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 June 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 July 31, 1997, 62,746,483 common shares were outstanding.
<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 June 30, 1997,
and December 31, 1996, and the related consolidated statements of income, common
shareholders' equity and cash flows for the three, six, and twelve month periods
ended June 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 June 30, 1997, and December 31, 1996,
and the results of their operations and their cash flows for the three, six, and
twelve month periods ended June 30, 1997 and 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
July 29, 1997
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
June 30, December 31,
ASSETS 1997 1996
============= ============
(Dollars in thousands)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Utility Plant, (Note 2)(including
Construction Work in Progress of
$169,983 and $166,812, respectively)
Electric $ 4,077,005 $ 4,050,084
Gas 1,365,216 1,344,230
Common 350,680 346,636
Water 548,321 0
------------ ------------
6,341,222 5,740,950
Less - Accumulated provision for
depreciation and amortization 2,722,767 2,546,162
------------ ------------
Total Utility Plant 3,618,455 3,194,788
------------ ------------
Other property, at cost, net of accumulated
provision for depreciation 142,611 147,370
------------ ------------
Total Property, Plant and Equipment 3,761,066 3,342,158
------------ ------------
INVESTMENTS:
Investments, at equity (Note 2) 81,745 52,260
Investments, at cost 31,249 30,424
Other investments 23,411 20,090
------------ ------------
Total Investments 136,405 102,774
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 29,391 26,333
Accounts receivable, less reserve of
$7,676 and $5,569, respectively (Note 2) 175,147 165,441
Other receivables (Note 23) 111,536 42,184
Fuel adjustment clause (Note 2) 8,257 9,149
Gas cost adjustment clause (Note 2) 47,055 100,214
Materials and supplies, at average cost 62,667 59,859
Electric production fuel, at average cost 28,632 26,483
Natural gas in storage (Note 2) 35,127 65,093
Prepayments and other 29,850 28,491
------------ ------------
Total Current Assets 527,662 523,247
------------ ------------
OTHER ASSETS:
Regulatory assets (Note 2) 227,685 236,205
Intangible assets (Note 2) 86,023 0
Prepayments and other (Note 10) 117,506 84,499
------------ ------------
Total Other Assets 431,214 320,704
------------ ------------
$ 4,856,347 $ 4,288,883
============ ============
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
June 30, December 31,
CAPITALIZATION AND LIABILITIES 1997 1996
============ ============
(Dollars in thousands)
<S> <C> <C>
CAPITALIZATION:
Common shareholders' equity
(See accompanying statement) $ 1,258,417 $ 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) 59,996 61,246
Long-term debt excluding amounts due
within one year (Note 18) 1,608,345 1,127,106
------------ ------------
Total Capitalization 3,012,378 2,369,979
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 19) 189,796 144,552
Short-term borrowings (Note 20) 168,781 425,985
Accounts payable 177,930 251,730
Sinking funds due within one year
(Notes 14 and 18) 3,328 3,328
Dividends declared on common and
preferred stocks 29,439 28,308
Customer deposits 28,913 17,580
Taxes accrued 91,236 78,723
Interest accrued 15,405 7,557
Accrued employment costs 44,739 44,186
Other accruals 49,572 30,054
------------ ------------
Total Current Liabilities 799,139 1,032,003
------------ ------------
OTHER:
Deferred income taxes (Note 9) 632,297 602,745
Deferred investment tax credits, being
amortized over life of related property
(Note 9) 109,279 108,258
Deferred credits 56,845 37,338
Customer advances and contributions
in aid of construction (Note 2) 103,012 15,830
Accrued liability for postretirement
benefits (Note 11) 129,182 109,429
Other noncurrent liabilities 14,215 13,301
------------ ------------
Total Other 1,044,830 886,901
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5, 6, 8, 21, 22 and 23)
$ 4,856,347 $ 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
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1997 1996 1997 1996
========== ========== ========== ==========
(Dollars in thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues:
(Notes 2, 7, and 25)
Gas $ 121,010 $ 120,738 $ 454,410 $ 448,342
Electric 244,054 244,232 489,878 492,656
Water 18,795 0 18,795 0
Products and Services 139,535 33,772 220,054 73,165
---------- ---------- ---------- ----------
523,394 398,742 1,183,137 1,014,163
---------- ---------- ---------- ----------
Cost of Sales: (Note 2)
Gas costs 61,961 67,438 276,801 266,696
Fuel for electric
generation 54,609 53,184 113,017 110,386
Power purchased 10,518 14,322 19,478 26,283
Products and Services 113,795 17,900 179,109 41,153
---------- ---------- ---------- ----------
240,883 152,844 588,405 444,518
---------- ---------- ---------- ----------
Operating Margin 282,511 245,898 594,732 569,645
---------- ---------- ---------- ----------
Operating Expenses and
Taxes (except income):
Operation 108,200 81,400 191,884 170,648
Maintenance (Note 2) 15,094 22,849 35,598 43,854
Depreciation and
amortization (Note 2) 64,414 58,710 122,759 115,136
Taxes (except income) 20,291 17,587 41,600 38,593
---------- ---------- ---------- ----------
207,999 180,546 391,841 368,231
---------- ---------- ---------- ----------
Operating Income 74,512 65,352 202,891 201,414
---------- ---------- ---------- ----------
Other Income (Deductions)
(Note 2) 3,897 2,228 10,885 2,185
---------- ---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt 28,814 21,899 49,609 43,368
Other interest 1,000 3,343 5,390 6,592
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 1,200 1,167 2,333 2,326
Dividend requirements on
preferred stocks of
subsidiaries 2,179 2,178 4,346 4,377
---------- ---------- ---------- ----------
Income before income taxes 45,216 38,993 152,098 146,936
---------- ---------- ---------- ----------
Income taxes 16,980 15,564 53,024 56,021
---------- ---------- ---------- ----------
Net Income 28,236 23,429 99,074 90,915
Dividend requirements on
preferred shares 0 0 0 119
---------- ---------- ---------- ----------
Balance available for
common shareholders $ 28,236 $ 23,429 $ 99,074 $ 90,796
========== ========== ========== ==========
Average common shares
outstanding 62,827,620 61,234,350 61,202,013 61,649,509
Earnings per average
common share $ 0.44 $ 0.38 $ 1.61 $ 1.47
========== ========== ========== ==========
Dividends declared per
common share $ 0.45 $ 0.42 $ 0.90 $ 0.84
========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Twelve Months
Ended June 30,
----------------------
1997 1996
========== ==========
(Dollars in thousands, except for per share amounts)
<S> <C> <C>
Operating Revenues:
(Notes 2, 7, and 25)
Gas $ 805,463 $ 740,275
Electric 1,019,453 1,040,088
Water 18,795 0
Products and Services 313,212 103,892
---------- ----------
2,156,923 1,884,255
---------- ----------
Cost of Sales: (Note 2)
Gas costs 493,882 428,451
Fuel for electric
generation 235,846 243,026
Power purchased 46,946 47,831
Products and Services 239,196 46,090
---------- ----------
1,015,870 765,398
---------- ----------
Operating Margin 1,141,053 1,118,857
---------- ----------
Operating Expenses and
Taxes (except income):
Operation 358,055 350,405
Maintenance (Note 2) 75,085 82,033
Depreciation and
amortization (Note 2) 241,617 219,315
Taxes (except income) 78,511 74,894
---------- ----------
753,268 726,647
---------- ----------
Operating Income 387,785 392,210
---------- ----------
Other Income (Deductions)
(Note 2) 20,687 4,415
---------- ----------
Interest and Other Charges:
Interest on long-term debt 91,623 84,914
Other interest 14,534 14,140
Amortization of premium,
reacquisition premium,
discount and expense
on debt, net 4,613 4,625
Dividend requirements on
preferred stocks of
subsidiaries 8,681 8,833
---------- ----------
Income before income taxes 289,021 284,113
---------- ----------
Income taxes 104,128 105,012
---------- ----------
Net Income 184,893 179,101
Dividend requirements on
preferred shares 0 1,651
---------- ----------
Balance available for
common shareholders $ 184,893 $ 177,450
========== ==========
Average common shares
outstanding 60,967,583 62,219,569
Earnings per average
common share $ 3.03 $ 2.85
========== ==========
Dividends declared per
common share $ 1.77 $ 1.65
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Dollars in Thousands
