<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
December 31, 1997
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
______________________________
NIPSCO Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
INDIANA
(State or Other Jurisdiction of Incorporation)
1-9779 35-1719974
(Commission File Number) (IRS Employer Identification No.)
801 E. 86th Place, Merrillville, Indiana 46410
(Address of Principal Executive Offices) (Zip Code)
(219) 853-5200
(Registrant's Telephone Number, Including Area Code)
================================================================================
<PAGE>
Item 5. Other Events
The purpose of this Current Report is to file certain financial information
regarding the Registrant (NIPSCO Industries, Inc.) and its subsidiaries. Such
financial information is set forth in the exhibits to this Current Report.
<TABLE>
<CAPTION>
Exhibits
Exhibit
Number Description of Item
------- -------------------
<S> <C>
(23) Consent of Arthur Andersen LLP.
(27.1) Financial Data Schedule.
(27.2) Restated Financial Data Schedule.
(27.3) Restated Financial Data Schedule.
(99.1) Financial Information for the
year December 31, 1997.
---Management's Discussion and Analysis of
Financial Condition and Results of Operations.
---Consolidated Statement of Income.
---Consolidated Balance Sheet.
---Consolidated Statement of Capitalization.
---Consolidated Statement of Long-Term Debt.
---Consolidated Statement of Cash Flows.
---Consolidated Statement of Common Shareholders'
Equity.
---Notes to Consolidated Financial Statements.
---Report of Independent Public Accountants.
---Selected Supplemental Information.
(99.2) Condensed Financial Information of NIPSCO
Industries, Inc. and Subsidiaries.
---Schedule I - Condensed Balance Sheet.
---Schedule I - Condensed Statement of Income.
---Schedule I - Condensed Statement of Cash Flows.
---Notes to Condensed Financial Statements.
(99.3) NIPSCO Industries, Inc. Schedule of Valuation and
Qualifying Accounts.
</TABLE>
<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, hereunto duly authorized.
NIPSCO Industries, Inc.
(Registrant)
By_________________________________
Nina M. Rausch
Secretary
Date: February 13, 1998
2
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
(23) Consent of Arthur Andersen LLP.
(27.1) Financial Data Schedule.
(27.2) Restated Financial Data Schedule
(27.3) Restated Financial Data Schedule
(99.1) Financial Information for the Year December 31, 1997.
--Management's Discussion and Analysis of Financial
Condition and Results of Operations.
--Consolidated Statement of Income.
--Consolidated Balance Sheet
--Consolidated Statement of Capitalization
--Consolidated Statement of Long-Term Debt.
--Consolidated Statement of Cash Flows.
--Consolidated Statement of Common Shareholders' Equity.
--Notes to Consolidated Financial Statements.
--Report of Independent Public Accountants.
--Selected Supplemental Information.
(99.2) Condensed Financial Information of NIPSCO Industries, Inc.
and Subsidiaries.
--Schedule I--Condensed Balance Sheet.
--Schedule I--Condensed Statement of Income.
--Schedule I--Condensed Statement of Cash Flows.
--Notes to Condensed Financial Statements.
(99.3) NIPSCO Industries, Inc. Schedule of Valuation and
Qualifying Accounts.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 30, 1998, on NIPSCO Industries, Inc.'s consolidated
financial statements and related schedules as of and for the year ended December
31, 1997, included in this Form 8-K, into NIPSCO Industries, Inc.'s 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; Form S-3 Registration Statement No. 333-26847 and
Form S-3 Registration Statement No. 333-39911.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> This schedule contains summary financial information extracted from
the financial statements of NIPSCO Industries, Inc. for twelve months ended
December 31, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,656,126
<OTHER-PROPERTY-AND-INVEST> 235,153
<TOTAL-CURRENT-ASSETS> 630,708
<TOTAL-DEFERRED-CHARGES> 135,358
<OTHER-ASSETS> 279,688
<TOTAL-ASSETS> 4,937,033
<COMMON> 506,987
<CAPITAL-SURPLUS-PAID-IN> 91,581
<RETAINED-EARNINGS> 666,220
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,264,788
58,841
85,620
<LONG-TERM-DEBT-NET> 481,071
<SHORT-TERM-NOTES> 87,709
<LONG-TERM-NOTES-PAYABLE> 1,186,854
<COMMERCIAL-PAPER-OBLIGATIONS> 88,500
<LONG-TERM-DEBT-CURRENT-PORT> 54,621
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,627,201
<TOT-CAPITALIZATION-AND-LIAB> 4,937,033
<GROSS-OPERATING-REVENUE> 2,586,541
<INCOME-TAX-EXPENSE> 105,205
<OTHER-OPERATING-EXPENSES> 2,175,988
<TOTAL-OPERATING-EXPENSES> 2,175,988
<OPERATING-INCOME-LOSS> 410,553
<OTHER-INCOME-NET> 14,619
<INCOME-BEFORE-INTEREST-EXPEN> 425,172
<TOTAL-INTEREST-EXPENSE> 129,298
<NET-INCOME> 190,849
0
<EARNINGS-AVAILABLE-FOR-COMM> 190,849
<COMMON-STOCK-DIVIDENDS> 114,303
<TOTAL-INTEREST-ON-BONDS> 28,093
<CASH-FLOW-OPERATIONS> 428,457
<EPS-PRIMARY> 1.54<F1>
<EPS-DILUTED> 1.53
<FN>
<F1> Amount represents basic earnings per share.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> This schedule contains summary financial information extracted from
the financial statements of NIPSCO Industries, Inc. for twelve months ended
December 31, 1996 and three months ended March 31, 1997, June 30, 1997,
and September 30, 1997, respectively, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<BOOK-VALUE> PER-BOOK PER-BOOK PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,194,788 3,621,142 3,618,455 3,607,264
<OTHER-PROPERTY-AND-INVEST> 250,144 270,635 279,016 231,035
<TOTAL-CURRENT-ASSETS> 511,079 592,320 527,662 523,873
<TOTAL-DEFERRED-CHARGES> 86,863 104,164 117,506 130,358
<OTHER-ASSETS> 231,469 322,312 313,708 303,383
<TOTAL-ASSETS> 4,274,343 4,910,573 4,856,347 4,795,913
<COMMON> 477,935 574,950 534,514 534,782
<CAPITAL-SURPLUS-PAID-IN> 31,336 86,767 89,860 90,499
<RETAINED-EARNINGS> 591,230 635,399 634,043 641,424
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,100,501 1,297,116 1,258,417 1,266,705
61,246 61,246 59,996 59,396
81,126 85,622 85,620 85,620
<LONG-TERM-DEBT-NET> 403,983 496,698 796,115 495,460
<SHORT-TERM-NOTES> 112,780 102,907 111,131 87,709
<LONG-TERM-NOTES-PAYABLE> 723,123 875,388 812,230 1,113,260
<COMMERCIAL-PAPER-OBLIGATIONS> 313,205 170,900 57,650 77,500
<LONG-TERM-DEBT-CURRENT-PORT> 146,052 154,643 191,296 111,722
1,828 1,828 1,828 1,828
<CAPITAL-LEASE-OBLIGATIONS> 0 0 0 0
<LEASES-CURRENT> 0 0 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,330,499 1,664,225 1,482,064 1,496,713
<TOT-CAPITALIZATION-AND-LIAB> 4,274,343 4,910,573 4,856,347 4,795,913
<GROSS-OPERATING-REVENUE> 1,987,948 659,950 523,186 596,315
<INCOME-TAX-EXPENSE> 107,125 36,044 16,623 20,208
<OTHER-OPERATING-EXPENSES> 1,601,640 531,364 449,238 509,480
<TOTAL-OPERATING-EXPENSES> 1,601,640 531,364 449,238 509,480
<OPERATING-INCOME-LOSS> 386,308 128,586 73,948 86,835
<OTHER-INCOME-NET> 11,986 6,367 4,518 3,326
<INCOME-BEFORE-INTEREST-EXPEN> 398,294 134,953 78,466 90,161
<TOTAL-INTEREST-EXPENSE> 114,435 28,071 33,607 34,084
<NET-INCOME> 176,734 70,838 28,236 35,869
119 0 0 0
<EARNINGS-AVAILABLE-FOR-COMM> 176,615 70,838 28,236 35,869
<COMMON-STOCK-DIVIDENDS> 103,981 26,273 29,962 28,244
<TOTAL-INTEREST-ON-BONDS> 31,847 0 0 0
<CASH-FLOW-OPERATIONS> 321,011 305,118 (78,361) 129,908
<EPS-PRIMARY> 1.44<F1><F2> 0.59<F1><F2> 0.22<F1><F2> 0.28<F1><F2>
<EPS-DILUTED> 1.43<F2> 0.59<F2> 0.22<F2> 0.28<F2>
<FN>
<F1> Amount represents basic earnings per share.
<F2> Amounts restated to reflect two-for-one stock split and adoption of SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> This schedule contains summary financial information extracted from the
financial statements of NIPSCO Industries, Inc. for three months ended March 31,
1996, June 30, 1996, September 30, 1996, respectively, and twelve months ended
December 31, 1995, and December 31, 1994, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 APR-01-1996 JUL-01-1996 JAN-01-1995 JAN-01-1994
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1995 DEC-31-1994
<BOOK-VALUE> PER-BOOK PER-BOOK PER-BOOK PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,193,707 3,181,364 3,167,808 3,213,264 3,230,957
<OTHER-PROPERTY-AND-INVEST> 232,699 235,446 244,314 223,785 164,010
<TOTAL-CURRENT-ASSETS> 384,173 362,053 414,062 316,581 327,945
<TOTAL-DEFERRED-CHARGES> 57,796 63,707 72,220 33,399 26,182
<OTHER-ASSETS> 211,887 212,933 213,527 212,491 195,449
<TOTAL-ASSETS> 4,080,262 4,055,503 4,111,931 3,999,520 3,944,543
<COMMON> 539,988 531,257 518,123 577,707 633,737
<CAPITAL-SURPLUS-PAID-IN> 28,031 28,886 29,776 27,601 28,687
<RETAINED-EARNINGS> 558,331 556,085 565,043 516,907 445,424
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,126,350 1,116,228 1,112,942 1,122,215 1,107,848
63,651 62,401 61,801 98,651 101,057
81,325 81,129 81,129 81,325 86,389
<LONG-TERM-DEBT-NET> 429,856 429,995 403,869 354,716 449,851
<SHORT-TERM-NOTES> 93,910 89,417 235,026 139,170 105,400
<LONG-TERM-NOTES-PAYABLE> 822,323 824,941 786,815 821,012 730,487
<COMMERCIAL-PAPER-OBLIGATIONS> 97,400 176,500 180,000 121,500 206,100
<LONG-TERM-DEBT-CURRENT-PORT> 97,862 91,377 77,634 97,649 27,600
1,828 1,828 1,828 1,828 1,828
<CAPITAL-LEASE-OBLIGATIONS> 0 0 0 0 0
<LEASES-CURRENT> 0 0 0 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,265,757 1,181,687 1,170,887 1,161,454 1,127,983
<TOT-CAPITALIZATION-AND-LIAB> 4,080,262 4,055,503 4,111,931 3,999,520 3,944,543
<GROSS-OPERATING-REVENUE> 615,421 398,742 393,712 1,769,308 1,768,029
<INCOME-TAX-EXPENSE> 40,457 15,564 18,907 101,897 91,253
<OTHER-OPERATING-EXPENSES> 479,359 333,390 317,088 1,387,431 1,414,577
<TOTAL-OPERATING-EXPENSES> 479,359 333,390 317,088 1,387,431 1,414,577
<OPERATING-INCOME-LOSS> 136,062 65,352 76,624 381,877 353,452
<OTHER-INCOME-NET> (43) 2,228 5,338 1,471 18,818
<INCOME-BEFORE-INTEREST-EXPEN> 136,019 67,580 81,962 383,348 372,270
<TOTAL-INTEREST-EXPENSE> 28,076 28,587 28,645 105,986 117,030
<NET-INCOME> 67,486 23,429 34,410 175,465 163,987
119 0 0 3,063 3,063
<EARNINGS-AVAILABLE-FOR-COMM> 67,367 23,429 34,410 172,402 160,924
<COMMON-STOCK-DIVIDENDS> 25,794 25,684 25,561 100,232 94,803
<TOTAL-INTEREST-ON-BONDS> 0 0 0 22,473 31,075
<CASH-FLOW-OPERATIONS> 154,821 3,848 57,105 391,492 336,392
<EPS-PRIMARY> 0.54<F1><F2> 0.19<F1><F2> 0.28<F1><F2> 1.36<F1><F2> 1.24<F1><F2>
<EPS-DILUTED> 0.54<F2> 0.19<F2> 0.28<F2> 1.35<F2> 1.23<F2>
<FN>
<F1> Amount represents basic earnings per share.
<F2> Amounts restated to reflect two-for-one stock split and adoption of SFAS No. 128.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
NIPSCO Industries, Inc.
INDEX
-----
<TABLE>
<CAPTION>
Financial Information for the Year Ended December 31, 1997. Page
----
<S> <C>
- --Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 2
- --Consolidated Statement of Income....................................................................... 11
- --Consolidated Balance Sheet............................................................................. 12
- --Consolidated Statement of Capitalization............................................................... 14
- --Consolidated Statement of Long-Term Debt............................................................... 15
- --Consolidated Statement of Cash Flows................................................................... 16
- --Consolidated Statement of Common Shareholder's Equity.................................................. 17
- --Notes to Consolidated Financial Statements............................................................. 18
- --Report of Independent Public Accountants............................................................... 43
- --Selected Supplemental Information...................................................................... 44
</TABLE>
<PAGE>
1997 Financial Review
Management's Discussion and Analysis of Financial Condition and 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 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;
2
<PAGE>
utility line locating and marking; and related products targeted at customer
segments principally through the following wholly-owned subsidiaries: NIPSCO
Development Company, Inc. (Development); NIPSCO Energy Services, Inc.
(Services); Primary Energy, Inc. (Primary); Miller; and SM&P. NIPSCO Capital
Markets, Inc. (Capital Markets) handles financing for Industries and its
subsidiaries, other than Northern Indiana. These subsidiaries are referred to
collectively as "Products and Services."
On December 18, 1997, Industries and Bay State Gas Company signed a
definitive merger agreement under which Industries will acquire all of the
common stock of Bay State Gas Company in a stock-for-stock transaction. Refer to
Purchase of Bay State Gas Company in Notes to Consolidated Financial Statements
for a more detailed discussion of the proposed acquisition.
NET INCOME
All references throughout this Annual Report to number of common shares reported
for the period including per share amounts, stock option data and market prices
of Industries' common stock have been restated to reflect a two-for-one stock
split which is payable February 20, 1998, to shareholders of record at the close
of business on January 30, 1998. At December 31, 1997, Industries adopted SFAS
No. 128 "Earnings per Share." The adoption of this statement required Industries
to present basic earnings per share and diluted earnings per share in place of
primary earnings per share. Refer to Earnings per Share in Notes to
Consolidated Financial Statements for information related to this disclosure.
For 1997, net income of Industries increased to $190.8 million, or basic
earnings of $1.54 per average common share, compared to $176.7 million, or basic
earnings of $1.44 per average common share, for 1996. There were approximately
1.5 million more average common shares outstanding in 1997 than 1996. In 1995,
net income was $175.5 million, or basic earnings of $1.36 per average common
share. See Notes to Consolidated Financial Statements for Segments of Business
regarding revenue and operating income derived from the delivery of gas,
electricity, water and products and services.
REVENUES
In 1997, operating revenues increased $598.6 million, or 30.1%, over 1996.
Operating revenues in 1996 increased $218.6 million, or 12.4%, from 1995.
During 1997, gas deliveries in dekatherms (dth), which include
transportation services, increased 2.7%. Gas sales levels in 1997 remained
relatively unchanged from 1996. Gas transportation services increased 4.6%
mainly due to increased deliveries of gas transported for others. The Energy
Utilities had approximately 729,400 gas customers at December 31, 1997. During
1996, gas deliveries increased 6.6% over 1995. Gas sales in 1996 increased 14.5%
due to higher sales to residential and commercial customers as a result of
colder weather during the first quarter of 1996 and increased sales to
industrial and wholesale customers. Gas transportation services increased 1.6%
mainly due to increased deliveries by Crossroads, which were partially offset by
decreased deliveries to Northern Indiana's industrial customers.
