-----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, KifaUpZEaaEwmhuijrC5NFoKtBIdFUVw4sTbVlq3eVowZUuIlOjncQPNd5pmiaSU iigTs8RZB5gjNow40AgeXg== 0000072843-95-000004.txt : 19951201 0000072843-95-000004.hdr.sgml : 19951201 ACCESSION NUMBER: 0000072843-95-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN INDIANA PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000072843 STANDARD INDUSTRIAL CLASSIFICATION: 4931 IRS NUMBER: 350552990 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04125 FILM NUMBER: 95590382 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 September 30, 1995 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 October 31, 1995, 73,282,258 common shares were outstanding. NORTHERN INDIANA PUBLIC SERVICE COMPANY Part I. FINANCIAL INFORMATION 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 September 30, 1995, and December 31, 1994, and the related consolidated statements of income, retained earnings and cash flows for the three, nine, and twelve month periods ended September 30, 1995, and 1994. 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 September 30, 1995, and December 31, 1994, and the results of their operations and their cash flows for the three, nine, and twelve month periods ended September 30, 1995, and 1994, in conformity with generally accepted accounting principles. As discussed in Notes 6 and 8 to the consolidated financial statements, effective January 1, 1993, Northern Indiana Public Service Company and subsidiaries changed their methods of accounting for income taxes and postretirement benefits other than pensions. Arthur Andersen LLP Chicago, Illinois November 6, 1995
CONSOLIDATED BALANCE SHEET September 30, December 31, ASSETS 1995 1994 ============ =========== (Dollars in thousands) UTILITY PLANT, AT ORIGINAL COST (INCLUDING CONSTRUCTION WORK IN PROGRESS OF $185,128 AND $201,898, RESPECTIVELY) (NOTE 2): Electric $ 3,918,221 $ 3,858,118 Gas 1,132,833 1,107,075 Common 338,467 316,120 ----------- ----------- 5,389,521 5,281,313 Less - Accumulated provision for depreciation and amortization 2,289,288 2,162,828 ----------- ----------- Total Utility Plant 3,100,233 3,118,485 ----------- ----------- OTHER PROPERTY AND INVESTMENTS 9,150 10,155 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents 7,776 20,994 Accounts receivable, less reserve of $5,886 and $3,955, respectively (Note 2) 54,367 80,977 Fuel adjustment clause (Note 2) 8,683 1,614 Gas cost adjustment clause (Note 2) 0 27,844 Materials and supplies, at average cost 64,426 63,835 Electric production fuel, at average cost 16,803 18,347 Natural gas in storage, at last-in, first-out cost (Note 2) 63,431 72,462 Prepayments and other 16,621 10,169 ----------- ----------- Total Current Assets 232,107 296,242 ----------- ----------- OTHER ASSETS: Regulatory assets (Note 2) 202,872 194,809 Deferred charges and other noncurrent assets 5,010 4,620 ----------- ----------- Total Other Assets 207,882 199,429 ----------- ----------- $ 3,549,372 $ 3,624,311 =========== =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED BALANCE SHEET September 30, December 31, CAPITALIZATION AND LIABILITIES 1995 1994 ============ =========== (Dollars in thousands) CAPITALIZATION: Common stock - without par value - authorized 75,000,000 shares, issued and outstanding 73,282,258 shares (Note 14) $ 859,488 $ 859,488 Additional paid-in capital 12,492 11,903 Retained earnings (see accompanying statement) (Note 13) 139,534 145,289 ----------- ----------- Common shareholders' equity 1,011,514 1,016,680 Cumulative preferred stocks (Note 10) - Series without mandatory redemption provisions (Note 11) 81,525 86,389 Series with mandatory redemption provisions (Note 12) 64,207 66,057 Long-term debt excluding amounts due within one year (Note 15) 1,059,352 1,065,351 ----------- ----------- Total Capitalization 2,216,598 2,234,477 ----------- ----------- CURRENT LIABILITIES: Obligations due within one year - Commercial paper 42,300 156,500 First mortgage bonds - Series N, 4-5/8% - due May 15, 1995 0 22,436 Medium-term notes - Issued at interest rates of 6.19% and 6.25% with a weighted average interest rate of 6.21% and maturities of July 25, 1996 and July 26, 1996 80,000 0 Notes payable - Issued at interest rates between 5.83% and 5.96% with a weighted average interest rate of 5.86% and various maturities between October 4, 1995 and November 1, 1995 64,400 92,700 ----------- ----------- 186,700 271,636 ----------- ----------- OTHER CURRENT LIABILITIES - Accounts payable 101,541 142,018 Sinking funds due within one year (Notes 12 and 15) 2,621 2,578 Dividends declared on common and preferred stocks 49,868 44,758 Customer deposits 9,327 8,678 Taxes accrued 49,152 48,806 Gas cost adjustment clause (Note 2) 25,170 0 Interest accrued 18,180 10,043 Accrued employment costs 40,873 43,260 Other accruals 37,563 9,674 ----------- ----------- 334,295 309,815 ----------- ----------- Total Current Liabilities 520,995 581,451 ----------- ----------- OTHER: Deferred income taxes (Note 6) 577,000 575,841 Deferred investment tax credits, being amortized over life of related property (Note 6) 116,245 121,822 Deferred credits 36,993 41,758 Accrued liability for postretirement benefits (Note 8) 65,870 47,718 Regulatory income tax liability (Note 6) 9,384 14,625 Other noncurrent liabilities 6,287 6,619 ----------- ----------- Total Other 811,779 808,383 ----------- ----------- COMMITMENTS AND CONTINGENCIES: (Notes 3, 4, 5, 17 and 18) $ 3,549,372 $ 3,624,311 =========== =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME Three Months Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 1995 1994 1995 1994 ========== ========== ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 4 and 20) Gas $ 66,411 $ 64,432 $ 433,152 $ 446,045 Electric 296,731 262,803 780,222 755,142 ---------- ---------- ---------- ---------- 363,142 327,235 1,213,374 1,201,187 ---------- ---------- ---------- ---------- Cost of Energy: (Note 2) Gas costs 34,996 33,329 253,047 262,931 Fuel for electric generation 69,612 62,140 179,309 184,938 Power purchased 13,126 9,143 35,259 27,985 ---------- ---------- ---------- ---------- 117,734 104,612 467,615 475,854 ---------- ---------- ---------- ---------- Operating Margin 245,408 222,623 745,759 725,333 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 71,007 67,548 206,090 208,479 Maintenance (Note 2) 18,551 18,662 57,925 59,190 Depreciation and amortization (Note 2) 49,958 47,900 147,366 142,692 Taxes (except income) 17,117 16,540 53,704 53,100 ---------- ---------- ---------- ---------- 156,633 150,650 465,085 463,461 ---------- ---------- ---------- ---------- Operating Income Before Utility Income Taxes 88,775 71,973 280,674 261,872 ---------- ---------- ---------- ---------- Utility Income Taxes (Note 6) 24,946 19,308 80,271 71,955 ---------- ---------- ---------- ---------- Operating Income 63,829 52,665 200,403 189,917 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) (956) (495) (2,534) (1,096) ---------- ---------- ---------- ---------- Income Before Interest and Other Charges 62,873 52,170 197,869 188,821 ---------- ---------- ---------- ---------- Interest and Other Charges: Interest on long-term debt 18,127 16,731 54,205 53,873 Other interest 1,463 2,639 5,848 6,451 Allowance for borrowed funds used during construction and carrying charges (Note 2) (436) (1,103) (3,513) (2,625) Amortization of premium, reacquisition premium, discount and expense on debt, net 1,078 948 3,038 2,624 ---------- ---------- ---------- ---------- 