-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BJ9EngpX8qPez0wc+8bBFW5xw4+vM3WQXhUyRHGvZtT8aZ4l1eP/2KKJRsc+81go fcWBUoqQVLREr6siWmXAgw== 0000072843-98-000003.txt : 19980518 0000072843-98-000003.hdr.sgml : 19980518 ACCESSION NUMBER: 0000072843-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN INDIANA PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000072843 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 350552990 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04125 FILM NUMBER: 98623323 BUSINESS ADDRESS: STREET 1: 5265 HOHMAN AVE CITY: HAMMOND STATE: IN ZIP: 46320-1775 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 10-Q 1 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 1-4125 NORTHERN INDIANA PUBLIC SERVICE COMPANY (Exact name of registrant as specified in its charter) Indiana 35-0552990 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5265 Hohman Avenue, Hammond, Indiana 46320-1775 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 853-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of April 30, 1998, 73,282,258 common shares were outstanding. NORTHERN INDIANA PUBLIC SERVICE COMPANY PART 1. FINANCIAL INFORMATION Item I. FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of NORTHERN INDIANA PUBLIC SERVICE COMPANY: We have audited the accompanying consolidated balance sheet of Northern Indiana Public Service Company (an Indiana corporation and a wholly owned subsidiary of NIPSCO Industries, Inc.) and subsidiaries as of March 31, 1998, and December 31, 1997, and the related consolidated statements of income, retained earnings and cash flows for the three and twelve month periods ended March 31, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's 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 Northern Indiana Public Service Company 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
CONSOLIDATED BALANCE SHEET March 31, December 31, ASSETS 1998 1997 ============ ============ (Dollars in thousands) UTILITY PLANT, AT ORIGINAL COST (INCLUDING CONSTRUCTION WORK IN PROGRESS OF $142,049 AND $140,534 RESPECTIVELY) (NOTE 2): Electric $ 4,082,197 $ 4,066,568 Gas 1,230,779 1,223,693 Common 349,531 351,350 ------------ ------------ 5,662,507 5,641,611 Less - Accumulated provision for depreciation and amortization 2,655,379 2,613,352 ------------ ------------ Total Utility Plant 3,007,128 3,028,259 ------------ ------------ OTHER PROPERTY AND INVESTMENTS 701 1,215 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents 25,775 9,800 Accounts receivable, less reserve of $4,919 and $4,524, respectively (Note 2) 104,910 101,188 Fuel adjustment clause (Note 2) 1,111 2,679 Gas cost adjustment clause (Note 2) 36,456 86,520 Materials and supplies, at average cost 54,980 53,666 Electric production fuel, at average cost 21,241 18,837 Natural gas in storage, at last-in, first-out cost (Note 2) 18,317 45,880 Prepayments and other 24,972 23,128 ------------ ------------ Total Current Assets 287,762 341,698 ------------ ------------ OTHER ASSETS: Regulatory assets (Note 2) 202,770 205,965 Prepayments and other (Note 6) 105,702 97,777 ------------ ------------ Total Other Assets 308,472 303,742 ------------ ------------ $ 3,604,063 $ 3,674,914 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED BALANCE SHEET March 31, December 31, CAPITALIZATION AND LIABILITIES 1998 1997 ============ ============ (Dollars in thousands) CAPITALIZATION: Common stock - without par value - authorized 75,000,000 shares, issued and outstanding 73,282,258 shares (Note 12) $ 859,488 $ 859,488 Additional paid-in capital 12,522 12,522 Retained earnings (see accompanying statement) (Note 11) 163,951 146,293 ------------ ------------ Common shareholder's equity 1,035,961 1,018,303 Cumulative preferred stocks (Note 8) Series without mandatory redemption provisions (Note 9) 81,122 81,123 Series with mandatory redemption provisions (Note 10) 58,841 58,841 Long-term debt excluding amounts due within one year (Note 14) 1,079,617 1,079,496 ------------ ------------ Total Capitalization 2,255,541 2,237,763 ------------ ------------ CURRENT LIABILITIES - Current portion of long-term debt (Note 15) 51,009 51,009 Short-term borrowings (Note 16) 18,500 119,000 Accounts payable 101,820 127,742 Dividends declared on common and preferred stocks 47,201 56,198 Customer deposits 20,848 20,236 Taxes accrued 147,559 88,852 Interest accrued 18,508 7,646 Accrued employment costs 37,271 51,095 Other accruals 30,888 34,051 ------------ ------------ Total Current Liabilities 473,604 555,829 ------------ ------------ OTHER: Deferred income taxes (Note 5) 597,604 602,936 Deferred investment tax credits, being amortized over life of related property (Note 5) 98,071 99,853 Deferred credits 53,150 53,323 Accrued liability for postretirement benefits (Note 7) 115,816 115,177 Other noncurrent liabilities 10,277 10,033 ------------ ------------ Total Other 874,918 881,322 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 17 and 18) $ 3,604,063 $ 3,674,914 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME Three Months Twelve Months Ended March 31, Ended March 31, ---------------------- ---------------------- 1998 1997 1998 1997 ========== ========== ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 3 and 20) Gas $ 218,730 $ 305,674 $ 648,355 $ 735,663 Electric 240,186 245,824 1,011,445 1,019,631 ---------- ---------- ---------- ---------- 458,916 551,498 1,659,800 1,755,294 ---------- ---------- ---------- ---------- Cost of Energy: (Note 2) Gas costs 123,170 196,735 378,871 457,674 Fuel for electric generation 55,594 58,408 235,734 234,421 Power purchased 3,647 8,960 31,961 50,750 ---------- ---------- ---------- ---------- 182,411 264,103 646,566 742,845 ---------- ---------- ---------- ---------- Operating Margin 276,505 287,395 1,013,234 1,012,449 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 62,103 69,789 261,589 275,147 Maintenance (Note 2) 16,694 17,338 68,209 68,547 Depreciation and amortization (Note 2) 56,520 55,252 224,293 214,208 Taxes (except income) 19,137 20,157 70,732 72,168 ---------- ---------- ---------- ---------- 154,454 162,536 624,823 630,070 ---------- ---------- ---------- ---------- Operating Income Before Utility Income Taxes 122,051 124,859 388,411 382,379 ---------- ---------- ---------- ---------- Utility Income Taxes (Note 6) 35,917 37,007 109,009 105,990 ---------- ---------- ---------- ---------- Operating Income 86,134 87,852 279,402 276,389 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) (608) (409) (3,858) 825 ---------- ---------- ---------- ---------- Interest: Interest on long-term debt 17,850 16,217 71,060 67,080 Other interest 849 2,851 5,218 11,506 Amortization of premium, reacquisition premium, discount and expense on debt, net 1,053 1,043 4,204 4,214 ---------- ---------- ---------- ---------- 19,752 20,111 80,482 82,800 ---------- ---------- ---------- ---------- Net Income 65,774 67,332 195,062 194,414 Dividend requirements on preferred shares 2,116 2,167 8,488 8,680 ---------- ---------- ---------- ---------- Balance available for common shares $ 63,658 $ 65,165 $ 186,574 $ 185,734 ========== ========== ========== ========== Dividends declared $ 46,000 $ 44,000 $ 189,775 $ 187,200 ========== ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS Three Months Twelve Months Ended March 31, Ended March 31, ------------------- ------------------- 