>
1998 $ 149,311,884
1999 $ 60,466,375
2000 $ 16,977,091
2001 $ 160,328,751
</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 one year to
thirty 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. On 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 January 12, 1996, Industries redeemed all 350,000 shares of its
8.75% Preferred Shares, pursuant to mandatory redemption provisions, for $100
per share plus accrued dividends. The redemption was accomplished through the
use of short-term debt issued by Capital Markets. Capital Markets refinanced
the short-term debt on February 13, 1996 through the issuance and sale of
$75 million of its 7-3/4% Junior Subordinated Deferrable Interest Debentures,
Series A, due March 31, 2026 (Debentures) pursuant to an underwritten public
offering. Proceeds from sale of the Debentures were used to pay short-term
debt incurred to redeem Industries' $35 million of 8.75% Preferred Shares,
and to pay other short-term debt of Capital Markets.
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. 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 $432.6 million at March 31, 1996.
(17) CURRENT PORTION OF LONG-TERM DEBT: At March 31, 1996 and December 31,
1995, Industries' current portion of long-term debt due within one year was
as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Medium-term notes -
Issued at interest rates of 6.27% and
6.31% with a weighted average interest
rate of 6.30% and maturities of
July 25, 1996 and July 26, 1996 $ 80,000 $ 80,000
NIPSCO CAPITAL MARKETS, INC.:
Medium-term notes -
9.95% - due June 10, 1996 7,500 7,500
LAKE ERIE LAND COMPANY:
Notes payable 2,937 2,961
ELM ENERGY AND RECYCLING (UK), LTD.:
Term loan facility 4,480 4,554
NDC DOUGLAS PROPERTIES, INC.:
Notes payable 2,152 1,840
------------ ------------
Total current portion of long-term debt $ 97,069 $ 96,855
============ ============
</TABLE>
(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 March 31, 1996, 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 which are expected to be
renewed for the subsequent twelve-month period. The credit pricing of
each of the lines varies from either the lending banks' commercial prime or
market rates. Northern Indiana has agreed to compensate the participating
banks with arrangements that vary from no commitment fees to a combination of
fees which are mutually satisfactory to both parties. As of March 31,
1996, there were no borrowings under these lines of credit. The Credit
Agreement and lines of credit are also available to support the issuance of
commercial paper.
Northern Indiana also has $268.5 million of money market lines of
credit. As of March 31, 1996 and December 31, 1995, there were $80.1 million
and $118.8 million of borrowings, respectively, outstanding under these lines
of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1996, there were no borrowings outstanding under this facility.
Northern Indiana and Capital Markets makes use of commercial paper to
fund short-term working capital requirements.
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
backup instrument for a commercial paper program. As of March 31, 1996,
there were no borrowings outstanding under this agreement.
Capital Markets also has $105 million of money market lines of credit.
As of March 31, 1996 and December 31, 1995, $11.3 million and $17.4 million,
respectively, of borrowings were outstanding under these lines of credit.
At March 31, 1996 and December 31, 1995, Industries' short-term
borrowings were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
Commercial paper -
Weighted average interest rate of
5.36% at March 31, 1996 $ 17,400 $ 44,800
Notes payable -
Issued at interest rates between 5.28%
and 5.62% with a weighted average
interest rate of 5.42% and various
maturities between April 2, 1996
and April 22, 1996 80,100 118,800
NIPSCO CAPITAL MARKETS, INC.:
Commercial paper -
Weighted average interest rate of
5.61% at March 31, 1996 80,000 76,700
Notes payable -
Issued at interest rates of 5.63% and
5.66% with a weighted average interest
rate of 5.65% and maturities of
April 8, 1996 and April 25, 1996 11,300 17,400
LAKE ERIE LAND COMPANY:
Notes payable - 0 1,239
ELM ENERGY AND RECYCLING (UK), LTD.:
Standby loan facility 2,510 1,732
------------ ------------
Total short-term borrowings $ 191,310 $ 260,671
============ ============
</TABLE>
(19) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a
twenty-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 March 31, 1996:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
===============================
(Dollars in thousands)
<S> <C>
1997 $ 9,556
1998 8,439
1999 7,260
2000 5,801
2001 5,727
Later years 75,366
--------
Total minimum
payments required $112,149
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
============ ============
(Dollars in thousands)
<S> <C> <C>
Three months ended $ 2,031 $ 1,828
Twelve months ended $ 8,653 $ 7,861
</TABLE>
(20) COMMITMENTS: Northern Indiana estimates that approximately $764
million will be expended for construction purposes for the period from
January 1, 1996 to December 31, 2000. Substantial commitments have been made
by Northern Indiana in connection with this program.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber
services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly
Generating Station. Services under this contract commenced on June 15, 1992
with annual charges approximating $20 million. The agreement provides that,
assuming various performance standards are met by Pure Air, a termination
payment would be due if Northern Indiana terminates the agreement prior to the
end of the twenty-year contract period.
