SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1997
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number 1-9779
NIPSCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1719974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5265 Hohman Avenue, Hammond, Indiana 46320-1775
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
As of October 31, 1997, 62,730,811 common shares were outstanding.
<PAGE>
<PAGE>
NIPSCO INDUSTRIES, INC.
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of
NIPSCO Industries, Inc.:
We have audited the accompanying consolidated balance sheet of NIPSCO
Industries, Inc. (an Indiana corporation) and subsidiaries as of September 30,
1997, and December 31, 1996, and the related consolidated statements of income,
common shareholders' equity and cash flows for the three, nine and twelve month
periods ended September 30, 1997 and 1996. These consolidated financial
statements are the responsibility of Industries' management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NIPSCO
Industries, Inc. and subsidiaries as of September 30, 1997, and December 31,
1996, and the results of their operations and their cash flows for the three,
nine and twelve month periods ended September 30, 1997 and 1996, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
October 29, 1997
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
September 30, December 31,
ASSETS 1997 1996
============== ============
<S> <C> <C>
(In thousands)
PROPERTY, PLANT AND EQUIPMENT:
Utility Plant, (Note 2)(including
Construction Work in Progress of
$184,110 and $166,812, respectively)
Electric $ 4,089,701 $ 4,050,084
Gas 1,378,448 1,344,230
Common 350,432 346,636
Water 559,132 0
------------- ------------
6,377,713 5,740,950
Less -Accumulated provision for
depreciation and amortization 2,770,449 2,546,162
------------- ------------
Total Utility Plant 3,607,264 3,194,788
------------- ------------
Other property, at cost, net of accumulated
provision for depreciation 95,291 147,370
------------- ------------
Total Property, Plant and Equipment 3,702,555 3,342,158
------------- ------------
INVESTMENTS:
Investments, at equity (Note 2) 81,967 52,260
Investments, at cost 30,155 30,424
Other investments 23,622 20,090
------------- -------------
Total Investments 135,744 102,774
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents 28,285 26,333
Accounts receivable, less reserve of
$7,401 and $5,569, respectively (Note 2) 171,251 165,441
Other receivables (Note 23) 81,620 42,184
Fuel adjustment clause (Note 2) 3,806 9,149
Gas cost adjustment clause (Note 2) 60,491 100,214
Materials and supplies, at average cost 61,923 59,859
Electric production fuel, at average cost 17,148 26,483
Natural gas in storage (Note 2) 72,024 65,093
Prepayments and other 27,325 28,491
------------- -------------
Total Current Assets 523,873 523,247
------------- -------------
OTHER ASSETS:
Regulatory assets (Note 2) 218,023 236,205
Intangible assets (Note 2) 85,360 0
Prepayments and other (Note 10) 130,358 84,499
------------- -------------
Total Other Assets 433,741 320,704
------------- -------------
$ 4,795,913 $ 4,288,883
============= =============
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
September 30, December 31,
CAPITALIZATION AND LIABILITIES 1997 1996
============= ============
(In thousands)
<S> <C> <C>
CAPITALIZATION:
Common shareholders' equity
(See accompanying statement) $ 1,266,705 $ 1,100,501
Cumulative preferred stocks (Note 12) -
Series without mandatory redemption
provisions (Note 13) 85,620 81,126
Series with mandatory redemption
provisions (Note 14) 59,396 61,246
Long-term debt excluding amounts due
within one year (Note 18) 1,608,720 1,127,106
------------- ------------
Total Capitalization 3,020,441 2,369,979
------------- ------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 19) 110,222 144,552
Short-term borrowings (Note 20) 165,209 425,985
Accounts payable 179,219 251,730
Sinking funds due within one year
(Notes 14 and 18) 3,328 3,328
Dividends declared on common and
preferred stocks 29,199 28,308
Customer deposits 29,337 17,580
Taxes accrued 88,995 78,723
Interest accrued 20,709 7,557
Accrued employment costs 48,023 44,186
Other accruals 44,437 30,054
------------- ------------
Total Current Liabilities 718,678 1,032,003
------------- ------------
OTHER:
Deferred income taxes (Note 9) 630,894 602,745
Deferred investment tax credits, being
amortized over life of related property
(Note 9) 107,446 108,258
Deferred credits 62,955 37,338
Customer advances and contributions
in aid of construction (Note 2) 105,548 15,830
Accrued liability for postretirement
benefits (Note 11) 134,823 109,429
Other noncurrent liabilities 15,128 13,301
------------- ------------
Total Other 1,056,794 886,901
------------- ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5, 6, 8, 21, 22 and 23)
$ 4,795,913 $ 4,288,883
============= ============
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except for per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -----------------------
1997 1996 1997 1996
========== ========= ========== ==========
<S> <C> <C> <C> <C>
Operating Revenues: (Notes 2, 7 and 25)
Gas $ 90,258 $ 79,498 $ 544,668 $ 527,840
Electric 279,221 276,776 769,099 769,432
Water 23,577 0 42,372 0
Products and Services 203,259 37,438 423,313 110,603
---------- ---------- ---------- ----------
596,315 393,712 1,779,452 1,407,875
---------- ---------- ---------- ----------
Cost of Sales: (Note 2)
Gas costs 53,841 42,784 330,642 309,480
Fuel for electric generation 65,008 62,346 178,025 172,732
Power purchased 13,143 15,356 32,621 41,639
Products and Services 174,467 17,621 353,576 58,774
---------- ---------- ---------- ----------
306,459 138,107 894,864 582,625
---------- ---------- ---------- ----------
Operating Margin 289,856 255,605 884,588 825,250
---------- ---------- ---------- ----------
Operating Expenses and Taxes (except income):
Operation 102,999 83,109 294,883 253,757
Maintenance (Note 2) 16,049 20,256 51,647 64,110
Depreciation and amortization (Note 2) 64,712 58,427 187,471 173,563
Taxes (except income) 19,261 17,189 60,861 55,782
---------- ---------- ---------- ----------
203,021 178,981 594,862 547,212
---------- ---------- ---------- ----------
Operating Income 86,835 76,624 289,726 278,038
---------- ---------- ---------- ----------
Other Income (Deductions) (Note 2) 3,326 5,338 14,211 7,523
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 28,266 21,166 77,875 64,534
Other interest 2,435 4,163 7,825 10,755
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1,209 1,142 3,542 3,468
Dividend requirements on preferred stock
of subsidiaries 2,174 2,174 6,520 6,551
---------- ---------- ---------- ----------
34,084 28,645 95,762 85,308
---------- ---------- ---------- ----------
Income before income taxes 56,077 53,317 208,175 200,253
---------- ---------- ---------- ----------
Income taxes 20,208 18,907 73,232 74,928
---------- ---------- ---------- ----------
Net Income 35,869 34,410 134,943 125,325
Dividend requirements on preferred shares 0 0 0 119
---------- ---------- ---------- ----------
Balance available for common shareholders $ 35,869 $ 34,410 $ 134,943 $ 125,206
========== ========== ========== ==========
Average common shares outstanding 62,747,931 61,061,196 61,722,982 61,451,974
Earnings per average common share $ 0.57 $ 0.56 $ 2.18 $ 2.03
========== ========== ========== ==========
Dividends declared per common share $ 0.45 $ 0.42 $ 1.35 $ 1.26
========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except for per share amounts)
Twelve Months
Ended September 30,
----------------------
1997 1996
========== ==========
<S> <C> <C>
Operating Revenues: (Notes 2, 7 and 25)
Gas $ 816,223 $ 746,125
Electric 1,021,898 1,020,133
Water 42,372 0
Products and Services 479,033 131,338
---------- ----------
2,359,526 1,897,596
---------- ----------
Cost of Sales: (Note 2)
Gas costs 504,939 433,034
Fuel for electric generation 238,508 235,760
Power purchased 44,733 50,061
Products and Services 396,042 60,808
---------- ----------
1,184,222 779,663
---------- ----------
Operating Margin 1,175,304 1,117,933
---------- ----------
Operating Expenses and Taxes (except income):
Operation 377,945 351,568
Maintenance (Note 2) 70,878 83,436
Depreciation and amortization (Note 2) 247,902 224,897
Taxes (except income) 80,583 74,475
---------- ----------
777,308 734,376
---------- ----------
Operating Income 397,996 383,557
---------- ----------
Other Income (Deductions) (Note 2) 18,675 9,203
---------- ----------
Interest and Other Charges:
Interest on long-term debt 98,723 85,019
Other interest 12,807 16,730
Amortization of premium, reacquisition premium,
discount and expense on debt, net 4,679 4,618
Dividend requirements on preferred stock
of subsidiaries 8,681 8,776
---------- ----------
124,890 115,143
---------- ----------
Income before income taxes 291,781 277,617
---------- ----------
Income taxes 105,429 100,464
---------- ----------
Net Income 186,352 177,153
Dividend requirements on preferred shares 0 885
---------- ----------
Balance available for common shareholders $ 186,352 $ 176,268
========== ==========
Average common shares outstanding 61,392,733 61,724,244
Earnings per average common share $ 3.03 $ 2.85
========== ==========
Dividends declared per common share $ 1.80 $ 1.68
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Dollars in Thousands
----------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Three Months Ended Total Shares Capital Earnings Shares
======================== =========== ========= ========= ========= ==========
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076 $ (339,673)
Net income 34,410 34,410
Dividends:
Preferred shares
Common shares (25,561) (25,561)
Treasury shares acquired (13,904) (13,904)
Issued:
Employee stock purchase
plan 166 100 66
Long-term incentive plan 704 704
Amortization of
unearned compensation 560
Unrealized gain(loss) on
available for sale
securities 230
Other 109 (22)
------------ ---------- --------- ---------- -----------
Balance, September 30, 1996 $ 1,112,942 $ 870,930 $ 32,774 $ 566,903 $ (352,807)
============ ========== ========= ========== ===========
Balance, July 1, 1997 $ 1,258,417 $ 870,930 $ 89,556 $ 634,083 $ (336,416)
Net income 35,869 35,869
Dividends:
Preferred shares
Common shares (28,244) (28,244)
Treasury shares acquired (1,211) (1,211)
Issued:
IWC Resources acquisition 0 0 0
Acquisition of minority
interest 0 0 0
Employee stock purchase
plan 174 107 67
Long-term incentive plan 1,412 1,412
Amortization of
unearned compensation 531
Unrealized gain (loss) on
available for sale securities 1
Other (244)
------------ ----------- ---------- ---------- -----------
Balance, September 30, 1997 $ 1,266,705 $ 870,930 $ 89,663 $ 641,708 $ (336,148)
============ =========== ========== ========== ===========
<CAPTION>
Dollars in Thousands Shares
-------------------------- ----------------------
Currency
Three Months Ended Translation Common Treasury
(continued) Adjustment Other Shares Shares
======================== =========== ========= ========== ===========
<S> <C> <C> <C> <C>
Balance, July 1, 1996 $ (1,991) $ (3,788) 73,892,109 (12,737,360)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (377,024)
Issued:
Employee stock purchase
plan 4,118
Long-term incentive plan 26,100
Amortization of
unearned compensation 560
Unrealized gain (loss) on
available for sale
securities 230
Other 131
----------- ----------- ----------- -----------
Balance, September 30, 1996 $ (1,860) $ (2,998) 73,892,109 (13,084,166)
=========== =========== =========== ===========
Balance, July 1, 1997 $ (40) $ 304 73,892,109 (11,158,490)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (29,517)
Issued:
IWC Resources acquisition 0
Acquisition of minority
interest 0
Employee stock purchase
plan 4,201
Long-term incentive plan 46,300
Amortization of
unearned compensation 531
Unrealized gain (loss) on
available for sale securities 1
Other (244)
----------- ----------- ----------- -----------
Balance, September 30, 1997 $ (284) $ 836 73,892,109 (11,137,506)
=========== =========== =========== ===========
<CAPTION>
Dollars in Thousands
-----------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Nine Months Ended Total Shares Capital Earnings Shares
======================== =========== ========== ========== ========== ===========
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 1,122,215 $ 870,930 $ 32,210 $ 518,837 $ (293,223)
Net income 125,325 125,325
Dividends:
Preferred shares (119) (119)
Common shares (77,039) (77,039)
Treasury shares acquired (61,940) (61,940)
Issued:
Employee stock purchase
plan 615 361 254
Long-term incentive plan 1,714 184 2,102
Amortization of
unearned compensation 1,748
Unrealized gain(loss) on
available for sale
securities 435
Other (12) 19 (101)
----------- ---------- ---------- ---------- -----------
Balance, September 30, 1996 $ 1,112,942 $ 870,930 $ 32,774 $ 566,903 $ (352,807)
=========== ========== ========== ========== ===========
Balance, January 1, 1997 $ 1,100,501 $ 870,930 $ 32,868 $ 591,370 $ (392,995)
Net income 134,943 134,943
Dividends:
Preferred shares 0 0
Common shares (84,479) (84,479)
Treasury shares acquired (103,740) (103,740)
Issued:
IWC Resources acquisition 207,422 55,009 152,413
Acquisition of minority
interest 5,469 1,351 4,118
Employee stock purchase
plan 420 211 209
Long-term incentive plan 3,627 223 3,847
Amortization of
unearned compensation 1,513
Unrealized gain (loss) on
available for sale securities 1,298
Other (269) 1 (126)
----------- ----------- ---------- ----------- -----------
Balance, September 30, 1997 $ 1,266,705 $ 870,930 $ 89,663 $ 641,708 $ (336,148)
=========== =========== ========== =========== ===========
<CAPTION>
Dollars in Thousands Shares
-------------------------- ----------------------
Currency
Nine Months Ended Translation Common Treasury
(continued) Adjustment Other Shares Shares
======================== ============ ========= ========== ==========
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ (1,930) $ (4,609) 73,892,109 (11,512,513)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (1,666,768)
Issued:
Employee stock purchase
plan 15,965
Long-term incentive plan (572) 79,150
Amortization of
unearned compensation 1,748
Unrealized gain (loss) on
available for sale securities 435
Other 70
------------ ---------- ---------- ----------
Balance, September 30, 1996 $ (1,860) $ (2,998) 73,892,109 (13,084,166)
============ ========== ========== ==========
Balance, January 1, 1997 $ (140) $ (1,532) 73,892,109 (14,086,448)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (2,618,875)
Issued:
IWC Resources acquisition 5,291,089
Acquisition of minority
interest 135,032
Employee stock purchase
plan 13,163
Long-term incentive plan (443) 128,533
Amortization of
unearned compensation 1,513
Unrealized gain (loss) on
available for sale securities 1,298
Other (144)
------------ ----------- ---------- -----------
Balance, September 30, 1997 $ (284) $ 836 73,892,109 (11,137,506)
============ =========== ========== ===========
<CAPTION>
Dollars in Thousands
-----------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Twelve Months Ended Total Shares Capital Earnings Shares
