SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-9779
NIPSCO Industries, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1719974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue, Merrillville, Indiana 46410
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 853-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
As of April 30, 1998, 122,106,038 common shares were outstanding.
<PAGE>
NIPSCO Industries, Inc.
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Public Accountants
To The Board of Directors of
NIPSCO Industries, Inc.:
We have audited the accompanying consolidated balance sheet of NIPSCO
Industries, Inc. (an Indiana corporation) and subsidiaries as of March 31, 1998,
and December 31, 1997, and the related consolidated statements of income, common
shareholders' equity and cash flows for the three and twelve month periods ended
March 31, 1998 and 1997. These consolidated financial statements are the
responsibility of Industries' management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NIPSCO
Industries, Inc. and subsidiaries as of March 31, 1998, and December 31, 1997,
and the results of their operations and their cash flows for the three and
twelve month periods ended March 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
April 28, 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
March 31, December 31,
Assets 1998 1997
========== ==========
<S> <C> <C>
(In thousands)
Property, Plant and Equipment:
Utility Plant, (Note 2)(including Construction Work in
Progress of $205,460 and $188,710, respectively)
Electric $ 4,082,197 $ 4,066,568
Gas 1,403,152 1,395,140
Water 618,279 604,018
Common 349,531 351,350
--------------- -----------------
6,453,159 6,417,076
Less -Accumulated provision for depreciation
and amortization 2,806,186 2,759,945
--------------- -----------------
Total Utility Plant 3,646,973 3,657,131
--------------- -----------------
Other property, at cost, net of accumulated provision
for depreciation 76,264 96,028
--------------- -----------------
Total Property, Plant and Equipment 3,723,237 3,753,159
--------------- -----------------
Investments:
Investments, at equity (Note 2) 108,008 82,855
Investments, at cost 33,212 31,771
Other investments 26,729 24,499
--------------- -----------------
Total Investments 167,949 139,125
--------------- -----------------
Current Assets:
Cash and cash equivalents 40,376 30,780
Accounts receivable, less reserve of $5,727 and
$5,887, respectively (Note 2) 243,971 231,580
Other receivables (Note 24) 127,821 107,231
Fuel adjustment clause (Note 2) 1,111 2,679
Gas cost adjustment clause (Note 2) 37,972 89,991
Materials and supplies, at average cost 62,081 60,085
Electric production fuel, at average cost 21,241 18,837
Natural gas in storage (Note 2) 21,023 61,436
Prepayments and other 32,248 28,089
--------------- -----------------
Total Current Assets 587,844 630,708
--------------- -----------------
Other Assets:
Regulatory assets (Note 2) 208,074 211,513
Intangible assets, net of accumulated amortization (Note 2) 67,436 68,175
Prepayments and other (Note 9) 145,952 134,353
--------------- -----------------
Total Other Assets 421,462 414,041
--------------- -----------------
$ 4,900,492 $ 4,937,033
=============== ================
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
March 31, December 31,
Capitalization and Liabilities 1998 1997
=========== ===========
(In thousands)
<S> <C> <C>
Capitalization:
Common shareholders' equity
(See accompanying statement) $ 1,276,530 $ 1,264,788
Cumulative preferred stocks (Note 11) -
Series without mandatory redemption provisions (Note 12) 85,619 85,620
Series with mandatory redemption provisions (Note 13) 58,841 58,841
Long-term debt excluding amounts due within one
year (Note 19) 1,670,761 1,667,925
----------------- -----------------
Total Capitalization 3,091,751 3,077,174
----------------- -----------------
Current Liabilities:
Current portion of long-term debt (Note 20) 55,729 54,621
Short-term borrowings (Note 21) 142,802 212,639
Accounts payable 203,890 226,751
Dividends declared on common and preferred stocks 30,926 30,784
Customer deposits 22,684 22,091
Taxes accrued 137,086 77,573
Interest accrued 23,823 19,124
Accrued employment costs 42,503 58,799
Other accruals 43,924 47,930
----------------- -----------------
Total Current Liabilities 703,367 750,312
----------------- -----------------
Other:
Deferred income taxes (Note 8) 642,865 651,815
Deferred investment tax credits, being amortized over
life of related property (Note 8) 103,717 105,538
Deferred credits 78,017 73,715
Customer advances and contributions in aid of
construction (Note 2) 110,674 110,145
Accrued liability for postretirement benefits (Note 10) 134,365 132,919
Other noncurrent liabilities 35,736 35,415
----------------- -----------------
Total Other 1,105,374 1,109,547
----------------- -----------------
Commitments and Contingencies
(Notes 5, 7, 22, 23 and 24)
$ 4,900,492 $ 4,937,033
========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Income
(Dollars in thousands, except for per share amounts)
Three Months Twelve Months
Ended March 31, Ended March 31,
----------------------------------------------------
1998 1997 1998 1997
======== ======== ======== ========
<S> <C> <C> <C> <C>
Operating Revenues: (Notes 2, 6 and 26)
Electric $ 323,834 $ 260,657 $ 1,249,508 $ 1,034,464
Gas 242,735 333,400 716,574 805,191
Water 17,709 0 78,452 0
Products and Services 195,066 65,893 661,401 192,822
---------------------------- ----------------------------
779,344 659,950 2,705,935 2,032,477
---------------------------- ----------------------------
Cost of Sales: (Note 2)
Fuel for electric generation 55,594 58,408 235,734 234,421
Power purchased 90,443 23,888 271,586 65,678
Gas costs 138,428 214,840 418,875 499,359
Products and Services 175,945 50,386 562,307 128,374
---------------------------- ----------------------------
460,410 347,522 1,488,502 927,832
---------------------------- ----------------------------
Operating Margin 318,934 312,428 1,217,433 1,104,645
---------------------------- ----------------------------
Operating Expenses and Taxes (except income):
Operation 96,171 85,704 400,720 340,168
Maintenance (Note 2) 18,947 18,484 77,015 73,926
Depreciation and amortization (Note 2) 63,274 58,344 254,734 235,911
Taxes (except income) 23,428 21,310 85,883 75,808
---------------------------- ----------------------------
201,820 183,842 818,352 725,813
---------------------------- ----------------------------
Operating Income 117,342 128,586 399,309 378,832
---------------------------- ----------------------------
Other Income (Deductions) (Note 2) 8,448 9,403 14,813 21,156
---------------------------- ----------------------------
Interest and Other Charges:
Interest on long-term debt 27,274 19,803 112,969 82,499
Other interest 1,908 4,968 7,331 18,672
Amortization of premium, reacquisition premium,
discount and expense on debt, net 1,148 1,133 4,733 4,579
Dividend requirements on preferred stock
of subsidiaries 2,167 2,167 8,691 8,680
---------------------------- ----------------------------
32,497 28,071 133,724 114,430
---------------------------- ----------------------------
Income before income taxes 93,065 109,918 280,170 285,558
---------------------------- ----------------------------
Income taxes 32,343 39,080 99,437 105,472
---------------------------- ----------------------------
Net Income $ 60,722 $ 70,838 $180,733 $180,086
======== ======== ======== ========
Average common shares outstanding - basic 123,872,613 119,116,686 125,021,821 121,140,716
Earnings per average common share - basic $ 0.49 $ 0.59 $ 1.44 $ 1.48
======== ======== ======== ========
Earnings per average common share - diluted $ 0.48 $ 0.59 $ 1.44 $ 1.48
======== ======== ======== ========
Dividends declared per common share $ 0.240 $ 0.225 $ 0.930 $ 0.870
======== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement Of Common Shareholders= Equity
Additional
(Dollars in thousands) Common Treasury Paid-in Retained
Three Months Ended Shares Shares Capital Earnings Other
======================== ========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 870,930 $ (392,995) $ 32,868 $ 591,370 $ (4,280)
Comprehensive Income:
Net income 70,838
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $18)
Gain (loss) on foreign currency
translation:
Unrealized
Total Comprehensive Income
Dividends:
Common shares (26,273)
Treasury shares acquired (56,491) 35
Issued:
IWC Resources Corporation
acquisition 152,409 55,008
Employee stock purchase plan 75 113
Long-term incentive plan 1,022 94 (351)
Amortization of
unearned compensation 503
Other (35)
----------- ----------- ---------- ---------- ----------
Balance, March 31, 1997 $ 870,930 $ (295,980) $ 88,118 $ 635,900 $ (4,128)
========== =========== ========== ========== ==========
Balance, January 1, 1998 $ 870,930 $ (363,943) $ 89,768 $ 667,790 $ (2,624)
Comprehensive Income:
Net income 60,722
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $684)
Gain (loss) on foreign currency
translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (29,929)
Treasury shares acquired (23,298) 2
Issued:
Employee stock purchase plan 57 120
Long-term incentive plan 3,175 (12) (34)
Amortization of
unearned compensation 499
Other (655)
----------- ----------- ---------- ---------- ----------
Balance, March 31, 1998 $ 870,930 $ 384,009) $ 89,878 $ 697,928 $ (2,159)
========== ========== ========== =========== ==========
<CAPTION>
Accumulated Shares
Other --------------------------
Three Months Ended Comprehensive Comprehensive Common Treasury
(continued) Income Total Income Shares Shares
======================== ========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 2,608 $ 1,100,501 147,784,218 (28,172,896)
Comprehensive Income:
Net income 70,838 70,838
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $18) 29 29 29
Gain (loss) on foreign currency
translation:
Unrealized (361) (361) (361)
----------
Total Comprehensive Income $ 70,506
==========
Dividends:
Common shares (26,273)
Treasury shares acquired (56,456) (2,852,228)
Issued:
IWC Resources Corporation
acquisition 207,417 10,580,764
Employee stock purchase plan 188 9,508
Long-term incentive plan 765 71,100
Amortization of
unearned compensation 503
Other (35)
---------- ------------ ----------- -----------
Balance, March 31, 1997 $ 2 ,276 $ 1,297,116 147,784,218 (20,363,752)
========== ============ ============ ===========
Balance, January 1, 1998 $ 2,867 $ 1,264,788 147,784,218 (23,471,554)
Comprehensive Income:
Net income 60,722 $ 60,722
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $684) 1,119 1,119 1,119
Gain (loss) on foreign currency
translation:
Unrealized 162 162 162
Realized (186) (186) (186)
-----------
Total Comprehensive Income $ 61,817
===========
Dividends:
Common shares (29,929)
Treasury shares acquired (23,296) (910,574)
Issued:
Employee stock purchase plan 177 7,158
Long-term incentive plan 3,129 197,044
Amortization of
unearned compensation 499
Other (655)
------------ -------------- ------------- ------------
Balance, March 31, 1998 $ 3,962 $ 1,276,530 147,784,218 (24,177,926)
============ ============= ============= ============
<CAPTION>
Additional
(Dollars in thousands) Common Treasury Paid-in Retained
Twelve Months Ended Shares Shares Capital Earnings Other
======================== ========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1996 $ 870,930 $ (330,942) $ 32,541 $ 560,401 $ (6,126)
Comprehensive Income:
Net income 180,086
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $709)
Gain (loss) on foreign currency
translation:
Unrealized
Total Comprehensive Income
Dividends:
Common shares (104,460)
Treasury shares acquired (123,501) 35
Issued:
IWC Resources Corporation
acquisition 152,409 55,008
Employee stock purchase plan 278 390
Long-term incentive plan 5,776 126 (461)
Amortization of
unearned compensation 2,459
Other 18 (127)
----------- ------------- ------------ ------------ ------------
Balance, March 31, 1997 $ 870,930 $ (295,980) $ 88,118 $ 635,900 $ (4,128)
----------- ------------- ------------ ------------ ------------
Net income 180,733
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $1,699)
Gain (loss) on foreign currency
translation:
Unrealized
Realized
Total Comprehensive Income
Dividends:
Common shares (117,959)
Treasury shares acquired (99,884) (33)
Issued:
Acquisition of minority interest 4,118 1,351
Employee stock purchase plan 255 431
Long-term incentive plan 7,482 12 (126)
Amortization of
unearned compensation 2,095
Other (1) (746)
----------- ------------ ------------ ------------ ------------
Balance, March 31, 1998 $ 870,930 $ (384,009) $ 89,878 $ 697,928 $ (2,159)
========== ========== =========== =========== ===========
<CAPTION>
Accumulated Shares
Other ---------------------------
Three Months Ended Comprehensive Comprehensive Common Treasury
(continued) Income Total Income Shares Shares
======================== ========== ========== ========== ========== ==========
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1996 $ (454) $ 1,126,350 147,784,218 (25,006,726)
Comprehensive Income:
Net income 180,086 $ 180,086
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $709) 1,161 1,161 1,161
Gain (loss) on foreign currency
translation:
Unrealized 1,569 1,569 1,569
------------
Total Comprehensive Income $ 182,816
============
Dividends:
Common shares (104,460)
Treasury shares acquired (123,466) (6,392,082)
Issued:
IWC Resources Corporation
acquisition 207,417 10,580,764
Employee stock purchase plan 668 34,992
Long-term incentive plan 5,441 419,300
Amortization of
unearned compensation 2,459
Other (109)
------------ ------------ ------------ ------------
Balance, March 31, 1997 $ 2,276 $ 1,297,116 147,784,218 (20,363,752)
------------ ------------ ------------ ------------
Comprehensive Income:
Net income 180,733 $ 180,733
Other comprehensive income,
net of tax:
Unrealized gain (net of income
tax of $1,699) 2,779 2,779 2,779
Gain (loss) on foreign currency
translation:
Unrealized (907) (907) (907)
Realized (186) (186) (186)
-----------
Total Comprehensive Income $ 182,419
===========
Dividends:
Common shares (117,959)
Treasury shares acquired (99,917) (4,595,274)
Issued:
Acquisition of minority interest 5,469 270,064
Employee stock purchase plan 686 32,026
Long-term incentive plan 7,368 479,010
Amortization of
unearned compensation 2,095
Other (747)
------------ ------------ ------------ ------------
Balance, March 31, 1998 $ 3,962 $ 1,276,530 147,784,218 (24,177,926)
============ =========== ============ ============
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
(In thousands)
Three Months Twelve Months
Ended March 31, Ended March 31,
--------------------- ----------------------
1998 1997 1998 1997
======== ======== ======== ========
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 60,722 $ 70,838 $ 180,733 $ 180,086
Adjustments to reconcile net income
to net cash:
Depreciation and amortization 63,274 58,344 254,734 238,756
Deferred federal and state income
taxes, net (30,040) (12,343) (19,345) (5,229)
Deferred investment tax credits, net (1,821) (1,802) (7,395) (7,541)
Advance contract payment 475 475 1,900 1,900
Change in certain assets and liabilities -*
Accounts receivable, net (12,391) 13,787 (63,547) 21,897
Other receivables (20,590) (40,011) (45,626) (59,609)
Electric production fuel (2,404) 2,351 2,891 (4,186)
Materials and supplies (1,996) 220 349 4,739
Natural gas in storage 40,413 47,075 (3,005) (6,112)
Accounts payable (13,470) 55,650 (87,687) 105,513
Taxes accrued 80,313 77,762 5,940 43,780
Fuel adjustment clause 1,568 (3,781) 11,819 (4,463)
Gas cost adjustment clause 52,019 12,228 50,014 (38,889)
Accrued employment costs (16,296) (4,821) 660 1,463
Other accruals (4,006) 25,511 (20,088) (299)
Other, net (6,207) 3,635 50,555 (21,803)
------------- ------------- -------------- --------------
Net cash provided by operating activities 189,563 305,118 312,902 450,003
-------------- -------------- -------------- --------------
Cash flows used in investing activities:
Utilities construction expenditures (48,203) (46,581) (220,553) (198,043)
Acquisition of IWC Resources
Corporation, net of cash acquired 0 (288,932) 0 (288,932)
Acquisition of minority interest 0 0 (5,641) 0
Proceeds from disposition of assets 9,705 29,500 16,198 29,500
Proceeds from settlement of litigation 0 0 41,069 0
Other, net (25,916) (19,352) (61,384) (32,655)
-------------- -------------- -------------- --------------
Net cash used in investing activities (64,414) (325,365) (230,311) (490,130)
-------------- -------------- -------------- --------------
Cash flows provided by (used in)
financing activities:
Issuance of long-term debt 6,371 136,302 528,301 138,371
Issuance of short-term debt 276,921 254,045 1,052,384 1,496,567
Net change in commercial paper (40,000) (142,305) (122,340) 73,500
Retirement of long-term debt (2,547) (1,469) (325,682) (90,144)
Retirement of short-term debt (306,673) (285,620) (1,063,277) (1,510,619)
Retirement of preferred shares (1) (1) (2,408) (2,605)
Issuance of common shares 3,340 208,486 13,427 213,594
Acquisition of treasury shares (23,296) (56,591) (99,789) (123,601)
Cash dividends paid on common shares (29,789) (26,772) (114,610) (103,753)
Cash dividends paid on preferred shares 0 0 0 (647)
Other, net 121 115 (497) 488
-------------- ------------- -------------- --------------
Net cash provided by (used in)
financing activities (115,553) 86,190 (134,491) 91,151
-------------- ------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents 9,596 65,943 (51,900) 51,024
Cash and cash equivalents at
Beginning of period 30,780 26,333 92,276 41,252
-------------- ------------- -------------- --------------
Cash and cash equivalents at
End of period $ 40,376 $ 92,276 $ 40,376 $ 92,276
============= ============ ============ ===========
*Net of effect from purchase of IWC Resources Corporation.