20,232 19,215 59,578 60,323 ---------- ---------- ---------- ---------- Net Income 42,641 32,955 138,291 128,498 Dividend requirements on preferred shares 2,231 2,520 6,821 7,616 ---------- ---------- ---------- ---------- Balance available for common shares $ 40,410 $ 30,435 $ 131,470 $ 120,882 ========== ========== ========== ========== Dividends declared $ 48,500 $ 42,042 $ 137,225 $ 125,565 ========== ========== ========== ========== Twelve Months Ended September 30, ---------------------- 1995 1994 ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 4 and 20) Gas $ 606,610 $ 656,859 Electric 1,019,572 989,110 ---------- ---------- 1,626,182 1,645,969 ---------- ---------- Cost of Energy: (Note 2) Gas costs 355,927 387,871 Fuel for electric generation 241,505 246,177 Power purchased 39,777 33,221 ---------- ---------- 637,209 667,269 ---------- ---------- Operating Margin 988,973 978,700 ---------- ---------- Operating Expenses and Taxes (except income): Operation 273,125 275,973 Maintenance (Note 2) 77,607 82,384 Depreciation and amortization (Note 2) 196,100 190,094 Taxes (except income) 71,021 69,997 ---------- ---------- 617,853 618,448 ---------- ---------- Operating Income Before Utility Income Taxes 371,120 360,252 ---------- ---------- Utility Income Taxes (Note 6) 104,573 97,930 ---------- ---------- Operating Income 266,547 262,322 ---------- ---------- Other Income (Deductions) (Note 2) 2,288 (1,070) ---------- ---------- Income Before Interest and Other Charges 268,835 261,252 ---------- ---------- Interest and Other Charges: Interest on long-term debt 71,103 73,357 Other interest 8,947 7,710 Allowance for borrowed funds used during construction and carrying charges (Note 2) (4,922) (2,675) Amortization of premium, reacquisition premium, discount and expense on debt, net 4,011 3,450 ---------- ---------- 79,139 81,842 ---------- ---------- Net Income 189,696 179,410 Dividend requirements on preferred shares 9,118 10,189 ---------- ---------- Balance available for common shares $ 180,578 $ 169,221 ========== ========== Dividends declared $ 180,475 $ 171,845 ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS Three Months Nine Months Twelve Months Ended September 30, Ended September 30, Ended September 30, 1995 1994 1995 1994 1995 1994 ========= ========= ========= ========= ========= ========= (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 147,624 $ 151,038 $ 145,289 $ 144,114 $ 139,431 $ 142,056 ADD: Net income 42,641 32,955 138,291 128,498 189,696 179,410 --------- --------- --------- --------- --------- --------- 190,265 183,993 283,580 272,612 329,127 321,466 --------- --------- --------- --------- --------- --------- LESS: Dividends Cumulative Preferred stocks - 4-1/4% series 223 225 669 674 893 898 4-1/2% series 90 90 270 270 360 360 4.22% series 113 113 337 337 448 448 4.88% series 122 122 366 366 488 488 7.44% series 77 77 233 233 312 312 7.50% series 65 65 196 196 261 261 8.85% series 221 249 682 765 931 1,042 7-3/4% series 113 124 339 372 459 502 8.35% series 150 159 472 510 634 685 6.50% series 699 699 2,096 2,096 2,795 2,795 Adjustable Rate, series A 358 597 1,161 1,797 1,537 2,398 Common shares 48,500 42,042 137,225 125,565 180,475 171,845 Capital stock expense 0 0 0 0 0 1 --------- --------- --------- --------- --------- --------- 50,731 44,562 144,046 133,181 189,593 182,035 --------- --------- --------- --------- --------- --------- BALANCE AT END OF PERIOD $ 139,534 $ 139,431 $ 139,534 $ 139,431 $ 139,534 $ 139,431 ========= ========= ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------ 1995 1994 1995 1994 =========== =========== =========== =========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 42,641 $ 32,955 $ 138,291 $ 128,498 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 49,958 47,900 147,366 142,692 Deferred federal and state operating income taxes, net 4,199 7,514 (17,916) (7,965) Deferred investment tax credits, net (1,860) (1,846) (5,578) (4,644) Change in certain assets and liabilities - Accounts receivable, net 6,375 30,343 26,610 56,288 Electric production fuel 2,915 2,244 1,544 936 Materials and supplies 1,203 (518) (591) (612) Natural gas in storage (28,829) (38,879) 9,031 (24,539) Accounts payable (1,142) (4,954) (40,477) (41,659) Taxes accrued (18,497) (22,452) 14,218 (43,510) Fuel adjustment clause (5,763) 2,445 (7,069) 1,552 Gas cost adjustment clause (3,518) (3,642) 53,014 55,505 Accrued employment costs 767 2,363 (2,387) 303 Other accruals (388) (1,171) 27,889 (439) Other, net 11,230 7,965 13,626 9,965 ----------- ----------- ----------- ----------- Net cash provided by operating activities 59,291 60,267 357,571 272,371 ----------- ----------- ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (35,965) (54,003) (131,205) (151,400) Other, net 2,162 0 1,460 153 ----------- ----------- ----------- ----------- Net cash used in investing activities (33,803) (54,003) (129,745) (151,247) ----------- ----------- ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 0 187,207 168,386 207,602 Issuance of short-term debt 64,400 295,125 451,100 741,977 Net change in commercial paper 42,300 19,300 (114,200) 100,305 Retirement of long-term debt (97,298) (67,546) (119,744) (258,013) Retirement of short-term debt 0 (397,026) (479,400) (769,927) Retirement of preferred stock (1,008) (891) (6,339) (2,050) Cash dividends paid on common shares (43,975) (41,808) (131,160) (129,803) Cash dividends paid on preferred shares (3,013) (2,521) (9,264) (7,616) Other, net 254 0 (423) 0 ---------- ----------- ----------- ----------- Net cash used in financing activities (38,340) (8,160) (241,044) (117,525) ---------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,852) (1,896) (13,218) 3,599 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,628 10,674 20,994 5,179 ---------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,776 $ 8,778 $ 7,776 $ 8,778 ========== =========== =========== =========== Twelve Months Ended September 30, ------------------------ 1995 1994 ========== =========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 189,696 $ 179,410 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 196,100 190,094 Deferred federal and state operating income taxes, net (21,419) 5,941 Deferred investment tax credits, net (7,350) (6,485) Change in certain assets and liabilities* - Accounts receivable, net (11,432) (5,334) Electric production fuel 3,794 4,137 Materials and supplies 1,330 1,066 Natural gas in storage 17,911 (15,636) Accounts payable (27,934) 15,648 Taxes accrued 40,983 (31,284) Fuel adjustment clause (3,795) (2,565) Gas cost adjustment clause 5,230 43,437 Accrued employment costs 492 (2,336) Other accruals 25,146 1,610 Other, net 30,858 (21,806) ---------- ----------- Net cash provided by operating activities 439,610 355,897 ---------- ----------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (176,659) (214,701) Other, net 7,007 (248) ---------- ----------- Net cash used in investing activities (169,652) (214,949) ---------- ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 169,668 207,602 Issuance of short-term debt 692,050 915,729 Net change in commercial paper (85,900) 113,500 Retirement of long-term debt (71,977) (308,434) Retirement of short-term debt (774,700) (881,680) Retirement of preferred stock (14,643) (2,580) Cash dividends paid on common shares (173,202) (172,338) Cash dividends paid on preferred shares (11,833) (10,201) Other, net (423) 0 ---------- ----------- Net cash used in financing activities (270,960) (138,402) ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,002) 2,546 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,778 6,232 ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,776 $ 8,778 ========== =========== 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: PRINCIPLES OF CONSOLIDATION. 