======================== =========== ========== =========== ========== ==========
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1995 $ 1,117,182 $ 870,930 $ 32,202 $ 493,876 $ (271,474)
Net income 177,153 177,153
Dividends:
Preferred shares (885) (885)
Common shares (103,140) (103,140)
Treasury shares acquired (87,030) (87,030)
Issued:
Employee stock purchase
plan 615 361 254
Long-term incentive plan 5,057 186 5,443
Amortization of
unearned compensation 2,425
Unrealized gain(loss) on
available for sale securities 2,104
Other (539) 25 (101)
----------- ---------- ----------- ----------- -----------
Balance, September 30, 1996 $ 1,112,942 $ 870,930 $ 32,774 $ 566,903 $ (352,807)
----------- ---------- ----------- ----------- -----------
Net income 186,352 186,352
Dividends:
Preferred shares 0 0
Common shares (111,421) (111,421)
Treasury shares acquired (147,298) (147,298)
Issued:
IWC Resources acquisition 207,422 55,009 152,413
Acquisition of minority
interest 5,469 1,351 4,118
Employee stock purchase
plan 695 411 284
Long-term incentive plan 6,817 118 7,142
Amortization of
unearned compensation 2,335
Unrealized gain (loss) on
available for sale securities 1,942
Other 1,450 (126)
----------- ---------- ----------- ------------ ------------
Balance, September 30, 1997 $ 1,266,705 $ 870,930 $ 89,663 $ 641,708 $ (336,148)
=========== ========== =========== ============ ============
<CAPTION>
Dollars in Thousands Shares
-------------------------- -----------------------
Currency
Twelve Months Ended Translation Common Treasury
(continued) Adjustment Other Shares Shares
======================== ============ ========== ========== ==========
<S> <C> <C> <C> <C>
Balance, October 1, 1995 $ (1,397) $ (6,955) 73,892,109 (10,953,189)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (2,357,692)
Issued:
Employee stock purchase
plan 15,965
Long-term incentive plan (572) 210,750
Amortization of
unearned compensation 2,425
Unrealized gain (loss) on
available for sale securities 2,104
Other (463)
------------ ---------- ---------- ----------
Balance, September 30, 1996 $ (1,860) $ (2,998) 73,892,109 (13,084,166)
------------ ---------- ---------- ----------
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (3,745,711)
Issued:
IWC Resources acquisition 5,291,089
Acquisition of minority
interest 135,032
Employee stock purchase
plan 17,867
Long-term incentive plan (443) 248,383
Amortization of
unearned compensation 2,335
Unrealized gain (loss) on
available for sale securities 1,942
Other 1,576
------------ ---------- ---------- ----------
Balance, September 30, 1997 $ (284) $ 836 73,892,109 (11,137,506)
============ ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1997 1996 1997 1996
======== ======== ========= ========
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 35,869 $ 34,410 $ 134,943 $ 125,325
Adjustments to reconcile net income to net cash:
Depreciation and amortization 64,712 58,427 187,471 173,563
Deferred federal and state income
taxes, net (542) 2,069 (33,902) 14,871
Deferred investment tax credits, net (1,832) (1,984) (5,467) (5,322)
Advance contract payment 475 475 1,425 (17,575)
Change in certain assets and liabilities -*
Accounts receivable, net 3,896 20,234 22,959 49,399
Other receivables 29,916 15,534 (39,436) (17,817)
Electric production fuel 11,484 (301) 9,335 (16,940)
Materials and supplies 744 2,168 727 5,246
Natural gas in storage (36,897) (53,023) (6,931) (21,669)
Accounts payable 5,171 (7,168) (54,980) (126)
Taxes accrued (4,664) (22,354) 30,585 (16,174)
Fuel adjustment clause 4,451 1,816 5,343 494
Gas cost adjustment clause (13,436) (10,763) 39,723 (58,286)
Accrued employment costs 3,284 797 1,359 (8,232)
Other accruals (1,635) (2,265) 11,264 (11,032)
Other, net 28,912 22,100 52,247 25,470
--------- --------- ---------- ----------
Net cash provided by operating activities 129,908 60,172 356,665 221,195
--------- --------- ---------- ----------
Cash flows used in investing activities:
Energy Utilities construction expenditures (51,833) (48,580) (160,504) (131,456)
IWCR construction expenditures (13,140) 0 (27,381) 0
Acquisition of IWC Resources
Corporation, net of cash acquired 0 0 (288,932) 0
Acquisition of minority interest 0 0 (5,641) 0
Proceeds from disposition of assets 186 0 29,961 0
Proceeds from settlement of litigation 41,069 0 41,069 0
Other, net 1,128 (8,491) (18,649) (23,060)
--------- --------- ---------- ----------
Net cash used in investing activities (22,590) (57,071) (430,077) (154,516)
--------- --------- ---------- ----------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt 42,669 0 450,931 77,450
Issuance of short-term debt 203,400 519,050 778,495 1,117,458
Net change in commercial paper 19,850 3,500 (235,705) 58,500
Retirement of long-term debt (116,909) (80,434) (118,416) (89,171)
Retirement of short-term debt (228,807) (374,350) (827,302) (1,022,385)
Retirement of preferred shares (600) (600) (1,853) (37,046)
Issuance of common shares 1,586 853 216,919 2,267
Acquisition of treasury shares (1,211) (13,904) (103,740) (61,940)
Cash dividends paid on common shares (28,247) (25,692) (83,342) (77,685)
Cash dividends paid on preferred shares 0 0 0 (119)
Other, net (155) 121 (623) 401
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities (108,424) 28,544 75,364 (32,270)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (1,106) 31,645 1,952 34,409
Cash and cash equivalents at
Beginning of period 29,391 31,260 26,333 28,496
---------- ---------- ---------- ----------
Cash and cash equivalents at
End of period $ 28,285 $ 62,905 $ 28,285 $ 62,905
========== ========== ========== ==========
*Net of effect from purchase of IWC Resources Corporation.
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Twelve Months
Ended September 30,
--------------------
1997 1996
======== ========
<S> <C> <C>
Cash flows from operating activities:
Net income $ 186,352 $ 177,153
Adjustments to reconcile net income to net cash:
Depreciation and amortization 247,902 224,897
Deferred federal and state income
taxes, net (27,647) 31,911
Deferred investment tax credits, net (7,553) (7,233)
Advance contract payment 1,900 (17,575)
Change in certain assets and liabilities -*
Accounts receivable, net (82,883) (15,814)
Other receivables (52,397) (29,223)
Electric production fuel 14,050 (14,395)
Materials and supplies 666 6,731
Natural gas in storage 10,529 (8,489)
Accounts payable 26,159 29,759
Taxes accrued 57,233 (34,962)
Fuel adjustment clause 6,001 (1,124)
Gas cost adjustment clause (782) (88,746)
Accrued employment costs 7,082 (3,051)
Other accruals 8,793 (17,453)
Other, net 42,050 23,067
--------- ---------
Net cash provided by operating activities 437,455 255,453
--------- ---------
Cash flows used in investing activities:
Energy Utilities construction expenditures (217,903) (179,960)
IWCR construction expenditures (27,381) 0
Acquisition of IWC Resources Corporation,
net of cash acquired (288,932) 0
Acquisition of minority interest (5,641) 0
Proceeds from disposition of assets 29,961 0
Proceeds from settlement of litigation 41,069 0
Other, net (22,809) (54,298)
---------- ---------
Net cash used in investing activities (491,636) (234,258)
---------- ---------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt 451,847 75,316
Issuance of short-term debt 1,243,247 1,931,495
Net change in commercial paper (102,500) 94,000
Retirement of long-term debt (119,037) (87,614)
Retirement of short-term debt (1,414,651) (1,770,311)
Retirement of preferred shares (2,411) (37,802)
Issuance of common shares 220,368 5,804
Acquisition of treasury shares (147,298) (87,030)
Cash dividends paid on common shares (108,847) (102,156)
Cash dividends paid on preferred shares (647) 968
Other, net (510) 542
---------- ---------
Net cash provided by (used in)
financing activities 19,561 23,212
---------- ---------
Net increase (decrease) in cash and
cash equivalents (34,620) 44,407
Cash and cash equivalents at
Beginning of period 62,905 18,498
---------- ---------
Cash and cash equivalents at
End of period $ 28,285 $ 62,905
========== =========
*Net of effect from purchase of IWC Resources Corporation.
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
energy/utility-based holding company providing electric energy, natural gas and
water to the public through its six wholly-owned regulated subsidiaries
("Utilities"): Northern Indiana Public Service Company (Northern Indiana);
Kokomo Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light
Company, Inc. (NIFL); Crossroads Pipeline Company (Crossroads); Indianapolis
Water Company (IWC); and Harbour Water Corporation (Harbour). Industries'
regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and
Crossroads) are referred to as "Energy Utilities"; and regulated water
subsidiaries (IWC and Harbour) are referred to as "Water Utilities."
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR=s subsidiaries include two regulated water utilities (IWC and Harbour) and
five non-utility companies providing utility-related services including
installation, repair and maintenance of underground pipelines and utility line
locating and marking. The two primary non-utility subsidiaries are Miller
Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P).
Industries also provides non-regulated energy/utility-related services
including energy marketing and trading; power generation; gas transmission,
supply and storage; installation, repair and maintenance of underground
pipelines; utility line locating and marking; and related products targeted at
customer segments principally through the following wholly- owned subsidiares:
NIPSCO Development Company, Inc. (Development); NIPSCO Energy Services, Inc.
(Services); Primary Energy, Inc. (Primary); Miller; and SM&P. NIPSCO Capital
Markets, Inc. (Capital Markets) handles financing for Industries and its
subsidiaries, other than Northern Indiana. These subsidiaries are referred to
collectively as "Products and Services."
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of majority-owned subsidiaries of Industries after the elimination of
significant intercompany accounts and transactions. Investments for which
Industries has at least a 20% interest and certain joint ventures are accounted
for under the equity method. Investments with less than a 20% interest are
accounted for under the cost method. Certain reclassifications were made to
conform the prior years' financial statements to the current presentation.
The prior period operating results related to "Products and Services" were
previously reported under the caption "Other Income (Deductions)" in the
Consolidated Statement of Income. Accordingly, these results have been
reclassified to conform to the current presentation.
The accompanying consolidated financial statements of Industries include
three and six months of operating results for IWCR for the periods ended
September 30, 1997.
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. Utility revenues are recorded based on estimated
service rendered, but are billed to customers monthly on a cycle basis.
Construction revenues are recognized on the percentage of completion method
whereby revenues are recognized in proportion to costs incurred over the life of
each project.
DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on a
straight-line method over the remaining service lives of the electric, gas and
common properties. The provisions, as a percentage of the cost of depreciable
utility plant, were approximately 4.3% for the three-month, nine-month and
twelve-month periods ended September 30, 1997; and 4.3%, 4.2% and 4.2% for the
three-month, nine-month and twelve-month periods ended September 30, 1996,
respectively. The depreciation rates for electric and gas properties were 3.55%
and 4.92%, respectively.
Kokomo Gas provides depreciation on the original cost of utility plant in
service using straight-line rates that averaged approximately 3.2% for the
three-month, nine-month and twelve-month periods ended September 30, 1997; and
3.1% for the three-month, nine-month and twelve-month periods ended September
30, 1996.
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, nine-month and twelve-month periods ended September 30, 1997 and
September 30, 1996.
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, nine-month and twelve-month periods ended September 30, 1997 and
September 30, 1996.
IWC and Harbour provide depreciation on the original cost of utility plant
in service using a composite annual rate of 1.9% and 2.0%, respectively.
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 retired unit is replaced or
removed, the cost of such property is credited to utility plant, and such cost,
together with the cost of removal less salvage, is charged to the accumulated
provision for depreciation.
AMORTIZATION OF SOFTWARE COSTS. Industries amortizes capitalized software
costs using the straight-line method based on estimated economic lives.
PLANT ACQUISITION ADJUSTMENTS. Utility plant includes amounts representing
the excess of purchase price over underlying book values associated with the
acquisitions of Kokomo Gas, NIFL, IWC and Harbour. These amounts are $169.6
million (see Note 4) and $40.6 million at September 30, 1997 and December 31,
1996, respectively, and are being amortized over a forty-year period from the
respective dates of acquisition.
INTANGIBLE ASSETS. The excess of cost over the fair value of the net
assets of non-utility subsidiaries acquired as part of the IWCR acquisition (see
Note 4) has been recorded as goodwill and is being amortized over a forty-year
period from the date of acquisition. Industries acquired the minority interest
in NESI Energy Marketing, L.L.C. in April 1997. The excess of the purchase price
over the fair value of the tangible net assets associated with this acquisition
has been recorded as an intangible asset and is being amortized over a
twenty-year period from the date of acquisition. Industries assesses the
recoverability of its intangible assets on a periodic basis to confirm that
expected future cash flows will be sufficient to support the recorded intangible
assets.
COAL RESERVES. Northern Indiana has a long-term mining contract to mine
its coal reserves through the year 2001. The costs of these reserves are being
recovered through the rate-making process as such coal reserves are used to
produce electricity.
POWER PURCHASED. Power purchases and net interchange power with other
electric utilities under interconnection agreements are included in Cost of
Sales under the caption "Power purchased."
ACCOUNTS RECEIVABLE. At September 30, 1997, Northern Indiana had sold $100
million of its accounts receivable under a sales agreement which expires May 31,
2002.
CUSTOMER ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION. IWC allows
developers to install and provide for the installation of water main extensions,
which are to be transferred to IWC upon completion. The cost of the main
extensions and the amount of any funds advanced for the cost of water mains
installed are included in customer advances for construction and are generally
refundable to the customer over a period of ten years. Advances not refunded
within ten years are permanently transferred to contributions in aid of
construction.
STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement of
Cash Flows, Industries considers temporary cash investments with an original
maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest was as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
------------------- ------------------- -------------------
(In thousands) 1997 1996 1997 1996 1997 1996
======= ======== ======= ======= ======== ========
<S> <C> <C> <C> <C> <C> <C>
Income taxes $ 19,000 $ 20,047 $ 80,700 $ 75,795 $ 80,700 $113,635
Interest, net of
amounts capitalized 24,059 15,141 68,714 56,089 99,906 89,103
</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 Energy 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 7, 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 September 1997 and December 1996 the estimated
replacement cost of gas in storage (current and non-current) at September 30,
1997 and December 31, 1996 exceeded the stated LIFO cost by approximately $54
million and $96 million, respectively. Certain other subsidiaries of Industries
have natural gas in storage valued at average cost.
HEDGING ACTIVITIES. Industries utilizes a variety of commodity-based
derivative financial instruments to reduce the price risk inherent in its
natural gas and electric power marketing activities. The gains and losses on
these derivative financial instruments are deferred (Other Current Assets or
Other Current Liabilities) pursuant to an identified risk reduction strategy.
Such deferrals are recognized in income concurrent with the disposition of the
underlying physical commodity. In certain circumstances, a derivative financial
instrument will serve to hedge the acquisition cost of gas injected into
storage. In this situation, the gain or loss on the derivative financial
instrument is deferred as part of the cost basis of gas in storage and
recognized upon the ultimate disposition of the natural gas. If a derivative
financial instrument contract is terminated early because it is probable that a
transaction or forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative financial
instrument contract is terminated early for other economic reasons, any gain or
loss as of the termination date is deferred and recorded when the associated
transaction or forecasted transaction affects earnings.
Industries' gas subsidiaries use commodity futures contracts, options and
swaps to hedge the impact of natural gas price fluctuations related to its
business activities, including price risk related to the physical location of
the natural gas (basis risk). As of September 30, 1997, Industries had open
derivative financial instruments representing hedges of natural gas sales of 9.6
billion cubic feet (Bcf), natural gas purchases of 4.0 Bcf and net basis
differentials of 9.4 Bcf. The net deferred gain on these derivative financial
instruments as of September 30, 1997 was not material.
Industries purchases options to hedge price risk associated with a portion
of its fixed price purchase and sale commitments related to electricity. The net
deferred gain on these options as of September 30, 1997 was not material.
IMPACT OF ACCOUNTING STANDARDS. In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." This statement specifies the
computation, presentation and disclosure requirements for earnings per share for
entities with publicly held common stock. Its objective is to simplify the
computation of earnings per share and to make the U.S. standard for computing
earnings per share more compatible with the standards of other countries and
with that of the International Accounting Standards Committee. This statement is
effective for fiscal years ending after December 15, 1997. Industries will adopt
this statement at year-end 1997 and does not expect adoption of the statement to
have a significant impact on its current earnings per share calculation.
In July 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of the statement is to report a measure of all changes in equity
of an enterprise that result from transactions or other economic events during
the period other than transactions with shareholders. Industries will be
required to display items of other comprehensive income including, but not
limited to, changes in its unrealized holding gains or losses on its
available-for-sale securities and foreign currency translation adjustments.
Industries will adopt this statement effective January 1, 1998.
REGULATORY ASSETS. The Utilities' operations are subject to the regulation
of the Commission and, in the case of the "Energy Utilities", the Federal Energy
Regulatory Commission (FERC). Accordingly, the Utilities' accounting policies
are subject to the provisions of 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 their
operations. As of September 30, 1997 and December 31, 1996, the regulatory
assets identified 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 of the
regulatory assets identified below might be required, unless some form of
transition cost recovery is established by the appropriate regulatory body which
would meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period.
Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1997 1996
============ ============
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 18) $ 47,626 $ 50,262
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges and
deferred depreciation (See below) 67,600 70,763
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,114 10,816
Deferred SFAS No. 106 expense not
recovered (Note 11) 89,060 87,557
FERC Order No. 636 transition costs (Note 7) 27,521 47,399
Regulatory income tax asset, net (Note 9) 9,921 4,736
Other 4,218 0
------------ -----------
256,060 271,533
Less: Current portion of regulatory assets 38,037 35,328
------------- -----------
$ 218,023 $ 236,205
============= ===========
</TABLE>
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges and
deferred depreciation in accordance with orders of the Commission until the cost
of each unit was allowed in rates. Such carrying charges and deferred
depreciation are being amortized over the remaining life of each unit.
Northern Indiana has capitalized carrying charges and deferred
depreciation and certain operating expenses relating to its scrubber service
agreement for its Bailly Generating Station in accordance with an order of the
Commission. Pursuant to such order, capitalization of carrying charges and
deferral of depreciation and certain operating expenses ceased on December 31,
1995. The accumulated balance of the deferred costs and related carrying charges
is being amortized over the remaining life of the scrubber service agreement.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds used
during construction (AFUDC) is charged to construction work in progress during
the period of construction and represents the net cost of borrowed funds used
for construction purposes and a reasonable rate upon other (equity) funds. Under
established regulatory rate practices, after the construction project is placed
in service, Northern Indiana is permitted to include in the rates charged for
utility services (a) a fair return on and (b) depreciation of such AFUDC
included in plant in service.
At January 1, 1995, a pre-tax rate of 6.0% for all construction was being
used; effective January 1, 1996 the rate decreased to 5.5%; and effective
January 1, 1997, the rate increased to 6.0%.
FOREIGN CURRENCY TRANSLATION. Translation gains or losses are based upon
the end-of-period exchange rate and are recorded as a separate component of
common shareholders' equity.
INVESTMENTS IN REAL ESTATE. Development invests in a series of affordable
housing projects within the Utilities' service territories. 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
$30.9 million and $24.1 million relating to affordable housing projects at
September 30, 1997 and December 31, 1996, 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) RESOLUTION OF TAX MATTER: In 1991, the Internal Revenue Service (IRS) issued
a notice of deficiency for Northern Indiana's taxes for the years 1982 through
1985 ($3,785,250 per year plus interest) relating to interest payments on $70
million of 17-1/4% Notes issued in 1981 by Northern Indiana's former foreign
subsidiary, Northern Indiana Public Service Finance N.V. (Finance). The IRS
maintained that interest paid on the Notes should have been subject to United
States tax withholding. Northern Indiana challenged the assessment in the United
States Tax Court (Tax Court) and 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. The IRS appealed the Tax Court's decision to the U. S.
Court of Appeals for the Seventh Circuit (Court of Appeals) and Northern Indiana
filed a cross appeal. On June 6, 1997 the Court of Appeals issued an order
affirming in full the Tax Court order. The IRS did not appeal the decision of
the Court of Appeals.
(4) PURCHASE OF IWC RESOURCES CORPORATION: On March 25, 1997, Industries
acquired all the outstanding common stock of IWCR for $290.5 million. Industries
financed this transaction with debt of approximately $83.0 million and issuance
of approximately 5.3 million Industries' common shares. Industries accounted for
the acquisition as a purchase the purchase price was allocated to the assets and
liabilities acquired based on their estimated fair values. The accompanying
consolidated financial statements reflect a preliminary allocation of the
purchase price (see Note 2) as the purchase price allocation has not been
finalized.
Following is a summary of the assets acquired and liabilities assumed in
the acquisition of IWCR:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Assets acquired:
Utility plant (net of
accumulated depreciation) $ 448,387
Other property and investments 26,526
Other current assets 34,826
Intangible assets 80,572
Other noncurrent assets 22,350
---------
612,661
Less:
Liabilities assumed:
Long-term debt 112,185
Preferred stock 4,497
Short-term debt 28,329
Other current liabilities 23,315
Customer advances and contributions
in aid of construction 86,175
Other noncurrent liabilities 67,623
---------
322,124
---------
Net assets acquired $ 290,537
=========
</TABLE>
On a proforma basis, the acquisition of IWCR does not have a material
impact on Industries' consolidated operating results.
(5) RESOLUTION OF ELM ENERGY AND RECYCLING (UK) LTD. LITIGATION:
Development is a 85% shareholder in Elm Energy and Recycling (UK) Ltd. (Elm),
which owns and operates a tire-fueled electric generating plant in
Wolverhampton, England (Project). In 1995, the Project failed certain
performance and reliability tests which had been established under a contract
between Elm and TBV Power Limited (TBV), a company jointly owned by subsidiaries
of the Tarmac PLC Group and Black & Veatch. Elm "rejected" the Project in
accordance with the contract, and the independent Project engineer then
certified that 29.6 million British Pounds Sterling (approximately $47.9 million
at September 30, 1997) were to be reimbursed by TBV to Elm. TBV filed suit in
the English courts to enjoin enforcement of the decision and to allege certain
breaches of the underlying construction contract. Elm counterclaimed, and Elm
and Development also sought additional remedies at law, in both the United
States and the United Kingdom, for damages and/or sanctions against TBV, Tarmac
PLC Group, Black & Veatch and its chairman. Black & Veatch counterclaimed
against Elm and Development.
In September 1997, a settlement was reached on mutually agreed terms which
resulted in the dismissal, with prejudice, of all litigation in the United
States and the United Kingdom relating to the Project (Elm Litigation
Settlement). Concurrently, Elm reached a settlement with its banks pursuant to
which the banks were paid a portion of the proceeds received by Elm in the Elm
Litigation Settlement in exchange for the banks agreeing to forgive Elm's
remaining bank debt and to release all security interests they had in the
Project. The Elm Litigation Settlement was not material to the results of
operations or financial position of Industries. Elm is continuing to operate the
Project and Development provides financing to support its operations.
(6) NESI ENERGY MARKETING CANADA LTD. LITIGATION: On October 31, 1996, Services'
wholly-owned subsidiary NIPSCO Energy Services Canada Ltd. (NESI Canada)
acquired 70% of the outstanding shares of Chandler Energy Inc., a gas marketing
and trading company located in Calgary, Alberta, and subsequently renamed it
NESI Energy Marketing Canada Ltd. (NEMC). Between November 1 and November 27,
1996, gas prices in the Calgary market increased dramatically. As a result, NEMC
was selling gas, pursuant to contracts entered into prior to the acquisition
date, at prices substantially below its costs to acquire such gas. On November
27, 1996, NEMC ceased doing business and sought protection from its creditors
under the Companies' Creditors Arrangement Act, a Canadian corporate
reorganization statute. NEMC was declared bankrupt as of December 12, 1996.
Certain creditors of NEMC have filed claims against Industries, Services,
Capital Markets and NESI Canada, alleging certain misrepresentations relating to
NEMC's financial condition and claiming damages. Industries and its affiliates
intend to vigorously defend against such claims and any other claims seeking to
assert that any party other than NEMC is responsible for NEMC's liabilities.
Industries has fully reserved its investment in NEMC. Management believes that
any additional loss relating to NEMC would not be material to the results of
operations or financial position of Industries.
(7) FERC ORDER NO. 636: The Energy Utilities have recorded approximately $135
million of interstate pipeline transition costs to reflect the impact of FERC
Order No. 636, a majority of which costs have been paid to the pipeline
suppliers. The Energy Utilities expect that additional transition costs will not
be significant. The Commission has approved the recovery of these FERC-allowed
transition costs on a volumetric basis from sales and transportation customers.
Regulatory assets, in amounts corresponding to the costs recorded but not yet
collected, have been recorded to reflect the ultimate recovery of these costs.
(8) 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
approximately $20 million to cover probable corrective actions as of September
30, 1997; however, environmental regulations and remediation techniques are
subject to future change. The ultimate cost could be significant, depending on
the extent of corrective actions required. Based upon investigations and
management's understanding of current laws and regulations, 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 results of operations or financial position of
Industries.
On December 19, 1996, the Environmental Protection Agency (EPA) promulgated
rules for the second phase of the Acid Rain nitrogen oxides reduction program.
Northern Indiana is evaluating compliance strategies to meet the reduced
emission limitations found in the final rule. Additional controls may be needed
to meet the requirements. A compliance plan must be submitted to the EPA by
December 31, 1997 with details of the plan to meet the new limits by January 1,
2000.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the CAAA
sulfur dioxide regulations will impact electric rates by less than 5% in the
future.
The CAAA contain provisions that could lead to limitations on emissions of
nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements. Northern
Indiana cannot predict the costs of complying with CAAA requirements, but
Northern Indiana believes that any such mandated costs would be recoverable
through the rate-making process.
The EPA issued final rules on July 18, 1997 revising the National Ambient
Air Quality Standards for ozone and particulate matter. The revised standards
begin a regulatory process that may lead to reductions in sulfur dioxide and
nitrogen oxide emissions from coal-fired boilers (including Northern Indiana's
generating stations) beyond reductions required in the Acid Rain provisions of
the CAAA. Northern Indiana cannot predict the costs of complying with future
control requirements to meet these new standards. Northern Indiana will continue
to closely monitor developments in this area and anticipates the exact nature of
the impact of the new standards on its operations will not be known for some
time.
The EPA has notified Northern Indiana that it is a "potentially
responsible party" (PRP) under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA) and may be required to share in the cost
of cleanup of several waste disposal sites identified by the EPA. The sites are
in various stages of investigation, analysis and remediation. At each of the
sites, Northern Indiana is one of several PRPs, and it is expected that remedial
costs, as provided under CERCLA, will be shared among them. At some sites
Northern Indiana and/or the other named PRPs are presently working with the EPA
to clean up the sites and avoid the imposition of fines or added costs.
The Energy Utilities have instituted a program to investigate former
manufactured-gas plants where one of them is the current or former owner. The
Energy Utilities have identified twenty-eight of these sites and made visual
inspections of these sites. Initial samplings have been conducted at eighteen
sites. Follow-up investigations have been conducted at seven sites and remedial
measures have been selected at four sites. The Energy Utilities will continue
their program to assess and cleanup sites.
During the course of various investigations, the Energy Utilities have
identified impacts to soil, groundwater, sediment and surface water from former
manufactured-gas plants. At three sites where residues were noted seeping into
rivers, Northern Indiana notified the Indiana Department of Environmental
Management (IDEM) and the EPA and immediately took steps to contain the
material. The Energy Utilities have worked with IDEM or the EPA on investigation
or remedial activities at several sites. Three of the sites have been enrolled
in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites
in the VRP is to obtain IDEM approval of the selection and implementation of
whatever remedial measures, if any, may be required. The Energy Utilities
anticipate placing additional sites in the VRP after remedial measures have been
selected.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured-gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative order
with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy)
(formerly PSI Energy, Inc.) that it was a former owner or operator of seven
former manufactured-gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities. In December 1996, Northern
Indiana sent a written demand to Cinergy related to one of these sites, Goshen.
Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern
Indiana has already incurred and to be incurred to implement the needed remedy
at the Goshen site. In August 1997, Northern Indiana filed suit in Indiana state
court against Cinergy seeking recovery of those costs.
In 1994, the Energy Utilities approached various companies that provided
insurance coverage which the Energy Utilities believe covers costs related to
actions taken at former manufactured-gas plants. In September 1995, certain of
the insurance companies initiated a suit in Indiana state court against Northern
Indiana seeking a ruling that denied coverage. Later that same month, Northern
Indiana initiated a similar suit in federal court, and the state court action
was stayed. After the dismissal of the federal court action on procedural
grounds in May 1997, Northern Indiana filed claims in the state court action
against various insurance companies, seeking coverage for costs associated with
several former manufactured-gas plants and damages for alleged misconduct by
some of the insurance companies. The state court action is now proceeding.
Northern Indiana has received cash settlements from several of the insurance
companies.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources may
result in adverse health effects has been the subject of public, governmental
and media attention. Recently, researchers from the National Cancer Institute
and the Childhood Cancer Group reported they found no evidence magnetic fields
in homes increase the risk of childhood leukemia. This study follows an EMF
report released late last year by the U.S. National Research Counsel of the
National Academy of Sciences, which concluded, after examining more than 500 EMF
studies spanning 17 years, that, among other things, there was insufficient
evidence to consider EMF a threat to human health. Despite the reports'
findings, future research appropriations are continuing to be dedicated to
explore this issue.
The Water Utilities are subject to pollution control and water quality
control regulations, including those issued by the EPA, IDEM, the Indiana Water
Pollution Control Board, and the Indiana Department of Natural Resources. Under
the Federal Clean Water Act and Indiana's regulations, IWC must obtain National
Pollutant Discharge Elimination System (NPDES) permits for discharges from its
water treatment stations. Application for renewal of any expiring permits have
been filed and are the subject of ongoing discussions with, but not finalized
by, IDEM. These permits continue in effect pending review of the applications.
Under the Federal Safe Drinking Water Act (SDWA), the Water Utilities are
subject to regulation by the EPA for the quality of water sold and treatment
techniques used to make the water potable. The EPA promulgates nationally
applicable maximum contaminant levels (MCLs) for contaminants found in drinking
water. Management believes its water utilities are currently in compliance with
all MCLs promulgated to date. The EPA has continuing authority, however, to
issue additional regulations under the SDWA. In August 1996, Congress amended
the SDWA to allow the EPA more authority to weigh the costs and benefits of
regulations being considered in some, but not all, cases. The 1996 amendments do
not, however, reduce the number of new standards required by the 1986
amendments. Such standards promulgated could be costly and require substantial
changes in the Water Utilities' operations. The Water Utilities would expect to
recover the costs of such changes through their water rates; however, such
recovery may not necessarily be timely.
Under a 1991 law enacted by the Indiana Legislature, a water utility may
petition the Commission for prior approval of its plans and estimated
expenditures required to comply with provisions of, and regulations under, the
Federal Clean Water Act and SDWA. Upon obtaining such approval, a water utility
may include, to the extent of its estimated costs as approved by the Commission,
such costs in its rate base for rate-making purposes and recover its costs of
developing and implementing the approved plans if statutory standards are met.
The capital costs for such new systems, equipment or facilities or modifications
of existing facilities may be included in a water utility's rate base upon
completion of construction of the project or any part thereof. While use of this
statute is voluntary on the part of a water utility, if utilized, it should
allow water utilities a greater degree of confidence in recovering major costs
incurred to comply with environmentally related laws on a timely basis.
(9) 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 of the Utilities are
recoverable or payable through future rates, regulatory assets and liabilities
have been established. Regulatory assets are primarily attributable to
undepreciated AFUDC-equity and the cumulative net amount of other income tax
timing differences for which deferred taxes had not been provided in the past,
when regulators did not recognize such taxes as costs in the rate-making
process. Regulatory liabilities are primarily attributable to the Utilities'
obligation to credit to ratepayers deferred income taxes provided at rates
higher than the current federal tax rate currently being credited to ratepayers
using the average rate assumption method and unamortized deferred investment tax
credits.
The components of the net deferred income tax liability at September 30,
1997 and December 31, 1996, are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1997 1996
============= ============
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 771,471 $ 727,528
AFUDC-equity 35,903 37,713
Adjustment clauses 23,987 41,181
Take-or-pay gas costs 496 877
Other regulatory assets 30,270 39,458
Reacquisition premium on debt 18,674 19,041
Deferred tax assets -
Deferred investment tax credits (40,738) (41,046)
Removal costs (141,305) (131,718)
FERC Order No. 636 transition costs (10,437) (8,144)
Other postretirement/postemployment benefits (50,218) (43,446)
Other, net (813) (11,987)
------------ -----------
637,290 629,457
Less: Deferred income taxes related to
current assets and liabilities 6,396 26,712
------------ -----------
Deferred income taxes -noncurrent $ 630,894 $ 602,745
============ ===========
</TABLE>
Federal and state income taxes as set forth in the Consolidated Statement
of Income are comprised of the following:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
--------- --------- -------- --------- --------- ---------
(In thousands) 1997 1996 1997 1996 1997 1996
========= ========= ======== ======== ========= ========
<S> <C> <C> <C> <C> <C> <C>
Current income taxes -
Federal $ 18,988 $ 15,955 $ 97,004 $ 56,044 $121,586 $ 64,253
State 3,594 2,866 15,597 9,335 19,043 11,533
--------- --------- -------- -------- -------- --------
22,582 18,821 112,601 65,379 140,629 75,786
--------- --------- -------- -------- -------- --------
Deferred income taxes, net -
Federal (554) 1,841 (31,452) 13,550 (25,720) 29,256
State 12 228 (2,450) 1,321 (1,927) 2,655
--------- --------- -------- -------- -------- --------
(542) 2,069 (33,902) 14,871 (27,647) 31,911
--------- --------- --------- -------- -------- --------
Deferred investment tax
credits, net (1,832) (1,984) (5,467) (5,322) (7,553) (7,233)
--------- --------- -------- -------- -------- --------
Income taxes 20,208 18,906 73,232 74,928 105,429 100,464
Income taxes applicable to
non-operating activities
and equity investments 474 1,170 3,032 601 2,224 (770)
--------- --------- -------- -------- -------- --------
Total income taxes $ 20,682 $ 20,076 $ 76,264 $ 75,529 $107,653 $99,694
========= ========= ======== ======== ======== ========
</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 Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
--------- --------- --------- --------- --------- ---------
(In thousands) 1997 1996 1997 1996 1997 1996
========= ========= ========= ========= ========= =========
<S> <C> <C> <C> <C> <C> <C>
Net income $ 35,869 $ 34,410 $ 134,943 $ 125,325 $ 186,352 $ 177,153
Add-Income taxes 20,682 20,076 76,264 75,529 107,653 99,694
Dividend requirements on
preferred stocks of subsidiaries 2,174 2,174 6,520 6,551 8,681 8,776
--------- --------- --------- --------- --------- ---------
Income before preferred
dividend requirements of
subsidiaries and income taxes $ 58,725 $ 56,660 $ 217,727 $ 207,405 $ 302,686 $ 285,623
========= ========= ========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the
statutory rate $ 20,553 $ 19,832 $ 76,204 $ 72,592 $ 105,939 $ 99,969
Reconciling items multiplied by the statutory rate:
Book depreciation over
related tax depreciation 1,021 1,007 3,109 3,020 4,710 4,024
Amortization of deferred
investment tax credits (1,832) (1,984) (5,467) (5,322) (7,553) (7,233)
State income taxes, net of
federal income tax benefit 2,957 1,946 9,356 7,337 12,559 9,598
Reversal of deferred taxes
provided at rates in excess
of the current federal
income tax rate (1,033) (1,409) (4,069) (4,228) (6,485) (5,814)
Other, net (984) 684 (2,869) 2,130 (1,517) (850)
--------- --------- --------- --------- --------- --------
Total income taxes $ 20,682 $ 20,076 $ 76,264 $ 75,529 $ 107,653 $ 99,694
========= ========= ========= ========= ========= ========
</TABLE>
(10) PENSION PLANS: Industries and its subsidiaries have four noncontributory,
defined benefit retirement plans covering the majority of their employees.
Benefits under the plans reflect the employees' compensation, years of service
and age at retirement.
The plans' funded status as of January 1, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
========== ==========
<S> <C> <C>
Vested benefit obligation $ (550,151) $ (549,234)
Nonvested benefit (105,339) (104,814)
---------- ----------
Accumulated benefit obligation $ (655,490) $ (654,048)
========== ==========
Projected benefit obligation for service
rendered to date $ (759,406) $ (759,681)
Plan assets at fair market value 806,888 706,320
---------- ----------
Plan assets in excess of (or less than)
projected benefit obligation 47,482 (53,361)
Unrecognized transition obligation at January 1,
being recognized over seventeen years 37,401 43,484
Unrecognized prior service cost 25,528 27,242
Unrecognized gains (66,611) (4,217)
---------- -----------
Prepaid pension costs $ 43,800 $ 13,148
========== ===========
</TABLE>
The accumulated benefit obligation is the present value of future pension
benefit payments and is based on a plan benefit formula without considering
expected future salary increases. The projected benefit obligation considers
estimated future salary increases. Discount rates of 7.75% and 7.25% and rates
of increase in compensation levels of 5.50% were used to determine the
accumulated benefit obligation and projected benefit obligation at January 1,
1997 and 1996, respectively.
The following items are the components of provisions for pensions for the
three-month, nine-month and twelve-month periods ended September 30, 1997 and
September 30, 1996:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
-------- -------- -------- -------- -------- --------
(In thousands) 1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 6,641 $ 4,495 $16,023 $ 15,083 $ 17,240 $ 17,453
Interest costs 31,651 17,482 65,003 49,611 68,869 62,075
Estimated return on plan assets (40,486) (20,874) (81,966) (58,977) (110,396) (155,593)
Amortization of transition
obligation 3,216 1,791 6,569 5,054 6,937 6,410
Other net amortization and
deferral 2,011 846 3,911 2,396 27,975 86,607
------- ------- ------- -------- -------- --------
$ 3,033 $ 3,740 $ 9,540 $ 13,167 $ 10,625 $ 16,952
======= ======= ======= ======== ======== ========
</TABLE>
Assumptions used in the valuation and determination of 1997 and 1996
pension expenses were as follows:
<TABLE>
<CAPTION>
1997 1996
====== ======
<S> <C> <C>
Discount rate 7.75% 7.25%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00%
</TABLE>
The plans' assets are invested primarily in common stocks, bonds and
notes. On July 22, 1997, a substantial portion of the plans' domestic equity
investments were hedged against substantial movements in the S&P 500 Index. The
hedge will expire on December 31, 1997.
IWCR participates in several industry-wide, multi-employer pension plans
for certain of its union employees at Miller. These plans provide for monthly
benefits based on length of service. Specified amounts per compensated hour for
each employee are contributed to the trustees of these plans. Contributions of
$0.6 million and $1.1 million were made to these plans for the three-month and
six-month periods ended September 30, 1997. The relative position of each
employer participating in these plans with respect to the actuarial present
value of accumulated plan benefits and net assets available for benefits is not
available.
(11) POSTRETIREMENT BENEFITS: Industries provides certain health care and life
insurance benefits for retired employees. The majority 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 rate-making has historically included the cost of
providing these benefits based on the related insurance premiums. On December
30, 1992, the Commission authorized the accrual method of accounting for
postretirement benefits for rate-making purposes consistent with SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
authorized the deferral of the differences between the net periodic
postretirement benefit costs and the insurance premiums paid for such benefits
(OPRB) as a regulatory asset until such time as the accrual cost method could be
reflected in the rate-making process.
On June 11, 1997, the Commission issued an order approving the inclusion
of accrual-based postretirement benefit costs in the rate-making process to be
effective February 1, 1997 for electric rates and March 1, 1997 for gas rates.
These costs include an amortization of the existing regulatory asset consistent
with the remaining amortization period for the transition obligation. Northern
Indiana discontinued its cost deferral and began amortizing its regulatory asset
concurrent with these dates.
IWC's current rates include postretirement benefit costs on an accrual
basis, including amortization of the regulatory asset that arose prior to
inclusion of these costs in the rates. IWC currently remits to a grantor trust
amounts collected in rates.
The following table sets forth the plans' accumulated postretirement
benefit obligation as of January 1, 1997 and 1996:
<TABLE>
<CAPTION>
January 1, January 1,
(In thousands) 1997 1996
========= ==========
<S> <C> <C>
Postretirement Benefit Obligation for:
Retirees $ (85,308) $ (99,453)
Fully eligible active plan participants (19,448) (23,084)
Other active plan participants (115,383) (136,322)
---------- ---------
Accumulated postretirement benefit obligation (220,139) (258,859)
Unrecognized transition obligation at January 1,
being recognized over twenty years 188,229 197,088
Unrecognized actuarial gain (91,023) (23,439)
---------- ---------
Accrued liability for postretirement benefits $(122,933) $ (85,210)
========== =========
</TABLE>
A discount rate of 7.75%, a pre-Medicare medical trend rate of 9%
declining to a long-term rate of 6%, a discount rate of 7.25% and a pre-Medicare
medical trend rate of 10% declining to a long-term rate of 6%, were used to
determine the accumulated postretirement benefit obligation at January 1, 1997
and 1996, respectively.
The decrease in the accumulated postretirement benefit obligation (APBO)
and the related increase in unrecognized actuarial gain at January 1, 1997 were
primarily attributable to favorable claim experience and the increase in the
discount rate to 7.75%. Additionally, Industries amended its plan to implement a
3% cap on its share of retiree cost increases for pre-Medicare benefits for
certain non-bargaining retirees who retire after February 1, 1997. This plan
amendment reduced the APBO and the unrecognized transition obligation by $9.6
million at January 1, 1997.