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(1) Holding Company Structure: NIPSCO Industries, Inc. (Industries) is an
energy/utility-based holding company providing electric energy, natural gas and
water to the public through its six wholly-owned regulated subsidiaries
(Utilities): Northern Indiana Public Service Company (Northern Indiana); Kokomo
Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc.
(NIFL); Crossroads Pipeline Company (Crossroads); Indianapolis Water Company
(IWC); and Harbour Water Corporation (Harbour). Industries' regulated gas and
electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and Crossroads) are
referred to as "Energy Utilities"; and regulated water subsidiaries (IWC and
Harbour) are referred to as "Water Utilities."
Industries also provides non-regulated energy/utility-related services
including gas marketing and trading; wholesale power marketing; 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); NI
Energy Services, Inc. (Services) (formerly known as NIPSCO Energy Services,
Inc.); Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller); and
SM&P Utility Resources, Inc. (SM&P). NIPSCO Capital Markets, Inc. (Capital
Markets) handles financing for Industries and its subsidiaries, other than
Northern Indiana. These subsidiaries, other than the wholesale power marketing
operations of Services, are referred to collectively as "Products and Services."
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 including Miller and SM&P.
On December 16, 1997, the Board of Directors authorized a two-for-one split
of Industries' common stock. The stock split was paid February 20, 1998, to
shareholders of record at the close of business 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 reflect the two-for-one stock
split as if it had occurred at the beginning of the earliest period.
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 Note 4 to Consolidated Financial
Statements for a more detailed discussion of the proposed acquisition.
(2) Summary of Significant Accounting Policies:
Basis of Presentation. The consolidated financial statements include the
accounts of majority-owned subsidiaries of Industries after the elimination of
significant intercompany accounts and transactions. Investments for which
Industries has at least a 20% interest and certain joint ventures are accounted
for under the equity method. Investments with less than a 20% interest are
accounted for under the cost method. Certain reclassifications were made to
conform the prior years' financial statements to the current presentation.
The accompanying consolidated financial statements of Industries include
the operating results of IWCR for the three and twelve months periods ended
March 31, 1998.
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. Gas
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. Industries records provisions for losses on construction
contracts, if any, in the period in which such losses become probable.
Depreciation and Maintenance. The Utilities provide depreciation on a
straight-line method over the remaining service lives of the electric, gas,
water and common properties. The approximated weighted average remaining lives
for major components of each electric, gas and water plant are as follows:
Electric:
Electric generation plant 24 years
Transmission plant 26 years
Distribution plant 25 years
Other electric plant 24 years
The provision of depreciable electric utility plant, as a percentage of the
original cost, was 3.60% for the three-month and twelve-month periods ended
March 31, 1998 and March 31, 1997.
Gas:
Gas storage plant 18 years
Transmission plant 34 years
Distribution plant 27 years
Other gas plant 24 years
The provision of depreciable gas utility plant, as a percentage of the
original cost, was 5.15% for the three and twelve months ended March 31, 1998
and 5.06% for the three and twelve months ended March 31, 1997.
Water:
Water source and treatment plant 34 years
Distribution plant 68 years
Other water plant 13 years
The provision of depreciable water utility plant, as a percentage of the
original cost, was 1.9% and 1.5% for the three-month and twelve-month periods
ended March 31, 1998, respectively.
The Utilities follow the practice of charging maintenance and repairs,
including the cost of renewals of minor items of property, to maintenance
expense accounts, except for repairs of transportation and service equipment
which are charged to clearing accounts and redistributed to operating expense
and other accounts. When property which represents a retired unit is replaced or
removed, the cost of such property is credited to utility plant, and such cost,
together with the cost of removal less salvage, is charged to the accumulated
provision for depreciation.
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 being
amortized over a forty-year period from the respective dates of acquisition. The
plant acquisition adjustments net of accumulated amortization were $189.1
million and $190.4 million at March 31, 1998 and December 31, 1997,
respectively.
Amortization of Software Costs. Industries has capitalized software
relating to various technology functions. At the date of installation,
Industries estimated that the specific software will have a useful life between
five and ten years. The Federal Energy Regulatory Commission (FERC) prescribes
certain amortization periods, and Industries' management has determined that, on
average, these are reasonable useful life estimates for the portfolio of
capitalized software. The Energy Utilities include these amortization estimates,
based on useful life, in their quarterly filings with the Indiana Utility
Regulatory Commission (Commission).
Intangible Assets. The excess of cost over the fair value of the net assets
of non-utility subsidiaries acquired is reported 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 years. Industries assesses the recoverability of its intangible
assets on a periodic basis to confirm that expected future cash flows will be
sufficient to support the recorded intangible assets. Accumulated amortization
of intangibles at March 31, 1998 and December 31, 1997, was approximately $2.6
million and $1.1 million, respectively.
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 and wholesale power
purchases are included in Cost of Sales under the caption "Power purchased."
Accounts Receivable. At March 31, 1998, 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.
Comprehensive Income. Industries adopted SFAS No. 130, "Reporting
Comprehensive Income" effective January 1, 1998. The objective of the statement
is to report comprehensive income which is a measure of all changes in equity of
an enterprise which result from transactions or other economic events during the
period other than transactions with shareholders. Industries' components of
other comprehensive income includes unrealized gains (losses) on available for
sale securities and unrealized gains (losses) on foreign currency translation
adjustments. The accumulated amounts for these components, respectively, were
$1.6 million and $(2.1) million as of April 1, 1996; $2.7 million and $(0.1)
million as of January 1, 1997; and $4.4 million and $(1.5) million as of January
1, 1998. This information is disclosed in Industries' Consolidated Statement of
Common Shareholders' Equity.
Statement of Cash Flows. For the purposes of the Consolidated Statement of
Cash Flows, Industries considers temporary cash investments with an original
maturity of three months or less to be cash equivalents.
Cash paid during the periods reported for income taxes and interest was as
follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------- ------- ------- ---------
(In thousands) 1998 1997 1998 1997
======= ======= ======= =======
<S> <C> <C> <C> <C>
Income taxes $ 0 $ 0 $ 116,849 $ 75,795
Interest, net of amounts
capitalized 23,549 12,111 113,799 88,988
</TABLE>
Fuel Adjustment Clause. All metered electric rates contain a provision for
adjustment in charges for electric energy to reflect increases and decreases in
the cost of fuel and the fuel cost of purchased power through operation of a
fuel adjustment clause. As prescribed by order of the Commission applicable to
metered retail rates, the adjustment factor has been calculated based on the
estimated cost of fuel and the fuel cost of purchased power in a future
three-month period. If two statutory requirements relating to expense and return
levels are satisfied, any under-recovery or over-recovery caused by variances
between estimated and actual cost in a given three-month period will be included
in a future filing. Northern Indiana records any under-recovery or over-recovery
as a current asset or current liability until such time as it is billed or
refunded to its customers. The fuel adjustment factor is subject to a quarterly
hearing by the Commission and remains in effect for a three-month period.
Gas Cost Adjustment Clause. All metered gas rates contain an adjustment
factor which reflects the cost of purchased gas, contracted gas storage and
storage transportation charges. The Energy Utilities record any under-recovery
or over-recovery as a current asset or current liability until such time as it
is billed or refunded to their customers. The gas cost adjustment factor for
Northern Indiana is subject to a quarterly hearing by the Commission and remains
in effect for a three-month period. The gas cost adjustment factors for Kokomo
Gas and NIFL are subject to semi-annual hearings by the Commission and remain in
effect for a six-month period. If the statutory requirement relating to the
level of return is satisfied, any under-recovery or over-recovery caused by
variances between estimated and actual cost in a given three-month or six-month
period will be included in a future filing. See Note 6, FERC Order No. 636 for a
discussion of gas transition cost charges.
Natural Gas in Storage. Northern Indiana's natural gas in storage is valued
using the last-in, first-out (LIFO) inventory methodology. Based on the average
cost of gas purchased in March 1998 and December 1997 the estimated replacement
cost of gas in storage (current and non-current) at March 31, 1998 and December
31, 1997 exceeded the stated LIFO cost by approximately $29 million and $42
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 anticipated 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 anticipated transaction affects earnings.
Industries uses 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 March 31, 1998, Industries had open derivative financial
instruments representing hedges of natural gas sales of 11.9 billion cubic feet
(Bcf), natural gas purchases of 9.1 Bcf and net basis differentials of 35.8 Bcf.
The net deferred gains on these derivative financial instruments as of March 31,
1998 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 March 31, 1998 were not material.
Regulatory Assets. The Utilities' operations are subject to the regulation
of the Commission and, in the case of the Energy Utilities, the 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 March 31, 1998 and December 31,
1997, the regulatory assets identified below represent probable future revenue
to the Utilities associated with certain incurred costs as these costs are
recovered through the rate-making process. If a portion of the Utilities'
operations becomes no longer subject to the provisions of SFAS No. 71, a
write-off of certain 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.
Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1998 1997
========== ==========
<S> <C> <C>
Unamortized reacquisition premium on
debt (Note 19) $ 45,869 $ 46,748
Unamortized R.M. Schahfer Unit 17 and
Unit 18 carrying charges and deferred
depreciation (See below) 65,492 66,546
Bailly scrubber carrying charges and
deferred depreciation (See below) 9,647 9,880
Deferred SFAS No. 106 expense not
recovered (Note 10) 86,158 87,653
FERC Order No. 636 transition costs (Note 6) 25,771 28,744
Regulatory income tax asset, net (Note 8) 7,218 6,941
Other 4,207 4,261
------------ -----------
244,362 250,773
Less: Current portion of regulatory assets 36,288 39,260
------------ -----------
$ 208,074 $ 211,513
============ ===========
</TABLE>
Carrying Charges and Deferred Depreciation. Upon completion of R. M.
Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges and
deferred depreciation in accordance with orders of the Commission until the cost
of each unit was allowed in rates. Such carrying charges and deferred
depreciation are being amortized over the remaining life of each unit.
Northern Indiana has capitalized carrying charges and deferred depreciation
and certain operating expenses relating to its scrubber service agreement for
its Bailly Generating Station in accordance with an order of the Commission. 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, 1996, a pre-tax rate of 5.5% for all construction was being
used; effective January 1, 1997 the rate remained at 5.5%; and effective January
1, 1998, the rate increased to 6.0%.
Foreign Currency Translation. Translation gains or losses are based upon
the end-of-period exchange rate and are recorded as a separate component of
common shareholders' equity.
Investments in Real Estate. Development invests in a series of affordable
housing projects within the Utilities' service territories. These investments
include certain tax benefits, including low-income housing tax credits and tax
deductions for operating losses of the housing projects. Development accounts
for these investments using the equity method. Investments, at equity, include
$35.5 million and $30.1 million relating to affordable housing projects at March
31, 1998 and December 31, 1997, respectively.
Income Taxes. Deferred income taxes are recognized as costs in the
rate-making process by the commissions having jurisdiction over the rates
charged by the Utilities. Deferred income taxes are provided as a result of
provisions in the income tax law that either require or permit certain items to
be reported on the income tax return in a different period than they are
reported in the financial statements. These taxes are reversed by a debit or
credit to deferred income tax expense as the temporary differences reverse.
Investment tax credits have been deferred and are being amortized to income over
the life of the related property.
(3) 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.
(4) 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 $551 million. 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 in 1998 that will expand the operations of Bay
State's non-regulated energy service companies.
(5) 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.
(6) FERC Order No. 636: Since December 1993, the Energy Utilities have paid
approximately $139 million of interstate pipeline transition costs to pipeline
suppliers to reflect the impact of FERC Order No. 636. 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.
(7) 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 March 31,
1998; 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 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, the 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 can 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 current CAAA
requirements. Northern Indiana cannot predict the costs of complying with future
control requirements to meet these new standards. Northern Indiana will continue
to closely monitor developments in this area and anticipates the exact nature of
the impact of the new standards on its operations will not be known for some
time.
The EPA has notified Northern Indiana that it is a "potentially responsible
party" (PRP) under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA) and may be required to share in the cost of cleanup of
several waste disposal sites identified by the EPA. The sites are in various
stages of investigation, analysis and remediation. At each of the sites,
Northern Indiana is one of several PRPs, and it is expected that remedial costs,
as provided under CERCLA, will be shared among them. At some sites Northern
Indiana and/or the other named PRPs are presently working with the EPA to clean
up the sites and avoid the imposition of fines or added costs.
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 of 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 eight sites and remedial
measures have been selected at five 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 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.
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 the 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.
(8) 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 March 31, 1998
and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1998 1997
=========== ===========
<S>
<C> <C>
Deferred tax liabilities -
Accelerated depreciation and other
property differences $ 781,738 $ 779,223
AFUDC-equity 34,675 35,282
Adjustment clauses 14,822 35,253
Take-or-pay gas costs 496 496
Other regulatory assets 31,331 31,862
Reacquisition premium on debt 18,012 18,335
Deferred tax assets -
Deferred investment tax credits (39,339) (40,017)
Removal costs (147,209) (144,111)
Other postretirement/postemployment benefits (45,856) (45,298)
Other, net (10,960) (3,565)
------------ ---------
637,710 667,460
Less: Deferred income taxes related to current
assets and liabilities (5,155) 15,645
----------- -----------
Deferred income taxes -noncurrent $ 642,865 $ 651,815
=========== ===========
</TABLE>
Federal and state income taxes as set forth in the Consolidated Statement
of Income are comprised of the following:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
-------- -------- ------- -------
(In thousands) 1998 1997 1998 1997
======== ======= ======= =======
<S> <C> <C> <C> <C>
Current income taxes -
Federal $ 55,917 $ 46,333 $ 107,709 $ 102,345
State 8,287 6,892 18,468 15,897
------------ ------------ ------------ ------------
64,204 53,225 126,177 118,242
------------ ------------ ------------ ------------
Deferred income taxes, net -
Federal (27,806) (11,432) (18,145) (5,020)
State (2,234) (911) (1,200) (209)
------------ ------------ ------------ ------------
(30,040) (12,343) (19,345) (5,229)
------------ ------------ ------------ ------------
Deferred investment tax
credits, net (1,821) (1,802) (7,395) (7,541)
------------ ------------ ------------ ------------
Total income taxes $ 32,343 $ 39,080 $ 99,437 $ 105,472
========== ========== ========== ===========
</TABLE>
A reconciliation of total income tax expense to an amount computed by
applying the statutory federal income tax rate to pre-tax income is as follows:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
------------ ------------ ------------ -----------
(In thousands) 1998 1997 1998 1997
=========== =========== ============ ===========
<S> <C> <C> <C> <C>
Net income $ 60,722 $ 70,838 $ 180,733 $ 180,086
Add-Income taxes 32,343 39,080 99,437 105,472
Dividend requirements on preferred stocks
of subsidiaries 2,167 2,167 8,691 8,680
------------ ------------ ------------ -----------
Income before preferred dividend requirements of
subsidiaries and income taxes $ 95,232 $ 112,085 $ 288,861 $ 294,238
=========== ========== =========== ==========
Amount derived by multiplying pre-tax
income by the statutory rate $ 33,331 $ 39,230 $ 101,101 $ 102,983
Reconciling items multiplied by the statutory rate:
Book depreciation over related tax depreciation 998 1,044 4,026 4,682
Amortization of deferred investment tax credits (1,821) (1,802) (7,395) (7,541)
State income taxes, net of federal income tax
benefit 3,300 3,567 11,597 10,424
Reversal of deferred taxes provided at rates in excess
of the current federal income tax rate (1,271) (1,518) (3,816) (6,488)
Low-income housing credits (960) (764) (3,252) (2,491)
Nondeductible amounts related to amortization of
intangible assets and plant acquisition adjustments 629 96 2,173 385
Other, net (1,863) (773) (4,997) 3,518
------------ ------------ ------------ -----------
Total income taxes $ 32,343 $ 39,080 $ 99,437 $ 105,472
=========== =========== ============ ===========
</TABLE>
(9) 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 change in the benefit obligation for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
======== ========
<S> <C> <C>
Benefit obligation at beginning of year (January 1,) $ 743,634 $ 759,557
Service cost 14,714 16,300
Interest cost 57,938 53,477
Plan amendments 25,096 0
Actuarial (gain) loss 73,818 (39,024)
Acquisition of IWCR 15,722 0
Benefits paid (55,166) (46,676)
----------- ----------
Benefit obligation at end of the year (December 31,)$ 875,756 $ 743,634
========= ==========
</TABLE>
The change in the fair value of the plans' assets for the years 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
======== ========
<S> <C> <C>
Fair value of plan assets at beginning of year (January 1,) $ 790,978 $ 705,541
Actual return on plans' assets 126,695 87,407
Employer contributions 46,440 44,706
Acquisition of IWCR 15,910 0
Benefits paid (55,166) (46,676)
---------- ----------
Plan assets at fair value at end of the year (December 31,) $ 924,857 $ 790,978
========== ==========
</TABLE>
The plans' assets are invested primarily in common stocks, bonds and notes.