1998 1997 1998 1997 ========= ========= ========= ========= (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 146,293 $ 145,987 $ 167,152 $ 168,618 ADD: Net income 65,774 67,332 195,062 194,414 --------- --------- --------- --------- 212,067 213,319 362,214 363,032 --------- --------- --------- --------- LESS: Dividends Cumulative Preferred stocks - 4-1/4% series 222 222 889 889 4-1/2% series 91 91 360 360 4.22% series 113 113 448 448 4.88% series 122 122 488 488 7.44% series 77 77 312 312 7.50% series 66 66 261 261 8.85% series 166 194 654 765 7-3/4% series 81 91 352 384 8.35% series 125 138 509 559 6.50% series 698 698 2,795 2,795 Adjustable Rate, Series A 355 355 1,420 1,419 Common shares 46,000 44,000 189,775 187,200 --------- --------- --------- --------- 48,116 46,167 198,263 195,880 --------- --------- --------- --------- BALANCE AT END OF PERIOD $ 163,951 $ 167,152 $ 163,951 $ 167,152 ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, ------------------------ 1998 1997 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 65,774 $ 67,332 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 56,520 55,252 Deferred federal and state operating income taxes, net (26,666) (8,015) Deferred investment tax credits, net (1,782) (1,794) Advance contract payment 475 475 Change in certain assets and liabilities - Accounts receivable, net (3,722) (5,122) Electric production fuel (2,404) 2,351 Materials and supplies (1,314) 56 Natural gas in storage 27,563 35,585 Accounts payable (16,531) (37,618) Taxes accrued 78,658 63,304 Fuel adjustment clause 1,568 (3,781) Gas cost adjustment clause 50,064 13,323 Accrued employment costs (13,824) (4,353) Other accruals (3,163) 24,169 Other, net 4,912 17,091 ---------- ---------- Net cash provided by operating activities 216,128 218,255 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (33,310) (45,421) Other, net (9,350) (464) ---------- ---------- Net cash used in investing activities (42,660) (45,885) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of short-term debt 118,160 180,400 Net change in commercial paper (53,000) (91,405) Retirement of short-term debt (165,660) (191,900) Retirement of preferred shares 0 (1) Cash dividends paid on common shares (55,000) (53,000) Cash dividends paid on preferred shares (2,114) (2,165) Other, net 121 115 ---------- ---------- Net cash used in financing activities (157,493) (157,956) ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 15,975 14,414 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,800 8,279 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,775 $ 22,693 ========== ========== Twelve Months Ended March 31, ------------------------ 1998 1997 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 195,062 $ 194,414 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 224,293 214,208 Deferred federal and state operating income taxes, net (27,065) 3,215 Deferred investment tax credits, net (7,193) (7,460) Advance contract payment 1,900 1,900 Change in certain assets and liabilities - Accounts receivable, net 12,078 3,247 Electric production fuel 2,891 (4,186) Materials and supplies 1,760 6,051 Natural gas in storage (3,493) (3,875) Accounts payable (30,186) (19,327) Taxes accrued 36,842 35,649 Fuel adjustment clause 11,819 (4,463) Gas cost adjustment clause 48,388 (33,822) Accrued employment costs 709 (1,218) Other accruals (21,215) (2,564) Other, net 9,620 19,321 ---------- ---------- Net cash provided by operating activities 456,210 401,090 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (162,120) (188,012) Other, net (12,077) 2,142 ---------- ---------- Net cash used in investing activities (174,197) (185,870) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 139,000 0 Issuance of short-term debt 472,190 1,079,150 Net change in commercial paper (84,000) 85,100 Retirement of long-term debt (67,247) (80,000) Retirement of short-term debt (539,690) (1,091,750) Retirement of preferred shares (2,407) (2,605) Cash dividends paid on common shares (187,775) (187,450) Cash dividends paid on preferred shares (8,505) (8,712) Other, net (497) 489 ---------- ---------- Net cash used in financing activities (278,931) (205,778) ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,082 9,442 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,693 13,251 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,775 $ 22,693 ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) was incorporated in Indiana on September 22, 1987 and became the parent of Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988. Northern Indiana is a public utility operating company supplying electricity and gas to the public in the northern third of Indiana. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Northern Indiana and its two subsidiaries, Shore Line Shops, Inc. and NIPSCO Exploration Company, Inc. All significant intercompany items have been eliminated in consolidation. Certain reclassifications were made to conform the prior years' financial statements to the current presentation. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OPERATING REVENUES. Revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on a straight-line method over the remaining service lives of the electric, gas and common properties. The approximated weighted average remaining lives for major components of each electric and gas 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 3.6% 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 5.4% for the three-month and twelve-month periods ended March 31, 1998 and 5.3% for the three-month and twelve-month periods ended March 31, 1997. Northern Indiana follows the practice of charging maintenance and repairs, including the cost of renewals of minor items of property, to maintenance expense accounts, except for repairs of transportation and service equipment which are charged to clearing accounts and redistributed to operating expense and other accounts. When property which represents a retired unit is replaced or removed, the cost of such property is credited to utility plant and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. AMORTIZATION OF SOFTWARE COSTS. Northern Indiana has capitalized software relating to various technology functions. At the date of installation, Northern Indiana 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 Northern Indiana's management has determined that, on average, these are reasonable useful life estimates for the portfolio of capitalized software. Northern Indiana includes these amortization estimates, based on useful life, in its quarterly filings with the Indiana state regulatory commission. COAL RESERVES. Northern Indiana has a long-term mining contract to mine its coal reserves through the year 2001. The costs of these reserves are being recovered through the rate-making process as such coal reserves are used to produce electricity. POWER PURCHASED. Power purchases and net interchange power with other electric utilities under interconnection agreements are included in Cost of Energy 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. The March 31, 1998 and December 31, 1997 accounts receivable balances include approximately $3.5 million and $5.4 million, respectively, due from associated companies. COMPREHENSIVE INCOME. Northern Indiana adopted SFAS No. 130, Reporting Comprehensive Income" effective January 1, 1998. This statement established standards for reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 did not impact Northern Indiana's financial statements for the periods presented. STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement of Cash Flows, Northern Indiana 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:
Three Months Twelve Months Ended March 31, Ended March 31, ------------------ ------------------ 1998 1997 1998 1997 ======== ======== ======== ======== (Dollars in thousands) Income taxes $ 20 $ 0 $104,829 $ 73,473 Interest, net of amounts capitalized $ 7,534 $ 6,808 $ 75,811 $ 76,191
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect increases and decreases in the cost of fuel and the fuel cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the Indiana Utility Regulatory Commission (Commission) applicable to metered retail rates, the adjustment factor has been calculated based on the estimated cost of fuel and the fuel cost of purchased power in a future three-month period. If two statutory requirements relating to expense and return levels are satisfied, any under-recovery or over-recovery caused by variances between estimated and actual cost in a given three-month period will be included in a future filing. Northern Indiana records any under-recovery or over-recovery as a current asset or current liability until such time as it is billed or refunded to its customers. The fuel adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment factor which reflects the cost of purchased gas, contracted gas storage and storage transportation charges. 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 gas cost adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-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 period will be included in a future filing. See Note 3, FERC Order No. 636 for a discussion of gas transition cost charges. NATURAL GAS IN STORAGE. 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. AFFILIATED COMPANY TRANSACTIONS. Pursuant to agreement, effective July 1, 1996, Northern Indiana receives executive, financial, gas supply, sales and marketing, and administrative and general services from an affiliate, NIPSCO Industries Management Services Company (NIMSC), a wholly-owned subsidiary of Industries. The costs of these services are charged to Northern Indiana based on payroll and expenses incurred by NIMSC's employees for the benefit of Northern Indiana. These costs, which totaled $7.0 million and $27.2 million for the three-month and twelve-month periods ended March 31, 1998 and totaled $8.6 million and $25.8 million for the three-month and twelve-month periods ended March 31, 1997, consist primarily of employee compensation and benefits. Northern Indiana purchased natural gas and transportation services from affiliated companies in the amounts of $1.9 million and $9.1 million representing 2.2% and 2% of Northern Indiana's total gas costs for the three-month and twelve-month periods ended March 31, 1998, respectively. Northern Indiana purchased natural gas and transportation services from affiliated companies in the amounts of $3.0 million and $12.5 million representing 2.2% and 2.9% of Northern Indiana's total gas costs for the three-month and twelve-month periods ended March 31, 1997, respectively. Northern Indiana subleases a portion of office facilities to affiliated companies for a monthly fee, which includes operating expenses, based on space utilization. HEDGING ACTIVITIES. Northern Indiana uses commodity futures and option contracts to hedge the impact of natural gas price fluctuations related to its business activities. Gains and losses on these commodity-based derivative financial instruments are deferred and recognized in income concurrent with the related purchases and sales of natural gas. As of March 31, 1998, Northern Indiana had open futures and option contracts representing hedges of natural gas sales of 4.9 billion cubic feet (Bcf) and natural gas purchases of 4.4 Bcf. The net deferred gain on these commodity-based derivative financial instruments as of March 31, 1998 was not material. REGULATORY ASSETS. Northern Indiana's operations are subject to the regulation of the Commission and FERC. Accordingly, Northern Indiana's accounting policies are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Northern Indiana monitors changes in market and regulatory conditions and the resulting impact of such changes in order to continue to apply the provisions of SFAS No. 71 to some or all of its operations. As of March 31, 1998 and December 31, 1997, the regulatory assets identified below represent probable future revenue to Northern Indiana associated with certain incurred costs as these costs are recovered through the rate-making process. If a portion of Northern Indiana's 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:
March 31, December 31, 1998 1997 ============= ============= (Dollars in thousands) Unamortized reacquisition premium on debt (Note 14) $ 45,560 $ 46,426 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 Deferral of SFAS No. 106 expense not recovered (Note 7) 82,565 83,965 FERC Order No. 636 transition costs (Note 3) 25,771 28,744 Regulatory income tax asset, net (Note 5) 10,023 9,664 ------------- ------------- 239,058 245,225 Less: Current portion of regulatory assets 36,288 39,260 ------------- ------------- $ 202,770 $ 205,965 ============= =============
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%. INCOME TAXES. Deferred income taxes are recognized as costs in the rate-making process by the commissions having jurisdiction over the rates charged by Northern Indiana. 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) FERC ORDER NO. 636. Since December 1993, Northern Indiana has paid approximately $137 million of interstate pipeline transition costs to pipeline suppliers to reflect the impact of FERC Order No. 636. Northern Indiana expects 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. (4) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. It is Northern Indiana's intent to continue to evaluate its facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has recorded a reserve of approximately $19 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, Northern Indiana believes 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 Northern Indiana. Because of major investments made in modern environmental control facilities and the use of low-sulfur coal, all of Northern Indiana's electric production facilities now comply with the specific sulfur dioxide limitations contained in the acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Reflecting this compliance, on December 31, 1997, 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 emissions 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 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 that the exact nature of the impact of the new standards on its operations will not be known for some time. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159 nations formally agreed to targets reducing worldwide levels of greenhouse gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would impose an obligation on the United States to reduce its emissions of greenhouse gas to a level seven percent below 1990 levels during the period 2008 to 2012. The impact of this agreement on Northern Indiana is uncertain. Northern Indiana, as a charter member of the Department of Energy's Climate Challenge Program, the electric industries' voluntary reduction effort, has already implemented over 21 projects to voluntarily reduce greenhouse gas 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. Northern Indiana has instituted a program to investigate former manufactured-gas plants where it is the current or former owner. Northern Indiana has identified twenty-four of these sites and made visual inspections of these sites. Initial samplings have been conducted at fifteen sites. Follow-up investigations have been conducted at eight sites and remedial measures have been selected at five sites. Northern Indiana will continue its program to assess and cleanup sites. During the course of various investigations, Northern Indiana has identified impacts to soil, groundwater, sediment and surface water from former manufactured-gas plants. At three sites where residues were noted seeping into rivers, Northern Indiana notified the IDEM and the EPA and immediately took steps to contain the material. Northern Indiana has 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. Northern Indiana anticipates 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, Northern Indiana approached various companies that provided insurance coverage which Northern Indiana believes 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 previously released by the U.S. National Research Council of the National Academy of Sciences, which concluded, after examining more than 500 EMF studies spanning seventeen years, that among other things, there was insufficient evidence to consider EMF a threat to human health. Despite the report's findings, future research appropriations are continuing to be dedicated to explore this issue. (5) INCOME TAXES: Northern Indiana uses the liability method of accounting for income taxes under which deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. To the extent certain deferred income taxes are recoverable or payable through future rates, regulatory assets and liabilities have been 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 Northern Indiana's 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. Northern Indiana joins in the filing of consolidated tax returns with Industries and currently pays to Industries its separate return tax liability as defined in the Tax Sharing Agreement between Industries and its subsidiaries. The components of the net deferred income tax liability at March 31, 1998 and December 31, 1997 are as follows:
March 31, December 31, 1998 1997 ============= ============= (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 731,642 $ 729,153 AFUDC-equity 34,675 35,282 Adjustment clauses 14,247 33,829 Take-or-pay gas costs 384 384 Other regulatory assets 31,313 31,844 Reacquisition premium on debt 17,279 17,607 Deferred tax assets - Deferred investment tax credits (37,186) (37,869) Removal costs (147,209) (144,111) Other postretirement/postemployment benefits (43,923) (43,680) Other, net (9,582) (5,516) ------------- ------------- 591,640 616,923 Less: Deferred income taxes related to current assets and liabilities (5,964) 13,987 ------------- ------------- Deferred income taxes - noncurrent $ 597,604 $ 602,936 ============= =============
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Twelve Months Ended March 31, Ended March 31, -------------------- -------------------- 1998 1997 1998 1997 ========= ========= ========= ========= (Dollars in thousands) Current income taxes - Federal $ 56,129 $ 40,745 $ 124,286 $ 95,457 State 8,236 6,071 18,981 14,778 --------- --------- --------- --------- 64,365 46,816 143,267 110,235 --------- --------- --------- --------- Deferred income taxes, net - Federal (24,648) (7,451) (25,195) 2,700 State (2,018) (564) (1,870) 515 --------- --------- --------- --------- (26,666) (8,015) (27,065) 3,215 --------- --------- --------- --------- Deferred investment tax credits, net (1,782) (1,794) (7,193) (7,460) --------- --------- --------- --------- Total utility operating income taxes 35,917 37,007 109,009 105,990 Income tax applicable to non- operating activities and income of subsidiaries (405) (253) (3,688) (1,086) --------- --------- --------- --------- Total income taxes $ 35,512 $ 36,754 $ 105,321 $ 104,904 ========= ========= ========= =========
A reconciliation of total tax expense to an amount computed by applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Twelve Months Ended March 31, Ended March 31, -------------------- -------------------- 1998 1997 1998 1997 ========= ========= ========= ========= (Dollars in thousands) Net income $ 65,774 $ 67,332 $ 195,062 $ 194,414 Add-Income taxes 35,512 36,754 105,572 104,904 --------- --------- --------- --------- Net income before income taxes $ 101,286 $ 104,086 $ 300,634 $ 299,318 ========= ========= ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 35,450 $ 36,430 $ 105,222 $ 104,761 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 (1,782) (1,794) (7,193) (7,460) State income taxes, net of federal income tax benefit 3,310 3,364 10,193 10,086 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,271) (1,518) (3,816) (6,488) Other, net (1,193) (772) (2,860) (677) --------- --------- --------- --------- Total income taxes $ 35,512 $ 36,754 $ 105,572 $ 104,904 ========= ========= ========= =========
(6) PENSION PLANS: Industries has a noncontributory, defined benefit retirement plan covering substantially all employees of Northern Indiana. Benefits under the plan reflect the employees' compensation, years of service and age at retirement. The change in the benefit obligation for 1997 and 1996 is as follows:
1997 1996 ========= ========= (Dollars in thousands) Benefit obligation at beginning $ 732,870 $ 749,869 of year (January 1,) Service cost 13,325 15,877 Interest cost 55,920 52,787 Plan amendments 25,096 0 Actuarial (gain)loss 67,975 (39,435) Benefits paid (52,137) (46,228) --------- --------- Benefit obligation at end of the year (December 31,) $ 843,049 $ 732,870 ========= =========
The change in the fair value of the plan's value assets for years 1997 and 1996 is as follows:
1997 1996 ========= ========= (Dollars in thousands) Fair value of plan assets at $ 782,162 $ 697,919 beginning of year January 1,) Actual return on plan's assets 122,537 86,622 Employer contributions 44,388 43,850 Benefits paid (52,137) (46,229) --------- --------- Plan assets at fair value at end of the year (December 31,) $ 896,950 $ 782,162 ========= =========
Plan assets are invested primarily in common stocks, bonds and notes. The plan's funded status as of January 1, 1998 and January 1, 1997 is as follows:
January 1, January 1, 1998 1997 ========= ========= (Dollars in thousands) Plan assets in excess of $ 53,901 $ 49,292 benefit obligation Unrecognized net actuarial gains (51,191) (67,111) Unrecognized prior service cost 45,502 23,736 Unrecognized transition amount being recognized over seventeen years 32,930 38,418 --------- --------- Prepaid pension costs $ 81,142 $ 44,335 ========= =========
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 4.50% and 5.5% were used to determine the benefit obligation at January 1, 1998 and 1997, respectively. The increase in 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 $89.7 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:
Three Months Twelve Months Ended Ended March 31, March 31, ------------------ ------------------ 1998 1997 1998 1997 ======== ======== ======== ======== (Dollars in thousands) Service costs $ 4,440 $ 4,466 $ 13,299 $ 14,198 Interest costs 18,633 16,326 58,228 50,253 Expected return on plan assets (23,485) (20,308) (73,659) (60,721) Amortization of transition obligation 1,829 1,604 5,713 5,134 Amortization of prior service cost 1,109 912 3,526 2,491 -------- -------- -------- -------- $ 2,526 $ 3,000 $ 7,107 $ 11,355 ======== ======== ======== ========
Assumptions used in the valuation and determination of 1998 and 1997 pension expense were as follows:
1998 1997 ===== ===== 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%
(7) POSTRETIREMENT BENEFITS: Northern Indiana provides certain health care and life insurance benefits for retired employees. Substantially all of Northern Indiana's employees may become eligible for those benefits if they reach retirement age while working for Northern Indiana. The expected cost of such benefits is accrued during the employees' years of service. Northern Indiana's rate-making has historically included the cost of providing these benefits based on the related insurance premiums. On December 30, 1992, the Commission authorized the accrual method of accounting for postretirement benefits for rate-making purposes consistent with SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions," and authorized the deferral of the differences between the net periodic postretirement benefit costs and the insurance premiums paid for such benefits as a regulatory asset until such time as the accrual cost method could be reflected in the rate-making process. On June 11, 1997, the Commission issued an order approving the inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with these dates. The following table sets forth the plan's change in accumulated postretirement benefit obligation (APBO) for the years 1997 and 1996:
1997 1996 ========= ========= (Dollars in thousands) Accumulated postretirement $ 194,937 $ 253,157 benefit obligation at beginning of year (January 1,) Service cost 3,068 5,853 Interest cost 14,523 17,973 Plan amendments 4,015 (9,607) Actuarial (gain) (12,534) (66,112) Benefits paid (9,006) (6,327) --------- --------- Accumulated postretirement benefit obligation at end of the year (December 31,) $ 195,003 $ 194,937 ========= =========
The change in the fair value of the plan's assets for the years 1997 and 1996 is as follows:
1997 1996 ========= ========= (Dollars in thousands) Fair value of plan assets at $ 0 $ 0 beginning of year (January 1,) Employer contributions 11,406 6,627 Benefits paid (9,006) (6,627) --------- --------- Plan assets at fair value at end of the year (December 31,) $ 2,400 $ 0 ========= =========
Following is the funded status for postretirement benefits as of January 1, 1998 and January 1, 1997:
January 1, January 1, 1998 1997 ========= ========= (Dollars in thousands) Funded status $(192,603) $(194,937) Unrecognized actuarial gain (99,262) (88,784) Unrecognized prior service cost 3,737 0 Unrecognized transition amount being recognized over twenty years 161,214 171,962 --------- --------- Accrued liability for postretirement benefits $(126,914) $(111,759) ========= =========
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 change in the APBO reflects the decrease in the discount rate from 7.75% to 7.00%, substantially offset by favorable claim experience and reduction in the medical trend rate assumption. The accrued liability for postretirement benefits was $127.1 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:
Three Months Twelve Months Ended Ended March 31, March 31, ---------------- ---------------- 1998 1997 1998 1997 ======= ======= ======= ======= (Dollars in thousands) Service costs $ 737 $ 917 $ 2,888 $ 5,333 Interest costs 3,650 4,376 13,797 17,375 Expected return on plan assets (50) 0 (50) 0 Amortization of transition obligation over twenty years 2,675 2,702 10,720 11,017 Amortization of prior service cost 75 0 354 0 Amortization of actuarial (gain) (1,375) (993) (6,160) (911) ------- ------- ------- ------- $ 5,712 $ 7,002 $21,549 $32,814 ======= ======= ======= =======
Assumptions used in the valuation and determination of 1998 and 1997 net periodic postretirement benefit costs were as follows:
1998 1997 ===== ===== Discount rate 7.00% 7.75% Rate of increase in compensation levels 4.50% 5.50%
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 $23.2 million, and increase 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. 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 $19.2 million, and decrease the aggregate of the service and interest cost components of plan costs by approximately $0.5 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. (8) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS OF NORTHERN INDIANA: 2,400,000 shares - Cumulative Preferred - $100 par value 3,000,000 shares - Cumulative Preferred - no par value 2,000,000 shares - Cumulative Preference - $50 par value (none outstanding) 3,000,000 shares - Cumulative Preference - no par value (none issued) Note 9 sets forth the preferred stocks which are redeemable solely at the option of Northern Indiana and Note 10 sets forth the preferred stocks which are subject to mandatory redemption requirements or whose redemption is outside the control of Northern Indiana. The Preferred shareholders of Northern Indiana have no voting rights, except in the event of default on the payment of four consecutive quarterly dividends, or as required by Indiana law to authorize additional preferred shares, or by the Articles of Incorporation in the event of certain merger transactions. (9) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF NORTHERN INDIANA, OUTSTANDING AT MARCH 31, 1998 AND DECEMBER 31, 1997 (SEE NOTE 8):
Redemption Price at March 31, December 31, March 31, 1998 1997 1998 ============ ============ ============ (Dollars in thousands) 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 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 ------------ ------------ $ 81,122 $ 81,123 ============ ============
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 Northern Indiana at the redemption prices shown. (10) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1998 AND DECEMBER 31, 1997 (SEE NOTE 8): Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of Northern Indiana are as follow:
March 31, December 31, 1998 1997 ============ ============ (Dollars in thousands) Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of Northern Indiana: Cumulative preferred stock - $100 par value - 8.85% series - 62,500 shares outstanding, excluding sinking fund payments due within one year $ 6,250 $ 6,250 7-3/4% series - 38,906 shares outstanding, excluding sinking fund payments due within one year 3,891 3,891 8.35% series - 57,000 shares outstanding, excluding sinking fund payments due within one year 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 ============ ============
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:
Sinking Fund Or Mandatory Redemption Series Redemption Price Per Share Provisions ====== ========================== ============================= 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.
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:
Twelve Months Ended March 31,* ================================== 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.