Net periodic postretirement benefits costs for the three-month, nine-month
and twelve-month periods ended September 30, 1997 and September 30, 1996 include
the following components:
<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
---------------- ---------------- ---------------
(In thousands) 1997 1996 1997 1996 1997 1996
====== ====== ======= ====== ======= ======
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 1,589 $ 1,621 $ 4,638 $ 4,861 $ 7,129 $ 6,359
Interest costs 4,798 5,079 14,056 15,238 17,129 20,034
Amortization of transition
obligation over twenty years 2,970 3,095 8,704 9,285 11,012 12,181
Amortization of unrecognized
actuarial gain (1,014) (583) (3,036) (1,748) (1,842) (2,304)
------- ------- -------- ------- ------- -------
$ 8,343 $ 9,212 $24,362 $27,636 $33,428 $36,270
======= ====== ======== ======= ======= =======
</TABLE>
The net periodic postretirement benefit costs for 1997 were determined
assuming a 7.75% discount rate, a 5% rate of compensation increase and a
pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%. The
effect of a 1% increase in the assumed health care cost trend rates for each
future year would increase the accumulated postretirement benefit obligation at
January 1, 1997 by approximately $31.3 million, and increase the aggregate of
the service and interest cost components of plan costs by approximately $1.2
million and $3.6 million for the three-month and nine-month periods ended
September 30, 1997, respectively. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.
(12) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS:
INDUSTRIES -
20,000,000 shares -Preferred -without par value
Effective March 2, 1990, 2,000,000 of Industries' Series A Junior
Participating Preferred Shares were reserved for issuance pursuant to the Share
Purchase Rights Plan described in Note 16, 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)
INDIANAPOLIS WATER COMPANY -
300,000 shares -Cumulative Preferred -$100 par value
Note 13 sets forth the preferred stocks which are redeemable solely at the
option of the issuer, and Note 14 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 Northern Indiana and IWC 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.
(13) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER,
OUTSTANDING AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (see Note 12):
<TABLE>
<CAPTION>
Redemption
Price at
September 30, December 31, September 30,
(Dollars in thousands) 1997 1996 1997
============ =========== ===========
<S> <C> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
CUMULATIVE PREFERRED STOCK -
$100 PAR VALUE -
4-1/4% series - 209,123 and 209,145
shares outstanding, respectively $ 20,912 $ 20,915 $101.20
4-1/2% series - 79,996 shares outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254 N/A
CUMULATIVE PREFERRED STOCK -
NO PAR VALUE -
Adjustable rate (6.00% at
September 30, 1997), Series A
(stated value $50 per share)
473,285 shares outstanding 23,664 23,664 $ 50.00
INDIANAPOLIS WATER COMPANY:
CUMULATIVE PREFERRED STOCK -
$100 PAR VALUE -
Rates ranging from 4.00% to 5.00%,
44,966 shares outstanding 4,497 0 $100 - $105
---------- ---------
$ 85,620 $ 81,126
========== =========
</TABLE>
During the period October 1, 1995 to September 30, 1997, there were no
additional issuances of the above preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at any
time upon thirty days' notice at the option of the issuer at the redemption
prices shown.
(14) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT SEPTEMBER 30, 1997 AND DECEMBER
31, 1996 (see Note 12): Preferred stocks subject to mandatory redemption
requirements or whose redemption is outside the control of issuer, excluding
sinking fund payments due within one year are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1997 1996
============ ============
<S> <C> <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
CUMULATIVE PREFERRED STOCK -$100 PAR VALUE-
8.85% series - 62,500 and 75,000 Shares
outstanding, respectively $ 6,250 $ 7,500
7-3/4% series - 44,460 shares outstanding 4,446 4,446
8.35% series - 57,000 and 63,000 shares
outstanding, respectively 5,700 6,300
CUMULATIVE PREFERRED STOCK -NO PAR VALUE -
6.50% series - 430,000 shares outstanding 43,000 43,000
--------- ---------
$ 59,396 $ 61,246
========= =========
</TABLE>
The redemption prices at September 30, 1997, as well as sinking fund
provisions for the cumulative preferred stock subject to mandatory redemption
requirements, or whose redemption is outside the control of Northern Indiana,
are as follows:
<TABLE>
<CAPTION>
Sinking Fund or
Series Redemption Price Per Share Mandatory Redemption Provisions
======== ========================== =================================
<S> <C> <C>
Cumulative preferred stock -$100 par value -
8.85% $101.48, reduced periodically 12,500 shares on or before April 1.
8.35% $103.69, reduced periodically 3,000 shares on or before July 1; increasing
to 6,000 shares beginning in 2004;
noncumulative option to double amount
each year.
7-3/4% $104.41, reduced periodically 2,777 shares on or before December 1;
noncumulative option to double amount
each year.
Cumulative preferred stock -no par value -
6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at September 30, 1997 for each of the twelve-month periods
subsequent to September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,*
=================================
<S> <C>
1999 $1,827,700
2000 $1,827,700
2001 $1,827,700
2002 $1,827,700
* Table does not reflect redemptions made after September 30, 1997.
</TABLE>
(15) COMMON SHARE DIVIDEND: During the next few years, Industries expects that
the majority of earnings available for distribution of dividends will depend
upon dividends paid to Industries by Northern Indiana. Northern Indiana's
Indenture provides that it will not declare or pay any dividends on any class of
capital stock (other than preferred or preference stock) except out of earned
surplus or net profits of Northern Indiana. At September 30, 1997, Northern
Indiana had approximately $139.9 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.
(16) 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
Industries' common shares. At September 30, 1997, Industries had purchased
approximately 21.4 million shares since 1989 at an average price of $27.85 per
share. Approximately 4.7 million additional common shares may be repurchased
under the Board's authorization.
(17) 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 September 30, 1997, there were 4,578
shares and 1,939,750 shares reserved for future awards under the 1988 Plan and
1994 Plan, respectively. The 1988 Plan and 1994 Plan permit the following types
of grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights and
performance units. No incentive stock options or performance units were
outstanding at September 30, 1997. Under both Plans, the exercise price of each
option equals the market price of Industries' stock on the date of grant. Each
option's maximum term is ten years and vests one year from the date of grant.
The stock appreciation rights (SARs) may be exercised only in tandem with
stock options on a one-for-one basis and are payable in cash, Industries' common
shares or a combination thereof. Restricted stock awards are restricted as to
transfer and are subject to forfeiture for specific periods from the date of
grant. Restrictions on shares awarded in 1995 lapse five years from date of
grant and vesting is variable from 0% to 200% of the number awarded, subject to
specific earnings per share and stock appreciation goals. Restrictions on shares
awarded in 1996 and 1997 lapse two years from date of grant and vesting is
variable from 0% to 100% of the number awarded, subject to specific performance
goals. If a participant's employment is terminated prior to vesting other than
by reason of death, disability or retirement, restricted shares are forfeited.
There were 271,333 and 262,000 restricted shares outstanding at September 30,
1997 and December 31, 1996, 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. If a director's service on the Board is terminated for any reason
other than death or disability, any common shares not vested as of the date of
termination are forfeited. As of September 30, 1997, 32,750 shares had been
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 $0.5, $1.4 and $1.9 million for the
three-month, nine-month and twelve-month periods ending September 30, 1997,
respectively. 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 Nine Months Twelve Months
Ended Ended Ended
September 30, September 30, September 30,
--------------- ----------------- ----------------
1997 1996 1997 1996 1997 1996
====== ====== ======= ======= ======= =======
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net Income:
As reported $35,869 $34,410 $134,943 $125,325 $186,352 $177,153
Pro forma 35,653 34,238 134,313 124,838 185,516 176,503
Earnings Per Share:
As reported $ 0.57 $ 0.56 $ 2.18 $ 2.03 $ 3.03 $ 2.85
Pro forma 0.57 0.56 2.18 2.03 3.02 2.85
</TABLE>
The fair value of each option granted used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
the three-month, nine-month and twelve-month periods ended September 30, 1997
and September 30, 1996: risk-free interest rate of 6.29% and 6.39%,
respectively; expected dividend yield per share of $1.74 and $1.68,
respectively; expected option term of five and one-quarter years and five years,
respectively; and expected volatilities of 12.7% and 13.2%, respectively.
Changes in outstanding shares under option and SARs for the three-month,
nine-month and twelve-month periods ended September 30, 1997 and September 30,
1996 are as follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
----------------------------------------------
Weighted Weighted
Average Average
Option Option
Three Months Ended September 30, 1997 Price 1996 Price
================================ ======= == ======= ========= =======
<S> <C> <C> <C> <C>
Balance, beginning of period 1,104,400 $30.66 1,052,700 $28.64
Granted 266,800 41.28 278,300 37.81
Exercised (46,300) 31.64 (18,100) 28.32
Canceled 0 0
--------- ---------
Balance, end of period 1,324,900 32.76 1,312,900 30.59
========= =========
Shares exercisable 1,058,100 30.62 1,034,600 28.65
========= =========
Weighted average fair value
of options granted $ 5.32 $ 5.00
======== ========
<CAPTION>
NONQUALIFIED STOCK OPTIONS
--------------------------------------------
Weighted Weighted
Average Average
Option Option
Nine Months Ended September 30, 1997 Price 1996 Price
================================ ========= ======= ========= =======
<S> <C> <C> <C> <C>
Balance, beginning of period 1,187,150 $30.58 1,107,750 $28.55
Granted 266,800 41.28 278,300 37.81
Exercised (117,200) 29.53 (64,150) 26.42
Canceled (11,850) 37.81 (9,000) 32.52
--------- ---------
Balance, end of period 1,324,900 32.76 1,312,900 30.59
========= =========
Shares exercisable 1,058,100 30.62 1,034,600 28.65
========= =========
Weighted average fair value
of options granted $ 5.32 $ 5.00
======== ========
<CAPTION>
NONQUALIFIED STOCK OPTIONS
---------------------------------------------
Weighted Weighted
Average Average
Option Option
Twelve Months Ended September 30, 1997 Price 1996 Price
================================= ========= ======= ========= =======
<S> <C> <C> <C> <C>
Balance, beginning of period 1,312,900 $30.59 1,242,350 $28.36
Granted 266,800 41.28 278,300 37.81
Exercised (237,050) 29.98 (195,750) 26.60
Canceled (17,750) 37.09 (12,000) 32.50
--------- ---------
Balance, end of period 1,324,900 32.76 1,312,900 30.59
========= =========
Shares exercisable 1,058,100 30.62 1,034,600 28.65
========= =========
Weighted average fair value
of options granted $ 5.32 $ 5.00
======== ========
<CAPTION>
NONQUALIFIED STOCK OPTIONS WITH SARs
--------------------------------------------
Option Option
Three Months Ended September 30, 1997 Price 1996 Price
=============================== ======== ======= ======== =======
<S> <C> <C> <C> <C>
Balance, beginning of period 5,600 $10.94 5,600 $10.94
Exercised 0 0
-------- --------
Balance, end of period 5,600 10.94 5,600 10.94
======== ========
Shares exercisable 5,600 10.94 5,600 10.94
======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs
---------------------------------------------
Option Option
Nine Months Ended September 30, 1997 Price 1996 Price
=============================== ======== ======= ======== =======
<S> <C> <C> <C> <C>
Balance, beginning of period 5,600 $10.94 5,600 $10.94
Exercised 0 0
-------- ---------
Balance, end of period 5,600 10.94 5,600 10.94
======== ========
Shares exercisable 5,600 10.94 5,600 10.94
======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs
---------------------------------------------
Option Option
Twelve Months Ended September 30 , 1997 Price 1996 Price
================================ ======== ======= ======== =======
<S> <C> <C> <C> <C>
Balance, beginning of period 5,600 $10.94 5,600 $10.94
Exercised 0 0
--------- ---------
Balance, end of period 5,600 10.94 5,600 10.94
======== ========
Shares exercisable 5,600 10.94 5,600 10.94
======== ========
</TABLE>
The following table summarizes information about non-qualified stock
options at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -----------------------------------------------------------------------------
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Option Price September 30, 1997 Contractual Life Option Price
=============== ================== ================ ===============
<S> <C> <C> <C>
$10.94 to $17.94 87,000 2.30 years $16.59
$22.94 to $30.31 351,250 5.60 years $26.60
$32.44 to $41.28 886,650 8.39 years $36.79
- ----------------- --------- ----------- -------
$10.94 to $41.28 1,324,900 7.25 years $32.76
=========
<CAPTION>
OPTIONS EXERCISABLE
- ------------------------------------------------------------
Number
Range of Exercisable at Weighted Average
Option Price September 30, 1997 Option Price
================ ================== ===============
<S> <C> <C>
$10.94 to $17.94 87,000 $16.59
$22.94 to $30.31 351,250 $26.60
$32.44 to $37.81 619,850 $34.86
- ---------------- ---------- ---------
$10.94 to $37.81 1,058,100 $30.62
==========
</TABLE>
(18) LONG-TERM DEBT: At September 30, 1997 and December 31, 1996, Industries'
outstanding long-term debt, excluding amounts due within one year, issued and
not retired or canceled was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1997 1996
============ ===========
<S> <C> <C>
First mortgage bonds -
Interest rates between 5.20% and 9.83%
with a weighted average interest rate of
7.22% and various maturities between
October 1, 1998 and September 1, 2025 $ 201,609 $ 109,509
Pollution control notes and bonds-
Interest rates between 3.77% and 5.70%
with a weighted average interest rate of
3.93% and various maturities between
October 1, 2003 and April 1, 2019 242,000 242,000
Medium-term notes -
Interest rates between 6.10% and 7.99%
with a weighted average interest rate of
7.19% and various maturities between
April 5, 2000 and August 4, 2027 1,048,025 644,025
Subordinated Debentures -
7-3/4%, due March 31, 2026 75,000 75,000
Notes payable -
Interest rates between 6.31% and 9.00%
with a weighted average interest rate of
7.34% and various maturities between
December 22, 1999 and April 1, 2006 40,635 19,522
Variable bank loan -
6.50% -due August, 2003 5,600 0
Term Loan Facility 0 40,576
Unamortized premium and discount on
long-term debt, net (4,149) (3,526)
---------- ----------
Total long-term debt, excluding amounts
due in one year $1,608,720 $1,127,106
========== ==========
</TABLE>
The sinking fund requirements of long-term debt outstanding at September
30, 1997 (including the maturity of Northern Indiana's first mortgage bonds:
Series P, 6-7/8%, due October 1, 1998 and Series T, 7.50%, due April 1, 2002;
Northern Indiana's medium-term notes due from March 20, 2000 to June 12, 2002;
NDC Douglas Properties, Inc.'s notes payable due December 22, 1999 and August
15, 2002; IWC's first mortgage bonds: Series 5.20%, due May 1, 2001 and Series
8.00%, due December 15, 2001; and IWCR's senior notes payable, due March 15,
2001), for each of the twelve-month periods subsequent to September 30, 1998 are
as follows:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
=================================
<S> <C>
1999 $ 21,656,468
2000 162,674,817
2001 48,698,492
2002 65,998,446
</TABLE>
Unamortized debt expense, premium and discount on long-term debt
applicable to outstanding bonds are being amortized over the lives of such
bonds. Reacquisition premiums are being deferred and amortized. These premiums
are not earning a return during the recovery period.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes. As
of September 30, 1997, $139.0 million of the medium-term notes had been issued
with various interest rates and maturities. The proceeds from these issuances
were used to pay short-term debt incurred to redeem its First Mortgage Bonds,
Series N, and to pay at maturity various issues of Medium-Term Notes, Series D.