----------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Three Months Ended Total Shares Capital Earnings Shares
======================== =========== =========== =========== ========== ==========
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401 $ (330,942)
Net income 23,429 23,429
Dividends:
Preferred shares
Common shares (25,684) (25,684)
Treasury shares acquired (9,548) (9,548)
Issued:
Employee stock purchase
plan 146 84 62
Long-term incentive plan 675 30 755
Amortization of
unearned
compensation 574
Unrealized gain(loss) on
available for sale
securities 258
Other 28 19 (70)
----------- ----------- ----------- ---------- ----------
Balance, June 30, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076 $ (339,673)
=========== =========== =========== ========== ==========
Balance, April 1, 1997 $ 1,297,116 $ 870,930 $ 88,118 $ 635,900 $ (295,980)
Net income 28,236 28,236
Dividends:
Preferred shares
Common shares (29,962) (29,962)
Treasury shares acquired (45,938) (45,938)
Issued:
IWC Resources acquisition (130) (34) (96)
Acquisition of minority
interest 5,469 1,351 4,118
Employee stock purchase
plan 165 98 67
Long-term incentive plan 1,343 22 1,413
Amortization of unearned
compensation 479
Unrealized gain (loss) on
available for sale
securities 1,268
Other 371 1 (91)
----------- ----------- ----------- ----------- ----------
Balance, June 30, 1997 $ 1,258,417 $ 870,930 $ 89,556 $ 634,083 $ (336,416)
=========== =========== =========== =========== ==========
<CAPTION>
Dollars in Thousands Shares
------------------------- -------------------------
Currency
Three Months Ended Translation Common Treasury
(continued) Adjustment Other Shares Shares
======================== =========== =========== =========== ============
<S> <C> <C> <C> <C>
Balance, April 1, 1996 $ (2,070) $ (4,510) 73,892,109 (12,503,363)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (266,067)
Issued:
Employee stock purchase
plan 3,920
Long-term incentive plan (110) 28,150
Amortization of unearned
compensation 574
Unrealized gain (loss) on
available for sale
securities 258
Other 79
----------- ----------- ----------- ------------
Balance, June 30, 1996 $ (1,991) $ (3,788) 73,892,109 (12,737,360)
=========== =========== =========== ============
Balance, April 1, 1997 $ (501) $ (1,351) 73,892,109 (10,181,876)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (1,159,751)
Issued:
IWC Resources acquisition (2,786)
Acquisition of minority
interest 135,032
Employee stock purchase
plan 4,208
Long-term incentive plan (92) 46,683
Amortization of unearned
compensation 479
Unrealized gain (loss) on
available for sale
securities 1,268
Other 461
----------- ----------- ----------- ------------
Balance, June 30, 1997 $ (40) $ 304 73,892,109 (11,158,490)
=========== =========== =========== ============
<CAPTION>
Dollars in Thousands
---------------------------------------------------------------
Additional
Common Paid-in Retained Treasury
Six 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 90,915 90,915
Dividends:
Preferred shares (119) (119)
Common shares (51,478) (51,478)
Treasury shares acquired (48,036) (48,036)
Issued:
Employee stock purchase
plan 449 261 188
Long-term incentive plan 1,010 184 1,398
Amortization of unearned
compensation 1,188
Unrealized gain (loss) on
available for sale
securities 205
Other (121) 19 (79)
----------- ----------- ---------- ----------- ----------
Balance, June 30, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076 $ (339,673)
=========== =========== =========== =========== ==========
Balance, January 1, 1997 $ 1,100,501 $ 870,930 $ 32,868 $ 591,370 $ (392,995)
Net income 99,074 99,074
Dividends:
Preferred shares 0 0
Common shares (56,235) (56,235)
Treasury shares acquired (102,529) (102,529)
Issued:
IWC Resources acquisition 207,422 55,009 152,413
Acquisition of minority
interest 5,469 1,351 4,118
Employee stock purchase
plan 353 211 142
Long-term incentive plan 2,108 116 2,435
Amortization of unearned
compensation 982
Unrealized gain (loss) on
available for sale
securities 1,297
Other (25) 1 (126)
----------- ----------- ---------- ----------- ----------
Balance, June 30, 1997 $ 1,258,417 $ 870,930 $ 89,556 $ 634,083 $ (336,416)
=========== =========== ========== =========== ==========
<CAPTION>
Dollars in Thousands Shares
------------------------ --------------------------
Currency
Six 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 (1,289,744)
Issued:
Employee stock purchase
plan 11,847
Long-term incentive plan (572) 53,050
Amortization of unearned
compensation 1,188
Unrealized gain on
available for sale
securities 205
Other (61)
----------- ---------- ----------- ------------
Balance, June 30, 1996 $ (1,991) $ (3,788) 73,892,109 (12,737,360)
----------- ---------- ----------- ------------
Balance, January 1, 1997 $ (140) $ (1,532) 73,892,109 (14,086,448)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (2,589,358)
Issued:
IWC Resources acquisition 5,291,089
Acquisition of minority
interest 135,032
Employee stock purchase
plan 8,962
Long-term incentive plan (443) 82,233
Amortization of unearned
compensation 982
Unrealized gain (loss) on
available for sale
securities 1,297
Other 100
----------- ---------- ----------- ------------
Balance, June 30, 1997 $ (40) $ 304 73,892,109 (11,158,490)
=========== ========== =========== ============
<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, July 1, 1995 $ 1,116,208 $ 870,930 $ 31,950 $ 482,823 $ (260,485)
Net income 179,101 179,101
Dividends:
Preferred shares (1,651) (1,651)
Common shares (102,053) (102,053)
Treasury shares acquired (84,980) (84,980)
Issued:
Employee stock purchase
plan 748 420 328
Long-term incentive plan 5,078 186 5,464
Amortization of unearned
compensation 2,439
Unrealized gain (loss) on
available for sale
securities 1,874
Other (536) 118 (144)
----------- ----------- ---------- ----------- ----------
Balance, June 30, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076 $ (339,673)
----------- ----------- ---------- ----------- ----------
Net income 184,893 184,893
Dividends:
Preferred shares 0 0
Common shares (108,738) (108,738)
Treasury shares acquired (159,991) (159,991)
Issued:
IWC Resources acquisition 207,422 55,009 152,413
Acquisition of minority
interest 5,469 1,351 4,118
Employee stock purchase
plan 687 404 283
Long-term incentive plan 6,109 118 6,434
Amortization of unearned
compensation 2,364
Unrealized gain (loss) on
available for sale
securities 2,171
Other 1,803 (148)
----------- ----------- ---------- ----------- ----------
Balance, June 30, 1997 $ 1,258,417 $ 870,930 $ 89,556 $ 634,083 $ (336,416)
=========== =========== ========== =========== ==========
<CAPTION>
Dollars in Thousands Shares
------------------------ --------------------------
Currency
Twelve Months Ended Translation Common Treasury
(continued) Adjustment Other Shares Shares
======================== =========== ========== =========== ============
<S> <C> <C> <C> <C>
Balance, July 1, 1995 $ (1,481) $ (7,529) 73,892,109 (10,627,573)
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (2,344,075)
Issued:
Employee stock purchase
plan 20,638
Long-term incentive plan (572) 213,650
Amortization of unearned
compensation 2,439
Unrealized gain on
available for sale
securities 1,874
Other (510)
----------- ---------- ----------- ------------
Balance, June 30, 1996 $ (1,991) $ (3,788) 73,892,109 (12,737,360)
----------- ---------- ----------- ------------
Net income
Dividends:
Preferred shares
Common shares
Treasury shares acquired (4,093,218)
Issued:
IWC Resources acquisition 5,291,089
Acquisition of minority
interest 135,032
Employee stock purchase
plan 17,784
Long-term incentive plan (443) 228,183
Amortization of unearned
compensation 2,364
Unrealized gain (loss) on
available for sale
securities 2,171
Other 1,951
----------- ---------- ----------- ------------
Balance, June 30, 1997 $ (40) $ 304 73,892,109 (11,158,490)
=========== ========== =========== ============
The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
(Dollars in thousands) 1997 1996 1997 1996
========= ========= ========= =========
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,236 $ 23,429 $ 99,074 $ 90,915
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 64,414 58,710 122,759 115,136
Deferred federal and state income
taxes, net (20,884) (1,937) (33,360) 12,802
Deferred investment tax credits, net (1,833) (1,668) (3,635) (3,338)
Advance contract payment 475 475 950 (18,050)
Change in certain assets and liabilities - *
Accounts receivable, net (24,065) 62,940 (50,289) 29,165