The plans' funded status as of January 1, 1998 and January 1, 1997 is as
follows:
<TABLE>
<CAPTION>
January 1, January 1,
(In thousands) 1998 1997
========= =========
<S> <C> <C>
Plan assets in excess of benefit obligation $49,100 $ 47,344
Unrecognized net actuarial loss (46,959) (66,976)
Unrecognized prior service cost 47,114 25,172
Unrecognized transition amount 32,107 38,062
----------- -----------
Prepaid pension costs $ 81,362 $ 43,602
=========== ===========
</TABLE>
The benefit obligation is the present value of future pension benefit
payments and is based on a plan benefit formula which considers expected 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 benefit
obligation at January 1, 1998 and 1997, respectively. The increase in the
benefit obligation at January 1, 1998 is mainly caused by the decrease in the
discount rate from 7.75% to 7.00%. Prepaid pension costs were $90.4 million as
of March 31, 1998.
The following items are the components of provisions for pensions for the
three-month and twelve-month periods ended March 31, 1998 and March 31, 1997:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
--------- --------- --------- ---------
(In thousands) 1998 1997 1998 1997
======= ======= ======= =======
<S> <C> <C> <C> <C>
Service costs $ 4,934 $ 4,573 $14,799 $14,606
Interest costs 19,324 16,536 60,433 50,962
Expected return on plan assets (24,733) (20,503) (76,483) (61,528)
Amortization of transition obligation 1,760 1,588 5,498 5,068
Amortization of prior service costs 1,676 950 4,227 2,718
-------- --------- ------- --------
$ 2,961 $ 3,144 $ 8,474 $ 11,826
======== ========= ======= =======
</TABLE>
Assumptions used in the valuation and determination of 1998 and 1997
pension expense were as follows:
<TABLE>
<CAPTION>
1998 1997
====== ======
<S> <C> <C>
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 4.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00%
</TABLE>
IWCR participates in several industry-wide, multi-employer pension plans
for certain of its union employees at Miller. These plans provide for monthly
benefits based on length of service. Specified amounts per compensated hour for
each employee are contributed to the trustees of these plans. Contributions of
$0.4 million and $2.1 million were made to these plans for the three-month and
twelve-month periods ended March 31, 1998. 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.
(10) 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 benefit costs and the insurance premiums paid for such benefits
as a regulatory asset. On June 11, 1997, the Commission issued an order
approving the inclusion of accrual-based postretirement benefit costs in the
rate-making process to be effective February 1, 1997 for electric rates and
March 1, 1997 for gas rates. These costs include an amortization of the existing
regulatory asset consistent with the remaining amortization period for the
transition obligation. Northern Indiana discontinued its cost deferral and began
amortizing its regulatory asset concurrent with these dates.
IWC's current rates include postretirement benefit costs on an accrual
basis, including amortization of the regulatory asset that arose prior to
inclusion of these costs in the rates. IWC currently remits to a grantor trust
amounts collected in rates.
The following table sets forth the change in the plans' accumulated
postretirement benefit obligation (APBO) for the years 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
========= ========
<S> <C> <C>
Accumulated postretirement benefit obligation
at beginning of year (January 1,) $ 200,790 $ 257,915
Service cost 5,034 7,352
Interest cost 16,215 18,310
Plan amendments 4,015 (10,482)
Actuarial (gain) (10,242) (65,718)
Acquisition of IWCR 18,505 0
Benefits paid (10,409) (6,587)
--------- ---------
Accumulated postretirement benefit obligation
at end of the year (December 31,) $ 223,908 $ 200,790
========= =========
</TABLE>
The change in the fair value of the plans' assets for the years 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
======== ========
<S>
<C> <C>
Fair value of plan assets at beginning of year (January 1,) $ 0 $ 0
Employer contributions 12,809 6,587
Benefits paid (10,409) (6,587)
----------- -----------
Plan assets at fair value at end of the year (December 31,) $ 2,400 $ 0
=========== ===========
</TABLE>
Following is the funded status for postretirement benefits as of January 1,
1998 and January 1, 1997:
<TABLE>
<CAPTION>
January 1, January 1,
(In thousands) 1998 1997
========= =========
<S> <C> <C>
Funded status $ (221,508) $(200,790)
Unrecognized net actuarial gain (99,118) (89,547)
Unrecognized prior service cost 4,195 0
Unrecognized transition amount 176,464 175,012
---------- ---------
Accrued liability for postretirement benefits $ (139,966) $(115,325)
========== =========
</TABLE>
A discount rate of 7.00%, a pre-Medicare medical trend rate of 8% declining
to a long-term rate of 5%, 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
APBO at January 1, 1998 and 1997, respectively. The increase in the APBO at
January 1, 1998 was primarily attributable to the inclusion of IWCR's APBO and
the decrease in the discount rate from 7.75% to 7.00%. The accrued liability for
postretirement benefits was $139.2 million at March 31, 1998.
Net periodic postretirement benefits costs, before consideration of the
rate-making discussed previously, for the three-month and twelve-month periods
ended March 31, 1998 and March 31, 1997 include the following components:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
(In thousands) 1998 1997 1998 1997
====== ====== ====== ======
<S> <C> <C> <C> <C>
Service costs $1,187 $ 1,460 $4,631 $7,192
Interest costs 4,073 4,460 15,491 17,691
Expected return on plan assets (50) 0 (50) 0
Amortization of transition obligation 2,929 2,764 11,723 11,262
Amortization of prior service cost 75 0 354 0
Amortization of (gain) loss (1,393) (1,008) (6,229) (979)
------- -------- -------- --------
$ 6,821 $ 7,676 $ 25,920 $ 35,166
======= ======== ======== ========
</TABLE>
Assumptions used in the determination of 1998 and 1997 net periodic
postretirement benefit costs were as follows:
<TABLE>
<CAPTION>
1998 1997
====== ======
<S> <C> <C>
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 4.50% 5.50%
</TABLE>
The pre-Medicare medical trend rates used for 1998 and 1997 were 8%
declining to a long-term rate of 5% and 9% declining to a long-term rate of 6%,
respectively. The effect of a 1% increase in the assumed health care cost trend
rates for each future year would increase the accumulated postretirement benefit
obligation at January 1, 1998 by approximately $27.1 million, and increase the
aggregate of the service and interest cost components of plan costs by
approximately $0.7 million for the three-month period ended March 31, 1998. The
effect of a 1% decrease in the assumed health care cost trend rates for each
future year would decrease the accumulated postretirement benefit obligation at
January 1, 1998 by approximately $22.2 million, and decrease the aggregate of
the service and interest cost components of plan costs by approximately $0.6
million for the three-month period ended March 31, 1998. Amounts disclosed above
could be changed significantly in the future by changes in health care costs,
work force demographics, interest rates, or plan changes.
(11) Authorized Classes of Cumulative Preferred and Preference Stocks:
Industries -
20,000,000 shares -Preferred -without par value
4,000,000 of Industries' Series A Junior Participating Preferred Shares are
reserved for issuance pursuant to the Share Purchase Rights Plan described in
Note 17, Common Shares.
Northern Indiana -
2,400,000 shares -Cumulative Preferred -$100 par value
3,000,000 shares -Cumulative Preferred -no par value
2,000,000 shares -Cumulative Preference -$50 par value
(none outstanding)
3,000,000 shares -Cumulative Preference -no par value
(none issued)
Indianapolis Water Company -
300,000 shares -Cumulative Preferred -$100 par value
Note 12 sets forth the preferred stocks which are redeemable solely at the
option of the issuer, and Note 13 sets forth the preferred stocks which are
subject to mandatory redemption requirements or whose redemption is outside the
control of the issuer.
The Preferred shareholders of 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.
(12) Preferred Stocks, Redeemable Solely at the Option of the Issuer,
Outstanding at March 31, 1998 and December 31, 1997 :
<TABLE>
<CAPTION>
Redemption
Price at
March 31, December 31, March 31,
(Dollars in thousands) 1998 1997 1998
=========== =========== ===========
<S> <C> <C> <C>
Northern Indiana Public Service Company:
Cumulative preferred stock - $100 par value -
4-1/4% series - 209,107 and 209,118 shares
outstanding, respectively $ 20,911 $ 20,912 $101.20
4-1/2% series - 79,996 shares outstanding 8,000 8,000 $100.00
4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60
4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00
7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00
7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00
Premium on preferred stock 254 254 N/A
Cumulative preferred stock -
no par value -
Adjustable rate (6.00% at March 31, 1998),
Series A (stated value $50 per share) 473,285
shares outstanding 23,664 23,664 $ 50.00
Indianapolis Water Company:
Cumulative preferred stock - $100 par value -
Rates ranging from 4.00% to 5.00%, 44,966
shares outstanding 4,497 4,497 $100 - $105
----------- -----------
$ 85,619 $ 85,620
=========== ===========
</TABLE>
During the period April 1, 1996 to March 31, 1998, there were no additional
issuances of the above
preferred stocks.
The foregoing preferred stocks are redeemable in whole or in part at any
time upon thirty days' notice at the option of the issuer at the redemption
prices shown.
(13) Redeemable Preferred Stocks Outstanding at March 31, 1998 and December
31, 1997 : Preferred stocks subject to mandatory redemption requirements or
whose redemption is outside the control of issuer, excluding sinking fund
payments due within one year are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1998 1997
========= ==========
<S> <C> <C>
Northern Indiana Public Service Company:
Cumulative preferred stock -$100 par value -
8.85% series - 62,500 shares outstanding $ 6,250 $ 6,250
7-3/4% series - 38,906 shares outstanding 3,891 3,891
8.35% series - 57,000 shares outstanding 5,700 5,700
Cumulative preferred stock -no par value -
6.50% series - 430,000 shares outstanding 43,000 43,000
---------- ----------
$ 58,841 $ 58,841
========== ==========
</TABLE>
The redemption prices at March 31, 1998, as well as sinking fund provisions
for the cumulative preferred stock subject to mandatory redemption requirements,
or whose redemption is outside the control of Northern Indiana, are as follows:
<TABLE>
<CAPTION>
Sinking Fund or
Series Redemption Price Per Share Mandatory Redemption Provisions
=== ======== ====================== ======================================
<S> <C> <C>
Cumulative preferred stock -$100 par value -
8.85% $101.11, 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 March 31, 1998 for each of the twelve-month periods subsequent to
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,*
============================
<S> <C>
2000 $1,827,700
2001 $1,827,700
2002 $1,827,700
2003 $1,827,700
* Table does not reflect redemptions made after March 31, 1998.
</TABLE>
(14) Stock Split: On December 16, 1997, the Board of Directors authorized a
two-for-one split of Industries' common stock. The stock split was paid February
20, 1998, to shareholders of record at the close of business 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 reflect the
two-for-one stock split as if it had occurred at the beginning of the earliest
period.
(15) Common Share Dividend: During the next few years, Industries expects
that the majority of earnings available for distribution of dividends will
depend upon dividends paid to Industries by Northern Indiana. Northern Indiana's
Indenture dated August 1, 1939, as amended and supplemented (Indenture),
provides that it will not declare or pay any dividends on any class of capital
stock (other than preferred or preference stock) except out of earned surplus or
net profits of Northern Indiana. At March 31, 1998, Northern Indiana had
approximately $164.0 million of retained earnings (earned surplus) available for
the payment of dividends. Future dividends will depend upon adequate retained
earnings, adequate future earnings and the absence of adverse developments.
(16) 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>
Three Months Twelve Months
Ended March 31, Ended March 31,
(Dollars in thousands, except per share amounts) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic
Weighted Average Number of Shares:
Average Common Shares Outstanding 123,872,613 119,116,686 125,021,821 121,140,716
Net Income to be Used to Compute Basic Earnings per Share:
Net Income $ 60,722 $ 70,838 $ 180,733 $ 180,086
Basic Earnings per Average Common Share $ 0.49 $ 0.59 $ 1.44 $ 1.48
Diluted
Weighted Average Number of Shares:
Average Common Shares Outstanding 123,872,613 119,116,686 125,021,821 121,140,716
Dilutive effect for Nonqualified Stock Options 511,358 311,027 304,907 242,047
Weighted Average Shares 124,383,971 119,427,713 125,326,728 121,382,763
Net Income to be Used to Compute Diluted Earnings per Share:
Net Income $ 60,722 $ 70,838 $ 180,733 $ 180,086
Diluted Earnings per Average Common Share $ 0.48 $ 0.59 $ 1.44 $ 1.48
</TABLE>
(17) Common Shares: On April 8, 1998, shareholders approved an increase in
the number of authorized common shares without par value from 200,000,000 shares
to 400,000,000 shares.
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 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 merged Industries into the acquirer, the Rights would
entitle the holders to purchase Industries' or the acquirer's common shares for
one-half of the market price. The Rights will not dilute Industries' common
shares nor affect earnings per share unless they become exercisable for common
shares. The Plan was not adopted in response to any specific attempt to acquire
control of Industries.
Common Share Repurchases. The Board has authorized the repurchase of
Industries' common shares. At March 31, 1998, Industries had purchased
approximately 45.0 million shares since 1989 at an average price of $14.41 per
share. Approximately 17.1 million additional common shares may be repurchased
under the Board's authorization.
(18) 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 March 31, 1998, there were 12,912 shares
and 3,837,500 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
performance units. No incentive stock options or performance units were
outstanding at March 31, 1998. Under both Plans, the exercise price of each
option equals the market price of Industries' stock on the date of grant. Each
option has a maximum term of 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 1998 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 558,666 and 542,666 restricted shares outstanding at March 31, 1998
and December 31, 1997, 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. If a director's service on the Board is terminated for any reason
other than death or disability, any common shares not vested as of the date of
termination are forfeited. As of April 8, 1998, 138,100 shares had been issued
under the Plan.
Industries accounts for these plans under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized for
non-qualified stock options. The compensation cost that has been charged against
income for restricted stock awards was $0.5 and $1.9 million for the three-month
and twelve-month periods ending March 31, 1998, respectively. Had compensation
cost for non-qualified stock options been determined consistent with SFAS No.
123 "Accounting for Stock-Based Compensation," Industries' net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
----------------- -------------------
1998 1997 1998 1997
======= ======= ======== ========
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net Income:
As reported $ 60,722 $ 70,838 $ 180,733 $ 180,086
Pro forma 60,501 70,631 179,869 179,341
Earnings Per Average Common Share:
Basic:
As reported $ 0.49 $ 0.59 $ 1.44 $ 1.48
Pro forma 0.49 0.59 1.43 1.48
Diluted:
As reported $ 0.48 $ 0.59 $ 1.43 $ 1.48
Pro forma 0.48 0.59 1.43 1.47
</TABLE>
The fair value of each option granted used to determine pro forma net
income is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
the three-month and twelve-month periods ended March 31, 1998 and March 31,
1997: risk-free interest rate of 6.29% and 6.39%, respectively; expected
dividend yield per share of $0.87 and $0.84, respectively; expected option term
of five and one-quarter years and five years, respectively; and expected
volatilities of 12.7% and 13.2%, respectively.