IWC's first mortgage bonds are secured by its utility plant. Provisions
of trust indentures related to the 5-7/8% Series Bonds and the 8% Series Bonds
require annual sinking or improvement payments amounting to 1/2% of the maximum
aggregate amount outstanding. As permitted, this requirement has been satisfied
by substituting a portion of permanent additions to utility plant.
On February 13, 1996, Capital Markets issued $75 million of 7-3/4% Junior
Subordinated Deferrable Interest Debentures, Series A, due March 31, 2026
(Debentures) pursuant to an underwritten public offering. Proceeds from the sale
of the Debentures were used to pay short-term debt incurred to redeem on January
12, 1996 $35 million of Industries' 8.75% Preferred Shares, pursuant to
mandatory redemption, and to pay other short-term debt of Capital Markets.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes with various interest rates and maturities.
The proceeds from these issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations 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, was approximately $1.3 billion at September 30, 1997.
(19) CURRENT PORTION OF LONG-TERM DEBT: At September 30, 1997 and December 31,
1996, Industries' current portion of long-term debt due within one year was as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1997 1996
============ ===========
<S> <C> <C>
First Mortgage Bonds $ 0 $ 25,747
Medium-term notes -
Interest rate of 5.83% and 5.95% with
a weighted average interest rate of
5.86% and various maturities between
April 6, 1998 and April 13, 1998 35,000 40,000
Zero Coupon notes -
7.57%, $72,500 at maturity
-due December 1, 1997 71,618 67,731
Notes payable -
Interest rates between 6.72% and 9.00%
with a weighted average interest rate
of 7.76% and maturities between
October 1, 1997 and August 31, 1998 3,604 5,033
Term loan facility 0 6,041
----------- ----------
Total current portion of long-term debt $ 110,222 $ 144,552
=========== ==========
</TABLE>
Capital Markets expects to refinance its 7.57% Zero Coupon Notes maturing
in the amount of $72.5 million on December 1, 1997.
(20) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving Credit
Agreement with several banks which terminates August 19, 1999. As of September
30, 1997, there were no borrowings outstanding under this agreement. In
addition, Northern Indiana has $14.2 million in lines of credit which run to May
31, 1998. The credit pricing of each of the lines varies from either the lending
banks' commercial prime or market rates. Northern Indiana has agreed to
compensate the participating banks with arrangements that vary from no
commitment fees to a combination of fees which are mutually satisfactory to both
parties. As of September 30, 1997, there were no borrowings under these lines of
credit. The Credit Agreement and lines of credit are also available to support
the issuance of commercial paper.
Northern Indiana also has $273.5 million of money market lines of credit.
As of September 30, 1997 and December 31, 1996, there were $13.6 million and
$79.0 million of borrowings, respectively, outstanding under these lines of
credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1997, there were no borrowings outstanding under this facility.
Northern Indiana and Capital Markets make use of commercial paper to fund
short-term working capital requirements.
As of September 30, 1997 and December 31, 1996, Northern Indiana had $77.5
million and $193.9 million of commercial paper outstanding, respectively. At
September 30, 1997, the weighted average interest rate of commercial paper
outstanding was 5.59%.
Capital Markets has a $150 million revolving Credit Agreement which will
terminate August 19, 1999. This facility provides short-term financing
flexibility to Industries and also serves as the back-up instrument for a
commercial paper program. As of September 30, 1997, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of September 30, 1997 and December 31, 1996, $22.6 million and $27.0 million,
respectively, of borrowings were outstanding under these lines of credit.
As of September 30, 1997 Capital Markets had no commerical paper
outstanding. At December 31, 1996, Capital Markets had $119.3 million of
commercial paper outstanding.
IWCR and its subsidiaries had lines of credit with banks aggregating $57.7
million. As of September 30, 1997, $46.9 million of borrowings were outstanding
under these lines of credit.
At September 30, 1997 and December 31, 1996, Industries' short-term
borrowings were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1997 1996
============= ============
<S> <C> <C>
Commercial paper $ 77,500 $ 313,205
Notes payable 83,159 106,000
Standby loan facility 0 4,949
Revolving loan facility 4,550 1,831
------------- ------------
Total short-term borrowings $ 165,209 $ 425,985
============= ============
</TABLE>
(21) 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 $3.4 million.
The following is a schedule, by years, of future minimum rental payments,
excluding those to associated companies, required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
September 30, 1997:
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
=================================
<S> <C>
(In thousands)
1998 $ 15,279
1999 14,240
2000 13,585
2001 13,340
2002 51,038
Later years 85,417
--------
Total minimum payments required $192,899
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
September 30, September 30,
(In thousands) 1997 1996
============ ============
<S> <C> <C>
Three months ended $2,112 $1,762
Nine months ended 6,652 5,486
Twelve months ended 9,287 7,760
</TABLE>
(22) COMMITMENTS: The Utilities estimate that approximately $974 million will be
expended for construction purposes for the period from January 1, 1997 to
December 31, 2001. Substantial commitments have been made by the Utilities in
connection with their programs.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber services
to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating
Station. Services under this contract commenced on June 15, 1992 with annual
charges approximating $20 million. The agreement provides that, assuming various
performance standards are met by Pure Air, a termination payment would be due if
Northern Indiana terminates the agreement prior to the end of the twenty-year
contract period.
Northern Indiana has entered into an agreement with IBM to perform all
data center, application development and maintenance, and desktop management of
Northern Indiana.
(23) PRIMARY ENERGY: Primary is the parent of the following subsidiaries: Harbor
Coal Company (Harbor Coal); North Lake Energy Corporation (North Lake); Lakeside
Energy Corporation (LEC); Portside Energy Corporation (Portside); and Cokenergy,
Inc (CE). Primary arranges energy-related projects with large industrial
customers and has 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 located at Inland Steel Company. The facility uses steam generated by
Inland Steel to produce electricity which is delivered to Inland Steel. The
facility began commercial operation in May 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 a lease for the use of a 161-megawatt energy facility
located at USS Gary Works. The facility processes high-pressure steam into
electricity and low-pressure steam for delivery to USX Corporation-US Steel
Group. The fifteen-year tolling agreement with US Steel commenced on April 16,
1997 when the facility was placed in commercial operation. Capital Markets
guarantees LEC's security deposit obligations relative to the lease and certain
limited LEC obligations to the lessor.
Portside has entered into an agreement with National Steel Corporation
(National) to utilize a new 63-megawatt energy facility at National's Midwest
Division to process natural gas into electricity, process steam and heated water
for a fifteen-year period. Portside has entered into a lease with a third-party
lessor for use of the facility. Industries has guaranteed certain Portside
obligations to the lessor. Construction of the project began in June 1996 and
the facility began commercial operation on September 26, 1997.
CE has entered into a fifteen-year service agreement with Inland Steel
Company and the Indiana Harbor Coke Company, LP (Harbor Coke), a subsidiary of
Sun Company, Inc. This agreement provides that CE will utilize a new energy
facility at Inland's Indiana Harbor Works to scrub flue gases and recover waste
heat from the coke facility being constructed by Harbor Coke and produce process
steam and electricity from the recovered heat which will be delivered to Inland.
CE intends to lease these facilities, once constructed, from a third party.
Additionally, CE has entered into an interim agreement, which expires when the
lease is established with the third party lessor, under which CE is acting as
agent to design, construct and start up the facilities. Capital Markets
anticipates guaranteeing certain CE obligations relative to the anticipated
lease. Construction of the project began in January 1997. The facility is
scheduled to be operational in July 1998.
Primary has advanced approximately $82 million and $42 million, at
September 30, 1997 and December 31, 1996, respectively, to the lessors of the
energy related projects discussed above. These net advances are included in
"Other Receivables" in the Consolidated Balance Sheet and as a component of
operating activities in the Consolidated Statement of Cash Flows.
(24) 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 (excluding derivatives) are as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------------ -------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
========== ========== ========= ===========
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 28,285 $ 28,285 $ 26,333 $ 26,333
Investments 31,748 32,178 30,003 33,019
Long-term debt (including
current portion) 1,720,442 1,704,547 1,273,158 1,220,492
Preferred stock 146,844 132,246 144,200 126,379
</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.
(25) CUSTOMER CONCENTRATIONS: Industries' utility subsidiaries supply
natural gas, electric energy and water. Natural gas and electric energy are
supplied to the northern third of Indiana. The water utilities serve
Indianapolis, Indiana and surrounding areas. Although the Energy 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% and 2% of gas
revenue (including transportation services) and 21% and 22%, of electric revenue
for the twelve months ended September 30, 1997 and September 30, 1996,
respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
HOLDING COMPANY -
NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding
company providing electric energy, natural gas and water to the public through
its six wholly-owned regulated subsidiaries ("Utilities"): Northern Indiana
Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo
Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline
Company (Crossroads); Indianapolis Water Company (IWC); and Harbour Water
Corporation (Harbour). Industries' regulated gas and electric subsidiaries
(Northern Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy
Utilities"; and regulated water subsidiaries (IWC and Harbour) are referred to
as "Water Utilities."
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR's subsidiaries include two regulated water utilities (IWC and Harbour) and
five non-utility companies providing utility-related products and services
including installation, repair and maintenance of underground pipelines and
utility line locating and marking. The two primary non-utility subsidiaries are
Miller Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P).
Industries also provides non-regulated energy/utility-related products and
services including energy marketing and trading; power generation; gas
transmission, supply and storage; installation, repair and maintenance of
underground pipelines; utility line locating and marking; and related products
targeted at customer segments principally through the following wholly-owned
subsidiares: NIPSCO Development Company, Inc. (Development); NIPSCO Energy
Services, Inc. (Services); Primary Energy, Inc. (Primary); Miller; and SM&P.
NIPSCO Capital Markets, Inc. (Capital Markets) handles financing for Industries
and its subsidiaries, other than Northern Indiana. These subsidiaries are
referred to collectively as "Products and Services."
Industries results of operations include three and six months of operating
results from IWCR for the three-month, nine-month and twelve-month periods ended
September 30, 1997. The discussion below excludes the comparative results of
IWCR operations, as such discussion would not be meaningful.
REVENUES -
Total operating revenues for the twelve months ended September 30, 1997
increased $461.9 million as compared to the twelve months ended September 30,
1996. The increase includes $110.1 million reflecting six months of operating
revenues from IWCR for the current period. Gas revenues increased $70.1 million,
electric revenues increased $1.8 million and Products and Services revenues,
excluding IWCR, increased $280.0 million, as compared to the same period in
1996. The increase in gas revenues was largely attributable to increased gas
costs per dekatherm (dth) and increased sales to wholesale customers, partially
offset by decreased gas transition costs. The increase in electric revenues was
mainly due to increased sales to residential customers and increased fuel cost
per kilowatt-hour (kwh), partially offset by decreased sales to industrial and
wholesale customers. Increased volumes in gas marketing resulted in an increase
of $173.3 million in Products and Services revenue for the twelve-month period
ended September 30, 1997. NESI Power Marketing, Inc., a wholly-owned subsidiary
of Services, which was formed on December 11, 1996, markets wholesale power and
provided an additional $105.2 million in operating revenue for Products and
Services for the twelve months ended September 30, 1997.
Total operating revenues for the nine months ended September 30, 1997
increased $371.6 million as compared to the nine months ended September 30,
1996. The increase includes $110.1 million reflecting six months of operating
revenues from IWCR for the current period. Gas revenues increased $16.8 million,
electric revenues decreased $0.3 million and Products and Services revenue,
excluding IWCR, increased $245.0 million, as compared to the same period in
1996. The increase in gas revenues was mainly due to increased gas costs per
dth, increased sales to wholesale customers and increased deliveries of gas
transported for others, partially offset by decreased sales to residential and
commercial customers and decreased gas transition costs. Increased gas and
wholesale power marketing volumes resulted in an increase of $243.9 million in
Products and Services revenue for the nine-month period ended September 30,
1997.
Total operating revenues for the three months ended September 30, 1997
increased $202.6 million as compared to the three months ended September 30,
1996. The increase includes $58.5 million reflecting three months of operating
revenues from IWCR for the current period. Gas revenues increased $10.8 million,
electric revenues increased $2.4 million and Products and Services revenue,
excluding IWCR, increased $130.9 million compared to the same period in 1996.
The increase in gas revenues was mainly due to increased gas costs per dth,
increased sales to wholesale customers and increased deliveries of gas
transported for others, partially offset by decreased gas transition costs. The
increase in electric revenues was mainly due to increased sales to residential
customers and increased fuel costs per kwh, partially offset by decreased sales
to commercial, industrial and wholesale customers. Increased volumes in gas and
wholesale power marketing resulted in an increase of $133.5 million in Products
and Services revenue for the three-month period ended September 30, 1997.
The basic steel industry accounted for 31% of natural gas delivered
(including volumes transported) and 34% of electric sales for the Energy
Utilities during the twelve months ended September 30, 1997.
The components of the variations in gas, electric and products and
services revenues are shown in the following table:
<TABLE>
<CAPTION>
Variations from Prior Periods
-----------------------------------------------------------
September 30, 1997 Compared to September 30, 1996
-----------------------------------------------------------
Three Nine Twelve
(In thousands) Months Months Months
======= ======= =======
<S> <C> <C> <C>
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ 10,420 $ 25,465 $ 71,292
Gas transition costs (2,082) (588) (5,108)
Changes in sales levels 1,174 (11,361) 428
Gas transported 1,248 3,312 3,486
---------- ---------- ----------
Gas Revenue Change 10,760 16,828 70,098
---------- ---------- ----------
Electric Revenue -
Pass through of net changes
in fuel costs 7,075 8,468 8,769
Changes in sales levels (4,630) (8,801) (7,004)
---------- ---------- ----------
Electric Revenue Change 2,445 (333) 1,765
---------- ---------- ----------
Water Revenue Change 23,577 42,372 42,372
---------- ---------- ----------
Products and Services Revenue -
Gas marketing 70,687 138,694 173,303
Wholesale power marketing 62,798 105,201 105,201
Pipeline construction 17,197 31,829 31,829
Locate and marking 16,716 33,921 33,921
Other (1,577) 3,065 3,441
---------- ---------- ----------
Product and Services Revenue Change 165,821 312,710 347,695
---------- ---------- ----------
Total Revenue Change $ 202,603 $ 371,577 $ 461,930
========== ========== ==========
</TABLE>
See Note 7 to Notes to Consolidated Financial Statements regarding FERC
Order No. 636 transition costs.