Electric production fuel (4,500) (10,951) (2,149) (16,639)
Materials and supplies (237) 2,412 (17) 3,078
Natural gas in storage (17,109) (17,624) 29,966 31,354
Accounts payable (115,801) (24,109) (60,151) 7,042
Taxes accrued (42,513) (38,276) 35,249 6,180
Fuel adjustment clause 4,673 (3,156) 892 (1,322)
Gas cost adjustment clause 40,931 151 53,159 (47,523)
Accrued employment costs 2,896 (236) (1,925) (9,029)
Other accruals (12,612) (21,074) 12,899 (8,767)
Other, net 19,568 (25,164) 23,335 (29,981)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities (78,361) 3,922 226,757 161,023
--------- --------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Utility construction expenditures (62,025) (45,203) (108,421) (82,512)
Construction expenditures related to
Crossroads Pipeline Company (65) (279) (250) (364)
IWCR construction expenditures (14,241) 0 (14,241) 0
Acquisition of IWC Resources Corporation,
net of cash acquired 0 0 (288,932) 0
Acquisition of minority interest (5,641) 0 (5,641) 0
Customer advances for construction, net
of refunds 134 0 134 0
Proceeds from disposition of assets 275 0 29,775 0
Other, net (559) (652) (19,911) (14,569)
--------- --------- --------- ---------
Net cash used in
investing activities (82,122) (46,134) (407,487) (97,445)
--------- --------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 271,960 1,153 408,262 77,450
Issuance of short-term debt 321,050 258,720 575,095 598,408
Net change in commercial paper (113,250) 79,100 (255,555) 55,000
Retirement of long-term debt (38) (7,620) (1,507) (8,737)
Retirement of short-term debt (312,875) (263,300) (598,495) (648,035)
Retirement of preferred shares (1,252) (1,446) (1,253) (36,446)
Issuance of common shares 6,847 806 215,333 1,414
Acquisition of treasury shares (45,938) (9,548) (102,529) (48,036)
Cash dividends paid on common shares (28,323) (25,784) (55,095) (51,993)
Cash dividends paid on preferred shares 0 0 0 (119)
Other, net (583) 139 (468) 280
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities 97,598 32,220 183,788 (60,814)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (62,885) (9,992) 3,058 2,764
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 92,276 41,252 26,333 28,496
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 29,391 $ 31,260 $ 29,391 $ 31,260
========= ========= ========= =========
*Net of effect from purchase of IWC Resources Corporation.
The accompanying notes to consolidated financial statements are an integral
part of this statement.
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months
Ended June 30,
-----------------------
(In thousands) 1997 1996
========= =========
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 184,893 $ 179,101
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH:
Depreciation and amortization 241,617 219,315
Deferred federal and state income
taxes, net (25,036) 34,092
Deferred investment tax credits, net (7,705) (7,117)
Advance contract payment 1,900 (18,050)
Change in certain assets and liabilities - *
Accounts receivable, net (135,897) (15,427)
Electric production fuel 2,265 (11,179)
Materials and supplies 2,090 6,943
Natural gas in storage (5,597) 8,800
Accounts payable 13,820 39,545
Taxes accrued 39,543 (32,991)
Fuel adjustment clause 3,366 (8,703)
Gas cost adjustment clause 1,891 (84,097)
Accrued employment costs 4,595 (2,567)
Other accruals 8,163 (15,037)
Other, net 37,811 (38,857)
--------- ---------
Net cash provided by (used in)
operating activities 367,719 253,771
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Utility construction expenditures (210,008) (171,385)
Construction expenditures related to
Crossroads Pipeline Company (4,642) (2,644)
IWCR construction expenditures (14,241) 0
Acquisition of IWC Resources Corporation,
net of cash acquired (288,932) 0
Acquisition of minority interest (5,641) 0
Customer advances for construction, net
of refunds 134 0
Proceeds from disposition of assets 29,775 0
Other, net (32,562) (57,883)
--------- ---------
Net cash used in investing activities (526,117) (231,912)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Issuance of long-term debt 409,178 83,031
Issuance of short-term debt 1,558,897 1,481,242
Net change in commercial paper (118,850) 133,400
Retirement of long-term debt (82,562) (104,886)
Retirement of short-term debt (1,560,194) (1,412,693)
Retirement of preferred shares (2,411) (38,210)
Issuance of common shares 219,635 5,975
Acquisition of treasury shares (159,991) (84,980)
Cash dividends paid on common shares (106,292) (101,014)
Cash dividends paid on preferred shares (647) (1,651)
Other, net (234) 517
--------- ---------
Net cash provided by (used in)
financing activities 156,529 (39,269)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,869) (17,410)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 31,260 48,670
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 29,391 $ 31,260
========= =========
*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); NIPSCO Capital Markets, Inc.
(Capital Markets); Miller ; and SM&P. 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 operating results of IWCR for the three-month period ended June 30,
1997 are reported in the accompanying consolidated financial statements of
Industries.
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, six-month and
twelve-month periods ended June 30, 1997; and 4.3%, 4.2% and 4.1% for the
three-month, six-month and twelve-month periods ended June 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, six-month and twelve-month periods ended June 30, 1997; and 3.1%
for the three-month, six-month and twelve-month periods ended June 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,
six-month and twelve-month periods ended June 30, 1997 and June 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, six-month, and twelve-month periods ended June 30, 1997 and June
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 $170.4
million (see Note 4) and $40.6 million at June 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.(NEM) 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 June 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 Six Months Twelve Months
(In thousands) Ended June 30, Ended June 30, Ended June 30,
------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Income taxes $ 61,700 $ 55,748 $ 61,700 $ 55,748 $ 81,747 $124,088
Interest, net of
amounts capitalized $ 32,544 $ 30,544 $ 44,655 $ 40,948 $ 90,988 $ 89,337
</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 June 1997 and December 1996 the estimated replacement
cost of gas in storage (current and non-current) at June 30, 1997 and December
31, 1996 exceeded the stated LIFO cost by approximately $32 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 June 30, 1997, Industries had open
derivative financial instruments representing hedges of natural gas sales of 4.5
billion cubic feet (Bcf) and net basis differentials of 3.3 Bcf. The net
deferred gain on these derivative financial instruments as of June 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 loss on these options as of June 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 June 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 and were reflected in the Consolidated
Balance Sheet as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1997 1996
============= ============
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 18) $ 48,505 $ 50,262
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges and
deferred depreciation (See below) 68,655 70,763
Bailly scrubber carrying charges and
deferred depreciation (See below) 10,348 10,816
Deferred SFAS No. 106 expense not
recovered (Note 11) 90,512 87,557
FERC Order No. 636 transition costs (Note 7) 30,386 47,399
Regulatory income tax asset (Note 9) 8,521 4,736
Other 4,331 0
------------- ------------
261,258 271,533
Less: Current portion of regulatory assets 33,573 35,328
------------- ------------
$ 227,685 $ 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 in 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
$31.2 million and $24.1 million relating to affordable housing projects at June
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) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service
(IRS) issued a notice of deficiency for Northern Indiana's taxes for the years
1982 through 1985 ($3,785,250 per year plus interest) relating to interest
payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's
former foreign subsidiary, Northern Indiana Public Service Finance N.V.