Changes in outstanding shares under option and SARs for the three-month and
twelve-month periods ended March 31, 1998 and March 31, 1997 are as follows:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
----------------------------------------------
Weighted Weighted
Average Average
Option Option
Three Months Ended March 31, 1998 Price 1997 Price
============================ ========== ======= ======== =======
<S> <C> <C> <C> <C>
Balance, beginning of period 2,535,400 $ 16.41 2,360,900 $ 15.33
Granted 0 0
Exercised (200,800) 12.55 (53,100) 14.02
Canceled 0 (23,700) 18.91
----------- ----------
Balance, end of period 2,334,600 16.74 2,284,100 15.33
=========== ==========
Shares exercisable 1,806,000 15.60 1,759,200 14.26
=========== ==========
NONQUALIFIED STOCK OPTIONS
---------------------------------------------
Weighted Weighted
Average Average
Option Option
Twelve Months Ended March 31, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 2,284,100 $ 15.33 2,166,300 $ 14.30
Granted 533,600 20.64 556,600 18.91
Exercised (478,100) 14.28 (395,300) 14.45
Canceled (5,000) 20.64 (43,500) 18.12
---------- ---------
Balance, end of period 2,334,600 16.74 2,284,100 15.33
========== =========
Shares exercisable 1,806,000 15.60 1,759,200 14.26
========== =========
Weighted average fair value
of options granted $ 2.66 $ 2.50
======== ========
<CAPTION>
NONQUALIFIED STOCK OPTIONS WITH SARs
----------------------------------------------
Option Option
Three Months Ended March 31, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47
Exercised 0 0
---------- ---------
Balance, end of period 11,200 5.47 11,200 5.47
======== ========
Shares exercisable 11,200 5.47 11,200 5.47
======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs
--------------------------------------------
Option Option
Twelve Months Ended March 31, 1998 Price 1997 Price
============================ ======== ======= ======== =======
Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47
Exercised 0 0
---------- ---------
Balance, end of period 11,200 5.47 11,200 5.47
======== ========
Shares exercisable 11,200 5.47 11,200 5.47
======== ========
</TABLE>
The following table summarizes information about non-qualified stock
options at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------------------------------------
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Option Price March 31, 1998 Contractual Life Option Price
============= =============== =============== ===============
<S> <C> <C> <C>
$ 5.47 to $ 8.97 102,200 1.79 years $ 8.29
$11.47 to $15.16 594,600 5.21 years $13.41
$16.22 to $20.64 1,637,800 7.96 years $18.48
- ---------------- ------------ ------------ ----------
$5.47 to $20.64 2,334,600 6.99 years $16.74
===========
<CAPTION>
OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
Number
Range of Exercisable at Weighted Average
Option Price March 31, 1998 Option Price
============= =============== ==============
$ 5.47 to $ 8.97 102,200 $ 8.29
$11.47 to $15.16 594,600 $13.41
$16.22 to $18.91 1,109,200 $17.45
- ---------------- ---------- -------
$ 5.47 to $18.91 1,806,000 $15.60
==========
</TABLE>
(19) Long-Term Debt: At March 31, 1998 and December 31, 1997, Industries'
outstanding long-term debt, excluding amounts due within one year, issued and
not retired or canceled was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1998 1997
========== ==========
<S> <C> <C>
First mortgage bonds -
Interest rates between 5.20% and 9.83% with a weighted
average interest rate of 7.22% and various maturities
between May 1, 2001 and September 1, 2025 $ 187,100 $ 187,100
Pollution control notes and bonds-
Interest rates between 3.58% and 5.70% with a weighted
average interest rate of 4.07% and various maturities
between October 1, 2003 and April 1, 2019 241,000 241,000
Medium-term notes -
Interest rates between 6.10% and 7.99% with a weighted
average interest rate of 7.19% and various maturities
between April 5, 2000 and August 4, 2027 1,048,025 1,048,025
Subordinated Debentures -
7-3/4%, due March 31, 2026 75,000 75,000
Senior Notes Payable -
6.78%, due December 1, 2027 75,000 75,000
Notes payable -
Interest rates between 6.31% and 9.00% with a weighted
average interest rate of 7.34% and various maturities
between August 31, 1999 and January 1, 2008 42,944 40,229
Variable bank loan -
6.50% -due August, 2003 5,600 5,600
Unamortized premium and discount on long-term debt, net (3,908) (4,029)
---------- ----------
Total long-term debt, excluding amounts due in one year $1,670,761 $1,667,925
========= ==========
</TABLE>
The sinking fund requirements of long-term debt outstanding at March 31,
1998 (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 March 31, 2003; NDC Douglas Properties, Inc.'s notes payable due
December 22, 1999 thru January 29, 2003; IWC's first mortgage bonds: Series
5.20%, due May 1, 2001 and Series 8.00%, due December 15, 2001; and IWCR's
senior notes payable, due March 15, 2001), for each of the twelve-month periods
subsequent to March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
===========================
<S> <C>
2000 $ 14,661,785
2001 172,120,004
2002 39,584,457
2003 84,625,802
</TABLE>
Unamortized debt expense, premium and discount on long-term debt applicable
to outstanding bonds are being amortized over the lives of such bonds.
Reacquisition premiums are being deferred and amortized. These premiums are not
earning a return during the recovery period.
Northern Indiana's Indenture, 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
$217.7 million of its Medium-Term Notes, Series E, with various maturities, for
purposes of refinancing certain first mortgage bonds and medium-term notes. As
of March 31, 1998, $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.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes with various interest rates and maturities.
The proceeds from these issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations of Capital Markets.
In December 1997, Capital Markets issued and sold $75 million of 6.78%
senior notes payable which mature December 1, 2027. The holders of the notes
have the right to require Capital Markets to repurchase all or a portion of the
notes on December 1, 2007 at a purchase price of the principal amount plus
accrued interest thereon. The proceeds from these issuances were primarily used
for the payment of Capital Markets Zero Coupon Notes which matured December 1,
1997. The remaining net proceeds were used for 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' obligations in the
event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' creditors against
the stock and assets of Northern Indiana which are owned by Industries. Under
the terms of the Support Agreement, in addition to the cash flow of cash
dividends paid to Industries by any of its consolidated subsidiaries, the assets
of Industries, other than the stock and assets of Northern Indiana, are
available as recourse for the benefit of Capital Markets' creditors. The
carrying value of the assets of Industries, other than the assets of Northern
Indiana, reflected in the consolidated financial statements of Industries, was
approximately $1.3 billion at March 31, 1998.
(20) Current Portion of Long-Term Debt: At March 31, 1998 and December 31,
1997, Industries' current portion of long-term debt due within one year was as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1998 1997
=========== ==========
<S> <C> <C>
First Mortgage Bonds $ 14,509 $ 14,509
Medium-term notes -
Interest rates of 5.83% and 5.95% with a weighted
average interest rate of 5.86% and various
maturities between April 6, 1998 and April 13, 1998 35,000 35,000
Notes payable -
Interest rates between 6.72% and 9.00% with a weighted
average interest rate of 7.76% and maturities between
August 31, 1998 and January 1, 1999 4,720 3,612
Sinking funds due within one year 1,500 1,500
----------- ----------
Total current portion of long-term debt $ 55,729 $ 54,621
=========== =========
</TABLE>
(21) Short-Term Borrowings: Northern Indiana and Capital Markets make use
of commercial paper to fund short-term working capital requirements. As of March
31, 1998 and December 31, 1997, Northern Indiana had $18.5 million and $71.5
million of commercial paper outstanding, respectively. At March 31, 1998, the
interest rate of commercial paper outstanding was 5.60%. As of March 31, 1998
and December 31, 1997 Capital Markets had $30.0 million and $17.0 million of
commercial paper outstanding. At March 31, 1998, the weighted average interest
rate of commercial paper outstanding was 5.76%.
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999. As of March 31, 1998, 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 March 31, 1998, 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 March 31, 1998 there were no borrowings under these lines of credit. At
December 31, 1997, there was $47.5 million of borrowings outstanding under these
lines of credit.
Northern Indiana has a $50 million uncommitted finance facility. At March
31, 1998, 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 March 31, 1998, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of March 31, 1998 and December 31, 1997, $28.0 million and $20.1 million,
respectively, of borrowings were outstanding under these lines of credit.
IWCR and its subsidiaries had lines of credit with banks aggregating $78.7
million. As of March 31, 1998 and December 31, 1997, $60.1 million and $48.9
million of borrowings were outstanding under these lines of credit,
respectively.
At March 31, 1998 and December 31, 1997, Industries' short-term borrowings
were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1998 1997
=========== ===========
<S> <C> <C>
Commercial paper $ 48,500 $ 88,500
Notes payable 94,302 116,469
Revolving loan facility 0 7,670
----------- -----------
Total short-term borrowings $ 142,802 $ 212,639
=========== ===========
</TABLE>
(22) 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
March 31, 1998:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
======================================
<S> <C>
(In thousands)
1999 $ 15,959
2000 13,600
2001 13,343
2002 13,334
2003 49,796
Later years 80,081
---------
Total minimum payments required $186,113
=========
</TABLE>
The consolidated financial statements include rental expense for all
operating leases as follows:
<TABLE>
<CAPTION>
March 31, March 31,
(In thousands) 1998 1997
========== ==========
<S> <C> <C>
Three months ended $ 4,949 $ 2,248
Twelve months ended 11,540 8,338
</TABLE>
(23) Commitments: The Utilities estimate 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.
(24) Primary Energy: Primary arranges energy-related projects for large
energy-intensive facilities and has entered into certain commitments in
connection 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 $128 million and $107 million, at March
31, 1998 and December 31, 1997, respectively, to the lessors of the energy
related projects discussed above. These net advances are included in "Other
Receivable" 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 to produce electricity.
(25) Fair Value of Financial Instruments: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Investments: The fair value of some investments is estimated based on
market prices for those or similar investments.
Long-term debt/Preferred stock: The fair value of long-term debt and
preferred stock is estimated based on the quoted market prices for the same or
similar issues or on the rates offered to Industries for securities of the same
remaining maturities. Certain premium costs associated with the early settlement
of long-term debt are not taken into consideration in determining fair value.
The carrying values and estimated fair values of Industries' financial
instruments (excluding derivatives) are as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------------------- ------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
======== ========= ========= ==========
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 40,376 $ 40,376 $ 30,780 $ 30,780
Investments 34,771 34,068 32,625 32,886
Long-term debt (including
current portion) 1,726,490 1,759,879 1,722,546 1,718,897
Preferred stock 146,288 135,732 146,289 139,814
</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.
(26) Customer Concentrations: Industries' utility subsidiaries supply
natural gas, electric energy and water. Natural gas and electric energy are
supplied to the northern third of Indiana. The water utilities serve
Indianapolis, Indiana and surrounding areas. Although the Energy Utilities have
a diversified base of residential and commercial customers, a substantial
portion of their electric and gas industrial deliveries are dependent upon the
basic steel industry. The basic steel industry accounted for 2% and 4% of gas
revenue (including transportation services) and 19% and 22% of electric revenue
for the twelve months ended March 31, 1998 and March 31, 1997, respectively.
(27) Business Segments: Industries adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" during the first quarter of
1998. SFAS No. 131 establishes standards for reporting information about
operating segments in financial statements and disclosures about products and
services, and geographic areas. Operating segments are defined as components of
an enterprise for which separate financial information is available and is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Industries has four reportable operating segments: Gas, Electric, Water and
Gas Marketing. The Gas segment includes regulated gas utilities which provide
natural gas distribution services to the public. The Electric segment is
comprised principally of Northern Indiana, a regulated electric utility, which
generates, transmits and distributes electricity. In addition, the Electric
segment includes a wholesale power marketing operation which markets wholesale
power to other utilities and electric power marketers. The Water segment
includes regulated water utilities which provide distribution of water supply to
the public. The Gas Marketing segment provides natural gas marketing and sales
to wholesale and industrial customers. The Other Products and Services category
includes a variety of energy-related businesses, such as installation, repair
and maintenance of underground pipelines; utility line locating and marking;
transmission of natural gas through pipelines; the arrangement of energy-related
projects for large energy-intensive facilities; and other energy-related
products.
Industries' reportable segments are operations that are managed separately
and meet the quantitative thresholds required by SFAS No. 131.
Revenues for each of Industries' segments are principally attributable to
customers in the United States. Additional revenues, which are insignificant to
Industries' consolidated revenues, are attributable to customers in Canada and
the United Kingdom.
The following tables provides information about Industries' business
segments. Industries uses income before interest and other charges and income
taxes as its primary measurement for each of the reported segments. Adjustments
have been made to the segment information to arrive at information included in
the results of operations and financial position of Industries. Such adjustments
include unallocated corporate revenues and expenses and the elimination of
intercompany transactions, a majority of which are intercompany receivables. The
accounting policies of the operating segments are the same as those described in
Note 2, "Summary of Significant Accounting Policies."
<TABLE>
<CAPTION>
(In thousands) Other
For the three months ended March 31, 1998 Gas Products
Gas Electric Water Marketing & Services Adjustments Total
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $242,735 $323,834 $ 17,709 $174,866 $ 53,875 $ (33,675) $ 779,344
Other Income (Deductions) $ 606 $ 89 $ (111) $ 517 $ 7,250 $ 97 $ 8,448
Depreciation and amortization $ 18,714 $ 38,768 $ 2,793 $ 66 $ 2,880 $ 53 $ 63,274
Income before Interest and Other
Charges and Income Taxes $ 48,728 $ 73,760 $ 3,674 $ 133 $ 2,537 $ (3,270) $ 125,562
Assets $903,257 $2,515,774 $568,453 $88,156 $1,435,329 $(610,477) $4,900,492
(In thousands) Other
For the three months ended March 31, 1997 Gas Products
Gas Electric Water Marketing & Services Adjustments Total
Operating revenues $333,401 $260,657 $ 0 $ 88,786 $ 25,339 $(48,233) $ 659,950
Other Income (Deductions) $ 385 $ 204 $ 0 $ 794 $ 8,076 $ (56) $ 9,403
Depreciation and amortization $17,858 $ 38,282 $ 0 $ 14 $ 2,140 $ 50 $ 58,344
Income before Interest and Other
Charges and Income Taxes $ 59,000 $ 69,896 $ 0 $ 3,372 $ 7,052 $(1,331) $ 137,989
Assets $960,226 $2,573,497 $517,592 $50,685 $1,065,418 $(256,845) $4,910,573
(In thousands) Other
For the twelve months ended March 31, 1998 Gas Products
Gas Electric Water Marketing &Services Adjustments Total
Operating revenues $716,574 $1,249,508 $ 78,571 $567,066 $240,501 $(146,285) $2,705,935
Other Income (Deductions) $ 1,008 $ 519 $ 1,354 $ 2,989 $ 9,208 $ (265) $ 14,813
Depreciation and amortization $73,703 $ 154,331 $11,033 $ 284 $15,179 $ 204 $ 254,734
Income before Interest and Other
Charges and Income Taxes $ 78,643 $ 316,105 $ 23,885 $ 4,105 $ 6,614 $(15,458) $413,894
Assets $903,257 $2,515,774 $568,453 $88,156$1,435,329 $(610,477) $4,900,492
(In thousands) Other
For the twelve months ended March 31, 1997 Gas Products
Gas Electric Water Marketing &Services Adjustments Total
Operating revenues $805,191 $1,034,464 $ 0 $244,414 $ 94,550 $(146,142 ) $2,032,477
Other Income (Deductions) $ 756 $ 1,046 $ 0 $ 2,958 $ 15,226 $ 1,170 $ 21,156
Depreciation and amortization $69,368 $ 148,343 $ 0 $ 42 $17,986 $ 172 $235,911
Income before Interest and Other
Charges and Income Taxes $85,796 $ 305,138 $ 0 $11,292 $ 3,377 $(5,615) $399,988
Assets $960,226 $2,573,497 $517,592 $50,685$1,065,418 $(256,845 ) $4,910,573
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Holding Company -
NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding
company providing electric energy, natural gas and water to the public through
its six wholly-owned regulated subsidiaries (Utilities): Northern Indiana Public
Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas);
Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline
Company (Crossroads); Indianapolis Water Company (IWC); and Harbour Water
Corporation (Harbour). Industries' regulated gas and electric subsidiaries
(Northern Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy
Utilities"; and regulated water subsidiaries (IWC and Harbour) are referred to
as "Water Utilities."