GAS COSTS -
The Energy Utilities' gas costs increased $11.1 million, $21.2 million and
$71.9 million for the three-month, nine-month and twelve-month periods ended
September 30, 1997, respectively. Gas costs increased for the three-month,
nine-month and twelve-month periods due to increased gas costs per dth,
partially offset by decreased gas transition costs. The average cost for the
Energy Utilities' purchased gas for the three-month, nine-month and twelve-month
periods ended September 30, 1997, after adjustment for gas transition costs
billed to transport customers, was $3.09, $3.10 and $3.22 per dth, respectively,
as compared to $2.72, $2.88 and $2.74 per dth for the same periods in 1996.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation increased $2.7 million, $5.3
million and $2.7 million for the three-month, nine-month and twelve-month
periods ended September 30, 1997, respectively, compared to the 1996 periods,
mainly as a result of increased production of electricity.
Power purchased decreased $2.2 million, $9.0 million and $5.3 million for
the three-month, nine-month and twelve-month periods ended September 30, 1997,
respectively, as a result of decreased bulk power purchases.
COST OF PRODUCTS AND SERVICES -
The cost of sales for Products and Services increased $335.2 million for
the twelve months ended September 30, 1997. The increase includes $45.8 million
reflecting six months of cost of sales from IWCR for the current period.
Increased volumes in gas and wholesale power marketing increased cost of sales
$288.0 million for the twelve-months ended September 30, 1997, compared to
September 30, 1996.
The cost of sales for Products and Services increased $294.8 million for
the nine-months ended September 30, 1997, compared to the 1996 period. The
increase includes $45.8 million reflecting six months of cost of sales from IWCR
for the current period. Increased volumes in gas and wholesale power marketing
increased cost of sales $248.0 million for the current nine-month period.
The cost of sales for Products and Services increased $156.8 million for
the three-months ended September 30, 1997, compared to the 1996 period. The
increase includes $23.6 million related to the cost of sales from IWCR for the
current period. Increased volumes in gas and wholesale power marketing increased
cost of sales $133.9 million for the three months ended September 30, 1997,
compared to September 30, 1996.
OPERATING MARGINS -
Operating margins for the twelve months ended September 30, 1997 increased
$57.4 million from the same period a year ago. The increase in operating margin
includes $64.3 million related to six months of IWCR operations in the current
period. The operating margin from gas deliveries decreased $1.8 million due to
decreased sales to residential and commercial customers reflecting milder
weather, partially offset by increased sales to wholesale customers. The
operating margin from electric sales increased $4.3 million due to increased
sales to residential customers, partially offset by decreased sales to
industrial and wholesale customers. The operating margin for Products and
Services, excluding IWCR, decreased $9.5 million, primarily from a decrease in
gas marketing margin offset by an increase in operating margin from the
Northlake and LEC facilities.
Operating margins for the nine months ended September 30, 1997 increased
$59.3 million from the same period a year ago. The increase in operating margin
includes $64.3 million related to six months of IWCR operations in the current
period. The operating margin from gas deliveries decreased $4.3 million due to
decreased sales to residential and commercial customers reflecting milder
weather, partially offset by increased sales to wholesale customers and
increased deliveries of gas transported for others. The operating margin from
electric sales increased $3.4 million as a result of increased sales to
residential customers, partially offset by decreased sales to industrial and
wholesale customers. The operating margin for Products and Services, excluding
IWCR, decreased $4.0 million resulting from a decrease in gas marketing margin
offset by an increase in operating margin from Northlake and LEC. The decrease
in gas marketing margin is largely attributable to the disposition of certain
oil and gas properties during the first quarter of 1997.
Operating margins for the three months ended September 30, 1997 increased
$34.3 million from the same period a year ago. The increase in operating margin
includes $34.9 million related to three months of IWCR operations in the current
period. Gas operating margin was consistent with the same period ended September
30, 1996. Operating margin from electric sales increased $2.0 million due to
increased sales to residential customers, which were partially offset by
decreased sales to commercial, industrial and wholesale customers. The operating
margin for Products and Services, excluding IWCR, decreased $2.4 million.
OPERATING EXPENSES AND TAXES -
Operation expenses increased $26.4 million for the twelve-month period
ended September 30, 1997. Operation expense includes an increase of $31.5
million reflecting six months of operations of IWCR in the current period. This
increase was offset by decreased production pollution control facility costs of
$5.2 million and decreased environmental cleanup costs of $4.4 million at
Northern Indiana. Operation expenses, excluding IWCR, increased $9.6 million for
the nine-month period ended September 30, 1997 reflecting operating expenses of
North Lake and LEC which began operations in May 1996 and April 1997,
respectively, in addition to new operations at Services. This increase was
offset by decreased electric production pollution control facility costs of $4.3
million and decreased environmental cleanup costs of $5.3 million at Northern
Indiana. Operation expenses, excluding IWCR, for the three-month period ended
September 30, 1997 increased $4.3 million partially attributable to operations
at LEC and new operations at Services.
Maintenance expenses decreased $12.6 million for the twelve-month period
ended September 30, 1997 mainly reflecting decreased maintenance activity at the
electric production facilities of $5.7 million and decreased maintenance on the
transmission and distribution facilities. Maintenance expenses decreased $12.5
million for the nine-month period reflecting decreased maintenance on electric
production facilities. Maintenance expenses decreased $4.2 million for the
three-month period primarily reflecting decreased maintenance on electric
production facilities.
Depreciation and amortization expense, excluding IWCR, increased $2.7,
$7.2 million and $16.3 million for the three-month, nine-month and twelve-month
periods ended September 30, 1997, respectively, resulting from plant additions,
increased amortization of computer software, amortization of deferred costs
related to scrubber services provided by Pure Air at the Bailly Generating
Station and amortization of SFAS No. 106 costs effective February 1, 1997.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) increased $6.7 million and $9.5 million for the
nine-month and twelve-month periods ended September 30, 1997, respectively,
mainly resulting from the disposition of certain oil and natural gas properties
during the first quarter of 1997. Other Income (Deductions) decreased $2.0
million for the three-month period ended September 30, 1997.
INTEREST AND OTHER CHARGES -
Interest and other charges increased for the three-month, nine-month and
twelve-month periods ended September 30, 1997 reflecting the issuance of $300
million of Capital Markets' medium-term notes, $75 million of Capital Markets'
Junior Subordinated Deferrable Interest Debentures, Series A and interest
expense at IWCR.
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 7, 9 and 11 for a discussion of FERC Order No. 636,
Income Taxes and Postretirement Benefits.
NET INCOME -
Industries' net income for the twelve-month period ended September 30,
1997 was $186.4 million compared to $177.2 million for the twelve-month period
ended September 30, 1996.
Net income for the nine months ended September 30, 1997 was $134.9 million
compared to $125.3 million for the nine months ended September 30, 1996.
Net income for the three months ended September 30, 1997 was $35.9 million
compared to $34.4 million for the three months ended September 30, 1996.
IMPACT OF ACCOUNTING STANDARDS -
For a discussion of the impact of accounting standards not yet adopted in
Industries' consolidated financial statements see Note 2, "Impact of Accounting
Standards" in the Notes to the Consolidated Financial Statements.
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 approximately $20 million to
cover probable corrective actions as of September 30, 1997; however,
environmental regulations and remediation techniques are subject to future
change. The ultimate cost could be significant, depending on the extent of
corrective actions required. Based upon investigations and management's
understanding of current laws and regulations, 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 results of operations or financial position of
Industries.
On December 19, 1996, the Environmental Protection Agency (EPA)
promulgated rules for the second phase of the Acid Rain nitrogen oxides
reduction program. Northern Indiana is evaluating compliance strategies to meet
the reduced emission limitations found in the final rule. Additional controls
may be needed to meet the requirements. A compliance plan must be submitted to
the EPA by December 31, 1997 with details of the plan to meet the new limits by
January 1, 2000.
Because of major investments made in modern environmental control
facilities and the use of low-sulfur coal, all of Northern Indiana's electric
production facilities now comply with the sulfur dioxide limitations contained
in the acid deposition provisions of the Clean Air Act Amendments of 1990
(CAAA). Northern Indiana estimates that total costs of compliance with the CAAA
sulfur dioxide regulations will impact electric rates by less than 5% in the
future.
The CAAA contain provisions that could lead to limitations on emissions of
nitrogen oxides and hazardous air pollutants which may require significant
capital expenditures for control of these emissions. Northern Indiana is
pursuing a nitrogen oxide control program to meet future requirements. Northern
Indiana cannot predict the costs of complying with CAAA requirements, but
Northern Indiana believes that any such mandated costs would be recoverable
through the rate-making process.
The EPA issued final rules on July 18, 1997 revising the National Ambient
Air Quality Standards for ozone and particulate matter. The revised standards
begin a regulatory process that may lead to reductions in sulfur dioxide and
nitrogen oxide emissions from coal-fired boilers (including Northern Indiana's
generating stations) beyond reductions required in the Acid Rain provisions of
the CAAA. Northern Indiana cannot predict the costs of complying with future
control requirements to meet these new standards. Northern Indiana will continue
to closely monitor developments in this area and anticipates the exact nature of
the impact of the new standards on its operations will not be known for some
time.
The EPA has notified Northern Indiana that it is a "potentially
responsible party" (PRP) under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA) and may be required to share in the cost
of cleanup of several waste disposal sites identified by the EPA. The sites are
in various stages of investigation, analysis and remediation. At each of the
sites, Northern Indiana is one of several PRPs, and it is expected that remedial
costs, as provided under CERCLA, will be shared among them. At some sites
Northern Indiana and/or the other named PRPs are presently working with the EPA
to clean up the sites and avoid the imposition of fines or added costs.
The Energy Utilities have instituted a program to investigate former
manufactured-gas plants where one of them is the current or former owner. The
Energy Utilities have identified twenty-eight of these sites and made visual
inspections of these sites. Initial samplings have been conducted at eighteen
sites. Follow-up investigations have been conducted at seven sites and remedial
measures have been selected at four sites. The Energy Utilities will continue
their program to assess and cleanup sites.
During the course of various investigations, the Energy Utilities have
identified impacts to soil, groundwater, sediment and surface water from former
manufactured-gas plants. At three sites where residues were noted seeping into
rivers, Northern Indiana notified the Indiana Department of Environmental
Management (IDEM) and the EPA and immediately took steps to contain the
material. The Energy Utilities have worked with IDEM or the EPA on investigation
or remedial activities at several sites. Three of the sites have been enrolled
in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites
in the VRP is to obtain IDEM approval of the selection and implementation of
whatever remedial measures, if any, may be required. The Energy Utilities
anticipate placing additional sites in the VRP after remedial measures have been
selected.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured-gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative order
with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy)
(formerly PSI Energy, Inc.) that it was a former owner or operator of seven
former manufactured-gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities. In December 1996, Northern
Indiana sent a written demand to Cinergy related to one of these sites, Goshen.
Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern
Indiana has already incurred and to be incurred to implement the needed remedy
at the Goshen site. In August 1997, Northern Indiana filed suit in Indiana state
court against Cinergy seeking recovery of those costs.
In 1994, the Energy Utilities approached various companies that provided
insurance coverage which the Energy Utilities believe covers costs related to
actions taken at former manufactured-gas plants. In September 1995, certain
of the insurance companies initiated a suit in Indiana state court against
Northern Indiana seeking a ruling that denied coverage. Later that same month,
Northern Indiana initiated a similar suit in federal court, and the state court
action was stayed. After the dismissal of the federal court action on procedural
grounds in May 1997, Northern Indiana filed claims in the state court action
against various insurance companies, seeking coverage for costs associated with
several former manufactured gas plants and damages for alleged misconduct by
some of the insurance companies. The state court action is now proceeding.
Northern Indiana has received cash settlements from several of the insurance
companies.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources may
result in adverse health effects has been the subject of public, governmental
and media attention. Recently, researchers from the National Cancer Institute
and the Childhood Cancer Group reported they found no evidence magnetic fields
in homes increase the risk of childhood leukemia. This study follows an EMF
report released late last year by the U.S. National Research Counsel of the
National Academy of Sciences, which concluded, after examining more than 500 EMF
studies spanning 17 years, that, among other things, there was insufficient
evidence to consider EMF a threat to human health. Despite the reports'
findings, future research appropriations are continuing to be dedicated to
explore this issue.
The Water Utilities are subject to pollution control and water quality
control regulations, including those issued by the EPA, IDEM, the Indiana Water
Pollution Control Board, and the Indiana Department of Natural Resources. Under
the Federal Clean Water Act and Indiana's regulations, IWC must obtain National
Pollutant Discharge Elimination System (NPDES) permits for discharges from its
water treatment stations. Application for renewal of any expiring permits have
been filed and are the subject of ongoing discussions with, but not finalized
by, IDEM. These permits continue in effect pending review of the applications.
Under the Federal Safe Drinking Water Act (SDWA), the Water Utilities are
subject to regulation by the EPA for the quality of water sold and treatment
techniques used to make the water potable. The EPA promulgates nationally
applicable maximum contaminant levels (MCLs) for contaminants found in drinking
water. Management believes its water utilities are currently in compliance with
all MCLs promulgated to date. The EPA has continuing authority, however, to
issue additional regulations under the SDWA. In August 1996, Congress amended
the SDWA to allow the EPA more authority to weigh the costs and benefits of
regulations being considered in some, but not all, cases. The 1996 amendments do
not, however, reduce the number of new standards required by the 1986
amendments. Such standards promulgated could be costly and require substantial
changes in the Water Utilities' operations. The Water Utilities would expect to
recover the costs of such changes through their water rates; however, such
recovery may not necessarily be timely.