Gas revenues were $807.2 million in 1997, an increase of $7.8 million from
1996. The increase in gas revenues was mainly due to increased sales to
wholesale customers, increased gas costs per dth and increased deliveries of gas
transported for others, partially offset by decreased sales to residential and
commercial customers and decreased gas transition costs. Gas revenues were
$799.4 million in 1996, an increase of $108.0 million from 1995. The increase in
gas revenues was mainly due to increased sales to residential and commercial
customers as the result of colder weather during the first quarter of 1996,
increased sales to industrial and wholesale customers and increased gas costs
per dth, which were partially offset by decreased gas transition costs. The
large commercial and industrial customers continued to utilize transportation
services provided by the Energy Utilities. Gas transportation customers purchase
much of their gas directly from producers and marketers and then pay a
transportation fee to have their gas delivered over the Energy Utilities'
systems. The Energy Utilities transported 203.7, 194.4 and 191.6 million dth in
1997, 1996 and 1995, respectively.
In 1997, sales of electricity in kilowatt-hours (kwh) decreased 4.5% from
1996 mainly due to decreased sales to wholesale and industrial customers
partially offset by increased sales to residential and commercial customers.
Industrial sales decreased during the period as a result of cogeneration
projects with two of Northern Indiana's major industrial customers coming online
during the period. Northern Indiana had approximately 416,300 electric customers
at December 31, 1997. In 1996, sales of electricity in kilowatt-hours (kwh)
decreased 1.1% from 1995 mainly due to decreased sales to residential customers
due to cooler summer weather in 1996 and decreased sales to industrial customers
due to operational difficulties at several major industrial customers, which
were partially offset by increased sales to commercial and wholesale customers.
3
<PAGE>
In 1997, electric revenues were $1.017 billion, a decrease of $5.1 million
from 1996. The decrease in electric revenues was mainly due to decreased sales
to industrial customers, partially offset by increased sales to residential and
commercial customers and increased revenues related to wholesale transactions.
Industrial sales decreased during the period as a result of cogeneration
projects with two of Northern Indiana's major industrial customers coming online
during the period. In 1996, electric revenues were $1.022 billion, a decrease of
$8.7 million from 1995. The decrease in electric revenues was mainly due to
decreased sales to residential customers due to cooler summer weather in 1996
and decreased sales to industrial customers due to operational difficulties at
several major industrial customers, which were partially offset by increased
sales to commercial and wholesale customers.
Water revenue for the period April 1997 through December 1997 was $60.7
million. Water sales to residential and commercial customers accounted for $54.4
million of 1997 revenues. The Water Utilities had sales in millions of gallons
(m.g.) of 35,566 during the last nine months of 1997 and served approximately
246,600 customers at December 31, 1997.
In 1997, Products and Services revenues were $701.5 million, an increase of
$535.2 million from 1996. The increase was partially due to an additional $274.4
million in gas energy marketing revenue resulting from increased sales to
existing customers and customer growth during 1997. NESI Power Marketing, Inc.,
a wholly-owned subsidiary of Services, formed in December 1996 to market
wholesale electric power accounted for $167.5 million of additional energy
marketing revenue in 1997. Miller and SM&P contributed $95.6 million to
operating revenues since the March 1997 acquisition of IWCR. Products and
Services revenue in 1996 was $166.3 million, an increase of $119.3 million from
1995. This increase was primarily due to increased volumes in gas energy
marketing.
The components of the changes in operating revenues are shown in the
following table:
Year 1997 Year 1996
Compared to Compared to
Year 1996 Year 1995
- --------------------------------------------------------------------------------
(In millions)
Gas Revenue
Pass through of net changes in purchased gas costs,
gas storage and storage transportation costs $ 14.8 $ 55.3
Gas transition costs (4.3) (33.5)
Changes in sales levels (6.6) 85.6
Gas transported 3.9 0.6
------ ------
Gas Revenue Change 7.8 108.0
------ ------
Electric Revenue
Pass through of net changes
in fuel costs 4.0 3.2
Changes in sales levels (9.1) (11.9)
------ ------
Electric Revenue Change (5.1) (8.7)
------ ------
Water Revenue Change 60.7 .-
------ ------
Products and Services
Revenue
Energy Marketing 441.9 84.0
Pipeline construction 47.2 .-
Locate and marking 48.4 .-
Other (2.3) 35.3
------ ------
Products and Services
Revenue Change 535.2 119.3
------ ------
Total Operating
Revenue Change $598.6 $218.6
------ ------
<PAGE>
See Rate Matters in Notes to Consolidated Financial Statements regarding
FERC Order No. 636 transition costs.
The basic steel industry accounted for 30% of natural gas delivered
(including volumes transported) and 33% of electric sales during 1997.
The Energy Utilities' rate schedules for electric and gas service to their
customers contain an electric rate adjustment clause for changes in the cost of
fuel and firm purchases of electric energy; and gas rate adjustment clauses to
reflect changes in the cost of gas purchased, contracted gas storage and storage
transportation costs. (See Fuel Adjustment Clause and Gas Cost Adjustment Clause
under Summary of Significant Accounting Policies in Notes to Consolidated
Financial Statements.)
GAS COSTS
The Energy Utilities' gas costs increased $11.5 million (2.3%) in 1997 due
to increased gas costs per dth, which were partially offset by decreased gas
transition costs. The average cost for the Energy Utilities purchased gas in
1997, after adjustment for gas transition costs billed to transport customers,
was $3.15 per dth as compared to $3.06 per dth in 1996. Gas costs increased
$84.6 million ( 21.2%) in 1996 due to increased purchases and increased gas
costs per dth, which were partially offset by decreased gas transition costs.
The average cost for the Energy Utilities purchased gas in 1996, after
adjustment for gas transition costs billed to transport customers, was $3.06 per
dth as compared to $2.68 per dth in 1995.
FUEL AND PURCHASED POWER
Cost of fuel for electric generation in 1997 increased mainly as a result
of increased production. The average cost per kwh generated decreased 2.3% from
1996 to 15.43 mills. The cost of fuel for electric generation in 1996 decreased
mainly as a result of decreased production. The average cost per kwh generated
decreased 0.6% from 1995 to 15.79 mills.
Power purchased decreased $16.5 million in 1997 as a result of decreased
bulk power purchases. Power purchased increased $10.1 million in 1996 as a
result of increased bulk power purchases and increased cost per megawatt
purchased.
COST OF PRODUCTS AND SERVICES
The cost of sales for Products and Services increased $503.3 million in
1997 to $604.5 million. Nine months of operations at IWCR's non-regulated
subsidiaries increased cost of sales $67.2 million in 1997. Additionally,
increased energy marketing activities increased cost of sales $435.7 million in
1997 compared to 1996. The cost of sales for Products and Services increased
$91.9 million in 1996 to $101.2 million. This increase reflects primarily an
increase in gas marketing activities.
OPERATING MARGINS
Operating margins increased $95.0 million in 1997 to $1.211 billion. The
gas operating margin decreased $3.7 million in 1997 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. Operating margin from electric sales increased $6.0
million due to in creased sales to residential and commercial customers, and
increased wholesale transactions, partially offset by decreased sales to
industrial customers. The Water Utilities contributed $60.7 million to operating
margin since the March 1997 acquisition of IWCR. Additionally, Miller and SM&P
increased Products and Services operating margin $28.4 million during 1997.
Operating margins increased $41 .1 million in 1996 to $1.116 billion. The gas
operating margin increased $23.3 million in 1996 due to increased sales to
residential and commercial customers reflecting colder weather during the first
quarter of 1996, increased sales to industrial and wholesale customers and
increased deliveries of gas transported for others. Operating margin from
electric sales decreased $9.6 million in 1996 due to decreased sales to
residential customers reflecting cooler summer weather in 1996 and decreased
sales to industrial customers due to plant operational difficulties at several
major customers, which were partially offset by increased sales to commercial
and whole sale customers. Operating margin from Products and Services increased
$27.4 million in 1996 mainly due to improved margins in gas production and gas
marketing activities.
OPERATING EXPENSES AND TAXES
Operating expenses and taxes (except income) in 1997 increased 9.6% from
1996 to $800.4 million and in 1996 increased 5.3% from 1995 to $729.7 million.
Operation expenses increased $44.2 million in 1997 over 1996. Nine months
of operations at IWCR increased operation expenses $44.1 million in 1997.
Additionally, new operations at Primary and Services increased operation
expenses $8.4 million in 1997. These increases were partially
<PAGE>
offset by reduced pension costs, environmental costs of $4.2 million and
pollution control facility costs of $4.1 million at Northern Indiana. Operation
expenses increased $3.3 million in 1996 over 1995 due to increased pollution
control facility costs, environmental costs of $5.9 million and other various
increased operating costs partially offset by reduced pension costs.
Maintenance expenses increased $2.5 million in 1997 from 1996 mainly
reflecting nine months of maintenance at the Water Utilities. Maintenance
expenses decreased $4.7 million in 1996 from 1995 mainly reflecting decreased
maintenance activity at electric production facilities and gas underground
storage facilities.
Depreciation and amortization expense increased $15.8 million in 1997 from
1996 resulting from plant additions, amortization of plant acquisition
adjustments and intangible assets. Depreciation and amortization expense
increased $27.0 million in 1996 from 1995 resulting from plant additions,
increased amortization of computer software and the amortization of deferred
costs related to scrubber services provided by Pure Air at the Bailly
Generating Station.
Other Income (Deductions) increased $2.6 million in 1997 from 1996 mainly
resulting from the disposition of certain oil and natural gas properties during
the first quarter of 1997. Other Income (Deductions) increased $10.5 million in
1996 from 1995 mainly reflecting the sale of Crescent Dunes Lakeshore property
to the National Park Service.
Interest and other charges increased $14.9 million and $8.4 million in 1997
and 1996, respectively. The 1997 increase reflects the issuance of $300 million
of Capital Markets' medium-term notes and interest expense at IWCR. The 1996
increase reflects the issuance of $169,275,000 of Northern Indiana's Medium-Term
Notes, Series D, and $75 million of Capital Markets' Junior Subordinated
Deferrable Interest Debentures, Series A, and the discontinuance of carrying
charges on deferred charges related to the Bailly Generating Station scrubber
service agreement.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
ENVIRONMENTAL MATTERS
The Utilities have an ongoing program to remain aware of laws and regulations
involved with hazardous waste and other environmental matters. The Utilities
intend to continue to evaluate their facilities and properties with respect to
these rules and identify any sites that would require corrective action. The
Utilities have recorded a reserve of approximately $20 million to cover probable
corrective actions as of December 31, 1997; however, environmental regulations
and remediation techniques are subject to future change. The ultimate cost could
be significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, the Utilities believe that any corrective actions required, after
consideration of insurance coverages and contributions from other potentially
responsible parties, will not have a significant impact on the results of
operations or financial position of Industries.
The Environmental Protection Agency (EPA) has notified Northern Indiana
that it is a "potentially responsible party" (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) and may be
required to share in the cost of cleanup of several waste disposal sites
identified by the EPA. The sites are in various stages of investigation,
analysis and remediation. At each of the sites, Northern Indiana is one of
several PRPs, and it is expected that remedial costs, as provided under CERCLA,
will be shared among them. At some sites, Northern Indiana and/or the other
named PRPs are presently working with the EPA to clean up the sites and avoid
the imposition of fines or added costs.
Refer to Environmental Matters in Notes to Consolidated Financial
Statements for a more detailed discussion of the status of certain environmental
issues.
LIQUIDITY AND CAPITAL RESOURCES
During the next few years, it is anticipated that the great majority of earnings
available for distribution of dividends will depend upon dividends paid to
Industries by Northern Indiana. See Notes to Consolidated Financial Statements
for a discussion of the Common Share Dividend.
Utility construction expenditures for 1997, 1996 and 1995 were
approximately $219 million, $208 million and $193 million, respectively.
Industries' total utility plant investment on December 31, 1997, was $6.4
billion.
During 1997, Industries' non-utility subsidiaries acquired interests in
other properties and investments totaling approximately $38 million.
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 December 31, 1997, $139.0 million of the medium-term notes had been issued
with various interest rates and maturities. The proceeds from these
<PAGE>
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 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 Industries' $35 million of 8.75% Preferred Shares, pursuant to
mandatory redemption, and to pay other short-term debt of Capital Markets.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes with various interest rates and maturities.
The proceeds from these issuances were used for the purchase of IWCR and to pay
outstanding short-term obligations of Capital Markets.
On December 1, 1997, Capital Markets issued $75 million of 6.78% Senior
Notes due December 1, 2027. Proceeds from the sale of these notes were
primarily used to pay Capital Markets' Zero Coupon Notes which matured December
1, 1997. The remaining balance of the proceeds will be used for Industries'
general corporate purposes.
Capital Markets has a $150 million revolving Credit Agreement which
terminates August 19, 1999. This facility provides short-term financing
flexibility to Industries and also serves as the back-up instrument for a
commercial paper program. As of December 31, 1997, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of December 31, 1997, $20.1 million of borrowings were outstanding under these
lines of credit.
As of December 31, 1997, Capital Markets had $17.0 million in commercial
paper outstanding, having a weighted average interest rate of 7.00%.
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 the assets of Industries,
other than the stocks and assets of Northern Indiana, reflected in the
consolidated financial statements of Industries, is approximately $1.3 billion
at December 31, 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 December 31, 1997, Northern
Indiana had $71.5 million in commercial paper outstanding, having a weighted
average interest rate of 6.16%.
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999. As of December 31, 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 December 31, 1997, there
were no borrowings under these lines of credit. The Credit Agreement and lines
of credit are also available to support the issuances of commercial paper.
Northern Indiana also has $273.5 million of money market lines of credit.
As of December 31, 1997, $47.5 million of borrowings were outstanding under
these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1997, there were no borrowings outstanding under this facility.
IWCR and its subsidiaries have lines of credit with banks aggregating $73.7
million. At December 31, 1997, $48.9 million of borrowings were outstanding
under these lines of credit.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
The Utilities do not expect the effects of inflation at current levels to
have a significant impact on their results of operations, ability to contain
cost increases, or need to seek timely and adequate rate
<PAGE>
relief. The Energy Utilities do not anticipate the need to file for gas and
electric base rate increases in the near future.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The primary market risks to which Industries is exposed and in connection with
which Industries uses market risk sensitive instruments are commodity price
risk and interest rate risk.
Industries engages in price risk management activities related to
electricity and natural gas. Price risk arises from fluctuations in energy
commodity prices due to changes in supply and demand. Industries actively
monitors and limits its exposure to commodity price risk. Industries' price risk
management policy allows the use of derivative financial and commodity
instruments to reduce (hedge) exposure to price risk of its supply and related
purchase and sales commitments of energy, as well as related anticipated
transactions. As part of this commodity price risk, Industries is exposed to
geographic price differentials due primarily to transportation costs and local
supply-demand factors. Industries uses basis swaps to hedge a portion of this
exposure. For economic reasons or otherwise, Industries does not hedge all of
its basis exposure.
Industries enters into certain sales contracts with customers based upon a
fixed sales price and varying volumes which are ultimately dependent upon the
customer's supply requirements. Industries utilizes financial instruments to
reduce the commodity price risk based on modeling techniques to anticipate
these future supply requirements. Industries continues to be exposed to price
risk for the difference between the ultimate supply requirements and those
modeled.
Although the Energy Utilities are subject to commodity price risk as part
of their traditional operations, the current regulatory framework within which
the Energy Utilities operate allows for full collection of fuel and gas costs in
rate-making. Consequently, there is limited commodity price risk after
consideration of the related rate-making. However, as the utility industry
deregulates, Energy Utilities will be providing services without the benefit of
the traditional rate-making allowances and will therefore be more exposed to
commodity price risk.
Because the commodities covered by Industries' derivative financial and
commodity instruments are substantially the same commodities that Industries
buys and sells in the physical market, no special correlation studies other than
monitoring the degree of convergence between the derivative and cash markets are
deemed necessary.
Industries' daily net commodity position consists of natural gas
inventories, commodity purchase and sales contracts and derivative financial
and commodity instruments. The fair value of such positions is a summation of
the fair values calculated for each commodity by valuing each net position at
quotes from exchanges and over-the-counter markets and includes location
differentials. Based on Industries' net commodity position at fair value at
December 31, 1997, a 10% adverse movement in electric and natural gas market
prices would have reduced net income by approximately $2.3 million. However,
any such movements in prices is not indicative of actual results and is subject
to change. Refer to Summary of Significant Accounting Policies--Hedging
Activities for further discussion of Industries' hedging policies.