(11) COMMON SHARE DIVIDEND: 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. (12) COMMON SHARES: Effective with the exchange of common shares on March 3, 1988 Northern Indiana's common shares are wholly-owned by Industries. On December 16, 1997, the Industries Board of Directors authorized a two-for-one stock split of Industries' common stock. The stock split was paid February 20, 1998, to shareholders of record at the close of business on January 30, 1998. All references to number of common 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. (13) LONG-TERM INCENTIVE PLAN: Industries has two long-term incentive plans for key management employees, including management of Northern Indiana, 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. Northern Indiana accounts for its allocable portion of 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 recognized in the Consolidated Statement of Income for restricted stock awards was $0.2 and $0.7 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," Northern Indiana's net income would have been reduced to the following pro forma amounts:
Three Months Twelve Months Ended Ended March 31, March 31, ------------------ ------------------ 1998 1997 1998 1997 ======== ======== ======== ======== (Dollars in thousands) Net Income: As reported $ 65,774 $ 67,332 $195,062 $194,414 Pro forma $ 65,553 $ 67,033 $194,198 $193,668
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. The weighted average fair value of options granted to all plan participants was $2.66 and $2.50 for the twelve-month period ended March 31, 1998 and March 31, 1997, respectively. There were 533,600 and 556,600 non-qualified stock options granted to all plan participants for the twelve-month periods ended March 31, 1998 and March 31, 1997, respectively. (14) LONG-TERM DEBT: At March 31, 1998 and December 31, 1997, the long-term debt of Northern Indiana, excluding amounts due within one year, issued and not retired or canceled was as follows:
AMOUNT OUTSTANDING --------------------------- March 31, December 31, 1998 1997 ============ ============ (Dollars in thousands) First mortgage bonds - Series T, 7-1/2%, due April 1, 2002 $ 39,500 $ 39,500 Series NN, 7.10%, due July 1, 2017 55,000 55,000 ------------ ------------ Total 94,500 94,500 ------------ ------------ Pollution control notes and bonds - Series A Note - City of Michigan City, 5.70% due October 1, 2003 18,000 18,000 Series 1988 Bonds - Jasper County - Series A, B and C - 3.61% weighted average at March 31, 1998, due November 1, 2016 130,000 130,000 Series 1988 Bonds - Jasper County - Series D - 3.58% weighted average at March 31, 1998, due November 1, 2007 24,000 24,000 Series 1994 Bonds - Jasper County - Series A - 3.80% at March 31, 1998, due August 1, 2010 10,000 10,000 Series 1994 Bonds - Jasper County - Series B - 3.80% at March 31, 1998, due June 1, 2013 18,000 18,000 Series 1994 Bonds - Jasper County - Series C - 3.80% at March 31, 1998, due April 1, 2019 41,000 41,000 ------------ ------------ Total 241,000 241,000 ------------ ------------ Medium-term notes - Interest rates between 6.10% and 7.69% with a weighted average interest rate of 7.00% and various maturities between April 5, 2000 and August 4, 2027 748,025 748,025 ------------ ------------ Unamortized premium and discount on long-term debt, net (3,908) (4,029) ------------ ------------ Total long-term debt excluding amounts due in one year $ 1,079,617 $ 1,079,496 ============ ============
The sinking fund requirements of long-term debt outstanding at March 31, 1998 (including the maturity of first mortgage bonds: Series T, 7-1/2%, due April 1, 2002; and medium-term notes due from March 20, 2000 to March 31, 2003) for each of the twelve-month periods subsequent to March 31, 1999 are as follows:
Twelve Months Ended March 31, ================================= 2000 $ 8,000,000 2001 $152,000,000 2002 $ 19,000,000 2003 $ 79,000,000
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 $217,692,000 of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of 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. (15) CURRENT PORTION OF LONG-TERM DEBT: At March 31, 1998 and December 31, 1997, Northern Indiana's current portion of long-term debt due within one year was as follows:
March 31, December 31, 1998 1997 ============ ============ (Dollars in thousands) First mortgage bonds - Series P, 6-7/8% - due October 1, 1998 $ 14,509 $ 14,509 Medium-term notes - Interest rate of 5.83% and 5.95% with a weighted average interest rate of 5.86% and various maturities between April 6, 1998 and April 13, 1998 35,000 35,000 Sinking funds due within one year 1,500 1,500 ------------ ------------ Total current portion of long-term debt $ 51,009 $ 51,009 ============ ============
(16) SHORT-TERM BORROWINGS: Northern Indiana uses commercial paper to fund short-term working capital requirements. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999. As of 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 outstanding under these lines of credit. As of 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. At March 31, 1998 and December 31, 1997, Northern Indiana's short- term borrowings were as follows:
March 31, December 31, 1998 1997 ============ ============ (Dollars in thousands) Commercial paper - Interest rate of 5.60% at March 31, 1998 $ 18,500 $ 71,500 Notes payable - Issued at interest rates between 6.03% and 6.38 % with a weighted average interest rate of 5.86% and various maturities between January 9,1998 and January 23, 1998 0 47,500 ------------ ------------ Total short-term borrowings $ 18,500 $ 119,000 ============ ============
(17) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a twenty-year agreement for the rental of office facilities from NIPSCO Development Company, Inc., a subsidiary of Industries, 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:
Twelve Months Ended March 31, ============================= (Dollars in thousands) 1999 $ 5,076 2000 3,055 2001 3,055 2002 3,055 2003 3,055 Later years 32,379 -------- Total minimum payments required $ 49,675 ========
The consolidated financial statements include rental expense for all operating leases as follows:
March 31, March 31, 1998 1997 ============ ============ (Dollars in thousands) Three months ended $ 2,148 $ 2,090 Twelve months ended $ 7,733 $ 8,729
(18) COMMITMENTS: Northern Indiana estimates that approximately $762 million will be expended for construction purposes for the period from January 1, 1998 to December 31, 2002. Substantial commitments have been made by Northern Indiana in connection with this program. Northern Indiana has entered into a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and Mitsubishi Heavy Industries America, Inc., under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating Station. Services under this contract commenced on June 15, 1992 with annual charges approximating $20 million. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminates the agreement prior to the end of the twenty-year contract period. Northern Indiana has entered into an agreement with IBM to perform all data center, application development and maintenance, and desktop management of Northern Indiana. (19) 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 Northern Indiana 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 Northern Indiana's financial instruments are as follows:
March 31, 1998 December 31, 1997 ---------------------- ---------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ========== ========== ========== ========== (Dollars in thousands) Cash and cash equivalents $ 25,775 $ 25,775 $ 9,800 $ 9,800 Investments $ 256 $ 256 $ 256 $ 256 Long-term debt (including current portion) $1,130,626 $1,148,921 $1,130,505 $1,128,851 Preferred stock $ 141,791 $ 132,317 $ 141,792 $ 135,317
Northern Indiana is 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. (20) CUSTOMER CONCENTRATIONS: Northern Indiana is a public utility operating company supplying natural gas and electrical energy in the northern third of Indiana. Although Northern Indiana has a diversified base of residential and commercial customers, a substantial portion of its electric and gas industrial deliveries are dependent upon the basic steel industry. The basic steel industry accounted for 3% of gas revenues (including transportation services) and 19% of electric revenue for the twelve months ended March 31, 1998 as compared to 4% and 22%, respectively, for the twelve months ended March 31, 1997. (21) BUSINESS SEGMENTS: Northern Indiana adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" during the first quarter of 1998. SFAS No. 131 established 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. Northern Indiana's reportable operating segments include regulated gas and electric services. Northern Indiana supplies gas and electric services to residential, commercial and industrial customers. The other category includes gas exploration, real estate transactions, non-utility revenues and expenses, and other corporate assets. Northern Indiana's reportable segments are operations that are managed separately and meet the quantitative thresholds required by SFAS No. 131. Revenues for each of Northern Indiana's segments are attributable to customers in the United States. The following tables provide information about Northern Indiana's business segments. Northern Indiana uses income before interest 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 Northern Indiana. The accounting policies of the operating segments are the same as those described in Note 2, "Summary of Significant Accounting Policies.