Industries also provides non-regulated energy/utility-related products and
services including gas marketing and trading; wholesale power marketing; 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); NI
Energy Services, Inc. (Services); Primary Energy, Inc. (Primary); Miller
Pipeline Corporation (Miller); and SM&P Utility Resources, Inc.(SM&P). NIPSCO
Capital Markets, Inc. (Capital Markets) handles financing for Industries and its
subsidiaries, other than Northern Indiana. These subsidiaries, other than the
wholesale power marketing operations of Services, are referred to collectively
as "Products and Services."
On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR).
IWCR's subsidiaries include two regulated water utilities (IWC and Harbour) and
five non-utility companies providing utility-related products and services
including installation, repair and maintenance of underground pipelines and
utility line locating and marking. The two primary non-utility subsidiaries are
Miller and SM&P. Industries results of operations include three and twelve
months of operating results from IWCR for the three-month and twelve-month
periods ended March 31, 1998. The discussion below excludes the comparative
results of IWCR operations, as such discussion would not be meaningful.
Revenues -
Total operating revenues for the twelve months ended March 31, 1998
increased $673.5 million as compared to the twelve months ended March 31, 1997.
The increase includes $200.7 million reflecting twelve months of operating
revenues from IWCR for the period. Gas revenues decreased $88.6 million,
electric revenues increased $215.0 million and Products and Services revenues,
excluding IWCR, increased $346.3 million, as compared to the same period in
1997. The decrease in gas revenues was largely attributable to decreased gas
costs per dekatherm (dth), decreased sales to residential and commercial
customers due to unusually warm weather during the first quarter of 1998,
decreased sales to industrial customers and decreased gas transition costs which
were partially offset by increased wholesale sales and increased deliveries of
gas transported for others. The increase in electric revenues was mainly due to
increased wholesale electric marketing activities and wholesale transactions,
and increased sales to residential and commercial customers which were partially
offset by decreased fuel costs per kilowatt hour (kwh) and decreased sales to
industrial customers. Increased volumes in gas marketing to existing and new
customers resulted in an increase of $344.5 million in Products and Services
revenues for the twelve-month period ended March 31, 1998. For the twelve months
ended March 31, 1998, volumes in gas marketing were 193.1 million dth, an
increase of 125.7 million dth over the same period in 1997.
Total operating revenues for the three months ended March 31, 1998
increased $119.4 million as compared to the three months ended March 31, 1997.
The increase includes $41.0 million reflecting three months of operating
revenues from IWCR for the current period. Gas revenues decreased $90.7 million,
electric revenues increased $63.2 million and Products and Services revenues,
excluding IWCR, increased $105.9 million compared to the same period in 1997.
The decrease in gas revenues was mainly due to decreased gas costs per dth,
decreased sales to residential and commercial customers due to unusually warm
weather during the first quarter of 1998, decreased sales to industrial
customers and decreased gas transition costs which were partially offset by
increased sales to wholesale customers. The increase in electric revenues was
mainly due to increased wholesale electric marketing activities and wholesale
transactions which were partially offset by decreased sales to industrial
customers and decreased fuel costs per kwh. Increased volumes in gas marketing
resulted in an increase of $105.5 million in Products and Services revenues for
the three-month period ended March 31, 1998. For the three months ended March
31, 1998, gas marketing volumes were 68.1 million dth, an increase of 44.4
million dth compared to the three months ended March 31, 1997.
The basic steel industry accounted for 31% of natural gas delivered
(including volumes transported) and 32% of electric sales for the Energy
Utilities during the twelve months ended March 31, 1998.
The components of the variations in gas, electric, water and Products and
Services revenues are shown in the following table:
<TABLE>
<CAPTION>
Variations from Prior Periods
---------------------------------------------------------------------
March 31, 1998 Compared to March 31, 1997
---------------------------------------------------------------------
Three Twelve
(In thousands) Months Months
======= =======
<S> <C> <C>
Gas Revenue -
Pass through of net changes in
purchased gas costs, gas storage,
and storage transportation costs $ (44,453) $ (55,177)
Gas transition costs (7,483) (13,195)
Changes in sales levels (39,719) (24,712)
Gas transported 990 4,467
----------- -----------
Gas Revenue Change (90,665) (88,617)
----------- -----------
Electric Revenue -
Pass through of net changes
in fuel costs (4,960) (3,339)
Changes in sales levels (678) (4,847)
Wholesale electric marketing 68,815 223,229
----------- ------------
Electric Revenue Change 63,177 215,043
----------- ------------
Water Revenue Change 17,709 78,452
----------- ------------
Products and Services Revenues -
Gas marketing 105,529 344,474
Pipeline construction 11,151 58,326
Locate and marking 11,286 59,640
Other 1,207 6,140
------------ ------------
Products and Services Revenue Change 129,173 468,580
------------ ------------
Total Revenue Change $ 119,394 $ 673,458
=========== ============
</TABLE>
See Note 6 to Notes to Consolidated Financial Statements regarding FERC
Order No. 636 transition costs.
Gas Costs -
The Energy Utilities' gas costs decreased $76.4 million and $80.5 million
for the three-month and twelve-month periods ended March 31, 1998, respectively.
Gas costs decreased for the three-month and twelve-month periods due to
decreased gas purchases, decreased gas costs per dth and decreased gas
transition costs. The average cost for the Energy Utilities' purchased gas for
the three-month and twelve-month periods ended March 31, 1998, after adjustment
for gas transition costs billed to transport customers, was $2.60 and $2.90 per
dth, respectively, as compared to $3.45 and $3.19 per dth for the same periods
in 1997.
Fuel and Purchased Power -
The cost of fuel for electric generation increased $1.3 million for the
twelve-month period ended March 31, 1998, compared to the 1997 periods, mainly
as a result of increased production of electricity. The cost of fuel for
electric generation decreased $2.8 million for the three months ended March 31,
1998 compared to the three months ended March 31, 1997 due to decreased
production of electricity.
Power purchased increased $66.6 million and $205.9 million for the
three-month and twelve-month periods ended March 31, 1998, respectively,
reflecting increased purchases of wholesale power for marketing activities which
were partially offset by decreased bulk power purchases at Northern Indiana. For
the twelve months ended March 31, 1998, electric power marketing purchases were
10.7 million kwh, an increase of 9.8 million kwh compared to the same period in
1997. Electric power marketing purchases increased 2.8 million kwh for the three
months ended March 31, 1998 compared to March 31, 1997.
Cost of Products and Services -
The cost of sales for Products and Services increased $433.9 million for
the twelve months ended March 31, 1998. The increase includes $85.0 million
reflecting twelve months of cost of sales from IWCR for the period. Increased
volumes in gas marketing activities increased cost of sales $321.2 million for
the twelve-months ended March 31, 1998, compared to March 31, 1997.
The cost of sales for Products and Services increased $125.6 million for
the three-months ended March 31, 1998, compared to the 1997 period. The increase
includes $17.9 million related to the cost of sales for IWCR in the current
period. Increased volumes in gas marketing activities increased cost of sales
$109.4 million for the three months ended March 31, 1998, compared to March 31,
1997.
Operating Margins -
Operating margins for the twelve months ended March 31, 1998 increased
$112.8 million from the same period a year ago. The increase in operating
margins includes $115.7 million related to twelve months of IWCR operations in
the period. The operating margin from gas deliveries decreased $8.1 million due
to decreased sales to residential and commercial customers reflecting unusually
warm weather in the first quarter of 1998 and decreased industrial sales which
were partially offset by increased sales to wholesale customers. Electric
operating margin increased $7.8 million due to increased sales to commercial
customers and increased wholesale transactions. The operating margin for
Products and Services, excluding IWCR, decreased $2.9 million, primarily from a
decrease in gas marketing margin offset by an increase in operating margin from
the LEC and Portside operations.
Operating margins for the three months ended March 31, 1998 increased $6.5
million from the same period a year ago. The increase in operating margins
includes $23.1 million related to three months of IWCR operations in the current
period. Gas operating margin decreased $14.3 million due to decreased sales to
residential and commercial customers reflecting unusually mild weather during
the period and decreased industrial sales, partially offset by increased
wholesale sales and gas transported for others. Electric operating margin
increased $2.5 million mainly as a result of increased wholesale transactions.
The operating margin for Products and Services, excluding IWCR, decreased $1.8
million, primarily reflecting a decrease in gas marketing margin.
Operating Expenses and Taxes -
Operation expenses increased $60.6 million for the twelve-month period
ended March 31, 1998. Operation expense includes an increase of $62.4 million
reflecting operations of IWCR in the current twelve-month period. New operations
at LEC and Portside increased operation expenses approximately $10.8 million.
This increase was offset by decreased environmental cleanup costs of $4.2
million, decreased employee costs of $3.8 million and decreased pollution
control facility costs of $2.2 million at Northern Indiana. Operation expenses,
excluding IWCR, for the three-month period ended March 31, 1998 decreased $11.6
million. Employee costs at Northern Indiana decreased $4.3 million for the three
months ended March 31, 1998 compared to the same period in 1997.
Maintenance expenses increased $3.1 million for the twelve-month period
ended March 31, 1998, mainly reflecting maintenance expenses of the Water
Utilities. Maintenance expenses decreased $0.5 million for the three-month
period ended March 31, 1998.
Depreciation and amortization expense increased $4.9 million and $18.8
million for the three-month and twelve-month periods ended March 31, 1998,
respectively, primarily reflecting depreciation and amortization at IWCR.
Other Income (Deductions) -
Other Income (Deductions) decreased $6.3 million due to a loss on
disposition of property during the twelve months ended March 31, 1998 and a gain
on the disposition of property during the same period a year ago.
Interest and Other Charges -
Interest and other charges increased for the three-month and twelve-month
periods ended March 31, 1998 reflecting the issuance of $300 million of Capital
Markets' medium-term notes, $75 million of Capital Markets' Junior Subordinated
Deferrable Interest Debentures, Series A and interest expense at IWCR.
See Notes to Consolidated Financial Statements for a discussion of
accounting policies and transactions impacting this analysis.
Net Income -
Industries' net income for the twelve-month period ended March 31, 1998 was
$180.7 million compared to $180.1 million for the twelve-month period ended
March 31, 1997.
Net income for the three months ended March 31, 1998 was $60.7 million
compared to $70.8 million for the three months ended March 31, 1997.
Environmental Matters -
The Utilities have an ongoing program to remain aware of laws and
regulations involved with hazardous waste and other environmental matters. It is
the Utilities' intent to continue to evaluate their facilities and properties
with respect to these rules and identify any sites that would require corrective
action. The Utilities have recorded a reserve of approximately $20 million to
cover probable corrective actions as of March 31, 1998; 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 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 Note 7 "Environmental Matters" 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 majority of earnings
available for distribution of dividends will depend upon dividends paid to
Industries by Northern Indiana. See Note 15 of Notes to Consolidated Financial
Statements for a discussion of the Common Share dividend.
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 March 31, 1998 and December 31,
1997, Northern Indiana had $18.5 million and $71.5 million of commercial paper
outstanding, respectively. At March 31, 1998, the interest rate of commercial
paper outstanding was 5.60%.
Northern Indiana has a $250 million revolving Credit Agreement with several
banks which terminates August 19, 1999. As of March 31, 1998, there were no
borrowings outstanding under this agreement. In addition, Northern Indiana has
$14.2 million in lines of credit. The credit pricing of each of the lines varies
from either the lending banks' commercial prime or market rates. Northern
Indiana has agreed to compensate the participating banks with arrangements that
vary from no commitment fees to a combination of fees which are mutually
satisfactory to both parties. As of March 31, 1998, 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 March 31, 1998 there were no borrowing outstanding under these lines of
credit.
Northern Indiana has a $50 million uncommitted finance facility. At March
31, 1998, there were no borrowings outstanding under this facility.
During recent years, Northern Indiana has been able to finance its
construction program with internally generated funds and expects to be able to
meet future commitments through such funds.
As of March 31, 1998 and December 31, 1997, Capital Markets had $30.0
million and $17.0 million of commercial paper outstanding. At March 31, 1998,
the weighted average interest rate of commercial paper outstanding was 5.76%.
Capital Markets has a $150 million revolving Credit Agreement which will
terminate August 19, 1999. This facility provides short-term financing
flexibility to Industries and also serves as the backup instrument for a
commercial paper program. As of March 31, 1998, there were no borrowings
outstanding under this agreement.
Capital Markets also has $130 million of money market lines of credit. As
of March 31, 1998 and December 31, 1997, $28.0 million and $20.1 million,
respectively, of borrowings were outstanding under these lines of credit.
Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold
$300 million of medium-term notes with various interest rates and maturities.
The proceeds from these issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations of Capital Markets.
The obligations of Capital Markets are subject to a Support Agreement
between Industries and Capital Markets, under which Industries has committed to
make payments of interest and principal on Capital Markets' obligations in the
event of a failure to pay by Capital Markets. Restrictions in the Support
Agreement prohibit recourse on the part of Capital Markets' creditors against
the stock and assets of Northern Indiana which are owned by Industries. Under
the terms of the Support Agreement, in addition to the cash flow of cash
dividends paid to Industries by any of its consolidated subsidiaries, the assets
of Industries, other than the stock and assets of Northern Indiana, are
available as recourse for the benefit of Capital Markets' creditors. The
carrying value of the assets of Industries, other than the assets of Northern
Indiana, reflected in the consolidated financial statements of Industries, was
approximately $1.3 billion at March 31, 1998.
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 and the purchase price was allocated to the assets and liabilities
acquired based on their fair values.
IWCR and its subsidiaries had lines of credit with banks aggregating $78.7
million. At March 31, 1998, $60.1 million of borrowings were outstanding under
these lines of credit.
Industries does not expect the effects of inflation at current levels to
have a significant impact on its results of operations, ability to contain cost
increases, or the Utilities' need to seek timely and adequate rate relief. The
Energy Utilities do not anticipate the need to file for gas and electric base
rate increases in the near future.
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 take 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 any 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 the
third quarter 1998 and other systems no later than the third quarter of 1999.
Industries estimates that costs to become year 2000 compliant will be
approximately $17-$26 million, including acquisition costs of new systems which
will be capitalized consistent with Industries' accounting policies. Costs
related to maintenance or modification of Industries' systems have been and will
be expensed as incurred. Industries does not anticipate the related costs will
have a material impact on its results of operations, nor does Industries
currently 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 and January 1998, legislation was introduced in the Indiana
General Assembly addressing electric utility competition and deregulation.
Neither proposed legislation was adopted. 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.
On October 8, 1997, the Commission approved Northern Indiana's Alternative
Regulatory Plan (ARP) which implements new rates and services that 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 gas cost incentive mechanism and a price protection
program. The gas cost incentive mechanism, which gives Northern Indiana the
opportunity to share any gas cost savings (or losses) with its customers based
on a comparison of Northern Indiana's actual gas supply portfolio costs to a
market based benchmark price, went into effect on Northern Indiana's system
November 1, 1997. The first pilot program was launched in January 1998 and the
first gas volumes flowed under this program in April 1998. The Commission order
allows the natural gas marketing affiliate of Northern Indiana to participate as
a supplier of choice to customers on the Northern Indiana system.
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.
Forward Looking Statements -
This report contains forward looking statements within the meaning of the
securities laws. Forward looking statements include terms such as "may", "will",
"expect", "believe", "plan" and other similar terms. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 are deemed
necessary other than monitoring the degree of convergence between the derivative
and cash markets.
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 counterparties and includes location
differentials. Based on Industries' net commodity position at fair value at
March 31, 1998, a 10% adverse movement in electric and natural gas market prices
would have reduced net income by approximately $0.8 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 the total debt portfolio includes a
medium-term note program, the interest component of which resets on a periodic
basis to reflect current market conditions. The Energy 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 Notes to
Consolidated Financial Statements for detailed information related to
Industries' long-term debt outstanding and the fair value of financial
instruments for the current market valuation of long-term debt.