Industries utilizes long-term debt as a primary source of capital in its
business. A significant portion of Industries' long-term debt consists of
medium-term notes, the interest component of which resets on a periodic basis to
reflect current market conditions. The Utilities utilize longer term fixed
price debt instruments which have been and will be refinanced at lower interest
rates if Industries deems it to be economical. Refer to Consolidated Statement
of Long-term Debt for detailed information related to Industries' long-term
debt outstanding and Fair Value of Financial Instruments in Notes to
Consolidated Financial Statements for current market valuation of long-term
debt.
YEAR 2000 COSTS
Industries has several major projects underway to modify portions of its systems
for proper functioning in the year 2000. These include a project to evaluate
Industries' proprietary software and to work with each of Industries' software
vendors to assure that appropriate steps are being taken to mitigate the problem
in each vendor's software or, in some cases, to replace software with year 2000
compliant software; a project to identify and mitigate problems wherever they
exist in Industries' systems ranging from equipment used in Northern Indiana's
generating stations to Industries' phone system that have date information
within them; and an initiative to assure that each entity that electronically
receives information from Industries or sends information to Industries is aware
of the steps that Industries is taking and is taking appropriate steps of its
own to address the problem. Consistent with its plan, Industries expects to be
year 2000 compliant with some systems as early as third quarter 1998 and other
systems no later than the third quarter of 1999.
Costs related to maintenance or modification of Industries' systems have
been and will be expensed as incurred. Industries estimates that costs to become
year 2000 compliant will be
<PAGE>
approximately $10-$15 million, including acquisition costs of new systems which
will be capitalized consistent with Industries' accounting policies. Industries
does not anticipate the related costs to have a material impact on its results
of operations, nor does Industries anticipate any disruption of its ability to
deliver service as a result of the year 2000 issue.
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-A
which opens wholesale power sales to competition and requires public utilities
owning, controlling, or operating transmission lines to file non-discriminatory
open access tariffs that offer others the same transmission service they provide
themselves. Northern Indiana filed its tariff as did virtually all other
transmission owners subject to FERC jurisdiction. Order No. 888-A also provides
for the 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. On November 25, 1997, FERC issued Order No. 888-B on
rehearing, affirming in all important respects its earlier Order No. 888-A.
Although wholesale customers represent a relatively small portion of Northern
Indiana's sales, Northern Indiana will continue its efforts to retain and add
customers by offering competitive rates.
In January 1997, legislation was introduced in the Indiana General Assembly
addressing electric utility competition and deregulation. This proposed
legislation was not adopted. Legislation similar to the 1997 electric
restructuring legislation was introduced in January 1998. Northern Indiana has
begun discussions with other utilities and its largest customers on the
technical and economic aspects of possible legislation to allow customer choice.
Operating in a competitive environment will place added pressures on utility
profit margins and credit quality. Increasing competition in the electric
utility industry has already led the credit rating agencies to apply more
stringent guidelines in making credit rating determinations.
Competition within the electric utility industry will create opportunities
to compete for new customers and revenues, as well as increase the risk of the
loss of customers. Industries' management has taken steps to make the company
more competitive and profitable in the changing utility environment, including
partnering on energy projects with major industrial customers and conversions of
some of its generating units to allow use of lower cost, low sulfur coal.
FERC Order No. 636 shifted primary responsibility for gas acquisition,
transportation and peak days' supply from pipelines to local gas distribution
companies such as the Energy Utilities. Although pipelines continue to transport
gas, they no longer provide sales service. The Energy Utilities believe they
have taken appropriate steps to ensure the continued acquisition of adequate gas
supplies at reasonable prices.
The mix of gas revenues from retail sales, interruptible retail sales, firm
transportation service and interruptible transportation services has changed
significantly over the past several years. The deregulation of the gas industry,
since the mid-1980s, 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. Following negotiation and settlement
with major intervenors, Northern Indiana submitted a modified ARP to the
Commission on May 9, 1997. In its modified ARP, Northern Indiana proposed to
implement new rates and services that would include, among other things, further
unbundling of services for additional customer classes, increased customer
choice for sources of natural gas supply, negotiated services and prices , an
incentive gas cost mechanism and a price protection program. On October 8, 1997,
the Commission issued an order approving, in all respects, the modified ARP
which became effective November 1, 1997. The first pilot program was launched in
January 1998 and the first gas volumes will flow under this program by March
1998. Significantly, the Commission order allows the natural gas marketing
affiliate of Northern Indiana to participate as a supplier in this pilot and in
future expansions of supplier choice to other customers on the Northern Indiana
system. On October 28, 1997, ERI Services, Inc. and Enron Capital and Trade
Resources Corp. filed Petitions for Rehearing of the October 8, 1997 order.
Northern Indiana expects a Commission decision on these Petitions during the
first quarter of 1998.
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.
9
<PAGE>
Forward Looking Statements
This Annual Report contains forward looking statements within the meaning of the
securities laws. Industries cautions that, while it believes such statements to
be based on reasonable assumptions and makes such statements in good faith,
there can be no assurance that the actual results will not differ materially
from such assumptions or that the expectations set forth in the forward looking
statements derived from such assumptions will be realized. Investors should be
aware of important factors that could have a material impact on future results.
These factors include, but are not limited to, weather, the federal and state
regulatory environment, the economic climate, regional, commercial, industrial
and residential growth in the service territories served by Industries'
subsidiaries, customers' usage patterns and preferences, the speed and degree
to which competition enters the utility industries, the timing and extent of
changes in commodity prices, changing conditions in the capital and equity
markets and other uncertainties, all of which are difficult to predict, and
many of which are beyond the control of Industries.
<PAGE>
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Operating Revenues:
Gas......................................... $ 807,239 $ 799,395 $ 691,402
Electric.................................... 1,017,083 1,022,231 1,030,923
Water....................................... 60,743 -- --
Products and Services....................... 701,476 166,322 46,983
---------- ---------- ----------
2,586,541 1,987,948 1,769,308
---------- ---------- ----------
Cost of Sales:
Gas costs................................... 495,287 483,777 399,113
Fuel for electric generation................ 238,548 233,215 242,337
Power purchased............................. 37,274 53,751 43,681
Products and Services....................... 604,505 101,240 9,357
---------- ---------- ----------
1,375,614 871,983 694,488
---------- ---------- ----------
Operating Margin................................. 1,210,927 1,115,965 1,074,820
---------- ---------- ----------
Operating Expenses and Taxes (except income):
Operation................................... 390,253 346,059 332,938
Maintenance................................. 76,552 74,101 78,828
Depreciation and amortization............... 249,804 233,993 206,959
Taxes (except income)....................... 83,765 75,504 74,218
---------- ---------- ----------
800,374 729,657 692,943
---------- ---------- ----------
Operating Income................................. 410,553 386,308 381,877
---------- ---------- ----------
Other Income (Deductions)........................ 14,619 11,986 1,471
---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt.................. 105,498 85,382 82,655
Other interest.............................. 10,391 15,736 9,883
Amortization of premium, reacquisition
premium, discount and expense on debt,
net....................................... 4,718 4,605 4,402
Dividend requirements on preferred
stocks of subsidiaries.................... 8,691 8,712 9,046
---------- ---------- ----------
129,298 114,435 105,986
---------- ---------- ----------
Income Taxes..................................... 105,025 107,125 101,897
---------- ---------- ----------
Net Income....................................... 190,849 176,734 175,465
---------- ---------- ----------
Dividend requirements on preferred shares........ -- 119 3,063
---------- ---------- ----------
Balance available for common shareholders........ $ 190,849 $ 176,615 $ 172,402
---------- ---------- ----------
Average common shares outstanding - basic* 123,849,126 122,381,500 126,562,354
Basic earnings per average common share*......... $ 1.54 $ 1.44 $ 1.36
---------- ----------- -----------
Diluted earnings per average common share*....... $ 1.53 $ 1.43 $ 1.35
---------- ----------- -----------
Dividends declared per common share*............. $ 0.915 $ 0.855 $ 0.795
---------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
*Amounts have been restated to reflect two-for-one stock split.
11
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------
Assets (Dollars in thousands)
<S> <C> <C>
Property, Plant and Equipment:
Utility Plant, at original cost (including construction work
in progress of $188,710 and $166,812, respectively):
Electric................................................. $4,066,568 $4,050,084
Gas...................................................... 1,395,140 1,344,230
Water.................................................... 603,013 --
Common................................................... 351,350 346,636
---------- ----------
6,416,071 5,740,950
Less-Accumulated provision for depreciation
and amortization......................................... 2,759,945 2,546,162
---------- ----------
Total utility plant...................................... 3,656,126 3,194,788
---------- ----------
Other property, at cost, less accumulated
provision for depreciation............................... 96,028 147,370
---------- ----------
Total Property, Plant and Equipment...................... 3,752,154 3,342,158
---------- ----------
Investments:
Investments, at equity........................................ 82,855 52,260
Investments, at cost.......................................... 31,771 30,424
Other investments............................................. 24,499 20,090
---------- ----------
Total Investments........................................ 139,125 102,774
---------- ----------
Current Assets:
Cash and cash equivalents..................................... 30,780 26,333
Accounts receivable, less reserve of
$5,887 and $5,569, respectively.......................... 231,580 165,441
Other receivables............................................. 107,231 42,184
Fuel adjustment clause........................................ 2,679 9,149
Gas cost adjustment clause.................................... 89,991 100,214
Materials and supplies, at average cost....................... 60,085 59,859
Electric production fuel, at average cost..................... 18,837 26,483
Natural gas in storage........................................ 61,436 65,093
Prepayments and other......................................... 28,089 28,491
---------- ----------
Total current assets..................................... 630,708 523,247
---------- ----------
Other Assets:
Regulatory assets............................................. 211,513 236,205
Intangible assets, less accumulated provision for amortization 68,175 --
Prepayments and other......................................... 135,358 84,499
---------- ----------
Total other assets....................................... 415,046 320,704
---------- ----------
$4,937,033 $4,288,883
---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
12
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------
Capitalization and Liabilities (Dollars in thousands)
<S> <C> <C>
Capitalization (see page 14):
Common shareholders' equity (see page 17)..................... $1,264,788 $1,100,501
Preferred stocks-
Northern Indiana Public Service Company:
Series without mandatory redemption provisions........... 81,123 81,126
Series with mandatory redemption provisions.............. 58,841 61,246
Indianapolis Water Company:
Series without mandatory redemption provisions........... 4,497 --
Long-term debt, excluding amounts due within one year......... 1,667,925 1,127,106
---------- ----------
Total capitalization..................................... 3,077,174 2,369,979
---------- ----------
Current Liabilities:
Current portion of long-term debt............................. 54,621 146,052
Short-term borrowings......................................... 212,639 425,985
Accounts payable.............................................. 226,751 251,730
Dividends declared on common and preferred stocks............. 30,784 28,308
Customer deposits............................................. 22,091 17,580
Taxes accrued................................................. 77,573 78,723
Interest accrued.............................................. 19,124 7,557
Accrued employment costs...................................... 58,799 44,186
Other accruals................................................ 47,930 31,882
---------- ----------
Total current liabilities................................ 750,312 1,032,003
---------- ----------
Other:
Deferred income taxes......................................... 651,815 602,745
Deferred investment tax credits, being amortized over life of
related property......................................... 105,538 108,258
Deferred credits.............................................. 73,715 37,338
Customer advances and contributions in aid of construction.... 110,145 15,830
Accrued liability for postretirement benefits................. 132,919 109,429
Other noncurrent liabilities.................................. 35,415 13,301
---------- ----------
Total other.............................................. 1,109,547 886,901
---------- ----------
Commitments and Contingencies (see notes)
$4,937,033 $4,288,883
---------- ----------
</TABLE>
13
<PAGE>
Consolidated Statement of Capitalization
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Common shareholders' equity (see page 17) $1,264,788 41.1% $1,100,501 46.4%
---------- ----------
Preferred Stocks, which are redeemable solely at
option of issuer:
Northern Indiana Public Service Company--
Cumulative preferred stock--$100 par value--
4 1/4% series--209,118 and 209,145
shares outstanding, respectively....................... 20,912 20,915
4 1/2% series--79,996 shares outstanding................... 8,000 8,000
4.22% series--106,198 shares outstanding................... 10,620 10,620
4.88% series--100,000 shares outstanding................... 10,000 10,000
7.44% series--41,890 shares outstanding.................... 4,189 4,189
7.50% series--34,842 shares outstanding.................... 3,484 3,484
Premium on preferred stock................................. 254 254
Cumulative preferred stock--no par value--
Adjustable Rate (6.00% at December 31,
1997)--Series A (stated value--$50 per
share), 473,285 shares outstanding..................... 23,664 23,664
---------- ----------
....................................................... 81,123 2.6% 81,126 3.4%
---------- ----------
Redeemable Preferred Stocks, subject to mandatory
redemption requirements or whose redemption is
outside the control of issuer:
Northern Indiana Public Service Company--
Cumulative preferred stock--$100 par value--
8.85% series--62,500 and 75,000 shares
outstanding, respectively................................. 6,250 7,500
7 3/4% series--38,906 and 44,460 shares
outstanding, respectively................................. 3,891 4,446
8.35% series--57,000 and 63,000 shares
outstanding, respectively................................. 5,700 6,300
Cumulative preferred stock--no par value--
6.50% series--430,000 shares outstanding...................... 43,000 43,000
---------- ----------
58,841 1.9% 61,246 2.6%
---------- ----------
Indianapolis Water Company--
Cumulative preferred stock--$100 par value--
Rates ranging from 4.00% to 5.00%
44,966 shares outstanding..................................... 4,497 0.2% -- --00
---------- ----------
Long-term debt (see page 15)............................................... 1,667,925 54.2% 1,127,106 47.6%
---------- ----- ---------- -----
Total capitalization................................................... $3,077,174 100.0% $2,369,979 100.0%
---------- ----- ---------- -----
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
14
<PAGE>
Consolidated Statement of Long-Term Debt
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Northern Indiana Public Service Company: (Dollars in thousands)
First mortgage bonds--
Series P, 6 7/8%--due October 1, 1998 $ - $ 14,509
Series T, 7 1/2%--due April 1, 2002 39,500 40,000
Series NN, 7.10%--due July 1, 2017 55,000 55,000
---------- -----------
Total 94,500 109,509
---------- -----------
Pollution control notes and bonds--
Series A note--City of Michigan City--
5.70% due October 1, 2003 18,000 19,000
Series 1988 Bonds--Jasper County--Series A, B and C
3.81% weighted average at December 31, 1997,
due November 1, 2016 130,000 130,000
Series 1988 Bonds--Jasper County--Series D
3.78% weighted average at December 31, 1997,
due November 1, 2007 24,000 24,000
Series 1994 Bonds--Jasper County--Series A
4.25% at December 31, 1997, due August 1, 2010 10,000 10,000
Series 1994 Bonds--Jasper County--Series B
4.25% at December 31, 1997, due June 1, 2013 18,000 18,000
Series 1994 Bonds--Jasper County--Series C
4.25% at December 31, 1997, due April 1, 2019 41,000 41,000
---------- -----------
Total 241,000 242,000
---------- -----------
Medium-term notes--
Issued at interest rates between 6.10% and 7.69%,
with a weighted average interest rate of 7.00% and various
maturities between April 5, 2000 and August 4, 2027 748,025 644,025
---------- -----------
Unamortized premium and discount on long-term debt, net (4,029) (3,526)
---------- -----------
Total long-term debt of Northern Indiana Public Service Company 1,079,496 992,008
---------- -----------
Indianapolis Water Company:
First mortgage bonds--
Series 5.20%--due May 1, 2001 11,600 --
Series 8.00%--due December 15, 2001 3,000 --
Series 7 7/8%--due March 1, 2019 40,000 --
Series 9.83%--due June 15, 2019 5,000 --
Series 6.10%--due December 1, 2022 5,000 --
Series 8.19%--due December 1, 2022 10,000 --
Series 5.85%--due September 1,2025 18,000 --
---------- -----------
Total long-term debt of Indianapolis Water Company 92,600 --
---------- -----------
IWC Resources Corporation:
Senior Note Payable--6.31% due March 15, 2001 14,000 --
Variable Bank Loan--6.50% due August, 2003 5,600 --
---------- -----------
Total long-term debt of IWC Resources Corporation 19,600 --
---------- -----------
NIPSCO Capital Markets, Inc.:
Subordinated Debentures--Series A, 73/4%, due March 31, 2026 75,000 75,000
Senior Notes Payable--6.78%, due December 1, 2027 75,000 --
Medium-term notes--
Issued at interest rates between 7.38% and 7.99%,
with a weighted average interest rate of 7.66% and various
maturities between April 1, 2004 and May 5, 2027 300,000 --
---------- -----------
Total long-term debt of NIPSCO Capital Markets, Inc. 450,000 75,000
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
NIPSCO Development Company, Inc.:
Lake Erie Land Company--Notes Payable--9.00%--
due July 7, 2004 2,637 100
Elm Energy and Recycling (UK), Ltd. Term Loan Facility -- 40,576
NDC Douglas Properties, Inc.--Notes Payable--
Interest rates between 6.72% and 8.15% with a weighted average
interest rate of 7.75% and maturities through April 1, 2006 23,592 19,422
---------- ----------
Total long-term debt of NIPSCO Development Company, Inc. 26,229 60,098
---------- ----------
Total long-term debt, excluding amounts due within one year $1,667,925 $1,127,106
---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities: (Dollars in thousands)
<S> <C> <C> <C>
Net income............................................................. $ 190,849 $ 176,734 $ 175,465
Adjustments to reconcile net income to net cash:
Depreciation and amortization.......................................... 249,804 233,993 206,959
Deferred federal and state operating income taxes, net................. (1,467) 21,126 (1,480)
Deferred investment tax credits, net................................... (7,376) (7,408) (7,515)
Advance contract payment............................................... 1,900 (17,100) --
Change in certain assets and liabilities--*
Accounts receivable, net............................................ (37,369) (45,037) (22,609)
Other receivables................................................... (65,047) (30,778) (11,406)
Electric production fuel............................................ 7,646 (12,225) 4,089
Natural gas in storage.............................................. 3,657 (4,209) 16,910
Accounts payable.................................................... (18,567) 81,013 (8,481)
Taxes accrued....................................................... 3,389 17,002 (9,202)
Fuel adjustment clause.............................................. 6,470 1,152 (8,687)
Gas cost adjustment clause.......................................... 10,223 (98,791) 24,549
Accrued employment costs............................................ 12,135 (2,509) 2,884
Other accruals...................................................... 11,994 (13,503) 22,723
Other, net............................................................. 60,216 2,525 5,833
---------- ---------- ----------
Net cash provided by operating activities........................... 428,457 301,985 390,032
---------- ---------- ----------
Cash flows provided by (used in) investing activities:
Utility construction expenditures...................................... (218,931) (207,881) (192,966)
Acquisition of IWC Resources, net of cash acquired..................... (288,932) -- --
Proceeds from disposition of assets.................................... 35,993 11,049 3,995
Proceeds from settlement of litigation................................. 41,069 -- --
Other, net............................................................. (60,461) (19,243) (54,284)
---------- ---------- ----------
Net cash used in investing activities............................... (491,262) (216,075) (243,255)
---------- ---------- ----------
Cash flows provided by (used in) financing activities:
Issuance of long-term debt............................................. 658,232 78,366 179,555
Issuance of short-term debt............................................ 1,029,508 1,582,210 1,290,973
Net change in commercial paper......................................... (224,645) 191,705 (84,600)
Retirement of long-term debt........................................... (324,604) (89,792) (122,105)
Retirement of short-term debt.......................................... (1,042,224) (1,609,734) (1,252,250)
Retirement of preferred shares......................................... (2,408) (37,604) (7,095)
Issuance of common shares.............................................. 218,566 5,716 7,389
Acquisition of treasury shares......................................... (133,077) (105,498) (69,183)
Cash dividends paid on common shares................................... (111,593) (103,190) (99,043)
Cash dividends paid on preferred shares................................ -- (766) (3,063)
Other, net............................................................. (503) 514 700
---------- ---------- ----------
Net cash provided by (used in) financing activities................. 67,252 (88,073) (158,722)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents..................... 4,447 (2,163) (11,945)
Cash and cash equivalents at beginning of period......................... 26,333 28,496 40,441
---------- ---------- ----------
Cash and cash equivalents at end of period............................... $ 30,780 $ 26,333 $ 28,496
---------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
*Net of effect from purchase of IWC Resources Corporation.