For the Three Months Adjust- Ended March 31, 1998 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $218,730 $ 240,186 $ 0 $ 0 $ 458,916 Other income (deductions)$ 582 $ 85 $ (839) $ (436) $ (608) Depreciation and amortization $ 17,753 $ 38,767 $ 0 $ 0 $ 56,520 Income before interest and utility income taxes $ 45,309 $ 77,409 $ (903) $ (372) $ 121,443 Assets $745,236 $2,494,907 $363,920 $ 0 $3,604,063 For the Three Months Adjust- Ended March 31, 1997 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $305,674 $ 245,824 $ 0 $ 0 $ 551,498 Other income (deductions)$ 466 $ 197 $ (526) $ (546) $ (409) Depreciation and amortization $ 16,970 $ 38,282 $ 0 $ 0 $ 55,252 Income before interest and utility income taxes $ 55,090 $ 70,432 $ (553) $ (519) $ 124,450 Assets $804,111 $2,562,141 $363,887 $ 0 $3,730,139 For the Twelve Months Adjust- Ended March 31, 1998 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $648,355 $1,011,445 $ 0 $ 0 $1,659,800 Other income (deductions)$ 938 $ 506 $ (1,723) $ (3,579) $ (3,858) Depreciation and amortization $ 69,964 $ 154,329 $ 0 $ 0 $ 224,293 Income before interest and utility income taxes $ 70,473 $ 319,382 $ (1,849) $ (3,453) $ 384,553 Assets $745,236 $2,494,907 $363,920 $ 0 $3,604,063 For the Twelve Months Adjust- Ended March 31, 1997 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $735,663 $1,019,631 $ 0 $ 0 $1,755,294 Other income (deductions)$ 873 $ 1,046 $ 722 $ (1,816) $ 825 Depreciation and amortization $ 65,865 $ 148,343 $ 0 $ 0 $ 214,208 Income before interest and utility income taxes $ 78,616 $ 305,682 $ 756 $ (1,850) $ 383,204 Assets $804,111 $2,562,141 $363,887 $ 0 $3,730,139
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUES - Total operating revenues for the twelve months ended March 31,1998 decreased $95.5 million as compared to the twelve months ended March 31, 1997. Gas revenues decreased $87.3 million and electric revenues decreased $8.2 million as compared to the same period in 1997. The decrease in gas revenues was mainly due to decreased sales to residential and commercial customers reflecting unusually warm weather during the first quarter of 1998, decreased industrial sales, decreased gas transition costs and decreased gas cost per dekatherm (dth), partially offset by increased wholesale sales and increased deliveries of gas transported for others. The decrease in electric revenues was mainly due to decreased sales to industrial customers and decreased fuel costs per kilowatt hour (kWh), partially offset by increased sales to residential and commercial customers. Total operating revenues for the three months ended March 31, 1998 decreased $92.6 million as compared to the three months ended March 31, 1997. Gas revenues decreased $87.0 million and electric revenues decreased $5.6 million. The decrease in gas revenues was mainly attributable to decreased sales to residential and commercial customers as a result of unusually warm weather during the first quarter of 1998, decreased sales to industrial customers, decreased gas transition costs, and decreased sales to wholesale customers. The decrease in electric revenues was mainly attributable to decreased sales to industrial customers and decreased fuel cost per kwh, partially offset by increased wholesale transactions. The basic steel industry accounted for 37% of natural gas delivered (including volumes transported) and 32% of electric sales during the twelve months ended March 31, 1998. The components of the variations in gas and electric revenues are shown in the following table:
Variations from Prior Periods --------------------------------- March 31, 1998 Compared to March 31, 1997 Three Twelve Months Months ========= ========= (Dollars in thousands) Gas Revenue - Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ (45,063) $ (57,542) Gas transition costs (7,102) (12,728) Changes in sales levels (35,622) (19,558) Gas transported 843 2,520 --------- --------- Gas Revenue Change $ (86,944) $ (87,308) --------- --------- Electric Revenue - Pass through of net changes in fuel costs $ (4,960) $ (3,339) Changes in sales levels (678) (4,847) --------- --------- Electric Revenue Change $ (5,638) $ (8,186) --------- --------- Total Revenue Change $ (92,582) $ (95,494) ========= =========
See Note 3 to Notes to Consolidated Financial Statements regarding FERC Order No. 636 transition costs. GAS COSTS - Gas costs decreased $73.6 and $78.8 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 of 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 $2.46 and $2.81 per dth, respectively, as compared to $3.40 and $3.14 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 1997 period, 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 decreased $5.3 and $18.8 million for the three-month and twelve-month periods ended March 31, 1998, respectively, as a result of decreased bulk power purchases. OPERATING MARGINS - Operating margins for the twelve-months ended March 31,1998 increased $0.8 million from the same period a year ago. The operating margin from gas deliveries decreased $8.5 million due to decreased sales to residential and commercial customers reflecting unusually warm weather and decreased industrial sales, partially offset by increased sales to wholesale customers and deliveries of gas transported for others. Electric operating margin increased $9.3 million due to increased sales to commercial and wholesale customers. Operating margins for the three-months ended March 31, 1998 decreased $10.9 million from the same period a year ago. Gas operating margin decreased $13.4 million due to decreased sales to residential customers reflecting unusually mild weather during the period and decreased industrial sales, partially offset by increased sales to wholesale customers and gas transported for others. Electric operating margin increased $2.5 million mainly as a result increased wholesale transactions. OPERATING EXPENSES AND TAXES - Operation expenses decreased $13.6 million for the twelve-month period ended March 31, 1998 mainly reflecting 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. Operation expenses decreased $7.7 million for the three-month period ended March 31, 1998 mainly reflecting decreased employee costs of $4.3 million and various other decreased operation costs. Depreciation and amortization expense increased $1.3 and $10.1 million for the three-month and twelve-month periods ended March 31, 1998, respectively, resulting from plant additions, partially offset by the gain on disposition of utility plant in December 1996. OTHER INCOME (DEDUCTIONS) - Other Income (Deductions) decreased $4.7 million for the twelve-month period ended March 31, 1998 due to a loss on disposition of property during the twelve months ended March 31, 1998 offset by a gain on the disposition of of property during the same period a year ago. INTEREST CHARGES - Interest charges decreased for the twelve-month period ended March 31, 1998 reflecting decreased short-term borrowings, partially offset by increased long-term debt outstanding during the period. See Notes to Consolidated Financial Statements for a discussion of accounting policies and transactions impacting this analysis. NET INCOME - Net income for the twelve-month period ended March 31, 1998 was $195.1 million compared to $194.4 million for the twelve-month period ended March 31, 1997. Net income for the three-months ended March 31, 1998 was $65.8 million compared to $67.3 million for the three-months ended March 31, 1997. ENVIRONMENTAL MATTERS - Northern Indiana has an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. It is Northern Indiana's intent to continue to evaluate its facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has recorded a reserve of approximately $19 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, Northern Indiana believes 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 Northern Indiana. The Environmental Protection Agency (EPA) has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites, Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. Refer to Note 4 "Environmental Matters" for a more detailed discussion of the status of certain environmental issues. LIQUIDITY AND CAPITAL RESOURCES - 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 31,1998, Northern Indiana had $18.5 million and $71.5 million in commercial paper outstanding, respectively. As of March 31, 1998, the interest rate of commercial paper 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 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 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. Northern