(Finance). The IRS maintained that interest paid on the Notes should have been
subject to United States tax withholding. The Notes were redeemed in 1985 and
Finance was subsequently liquidated. On October 25, 1991, Northern Indiana
challenged the assessment in the United States Tax Court (Tax Court) and the
matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor of
Northern Indiana, finding that the interest paid on the Notes was not subject to
United States tax withholding. On March 13, 1996, the IRS appealed the Tax
Court's decision to the U. S. Court of Appeals for the Seventh Circuit (Court of
Appeals), and on March 25, 1996 Northern Indiana filed its cross appeal. On June
6, 1997 the Court of Appeals issued an order affirming in full the Tax Court
order. The IRS has until September 4, 1997 to appeal the decision of the Court
of Appeals. Northern Indiana's management and general counsel do not expect the
IRS to appeal. However, if the IRS does appeal, Northern Indiana's management
and general counsel believe the Tax Court's decision will prevail.
(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, and 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>
(Dollars 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) ELM ENERGY AND RECYCLING (UK) LTD.: 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 $49.3 million at June 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 has counterclaimed, and Elm and Development are also seeking 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 has counterclaimed against Elm and Development. Development
believes that the claims made against it and Elm are meritless and that
remedies, in conjunction with Elm's rights under the construction contract, will
be sufficient to mitigate any losses which Elm and/or Development may otherwise
incur.
Elm is continuing to operate the Project, and the banks which provide the
non-recourse financing for the Project are continuing to support its operations.
However, because of ongoing defaults under the Project financing (resulting from
the Project's poor performance and the pending litigation), and the uncommitted
nature of a working capital facility provided by the banks, the banks have the
right to ask that the operation of the Project be terminated at any time. In
that event, some or all of Industries' investment in Elm may be at risk.
Industries' investment in Elm, however, was not material at June 30, 1997.
(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.
In December 1996, and in 1997, certain creditors of NEMC 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
$130 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 $17 million to cover probable corrective actions as of June 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 financial position or results of operations 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 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. Two 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 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 emanating
(EMF) 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. The U.S. National Research Council of the National Academy
of Sciences concluded in a report, after examining more than 500 EMF studies
spanning 17 years, that among other things, there is insufficient evidence to
consider EMF a threat to human health. Despite the report's findings, future
research appropriations are continuing to be dedicated to explore this issue.
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 June 30, 1997
and December 31, 1996, are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
============= ============
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities -
Accelerated depreciation
and other property differences $ 769,392 $ 727,528
AFUDC-equity 36,506 37,713
Adjustment clauses 20,804 41,181
Take-or-pay gas costs 601 877
Other regulatory assets 33,580 39,458
Reacquisition premium on debt 19,002 19,041
Deferred tax assets -
Deferred investment tax credits (41,433) (41,046)
Removal costs (138,109) (131,718)
FERC Order No. 636 transition costs (2,780) (8,144)
Other postretirement/postemployment
benefits (44,949) (43,446)
Other, net (16,341) (11,987)
------------- ------------
636,273 629,457
Less: Deferred income taxes related to
current assets and liabilities 3,976 26,712
------------- ------------
Deferred income taxes - noncurrent $ 632,297 $ 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 Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------ ------------------ ------------------
(In thousands) 1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
<S> <C> <C> <C> <C> <C> <C>
Current income taxes -
Federal $ 34,241 $ 16,390 $ 78,016 $ 40,089 $118,553 $ 66,552
State 5,456 2,781 12,003 6,469 18,315 11,486
-------- -------- -------- -------- -------- --------
39,697 19,171 90,019 46,558 136,868 78,038
-------- -------- -------- -------- -------- --------
Deferred income taxes, net -
Federal (19,344) (1,833) (30,898) 11,709 (23,325) 31,284
State (1,540) (104) (2,462) 1,093 (1,711) 2,808
-------- -------- -------- -------- -------- --------
(20,884) (1,937) (33,360) 12,802 (25,036) 34,092
-------- -------- -------- -------- -------- --------
Deferred investment tax
credits, net (1,833) (1,670) (3,635) (3,339) (7,704) (7,118)
-------- -------- -------- -------- -------- --------
Income taxes 16,980 15,564 53,024 56,021 104,128 105,012
Income taxes applicable to
non-operating activities
and equity investments (311) 46 2,558 (569) 2,920 (1,696)
-------- -------- -------- -------- -------- --------
Total income taxes $ 16,669 $ 15,610 $ 55,582 $ 55,452 $107,048 $103,316
======== ======== ======== ======== ======== ========
</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 Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
-------------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996
========= ========= ========= ========= ========= =========
<S> <C> <C> <C> <C> <C> <C>
Net income $ 28,236 $ 23,429 $ 99,074 $ 90,915 $ 184,893 $ 179,101
Add-Income taxes 16,669 15,610 55,582 55,452 107,048 103,316
Dividend requirements on
preferred stocks of
subsidiary 2,179 2,178 4,346 4,377 8,681 8,833
--------- --------- --------- --------- --------- ---------
Income before preferred
dividend requirements of
subsidiary and income taxes $ 47,084 $ 41,217 $ 159,002 $ 150,744 $ 300,622 $ 291,250
========= ========= ========= ========= ========= =========
Amount derived by multiplying
pre-tax income by the
statutory rate $ 16,480 $ 14,426 $ 55,651 $ 52,760 $ 105,218 $ 101,938
Reconciling items multiplied
by the statutory rate:
Book depreciation over
related tax depreciation 1,044 1,030 2,088 2,013 4,696 4,022
Amortization of deferred
investment tax credits (1,833) (1,670) (3,635) (3,339) (7,704) (7,118)
State income taxes, net of
federal income tax benefit 2,832 1,706 6,339 5,391 11,548 10,171
Reversal of deferred taxes
provided at rates in excess
of the current federal
income tax rate (1,518) (1,145) (3,036) (2,819) (6,861) (5,765)
Other, net (336) 1,263 (1,885) 1,446 151 68
--------- --------- --------- --------- --------- ---------
Total income taxes $ 16,669 $ 15,610 $ 55,582 $ 55,452 $ 107,048 $ 103,316
========= ========= ========= ========= ========= =========
</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, six-month, and twelve-month periods ended June 30, 1997 and June
30, 1996:
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 4,809 $ 4,321 $ 9,382 $ 10,588 $ 15,094 $ 16,222
Interest costs 16,816 13,078 33,352 32,129 54,700 57,964
Estimated return
on plan assets (20,977) (15,499) (41,480) (38,103) (90,784) (147,618)
Amortization of
transition obligation 1,765 1,321 3,353 3,263 5,512 5,974
Other net amortization
and deferral 950 636 1,900 1,550 26,810 86,397
-------- -------- -------- -------- -------- --------
$ 3,363 $ 3,857 $ 6,507 $ 9,427 $ 11,332 $ 18,939
======== ======== ======== ======== ======== ========
</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
$0.5 million were made to these plans for the three-month period ended June 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 the 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,
1997 1996
========== ==========
(In thousands)
<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% and a pre-Medicare medical trend rate of 9%
declining to a long-term rate of 6%, and 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, six-month,
and twelve-month periods ended June 30, 1997 and June 30, 1996 include the
following components:
<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 30,
------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996
======== ======== ======== ======== ======== ========
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Service costs $ 1,589 $ 1,620 $ 3,049 $ 3,240 $ 7,161 $ 6,264
Interest costs 4,798 5,079 9,258 10,159 17,410 19,700
Amortization of
transition obligation
over twenty years 2,970 3,095 5,734 6,190 11,137 11,985
Amortization of unrecognized
actuarial gain (1,014) (582) (2,022) (1,165) (1,411) (2,262)
-------- -------- -------- -------- -------- --------
$ 8,343 $ 9,212 $ 16,019 $ 18,424 $ 34,297 $ 35,687
======== ======== ======== ======== ======== ========
</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 $1.3
million and $2.4 million for the three-month and six-month periods ended June
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 JUNE 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 12):
<TABLE>
<CAPTION>
Redemption
Price at
June 30, December 31, June 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
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at
June 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 - $100 - $105
------------ ------------
$ 85,620 $ 81,126
============ ============
</TABLE>
During the period July 1, 1995 to June 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 JUNE 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 are as
follows:
<TABLE>
<CAPTION>
June 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, excluding sinking
fund payments due within one year $ 6,250 $ 7,500
7-3/4% series - 44,460 shares outstanding,
excluding sinking fund payments due within
one year 4,446 4,446
8.35% series - 63,000 shares outstanding,
excluding sinking fund payments due within
one year 6,300 6,300
Cumulative preferred stock - no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
----------- -----------
$ 59,996 $ 61,246
=========== ===========
</TABLE>
The redemption prices at June 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
Mandatory Redemption
Series Redemption Price Per Share 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% $103.93, 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 June 30, 1997 for each of the twelve-month periods subsequent to
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended June 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 June 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 June 30, 1997, Northern Indiana
had approximately $152.8 million of retained earnings (earned surplus) available
for the payment of dividends. Future dividends will depend upon adequate
retained earnings, adequate future earnings, and the absence of adverse
developments.