16
<PAGE>
Consolidated Statement of Common Shareholders' Equity
<TABLE>
<CAPTION>
Dollars in Thousands Shares
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Currency
Common Paid-In Retained Treasury Translation Common Treasury
Total Shares Capital Earnings Shares Adjustment Other Shares* Shares*
---------- -------- ---------- -------- --------- ----------- ----- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 $1,107,848 $870,930 $29,657 $446,928 $(237,193) $(1,504) $(970) 147,784,218 (19,973,440)
--------------------------------------------------------------------------------------------------------------
Net income 175,465 175,465
Dividends:
Preferred shares (3,063) (3,063)
Common shares (100,232) (100,232)
Treasury shares
acquired (69,183) (69,183) (4,115,330)
Issued:
Employee stock
purchase plan 604 301 303 38,044
Long-term
incentive plan 6,785 1,656 12,850 (7,721) 1,025,700
Unrealized gain on
available for
sale securities 1,669 1,669
Amortization of
unearned
compensation 2,413 2,413
Other (91) 596 (261) (426)
--------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 $1,122,215 $870,930 $32,210 $518,837 $(293,223) $(1,930) $(4,609) 147,784,218 (23,025,026)
--------------------------------------------------------------------------------------------------------------
Net income 176,734 176,734
Dividends:
Preferred shares (119) (119)
Common shares (103,981) (103,981)
Treasury shares
acquired (105,498) (105,498) (5,587,208)
Issued:
Employee stock
purchase plan 783 454 329 41,338
Long-term
incentive plan 5,011 186 5,397 (572) 398,000
Unrealized gain
on available
for sale
securities 1,079 1,079
Amortization of
unearned
compensation 2,570 2,570
Other 1,707 18 (101) 1,790
--------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 $1,100,501 $870,930 $32,868 $591,370 $(392,995) $ (140) $(1,532) 147,784,218 (28,172,896)
--------------------------------------------------------------------------------------------------------------
Net income 190,849 190,849
Dividends:
Common shares (114,303) (114,303)
Treasury shares
acquired (133,077) (133,077) (6,536,928)
Issued:
IWC Resources
Corporation
acquisition 207,417 55,008 152,409 10,580,764
Acquisition of
minority interest 5,469 1,351 4,118 270,064
Employee stock
purchase plan 697 424 273 34,376
Long-term
incentive plan 5,004 118 5,329 (443) 353,066
Unrealized gain on
available for
sale securities 1,689 1,689
Amortization of
unearned
compensation 2,099 2,099
Other (1,557) (1) (126) (1,430)
--------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 $1,264,788 $870,930 $89,768 $667,790 $(363,943) $(1,570) $1,813 147,784,218 (23,471,554)
--------------------------------------------------------------------------------------------------------------
</TABLE>
*Amounts restated to reflect two-for-one stock split.
17
<PAGE>
Notes to Consolidated Financial Statements
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 subsidiaries:
NIPSCO Development Company, Inc. (Development); NIPSCO Energy Services, Inc.
(Services); Primary Energy, Inc. (Primary); Miller; and SM&P. NIPSCO Capital
Markets, Inc. (Capital Markets) handles financing for Industries and its
subsidiaries, other than Northern Indiana. These subsidiaries are referred to
collectively as "Products and Services."
On December 18, 1997, Industries and Bay State Gas Company signed a
definitive merger agreement under which Industries will acquire all of the
common stock of Bay State Gas Company in a stock-for-stock transaction. Refer to
Purchase of Bay State Gas Company in Notes to Consolidated Financial Statements
for a more detailed discussion of the proposed acquisition.
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of majority-owned
subsidiaries of Industries after the elimination of significant intercompany
accounts and transactions. Investments for which Industries has at least a 20%
interest and certain joint ventures are accounted for under the equity method.
Investments with less than a 20% interest are accounted for under the cost
method. Certain reclassifications were made to conform the prior years'
financial statements to the current presentation.
The prior period operating results related to "Products and Services" were
previously reported under the caption "Other Income (Deductions)" in the
Consolidated Statement of Income. Accordingly, these results have been
reclassified to conform to the current presentation.
The accompanying consolidated financial statements of Industries include
nine months of operating results for IWCR for the period ended December 31,
1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Operating Revenues
Utility revenues are recorded based on estimated service rendered, but are
billed to customers monthly on a cycle basis. Energy marketing revenues are
recognized as the related commodity is delivered to customers. 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
The Energy Utilities provide depreciation on a straight-line method over the
remaining service lives of the electric, gas and common properties. The weighted
average provisions, as a percentage of the cost of original depreciable utility
plant, were approximately 4.3% for 1997, 4.2% for 1996 and 4.1% for 1995.
The Water Utilities provide depreciation on the original cost of utility
plant in service using a composite annual rate of 1.9% for 1997.
The Utilities follow the practice of charging maintenance and repairs,
including the cost of renewals of minor items of property, to maintenance
expense accounts, except for repairs of transportation and service equipment
which are charged to clearing accounts and redistributed to operating expense
and other accounts. When property which represents a retirement unit is replaced
or removed, the cost of such property is credited to utility plant, and such
cost, together with the cost of removal less salvage, is charged to the
accumulated provision for depreciation.
Amortization of Software Costs
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 $197.7 million (see Purchase of IWC Resources
Note) and $40.6 million at December 31, 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 is stated as goodwill and is being amortized on a
straight-line basis over a weighted average period of 34 years. Other intangible
assets approximating $7.7 million are being amortized over a period of eight
19
<PAGE>
years. Industries assesses the recoverability of its intangible assets on a
periodic basis to conform that expected future cash flows will be sufficient to
support the recorded intangible assets. Accumulated amortization of intangibles
at December 31, 1997, was approximately $1.1 million.
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 December 31, 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 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:
1997 1996 1995
- -------------------------------------------------------------------
(In thousands)
Income taxes...................... $116,849 $75,795 $117,940
Interest, net of amounts
capitalized.................... 102,361 87,281 89,321
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- or six-month period will be included
in a future filing. See FERC Order No. 636 for a discussion of gas transition
cost charges.
20
<PAGE>
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
December 1997 and 1996 the estimated replacement cost of gas in storage (current
and non-current) at December 31, 1997 and 1996 exceeded the stated LIFO cost by
approximately $42 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 December 31, 1997, Industries had open
derivative financial instruments representing hedges of natural gas sales of 8.9
billion cubic feet (Bcf), natural gas purchases and inventories of 13.4 Bcf and
net basis differentials of 33.4 Bcf. The net deferred loss on these derivative
financial instruments as of December 31, 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
deferred premiums paid on these options as of December 31, 1997 were not
material.
Impact of Accounting Standards
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 December 31,
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. Regulatory assets
were comprised of the following items:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Unamortized reacquisition
premium on debt
(See Long-Term Debt note) $ 46,748 $ 50,262
Unamortized R. M. Schahfer
Unit 17 and Unit 18 carry-
ing charges and deferred
depreciation (See below) 66,546 70,763
Bailly scrubber carrying
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
charges and defered
depreciation (See below) 9,880 10,816
Deferral of SFAS No. 106
expense not recovered (See
Postretirement Benefits note 87,653 87,557
FERC Order No. 636
transition costs (See FERC
Order NO. 636 note) 28,744 47,399
Regulatory income tax asset, net 6,941 4,736
Other 4,261 --
-------- --------
250,773 271,533
-------- --------
Less: Current portion of
regulatory assets 39,260 35,328
-------- --------
$211,513 $236,205
-------- --------
</TABLE>
If a portion of the Utilities' operations becomes no longer subject to the
provisions of SFAS No. 71, a write-off of certain regulatory assets 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.
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 pretax 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 remained at 5.5%.
Foreign Currency Translation
Translation gains or losses are based upon the end-of-period exchange rate and
are recorded as a separate component of common shareholders' equity.
Investments In Real Estate
Development invests in a series of affordable housing projects within the
Utilities' service territory. These investments include certain tax benefits,
including low-income housing tax credits and tax deductions for operating losses
of the housing projects. Development accounts for these investments using the
equity method. Investments, at equity, include $30.1 million and $24.1 million
relating to affordable housing projects at December 31, 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
22
<PAGE>
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.
RESOLUTION OF TAX MATTER
In 1991, the Internal Revenue Service (IRS) issued a notice of deficiency for
Northern Indiana's taxes for the years 1982 through 1985 ($3,785,250 per year
plus interest) relating to interest payments on $70 million of 17 1/4% Notes
issued in 1981 by Northern Indiana's former foreign subsidiary, Northern
Indiana Public Service Finance N.V. (Finance). The IRS maintained that interest
paid on the Notes should have been subject to United States tax withholding.
Northern Indiana challenged the assessment in the United States Tax Court (Tax
Court) and the Tax Court ruled in favor of Northern Indiana, finding that the
interest paid on the Notes was not subject to United States tax withholding. The
IRS appealed the Tax Court's decision to the U. S. Court of Appeals for the
Seventh Circuit (Court of Appeals) and Northern Indiana filed a cross appeal. On
June 6, 1997, the Court of Appeals issued an order affirming in full the
favorable Tax Court order. The IRS did not appeal the decision of the Court of
Appeals.
RESOLUTION OF ELM ENERGY AND RECYCLING (UK) LTD. LITIGATION
Development is an 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 $48.9 million
at December 31, 1997) were to be reimbursed by TBV to Elm. TBV filed suit in the
English courts to enjoin enforcement of the decision and to allege certain
breaches of the underlying construction contract. Elm counterclaimed, and Elm
and Development also sought additional remedies at law, in both the United
States and the United Kingdom, for damages and/or sanctions against TBV, Tarmac
PLC Group, Black & Veatch and its chairman. Black & Veatch counterclaimed
against Elm and Development.
In September 1997, a settlement was reached on mutually agreed terms which
resulted in the dismissal, with prejudice, of all litigation in the United
States and the United Kingdom relating to the Project (Elm Litigation
Settlement). Concurrently, Elm reached a settlement with its banks pursuant to
which the banks were paid a portion of the proceeds received by Elm in the Elm
Litigation Settlement in exchange for the banks agreeing to forgive Elm's
remaining bank debt and to release all security interests they had in the
Project. The Elm Litigation Settlement was not material to the results of
operations or financial position of Industries. Elm is continuing to operate the
Project and Development provides financing to support its operations.
NESI ENERGY MARKETING CANADA LTD.
LITIGATION
On October 31, 1996, Services' wholly-owned subsidiary NIPSCO Energy Services
Canada Ltd. (NESI Canada) acquired 70% of the outstanding shares of Chandler
Energy Inc., a gas marketing and trading company located in Calgary, Alberta,
and subsequently renamed it NESI Energy Marketing Canada Ltd. (NEMC). Between
November 1 and November 27, 1996, gas prices in the Calgary market increased
dramatically. As a result, NEMC was selling gas, pursuant to contracts entered
into prior to the acquisition date, at prices substantially below its costs to
acquire such gas. On November 27, 1996, NEMC ceased doing business and sought
protection from its creditors under the Companies' Creditors Arrangement Act, a
Canadian corporate reorganization statute. NEMC was declared bankrupt as of
December 12, 1996.
Certain creditors of NEMC have filed claims against Industries, Services,
Capital Markets and NESI Canada, alleging certain misrepresentations relating to
NEMC's financial condition and claiming damages. Industries and its affiliates
intend to vigorously defend against such claims and any other claims seeking to
assert that any party other than NEMC is responsible for NEMC's liabilities.
Industries has fully reserved its investment in NEMC. Management believes that
any additional loss relating to NEMC would not be material to the results of
operations or financial position of Industries.
FERC ORDER NO. 636
The Energy Utilities have recorded approximately $138 million of interstate
pipeline transition costs since December 1993 to reflect the impact of FERC
Order No. 636, a majority of which costs have
23
<PAGE>
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.
ENVIRONMENTAL MATTERS
The Utilities have an ongoing program to remain aware of laws and regulations
involved with hazardous waste and other environmental matters. The Utilities
intend to continue to evaluate their facilities and properties with respect to
these rules and identify any sites that would require corrective action. The
Utilities have recorded a reserve of approximately $20 million to cover probable
corrective actions as of December 31, 1997; however, environmental regulations
and remediation techniques are subject to future change. The ultimate cost could
be significant, depending on the extent of corrective actions required. Based
upon investigations and management's understanding of current laws and
regulations, the Utilities believe that any corrective actions required, after
consideration of insurance coverages and contributions from other potentially
responsible parties, will not have a significant impact on the results of
operations or financial position of Industries.