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. 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 provisions as a percentage of the cost of depreciable utility plant were approximately 4.0%, 4.1% and 4.1%, for the three, nine, and twelve month periods ended September 30, 1995, respectively, and 4.0% for the three, nine, and twelve month periods ended September 30, 1994. The depreciation rates for electric and gas properties were 3.55% and 4.92%, respectively. 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 retirement unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. 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 September 30, 1995, Northern Indiana had sold $100 million of certain of its accounts receivable under a sales agreement which expires May 31, 1997. The September 30, 1995, and December 31, 1994, accounts receivable balances include approximately $8.6 million due from Industries. 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 Nine Months Twelve Months Ended September 30, Ended September 30, Ended September 30, ------------------ ------------------ ------------------ 1995 1994 1995 1994 1995 1994 ======== ======== ======== ======== ======== ======== (Dollars in thousands) Income taxes $ 30,500 $ 25,300 $ 78,807 $ 89,874 $105,723 $108,550 Interest, net of amounts capitalized $ 13,549 $ 11,312 $ 49,661 $ 54,631 $ 72,013 $ 81,746
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 or overrecovery 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 or overrecovery 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 or overrecovery 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 or overrecovery caused by variances between estimated and actual cost in a given three or six month period will be included in a future filing. See Note 4, Rate Matters (Take-or-Pay Pipeline Gas Costs) and (FERC Order No. 636) for a discussion of take-or-pay charges and gas transition cost charges. NATURAL GAS IN STORAGE. Based on the average cost of gas purchased in September, 1995, and December, 1994, the estimated replacement cost of gas in storage (current and non-current) at September 30, 1995, and December 31, 1994, exceeded the stated LIFO cost by approximately $22 million and $38 million, respectively. REGULATORY ASSETS. Northern Indiana's operations are subject to the regulation of the Commission and the Federal Energy Regulatory Commission (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." The regulatory assets below represent probable future revenue to Northern Indiana associated with certain incurred costs as these costs are recovered through the rate making process. Regulatory assets were comprised of the following items, and were reflected in the Consolidated Balance Sheet as follows:
September 30, December 31, 1995 1994 ============ ============= (Dollars in thousands) Unamortized reacquisition premium on debt (Note 15) $ 54,220 $ 53,792 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 76,035 79,198 Bailly scrubber carrying charges and deferred depreciation (See below) 10,717 7,864 Deferral of SFAS No. 106 expense not recovered (Note 8) 57,517 43,772 FERC Order No. 636 transition costs (Note 4) 28,888 56,153 ------------ ------------- 227,377 240,779 ------------ ------------- Less: Current portion of regulatory assets 24,505 45,970 ------------ ------------- $ 202,872 $ 194,809 ============ =============
In March, 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement imposes stricter criteria for retention of regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Northern Indiana anticipates adopting this standard on January 1, 1996, and does not expect that adoption will have a material impact on its financial position or results of operations based on the current regulatory structure in which Northern Indiana operates. 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 began capitalizing carrying charges and deferring depreciation and certain operating expenses relating to its scrubber service agreement upon completion of the flue gas desulfurization plant in June, 1992, at Northern Indiana's Bailly Generating Station in accordance with an order of the Commission. Capitalization of carrying charges and deferral of depreciation and certain operating expenses will continue until December 31, 1995. Thereafter, the accumulated balance of the deferred costs and related carrying charges will be 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, 1993, a pretax rate of 3.7% for all construction was being used; effective January 1, 1994, the rate increased to 5.0% and effective January 1, 1995, the rate increased to 7.0%. 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) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service (IRS) issued a notice of deficiency for Northern Indiana's taxes for the years 1982 through 1985 ($3,785,250 per year plus interest) relating to interest payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's former foreign subsidiary, Northern Indiana Public Service Finance N.V. (Finance). The IRS believes that interest paid on the Notes should have been subject to United States tax withholding. Northern Indiana estimates this claim to be approximately $49 million of principal and interest at September 30, 1995. The Notes were redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991, Northern Indiana filed its petition challenging the assessment in the United States Tax Court (Tax Court). The matter was tried on May 31 and June 1, 1994, and briefing was completed September 30, 1994. On November 6, 1995, the Tax Court ruled in favor of Northern Indiana, finding that the interest paid on the Notes was not subject to United States tax withholding. While it is uncertain whether the IRS will appeal the Tax Court's decision, Northern Indiana's management and general counsel believe the ruling of the Tax Court will ultimately prevail. (4) RATE MATTERS: TAKE-OR-PAY PIPELINE GAS COSTS. The FERC has allowed certain interstate pipeline suppliers to pass on to their customers a portion of costs for contracted gas not purchased (take-or-pay), contract reformation and associated interest charges through direct billing to their customers, including Northern Indiana. Northern Indiana records take-or-pay costs as they are billed by the respective pipeline, and in an order dated September 28, 1988, the Commission allowed Northern Indiana to recover these additional gas costs on a volumetric basis from all customers, including transport customers. Northern Indiana has recovered approximately $187.0 million of take-or-pay costs and interest from its customers through September 30, 1995. As of September 30, 1995, an additional $4.0 million was scheduled to be billed to Northern Indiana and recovered from customers over a period of one to four years. FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636 which required interstate pipelines to restructure their services. Under the Order, existing pipeline sales services have been "unbundled" such that gas supplies are being sold separately from interstate transportation services. Northern Indiana's interstate pipeline suppliers have filed new tariffs