(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 June 30, 1997, Industries had purchased
approximately 21.3 million shares since 1989 at an average price of $27.83 per
share. Approximately 5.9 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 June 30, 1997, there were 4,578 shares
and 2,206,550 shares reserved for future awards under the 1988 Plan and 1994
Plan, respectively. The 1988 Plan and 1994 Plan permit the following types of
grants, separately or in combination: nonqualified stock options, incentive
stock options, restricted stock awards, stock appreciation rights, and
performance units. No incentive stock options or performance units were
outstanding at June 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 271,000 and 262,000 restricted shares outstanding at June 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 June 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 $0.4, $0.9, and $1.9 million for the
three-month, six-month, and twelve-month periods ending June 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 Six Months Twelve Months
Ended Ended Ended
June 30, June 30, June 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 $ 28,236 $ 23,429 $ 99,074 $ 90,915 $ 184,893 $ 179,101
Pro forma $ 28,029 $ 23,267 $ 98,660 $ 90,590 $ 184,102 $ 178,532
Earnings Per Share:
As reported $ 0.44 $ 0.38 $ 1.61 $ 1.47 $ 3.03 $ 2.85
Pro forma $ 0.44 $ 0.38 $ 1.61 $ 1.47 $ 3.02 $ 2.84
</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, six-month, and twelve-month periods ended June 30, 1997 and
June 30, 1996, respectively: risk-free interest rate of 6.39% and 6.24%,
respectively; expected dividend yield of $1.68 and $1.56 per share,
respectively; expected option term of five years; and expected volatility of
13.2% and 13.0%, respectively.
Changes in outstanding shares under option and SARs for the three-month,
six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Three Months Ended Option Option
June 30, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
<S> <C> <C> <C> <C>
Balance beginning of period 1,149,750 $ 30.57 1,089,850 $ 28.52
Exercised (44,350) $ 28.24 (25,150) $ 24.36
Canceled (1,000) $ 37.81 (4,000) $ 32.44
--------- ---------
Balance end of period 1,104,400 $ 30.66 1,060,700 $ 28.61
========= =========
Shares exercisable 841,950 $ 28.43 796,250 $ 27.34
========= =========
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Six Months Ended Option Option
June 30, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
<S> <C> <C> <C> <C>
Balance beginning of period 1,187,150 $ 30.58 1,107,750 $ 28.55
Exercised (70,900) $ 28.16 (38,050) $ 25.92
Canceled (11,850) $ 37.81 (9,000) $ 32.52
--------- ---------
Balance end of period 1,104,400 $ 30.66 1,060,700 $ 28.61
========= =========
Shares exercisable 841,950 $ 28.43 796,250 $ 27.34
========= =========
NONQUALIFIED STOCK OPTIONS
-------------------------------------------
Weighted Weighted
Average Average
Twelve Months Ended Option Option
June 30, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
<S> <C> <C> <C> <C>
Balance beginning of period 1,060,700 $ 28.61 995,900 $ 27.07
Granted 278,300 $ 37.81 277,450 $ 32.44
Exercised (216,850) $ 29.29 (198,650) $ 25.96
Canceled (17,750) $ 37.09 (14,000) $ 32.49
--------- ---------
Balance end of period 1,104,400 $ 30.66 1,060,700 $ 28.61
========= =========
Shares exercisable 841,950 $ 28.43 796,250 $ 27.34
========= =========
Weighted average fair value
of options granted $ 5.00 $ 3.87
========= =========
<CAPTION>
NONQUALIFIED STOCK OPTIONS WITH SARs
-------------------------------------------
Three Months Ended Option Option
June 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
-------------------------------------------
Six Months Ended Option Option
June 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
-------------------------------------------
Twelve Months Ended Option Option
June 30, 1997 Price 1996 Price
=========================== ========= ======== ========= ========
<S> <C> <C> <C> <C>
Balance beginning of period 5,600 $ 10.94 9,900 $ 10.94
Exercised 0 (4,300) $ 10.94
--------- ---------
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 June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------------------
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Option Price June 30, 1997 Contractual Life Option Price
================ ============== ================== =================
<S> <C> <C> <C>
$10.94 to $17.94 88,500 2.54 years $16.60
$22.94 to $28.75 359,150 5.84 years $26.58
$30.31 to $37.81 656,750 7.97 years $34.78
- ---------------- --------- ---------- ------
$10.94 to $37.81 1,104,400 6.84 years $30.66
=========
<CAPTION>
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------
Number
Range of Exercisable at Weighted Average
Option Price June 30, 1997 Option Price
================ ================== =================
<S> <C> <C>
$10.94 to $17.94 88,500 $16.60
$22.94 to $28.75 359,150 $26.58
$30.31 to $33.19 394,300 $32.77
- ---------------- --------- ------
$10.94 to $33.19 841,950 $28.43
=========
</TABLE>
(18)LONG-TERM DEBT: At June 30, 1997 and December 31, 1996, Industries'
long-term debt, excluding amounts due within one year, issued and not retired or
canceled was as follows:
<TABLE>
<CAPTION>
AMOUNTS OUTSTANDING
---------------------------
June 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 7.21%
and various maturities between October 1, 1998
and September 1, 2025 $ 202,109 $ 109,509
Pollution control notes and bonds-
Interest rates between 3.78% and 5.70% with
a weighted average interest rate of 4.01%
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 7.20%
and various maturities between March 20, 2000
and June 27, 2027 1,008,025 644,025
Subordinated Debentures -
7-3/4%, due March 31, 2026 75,000 75,000
Notes payable -
Interest rates between 6.31% and 8.15% with
a weighted average interest rate of 7.23%
and various maturities between December 22, 1999
and April 1, 2006 38,497 19,522
Variable bank loan -
6.81% - due August, 2003 5,600 -
Term Loan Facility-weighted average interest
rate of 8.81% at June 30, 1997, due
December 31, 2004 41,108 40,576
Unamortized premium and discount
on long-term debt, net (3,994) (3,526)
------------ -----------
Total long-term debt, excluding
amounts due in one year $ 1,608,345 $ 1,127,106
============ ===========
</TABLE>
The sinking fund requirements of long-term debt outstanding at June 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; 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 June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
=================================
<S> <C>
1999 $ 27,281,577
2000 167,945,193
2001 38,958,443
2002 86,746,993
</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 June 30, 1997, $99.0 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.