Northern Indiana has entered into an agreement with Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC to
perform all data center, application development and maintenance, and desktop
management of Northern Indiana.
Primary is the parent of subsidiaries including Harbor Coal
Company (Harbor Coal), North Lake Energy Corporation (North Lake), and
Lakeside Energy Corporation (LEC). Primary arranges energy-related projects
with large industrial customers and have entered into certain commitments in
connection with these projects.
Harbor Coal 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 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 be operational in June 1996.
Industries has guaranteed North Lake's obligations relative to the lease and
certain obligations to Inland Steel relative to the project.
LEC has entered into an agreement with USX Corporation - US Steel
Group to utilize a new 161 megawatt energy facility at USS Gary Works to
process high-pressure steam into electricity and low-pressure process steam
for a fifteen-year period. LEC will lease this facility, once constructed,
from a third party. Additionally, LEC has entered into an interim agreement,
which expires when the lease is established with the third-party lessor, under
which LEC is acting as the agent for the lessor to design, construct, and
start up the energy facility. Industries anticipates guaranteeing LEC's
security deposit obligations relative to the anticipated lease. Construction
of the project began in January 1996. The facility is scheduled to be
operational in May 1997.
(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 some investments is estimated based
on market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term
debt and preferred stock is estimated based on the quoted market
prices for the same or similar issues or on the rates offered to
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>
<CAPTION>
March 31, 1996 December 31, 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
========== ========== ========== ==========
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 41,252 $ 41,252 $ 28,496 $ 28,496
Investments $ 26,177 $ 27,726 $ 25,893 $ 27,045
Long-term debt (including
current portion) $1,350,041 $1,304,970 $1,273,376 $1,274,079
Preferred stock $ 146,804 $ 125,891 $ 181,804 $ 164,306
</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: Industries' public utility subsidiaries
supply natural gas and electrical energy in the northern third of Indiana.
Although these public utilities have a diversified base of residential and
commercial customers, a substantial portion of their electric and gas
industrial deliveries are dependent upon the basic steel industry. The basic
steel industry accounted for 4% of gas revenue (including transportation
services) and 22% of electric revenue for the twelve months ended
March 31, 1996 as compared to 3% and 25%, respectively, for the twelve
months ended March 31, 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
HOLDING COMPANY -
NIPSCO Industries, Inc. (Industries) is an Indiana corporation serving
as the holding company for a number of subsidiaries, including four regulated
companies: Northern Indiana Public Service Company (Northern Indiana); Kokomo
Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company,
Inc. (NIFL); and Crossroads Pipeline Company (Crossroads). Northern Indiana
is a public utility operating company supplying natural gas and electric
energy to the public. Kokomo Gas and NIFL are public utility operating
companies supplying natural gas to the public, and Crossroads is an interstate
natural gas transmission company.
Industries' major non-utility subsidiaries include NIPSCO Development
Company, Inc. (Development); NIPSCO Energy Services, Inc. (Services); Primary
Energy, Inc. (Primary); and NIPSCO Capital Markets, Inc. (Capital Markets).