with the FERC to implement Order No. 636, and Northern Indiana has contracted for a mix of transportation and storage services which will allow Northern Indiana to meet the needs of its customers. Customers of the pipelines, such as Northern Indiana, are expected to benefit from enhanced access to competitively priced gas supplies as well as from more flexible transportation services. Pipelines are seeking to recover from their customers certain transition costs associated with restructuring under the Order No. 636 regulation. Any such recovery is subject to established review procedures at the FERC. Also, mandated changes in pipeline rate design could increase the cost of firm transportation service on interstate pipelines. All interstate pipelines are now operating under Order No. 636 regulation. Northern Indiana's pipeline suppliers have made certain filings with the FERC for the collection of their respective transition costs. Northern Indiana expects that the total transition costs from all suppliers will approximate $137 million. However, the ultimate level of costs will depend on future events, including the market price of natural gas. Approximately $76 million of such costs have been recorded, a portion of which has been paid to the pipeline suppliers, subject to refund. On November 2, 1994, the Commission issued an order which approved the recovery of these FERC-allowed transition costs on a volumetric basis from Northern Indiana's sales and transportation customers (which is consistent with what the Commission authorized for the recovery of take-or-pay pipeline gas costs). Certain industrial customers appealed the November 2, 1994, order to the Indiana Court of Appeals. On May 25, 1995, the Court granted Northern Indiana's motion to dismiss the appeal for want of subject matter jurisdiction. On June 23, 1995, the transportation customers filed a petition for rehearing and reconsideration of the Court's order. On July 27, 1995, the Court denied the transportation customers' petition. On August 24, 1995, the transportation customers filed a Petition for Transfer with the Indiana Supreme Court seeking review of the Indiana Court of Appeals' decision. Northern Indiana filed a brief opposing the transportation customers' petition and the matter is pending Indiana Supreme Court decision. Regulatory assets, in amounts corresponding to the costs recorded, have been recorded to reflect the ultimate recovery of these costs. (5) ENVIRONMENTAL MATTERS: Because of major investments made in modern environmental control facilities and the use of low sulfur coal, all of Northern Indiana's electric production facilities now comply with the sulfur dioxide limitations contained in acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants, which may require significant capital expenditures for control of these emissions. Northern Indiana is evaluating a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate making process. Northern Indiana has an ongoing program to remain aware of laws and regulations involved with hazardous waste. 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 received notices from the Environmental Protection Agency (EPA) that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) 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 and SARA, 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. While all of the remedial costs at these sites are not determinable, Northern Indiana's analysis indicates its share of such costs with other PRPs should not have a significant impact on its financial position or the results of future operations. 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-three of these sites and made visual inspections of these sites. Northern Indiana has conducted initial samplings at ten sites. Follow-up investigations have been conducted at four sites and potential remedial measures are being evaluated. Northern Indiana will continue its program to assess sites. During the follow-up investigation of the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted the presence of hydrocarbons in the Elkhart River. Northern Indiana reported this finding to the Indiana Department of Environmental Management (IDEM) and the EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary Remediation Program (VRP). The goal of placing the site in the VRP will be to obtain IDEM approval of the determination and subsequent implementation of what remedial measures, if any, may be needed. Northern Indiana was notified by the IDEM of the release of a petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a former manufactured gas plant formerly owned by Northern Indiana. In cooperation with IDEM, Northern Indiana has taken steps to investigate and contain the substance. Northern Indiana has remediated part of the Fort Wayne site. The remainder of the site is being evaluated to determine what further remedial measures, if any, may be needed. 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 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. Northern Indiana has met with various companies who provided insurance coverage which Northern Indiana believe covers costs related to actions taken at former manufactured gas plants. In September 1995, certain insurance companies initiated a suit in Indiana state court against Northern Indiana to deny coverage. Later in September 1995, Northern Indiana filed a more comprehensive suit in Federal Court in Indiana against those insurers and several other insurance companies, seeking coverage for costs associated with several former manufactured gas plant sites. The possibility that exposure to electric and magnetic fields 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. A considerable amount of scientific research has been conducted on this topic without definitive results. Research is continuing to resolve scientific uncertainties. (6) INCOME TAXES: Effective January 1, 1993, Northern Indiana adopted SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for income taxes. Under the liability method, 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 implement SFAS No. 109, certain adjustments were made to deferred income taxes. To the extent such income taxes are recoverable or payable through future rates, regulatory assets and liabilities have been recorded in the Consolidated Balance Sheet. These adjustments include the amounts reflecting Northern Indiana's obligation to credit to ratepayers deferred income taxes provided at rates higher than the current federal tax rate which are currently being credited to ratepayers using the average rate assumption method required by the Tax Reform Act of 1986 and the Commission. The Consolidated Balance Sheet at September 30, 1995, and December 31, 1994, reflects a net regulatory income tax liability of $9.4 million and $14.6 million, respectively. The net regulatory income tax liability is derived from regulatory assets 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, and regulatory liabilities primarily attributable to deferred taxes provided at rates in excess of the current statutory rate, as discussed above, 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 September 30, 1995, and December 31, 1994, are as follows:
September 30, December 31, 1995 1994 ============ =========== (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 694,417 $ 684,887 AFUDC-equity 40,704 42,447 Adjustment clauses 0 11,173 Take-or-pay gas costs 1,212 1,687 Other regulatory assets 25,078 22,062 Reacquisition premium on debt 20,565 20,401 Deferred tax assets - Deferred investment tax credits (44,086) (46,201) Removal costs (114,446) (105,671) Adjustment clauses (6,254) 0 FERC Order No. 636 transition costs (3,262) (5,461) Other postretirement benefits (29,010) (22,253) Regulatory income tax liability (3,559) (5,547) Other, net (18,459) (21,911) ----------- ----------- 562,900 575,613 Less: Deferred income taxes related to current assets and liabilities (14,100) (228) ----------- ----------- Deferred income taxes - noncurrent $ 577,000 $ 575,841 =========== ===========
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Nine Months Ended September 30, Ended September 30, -------------------- -------------------- 1995 1994 1995 1994 ========= ========= ========= ========= (Dollars in thousands) Current income taxes - Federal $ 19,616 $ 11,705 $ 90,453 $ 73,346 State 2,991 1,935 13,312 11,218 --------- --------- --------- --------- 22,607 13,640 103,765 84,564 --------- --------- --------- --------- Deferred income taxes, net - Federal and State - Accelerated depreciation and other property differences 2,012 3,277 6,036 9,832 Removal costs (2,851) (2,808) (8,553) (8,425) Adjustment clauses 8,239 458 (2,932) (21,003) FERC Order No. 636 transition costs (2,211) 3,718 (10,486) 11,873 Take-or-pay gas costs (158) (363) (477) (1,833) Reacquisition premium on debt (313) 1,382 (940) 2,451 Other (519) 1,850 (564) (860) --------- --------- --------- --------- 4,199 7,514 (17,916) (7,965) --------- --------- --------- --------- Deferred investment tax credits, net (1,860) (1,846) (5,578) (4,644) --------- --------- --------- --------- Total utility operating income taxes 24,946 19,308 80,271 71,955 Income tax applicable to non- operating activities and income of subsidiaries (656) (292) (2,565) (202) --------- --------- --------- --------- Total income taxes $ 24,290 $ 19,016 $ 77,706 $ 71,753 ========= ========= ========= ========= Twelve Months Ended September 30, -------------------- 1995 1994 ========= ========= (Dollars in thousands) Current income taxes - Federal $ 116,109 $ 85,156 State 17,233 13,318 --------- --------- 133,342 98,474 --------- --------- Deferred income taxes, net - Federal and State - Accelerated depreciation and other property differences 4,485 13,374 Removal costs (12,221) (9,234) Adjustment clauses (722) (14,845) FERC Order No. 636 transition costs (10,966) 11,873 Take-or-pay gas costs (308) (326) Reacquisition premium on debt (779) 2,503 Other (908) 2,596 --------- --------- (21,419) 5,941 --------- --------- Deferred investment tax credits, net (7,350) (6,485) --------- --------- Total utility operating income taxes 104,573 97,930 Income tax applicable to non- operating activities and income of subsidiaries (12,654) (172) --------- --------- Total income taxes $ 91,919 $ 97,758 ========= =========
A reconciliation of total tax expense to an amount computed by applying the statutory federal income tax rate to pretax income is as follows:
Three Months Nine Months Ended September 30, Ended September 30, -------------------- -------------------- 1995 1994 1995 1994 ========= ========= ========= ========= (Dollars in thousands) Net Income $ 42,641 $ 32,955 $ 138,291 $ 128,498 Add-Income taxes 24,290 19,016 77,706 71,753 --------- --------- --------- --------- Net income before income taxes $ 66,931 $ 51,971 $ 215,997 $ 200,251 ========= ========= ========= ========= Amount derived by multiplying pretax income by the statutory rate $ 23,426 $ 18,190 $ 75,599 $ 70,088 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 1,005 967 3,014 2,902 Amortization of deferred investment tax credits (1,860) (1,846) (5,578) (5,610) State income taxes, net of federal income tax benefit 2,269 1,845 7,218 6,755 Fair market value of property donated in excess of book value 0 0 0 0 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,360) (1,298) (4,079) (3,895) Other, net 810 1,158 1,532 1,513 --------- --------- --------- --------- Total income taxes $ 24,290 $ 19,016 $ 77,706 $ 71,753 ========= ========= ========= ========= Twelve Months Ended September 30, -------------------- 1995 1994 ========= ========= (Dollars in thousands) Net Income $ 189,696 $ 179,410 Add-Income taxes 91,919 97,758 --------- --------- Net income before income taxes $ 281,615 $ 277,168 ========= ========= Amount derived by multiplying pretax income by the statutory rate $ 98,565 $ 97,073 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 4,156 3,875 Amortization of deferred investment tax credits (7,351) (7,451) State income taxes, net of federal income tax benefit 9,478 9,241 Fair market value of property donated in excess of book value (7,753) 0 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (5,991) (5,069) Other, net 815 89 --------- --------- Total income taxes $ 91,919 $ 97,758 ========= =========
(7) 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 plan's funded status as of January 1, 1995, and 1994 are as follows:
1995 1994 ========= ========= (Dollars in thousands) Vested benefit obligation $ 444,096 $ 473,280 Nonvested benefit 96,425 85,954 --------- --------- Accumulated benefit obligation $ 540,521 $ 559,234 ========= ========= Projected benefit obligation for service rendered to date $ 605,495 $ 644,788 Plan assets at fair market value 565,507 595,621 --------- --------- Projected benefit obligation in excess of plan assets 39,988 49,167 Unrecognized transition obligation at January 1, being recognized over 17 years (49,395) (54,883) Unrecognized prior service cost (28,111) (31,101) Unrecognized gains 47,147 53,723 --------- --------- Accrued pension costs $ 9,629 $ 16,906 ========= =========
The accumulated benefit obligation is the present value of future pension benefit payments and is based on the plan benefit formula without considering expected future salary increases. The projected benefit obligation considers estimated future salary increases. Discount rates of 8.75% and 7.50% and rates of increase in compensation levels of 5.5% were used to determine the accumulated benefit obligation and projected benefit obligation at January 1, 1995, and 1994, respectively. The decrease in the accumulated benefit obligation as of January 1, 1995, is mainly caused by the increase in the discount rate to 8.75% and was partially offset by changes in other plan assumptions. The following items are the components of provisions for pensions for the three and nine month periods ended September 30, 1995:
Three Nine Months Months ========= ========= (Dollars in thousands) Service costs $ 3,196 $ 9,587 Interest costs 13,180 39,540 Estimated return on plan assets (12,737) (38,210) Amortization of transition obligation 1,372 4,116 Other net amortization and deferral 614 1,842 --------- --------- $ 5,625 $ 16,875 ========= =========
Assumptions used in the valuation and determination of 1995 and 1994 pension expenses were as follows:
1995 1994 ===== ===== Discount rate 8.75% 7.50% Rate of increase in compensation levels 5.50% 5.50% Expected long-term rate of return on assets 9.00% 8.25%
Plan assets are invested primarily in common stocks, bonds and notes. Northern Indiana recorded provisions for pension costs as follows:
September 30, September 30, 1995 1994 ============ ============ (Dollars in thousands) Three months ended $ 5,625 $ 5,475 Nine months ended $ 16,875 $ 16,725 Twelve months ended $ 20,671 $ 22,403