<PAGE>
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
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, except as described under Note 5 (NESI Energy Marketing
Canada Ltd. Litigation) and Note 7 (Environmental Matters) in the Notes to
Consolidated Financial Statements under Part I, Item 1 of this report on Form
10-Q, which notes are incorporated by reference. No other material legal
proceedings against Industries or its subsidiaries are pending or, to the
knowledge of Industries, contemplated by governmental authorities or other
parties.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders. On April 8,
1998, at the Annual Meeting of Shareholders of the Registrant, shareholders of
the Registrant elected Steven C. Beering, James T. Morris, Denis E. Ribordy and
Carolyn Y. Woo as directors to serve until the 2001 Annual Meeting of
Shareholders. Carolyn Y. Woo was elected to replace Ernestine M. Raclin, who
retired at the expiration of her term. Directors whose term of office as
director continue after the 1998 Annual Meeting of Shareholders are Ian M.
Rolland, Edmund A. Schroer and John W. Thompson, whose terms expire at the 1999
Annual Meeting of Shareholders, and Arthur J. Decio, Gary L. Neale and Robert J.
Welsh, whose terms expire at the 2000 Annual Meeting of Shareholders.
There were no abstentions or broker non-votes for any of the nominees for
directors. The number of vostes cast for, or withheld, for each nominee for
director was as follows:
<TABLE>
<CAPTION>
Votes Votes
Received Withheld
<S> <C> <C> <C>
Steven C. Beering 101,325,618 1,223,579
James T. Morris 101,410,235 1,138,962
Denis E. Ribordy 101,368,173 1,181,024
Carolyn Y. Woo 101,230,143 1,319,053
</TABLE>
Additionally at the Annual Meeting of Shareholders, shareholders of the
Registrant approved an amendment to the Articles of Incorporation to increase
the number of authorized Common Shares from 200,000,000 to 400,000,000. The
number of votes cast for, or withheld, was as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstain
<S> <C> <C> <C>
98,201,052 3,487,304 860,840
</TABLE>
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 3(i) - Restated Articles of Incorporation
Exhibit 23 - Consent of Arthur Andersen LLP
Exhibit 27 - Financial Data Schedule
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Industries hereby agrees
to furnish the Commission, upon request, any instrument defining the rights of
holders of long-term debt of Industries not filed as an exhibit herein. No such
instrument authorizes long-term debt securities in excess of 10% of the total
assets of Industries and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K.
A report on Form 8-K was filed under the date of February 13, 1998. All
events were reported under Item 5, Other Events.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NIPSCO Industries, Inc.
(Registrant)
/s/ STEPHEN P. ADIK
--------------------------------------------------
Stephen P. Adik
Executive Vice President, Chief Financial Officer,
Treasurer and Chief Accounting Officer
Date: May 13, 1998
EXHIBIT A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
NIPSCO INDUSTRIES, INC.
ARTICLE I
Name
The name of the Corporation is NIPSCO Industries, Inc.
ARTICLE II
Period of Duration
The period during which the Corporation shall continue is perpetual.
ARTICLE III
Purpose and Powers
Purpose. The purpose for which the Corporation is formed is the transaction
of any or all lawful business for which corporations may be incorporated under
the Act.
Powers. The Corporation shall have the capacity to act possessed by natural
persons and, subject to any limitations or restrictions imposed by the Act,
other law or the Articles of Incorporation, shall have the power to do all acts
and things necessary, convenient or expedient to carry out the purposes for
which it is formed.
ARTICLE IV
Registered Office and Agent
The street address of the Corporation's registered office in Indiana and
the name of its registered agent at that office is Nina M. Rausch, 5265 Hohman
Avenue, Hammond, Indiana 46320.
ARTICLE V
Authorized Shares
A. Authorized Capital Shares.
The total number of shares which the Corporation shall have the authority
to issue shall be 420,000,000 shares, of which 400,000,000 shares shall be
Common Shares without par value and 20,000,000 shares shall be Preferred Shares
without par value.
B. Preferred Shares.
Preferred Shares may be issued from time to time in one or more series as
may from time to time be determined by the Board of Directors. Each series shall
be distinctly designated. All shares of any one series of the Preferred Shares
shall be alike in every particular, except that there may be different dates
from which dividends thereon, if any, shall be cumulative, if made cumulative.
The powers, preferences and relative, participating, optional and other rights
of each such series, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any other series at any time
outstanding. Subject to the provisions of Section C of this ARTICLE V, the Board
of Directors is hereby expressly granted authority to fix by resolution or
resolutions adopted prior to the issuance of any shares of each particular
series of Preferred Shares, the designation, powers, preferences and relative,
participating, optional and other rights, and the qualifications, limitations
and restrictions thereof, if any, of such series, including, but without
limiting the generality of the foregoing, the following:
(a) the distinctive designation of, and the number of Preferred Shares
which shall constitute the series, which number may be increased (except as
otherwise fixed by the Board of Directors) or decreased (but not below the
number of shares thereof then outstanding) from time to time by action of the
Board of Directors;
(b) the rate and times at which, and the terms and conditions upon which,
dividends, if any, on shares of the series shall be paid, the extent of
preferences or relation, if any, of such dividends to the dividends payable on
any other class or classes of shares of the Corporation, or on any series of
Preferred Shares or of any other class or classes of shares of the Corporation
and whether such dividends shall be cumulative or noncumulative;
(c) the right, if any, of the holders of shares of the series to convert
the same into, or exchange the same for, shares of any other class or classes of
shares of the Corporation, or any series of Preferred Shares, and the terms and
conditions of such conversion or exchange;
(d) whether shares of the series shall be subject to a redemption price or
prices including, without limitation, a redemption price or prices payable in
Common Shares and the time or times at which, and the terms and conditions upon
which shares of the series may be redeemed;
(e) the rights, if any, of the holders of shares of the series upon
voluntary or involuntary liquidation, merger, consolidation, distribution or
sale of assets, dissolution or winding up of the Corporation;
(f) the terms of the sinking fund or redemption or purchase account, if
any, to be provided for shares of the series; and
(g) the voting powers, if any, of the holders of shares of the series which
may, without limiting the generality of the foregoing, include (i) the right to
more or less than one vote per share on any or all matters voted upon by the
shareholders and (ii) the right to vote, as a series by itself or together with
other series of Preferred Shares or together with all series of Preferred Shares
as a class, upon such matters, under such circumstances and upon such conditions
as the Board of Directors may fix, including, without limitation, the right,
voting as a series by itself or together with other series of Preferred Shares
or together with all series of Preferred Shares as a class, to elect one or more
directors of this Corporation in the event there shall have been a default in
the payment of dividends on any one or more series of Preferred Shares or under
such other circumstances and upon such conditions as the Board of Directors may
determine.
No holder of any shares of any series of Preferred Shares shall be entitled
to vote for the election of directors or in respect of any other matter except
as may be required by the Indiana Business Corporation Law, as amended, or as is
permitted by the resolution or resolutions adopted by the Board of Directors
authorizing the issue of such series of Preferred Shares.
C. Common Shares.
1. After the requirements with respect to the preferential dividends on
Preferred Shares (fixed in accordance with the provisions of Section B of this
ARTICLE V), if any, shall have been met and after this Corporation shall have
complied with all the requirements, if any, with respect to the setting aside of
sums as sinking funds or redemption or purchase accounts (fixed in accordance
with the provisions of Section B of this ARTICLE V) and subject further to any
other conditions which may be fixed in accordance with the provisions of Section
B of this ARTICLE V, then, but not otherwise, the holders of Common Shares shall
be entitled to receive such dividends, if any, as may be declared from time to
time by the Board of Directors.
2. After distribution in full of the preferential amount (fixed in
accordance with the provisions of Section B of this ARTICLE V), if any, to be
distributed to the holders of Preferred Shares in the event of voluntary or
involuntary liquidation, distribution or sale of assets, dissolution or winding
up of the Corporation, the holders of the Common Shares shall be entitled to
receive all the remaining assets of the Corporation, tangible and intangible, of
whatever kind available for distribution to shareholders, ratably in proportion
to the number of Common Shares held by each.
3. Except as may otherwise be required by law, these Articles of
Incorporation or the provisions of the resolution or resolutions as may be
adopted by the Board of Directors pursuant to Section B of this ARTICLE V, each
holder of Common Shares shall have one vote in respect of each Common Shares
held by such holder on each matter voted upon by the shareholders and any such
right to vote shall not be cumulative.
D. Other Provisions.
1. The relative powers, preferences, and rights of each series of Preferred
Shares in relation to the powers, preferences and right of each other series of
Preferred Shares shall, in each case, be as fixed from time to time by the Board
of Directors in the resolution or resolutions adopted pursuant to authority
granted in Section B of this ARTICLE V, and the consent by class or series vote
or otherwise, of the holders of the Preferred Shares or such of the series of
the Preferred Shares as are from time to time outstanding shall not be required
for the issuance by the Board of Directors of any other series of Preferred
Shares whether the powers, preferences and rights of such other series shall be
fixed by the Board of Directors as senior to, or on a parity with, powers,
preferences and rights of such outstanding series, or any of them, provided,
however, that the Board of Directors may provide in such resolution or
resolutions adopted with respect to any series of Preferred Shares that the
consent of the holders of a majority (or such greater proportion as shall be
therein fixed) of the outstanding shares of such series voting thereon shall be
required for the issuance of any or all other series of Preferred Shares.
2. Subject to the provisions of Paragraph 1 of this Section D, shares of
any series of Preferred Shares may be issued from time to time as the Board of
Directors shall determine and on such terms and for such consideration as shall
be fixed by the Board of Directors.
3. Common Shares may be issued from time to time as the Board of Directors
shall determine and on such terms and for such consideration as shall be fixed
by the Board of Directors.
4. No holder of any of the shares of any class or series of shares or
securities convertible into such shares of any class or series of shares, or of
options, warrants or other rights to purchase or acquire shares of any class or
series of shares or of other securities of the Corporation shall have any
preemptive right to purchase, acquire or subscribe for any unissued shares of
any class or series or any additional shares of any class or series to be issued
by reason of any increase of the authorized capital shares of the Corporation of
any class or series, or bonds, certificates of indebtedness, debentures or other
securities convertible into or exchangeable for shares or any class or series,
or carrying any right to purchase or acquire shares of any class or series, but
any such unissued shares, additional authorized issue of shares of any class or
series of shares or securities convertible into or exchangeable for shares, or
carrying any right to purchase or acquire shares, may be issued and disposed of
pursuant to resolution of the Board of Directors to such persons, firms,
corporations or associations, and upon such terms as may be deemed advisable by
the Board of Directors in the exercise of its sole discretion.
5. The Corporation reserves the right to increase or decrease its
authorized capital shares, or any class or series thereof, or to reclassify the
same and to amend, alter, change or repeal any provision contained in the
Articles of Incorporation, or in any amendment thereto, in the manner now or
hereafter prescribed by law, but subject to such conditions and limitations as
are hereinbefore prescribed, and all right conferred upon shareholders in the
Articles of Incorporation of this Corporation, or any amendment thereto, are
granted subject to this reservation.
6. Unless any statute of the State of Indiana shall expressly provide to
the contrary and subject to the limitations hereinbefore set forth in this
ARTICLE V, the Corporation may acquire, hold and dispose of any of its shares of
any class heretofore issued and outstanding.
E. Series A Junior Participating Preferred Shares.
1. This Section E of the ARTICLE V hereby creates a series of Preferred
Shares and hereby states the designation and number of shares, and fixes the
relative powers, preferences and rights of such series.
2. Designation and Amount. The shares of such series shall be designated as
"Series A Junior Participating Preferred Shares" (the "Series A Preferred
Shares") and the number of shares constituting the Series A Preferred Shares
shall be 2,000,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of Series A Preferred Shares to a number less than the number of
shares then outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, rights or warrants or upon the conversion of
any outstanding securities issued by the Corporation convertible into Series A
Preferred Shares.
3. Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any series of
Preferred Shares (or any similar shares) ranking prior and superior to the
Series A Preferred Shares with respect to dividends, the holders of Series A
Preferred Shares, in preference to the holders of Common Shares and of any other
junior shares, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the 20th day of February, May, August and November
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Shares, in an amount per share (rounded to the nearest cent) equal to the
greater of (i) $26 or (ii) subject to the provision for adjustment hereinafter
set forth, 100 times the aggregate per share amount of all cash dividends, and
100 times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in Common Shares
or a subdivision of the outstanding Common Shares (by reclassification or
otherwise), declared on the Common Shares since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any Series A Preferred Share or
fraction of a Series A Preferred Share. In the event the Corporation shall at
any time declare or pay any dividend on the Common Shares payable in Common
Shares, or effect a subdivision or combination or consolidation of the
outstanding Common Shares (by reclassification or otherwise than by payment of a
dividend in Common Shares) into a greater or lesser number of Common Shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of Common Shares outstanding immediately after
such event and the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series
A Preferred Shares as provided in paragraph 3(a) of the Section E immediately
after it declares a dividend or distribution on the Common Shares (other than a
dividend payable in Common Shares); provided that, in the event no dividend or
distribution shall have been declared on the Common Shares during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $26 per share on the Series A Preferred
Shares shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding Series
A Preferred Shares from the Quarterly Dividend Payment Date next preceding the
date of issue of such shares, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of Series A
Preferred Shares entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
Series A Preferred Shares in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
Series A Preferred Shares entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
4. Voting Rights. The holders of Series A Preferred Shares will have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
Series A Preferred Share shall entitle the holder thereof to 100 votes on all
matters submitted to a vote of the shareholders of the Corporation. In the event
the Corporation shall at any time declare or pay any dividend on the Common
Shares payable in Common Shares, or effect a subdivision or combination or
consolidation of the outstanding Common Shares (by reclassification or otherwise
than by payment of a dividend in Common Shares) into a greater or lesser number
of Common Shares, then in each such case the number of votes per share to which
holders of Series A Preferred Shares were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction, the numerator
of which is the number of Common Shares outstanding immediately after such event
and the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event;
(b) Except as otherwise provided herein, in any other provisions of the
Articles of Incorporation of the Corporation creating a series of Preferred
Shares or any similar shares, or by law, the holders of Series A Preferred
Shares and the holders of Common Shares and any other capital shares of the
Corporation having general voting rights shall vote together as one class on all
matters submitted to a vote of shareholders of the Corporation;
(c) If at the time of any annual meeting of shareholders for the election
of directors a "default in preference dividends" on the Series A Preferred
Shares shall exist, the number of directors constituting the Board of Directors
of the Company shall be increased by two (2), and the holders of the Preferred
Shares of all series (whether or not the holders of such series of Preferred
Shares would be entitled to vote for the election of directors if such default
in preference dividends did not exist) shall have the right at such meeting,
voting together as a single class without regard to series, to the exclusion of
the holders of Common Shares, to elect two (2) directors of the Company to fill
such newly created directorships. Such right shall continue until there are no
dividends in arrears upon the Preferred Shares. Each director elected by the
holders of Preferred Shares (a "Preferred Director") shall continue to serve as
such director for the full term for which he shall have been elected,
notwithstanding that prior to the end of such term a default in preference
dividends shall cease to exist. Any Preferred Director may be removed by, and
shall not be removed except by, the vote of the holders of record of the
outstanding Preferred Shares voting together as a single class without regard to
series, at a meeting of the shareholders or of the holders of Preferred Shares
called for the purpose. So long as a default in any preference dividends on the
Preferred Shares shall exist, (i) any vacancy in the office of a Preferred
Director may be filled (except as provided in the following clause (ii)) by an
instrument in writing signed by the remaining Preferred Director and filed with
the Company and (ii) in the case of the removal of any Preferred Director, the
vacancy may be filled by the vote of the holders of the outstanding Preferred
Shares voting together as a single class without regard to series, at the same
meeting at which such removal shall voted. Each director appointed as aforesaid
by the remaining Preferred Director shall be deemed, for all purposes hereof, to
be a Preferred Director. Whenever the term of office of the Preferred Directors
shall end and a default in preference dividends shall no longer exist, the
number of directors constituting the Board of Directors of the Company shall be
reduced by two (2). For the purposes hereof, a "default in preference dividends"
on the Preferred Shares shall be deemed to have occurred whenever the amount of
accrued dividends upon any series of the Preferred Shares shall be equivalent to
six (6) full quarterly dividends or more, and, having so occurred, such default
shall be deemed to exist thereafter until, but only until, all accrued dividends
on all Preferred Shares of each and every series then outstanding shall have
been paid to the end of the last preceding quarterly dividend period; and
(d) Except as set forth herein, or as otherwise provided by law, holders of
Series A Preferred Shares shall have no special voting rights and their consent
shall not be required (except to the extend they are entitled to vote with
holders of Common Shares as set forth herein) for taking any corporate action;
and
5. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Shares, as provided in paragraph 3 of this
Section E, are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on Series A Preferred Shares
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Shares;
(ii) declare or pay dividends, or make any other distributions,
on any shares ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred
Shares, except dividends paid ratably on the Series A Preferred Shares
and all such parity shares on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
any shares ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Shares, provided
that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior shares in exchange for any shares of
the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred
Shares; or
(iv) redeem or purchase or otherwise acquire for consideration
any Series A Preferred Shares, or any shares ranking on a parity with
the Series A Preferred Shares, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of the Corporation
unless the Corporation could, under paragraph 5(a) of this Section E, purchase
or otherwise acquire such shares at such time and in such manner.