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 specific sulfur dioxide limitations
contained in the acid deposition provisions of the Clean Air Act Amendments of
1990 (CAAA). Reflecting this compliance, on December 31, 1997, Indiana
Department of Environmental Management (IDEM) issued the Phase II Acid Rain
permits for all four of Northern Indiana's electric generating stations. As
discussed below, however, other provisions of the CAAA impose additional
requirements on Northern Indiana.
On December 19, 1996, the Environmental Protection Agency (EPA) promulgated
rules for Phase II of the Acid Rain nitrogen oxides (NOx) reduction program. For
Phase I, during the summer of 1997, the EPA formally approved the Acid Rain
Early Election permits for the pulverized coal units at D. H. Mitchell and R. M.
Schahfer stations. The permits establish the Phase I limits for the NOx
emissions on these units until 2007. On December 23, 1997, Northern Indiana
submitted an Acid Rain Phase II NOx Compliance Plan to IDEM which included
additional controls for two cyclone fired boilers and a plan for emission
averaging to achieve the NOx limits for the system by 2000. Northern Indiana
plans a project to demonstrate a cost effective combustion control technique on
the Unit 12 cyclone fired boiler at Michigan City during 1998. The CAAA also
contain other provisions that could lead to limitations on emissions of
hazardous air pollutants which may require significant capital expenditures for
control of these emissions. Northern Indiana cannot predict what these
requirements will be or the costs of complying with these potential
requirements.
On October 10, 1997, the EPA proposed a rule under the nonattainment
provisions of the CAAA to reduce emissions transported across state boundaries
that allegedly are contributing to nonattainment of the one hour ozone standard
in downwind states. Because NOx is considered a precursor or cause of ozone
formation, the EPA proposed significant NOx reductions for 22 states, including
Indiana, to address the ozone transport issue. These proposals, and any
resulting NOx emission limitations, arise under different provisions of the CAAA
than the Acid Rain NOx program and could result in additional, more restrictive
emission limitations than are imposed under the Acid Rain Program. The EPA has
encouraged states to achieve the reductions by requiring controls on electric
utilities and large boilers. Northern Indiana is evaluating the EPA's proposal
and evaluating potential requirements that could result from any final rule.
The EPA issued final rules on July 18, 1997, revising the National Ambient
Air Quality Standards for ozone and particulate matter. The revised standards
begin a regulatory process that may lead to reductions in particulate, NOx
emissions and possibly sulfur dioxide emissions, from coal-fired boilers
(including Northern Indiana's generating stations) beyond reductions required in
the Acid Rain and nonattainment provisions of the CAAA. Northern Indiana cannot
predict the costs of complying with future control requirements to meet these
new standards. Northern Indiana will continue to closely monitor developments in
this area and anticipates that the exact nature of the impact of the new
standards on its operations will not be known for some time.
The EPA has notified Northern Indiana that it is a "potentially responsible
party" (PRP) under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) and may be required to share in the cost of cleanup of
several waste disposal sites identified by the EPA. The sites are in various
stages of investigation, analysis and remediation. At each of the sites,
Northern Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites Northern
Indiana and/or the other named PRPs are
<PAGE>
presently working with the EPA to clean up the sites and avoid the imposition of
fines or added costs.
In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159
nations formally agreed to targets reducing worldwide levels of greenhouse
gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would
impose an obligation on the United States to reduce its emissions of greenhouse
gas to a level seven percent below 1990 levels during the period 2008 to 2012.
The impact of this agreement on Northern Indiana is uncertain. Northern Indiana,
as a charter member of the Department of Energy's Climate Challenge Program,
the electric industries' voluntary reduction effort, has already implemented
over 21 projects to voluntarily reduce greenhouse gases emissions. Northern
Indiana continues to investigate methods to address reduction in carbon dioxide
emissions and will monitor the development of U.S. climate change policy.
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 IDEM and the EPA and immediately took
steps to contain the material. The Energy Utilities have worked with IDEM or the
EPA on investigation or remedial activities at several sites. Three of the
sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The
goal of placing these sites in the VRP is to obtain IDEM approval of the
selection and implementation of whatever remedial measures, if any, may be
required. The Energy Utilities anticipate placing additional sites in the VRP
after remedial measures have been selected.
Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered
into an agreement covering cost sharing and management of investigation and
remediation programs at five former manufactured-gas plant sites at which both
companies or their predecessors were former operators or owners. One of these
sites is the Lafayette site which Indiana Gas had previously notified Northern
Indiana is being investigated and remediated pursuant to an administrative
order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy)
(formerly PSI Energy, Inc.) that it was a former owner or operator of seven
former manufactured-gas plants at which Northern Indiana had conducted or was
planning investigation or remediation activities. In December 1996, Northern
Indiana sent a written demand to Cinergy related to one of these sites, Goshen.
Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern
Indiana has already incurred and to be incurred to implement the needed remedy
at the Goshen site. In August 1997, Northern Indiana filed suit in federal court
against Cinergy seeking recovery of those costs.
In 1994, the Energy Utilities approached various companies that provided
insurance coverage which the Energy Utilities believe covers costs related to
actions taken at former manufactured-gas plants. There has been litigation
between Northern Indiana and various insurance companies over covered costs.
Northern Indiana has filed claims in state court against various insurance
companies, seeking coverage for costs associated with several former
manufactured-gas plants and damages for alleged misconduct by some of the
insurance companies. The state court action is now proceeding. Northern Indiana
has received cash settlements from several of the insurance companies.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric sources may
result in adverse health effects has been the subject of public, governmental
and media attention. Recently, researchers from the National Cancer Institute
and the Childhood Cancer Group reported they found no evidence magnetic fields
in homes increase the risk of childhood leukemia. This study follows an EMF
report released late last year by the U.S. National Research Council of the
National Academy of Sciences, which concluded, after examining more than 500 EMF
studies spanning 17 years, that, among other things, there was insufficient
evidence to consider EMF a threat to human health. Despite the reports'
findings, future research appropriations are continuing to be dedicated to
explore this issue.
The Water Utilities are subject to pollution control and water quality
control regulations, including those issued by the EPA, IDEM, the Indiana Water
Pollution Control Board and the Indiana Department of Natural Resources. Under
the Federal Clean Water Act and Indiana's regulations, IWC must obtain National
Pollutant Discharge Elimination System (NPDES) permits for discharges from its
water treatment stations. Applications for renewal of any expiring permits have
been filed and are the subject of ongoing discussions with, but have not been
finalized by, IDEM. These permits continue in effect pending review of the
current applications.
<PAGE>
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 previously required. 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.
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 December 31,
1997 and 1996, are as follows:
1997 1996
---- ----
(in thousands)
Deferred tax liabilities --
Accelerated depreciation and other property differences $779,223 $727,528
AFUDC-equity 35,282 37,713
Adjustment clauses 35,253 41,181
Take-or-pay gas costs 496 877
Other regulatory assets 31,862 39,458
Reacquisition premium on debt 18,345 19,041
Deferred tax assets--
Deferred investment tax credits (40,025) (41,046)
Removal costs (144,111) (131,718)
FERC Order NO. 636 transition costs -- (8,144)
Other post retirement/postemployment benefits (45,613) (43,446)
Other, net (3,252) (11,987)
-------- --------
667,460 629,457
Less: Deferred income taxes related to current assets and -------- --------
liabilities 15,645 26,712
-------- --------
Deferred income taxes--noncurrent $651,815 $602,745
-------- --------
26
<PAGE>
Federal and state income taxes as set forth in the Consolidated Statement
of Income are comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current income taxes--
Federal $ 97,011 $ 80,626 $ 95,677
State 16,857 12,781 15,215
-------- -------- --------
113,868 93,407 110,892
-------- -------- --------
Deferred income taxes, net--
Federal (1,603) 19,282 (1,536)
State 136 1,844 56
-------- -------- --------
(1,467) 21,126 (1,480)
-------- -------- --------
Deferred investment tax credits, net (7,376) (7,408) (7,515)
-------- -------- --------
Income taxes 105,025 107,125 101,897
-------- -------- --------
Income tax applicable to non-operating
activities and equity investments 987 (207) (2,698)
-------- -------- --------
Total income taxes $106,012 $106,918 $ 99,199
-------- -------- --------
</TABLE>
A reconciliation of total tax expense to an amount computed by applying the
statutory federal income tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net income $190,849 $176,734 $175,465
Add--Income taxes 106,012 106,918 99,199
Dividend requirements on preferred stocks
of subsidiaries 8,691 8,712 9,046
-------- -------- --------
Income before preferred dividend requirements
of subsidiaries and income taxes $305,552 $292,364 $283,710
-------- -------- --------
Amount derived by multiplying pretax income
by statutory rate $106,943 $102,327 $ 99,299
Reconciling items multiplied by the
statutory rate:
Book depreciation over related tax
depreciation 4,072 4,621 4,018
Amortization of deferred investment tax
credits (7,376) (7,408) (7,515)
State income taxes, net of federal income
tax benefit 11,864 10,540 9,479
Reversal of deferred taxes provided at
rates in excess of the current federal
income tax rate (4,063) (6,644) (5,665)
Low-income housing credits (3,056) (2,303) (1,300)
Nondeductible amounts related to
amortization of intangible assets and
plant acquisition adjustments 1,640 385 385
Other, net (4,012) 5,400 498
-------- -------- --------
Total income taxes $106,012 $106,918 $ 99,199
-------- -------- --------
</TABLE>
<PAGE>
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 December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Vested benefit obligation $(662,235) $(541,611)
Nonvested benefit (117,642) (104,338)
---------- ----------
Accumulated benefit obligation $(779,877) $(645,949)
---------- ----------
Projected benefit obligation for service rendered
to date $(875,756) $(743,634)
Plan assets at fair market value 924,856 790,978
---------- ----------
Plan assets in excess of projected benefit obligation 49,100 47,344
Unrecognized transition obligation at December 31,
being recognized over seventeen years 32,107 38,062
Unrecognized prior service cost 47,114 25,172
Unrecognized gains (47,284) (66,976)
---------- ----------
Prepaid pension costs $81,037 $ 43,602
---------- ----------
</TABLE>
<PAGE>
The accumulated benefit obligation is the present value of future pension
benefit payments and is based on the plan benefit formula without considering
expected future salary increases. The projected benefit obligation considers
estimated future salary increases. Discount rates of 7.00% and 7.75% and rates
of increase in compensation levels of 4.5% and 5.5% were used to determine the
accumulated benefit obligation and projected benefit obligation at December 31,
1997 and 1996, respectively. The increase in the accumulated benefit obligation
at December 31, 1997 is mainly caused by the decrease in the discount rate from
7.75% to 7.00%.
The following items are the components of provisions for pensions for the
years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service costs $ 14,423 $ 16,300 $ 12,231
Interest costs 57,568 53,477 52,511
Actual return on plan assets (126,211) (87,407) (135,243)
Amortization of transition obligation 6,218 5,422 5,422
Other net amortization and deferral 56,659 26,460 86,165
---------- --------- ----------
$ 8,657 $ 14,252 $ 21,086
---------- --------- ----------
</TABLE>
Assumptions used in the valuation and determination of 1997, 1996 and 1995
pension expense were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.25% 8.75%
Rate of increase in compensation levels 5.50% 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
The plans' assets are invested primarily in common stocks, bonds and notes.
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
$1.7 million were made to these plans for the nine-month period ended December
31 , 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.
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 had 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 benefits costs and the insurance premiums paid for such benefits
as a regulatory asset until such time as the accrual cost method could be
reflected in the rate-making process.
On June 11, 1997, the Commission issued an order approving the inclusion of
accrual-based postretirement benefit costs in the rate-making process to be
effective February 1, 1997 for electric rates and March 1, 1997 for gas rates.
These costs include an amortization of the existing regulatory asset consistent
with the remaining amortization period for the transition obligation. Northern
Indiana discontinued its cost deferral and began amortizing its regulatory asset
concurrent with these dates.
IWC's current rates include postretirement benefit costs on an accrual
basis, including amortization of the regulatory asset that arose prior to
inclusion of these costs in rates. IWC currently remits to a grantor trust
amounts collected in rates.
28
<PAGE>
The following table sets forth the plans accumulated postretirement benefit
obligation as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Postretirement benefit obligations for:
Retirees $ (96,603) $ (76,710)
Fully eligible active plan participants (38,572) (19,448)
Other active plan participants (88,733) (104,632)
--------- ---------
Accumulated postretirement benefit obligation (223,908) (200,790)
Plan assets at fair value 2,400 --
--------- ---------
Funded status (221,508) (200,790)
Unrecognized transition obligation at December 31,
being recognized over twenty years 176,464 175,012
Amortization of prior service cost 4,195 --
Unrecognized actuarial gain (99,117) (89,547)
--------- ---------
Accrued liability for postretirement benefits $(139,966) $(115,325)
--------- ---------
</TABLE>
A discount rate of 7% and a pre-Medicare medical trend rate of 8% declining
to a long-term rate of 5% and a discount rate of 7.75% and a pre-Medicare
medical trend rate of 9% declining to a long-term rate of 6% were used to
determine the accumulated postretirement benefit obligation at December 31,
1997 and 1996, respectively.
The increase in the accumulated postretirement benefit obligation (APBO)
was primarily attributable to the inclusion of IWCR's APBO and the decrease in
the discount rate from 7.75% to 7.00%.
Net periodic postretirement benefit costs, before consideration of the
rate-making discussed above, for the years ended December 31, 1997 and 1996
include the following components:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Service costs $ 4,904 $ 7,352
Interest costs 15,878 18,311
Amortization of transition obligation over twenty years 11,558 11,593
Amortization of prior service cost 279 --
Amortization of unrecognized actuarial gain (5,844) (554)
------- -------
$26,775 $36,702
------- -------
</TABLE>
The net periodic postretirement benefit costs for 1997 were determined
assuming a 7.75% discount rate, a 5.5% rate of compensation increase and a pre-
Medicare medical trend rate of 8% declining to a long-term rate of 6%. The net
periodic postretirement benefit costs for 1996 were determined assuming a 7.25%
discount rate, a 5% rate of compensation increase and a pre-Medicare medical
trend rate of 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 December 31, 1997,
by approximately $27.1 million and increase the aggregate of the service and
interest cost components of plan costs by approximately $2.9 million for the
year ended December 31, 1997. Amounts disclosed above could be changed
significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.
PREFERRED AND PREFERENCE STOCKS
Industries is authorized to issue 20,000,000 shares of Preferred Stock, without
par value. Effective March 2, 1990, 2,000,000 shares of the Industries' Series A
Junior Participating Preferred Shares were reserved for issuance pursuant to the
Share Purchase Rights Plan described in Common Shares. In November 1990,
Industries issued and sold 350,000 shares of 8.75% Series Cumulative Preferred
Shares through a private placement for $35 million. Pursuant to mandatory
redemption provisions, all the shares were redeemed by Industries on January 12,
1996, for $100 per share plus accrued dividends.
The authorized classes of par value and no par value cumulative preferred
and preference stocks of Northern Indiana are as follows: Cumulative Preferred--
$100 par value--2,400,000 shares; Cumulative Preferred--no par value--3,000,000
shares; Cumulative Preference--$50 par value--2,000,000 shares (none
outstanding); and Cumulative Preference--no par value--3,000,000 shares (none
issued). The authorized class of cumulative preferred stock of IWC is $100 par
value -- 300,000 shares.
29
<PAGE>
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.
The redemption prices at December 31, 1997, for the cumulative preferred
stock, which is redeemable solely at the option of Northern Indiana and IWC, in
whole or in part, at any time upon thirty days' notice, are as follows:
<TABLE>
<CAPTION>
Redemption Price
Series Per Share
------ ----------------
<S> <C> <C>
Northern Indiana Public Service Company:
Cumulative preferred stock--$100 par value-- 4 1/4% $101.20
4 1/2% $100.00
4.22% $101.60
4.88% $102.00
7.44% $101.00
7.50% $101.00
Cumulative preferred stock-no par value-
adjustable rate (6.00% at December 31, 1997),
Series A (stated value $50 per share) $ 50.00
Indianapolis Water Company:
Cumulative preferred stock--$100 par value--
rates ranging from 4% to 5% $100-$105
</TABLE>
The redemption prices at December 31, 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>
Series Redemption Price Per Share Sinking Fund Or Mandatory Redemption
------ ---------------------------------------------------------------
<S> <C> <C>
Cumulative preferred stock--$100 par value--
8.85% $101.11, reduced periodically 12,500 shares on or before April 1.