On February 14, 1997, Capital Markets was authorized to issue and sell up
to $300 million of medium-term notes. As of June 30, 1997, $300 million of the
medium-term notes had been issued 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 $1.2 billion at June 30, 1997.
(19)CURRENT PORTION OF LONG-TERM DEBT: At June 30, 1997 and December 31,
1996, Industries' current portion of long-term debt due within one year was as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands) 1997 1996
============= ============
<S> <C> <C>
First Mortgage Bonds -
Interest rates of 5-7/8% and 6-3/8% with a
weighted average interest rate of 6.27% and
maturities of August 1, 1997 and
September 1, 1997 $ 32,522 $ 25,747
Medium-term notes -
Interest rate of 5.83% and 5.95% with a
weighted average interest rate of 5.85% and
various maturities between July 4, 1997
and April 13, 1998 75,000 40,000
Zero Coupon notes -
7.57%, $72,500 at maturity -
due December 1, 1997 70,296 67,731
Notes payable -
Interest rates between 6.72% and 9.00% with a
a weighted average interest rate of 8.26%
and maturities between October 1, 1997 and
April 1, 1998 5,894 5,033
Term loan facility -
Interest rate of 8.81% 6,084 6,041
------------ ------------
Total current portion of long-term debt $ 189,796 $ 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 unless
extended by its terms. As of June 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 June 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 June 30, 1997 and December 31, 1996, there were $35.1 million and $79.0
million of borrowings, respectively, outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At June
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 June 30, 1997 and December 31, 1996, Northern Indiana had $45.4
million and $193.9 million of commercial paper outstanding, respectively. At
June 30, 1997, the weighted average interest rate of commercial paper
outstanding was 5.60%.
Capital Markets has a $150 million revolving Credit Agreement which will
terminate August 19, 1999, unless extended by its terms. This facility provides
short-term financing flexibility to Industries and also serves as the back-up
instrument for a commercial paper program. As of June 30, 1997, there were no
borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit. As of
June 30, 1997 and December 31, 1996, $33.0 million and $27.0 million,
respectively, of borrowings were outstanding under these lines of credit.
As of June 30, 1997 and December 31, 1996, Capital Markets had $12.3
million and $119.3 million of commercial paper outstanding, respectively. At
June 30, 1997, the weighted average interest rate of commercial paper
outstanding was 5.80%.
As of June 30, 1997, IWCR and its subsidiaries had lines of credit with
banks aggregating $48.9 million. As of June 30, 1997, $34.2 million of
borrowings were outstanding under these lines of credit.
At June 30, 1997 and December 31, 1996, Industries' short-term borrowings
were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
============= ============
(Dollars in thousands)
<S> <C> <C>
Commercial paper $ 57,650 $ 313,205
Notes payable 102,200 106,000
Standby loan facility 6,266 4,949
Revolving loan facility 2,665 1,831
----------- -----------
Total short-term borrowings $ 168,781 $ 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
June 30, 1997:
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
==========================================
(In thousands)
<S> <C>
1998 $ 14,845
1999 14,527
2000 13,665
2001 13,377
2002 51,636
Later years 88,146
--------
Total minimum payments required $196,196
========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
June 30, June 30,
(In thousands) 1997 1996
========= =========
<S> <C> <C>
Three months ended $ 2,292 $ 1,693
Six months ended 4,540 3,724
Twelve months ended 8,937 8,187
</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 Integrated Systems
Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC to
perform all data center, application development and maintenance, and desktop
management of Northern Indiana.
(23)PRIMARY ENERGY: Primary Energy, a wholly-owned subsidiary of
Industries, is the parent of subsidiaries including 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 lease with a third-party lessor commenced on April 16,
1997 when the facility was placed in commercial operation. Capital Markets has
guaranteed LEC obligations relative to plant construction. Capital Markets also
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 intends to lease this facility, once
constructed, from a third party. Additionally, Portside has entered into an
interim agreement, which expires when the lease is established with the
third-party lessor, under which Portside is acting as agent for the lessor to
design, construct, and start up the energy facility. Industries has guaranteed
certain Portside obligations to the lessor during construction. Capital Markets
anticipates guaranteeing certain Portside obligations relative to the
anticipated lease. Construction of the project began in June 1996. The facility
is scheduled to be operational in August 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 January, 1997. The facility is
scheduled to be operational in July, 1998.
Primary has advanced approximately $112 million and $42 million, at June
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 "Other, net" 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>
June 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 $ 29,391 $ 29,391 $ 26,333 $ 26,333
Investments 32,953 36,953 30,003 33,019
Long-term debt (including
current portion) 1,799,641 1,745,925 1,273,158 1,220,492
Preferred stock 147,444 130,594 144,200 126,379
</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 3%,
respectively, of gas revenue (including transportation services) and 22% of
electric revenue for the twelve months ended June 30, 1997 and June 30, 1996.
<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); NIPSCO Capital
Markets, Inc. (Capital Markets); Miller ; and SM&P. These subsidiaries are
referred to collectively as "Products and Services".
Industries' results of operations include three months of operating results
from IWCR for the three-month, six-month and twelve-month periods ended June 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 June 30, 1997
increased $272.7 million as compared to the twelve months ended June 30, 1996.
The increase includes $51.6 million reflecting three months of operating
revenues from IWCR for the current period. Gas revenues increased $65.2 million,
electric revenues decreased $20.6 million, and Products and Services revenues
increased $209.3 million, as compared to the same period in 1996. The increase
in gas revenues was largely attributable to increased sales to wholesale
customers, increased deliveries of gas transported for others, and increased gas
costs per dekatherm (dth), partially offset by decreased gas transition costs.
The decrease in electric revenues was mainly due to decreased sales to
residential customers resulting from the cooler summer in 1996 and decreased
sales to industrial and wholesale customers. Increased volumes in gas marketing
resulted in an increase of $123.6 million in Products and Services revenue for
the twelve-month period ended June 30, 1997. NESI Power Marketing, a
wholly-owned subsidiary of Services, which was formed on December 11, 1996,
markets wholesale power and provided an additional $42.4 million in operating
revenue for Products and Services for the twelve months ended June 30, 1997.
Total operating revenues for the six months ended June 30, 1997 increased
$169.0 million as compared to the six months ended June 30, 1996. The increase
includes $51.6 million reflecting three months of operating revenues from IWCR
for the current period. Gas revenues increased $6.1 million, electric revenues
decreased $2.8 million and Products and Services revenue increased $146.9
million, as compared to the same period in 1996. The increase in gas revenues
was mainly due to increased sales to wholesale customers, increased deliveries
of gas transported for others, increased gas transition costs, and increased gas
costs per dth. The decrease in electric revenues was mainly due to decreased
sales to industrial and wholesale customers. Increased gas and wholesale power
marketing volumes resulted in an increase of $112.1 million in Products and
Services revenue for the six-month period ended June 30, 1997.
Total operating revenues for the three months ended June 30, 1997 increased
$124.7 million as compared to the three months ended June 30, 1996. The increase
includes $51.6 million reflecting three months of operating revenues from IWCR
for the current period. Gas and electric revenues were consistent with the
levels for the same period ended June 30, 1996. Increased volumes in gas and
wholesale power marketing resulted in an increase of $72.3 million in Products
and Services revenue for the three-month period ended June 30, 1997.