Development makes various investments, including real estate and
venture capital investments. Services coordinates the energy-related
diversification ventures of Industries. Primary arranges energy-related
projects with large industrial customers. Capital Markets handles financing
for Industries and its subsidiaries other than Northern Indiana.
The following discussion, except where noted, is attributable to the
operations of Northern Indiana, Kokomo Gas, NIFL and Crossroads (Utilities).
REVENUES -
Total operating revenues for the twelve months ended March 31, 1996
increased $142.5 million as compared to the twelve months ended March 31,
1995. Gas revenues increased $85.9 million and electric revenues increased
$56.6 million.
The increase in gas revenues for the twelve months ended March 31,
1996 was largely attributable to increased sales to residential and commercial
customers due to colder weather in the fourth quarter of 1995 and first
quarter of 1996 and increased sales to industrial and wholesale customers.
The increase in electric revenues for the twelve months ended
March 31, 1996 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 wholesale customers, and was partially offset by
decreased fuel cost per kilowatt-hour (kwh).
Total operating revenue for the three months ended March 31, 1996
increased $53.5 million as compared to the three months ended March 31,
1995. Gas revenues increased $42.7 million and electric revenues increased
$10.8 million as compared to the same period in 1995. The increase in gas
revenues was mainly due to increased sales to residential and commercial
customers reflecting colder weather, increased sales to industrial and
wholesale customers, and increased gas transition costs which were offset by
reduced purchased gas costs per dekatherm (dth). The increase in electric
revenue was mainly due to increased sales to residential and commercial
customers.
The basic steel industry accounted for 31% of natural gas delivered
(including volumes transported) and 36% of electric sales during the twelve
months ended March 31, 1996.
The components of the variations in gas and electric revenues are
shown in the following tables:
<TABLE>
<CAPTION>
Variations
from
Prior Periods
---------------------
March 31, 1996
Compared to
March 31, 1995
Three Twelve
Months Months
========= =========
(Dollars in thousands)
<S> <C> <C>
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ 8,325 $ (63,518)
Gas transition costs (14,983) 48,462
Changes in sales levels 48,888 101,721
Gas transport levels 464 (808)
--------- ---------
Gas Revenue Change 42,694 85,857
--------- ---------
Electric Revenue -
Pass through of net changes in fuel 1,472 (4,759)
Changes in sales levels 9,364 61,409
--------- ---------
Electric Revenue Change 10,836 56,650
--------- ---------
Total Revenue Change $ 53,530 $ 142,507
========= =========
</TABLE>
See Note 5 to the consolidated financial statements regarding FERC Order
No. 636 transition costs.
GAS COSTS -
The Utilities' gas costs increased $27.0 and $48.7 million for the
three-month and twelve-month periods ended March 31, 1996, respectively. Gas
costs increased for the three-month period due to increased purchases and
increased gas costs per dth. Gas costs increased for the twelve-month period
due to increased purchases and were partially offset by lower gas costs per
dth. The average cost for the Utilities' purchased gas for the three-month
and twelve-month periods ended March 31, 1996, after adjustment for gas
transition costs billed to transport customers, was $3.00 and $2.72 per dth,
respectively, as compared to $2.95 and $2.89 per dth for the same periods in
1995.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation increased for the three-
month and twelve-month periods ended March 31, 1996, compared to 1995 periods
mainly as a result of increased production of electricity.
Power purchased increased $10.3 million for the twelve-month period
ended March 31, 1996 as a result of increased bulk power purchases with other
utilities due to increased sales. Purchased power costs increased $1.0
million for the three months ended as a result of higher costs per megawatt
purchased.
OPERATING MARGINS -
Operating margins increased $75.6 million for the twelve months ended
March 31, 1996 from the same period a year ago. The operating margin from
gas deliveries increased $37.2 million due to increased sales to residential
and commercial customers reflecting colder weather in the fourth quarter of
1995 and first quarter of 1996, and increased sales to industrial and
wholesale customers compared to the twelve-month period ended March 31, 1995.