(8) 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. Those and similar benefits for active employees are provided through insurance plans whose premiums are based on the benefits to active employees and retirees paid during the year. Prior to January 1, 1993, Northern Indiana recognized the cost of providing those benefits by expensing insurance premiums, which is consistent with current rate making practices. Effective January 1, 1993, Northern Indiana adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which establishes accounting and reporting standards for such postretirement benefits. This standard requires the accrual of the expected cost of such benefits during the employee's years of service. The following table sets forth the plans' accumulated postretirement benefit obligation as of January 1, 1995, and January 1, 1994:
January 1, January 1, 1995 1994 ========== ========== (Dollars in thousands) Retirees $ 94,913 $ 88,034 Fully eligible active plan participants 18,796 29,006 Other active plan participants 103,559 147,687 ---------- ---------- Accumulated postretirement benefit obligation 217,268 264,727 Unrecognized transition obligation at January 1, being recognized over 20 years (204,265) (215,613) Unrecognized actuarial gain (loss) 44,905 (20,815) ---------- ---------- Accrued liability for postretirement benefits $ 57,908 $ 28,299 ========== ==========
A discount rate of 8.75% and a pre-Medicare medical trend rate of 11% declining to a long-term rate of 7% and a discount rate of 7.5% and a pre-Medicare medical trend rate of 12% declining to a long-term rate of 7% were used to determine the accumulated postretirement benefit obligation at January 1, 1995, and 1994, respectively. The transition obligation at January 1, 1993, for accumulated postretirement benefits earned and not recognized is being amortized over twenty years as allowed by SFAS No. 106. Net periodic postretirement benefits costs for the three, nine, and twelve month periods ended September 30, 1995, and September 30, 1994, include the following components:
Three Months Nine Months Twelve Months Ended Ended Ended September 30, September 30, September 30, ---------------- ---------------- ---------------- 1995 1994 1995 1994 1995 1994 ======= ======= ======= ======= ======= ======= (Dollars in thousands) Service costs $ 1,376 $ 1,922 $ 4,098 $ 5,766 $ 5,953 $ 7,432 Interest costs 4,651 4,893 13,953 14,679 18,844 18,738 Amortization of transition obligation over 20 years 2,837 2,837 8,511 8,511 11,348 11,348 Amortization of unrecognize actuarial (gain) (541) 0 (1,623) 0 (1,623) 0 ------- ------- ------- ------- ------- ------- $ 8,323 $ 9,652 $24,939 $28,956 $34,522 $37,518 ======= ======= ======= ======= ======= =======
The net periodic postretirement benefit costs for 1995 were determined assuming an 8.75% discount rate, a 5% rate of compensation increase and a pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%. 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, 1995, by approximately $32.0 million and increase the aggregate of the service and interest cost components of plan costs by approximately $1.2 million and $3.6 million for the three and nine month periods ended September 30, 1995. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates or plan changes. On December 30, 1992, the Commission authorized the accrual method of accounting for postretirement benefits for rate making purposes and authorized the deferral, as a regulatory asset to be recovered through future revenues, of the net increase in cost until such time as the new accrual cost method may be reflected in the rate making process. The Commission stated that a deferral period of four years or less would be rebuttably presumed to be reasonable and also indicated each utility would have to demonstrate its postretirement benefit costs were prudent and reasonably incurred at the time such costs were incurred at the time such costs were proposed to be recovered in the rate making process. Northern Indiana currently anticipates requesting the recovery of such costs within that period and, accordingly, is deferring as a regulatory asset the difference between the amount that would have been charged to expense under pay-as-you-go accounting and the amount accrued in accordance with the new standard. This conclusion could change as competitive factors influence pricing decisions. (9) POSTEMPLOYMENT BENEFITS: Effective January 1, 1994, Northern Indiana adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires Northern Indiana to accrue the estimated cost of benefits provided to former or inactive employees after employment but before retirement. Adoption of SFAS No. 112 did not have a material impact on Northern Indiana's financial position or results of operations. (10) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS: 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 11 sets forth the preferred stocks which are redeemable solely at the option of Northern Indiana, and Note 12 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. (11) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF NORTHERN INDIANA, OUTSTANDING AT SEPTEMBER 30, 1995, AND DECEMBER 31, 1994 (SEE NOTE 10):
Redemption Price at September 30, December 31, September 30, 1995 1994 1995 ============ =========== ============ (Dollars in thousands) Cumulative preferred stock - $100 par value - 4-1/4% series - 209,190 and 211,266 shares outstanding, respectively $ 20,919 $ 21,127 $ 101.20 4-1/2% series - 79,996 shares outstanding 8,000 8,000 100.00 4.22% series - 106,198 and 106,200 shares outstanding, respectively 10,620 10,620 101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 102.00 7.44% series - 41,890 and 41,900 shares outstanding, respectively 4,189 4,190 101.00 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 September 30, 1995), Series A (stated value $50 per share) 481,185 and 574,285 shares outstanding, respectively 24,059 28,714 50.00 ------------ ----------- $ 81,525 $ 86,389 ============ ===========
During the period October 1, 1993, to September 30, 1995, there were no issuances of the above preferred stocks. The foregoing preferred stocks are redeemable in whole or in part at any time upon 30 days notice at the option of Northern Indiana at the redemption prices shown. (12) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT SEPTEMBER 30, 1995, AND DECEMBER 31, 1994 (SEE NOTE 10):
September 30, December 31, 1995 1994 ============ ============ (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 - 87,500 and 100,000 shares outstanding, respectively, excluding sinking fund payments due within one year $ 8,750 $ 10,000 7-3/4% series - 55,568 shares outstanding, excluding sinking fund payments due within one year 5,557 5,557 8.35% series - 69,000 and 75,000 shares outstanding, respectively, excluding sinking fund payments due within one year 6,900 7,500 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ---------- ------------ $ 64,207 $ 66,057 ========== ============
The redemption prices at September 30, 1995, 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% $102.22, reduced periodically 12,500 shares on or before April 1. 8.35% $104.18, 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% $104.76, 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 September 30, 1995, for each of the twelve month periods subsequent to September 30, 1996, are as follows:
Twelve Months Ended September 30:* ================================= 1997 $ 1,827,700 1998 $ 1,827,700 1999 $ 1,827,700 2000 $ 1,827,700 * Table does not reflect redemptions made after September 30, 1995.