The basic steel industry accounted for 30% of natural gas delivered
(including volumes transported) and 35% of electric sales for the Energy
Utilities during the twelve months ended June 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
----------------------------------------
June 30, 1997 Compared to June 30, 1996
----------------------------------------
Three Six 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 $ (13,387) $ 15,045 $ 62,072
Gas transition costs (1,620) 1,494 (8,023)
Changes in sales levels 13,630 (12,535) 8,453
Gas transported 1,649 2,064 2,686
--------- --------- ---------
Gas Revenue Change 272 6,068 65,188
--------- --------- ---------
Electric Revenue -
Pass through of net changes
in fuel costs 152 1,393 (21)
Changes in sales levels (330) (4,171) (20,614)
--------- --------- ---------
Electric Revenue Change (178) (2,778) (20,635)
--------- --------- ---------
Water Revenue Change 18,795 18,795 18,795
--------- --------- ---------
Products and Services Revenue -
Gas marketing 44,690 68,007 123,617
Wholesale power marketing 27,580 42,403 42,403
Pipeline construction 14,632 14,632 14,632
Locate and marking 17,204 17,204 17,204
Other 1,657 4,643 11,464
--------- --------- ---------
Product and Services Revenue Change 105,763 146,889 209,320
--------- --------- ---------
Total Revenue Change $ 124,652 $ 168,974 $ 272,668
========= ========= =========
</TABLE>
See Note 7 to Notes to Consolidated Financial Statements regarding FERC
Order No. 636 transition costs.
GAS COSTS -
The Energy Utilities' gas costs decreased $5.5 million for the three-month
period ended June 30, 1997. Gas costs increased $10.1 and $65.4 million for the
six-month and twelve-month periods ended June 30, 1997, respectively. Gas costs
decreased for the three-month period due to decreased gas costs per dth
partially offset by increased purchases. Gas costs increased for the six-month
and twelve-month periods due to increased gas costs per dth, increased gas
transition costs, and increased purchases. The average cost for the Energy
Utilities' purchased gas for the three-month, six-month and twelve-month periods
ended June 30, 1997, after adjustment for gas transition costs billed to
transport customers, was $2.61, $3.10 and $3.14 per dth, respectively, as
compared to $2.84, $2.95 and $2.74 per dth for the same periods in 1996.
FUEL AND PURCHASED POWER -
The cost of fuel for electric generation decreased for the twelve-month
period ended June 30, 1997, compared to the 1996 period, mainly as a result of
decreased production of electricity.
Power purchased decreased $3.8 million and $6.8 million for the three-month
and six-month periods ended June 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 $193.1 million for
the twelve months ended June 30, 1997. The increase includes $22.2 million
reflecting three months of cost of sales from IWCR for the current period.
Increased volumes in gas and wholesale power marketing increased cost of sales
$167.8 million for the twelve-months ended June 30, 1997, compared to June 30,
1996.
The cost of sales for Products and Services increased $138.0 million for
the six- months ended June 30, 1997, compared to the 1996 period. The increase
includes $22.2 million reflecting three months of cost of sales from IWCR for
the current period. Increased volumes in gas and wholesale power marketing
increased cost of sales $114.1 million for the six months ended June 30, 1997,
compared to June 30, 1996.
The cost of sales for Products and Services increased $95.9 million for the
three- months ended June 30, 1997, compared to the 1996 period. The increase
includes $22.2 million reflecting three months of cost of sales from IWCR for
the current period. Increased volumes in gas and wholesale power marketing
increased cost of sales $73.6 million for the three months ended June 30, 1997,
compared to June 30, 1996.
OPERATING MARGINS -
Operating margins for the twelve months ended June 30, 1997 increased $22.2
million from the same period a year ago. The increase in operating margin
includes $29.4 million related to three months of IWCR operations in the current
period. The operating margin from gas deliveries decreased $0.2 million. The
operating margin from electric sales decreased $12.6 million due to decreased
sales to residential customers, reflecting milder 1996 summer weather, and
decreased sales to industrial and wholesale customers.
Operating margins for the six months ended June 30, 1997 increased $25.1
million from the same period a year ago. The increase in operating margin
includes $29.4 million related to three months of IWCR operations in the current
period. The operating margin from gas deliveries decreased $4.0 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 $1.4 million as a result of increased wholesale energy
transactions. The operating margin for Products and Services, excluding IWCR,
decreased $1.7 million resulting from a decrease in gas marketing margin.
Operating margins for the three months ended June 30, 1997 increased $36.6
million from the same period a year ago. The increase in operating margin
includes $29.4 million related to three months of IWCR operations in the current
period. Gas operating margin increased $5.7 million due to increased sales to
residential and commercial customers reflecting colder weather during the
period, increased sales to wholesale customers, and increased deliveries of gas
transported for others, partially offset by decreased sales to industrial
customers. Operating margin from electric sales increased $2.2 million due to
increased sales to residential and commercial customers, which were partially
offset by decreased sales to industrial and wholesale customers.
OPERATING EXPENSES AND TAXES -
Operation expenses increased $7.7 million for the twelve-month period ended
June 30, 1997. Operation expense includes an increase of $16.0 million
reflecting three months of operations of IWCR in the current period. This
increase was offset by decreased employee costs of $7.2 million and decreased
electric production pollution control facility costs of $4.7 million at Northern
Indiana. Operation expenses, excluding IWCR, increased $5.3 million for the
six-month period ended June 30, 1997 reflecting operating expenses of North Lake
and LEC which began operations in May 1996 and April 1997, respectively.
Operation expenses increased $10.8 million for the three-month period ended June
30, 1997.
Maintenance expenses decreased $6.9 million for the twelve-month period
ended June 30, 1997 mainly reflecting decreased maintenance activity at the
electric production facilities of $4.3 million and decreased maintenance of $2.6
million on the transmission and distribution facilities. Maintenance expenses
decreased $8.3 million for the six- month period reflecting decreased
maintenance on distribution facilities. Maintenance expenses decreased $7.8
million for the three-month period reflecting decreased maintenance on electric
production and distribution facilities.
Depreciation and amortization expense increased $5.7, $7.6 and $22.3
million for the three-month, six-month and twelve-month periods ended June 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. The increase in depreciation and
amortization also includes $3.1 million related to IWCR for the three-month,
six-month and twelve-month periods ended June 30, 1997.
OTHER INCOME (DEDUCTIONS) -
Other Income (Deductions) for the twelve-month period increased $16.3
million mainly resulting from the disposition of certain oil and natural gas
properties, and the sale of Crescent Dunes Lakeshore property to the National
Park Service. Other Income (Deductions) increased $8.7 million for the six-month
period ended June 30, 1997 mainly due to the disposition of certain oil and
natural gas properties. Other Income (Deductions) increased $1.7 million for the
three-month period ended June 30, 1997.
INTEREST AND OTHER CHARGES -
Interest and other charges increased for the three-month, six-month, and
twelve-month periods ended June 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 three months of
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 June 30, 1997 was
$184.9 million compared to $179.1 million for the twelve-month period ended June
30, 1996.
Net income for the six months ended June 30, 1997 was $99.1 million
compared to $90.9 million for the six months ended June 30, 1996.
Net income for the three months ended June 30, 1997 was $28.2 million
compared to $23.4 million for the three months ended June 30, 1996.
IMPACT OF ACCOUNTING STANDARDS -
For a discussion of the impact of accounting standards not yet adopted on
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 $17 million to
cover probable corrective actions as of June 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
financial position or results of operations 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 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. Two 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 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 emanating
(EMF) 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. The U.S. National Research Council of the National Academy
of Sciences concluded in a report, after examining more than 500 EMF studies
spanning 17 years, that among other things, there is insufficient evidence to
consider EMF a threat to human health. Despite the report's findings, future
research appropriations are continuing to be dedicated to explore this issue.