6. Reacquired Shares. Any Series A Preferred Shares purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued Preferred Shares and may be
reissued as part of a new series of Preferred Shares subject to the conditions
and restrictions on issuance set forth in the Articles of Incorporation of the
Corporation creating a series of Preferred Shares or any similar shares or as
otherwise required by law.
7. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (a)
to the holders of shares ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Shares unless,
prior thereto, the holders of Series A Preferred Shares shall have received
$6,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of Series A Preferred Shares shall be entitled to
receive an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount to be distributed
per share to holders of Common Shares, or (b) to the holders of shares ranking
on a parity (either as to dividends or upon liquidation, dissolution or winding
up) with the Series A Preferred Shares, except distributions made ratably on the
Series A Preferred Shares and all such parity shares in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time declare or pay any dividend on the Common Shares payable in Common
Shares, or effect a subdivision or combination or consolidation of the
outstanding Common Shares (by reclassification or otherwise than by payment of a
dividend in Common Shares) into a greater or lesser number of Common Shares,
then in each such case the aggregate amount to which holders of Series A
Preferred Shares were entitled immediately prior to such event under the proviso
in clause (A) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of a Common Shares
outstanding immediately after such event and the denominator of which is the
number of Common Shares that were outstanding immediately prior to such event.
8. Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the Common
Shares are exchanged for or changed into other shares or securities, cash and/or
any other property, then in any such case each Series A Preferred Share shall at
the same time be similarly exchanged or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount of shares, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each Common Share
is changed or exchanged. In the event the Corporation shall at any time declare
or pay any dividend on the Common Shares payable in Common Shares, or effect a
subdivision or combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise than by payment of a dividend in Common Shares)
into a greater or lesser number of Common Shares, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of Series A Preferred Shares shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the number of
Common Shares that were outstanding immediately prior to such event. 9. No
Redemption. The Series A Preferred Shares shall not be redeemable.
10. Conversion. The Series A Preferred Shares shall not be convertible into
Common Shares or shares of any other series of any other class of Preferred
Shares.
11. Rank. The Series A Preferred Shares shall rank, with respect to the
payment of dividends and the distribution of assets, junior to all series of any
other class of Preferred Shares, unless the terms of any such series shall
provide otherwise.
12. Amendment. The Articles of Incorporation of the Corporation shall not
be amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series A Preferred Shares so as to affect
them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding Series A Preferred Shares, voting together as a
single class.
F. 8.75% Series Cumulative Preferred Shares.
1. This Section F of this ARTICLE V hereby creates a series of Preferred
Shares and hereby states the designation and number of shares, and fixes the
powers, preferences and relative participating, optional and other rights of
such series, and the qualifications, limitation and restrictions thereof.
2. Designation And Amount. The shares of such series shall be designated as
"8.75% Series Cumulative Preferred Shares (Liquidation Preference $100 Per
Share)" (the "8.75% Series Preferred Shares") and the number of shares
constituting the 8.75% Series Preferred Shares shall be 350,000.
3. Dividends.
(a) The holders of 8.75% Series Preferred Shares, in preference to the
holders of the Series A Preferred Shares, the Common Shares and of any other
junior shares hereafter created, shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available for the
purpose, cumulative quarterly dividends at the rate of 8.75% per annum, computed
on the liquidation preference of the 8.75% Series Preferred Shares (using for
such computation a month of 30 days and a year of 360 days), payable in arrears
in cash on the 14th day of January, April, July and October in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date") to
the holders of record as of the 14th day of the month prior to such respective
dates, commencing on January 14, 1991. Dividends shall accumulate on a daily
basis. Holders of 8.75% Series Preferred Shares shall not be entitled to any
dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided on such shares. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on 8.75% Series Preferred Shares that may be in arrears. The initial
dividend shall be that proportion of a quarterly dividend that the number of
days (using a month of 30 days and a year of 360 days) from the date of sale and
delivery of such shares (including such date) to January 14, 1991, (excluding
such date) bears to ninety days.
(b) Except as set forth in the next sentence, no dividends shall be
declared, paid or set apart for payment on, or any other distributions made in
respect of, shares of any class or series ranking, as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, on a parity with the 8.75% Series Preferred Shares, unless full
cumulative dividends have been or contemporaneously are declared and paid on the
8.75% Series Preferred Shares through the most recent Quarterly Dividend Payment
Date. When dividends are not paid in full as aforesaid, upon the 8.75% Series
Preferred Shares, or on any such parity shares through the most recent
respective dividend payment date(s) thereof, all dividends declared upon the
8.75% Series Preferred Shares and such parity shares shall be declared
contemporaneously and pro rate so that the amount of dividends declared per
share on the 8.75% Series Preferred Shares and such parity shares shall in all
cases bear to each other the same ratio that accumulated dividends per share on
the 8.75% Series Preferred Shares and such other shares bear to each other (for
purposes of the foregoing, the amount of dividends declared per share shall be
based on the applicable dividend rate for such shares for the dividend period(s)
for which dividends were not paid in full).
4. Voting Rights. The holders of 8.75% Series Preferred Shares shall have
voting rights only as provided by law or as specifically set forth in this
Section F.
(a) Each 8.75% Series Preferred Share shall entitle the holder thereof to
one vote on all matters on which the shares may be voted.
(b) If at the time of any annual meeting of shareholders for the election
of directors a "default in preference dividends" on the 8.75% Series Preferred
Shares, or on any series of Preferred Shares, ranking on a parity with the 8.75%
Series Preferred Shares as to the payment of dividends and the distribution of
assets upon liquidation, dissolution or winding up, shall exist, the holders of
the 8.75% Series Preferred Shares and such parity shares shall have the right at
such meeting, voting together as a single class without regard to series, to the
exclusion of the holders of Common Shares and all other securities of the
Corporation, to elect two (2) directors of the Corporation. Such right shall
continue until there are no dividends in arrears upon the 8.75% Series Preferred
Shares. Each director elected by the holders of Preferred Shares as aforesaid
and any such parity shares (a "Preferred Director") shall continue to serve as
such director for the full term for which he shall have been elected,
notwithstanding that prior to the end of such term a default in preference
dividends shall cease to exist. Any Preferred Director may be removed by, and
shall not be removed except by, the vote of the holders of record of the
outstanding 8.75% Series Preferred Shares and any such parity shares voting
together as a single class without regard to series, at a meeting of the
shareholders or of the holders of 8.75% Series Preferred Shares and any such
parity shares called for the purpose. So long as a default in any preference
dividends on the 8.75% Series Preferred Shares or any such parity shares shall
exist, (i) any vacancy in the office of a Preferred Director may be filled
(except as provided in the following clause (ii)) by an instrument in writing
signed by the remaining Preferred Director and filed with the Company and (ii)
in the case of the removal of any Preferred Director, the vacancy may be filled
by the vote of the holders of the outstanding 8.75% Series Preferred Shares and
any such parity shares voting together as a single class without regard to
series, at the same meeting at which such removal shall be voted. Each director
appointed as aforesaid by the remaining Preferred Director shall be deemed, for
all purposes hereof, to be a Preferred Director. For the purposes hereof, a
"default in preference dividends" shall be deemed to have occurred whenever the
amount of accumulated dividends upon the 8.75% Series Preferred Shares or any
series of shares ranking on a parity therewith as to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding up shall
be equivalent to four (4) full quarterly dividends or more, and, having so
occurred, such default shall be deemed to exist thereafter until, but only
until, all accumulated dividends on all 8.75% Series Preferred Shares and any
such parity shares then outstanding shall have been paid to the end of the last
preceding quarterly dividend period or equivalent thereof.
(c) The Corporation shall not, without the vote or consent of the holders
of two-thirds of the outstanding 8.75% Series Preferred Shares and Preferred
Shares ranking on a parity with the 8.75% Series Preferred Shares as to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, amend its Articles of Incorporation to create or
authorize any class or series of shares, or any class or series of securities
convertible into any class or series of shares, which would rank prior to the
8.75% Series Preferred Shares and such parity shares as to the payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up.
5. Certain Restrictions.
(a) Whenever quarterly dividends payable on the 8.75% Series Preferred
Shares, as provided in paragraph 3 of this Section F, are in arrears, or in the
event the Corporation shall have failed to redeem the 8.75% Series Preferred
Shares on January 14, 1996, in accordance with the provisions of Section 8
hereof, thereafter and until all accumulated and unpaid dividends, whether or
not earned or declared, on 8.75% Series Preferred Shares outstanding shall have
been paid in full, or until such redemption shall have been effected, as the
case may be, the Corporation shall not:
(i) declare, pay or set apart for payment dividends, or make any other
distributions, on any shares ranking junior (either as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution
or winding up) to the 8.75% Series Preferred Shares;
(ii) redeem or purchase or otherwise acquire for consideration any
shares ranking junior (either as to the payment of dividends or as to the
distribution of assets upon liquidation, dissolution or winding up) to the
8.75% Series Preferred Shares, provided that the Corporation may at any
time redeem, purchase or otherwise acquire any such junior shares in
exchange for any shares of the Corporation ranking junior (either as to the
payment of dividends or as to the distribution of assets upon dissolution,
liquidation or winding up) to the 8.75% Series Preferred Shares; or
(iii) redeem or purchase or otherwise acquire for consideration any
8.75% Series Preferred Shares, or any shares ranking on a parity with the
8.75% Series Preferred Shares, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors)
to all holders of all such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment
among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of the
Corporation unless the Corporation could, under paragraph 5(a) of this
Section F, purchase or otherwise acquire such shares at such time and in
such manner.
6. Reacquired Shares. Any 8.75% Series Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued
Preferred Shares and may be reissued as part of a new series of Preferred
Shares subject to the conditions and restrictions on issuance set forth
herein and in the Articles of Incorporation of the Corporation creating a
series of Preferred Shares or any similar shares or as otherwise required
by law.
7. Liquidation, Dissolution or Winding Up. Upon the liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of 8.75% Series Preferred Shares will be entitled
to receive and to be paid out of the assets of the Corporation available
for distribution to its shareholders, before any payment or distribution
shall be made on the Common Shares or on any other class of shares of the
Corporation ranking junior to the 8.75% Series Preferred Shares as to the
distribution of assets upon liquidation, dissolution or winding up, an
amount equal to the liquidation preference with respect to such shares plus
an amount equal to all dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date of final distribution. The
liquidation preference for 8.75% Series Preferred Shares shall be $100.00
per share. After the payment to the holders of 8.75% Series Preferred
Shares of the full preferential amounts provided for as described herein,
the holders of 8.75% Series Preferred Shares as such shall have no right or
claim to any of the remaining assets of the Corporation. In the event the
assets of the Corporation available for distribution to the holders of
8.75% Series Preferred Shares upon any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, shall be
insufficient to pay in full all amounts to which such holders are entitled,
no such distribution shall be made on account of any shares of any other
class or series of Preferred Shares ranking on a parity with the 8.75%
Series Preferred Shares upon such liquidation, dissolution or winding up
unless proportionate distributive amounts shall be paid on account of the
shares of 8.75% Series Preferred Shares, ratable, in proportion to the full
distributable amounts for which holders of all such parity shares are
respectively entitled upon such liquidation. Subject to the rights of the
holders of shares of any series or class or classes of shares ranking on a
parity with the 8.75% Series Preferred Shares with respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the holders of
the 8.75% Series Preferred Shares as described herein, but not prior
thereto, any other series or class or classes of shares ranking junior to
the 8.75% Series Preferred Shares with respect to the distribution of
assets upon liquidation, dissolution or winding up shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the
holders of the 8.75% Series Preferred Shares shall not be entitled to share
therein.
8. Redemption.
(a) The 8.75% Series Preferred Shares shall be redeemed in whole by
the Corporation on January 14, 1996, at the redemption price of $100 per
share plus all unpaid cumulative dividends accumulated thereon to the date
of redemption, whether or not earned or declared. The Corporation shall
give notice of such redemption to the holders of the 8.75% Series Preferred
Shares by mail not more than sixty (60) but not less than thirty (30) days
prior to the redemption date, but failure to so mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of
such redemption.
(b) The Corporation shall, after giving notice of redemption as herein
provided, or after giving to the bank or trust company hereinafter referred
to irrevocable authority to give due notice, deposit at any time on or
prior to the redemption date specified in such notice, and after the
earliest date on which notice of redemption may be given as herein
provided, the amount of the aggregate redemption price plus all unpaid
cumulative dividends accumulated to the redemption date (whether or not
earned or declared) on the 8.75% Series Preferred Shares to be redeemed,
with a bank or trust company having a capital and surplus of at least five
million dollars and its principal office in the City of Chicago, Illinois,
designated in such notice, in trust for the holders of such shares so to be
redeemed, payable to the holders thereof on the date fixed for redemption,
and then, from and after the date of such deposit, such shares,
notwithstanding that any certificate for such shares so called for
redemption shall not have been surrendered for cancellation, shall no
longer be deemed outstanding and shall be deemed canceled and retired, and
each holder thereof shall not thereafter be entitled to receive any further
dividends or be entitled to exercise any rights as a holder of such shares,
excepting only the right to receive the redemption price thereof plus all
unpaid cumulative dividends accumulated thereon to the date of redemption
(whether or not earned or declared), but without interest thereon. The
moneys so deposited for the redemption of such shares shall be paid to the
holders of such shares upon the surrender to the Corporation for
cancellation of the certificates representing such shares, properly
endorsed in blank for transfer or accompanied by proper instruments of
assignment in blank (if required by the Corporation) and bearing all
necessary stock transfer tax stamps thereto affixed and canceled.
(c) In case the holder of any certificate for any 8.75% Series
Preferred Shares which shall have been redeemed shall not, within six (6)
years after such redemption date, claim the amount deposited for the
redemption thereof, any such bank or trust company shall, upon demand, pay
over to the Corporation such unclaimed amount and shall thereupon be
relieved of all responsibility in respect thereof; provided such bank or
trust company, before being required to make any such payment, may (at the
expense of the Corporation) cause to be published once a week on any
business day of the week for two (2) consecutive weeks in a newspaper of
general circulation in the city of Chicago, Illinois, customarily published
on each business day, a notice that such moneys have not been so called for
and that after a date named therein such moneys will be returned to the
Corporation.
9. Conversion. The 8.75% Series Preferred Shares shall not be
convertible into Common Shares or shares of any other class or series of
the Corporation.
10. Rank. The 8.75% Series Preferred Shares shall rank, with respect
to the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up, on a parity with all series of
Preferred Shares, unless the terms of any such series shall provide
otherwise. The Series A Preferred Shares shall rank junior to the 8.75%
Series Preferred Shares both as to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up.
11. Amendment. The Articles of Incorporation of the Corporation shall
not be amended in any manner which would materially alter or change the
designation, rights or preferences of the 8.75% Series Preferred Shares so
as to affect them adversely without the affirmative vote of the holders of
at least two-thirds of such shares then outstanding.
ARTICLE VI
Directors
1. The Board of Directors of the Corporation shall consist of ten (10)
directors. The directors shall be divided into three classes, and each
class shall consist of one-third, or as near as may be, of the total number
of directors constituting the Board of Directors. At the 1988 and at each
succeeding annual meeting of shareholders, successors to the class of
directors whose terms expire at that annual meeting shall be elected to
hold office for a three-year term, so that the term of office of one class
of directors shall expire in each year. In the event that the holders of
Preferred Shares are entitled at any shareholders meeting to elect
directors, then the term of office of all persons who may be directors
shall terminate upon the election of their successors at such meeting of
shareholders.