The operating margin from electric sales increased $38.4 million reflecting
increased sales to residential and commercial customers due to warmer weather
in the third quarter of 1995 and increased sales to wholesale customers.
Operating margins increased $22.2 million for the three months ended
March 31, 1996 over the same period a year ago. The operating margin from
gas deliveries increased $15.8 million due to increased sales to residential
and commercial customers reflecting colder weather, and increased sales to
industrial and wholesale customers. Operating margin on electric sales
increased $6.4 million reflecting increased sales to residential and
commercial customers and increased sales to wholesale customers.
OPERATING EXPENSES AND TAXES -
Operation expenses increased $8.3 and $17.2 million for the three-
month and twelve-month periods ended March 31, 1996, respectively. Operation
expenses increased for the three-month period reflecting increased electric
production costs of $2.2 million, increased employee-related costs of $1.6
million, and other increased operating costs. Operations expenses increased
for the twelve-month period reflecting a December 1995 Indiana Utility
Regulatory Commission (Commission) order to refund $3.4 million to electric
customers related to a 1992 insurance settlement previously credited to
operation and maintenance expenses, increased electric production costs of
$9.0 million resulting from pollution control facilities costs, increased
marketing activities, and increased employee-related costs.
Maintenance expenses decreased $3.7 and $6.7 million for the three-
month and twelve-month periods ended March 31, 1996, respectively, mainly
reflecting decreased maintenance activity at the electric production
facilities.
Depreciation and amortization expense increased for the three-month
and twelve-month periods ended March 31, 1996 as a result of net plant
additions.
Utility income taxes increased for the three-month and twelve-month
periods ended March 31, 1996 as a result of higher pre-tax income.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) decreased $5.4 million for the twelve-month
period ended March 31, 1996 as the result of the inclusion in the prior period
of a $5.6 million after-tax benefit for the Northern Indiana land donation to
the Shafer and Freeman Lakes Environmental Conservation Corporation. The
operating results of all non-utility subsidiaries are included in "Other
Income (Deductions)."
INTEREST AND OTHER CHARGES -
Interest and other charges increased for the three-month and
twelve-month periods ended March 31, 1996 reflecting the issuance of
$169,275,000 of Medium-Term Notes, Series D, and $75 million of Junior
Subordinated Deferrable Interest Debentures, Series A, and the discontinuance
of carrying charges on deferred charges related to the Bailly Generating
Station scrubber service agreement.
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, and 9 for a discussion of FERC
Order No. 636, Income Taxes and Postretirement Benefits.
NET INCOME-
Industries' net income for the twelve-month period ended March 31,
1996 was $182.6 million compared to $159.3 million for the twelve-month
period ended March 31, 1995.
Net income for the three months ended March 31, 1996 was $67.5
million compared to $60.3 million for the three months ended March 31, 1995.
ENVIRONMENTAL MATTERS -
The Utilities have an ongoing program to remain aware of laws and
regulations involved with hazardous waste and other environmental matters.
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. The Utilities have recorded a reserve of $5.3
million to cover probable corrective actions as of March 31, 1996, however,
environmental regulations and remediation techniques are subject to future
change. The ultimate cost could be significant depending on the extent of
corrective actions required. Based upon investigations and management's
understanding of current laws and regulations, the Utilities believe that
any corrective actions required, after consideration of insurance coverages
and contributions from other potentially responsible parties, will not have a
significant impact on the financial position or results of operations of
Industries.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the
CAAA sulfur dioxide regulations will impact electric rates by less than 5% in
the future.
The CAAA contain provisions that could lead to limitations on
emissions of nitrogen oxides and hazardous air pollutants which may require
significant capital expenditures for control of these emissions. Northern
Indiana is pursuing a nitrogen oxide control program to meet future
requirements. Northern Indiana cannot predict the costs of complying with
CAAA requirements, but Northern Indiana believes that any such mandated costs
would be recoverable through the rate-making process.