8.35% $103.69, reduced periodically 3,000 shares on or before July 1;
increasing to 6,000 shares
beginning in 2004; noncumulative
option to double amount each year.
7 3/4% $104.23, reduced periodically 2,777 shares on or before December 1;
noncumulative option to double
amount each year.
Cumulative preferred stock--no par value--
6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
</TABLE>
Sinking fund requirements with respect to redeemable preferred stocks
outstanding at December 31, 1997 for each of the four years subsequent to
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- ------------------------
<S> <C>
1999 $1,827,700
2000 $1,827,700
2001 $1,827,700
2002 $1,827,700
</TABLE>
STOCK SPLIT
On December 16, 1997, the Board of Directors authorized a two-for-one split of
Industries' common stock. Shareholders will receive one additional common share
for each common share held. The stock split will be payable February 20, 1998,
to shareholders of record at the close of business on January 30, 1998. All
references throughout this Annual Report to number of common shares reported for
the period including per share amounts, stock option data and market prices of
Industries' common stock have been restated to reflect the two-for-one stock
split as if it had occurred at the beginning of the earliest period. The common
share cash dividend to be paid February 20, 1998, is payable on pre-split
common shares.
<PAGE>
COMMON SHARE DIVIDEND
During the next few years, Industries expects that the great majority of
earnings available for distribution of dividends will depend upon dividends paid
to Industries by Northern Indiana. Northern Indiana's Indenture provides that it
will not declare or pay any dividends on any class of capital stock (other than
preferred or preference stock) except out of earned surplus or net profits of
Northern Indiana. At December 31, 1997, Northern Indiana had approximately
$146.3 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.
EARNINGS PER SHARE
At December 31, 1997, Industries adopted SFAS No. 128 "Earnings per Share." The
adoption of this statement required Industries to present basic earnings per
share and diluted earnings per share in place of primary earnings per share.
Basic earnings per share was computed by dividing net income, reduced for
preferred dividends, by the average number of common shares outstanding during
the period. The diluted earnings per share calculation assumes conversion of
nonqualified stock options into common shares. As a result of adopting the
statement, previously reported earnings per share information was restated. The
effect of this accounting change on previously reported earnings per share data
was insignificant.
The net income, preferred dividends and shares used to compute basic and
diluted earnings per share is presented in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding 123,849,126 122,381,500 126,562,354
------------ ----------- -----------
Net Income to be Used to Compute Basic Earnings per Share:
Net Income $190,849 $176,734 $175,465
Dividend requirements on Preferred Shares -- 119 3,063
------------ ----------- -----------
Balance Available for Common Shareholders $190,849 $176,615 $172,402
------------ ----------- -----------
Basic Earnings per Common Share $1.54 $1.44 $1.36
------------ ----------- -----------
Diluted
Weighted Average Number of Shares:
Average Common Shares Outstanding 123,849,126 122,381,500 126,562,354
Dilutive effect for Nonqualified Stock Options 374,344 323,367 238,286
------------ ----------- -----------
Weighted Average Shares 124,223,470 122,704,867 126,800,640
------------ ----------- -----------
Net Income to be Used to Compute Diluted Earnings per Share:
Net Income $190,849 $176,734 $175,465
------------ ----------- -----------
Dividend requirements on Preferred Shares -- 119 3,063
------------ ----------- -----------
Balance Available for Common Shareholders $190,849 $176,615 $172,402
------------ ----------- -----------
Diluted Earnings per Common Share $1.53 $1.43 $1.35
------------ ----------- -----------
</TABLE>
COMMON SHARES
Industries has 200,000,000 common shares authorized without par value. The
number of common shares authorized was not affected by the two-for-one stock
split.
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 two-hundredth of a share of Series A
Junior Participating Preferred Share, without par value, of Industries at a
price of $30 per one two-hundredth of a share. In certain circumstances, if an
acquirer obtained 25% of Industries' outstanding shares, or merged into
Industries or Industries into the acquirer, the Rights would entitle the holders
to purchase Industries' or the acquirer's common shares for one-half of the
market price. The Rights will not dilute
<PAGE>
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
December 31, 1997, Industries had purchased approximately 44.0 million shares
since 1989 at an average price of $14.18 per share. Approximately 8.0 million
additional common shares may be repurchase chased under the Board's
authorization. The number of shares purchased, additional shares that may be
repurchased and average price of shares repurchased have been restated to
reflect the two-for-one stock split.
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 5.0 million of
Industries' common shares to key employees through 1998 and 2004, respectively.
At December 31, 1997, there were 9,156 shares and 3,879,500 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 per formance units. No incentive
stock options or performance units were outstanding at December 31, 1997. Under
both Plans, the exercise price of each option equals the market price of
Industries' common shares 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 1997 and 1996 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 542,666, 524,000 and 661,000 restricted shares outstanding at
December 31, 1997, 1996 and 1995, respectively.
The Industries' Nonemployee Director Stock Incentive Plan, which was
approved by shareholders, provides for the issuance of up to 200,000 of
Industries' common shares to nonemployee directors of Industries. The Plan
provides for awards of common shares which vest in 20% per year increments, with
full vesting after five years. The Plan also allows the award of nonqualified
stock options in the future. If a director's service on the Board is terminated
for any reason other than death or disability, any common shares not vested as
of the date of termination are forfeited. As of December 31, 1997, 65,500 shares
were issued under the Plan.
Industries accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized for
nonqualified stock options. The compensation cost that has been charged against
net income for restricted stock awards was $1.8 million and $2.1 million for
the year ending December 31, 1997 and 1996, 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 average
common share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996
(In thousands, except per share amounts)
<S> <C> <C>
Net Income:
As reported $190,849 $176,734
Pro forma 189,999 176,087
Earnings Per Average Common Share:
Basic:
As reported $1.54 $1.44
Pro forma 1.53 1.43
Diluted:
As reported $1.53 $1.43
Pro forma 1.52 1.43
</TABLE>
<PAGE>
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 years ended December 31, 1997 and 1996, respectively: risk-free interest
rate of 6.29% and 6.39%, expected dividend yield of $0.87 and $0.84 per share,
expected option term of five and one-quarter years and five years and expected
volatility of 12.7% and 13.2%.
Changes in outstanding shares under option and SARs for 1995, 1996 and
1997, are as follows:
<TABLE>
<CAPTION>
Nonqualified Nonqualifed Stock
Stock Options Options With SARs
---------------------- --------------------
Weighted Average Option
Year Ended December 31, 1995 Options Option Price Options Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year 2,181,700 $13.33 19,800 $5.47
Granted 564,900 $16.20 --
Exercised (519,700) $12.34 (8,600) $5.47
Cancelled (24,800) $12.21 --
--------- ------
Balance at end of year 2,202,100 $14.31 11,200 $5.47
--------- ------
Shares exercisable 1,647,200 $13.68 11,200 $5.47
--------- ------
Weighted average fair value of options
granted $1.95
---------
Weighted Average Option
Year Ended December 31, 1996 Options Option Price Options Price
- ---------------------------------------------------------------------------------------------
Balance at beginning of year 2,202,100 $14.31 11,200 $5.47
Granted 556,600 $18.91 --
Exercised (368,000) $14.51 --
Cancelled (29,800) $16.88 --
--------- ------
Balance at end of year 2,360,900 $15.33 11,200 $5.47
--------- ------
Shares exercisable 1,812,300 $14.25 11,200 $5.47
--------- ------
Weighted average fair value of options
granted $2.50
---------
Weighted Average Option
Year Ended December 31, 1997 Options Option Price Options Price
- ---------------------------------------------------------------------------------------------
Balance at beginning of year 2,360,900 $15.33 11,200 $5.47
Granted 533,600 $20.64 --
Exercised (330,400) $15.29 --
Cancelled (28,700) $19.21 --
--------- ------
Balance at end of year 2,535,400 $16.41 11,200 $5.47
--------- ------
Shares exercisable 2,006,800 $15.30 11,200 $5.47
--------- ------
Weighted average fair value of options
granted $2.66
---------
</TABLE>
The following table summarizes information about non-qualified stock
options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
Range of Number Outstanding Weighted Average Weighted Average
Option Price at December 31, 1997 Remaining Contractual Life Option Price
<S> <C> <C> <C>
$ 5.47 to $ 8.53 160,600 2.08 years $ 8.34
$11.47 to $15.16 684,000 5.35 years $13.30
$16.59 to $20.64 1,690,800 8.18 years $18.44
- ---------------- --------- ---------- ------
$ 5.47 to $20.64 2,535,400 7.03 years $16.41
</TABLE>
<PAGE>
OPTIONS EXERCISABLE
-------------------
<TABLE>
<CAPTION>
Range of Number Exercisable Weighted Average
Option Price at December 31, 1997 Option Price
<S> <C> <C>
$ 5.47 to $ 8.53 160,600 $ 8.34
$11.47 to $15.16 684,000 $13.30
$16.59 to $18.91 1,162,200 $17.44
---------------- --------- ------
$ 5.47 to $18.91 2,006,800 $15.30
---------
</TABLE>
LONG-TERM DEBT
The sinking fund requirements of long-term debt outstanding at December 31, 1997
(including the maturity of Northern Indiana's first mortgage bonds: Series T,
7.50%, due April 1, 2002; Northern Indiana's medium-term notes due from March
20, 2000 to June 12, 2002; and NDC Douglas Properties, Inc.'s notes payable due
December 22, 1999 and August 15, 2002; IWC's first mortgage bonds: Series 5.20%,
due May 1, 2001 and Series 8.00%, due December 15, 2001; and IWCR's senior
notes payable, due March 15, 2001), for each of the four years subsequent to
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999 $ 7,744,133
2000 $163,164,203
2001 $ 52,697,115
2002 $ 63,997,185
--------------------------------
</TABLE>
Unamortized debt expense, premium and discount on long-term debt applicable
to outstanding bonds are being amortized over the lives of such bonds.
Reacquisition premiums are being deferred and amortized.
Northern Indiana's Indenture dated August 1, 1939, as amended and
supplemented, securing the first mortgage bonds issued by Northern Indiana,
constitutes a direct first mortgage lien upon substantially all property and
franchises, other than expressly excepted property, owned by Northern Indiana.
On 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 December 31, 1997, $139.0 million of the medium-term notes had been issued
with various interest rates and maturities. The proceeds from these issuances
were used to pay short-term debt incurred to redeem its First Mortgage Bonds,
Series N, and to pay at maturity various issues of Medium-Term Notes, Series D.
IWC's first mortgage bonds are secured by its utility plant. Provisions of
trust indentures related to the 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 Industries' $35 million of 8.75% Preferred Shares, pursuant to
mandatory redemption, and to pay other short-term debt of Capital Markets.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes with various interest rates and maturities.
The proceeds from these issuances were used for the purchase of IWCR and to pay
outstanding short-term obligations of Capital Markets.
On December 1, 1997, Capital Markets issued $75 million of 6.78% Senior
Notes due December 1, 2027. Proceeds from the sale of these notes were primarily
used to pay Capital Markets' Zero Coupon Notes which matured December 1, 1997.
The remaining balance of the proceeds will be used for Industries' general
corporate purposes.
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
<PAGE>
Markets' securities. The carrying value of the assets of Industries, other than
the stock and assets of Northern Indiana, reflected in the consolidated
financial statements of Industries, is approximately $1.3 billion at December
31, 1997.
CURRENT PORTION OF LONG-TERM DEBT
At December 31, 1997 and 1996, Industries' current portion of long-term
debt due within one year was as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
(Dollars in thousands)
<S> <C> <C>
First mortgage bonds $14,509 $ 25,747
Medium-term notes--
Interest rates between 5.83%
and 5.95% with a weighted
average interest rate of 5.86%
and maturities between April 6,
1998 and April 13, 1998 35,000 40,000
Zero Coupon Notes -- 67,731
Notes payable--
Interest rates between 6.72% and
9.00% with a weighted average
interest rate of 7.76% and
maturities between January 1,
1998 and December 22, 1998 3,612 5,033
Term loan facility -- 6,041
Sinking funds due within one year 1,500 1,500
------- --------
Total current portion of long-term debt $54,621 $146,052
------- --------
</TABLE>
SHORT-TERM BORROWINGS
Northern Indiana and Capital Markets make use of commercial paper to fund
short-term working capital requirements.
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999. As of December 31, 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 December 31, 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 December 31, 1997 and 1996, $47.5 million and $79.0 million of borrowings
were outstanding under these lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At
December 31, 1997, there were no borrowings outstanding under this facility.
Capital Markets has a $150 million revolving Credit Agreement which will
terminate August 19, 1999. This facility provides short-term financing
flexibility to Industries and also serves as the back-up instrument for a
commercial paper program. As of December 31, 1997, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of December 31, 1997 and 1996, $20.1 million and $27.0 million, respectively,
of borrowings were outstanding under these lines of credit.
IWCR and its subsidiaries have lines of credit with banks aggregating $73.7
million. At December 31, 1997, $48.9 million of borrowings were outstanding
under these lines of credit.
At December 31, 1997 and 1996, Industries' short-term borrowings were as
follows:
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Commercial paper--
Weighted average interest rate of
6.32% at December 31, 1997 $88,500 $313,205
Notes payable--
Issued at interest rates between 6.03%
and 8.50% with a weighted average
interest rate of 6.22% and various
maturities between January 5, 1998
and January 23, 1998 116,469 106,000
Standby loan facility -- 4,949
Revolving loan facility 7,670 1,831
-------- --------
Total short-term borrowings $212,639 $425,985
-------- --------
</TABLE>
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
December 31, 1997:
<TABLE>
<CAPTION>
Year Ending December 31, (In thousands)
- --------------------------------------------------------
<S> <C>
1998 $ 15,245
1999 13,968
2000 13,499
2001 13,287
2002 50,106
Later years 82,647
--------
Total minimum payments required $188,752
--------
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
Year Ending December 31, (In thousands)
- --------------------------------------------------------
<S> <C>
1997 $8,839
1996 8,121
1995 8,450
</TABLE>
COMMITMENTS
Industries estimates that approximately $1.019 billion will be expended for
construction purposes for the period from January 1, 1998 to December 31, 2002.
Substantial commitments have been made by the Utilities in connection with their
programs.
Northern Indiana has entered into a service agreement with Pure Air, a
general partnership between Air Products and Chemicals, Inc. and Mitsubishi
Heavy Industries America, Inc., under which Pure Air provides scrubber services
to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating
Station. Services under this contract commenced on June 15, 1992 with annual
charges approximating $20 million. The agreement provides that, assuming
various performance standards are met by Pure Air, a termination payment would
be due if Northern Indiana terminates the agreement prior to the end of the
twenty-year contract period.
Northern Indiana has entered into an agreement with IBM to perform all data
center, application development and maintenance and desktop management of
Northern Indiana.
PRIMARY ENERGY
Primary arranges energy-related projects for large energy-intensive
facilities and has entered into certain commitments with these projects. Primary
offers large energy customers, nationwide, expertise in managing the
engineering, construction, operation and maintenance of these energy-related
projects. Primary is the parent of the following subsidiaries: Harbor Coal
Company (Harbor Coal); North Lake Energy Corporation (North Lake); Lakeside
Energy Corporation (LEC); Portside Energy Corporation (Portside); and Cokenergy,
Inc (CE).
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 (Inland Steel) 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. The facility uses steam generated by Inland
Steel to produce electricity which is delivered to Inland Steel. The facility
began commercial operation in May 1996. Industries has guaranteed North Lake's
obligations relative to the lease and certain obligations to Inland Steel
relative to the project.
LEC has entered into a lease for the use of a 161-megawatt energy facility
located at USS Gary Works. The facility processes high-pressure steam into
electricity and low-pressure steam for delivery to USX Corporation-US Steel
Group. The fifteen-year tolling agreement with US Steel commenced on April 16,
1997 when the facility was placed in commercial operation. Capital Markets
guarantees LEC's security deposit obligations relative to the lease and certain
limited LEC obligations to the lessor.