2. A director shall hold office until the annual meeting for the year
in which his term expires and until his successor shall be elected and
shall qualify, subject, however, to prior death, resignation, retirement,
age and service limitations as may be set forth in the Bylaws,
disqualification or removal from office. Any vacancy on the Board of
Directors shall be filled by a majority of the Board of Directors then in
office even if less than a quorum, or by a sole remaining director. Any
director elected by the Board of Directors shall hold office until the
annual meeting for the year in which the term for that Class of Directors
shall expire.
3. A director may be removed by the directors or the shareholders, but
only for cause. If by directors, such action may be taken only at a meeting
of the Board, the meeting notice for which must state that the purpose, or
one of the purposes, of the meeting is the removal of the director, and the
affirmative vote of two-thirds of the remaining directors is necessary to
remove the director. If removal is by vote of the shareholders, it may only
be considered at an annual meeting of shareholders, and the affirmative
vote of two-thirds of the shares then entitled to vote for the election of
directors is necessary to remove the director. For purposes of this
section, cause for removal shall be construed to exist only if a director
whose removal is proposed has been convicted of a felony by a court of
competent jurisdiction and such conviction is no longer subject to appeal,
or has been adjudged by a court of competent jurisdiction to be liable for
willful misconduct in the performance of his or her duty to the Corporation
in a matter of substantial importance to the Corporation and such
adjudication is no longer subject to appeal.
ARTICLE VII
Business Combinations
A. Market Value Required.
Notwithstanding any other provision of these Articles of
Incorporation, the Corporation may not engage in any Business Combination
(hereinafter defined) with any Interested Shareholder (hereinafter defined)
of the Corporation unless the Business Combination meets the requirement
specified in either paragraphs 1, 2, 3 following:
1. A Business Combination approved by the Board of Directors of the
Corporation before the Interested Shareholders Acquisition Date, or as to
which the purchase of shares made by the Interested Shareholder on the
interested Shareholder's Acquisition Date had been approved by the Board of
Directors of the Corporation before the Interested Shareholder's
Acquisition Date.
2. A Business Combination approved by the affirmative vote of the
holders of a majority of the outstanding voting shares not beneficially
owned by the Interested Shareholder proposing the Business Combination, or
any Affiliate or Associate of the Interested Shareholder proposing the
Business Combination, at a meeting called for that purpose no earlier than
five (5) years after the Interested Shareholder's Acquisition Date.
3. A Business Combination that meets all of the following conditions:
(a) The aggregate amount of cash and the Market Value (as hereinafter
defined), as of the date of the consummation of the Business Combination,
of consideration other than cash to be received per share by holders of
Common Shares in such Business Combination, shall be at least equal to the
highest amount determined under clauses (i) and (ii) below:
(i) the highest per share price paid by or behalf of the
Interested Shareholder when the Interested Shareholder was the
beneficial owner (directly or indirectly) of five percent (5%) of the
outstanding voting shares for any Common Share in connection with the
acquisition by the Interested Shareholder of beneficial ownership of
Common Shares (x) within the five-year period immediately prior to the
first public announcement of the proposed Business Combination (the
"Announcement Date") or (y) in the transaction in which it became an
Interested Shareholder, whichever is higher, plus, in either case,
interest compounded annually from the earliest date on which the
highest per share acquisition price was paid through the consummation
date at the rate specified in the Act less the aggregate amount of any
cash dividends paid, and the market value of any dividends paid other
than in cash, per common share since the earliest date, up to the
amount of the interest.
(ii) the Market Value per Common Share on the Announcement Date
or on the date on which the Interested Shareholder became an
Interested Shareholder (the "Acquisition Date"), whichever is higher,
plus interest compounded annually from that date through the
consummation date at the rate specified in the Act less the aggregate
amount of any cash dividends paid, and the market value of any
dividends paid other than in cash, per common share since the earliest
date, up to the amount of the interest. (b) The aggregate amount of
cash and the Market Value (as hereinafter defined), as of the date of
the consummation of the Business Combination, of consideration other
than cash to be received per share by holders of shares of any class
or series of outstanding Preferred Shares in such Business Combination
shall be at least equal to the highest amount determined under clauses
(i), (ii) and (iii) below:
(i) the highest per share price paid by or on behalf of the
Interested Shareholder at a time when the Interested Shareholder was
the beneficial owner, directly or indirectly, of five percent (5%) or
more of the outstanding voting shares of the Corporation for any share
of such class or series of Preferred Shares in connection with the
acquisition by the Interested Shareholder of beneficial ownership of
shares of such class or series of Preferred Shares (x) within the
five-year period immediately prior to the Announcement Date or (y) in
the transaction in which it became an Interested Shareholder,
whichever is higher, plus in either case, interest compounded annually
from the earliest date on which the highest per share acquisition
price was paid through the consummation date at the rate specified in
the Act less the aggregate amount of any cash dividends paid, and the
market value of any dividends paid other than in cash, per common
share since the earliest date, up to the amount of the interest.
(ii) the Market Value per share of such class or series of
Preferred Shares on the Announcement Date or on the Acquisition Date,
whichever is higher, plus interest compounded annually from that date
through the consummation date at the rate specified in the Act less
the aggregate amount of any cash dividends paid, and the market value
of any dividends paid other than in cash, per common share since the
earliest date, up to the amount of the interest.
(iii) the highest preferential amount per share to which the
holders of shares of such class or series of Preferred Shares would be
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, plus the
aggregate amount of any dividends declared or due as to which the
holders are entitled before payment of dividends on some other class
or series of shares, unless the aggregate amount of the dividends is
included in the preferential amount.
(c) The consideration to be received by holders of a particular
class or series of outstanding Capital Shares shall be in cash or in
the same form as previously has been paid by or on behalf of the
Interested Shareholder in connection with its direct or indirect
acquisition of beneficial ownership of shares of such class or series
of Capital Shares. If the consideration previously paid by the
Interested Shareholder to acquire shares of any class or series of
Capital Shares varied among the recipients thereof as to form, the
form of consideration to be paid for such class or series of Capital
Shares in connection with the Business Combination shall be either
cash or the form used to acquire beneficial ownership of the largest
number of shares of such class or series of Capital Shares previously
acquired by the Interested Shareholder, and the consideration shall be
distributed promptly.
(d) After the Interested Shareholder's Acquisition Date and
before the Consummation Date with respect to the Business Combination,
the Interested Shareholder has not become the Beneficial Owner of any
additional voting shares of the Corporation except: (i) as part of the
transaction that resulted in the Interested Shareholder becoming an
Interested Shareholder; (ii) by virtue of proportionate share splits,
share dividends, or other distributions of shares in respect of shares
not constituting a Business Combination; (iii) through a Business
Combination meeting all of the conditions of the Articles of
Incorporation or (iv) through purchase by the Interested Shareholder
at any price that, if the price had been paid in an otherwise
permissible Business Combination the Announcement Date and
Consummation Date of which were the date of the purchase, would have
satisfied the requirements of these Articles of Incorporation.
B. Exceptions.
The provisions of the preceding Section A shall not be applicable
to any particular Business Combination if, in addition to any
affirmative vote required by law or these Articles of Incorporation,
such Business Combination shall be approved by the affirmative vote of
not less than eighty percent (80%) of the votes entitled to be cast by
the holders of all the outstanding Voting Shares (hereinafter
defined), voting together as a single class. Such Affirmative vote
shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage or separate class vote may be
specified, by law or in any agreement with any national securities
exchange or otherwise.
C. Definitions.
The following definitions shall apply with respect to this ARTICLE VII:
1. The term "Business Combination" shall mean:
(a) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) any Interested
Shareholder or (ii) any other corporation (whether or not itself an
Interested Shareholder) which is or after such merger or consolidation
would be an Affiliate or Associate of an Interested Shareholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions)
with or for the benefit of any Interested Shareholder or any Affiliate
or Associate of any Interested Shareholder involving any assets,
securities or commitments of the Corporation or any Subsidiary (i)
having an aggregate Market Value equal to ten percent (10%) or more of
the aggregate Market Value of (x) all the assets, determined on a
consolidated basis, of the Corporation, or (y) all the outstanding
shares of the Corporation or (ii) representing ten percent (10%) or
more of the earning power or net income, determined on a consolidated
basis, of the Corporation; or
c) the issuance or transfer by the Corporation or any Subsidiary
of the Corporation (in one (1) transaction or a series on
transactions) of any shares of the Corporation or any Subsidiary of
the Corporation that have an aggregate market value equal to five
percent (5%) or more of the aggregate market value of all the
outstanding shares of the Corporation to the Interested Shareholder or
an affiliate or the associate of the Interested Shareholder except
under the exercise of warrants or rights to purchase shares offered,
or a dividend or distribution paid or made pro rata to all
shareholders of the Corporation; or
(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation which is voted for or consented to by
any Interested Shareholder or any Affiliate or Associate thereof; or
(e) any reclassification of securities (including any share
split, share dividend, or other distribution of shares in respect of
shares, or reverse share split), or recapitalization of the
Corporation, or any merger or consolidation of the Corporation, with
any of its Subsidiaries, or any other transaction (whether or not with
or otherwise involving an Interested Shareholder) that has the effect,
directly or indirectly, of increasing the proportionate share of any
class or series of outstanding shares of any class or series of voting
shares or any securities convertible into voting shares of the
Corporation or any Subsidiary, that is beneficially owned by an
Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder; or
(f) any receipt by the Interested Shareholder or any Affiliate or
Associate of the Interested Shareholder of the benefit (directly or
indirectly, except proportionately as a shareholder of the
Corporation), of any loans, advances, guarantees, pledges, or other
financial assistance or any tax credits or other tax advantages
provided by or through the Corporation.
2. The term "Capital Shares" shall mean all capital shares of the
Corporation authorized to be issued from time to time under ARTICLE V
of these Articles of Incorporation, and the term "Voting Shares" shall
mean all Capital Shares that by its terms may be voted on all matters
submitted to shareholders of the Corporation generally.
3. The term "Interested Shareholder" shall mean any person (other
than the Corporation or any Subsidiary) who (i) is the beneficial
owner directly or indirectly of Voting Shares representing ten percent
(10%) or more of the votes entitled to be cast by the holders of all
then outstanding Voting Shares or (ii) is an Affiliate or Associate of
the Corporation and at any time within the five-year period
immediately prior to the Announcement Date was the beneficial owner of
Voting Shares representing ten percent (10%) or more of the votes
entitled to be cast by the holders of all then outstanding Voting
Shares. For the purpose of determining whether a person is an
Interested Shareholder, the number of Voting Shares of the Corporation
considered to be outstanding includes shares considered to be
beneficially owned by the person, but does not include any other
unissued shares of Voting Shares of the Corporation that may be
issuable under any agreement, arrangement, or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
4. A person shall be a "Beneficial Owner" of any Capital Shares
(i) which such person individually or any of its Affiliates or
Associates beneficially owns, directly or indirectly; (ii) which such
person individually or any of its Affiliates or Associates has,
directly or indirectly, (x) the right to acquire (whether such right
is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options,
or otherwise, or (y) the right to vote pursuant to any agreement,
arrangement or understanding; or (iii) which is beneficially owned,
directly or indirectly, by any other person with which such person or
any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of Capital Shares.
5. The term "Associate" when used to indicate a relationship with
any person, means: (1) Any corporation or organization of which the
person is an officer or partner or is, directly or indirectly, the
Beneficial Owner of ten percent (10%) or more of any class of voting
shares; (2) Any trust or other estate in which the person has a
substantial beneficial interest or as to which the person serves as
trustee or in a similar fiduciary capacity; and (3) Any relative or
spouse of the person, or any relative of the spouse, who has the same
home as the person.
6. The term "Affiliate" means a person that directly or
indirectly through one (1) or more intermediaries, controls, is
controlled by, or is under common control with a specified person.
7. The term "Subsidiary" of the Corporation means any other
corporation of which voting shares constituting a majority of the
outstanding voting shares of the other corporation entitled to be cast
are owned (directly or indirectly) by the Corporation.
8. The term "Market Value" means (i) in the case of shares, the
highest closing sale price during the 30-day period immediately
preceding the date in question of such a share on the Composite Tape
for New York Stock Exchange listed shares, or, if such shares are not
quoted on the Composite Tape, on the New York Stock Exchange, or, if
such shares are not listed on such Exchange, on the principal United
States securities exchange on which such shares are listed, or, if
such shares are not listed on any such exchange, the highest closing
bid quotation with respect to such a share during the 30-day period
preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any similar
system then in use, or if no such quotations are available, the Market
Value on the date in question of such a share as determined by a
majority of the directors in good faith; and (ii) in the case of
property other than cash or shares, the Market Value of such property
on the date in question as determined in good faith by a majority of
the directors.
9. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be
received" as used in subparagraphs 3(a) and 3(b) of Section A of this
ARTICLE VII shall include the Common Shares and/or the shares of any
other class or series of Capital Shares retained by the holders of
such shares.
ARTICLE VIII
Indemnification
Each director and each officer of the Corporation shall be
indemnified by the Corporation to the fullest extent permitted by law
against expenses (including attorneys' fees) judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred
by him or her in connection within the defense of any proceeding in
which he or she was or is a party or is threatened to be made a party
by reason of being or having been a director or an officer of the
Corporation. Such right of indemnification is not exclusive of any
other rights to which such director or officer may be entitled under
any now or hereafter existing statute, any other provision of these
Articles of Incorporation, the by-laws, agreement, vote of
shareholders or otherwise. If the Indiana Business Corporation Law is
amended to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Indiana Business Corporation Law, as so
amended. Any repeal or modification of this ARTICLE VIII by the
shareholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of
such repeal or modification.
ARTICLE IX
Amendments
The Corporation reserves the right to amend, alter, change or
repeal any provision in these Articles of Incorporation as permitted
by law, and all rights conferred on shareholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the
provision of Articles VI, VII, VIII and this Article IX may not be
amended, altered, changed or repealed unless such amendment,
alteration, change or repeal is approved by the affirmative vote of
the holders of not less than seventy-five percent (75%) of the
outstanding shares entitled to vote thereon.
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-Q into
Industries' previously filed Form S-8 Registration Statement No.
33-30619; Form S-8 Registration Statement No. 33-30621; Form S-8
Registration Statement No. 333-08263; Form S-8 Registration Statement
No. 333-19981; Form S-8 Registration Statement No. 333-19983; Form S-8
Registration Statement No. 333-19985; Form S-3 Registration Statement
No. 333-22347; Form S-3 Registration Statement No. 333-26847; Form S-3
Registration Statement No. 333-39911 and Form S-4A Registration
Statement No. 333-50537.
/s/ Arthur Andersen LLP
Chicago, Illinois
May 13, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted
from the financial statements of NIPSCO Industries, Inc. for three
months ended March 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,646,973
<OTHER-PROPERTY-AND-INVEST> 244,213
<TOTAL-CURRENT-ASSETS> 587,844
<TOTAL-DEFERRED-CHARGES> 145,952
<OTHER-ASSETS> 275,510
<TOTAL-ASSETS> 4,900,492
<COMMON> 486,921
<CAPITAL-SURPLUS-PAID-IN> 87,719
<RETAINED-EARNINGS> 701,890
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,276,530
58,841
85,619
<LONG-TERM-DEBT-NET> 485,100
<SHORT-TERM-NOTES> 94,302
<COMMERCIAL-PAPER-OBLIGATIONS> 48,500
<LONG-TERM-DEBT-CURRENT-PORT> 55,729
1,828
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,608,382
<TOT-CAPITALIZATION-AND-LIAB> 4,900,492
<GROSS-OPERATING-REVENUE> 779,344
<INCOME-TAX-EXPENSE> 32,343
<OTHER-OPERATING-EXPENSES> 662,230
<TOTAL-OPERATING-EXPENSES> 662,230
<OPERATING-INCOME-LOSS> 117,114
<OTHER-INCOME-NET> 8,448
<INCOME-BEFORE-INTEREST-EXPEN> 125,562
<TOTAL-INTEREST-EXPENSE> 32,497
<NET-INCOME> 60,722
0
<EARNINGS-AVAILABLE-FOR-COMM> 60,722
<COMMON-STOCK-DIVIDENDS> 29,929
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 189,563
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
</TABLE>