The Environmental Protection Agency (EPA) has notified Northern
Indiana that it is a "potentially responsible party" (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA)
and may be required to share in the cost of cleanup of several waste disposal
sites identified by the EPA. The sites are in various stages of
investigation, analysis, and remediation. At each of the sites, Northern
Indiana is one of several PRPs, and it is expected that remedial costs, as
provided under CERCLA, will be shared among them. At some sites, Northern
Indiana and/or the other named PRPs are presently working with the EPA to
clean up the sites and avoid the imposition of fines or added costs.
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. Initial samplings have been conducted at
thirteen sites. Follow-up investigations have been conducted at five 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
is to obtain IDEM approval of the determination and subsequent implementation
of what remedial measures, if any, may be needed.
Northern Indiana was notified by 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 that 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 state court action is stayed
pending resolution of the Northern Indiana suit in Federal court.
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 one year to
thirty 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. On 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.
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 backup instrument for a commercial paper program. As of March 31, 1996,
there were no borrowings outstanding under this agreement.
Capital Markets also has $105 million of money market lines of credit.
As of March 31, 1996, $11.3 million of borrowings were outstanding under
these lines of credit.
As of March 31, 1996, Capital Markets had $80.0 million in
commercial paper outstanding, having a weighted average interest rate of
5.61%.
On January 12, 1996, Industries redeemed all 350,000 shares of its
8.75% Preferred Shares, pursuant to mandatory redemption provisions, for $100
per share plus accrued dividends. The redemption was accomplished through the
use of short-term debt issued by Capital Markets. Capital Markets refinanced
the short-term debt on February 13, 1996 through the issuance and sale of
$75 million of its 7-3/4% Junior Subordinated Deferrable Interest Debentures,
Series A, due March 31, 2026 (Debentures), pursuant to an underwritten public
offering. Proceeds from sale of the Debentures were used to pay short-term
debt incurred to redeem Industries' $35 million of 8.75% Preferred Shares, and
to pay other short-term debt of Capital Markets.
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. 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 $432.6 million at March 31, 1996.
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 to fund short-term working capital requirements. As of
March 31, 1996, Northern Indiana had $17.4 million in commercial paper
outstanding, having a weighted average interest rate of 5.36%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1998 unless extended by its terms.
As of March 31, 1996, 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 which are expected to be renewed for the subsequent
twelve-month period. The credit pricing of each of the lines varies
from either the lending banks' commercial prime or market rates. Northern
Indiana has agreed to compensate the participating banks with arrangements
that vary from no commitment fees to a combination of fees which are mutually
satisfactory to both parties. As of March 31, 1996, there were no
borrowings under these lines of credit. The Credit Agreement and lines of
credit are also available to support the issuance of commercial paper.
Northern Indiana also has $268.5 million of money market lines of
credit. As of March 31, 1996, there were $80.1 million of borrowings
outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
March 31, 1996, 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 and electric base rate
increases in the near future.
COMPETITION
The Energy Policy Act of 1992 (Energy Act) allowed FERC to order
electric utilities to grant access to transmission systems by third-party
power producers. The Energy Act specifically prohibits federally mandated
wheeling of power for retail customers. On April 24, 1996, the FERC issued
its Order No. 888 which opens wholesale power sales to competition and
requires public utilities owning, controlling, or operating transmission lines
to file non-discriminatory open access tariffs that offer others the same
transmission service they provide themselves. Order No. 888 also provides
for the full recovery of stranded costs - that is, costs that were
prudently incurred to serve power customers and that could go unrecovered
if these customers use open access to move to another supplier. FERC expects
this rule will accelerate competition and bring lower prices and more choices
to wholesale energy customers. 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, Northern Indiana will continue its
efforts to retain and add customers by offering competitive rates.
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' 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 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 ensure the continued acquisition of adequate
gas supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales,
firm transportation service, and interruptible transportation services has
changed significantly over the past several years. The deregulation of the gas
industry, since the mid-1980's, allows large industrial and commercial
customers to purchase their gas supplies directly from producers and use the
Utilities' facilities to transport the gas. Transportation customers pay the
Utilities only for transporting their gas from the pipeline to the customers'
premises.