Portside has entered into an agreement with National Steel Corporation
(National) to utilize a new 63-megawatt energy facility at National's Midwest
Division to process natural gas into electricity, process steam and heated water
for a fifteen-year period. Portside has entered into a lease with a third-party
lessor for use of the facility. Industries has guaranteed certain Portside
obligations to the lessor. Construction of the project began in June 1996 and
the facility began commercial operation on September 26, 1997.
CE has entered into a fifteen-year service agreement with Inland Steel 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 Steel'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
Steel. CE intends to lease these facilities, once constructed, from a third
party. Additionally, CE has entered into an interim agreement, which expires
when the lease is established with the third party lessor, under which CE is
acting as agent to design, construct and start up the facilities. Capital
Markets anticipates guaranteeing certain CE obligations relative to the
anticipated lease. Construction of the project began in January 1997. The
facility is scheduled to be operational in June 1998.
Primary has advanced approximately $107 million and $42 million, at
December 31, 1997 and December 31, 1996, respectively, to the lessors of the
energy related projects discussed above. These net advances are included in
"Other Receivables" in the Consolidated Balance Sheet and as a component of
operating activities in the Consolidated Statement of Cash Flows.
Primary is evaluating other potential projects with Northern Indiana
customers as well as with potential customers outside of Northern Indiana's
service territory. Projects under consideration include those which use
industrial by-product fuels and natural gas.
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 10.6 million
Industries' common shares. Industries accounted for the acquisition as a
purchase. The purchase price was allocated to the assets and liabilities
acquired based on their fair values.
Following is a summary of the assets acquired and liabilities assumed in
the acquisition of IWCR:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------
<S> <C>
Assets acquired:
Utility plant (net of accumulated depreciation) $474,845
Other property and investments 26,526
Other current assets 34,826
Intangible assets 63,761
Other noncurrent assets 19,587
--------
619,545
Less Liabilities assumed:
Long-term debt 112,185
Preferred stock 4,497
Short-term borrowings 28,329
Other current liabilities 23,315
Customer advances and contributions in aid of construction 86,175
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Other noncurrent liabilities 74,507
--------
329,008
--------
Net assets acquired $290,537
--------
</TABLE>
IWCR's largest subsidiary, IWC, provides water service to approximately
246,600 customers in Indianapolis and adjacent counties. In addition, IWCR owns
an underground utility locating and marking service business and one of the
nation's major gas pipeline construction companies.
PURCHASE OF BAY STATE GAS COMPANY
On December 18, 1997, Industries and Bay State Gas Company (Bay State) signed a
definitive merger agreement under which Industries will acquire all of the
common stock of Bay State in a stock-for-stock transaction valued at $40 per Bay
State share. The transaction is valued at approximately $780 million ($540
million in equity and $240 million in debt and preferred stock). Bay State
shareholders will have the option of taking up to 50 percent of the total
purchase price in cash. Consummation of the merger is subject to certain closing
conditions, including the approval by the shareholders of Bay State as well as
the Securities and Exchange Commission, FERC and state regulatory agencies in
Massachusetts, New Hampshire and Maine. The transaction is expected to be
completed in late 1998.
Bay State, one of the largest natural gas utilities in New England,
provides natural gas distribution service to more than 30 0,000 customers in
Massachusetts, New Hampshire and Maine. The combined company will be one of the
10 largest natural gas distribution systems in the nation, servicing more than
1 million gas customers. In addition, Industries and Bay State anticipate
entering into a joint marketing agreement early in 1998 that will expand the
operations of Bay State's non-regulated energy service companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based on
market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for the same or
similar issues or on the rates offered to Industries for securities of the same
remaining maturities. Certain premium costs associated with the early settlement
of long-term debt are not taken into consideration in determining fair value.
The carrying values and estimated fair values of Industries' financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $30,780 $30,780 $26,333 $26,333
Investments 32,625 32,886 30,003 33,019
Long-term debt (including current portion) 1,722,546 1,718,897 1,273,158 1,220,492
Preferred stock 146,289 139,814 144,200 126,379
</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.
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 central Indiana. 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 following table shows the basic steel industry percentage of
gas revenue (including transportation services) and electric revenue for 1997,
1996 and 1995:
<PAGE>
Basic Steel Industry 1997 1996 1995
- ---------------------------------------------------------------------------
Gas revenue percent 4% 1% 5%
Electric revenue percent 20% 22% 22%
QUARTERLY FINANCIAL DATA
The following data summarize certain operating results for each of the quarters
of 1997 and 1996:
<TABLE>
<CAPTION>
1997 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
- ------------------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenues $659,950 $523,186 $596,315 $807,090
Operating expenses 531,364 449,238 509,905 685,481
-------- -------- -------- --------
Operating income 128,586 73,948 86,410 121,609
Other income (deductions) 6,367 4,518 3,326 408
Interest and other charges 28,071 33,607 34,084 33,536
Income taxes 36,044 16,623 19,783 32,575
-------- -------- -------- --------
Net income 70,838 28,236 35,869 55,906
Dividend requirements on preferred shares -- -- -- --
-------- -------- -------- --------
Balance available for common shareholders $ 70,838 $ 28,236 $ 35,869 $ 55,906
======== ======== ======== ========
Basic earnings per average common
share(a)(b) $ 0.59 $ 0.22 $ 0.28 $ 0.44
======== ======== ======== ========
Diluted earnings per average common
share(a)(b) $ 0.59 $ 0.22 $ 0.28 $ 0.44
======== ======== ======== ========
Market price for the quarter:(a)
High $ 20.125 $ 21.125 $ 21.282 $ 24.938
Low $ 19.000 $ 19.438 $ 20.344 $ 21.063
1996 Quarters Ended March 31 June 30 Sept. 30 Dec. 31
- ------------------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Operating revenues $615,421 $398,742 $393,712 $580,074
Operating expenses 479,359 333,390 317,088 471,804
-------- -------- -------- --------
Operating income 136,062 65,352 76,624 108,270
Other income (deductions) (43) 2,228 5,338 4,464
Interest and other charges 28,076 28,587 28,645 29,128
Income taxes 40,457 15,564 18,907 32,197
-------- -------- -------- --------
Net income 67,486 23,429 34,410 51,409
-------- -------- -------- --------
Dividend requirements on preferred shares 119 -- -- --
-------- -------- -------- --------
Balance available for common shareholders $ 67,367 $ 23,429 $ 34,410 $ 51,409
======== ======== ======== ========
Basic earnings per average common
share(a)(b) $ 0.54 $ 0.19 $ 0.28 $ 0.42
======== ======== ======== ========
Diluted earnings per average common
share(a)(b) $ 0.54 $ 0.19 $ 0.28 $ 0.42
======== ======== ======== ========
Market price for the quarter:(a)
High $ 19.563 $ 20.125 $ 20.125 $ 19.938
Low $ 17.938 $ 17.625 $ 17.875 $ 17.938
</TABLE>
(a) Amounts restated to reflect two-for-one stock split.
(b) Because of the combined mathematical effect of common shares repurchased and
issued and the cyclical nature of net income during the year, the sum of
earnings per share for any four quarterly periods may vary slightly from the
earnings per share for the equivalent twelve-month period.
<PAGE>
SEGMENTS OF BUSINESS
Industries' primary businesses provide natural gas, electric energy, water and
energy/utility-related products and services. The reportable items for these
segments for the years 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating information--
Gas operations:
Operating revenues $ 807,239 $ 799,395 $ 691,402
Operating expenses 719,453 702,735 605,805
---------- ---------- ----------
Operating income 87,786 96,660 85,597
---------- ---------- ----------
Electric operations:
Operating revenues 1,017,083 1,022,231 1,030,923
Operating expenses 705,296 721,603 723,159
---------- ---------- ----------
Operating income 311,787 300,628 307,764
---------- ---------- ----------
Water operations:
Operating revenues 60,743 -- --
Operating expenses 42,845 -- --
---------- ---------- ----------
Operating income 17,898 -- --
---------- ---------- ----------
Products and Services operations:
Energy marketing:
Operating revenues 533,810 91,869 7,892
Operating expenses 533,728 95,499 16,298
---------- ---------- ----------
Operating income 82 (3,630) (8,406)
---------- ---------- ----------
Other:
Operating revenues 167,666 74,453 39,091
Operating expenses 174,666 81,803 42,169
---------- ---------- ----------
Operating income (7,000) (7,350) (3,078)
---------- ---------- ----------
Total 410,553 386,308 381,877
Other income, net 14,619 11,986 1,471
Less--interest and other charges 129,298 114,435 105,986
Less--income taxes 105,025 107,125 101,897
---------- ---------- ----------
Net income per Consolidated Statement
of Income 190,849 176,734 175,465
Dividend requirements on preferred shares -- 119 3,063
---------- ---------- ----------
Balance available for common shareholders $ 190,849 $ 176,615 $ 172,402
========== ========== ==========
Other information--
Depreciation and amortization expense:
Electric $ 153,843 $ 146,444 $ 139,432
Gas 73,017 68,584 61,705
Water 5,311 -- --
Products and Services 17,633 18,965 5,822
---------- ---------- ----------
Total $ 249,804 $ 233,993 $ 206,959
========== ========== ==========
Construction expenditures:
Electric $ 115,012 $ 146,659 $ 132,273
Gas 64,009 61,222 60,693
Water 39,910 -- --
---------- ---------- ----------
Total $ 218,931 $ 207,881 $ 192,966
========== ========== ==========
Investment information--
Identifiable assets(a):
Electric $2,507,905 $2,575,995 $2,586,122
Gas 965,473 1,006,270 890,192
Water 510,177 -- --
---------- ---------- ----------
Total 3,983,555 3,582,265 3,476,314
Other corporate assets 953,478 706,618 523,206
---------- ---------- ----------
Total assets $4,937,033 $4,288,883 $3,999,520
========== ========== ==========
</TABLE>
(a) Utility plant less accumulated provision for depreciation and amortization,
materials and supplies, electric production fuel, natural gas in storage, fuel
and gas cost adjustment clauses, unamortized R. M. Schahfer Units 17 and 18
carrying charges and deferred depreciation, Bailly scrubber carrying charges and
deferred depreciation, and FERC Order No. 636 transition costs.
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of NIPSCO Industries, Inc.:
We have audited the accompanying consolidated balance sheet and consolidated
statements of capitalization and long-term debt of NIPSCO Industries, Inc. (an
Indiana corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, common shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements and the schedules referred to below are the
responsibility of Industries' management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules 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 December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules appearing in Exhibit 99.2
and Exhibit 99.3 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Chicago, Illinois
January 30, 1998 Arthur Andersen LLP
SELECTED SUPPLEMENTAL INFORMATION
GAS STATISTICS
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------ -------- --------
<S> <C> <C> <C>
Operating Revenues ($000's):
Residential (including home heating) $479,461 $422,646 $407,233
Commercial 164,359 141,193 132,647
Industrial 78,531 70,062 63,355
Gas transported for others 43,226 33,536 64,255
Other* 41,662 131,958 23,912
---------- ---------- ----------
Total $807,239 $799,395 $691,402
========== ========== ==========
Deliveries in dth (000's):
Residential (including home heating) 79,816 84,146 77,536
Commercial 31,640 32,164 29,268
Industrial 16,989 17,732 16,260
Gas transported for others 203,728 194,397 191,571
Other 14,201 8,263 1,301
---------- ---------- ----------
Total 346,374 336,702 315,936
========== ========== ==========
Customers Served--End of Year:
Residential (including home heating) 669,833 659,742 648,207
Commercial 55,124 54,300 53,254
Industrial 4,408 4,234 4,185
Other 84 80 75
---------- ---------- ----------
Total 729,449 718,356 705,721
========== ========== ==========
</TABLE>
*Includes deferred gas cost revenue of $(11,075), $95,843 and $11,351,
respectively.
SELECTED SUPPLEMENTAL INFORMATION
ELECTRIC STATISTICS
<TABLE>
Year Ended December 31, 1997 1996 1995
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Operating Revenues ($000's):
Residential $272,619 $269,906 $276,575
Commercial 253,299 247,808 244,776
Industrial 416,741 428,273 430,579
Street lighting 8,697 8,549 8,428
Sales for resale 44,958 43,272 40,425
Other** 20,769 24,423 30,140
---------- ---------- ----------
Total $1,017,083 $1,022,231 $1,030,923
========== ========== ==========
Sales in kilowatt-hours (000's):
Residential 2,723,990 2,700,234 2,797,247
Commercial 2,974,703 2,886,940 2,863,879
Industrial 8,971,926 9,318,353 9,552,777
Street lighting 57,764 56,413 55,515
Sales for resale 1,178,847 1,678,346 1,574,041
Other 84,935 100,265 80,894
---------- ---------- ----------
Total 15,992,165 16,740,551 16,924,353
========== ========== ==========
Customers Served--End of Year:
Residential 368,907 365,011 360,425
Commercial 43,802 42,911 42,228
Industrial 2,764 2,725 2,697
Other 861 874 873
---------- ---------- ----------
Total 416,334 411,521 406,223
========== ========== ==========
</TABLE>
**Includes deferred fuel cost revenue of $(5,223), $1,980 and $8,688,
respectively.