(13) COMMON SHARE DIVIDEND: Northern Indiana's Indenture provides that it will not declare or pay any dividends on any class of capital stock (other than preferred or preference stock) except out of earned surplus or net profits of Northern Indiana. At September 30, 1995, Northern Indiana had approximately $139.5 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. (14) COMMON SHARES: Effective with the exchange of common shares on March 3, 1988, Northern Indiana's common shares are wholly-owned by Industries. (15) LONG-TERM DEBT: At September 30, 1995, and December 31, 1994, the long-term debt of Northern Indiana, excluding amounts due within one year, issued and not retired or cancelled was as follows:
AMOUNT OUTSTANDING ----------------------------- September 30, December 31, 1995 1994 ============= ============ (Dollars in thousands) First mortgage bonds - Series O, 6-3/8%, due September 1, 1997 $ 25,747 $ 25,747 Series P, 6-7/8%, due October 1, 1998 14,509 14,509 Series T, 7-1/2%, due April 1, 2002 40,500 40,543 Series U, 8-1/8%, due July 15, 2003 0 55,239 Series Z, 8-1/8%, due August 15, 2007 0 39,569 Series NN, 7.10%, due July 1, 2017 55,000 55,000 ----------- ----------- Total 135,756 230,607 ----------- ----------- Pollution control notes and bonds - Series A Note - City of Michigan City, 5.70% due October 1, 2003 20,750 20,750 Series 1988 Bonds - Jasper County - Series A, B and C 3.76% weighted average at September 30, 1995, due November 1, 2016 130,000 130,000 Series 1988 Bonds - Jasper County - Series D 3.72% weighted average at September 30, 1995, due November 1, 2007 24,000 24,000 Series 1994 Bonds - Jasper County - Series A - 4.50% at September 30, 1995, due August 1, 2010 10,000 10,000 Series 1994 Bonds - Jasper County - Series B - 4.50% at September 30, 1995, due June 1, 2013 18,000 18,000 Series 1994 Bonds - Jasper County - Series C - 4.50% at September 30, 1995, due April 1, 2019 41,000 41,000 ----------- ----------- Total 243,750 243,750 ----------- ----------- Medium-term notes - Issued at interest rates between 5.83% and 7.64% with a weighted average interest rate of 6.82% and various maturities between July 25, 1997 and January 19, 2024 684,025 594,750 ----------- ----------- Unamortized premium and discount on long-term debt, net (4,179) (3,756) ----------- ----------- Total long-term debt excluding amounts due in one year $ 1,059,352 $ 1,065,351 =========== ===========
The sinking fund requirements of long-term debt outstanding at September 30, 1995, (including the maturity of first mortgage bonds: Series O, 6-3/8%, due September 1, 1997; and Series P, 6-7/8%, due October 1, 1998; and medium-term notes due from April 6, 1998 to June 1, 2000; for each of the twelve month periods subsequent to June 30, 1996, are as follows:
Twelve Months Ended September 30, ================================== 1997 $ 66,997,000 1998 $ 36,500,000 1999 $ 16,009,000 2000 $157,000,000
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. Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented, securing the first mortgage bonds issued by Northern Indiana, constitutes a direct first mortgage lien upon substantially all property and franchises, other than expressly excepted property, owned by Northern Indiana. On March 4, 1994, the Commission authorized Northern Indiana to issue up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30 years, for purposes of refinancing certain first mortgage bonds and paying short-term debt used to pay at maturity medium-term notes due in January and April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating $125.5 million, through the use of working capital and the proceeds of short-term debt. During 1994, $120.0 million of the Medium-Term Notes, Series D, were issued to complete the permanent refinancing of those first mortgage bonds. As of June 12, 1995, the remaining $169,275,000 of Medium- Term Notes, Series D, were issued and part of the proceeds were used to redeem all of the outstanding First Mortgage Bonds, Series U and Z aggregating $94.8 million on July 3, 1995. On August 25, 1994, Jasper County, Indiana issued Pollution Control Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due June 1, 2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The proceeds of these issuances were loaned to Northern Indiana under similar terms. The initial interest rate on Series 1994 Bonds was 3.10%, which resets daily. The proceeds of the Series 1994A and Series 1994C were used to retire on October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due October 15, 2004 and $41 million of Series LL First Mortgage Bonds, 7-1/2%, due October 15, 2014. The proceeds of the Series 1994B Bonds were used to retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994. The Series 1994 Bonds are secured by Letters of Credit from Union Bank of Switzerland. (16) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1998, unless extended by its terms. As of September 30, 1995, 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, 1996. 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 fee to a combination of fees which are mutually satisfactory to both parties. As of September 30, 1995, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuances of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of September 30, 1995, there were $64.4 million of borrowings outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At September 30, 1995, there were no borrowings outstanding under this facility. Northern Indiana uses commercial paper to fund short-term working capital requirements. As of September 30, 1995, Northern Indiana had $42.3 million in commercial paper outstanding, having a weighted average interest rate of 5.85%. (17) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a 20-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 $3.2 million. The following is a schedule, by years, of future minimum rental payments, excluding those to associated companies, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of September 30, 1995:
Twelve Months Ended September 30, ================================ (Dollars in thousands) 1996 $ 7,262 1997 5,389 1998 4,111 1999 3,161 2000 3,055 Later years 40,017 -------- Total minimum payments required $ 62,995 ========
The consolidated financial statements include rental expense for all operating leases as follows:
September 30, September 30, 1995 1994 ============ ============ (Dollars in thousands) Three months ended $ 2,844 $ 2,653 Nine months ended $ 7,981 $ 8,067 Twelve months ended $ 10,124 $ 10,542
(18) COMMITMENTS: Northern Indiana estimates that approximately $774 million will be expended for construction purposes for the period from January 1, 1995, to December 31, 1999. 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 will provide 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 20-year contract period. (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 investments are estimated based on market prices for those of similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock are 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:
September 30, 1995 December 31, 1994 ------------------------ ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value =========== =========== =========== =========== (Dollars in thousands) Cash and cash equivalents $ 7,776 $ 7,776 $ 20,994 $ 20,994 Investments $ 646 $ 646 $ 1,038 $ 1,038 Long-term debt (including current portion) $ 1,140,145 $ 1,141,799 $ 1,088,537 $ 998,393 Preferred stock $ 147,560 $ 127,257 $ 154,274 $ 120,891