Under a 1991 law enacted by the Indiana Legislature, a water utility may
petition the Commission for prior approval of its plans and estimated
expenditures required to comply with provisions of, and regulations under, the
Federal Clean Water Act and SDWA. Upon obtaining such approval, a water utility
may include, to the extent of its estimated costs as approved by the Commission,
such costs in its rate base for rate-making purposes and recover its costs of
developing and implementing the approved plans if statutory standards are met.
The capital costs for such new systems, equipment or facilities or modifications
of existing facilities may be included in a water utility's rate base upon
completion of construction of the project or any part thereof. While use of this
statute is voluntary on the part of a water utility, if utilized, it should
allow water utilities a greater degree of confidence in recovering major costs
incurred to comply with environmentally related laws on a timely basis.
LIQUIDITY AND CAPITAL RESOURCES -
During the next few years, it is anticipated that the majority of earnings
available for distribution of dividends will depend upon dividends paid to
Industries by Northern Indiana. See Note 15 of Notes to Consolidated Financial
Statements for a discussion of the Common Share dividend.
On February 13, 1996, Capital Markets issued $75 million of 7-3/4% Junior
Subordinated Deferrable Interest Debentures, Series A, due March 31, 2026
(Debentures), pursuant to an underwritten public offering. Proceeds from the
sale of the Debentures were used to pay short-term debt incurred to redeem on
January 12, 1996, $35 million of Industries= 8.75% Preferred Shares, pursuant to
mandatory redemption and to pay other short-term debt of Capital Markets.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes with various interest rates and maturities.
The proceeds from these issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations of Capital Markets.
Capital Markets expects to refinance its 7.57% Zero Coupon Notes maturing
in the amount of $72.5 million on December 1, 1997.
On March 25, 1997, Industries acquired all the outstanding common stock of
IWCR for $290.5 million. Industries financed this transaction with debt of
approximately $83.0 million and issuance of approximately 5.3 million
Industries' common shares. Industries accounted for the acquisition as a
purchase, and the purchase price was allocated to the assets and liabilities
acquired based on their estimated fair values. See Note 2 of Notes to
Consolidated Financial Statements for a discussion of the preliminary allocation
of the purchase price.
Capital Markets has a $150 million revolving Credit Agreement which will
terminate August 19, 1999. This facility provides short-term financing
flexibility to Industries and also serves as the backup instrument for a
commercial paper program. As of September 30, 1997, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of September 30, 1997, $22.6 million of borrowings were outstanding under these
lines of credit.
As of September 30, 1997, Capital Markets had no commercial paper
outstanding. At December 31, 1996, Capital Markets had $119.3 million of
commercial paper outstanding.
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 $1.3 billion at September 30, 1997.
Cash flow from operations has provided sufficient liquidity to meet
current operating requirements. Because of the seasonal nature of the utility
business and the construction program, Northern Indiana makes use of commercial
paper intermittently as short-term financing. As of September 30, 1997 and
December 31, 1996, Northern Indiana had $77.5 million and $193.9 million of
commercial paper outstanding, respectively. At September 30, 1997, the weighted
average interest rate of commercial paper outstanding was 5.59%.
Northern Indiana has a $250 million revolving Credit Agreement with
several banks which terminates August 19, 1999. As of September 30, 1997, there
were no borrowings outstanding under this agreement. In addition, Northern
Indiana has $14.2 million in lines of credit which run to May 31, 1998. The
credit pricing of each of the lines varies from either the lending banks'
commercial prime or market rates. Northern Indiana has agreed to compensate the
participating banks with arrangements that vary from no commitment fees to a
combination of fees which are mutually satisfactory to both parties. As of
September 30, 1997, there were no borrowings under these lines of credit. The
Credit Agreement and lines of credit are also available to support the issuance
of commercial paper.
Northern Indiana also has $273.5 million of money market lines of credit.
As of September 30, 1997, $13.6 million of borrowings were outstanding under
these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
September 30, 1997, there were no borrowings outstanding under this facility.
On May 28, 1997, Northern Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes. As
of September 30, 1997, $139.0 million of the medium-term notes had been issued
with various interest rates and maturities. The proceeds from these issuances
were used to pay short-term debt incurred to redeem its First Mortgage Bonds,
Series N, and to pay at maturity various issues of Medium-Term Notes, Series D.
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.
IWCR and its subsidiaries had lines of credit with banks aggregating $57.7
million. As of September 30, 1997, $46.9 million of borrowings were outstanding
under these lines of credit.
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 Energy
Utilities do not anticipate the need to file for gas and electric base rate
increases in the near future.
EMPLOYEE RELATIONS -
At September 30, 1997, approximately 74% of Northern Indiana's employees
(physical and clerical workers) were represented by two local unions of the
United Steelworkers of America, AFL-CIO-CLC. The bargaining unit employees'
contracts expired May 31, 1997. New contracts were ratified in October 1997. The
new contracts have a term of two years, from June 1, 1997 thru May 31, 1999.
YEAR 2000 COSTS -
Industries has completed an assessment of its information systems to
determine what modifications, if any, are necessary for proper functioning of
these systems in the year 2000. Costs related to maintenance or modification of
these systems will be expensed as incurred. Industries does not anticipate the
related costs to have a material impact on its results of operations.
COMPETITION -
The Energy Policy Act of 1992 (Energy Act) allows FERC to order electric
utilities to grant access to transmission systems by third-party power
producers. The Energy Act specifically prohibits federally mandated wheeling of
power for retail customers. On April 24, 1996, FERC issued its Order No. 888
which opens wholesale power sales to competition and requires public utilities
owning, controlling, or operating transmission lines to file non-discriminatory
open access tariffs that offer others the same transmission service they provide
themselves. Order No. 888 also provides for the full recovery of stranded costs
- - that is, costs that were prudently incurred to serve power customers and that
could go unrecovered if these customers use open access to move to another
supplier. FERC expects this rule will accelerate competition and bring lower
prices and more choices to wholesale energy customers. Although wholesale
customers represent a relatively small portion of Northern Indiana's sales,
Northern Indiana will continue its efforts to retain and add customers by
offering competitive rates.
In January 1997, legislation was introduced to the Indiana General Assembly
addressing electric utility competition and deregulation. This proposed
legislation has not been adopted, however, a study commission on electric
competition and deregulation was established by the Indiana General Assembly.
Northern Indiana has begun discussions with its largest customers on the
technical and economic aspects of possible legislation to allow customer choice.
Operating in a competitive environment will place added pressures on
utility profit margins and credit quality. Increasing competition in the
electric utility industry has already led the credit rating agencies to apply
more stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create opportunities
to compete for new customers and revenues, as well as increase the risk of the
loss of customers. 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 Energy Utilities. Although pipelines continue to transport
gas, they no longer provide sales service. The Energy 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 Energy
Utilities' facilities to transport the gas. Transportation customers pay the
Energy Utilities only for transporting their gas from the pipeline to the
customers' premises.
Northern Indiana filed a petition for an Alternative Regulatory Plan (ARP)
with the Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory environment and structure which will permit increased
choice for gas customers, competition among suppliers and improved natural gas
service. On May 9, 1997, Northern Indiana filed an Amended Stipulation and
Agreement which proposed a modified ARP. Northern Indiana=s proposal was
supported by numerous parties including the Office of Utility Consumer
Counselor, Citizens Action Coalition of Indiana, Inc. and major industrial
customers of Northern Indiana. In its modified ARP, Northern Indiana proposed to
implement new rates and services that would include, among other things, further
unbundling of services for additional customer classes, increased customer
choice for sources of natural gas supply, negotiated services and prices, an
incentive gas cost mechanism and a price protection program. The Commission held
a hearing on the ARP on June 12, 1997. On October 9, 1997, the Commission issued
an order approving, in all respects, the modified ARP which became effective
November 1, 1997.
To date, the Energy 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 Energy Utilities believe the steps they are taking to deal with increased
competition will have significant, positive effects in the next few years.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 6 (NESI
Energy Marketing Canada Ltd.) and Note 8 (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.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 11.1 -Computation of Per Share Earnings
Three-Month, Nine-Month and Twelve-Month Periods
Ended September 30, 1997.
Exhibit 11.2 -Computation of Per Share Earnings
Three-Month, Nine-Month and Twelve-Month Periods
Ended September 30, 1996.
Exhibit 23 -Consent of Arthur Andersen LLP
Exhibit 27 -Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NIPSCO Industries, Inc.
(Registrant)
/s/ Jerry M. Springer
Controller
and Chief Accounting Officer
Date: November 13, 1997
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS
Three-Month, Nine-Month and Twelve-Month
Periods Ended September 30, 1997
Fully
Three Months Ended September 30, 1997: Primary Diluted
============================================ ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at September 30, 1997 62,747,931 62,747,931
Dilutive Effect for Nonqualified Stock Options
at September 30, 1997 281,493 287,962
---------- ----------
Weighted Average Shares at September 30, 1997 63,029,424 63,035,893
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
Net Income $ 35,869 $ 35,869
Dividend Requirements on Preferred Shares 0 0
--------- ---------
Balance Available for Common Shareholders $ 35,869 $ 35,869
========= =========
Earnings Per Average Common Share $0.56(a) $0.56(a)
========= =========
<CAPTION>
Fully
Nine Months Ended September 30, 1997: Primary Diluted
============================================ ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at September 30, 1997 61,722,982 61,722,982
Dilutive Effect for Nonqualified Stock Options
at September 30, 1997 260,814 287,962
---------- ----------
Weighted Average Shares at September 30, 1997 61,983,796 62,010,944
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
Net Income $ 134,943 $ 134,943
Dividend Requirements on Preferred Shares 0 0
---------- ----------
Balance Available for Common Shareholders $ 134,943 $ 134,943
========== ==========
Earnings Per Average Common Share $2.17(a) $2.17(a)
========== ==========
<CAPTION>
Fully
Twelve Months Ended September 30, 1997: Primary Diluted
============================================ ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at September 30, 1997 61,392,733 61,392,733
Dilutive Effect for Nonqualified Stock Options
at September 30, 1997 249,327 287,962
---------- ----------
Weighted Average Shares at September 30, 1997 61,642,060 61,680,695
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
Net Income $ 186,352 $ 186,352
Dividend Requirements on Preferred Shares 0 0
--------- ---------
Balance Available for Common Shareholders $ 186,352 $ 186,352
========= =========
Earnings Per Average Common Share $3.02(a) $3.02(a)
========= =========
(a) This calculation is submitted in accordance with regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
</TABLE>
EXHIBIT 11.2
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS
Three-Month, Nine-Month and Twelve-Month
Periods Ended September 30, 1996
Fully
Three Months Ended September 30, 1996: Primary Diluted
============================================ ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at September 30, 1996 61,061,196 61,061,196
Dilutive Effect for Nonqualified Stock Options
at September 30, 1996 254,968 254,968
---------- ----------
Weighted Average Shares at September 30, 1996 61,316,164 61,316,164
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
Net Income $ 34,410 $ 34,410
Dividend Requirements on Preferred Shares 0 0
-------- --------
Balance Available for Common Shareholders $ 34,410 $ 34,410
======== ========
Earnings Per Average Common Share $0.56(a) $0.56(a)
======== ========
<CAPTION>
Fully
Nine Months Ended September 30, 1996: Primary Diluted
============================================ ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at September 30, 1996 61,451,974 61,451,974
Dilutive Effect for Nonqualified Stock Options
at September 30, 1996 251,571 251,571
---------- ----------
Weighted Average Shares at September 30, 1996 61,703,545 61,703,545
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
Net Income $ 125,325 $ 125,325
Dividend Requirements on Preferred Shares 119 119
--------- ----------
Balance Available for Common Shareholders $ 125,206 $ 125,206
========= =========
Earnings Per Average Common Share $2.02(a) $2.02(a)
========= =========
<CAPTION>
Fully
Twelve Months Ended September 30, 1996: Primary Diluted
============================================ ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at September 30, 1996 61,724,244 61,724,244
Dilutive Effect for Nonqualified Stock Options
at September 30, 1996 235,117 235,117
---------- ----------
Weighted Average Shares at September 30, 1996 61,959,361 61,959,361
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
Net Income $ 177,153 $ 177,153
Dividend Requirements on Preferred Shares 885 885
--------- ---------
Balance Available for Common Shareholders $ 176,268 $ 176,268
========= =========
Earnings Per Average Common Share $2.84(a) $2.84(a)
========= =========
(a) This calculation is submitted in accordance with regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
</TABLE>
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; Form S-8 Registration Statement No.
33-30621; Form S-8 Registration Statement No. 333-08263; Form S-8 Registration
Statement No. 333-19981; Form S-8 Registration Statement No. 333-19983; Form S-8
Registration Statement No. 333-19985; Form S-3 Registration Statement No.
333-22347; and Form S-3 Registration Statement No. 333-26847.
/s/ Arthur Andersen LLP
Chicago, Illinois
November 13, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of NIPSCO Industries, Inc. for three months ended September
30, 1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,607,264
<OTHER-PROPERTY-AND-INVEST> 231,035
<TOTAL-CURRENT-ASSETS> 523,873
<TOTAL-DEFERRED-CHARGES> 130,358
<OTHER-ASSETS> 303,383
<TOTAL-ASSETS> 4,795,913
<COMMON> 534,782
<CAPITAL-SURPLUS-PAID-IN> 90,499
<RETAINED-EARNINGS> 641,424
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,266,705
59,396
85,620
<LONG-TERM-DEBT-NET> 1,113,260
<SHORT-TERM-NOTES> 87,709
<LONG-TERM-NOTES-PAYABLE> 495,460
<COMMERCIAL-PAPER-OBLIGATIONS> 77,500
<LONG-TERM-DEBT-CURRENT-PORT> 111,722
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,496,713
<TOT-CAPITALIZATION-AND-LIAB> 4,795,913
<GROSS-OPERATING-REVENUE> 596,315
<INCOME-TAX-EXPENSE> 20,208
<OTHER-OPERATING-EXPENSES> 509,480
<TOTAL-OPERATING-EXPENSES> 509,480
<OPERATING-INCOME-LOSS> 86,835
<OTHER-INCOME-NET> 3,326
<INCOME-BEFORE-INTEREST-EXPEN> 90,161
<TOTAL-INTEREST-EXPENSE> 34,084
<NET-INCOME> 35,869
0
<EARNINGS-AVAILABLE-FOR-COMM> 35,869
<COMMON-STOCK-DIVIDENDS> 28,244
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 129,908
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