Northern Indiana filed an Alternative Regulatory Plan (ARP) with the
Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit increased
choice for gas customers, competition among suppliers, and improved natural
gas service. In its petition, Northern Indiana stated it would propose to
implement new rates and services that would include, but not be limited to,
further unbundling of services for additional customer classes which would
include increased customer choice for sources of natural gas supply,
negotiated services and prices, and incentive gas and storage cost mechanisms.
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. The Utilities believe the steps they are 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 pending
proceedings, including suits and claims against them for personal injury,
death and property damage, but, in the opinion of their counsel, the nature of
such proceedings and suits, and the amounts involved, do not depart from the
ordinary routine litigation and proceedings incidental to the kind of business
conducted by Industries and Northern Indiana, except as described under Note 3
Pending Tax Matter, Note 4 Elm Energy and Recycling (UK) Ltd., and Note 6
Environmental Matters in the Notes to Consolidated Financial Statements under
Part I, Item 1 of this report on Form 10-Q.
To the knowledge of Industries no other material legal proceedings
against Industries, Northern Indiana or their subsidiaries are contemplated by
governmental authorities and other parties.
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 10, 1996, at the Annual Meeting of Shareholders of the
registrant, shareholders of the registrant elected Ian M. Rolland, Edmund A.
Schroer and John W. Thompson as directors to serve until the 1999 Annual
Meeting of Shareholders. Directors whose terms of office as director continue
after the 1996 Annual Meeting of Shareholders are Arthur J. Decio, Gary L.
Neale, and Robert Welsh, whose terms expire at the 1997 Annual Meeting of
Shareholders, and Steven C. Beering, Ernestine M. Raclin, and Denis E.
Ribordy, whose terms expire at the 1998 Annual Meeting of Shareholders.
There were no abstentions and no broker non-votes for any of the
nominees for directors. The number of votes cast for, or withheld, for each
nominee for director was as follows:
<TABLE>
<CAPTION>
Votes Votes
Received Withheld
========== ==========
<S> <C> <C>
Ian M. Rolland 50,705,870 1,859,671
Edmund A. Schroer 50,594,784 1,970,756
John W. Thompson 48,986,206 3,579,334
</TABLE>
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 May 13, 1996
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.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Chicago, Illinois
May 13, 1996
<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
March 31, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,193,707
<OTHER-PROPERTY-AND-INVEST> 232,699
<TOTAL-CURRENT-ASSETS> 384,173
<TOTAL-DEFERRED-CHARGES> 57,796
<OTHER-ASSETS> 211,887
<TOTAL-ASSETS> 4,080,262
<COMMON> 539,988
<CAPITAL-SURPLUS-PAID-IN> 28,031
<RETAINED-EARNINGS> 558,331
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,126,350
63,651
81,325
<LONG-TERM-DEBT-NET> 429,856
<SHORT-TERM-NOTES> 93,910
<LONG-TERM-NOTES-PAYABLE> 822,323
<COMMERCIAL-PAPER-OBLIGATIONS> 97,400
<LONG-TERM-DEBT-CURRENT-PORT> 97,862
1,828
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<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,265,757
<TOT-CAPITALIZATION-AND-LIAB> 4,080,262
<GROSS-OPERATING-REVENUE> 576,028
<INCOME-TAX-EXPENSE> 41,467
<OTHER-OPERATING-EXPENSES> 439,566
<TOTAL-OPERATING-EXPENSES> 481,033
<OPERATING-INCOME-LOSS> 94,995
<OTHER-INCOME-NET> 461
<INCOME-BEFORE-INTEREST-EXPEN> 95,456
<TOTAL-INTEREST-EXPENSE> 27,970
<NET-INCOME> 67,486
119
<EARNINGS-AVAILABLE-FOR-COMM> 67,367
<COMMON-STOCK-DIVIDENDS> 25,794
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 154,821
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