Indiana does not expect the effects of inflation at current levels to have a significant impact on their results of operations, ability to contain cost increases, or need to seek timely and adequate rate relief. Northern Indiana does not anticipate the need to file for gas and electric base rate increases in the near future. YEAR 2000 COSTS - Northern Indiana has several major projects underway to modify portions of its systems for proper functioning in the year 2000. These include a project to evaluate Northern Indiana's proprietary software and to work with each of Northern Indiana's software vendors to assure that appropriate steps are being taken to mitigate the problem in each vendor's software or, in some cases, to replace software with year 2000 compliant software; a project to identify and mitigate problems wherever they exist in Northern Indiana's systems ranging from equipment used in Northern Indiana's generating stations to Northern Indiana's phone system that have date information within them; and an initiative to assure that each entity that electronically receives information from Northern Indiana or sends information to Northern Indiana is aware of the steps that Northern Indiana is taking and is taking appropriate steps of its own to address the problem. Consistent with its plan, Northern Indiana expects to be year 2000 compliant with some systems as early as third quarter 1998 and other systems no later than the third quarter of 1999. Northern Indiana estimates that costs to become year 2000 compliant will be approximately $13-$19 million, including acquisition costs of new systems which will be capitalized consistent with Northern Indiana's accounting policies. Costs related to maintenance or modification of Northern Indiana's systems have been and will be expensed as incurred. Northern Indiana does not anticipate the related costs will have a material impact on its results of operations, nor does Northern Indiana 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) allowed FERC to order electric utilities to grant access to transmission systems by third-party power producers. The Energy Act specifically prohibits federally mandated wheeling of power for retail customers. On April 24, 1996, the FERC issued its Order No. 888-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 both 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. Northern Indiana's management has taken steps to make the company more competitive and profitable in the changing utility environment, including 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 Northern Indiana. Although pipelines continue to transport gas, they no longer provide sales service. Northern Indiana believes it has taken appropriate steps to ensure the continued acquisition of adequate gas supplies at reasonable prices. The mix of gas revenues from retail sales, interruptible retail sales, firm transportation service, and interruptible transportation services has changed significantly over the past several years. The deregulation of the gas industry, since the mid-1980's, allows large industrial and commercial customers to purchase their gas supplies directly from producers and use Northern Indiana's facilities to transport the gas. Transportation customers pay Northern Indiana 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 implemented new rates and services that would include, among other things, further unbundling of services for additional customer classes, increased customer choice for sources of natural gas supply, negotiated services and prices, an incentive gas cost mechanism and a price protection program. The gas cost incentive mechanism, which gives Northern Indiana the opportunity to share any 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, Northern Indiana's system has not been materially adversely affected by competition, and management does not foresee substantial adverse effects in the near future, unless the current regulatory structure is substantially altered. Northern Indiana believes the steps it is 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. Northern Indiana 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 Northern Indiana, 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 Northern Indiana. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary market risks to which Northern Indiana is exposed and in connection with which Northern Indiana uses market risk sensitive instruments are commodity price risk and interest rate risk. Although Northern Indiana is subject to commodity price risk as part of its traditional operations, the current regulatory framework within which Northern Indiana operates 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, Northern Indiana will be providing services without the benefit of the traditional rate-making allowances and will therefore be more exposed to commodity price risk. Northern Indiana utilizes commodity futures and option contracts to minimize the impact of price changes to a small portion of its supply portfolio. The Commission issued an order approving the inclusion of any gains or losses associated with the use of derivative financial and commodity instruments into Northern Indiana's gas cost adjustment clause. Because the commodities covered by Northern Indiana's derivative financial and commodity instruments are substantially the same commodities that Northern Indiana buys and sells in the physical market, no special correlation studies other than monitoring the degree of convergence between the derivative and cash market are deemed necessary. Due to the provisions of the gas cost adjustment clause and the fuel adjustment clause, movements in the natural gas and electric market prices would not impact net income. Northern Indiana utilizes long-term debt as a primary source of capital in its business. A significant portion of Northern Indiana's long-term debt consists of fixed price debt instruments which have been and will be refinanced at lower interest rates if Northern Indiana deems it to be economical. Refer to Notes to Consolidated Financial Statements for detailed information related to Northern Indiana's long-term debt outstanding and Fair Value of Financial Instruments. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. Northern Indiana is party to various pending proceedings, including suits and claims against it for personal injury, death and property damage. Such proceedings and suits, and the amounts involved are routine litigation and proceedings for the kind of business conducted by Northern Indiana, except as described under Note 4 (Environmental Matters), in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Report on Form 10-Q. To the knowledge of Northern Indiana no other material legal proceedings against Northern Indiana or its subsidiaries are contemplated by governmental authorities and other parties. Item 2. CHANGES IN SECURITIES. None Item 3. DEFAULTS UPON SENIOR SECURITIES. None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 8, 1998, by written consent in liew of the Annual Meeting of Shareholders of the registrant, the sole shareholder of the registrant elected Steven C. Beering, Denis E. Ribordy and Carolyn Y. Woo as directors to serve until the 2001 Annual Meeting of Shareholders. Directors whose terms 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 W. Welsh, whose terms expire at 2000 Annual Meeting of Shareholders. Item 5. OTHER INFORMATION. None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. None 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. Northern Indiana Public Service Company (Registrant) /s/ David J. Vajda --------------------------------------- David J. Vajda, Controller and Chief Accounting Officer Date May 14, 1998 EX-23 2 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 Northern Indiana Public Service Company's previously filed Form S-3 Registration Statement No. 333-26847. /s/ Arthur Andersen LLP Chicago, Illinois May 14, 1998 EX-27 3
UT This schedule contains summary financial information extracted from the financial statements of Northern Indiana Public Service Company for three months ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1998 JAN-31-1998 MAR-31-1998 PER-BOOK 3,007,128 701 287,762 105,702 202,770 3,604,063 859,488 12,522 163,951 1,035,961 58,841 81,122 313,592 0 766,025 18,500 51,009 1,828 0 0 1,277,185 3,604,063 458,916 35,917 336,865 372,782 86,134 (608) 85,526 19,752 65,774 2,116 63,658 46,000 0 70,077 0 0
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