<PAGE>
WATER STATISTICS
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------ -------- --------
<S> <C> <C> <C>
Operating Revenues ($000's):***
Residential $39,570 $ - $ -
Commercial 14,763 - -
Industrial 3,015 - -
Other 3,395 - -
------- -------- --------
Total $60,743 $ - $ -
======= ======== ========
Sales in millions of gallons (000's):***
Residential 18,095 - -
Commercial 10,345 - -
Industrial 3,310 - -
Other 3,816 - -
------- -------- --------
Total 35,566 - -
======= ======== ========
Customers Served--End of Year:
Residential 225,627 - -
Commercial 17,083 - -
Industrial 347 - -
Other 3,586 - -
------- -------- --------
Total 246,643 - -
======= ======== ========
</TABLE>
***Amounts are for the period April 1997 through December 1997.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Gas ($000's) $807,239 $799,395 $691,402
Electric ($000's) 1,017,083 1,022,231 1,030,923
Water ($000's) 60,743 -- --
Products and Services ($000's) 701,476 166,322 46,983
---------- ---------- ----------
Total Operating Revenues ($000's) $2,586,541 $1,987,948 $1,769,308
Operating Margin ($000's) $1,210,927 $1,115,965 $1,074,820
Operating Income ($000's) $410,553 $386,308 $381,877
Net Income ($000's) $190,849 $176,734 $175,465
Shares outstanding at year enda 124,312,664 119,611,322 124,759,192
Number of common shareholders 37,373 35,339 37,299
Basic earnings per average common sharea $1.54 $1.44 $1.36
Diluted earnings per average common sharea $1.53 $1.43 $1.35
Return on average common equity 16.1% 15.9% 15.5%
Times interest earned (pre-tax) 3.43 3.55 3.75
Dividends paid per sharea $0.90 $0.84 $0.78
Dividend payout ratio 58.4% 58.3% 57.4%
Market values during the year:a
High $24.938 $20.125 $19.250
Low $19.000 $17.625 $14.625
Close $24.719 $19.813 $19.125
Book value of common sharesa $10.17 $9.20 $9.00
Market-to-book ratio at year enda 243.1% 215.4% 212.5%
Total Assets ($000's) $4,937,033 $4,288,883 $3,999,520
Utility construction expenditures ($000's)b $218,931 $207,881 $192,966
Capitalization:
Common shareholders' equity ($000's) $1,264,788 $1,100,501 $1,122,215
Preferred and preference stock-
Northern Indiana Public Service Company:
Series without mandatory redemption
provision ($000's) $81,123 $81,126 $81,325
Series with mandatory redemption
provisions ($000's) $58,841 $61,246 $63,651
NIPSCO Industries, Inc.:
Series with mandatory redemption
provision ($000's) $ -- $ -- $35,000
Indianapolis Water Company:
Series without mandatory redemption
provision ($000's) $4,497 $ -- $ --
Long-Term debt ($000's) $1,667,925 $1,127,106 $1,175,728
----------- ---------- ----------
Total Capitalization ($000's) $ 3,077,174 $2,369,979 $2,477,919
Number of employees 5,984 4,168 4,356
Notes: /a/Amounts restated to reflect two-for-one stock split. /b/Including AFUDC.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 681,909 $ 714,229 $ 666,221 $ 601,920 $ 625,159 $ 677,262 $ 620,723 $ 581,130
994,492 963,643 916,135 933,241 895,836 882,303 903,461 870,499
-- -- -- -- -- -- -- --
91,628 59,387 -- -- -- -- -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 1,768,029 $ 1,737,259 $ 1,582,356 $ 1,535,161 $ 1,520,995 $ 1,559,565 $ 1,524,184 $ 1,451,629
$ 1,014,566 $ 1,001,542 $ 927,089 $ 919,951 $ 885,262 $ 900,035 $ 863,213 $ 777,573
$ 353,452 $ 355,918 $ 246,217 $ 254,354 $ 247,777 $ 252,807 $ 257,923 $ 192,415
$ 163,987 $ 156,140 $ 136,648 $ 133,388 $ 125,361 $ 72,112c $ 103,449 $ 38,876
127,810,778 131,657,676 131,516,700 133,343,230 137,748,458 138,738,984 146,620,420 146,486,200
39,172 41,038 38,097 39,346 41,285 43,763 47,324 50,074
$ 1.24 $ 1.15 $ 1.00 $ 0.97 $ 0.90 $ 0.50c $ 0.70 $ 0.26
$ 1.23 $ 1.15 $ 0.99 $ 0.96 $ 0.89 $ 0.49c $ 0.70 $ 0.26
14.6% 14.4% 13.1% 12.9% 12.7% 7.2%c 10.4% 4.1%
3.56 3.47 3.17 2.93 2.81 2.02c 2.38 1.65
$ 0.72 $ 0.66 $ 0.62 $ 0.58 $ 0.52 $ 0.42 $ 0.30 $ 0.08
58.1% 57.4% 62.0% 59.8% 57.8% 84.0%c 42.9% 30.8%
$ 16.500 $ 17.438 $ 13.313 $ 13.500 $ 9.625 $ 9.813 $ 7.063 $ 6.500
$ 13.063 $ 13.063 $ 11.250 $ 9.250 $ 7.875 $ 6.563 $ 4.313 $ 4.000
$ 14.875 16.438 $ 13.250 $ 12.875 $ 9.438 $ 9.688 $ 6.938 $ 4.250
$ 8.67 $ 8.31 $ 7.87 $ 7.59 $ 7.30 $ 6.96 $ 7.02 $ 6.56
171.6% 197.8% 168.4% 169.6% 129.3% 139.2% 98.9% 64.8%
$ 3,947,138 $ 3,912,324 $ 3,807,941 $ 3,647,557 $ 3,625,181 $ 3,657,718 $ 3,684,721 $ 3,821,690
$ 202,245 $ 180,852 $ 172,329 $ 168,958 $ 152,280 $ 150,786 $ 116,874 $ 156,750
$ 1,107,848 $ 1,094,672 $ 1,034,530 $ 1,011,666 $ 1,005,982 $ 965,437 $ 1,028,554 $ 961,562
$ 86,389 $ 97,753 $ 97,917 $ 98,710 $ 99,374 $ 99,874 $ 99,937 $ 191,392
$ 66,057 $ 68,462 $ 70,668 $ 53,978 $ 59,358 $ 66,309 $ 75,189 $ 105,395
$ 35,000 $ 35,000 $ 35,000 $ 35,000 $ 35,000 $ -- $ -- $ --
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
$ 1,180,338 $ 1,192,500 $ 1,054,454 $ 1,068,708 $ 1,165,682 $ 1,261,760 $ 1,308,303 $ 1,401,326
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 2,475,632 $ 2,488,387 $ 2,292,569 $ 2,268,062 $ 2,365,396 $ 2,393,380 $ 2,511,983 $ 2,659,675
4,441 4,602 4,648 4,600 4,547 4,825 4,946 5,172
</TABLE>
/c/Earnings per share were reduced by $0.36 due to the $82.0 million refund,
less associated tax benefits of $30.3 million, related to the Bailly N1
generating unit.
<PAGE>
EXHIBIT 99.2
NIPSCO Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
INDEX
Page
----
<S> <C>
Condensed Financial Information of NIPSCO Industries, Inc. and Subsidiaries.
--Schedule I--Condensed Balance Sheet............................................................. 1
--Schedule I--Condensed Statement of Income....................................................... 2
--Schedule I--Condensed Statement of Cash Flows................................................... 3
--Notes to Condensed Financial Statements......................................................... 4
</TABLE>
<PAGE>
EXHIBIT 99.2
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
---------------------------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
------
Property:
Property in service................................................................. $ 2,625 $ 2,620
Construction work in progress....................................................... 5,147 76
Less: accumulated depreciation...................................................... 713 541
---------- ----------
Total property................................................................. 7,059 2,155
---------- ----------
Investments (principally investments in wholly-owned subsidiaries).................. 1,407,789 1,097,173
---------- ----------
Current Assets:
Cash and cash equivalents........................................................... 6,172 455
Amounts receivable from subsidiaries................................................ 85,056 75,508
Prepayments......................................................................... 21,971 3,647
---------- ----------
Total current assets........................................................... 113,199 79,610
---------- ----------
Other (principally notes receivable from associated companies)........................... 323,672 303,373
---------- ----------
$1,851,719 $1,482,311
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common shares....................................................................... $ 870,930 $870,930
Additional paid-in capital.......................................................... 89,768 32,868
Retained earnings................................................................... 667,790 591,370
Less: Treasury shares.............................................................. 363,943 392,995
Other............................................................................ (1,813) 1,532
Currency translation adjustment................................................. 1,570 140
---------- ----------
Total capitalization........................................................... 1,264,788 1,100,501
---------- ----------
Current Liabilities:
Dividends declared on common and preferred stock.................................... 29,535 27,053
Amounts payable to subsidiaries..................................................... 31,818 30,340
Other............................................................................... 2,589 5,085
---------- ----------
Total current liabilities..................................................... 63,942 62,478
---------- ----------
Other (principally notes payable to associated companies)................................ 522,989 319,332
---------- ----------
Commitments and Contingencies (Note 3):
$1,851,719 $1,482,311
========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
this statement.
1
<PAGE>
EXHIBIT 99.2
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Equity in net earnings of subsidiaries.............................. $ 202,680 $ 185,106 $ 180,827
------------ ------------ ------------
Other income (deductions):
Administrative and general expense............................. (12,117) (10,167) (9,854)
Interest income................................................ 27,272 21,443 15,575
Interest expense............................................... (37,652) (20,604) (12,274)
Other, net..................................................... (143) 1,543 (663)
------------ ------------ ------------
(22,640) (7,785) (7,216)
------------ ------------ ------------
Net income before income taxes...................................... 180,040 177,321 173,611
Income taxes........................................................ (10,809) 587 (1,854)
------------ ------------ ------------
Net income.......................................................... 190,849 176,734 175,465
Dividend requirements on preferred shares........................... -- 119 3,063
------------ ------------ ------------
Balance available for common shareholders........................... $ 190,849 $ 176,615 $ 172,402
============ ============ ============
Average common shares outstanding--basic*........................... 123,849,126 122,381,500 126,562,354
Basic earnings per average common share*............................ $ 1.54 $ 1.44 $ 1.36
============ ============ ============
Diluted earnings per average common share*.......................... $ 1.53 $ 1.43 $ 1.35
============ ============ ============
</TABLE>
*Amounts restated to reflect two-for-one stock split payable February 20, 1998,
to shareholders of record at the close of business on January 30, 1998.
The accompanying notes to condensed financial statements are an integral part of
this statement.
2
<PAGE>
EXHIBIT 99.2
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
--------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Net cash provided by operating activities........................ $ 147,712 $ 183,867 $ 184,300
--------- --------- ----------
Cash flows provided by (used in) investing activities:
Acquisition of IWC Resources, net of cash acquired (288,932) -- --
Acquisition of minority interest................................. (5,641) -- --
Capital expenditures............................................. (5,000) (22) (100)
Sale of property................................................. (5) 83 935
--------- --------- ----------
Net cash provided by (used in) investing activities.... (299,578) 61 835
--------- --------- ----------
Cash flows provided by (used in) financing activities:
Issuance of common shares................................... 218,566 5,716 7,389
Increase in notes payable to subsidiaries................... 205,396 133,298 41,211
Increase (decrease) in note receivable from subsidiaries.... (21,709) (82,740) (58,479)
Redemption of cumulative preferred shares with mandatory
redemption provisions..................................... -- (35,000) --
Cash dividends paid on common shares........................ (111,593) (103,190) (99,043)
Cash dividends paid on preferred shares..................... -- (766) (3,063)
Acquisition of treasury shares.............................. (133,077) (105,498) (69,183)
--------- --------- ----------
Net cash provided by (used in) financing activities.... 157,583 (188,180) (181,168)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents............. 5,717 (4,252) 3,967
Cash and cash equivalents at beginning of year................... 455 4,707 740
--------- --------- ----------
Cash and cash equivalents at end of year......................... $ 6,172 $ 455 $ 4,707
========= ========= ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
this statement.
3
<PAGE>
EXHIBIT 99.2
NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Dividends from Subsidiaries
Cash dividends paid to NIPSCO Industries, Inc. (Industries) by its
consolidated subsidiaries were (in thousands of dollars): $188,175, $184,750 and
$183,475 in 1997, 1996, and 1995, respectively.
2. Support Agreement
The obligations of NIPSCO Capital Markets, Inc. (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 Public
Service Company (Northern Indiana) which are owned by Industries. Under the
terms of the Support Agreement, in addition to the cash flow of cash dividends
paid to Industries by any of its consolidated subsidiaries, the assets of
Industries, other than the stock and assets of Northern Indiana, are available
as recourse to holders of Capital Markets' securities. The carrying value of the
assets of Industries, other than the stock and assets of Northern Indiana,
reflected in the consolidated financial statements of Industries, was
approximately $1.3 billion at December 31, 1997.
3. Contingencies
Industries and its subsidiaries are parties to various pending proceedings,
including suits and claims against them for personal injury, death, and property
damage. Such proceedings and suits, and the amounts involved, are routine
litigation and proceedings for the kinds of businesses conducted by Industries
and its subsidiaries.
4. Changes in Accounting Principles
At December 31, 1997, Industries adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share." As a result of adopting SFAS No.
128, previously reported earnings per share information has been restated. The
effect of this accounting change on previously reported earnings per share data
is insignificant.
The net income, preferred dividends and shares used to compute basic and diluted
earnings per share is presented in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding 123,849,126 122,381,500 126,562,354
=========== =========== ===========
Net Income to be Used to Compute Basic Earnings per Share:
Net Income $190,849 $176,734 $175,465
Dividend requirements on Preferred Shares -- 119 3,063
Balance Available for Common Shareholders $190,849 $176,615 $172,402
======== ======== ========
Basic Earning per Common Share $ 1.54 $ 1.44 $ 1.36
======== ======== ========
Diluted
Weighted Average Number of Shares
Average Common Shares Outstanding 123,849,126 122,381,500 126,562,354
Dilutive effective for Nonqualified Stock Options 374,344 323,367 238,286
------- ------- -------
Weighted Average Shares a 124,223,470 122,704,867 126,800,640
=========== =========== ===========
Net Income to be Used to Compute Diluted Earnings per Share
Net Income $190,849 $176,734 $175,465
Dividend requirements on Preferred Shares -- 119 3,063
Balance Available for common Shareholders $190,849 $176,615 $172,402
======== ======== ========
Diluted Earnings per Common Share $ 1.53 $ 1.43 $ 1.35
======== ======== ========
</TABLE>
5. STOCK SPLIT
On December 16, 1997, the Board of Directors authorized a two-for-one split
of Industries' common stock. Shareholders will receive one additional common
share for each common share held. The stock split will be payable February
20, 1998, to shareholders of record at the close of business on January 30,
1998. All references to number of shares reported for the period including
per share amounts and stock option data of Industries' common stock have
been restated to reflect the two-for-one stock split. The common share cash
dividend to be paid February 20, 1998 is payable on pre-split common shares.
6. 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 10.6 million
Industries' common shares. Industries accounted for the acquisition as a
purchase. The purchase price was allocated to the assets and liabilities
acquired based on their fair values.
7. PURCHASE OF BAY STATE GAS COMPANY
On December 18, 1997, Industries and Bay State Gas Company (Bay State)
signed a definitive merger agreement under which Industries will acquire all
of the common stock of Bay State in a stock-for-stock transaction valued at
$40 per Bay State share. The transaction is valued at approximately $780
million ($540 million equity and $240 million in debt and preferred stock).
Bay State shareholders will have the option of taking up to 50 percent of
the total purchase price in cash. Consummation of the merger is subject to
certain closing conditions, including the approval by the shareholders of
Bay State as well as the Securities and Exchange Commission, FERC and state
regulatory agencies in Massachusetts, New Hampshire and Maine. The
transaction is expected to be completed in late 1998.
Bay State, one of the largest natural gas utilities in New England, provides
natural gas distribution service to more than 300,000 customers in
Massachusetts, New Hampshire and Maine. The combined company will be one of
the 10 largest natural gas distribution systems in the nation, servicing
more than 1 million gas customers. In addition, Industries and Bay State
anticipate entering into a joint marketing agreement early in 1998 that will
expand the operations of Bay State's non-regulated energy service companies.
4
<PAGE>
EXHIBIT 99.3
NIPSCO INDUSTRIES, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ----------- ------------------------------ ------------ -------------
<S> <C> <C> <C> <C>
Additions
------------------------------ Deductions
Charged for Purposes
to Charged for which
Balance Costs and to Other Reserves Balance
Description Jan 1, 1997 IWCR Expenses Accounts were Created Dec. 31, 1997
----------- ----------- ---- --------- -------- ------------ -------------
(Dollars in Thousands)
Reserves Deducted in Consolidated Balance
Sheet from Assets to Which They Apply:
Reserve for accounts receivable.................. $ 5,569 $ 25 $ 6,573 $ -- $ 6,280 $ 5,887
Reserve for investments, at equity............... $ 1,953 $ -- $ -- $ -- $ 191 $ 1,762
Reserve for investments, at cost................. $ -- $ -- $ -- $ -- $ -- $ --
Reserves Classified Under Reserve Section of
Consolidated Balance Sheet:
Injuries and damages reserve..................... $ 4,376 $757 $ 6,603 $ -- $ 5,237 $ 6,499
Environmental reserves........................... $16,789 $ -- $ 9,489 $ -- $ 6,912 $19,366
Miscellaneous operating reserves................. $ 4,471 $ -- $ 30 $ -- $ 573 $ 3,928
</TABLE>
1
<PAGE>
EXHIBIT 99.3
NIPSCO INDUSTRIES, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Col.A Col. B Col. C Col. D Col. E
----- ------ --------------------- ------ ------
<S> <C> <C> <C> <C>
Additions
--------------------- Deductions
Charged for Purposes
Balance to Charged for which Balance
Jan 1, Costs and to Other Reserves Dec. 31,
Description 1996 Expenses Accounts were Created 1996
----------- ------- --------- -------- ------------- --------
(Dollars in Thousands)
Reserves Deducted in Consolidated Balance Sheet from
Assets to Which They Apply:
Reserve for accounts receivable............................. $7,264 $ 6,912 $ -- $8,607 $ 5,569
Reserve for investments, at equity.......................... $ 850 $ 1,103 $ -- $ -- $ 1,953
Reserves Classified Under Reserve Section of
Consolidated Balance Sheet:
Injuries and damages reserve................................ $1,837 $ 4,875 $ -- $2,336 $ 4,376
Environmental reserves...................................... $5,006 $15,862 $ -- $4,079 $16,789
Miscellaneous operating reserves............................ $4,091 $ 380 $ -- $ -- $ 4,471
</TABLE>
2
<PAGE>
EXHIBIT 99.3
NIPSCO INDUSTRIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------- ------------------- ------------ ------
Additions
------------------- Deductions
Charged for Purposes
Balance to Charged for which Balance
Jan. 1, Costs and to Other Reserves Dec. 31,
Description 1995 Expenses Accounts were Created 1995
----------- ------ --------- -------- ------------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Reserves Deducted in Consolidated Balance Sheet from
Assets to Which They Apply:
Reserve for accounts receivable.......................... $4,899 $6,759 $ -- $4,394 $7,264
Reserve for investments, at equity....................... $2,850 $ -- $ -- $2,000 $ 850
Reserves Classified Under Reserve Section of
Consolidated Balance Sheet:
Injuries and damages reserve............................. $2,538 $2,800 $ -- $3,501 $1,837
Environmental reserves................................... $3,610 $3,188 $ -- $1,792 $5,006
Miscellaneous operating reserves......................... $4,061 $ 30 $ -- $ -- $4,091
</TABLE>
3