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.
On February 14, 1997, Capital Markets was authorized to issue and sell up
to $300 million of medium-term notes. As of May 7, 1997, $300 million of the
medium-term notes had been issued 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, unless extended by its terms. This facility provides
short-term financing flexibility to Industries and also serves as the backup
instrument for a commercial paper program. As of June 30, 1997, there were no
borrowings outstanding under this agreement.
Capital Markets also has $95 million of money market lines of credit. As of
June 30, 1997, $33.0 million of borrowings were outstanding under these lines of
credit.
As of June 30, 1997 and December 31, 1996, Capital Markets had $12.3
million and $119.3 million of commercial paper outstanding, respectively. At
June 30, 1997, the weighted average interest rate of commercial paper
outstanding was 5.80%.
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 $1.2 billion at June 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 June 30, 1997 and December 31,
1996, Northern Indiana had $45.4 million and $193.9 million of commercial paper
outstanding, respectively. At June 30, 1997, the weighted average interest rate
of commercial paper outstanding was 5.60%.
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999 unless extended by its terms. As of June
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 June 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 June 30, 1997, $35.1 million of borrowings were outstanding under these
lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At June
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 June 30, 1997, $99.0 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.
As of June 30, 1997, IWCR and its subsidiaries had lines of credit with
banks aggregating $48.9 million. As of June 30, 1997, $34.2 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 June 30, 1997, approximately 73% 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'
current contracts expired May 31, 1997. Employees are currently working without
a contract. Northern Indiana continues to negotiate new agreements with the two
local unions, but cannot predict the timing or terms of new agreements.
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.
Industries 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 sale 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 proposes 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. Action by the Commission is expected
during the fourth quarter of 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 3 (Pending Tax
Matter), Note 5 (Elm Energy and Recycling (UK) Ltd.), 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, Six-Month, and Twelve-Month Periods
Ended June 30, 1997.
Exhibit 11.2 - Computation of Per Share Earnings
Three-Month, Six-Month, and Twelve-Month Periods
Ended June 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 August 13, 1997
EXHIBIT 11.1
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS
Three-Month, Six-Month and Twelve-Month
Periods Ended June 30, 1997
Fully
Three Months Ended June 30, 1997: Primary Diluted
====================================== ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at
June 30, 1997 62,827,620 62,827,620
Dilutive Effect for Nonqualified
Stock Options at June 30, 1997 265,673 298,340
---------- ----------
Weighted Average Shares at
June 30, 1997 63,093,293 63,125,960
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
<S> <C> <C>
Net Income $ 28,236 $ 28,236
Dividend Requirements on Preferred Shares 0 0
---------- ----------
Balance Available for Common Shareholders $ 28,236 $ 28,236
========== ==========
Earnings Per Average Common Share $ 0.44(a) $ 0.44(a)
========== ==========
Fully
Six Months Ended June 30, 1997: Primary Diluted
======================================= ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at
June 30, 1997 61,202,013 61,202,013
Dilutive Effect for Nonqualified
Stock Options at June 30, 1997 258,477 298,240
---------- ----------
Weighted Average Shares at
June 30, 1997 61,460,490 61,500,253
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
<S> <C> <C>
Net Income $ 99,074 $ 99,074
Dividend Requirements on Preferred Shares 0 0
---------- ----------
Balance Available for Common Shareholders $ 99,074 $ 99,074
========== ==========
Earnings Per Average Common Share $ 1.61(a) $ 1.61(a)
========== ==========
Fully
Twelve Months Ended June 30, 1997: Primary Diluted
======================================= ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at
June 30, 1997 60,967,583 60,967,583
Dilutive Effect for Nonqualified
Stock Options at June 30, 1997 241,303 298,340
---------- ----------
Weighted Average Shares at
June 30, 1997 61,208,886 61,265,923
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
<S> <C> <C>
Net Income $ 184,893 $ 184,893
Dividend Requirements on Preferred Shares 0 0
---------- ----------
Balance Available for Common Shareholders $ 184,893 $ 184,893
========== ==========
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, Six-Month and Twelve-Month
Periods Ended June 30, 1996
Fully
Three Months Ended June 30, 1996: Primary Diluted
====================================== ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at
June 30, 1996 61,234,350 61,234,350
Dilutive Effect for Nonqualified
Stock Options at June 30, 1996 342,993 406,438
---------- ----------
Weighted Average Shares at
June 30, 1996 61,577,343 61,640,788
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
<S> <C> <C>
Net Income $ 23,429 $ 23,429
Dividend Requirements on Preferred Shares 0 0
---------- ----------
Balance Available for Common Shareholders $ 23,429 $ 23,429
========== ==========
Earnings Per Average Common Share $ O.38(a) $ 0.38(a)
========== ==========
Six Months Ended June 30, 1996: Primary Diluted
======================================= ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at
June 30, 1996 61,649,509 61,649,509
Dilutive Effect for Nonqualified
Stock Options at June 30, 1996 364,434 406,438
---------- ----------
Weighted Average Shares at
June 30, 1996 62,013,943 62,055,947
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
<S> <C> <C>
Net Income $ 90,915 $ 90,915
Dividend Requirements on Preferred Shares 119 119
---------- ----------
Balance Available for Common Shareholders $ 90,796 $ 90,796
========== ==========
Earnings Per Average Common Share $ 1.46(a) $ 1.46(a)
========== ==========
Fully
Twelve Months Ended June 30, 1996: Primary Diluted
======================================= ========== ==========
<S> <C> <C>
Weighted Average Number of Shares:
Average Common Shares Outstanding at
June 30, 1996 62,219,569 62,219,569
Dilutive Effect for Nonqualified
Stock Options at June 30, 1996 278,995 406,438
---------- ----------
Weighted Average Shares at
June 30, 1996 62,498,564 62,626,007
========== ==========
Net Income to Be Used to Compute
Earnings Per Average Common Share:
(Dollars in thousands)
<S> <C> <C>
Net Income $ 179,101 $ 179,101
Dividend Requirements on Preferred Shares 1,651 1,651
---------- ----------
Balance Available for Common Shareholders $ 177,450 $ 177,450
========== ==========
Earnings Per Average Common Share $ 2.84(a) $ 2.83(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
August 13, 1997
<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 June 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> APR-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,618,455
<OTHER-PROPERTY-AND-INVEST> 279,016
<TOTAL-CURRENT-ASSETS> 527,662
<TOTAL-DEFERRED-CHARGES> 117,506
<OTHER-ASSETS> 313,708
<TOTAL-ASSETS> 4,856,347
<COMMON> 534,514
<CAPITAL-SURPLUS-PAID-IN> 89,860
<RETAINED-EARNINGS> 634,043
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,258,417
59,996
85,620
<LONG-TERM-DEBT-NET> 796,115
<SHORT-TERM-NOTES> 111,131
<LONG-TERM-NOTES-PAYABLE> 812,230
<COMMERCIAL-PAPER-OBLIGATIONS> 57,650
<LONG-TERM-DEBT-CURRENT-PORT> 191,296
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,490,288
<TOT-CAPITALIZATION-AND-LIAB> 4,856,347
<GROSS-OPERATING-REVENUE> 523,394
<INCOME-TAX-EXPENSE> 16,980
<OTHER-OPERATING-EXPENSES> 448,882
<TOTAL-OPERATING-EXPENSES> 448,882
<OPERATING-INCOME-LOSS> 74,512
<OTHER-INCOME-NET> 3,897
<INCOME-BEFORE-INTEREST-EXPEN> 78,409
<TOTAL-INTEREST-EXPENSE> 33,193
<NET-INCOME> 28,236
0
<EARNINGS-AVAILABLE-FOR-COMM> 28,236
<COMMON-STOCK-DIVIDENDS> 29,962
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> (78,361)
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