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 5% of gas revenues (including transportation services) and 23% of electric revenue for the twelve months ended September 30, 1995, as compared to 2% and 25%, respectively, for the twelve months ended September 30, 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUES - Total operating revenues for the twelve months ended September 30, 1995, decreased $19.8 million as compared to the twelve months ended September 30, 1994. Gas revenues decreased $50.2 million and electric revenues increased $30.4 million. The decrease in gas revenues was largely attributable to decreased sales to residential and commercial customers due to milder weather, decreased gas costs partially offset by increased gas transition charges and deliveries of gas transported for others. Gas transportation customers purchase much of their gas directly from producers and marketers and then pay a transportation fee to have their gas delivered over Northern Indiana's system. Northern Indiana had approximately 632,100 gas customers at September 30, 1995. The increase in electric revenues for the twelve months ended September 30, 1995, was mainly due to increased sales to residential and commercial customers as a result of warmer weather in the third quarter of 1995, and increased sales to industrial and wholesale customers, and was partially offset by decreased fuel cost per kilowatt-hour (kwh) and transitional rate adjustments to industrial customers signing new five year contracts. Total operating revenue for the nine months ended September 30, 1995 increased $12.2 million as compared to the nine months ended September 30, 1994. Gas revenues decreased $12.9 million and electric revenues increased $25.1 million as compared to the same period in 1994. The decrease in gas revenues was mainly due to decreased sales to residential and commercial customers as a result of warmer weather during the first quarter of 1995 and decreased gas costs partially offset by increased gas transition charges. The increase in electric revenue for the nine months ended September 30, 1995, was mainly due to increased sales to residential and commercial customers as a result of warmer weather in the third quarter and increased sales to wholesale customers, and was partially offset by lower fuel costs per kwh and to transitional rate adjustments to industrial customers. Total operating revenue for the three months ended September 30, 1995 increased $35.9 million as compared to the three months ended September 30, 1994. Gas revenues increased $2.0 million and electric revenues increased $33.9 million as compared to the same period in 1994. The increase in gas revenues was mainly due to increased revenues per dth of gas transported for others and was partially offset by decreased sales to residential customers. The increase in electric revenue for the three months ended September 30, 1995, was mainly due to increased sales to residential and commercial customers as a result of warmer weather partially offset by transitional rate adjustments to industrial customers. The basic steel industry accounted for 40% of natural gas delivered (including volumes transported) and 37% of electric sales during the twelve months ended September 30, 1995. The components of the variations in gas and electric revenues are shown in the following tables:
Variations from Prior Periods -------------------------------------- September 30, 1995 Compared to September 30, 1994 Three Nine Twelve Months Months Months ========== ============ =========== (Dollars in thousands) Gas Revenue - Pass through of net changes in purchased gas costs, gas storage and storage transportation costs $ (8,839) $ (43,407) $ (61,839) Take-or-pay costs and transition costs 11,706 46,603 62,351 Changes in sales levels (162) (16,102) (51,229) Gas transport levels (726) 13 468 ---------- ------------ ----------- Gas Revenue Change $ 1,979 $ (12,893) $ (50,249) ---------- ------------ ----------- Electric Revenue - Pass through of net changes in fuel $ 276 $ (13,948) $ (17,717) Changes in sales levels 33,652 39,028 48,179 ---------- ------------ ----------- Electric Revenue Change $ 33,928 $ 25,080 $ 30,462 ---------- ------------ ----------- Total Revenue Change $ 35,907 $ 12,187 $ (19,787) ========== ============ =========== See Note 4 to the consolidated financial statements (Rate Matters), regarding gas take-or-pay and FERC Order No. 636 transition costs.
GAS COSTS - Gas costs decreased $31.9 million for the twelve month period ended September 30, 1995, due to decreased purchases, lower sales and lower gas costs per dth. The average cost of purchased gas for the three, nine and twelve month periods ended September 30, 1995, after adjustment for take-or-pay and transition charges billed to transport customers was $2.60, $2.79 and $2.77 per dth, respectively, as compared to $2.83, $2.96 and $2.98 per dth for the same periods in 1994. FUEL AND PURCHASED POWER - The cost of fuel for electric generation decreased for the nine and twelve month periods ended September 30, 1995, compared to 1994 periods, mainly as a result of lower cost for coal. The cost of fuel for electric generation increased for the three month period ended September 30, 1995, mainly as a result of increased generation. Power purchased increased $4.0, $7.3 and $6.6 million for the three, nine, and twelve month periods ended September 30, 1995, respectively, as a result of increased bulk power purchases with other utilities due to increased sales. OPERATING MARGINS - Operating margins increased $10.3 million for the twelve months ended September 30, 1995, from the same period a year ago. The operating margin from gas deliveries decreased $18.3 million, due to decreased sales to residential and commercial customers as a result of milder weather and decreased sales to industrial customers which were partially offset by increased deliveries of gas transported for others, compared to the twelve month period ended September 30, 1994. The operating margins from electric sales increased $28.6 million, due to increased sales to residential and commercial customers as a result of warmer weather in the third quarter of 1995, and increased sales to industrial and wholesale customers. Operating margins increased $20.4 million for the nine months ended September 30, 1995, from the same period a year ago. Gas operating margin decreased $3.0 million due to decreased sales to residential and commercial customers due to warmer weather during the first quarter of 1995. Operating margins on electric sales increased $23.4 million due to increased sales to residential and commercial customers as a result of warmer weather in the third quarter of 1995 and increased sales to wholesale customers, partially offset by transitional rate adjustments to industrial customers. Operating margins increased $22.8 million for the three months ended September 30, 1995, over the same period a year ago. The operating margins from gas increased $0.3 million due to increased revenues per dth of gas transported for others. Operating margins on electric sales increased $22.5 million reflecting increased sales to residential and commercial customers as a result of warmer weather, partially offset by transitional rate adjustments to industrial customers. OPERATING EXPENSES AND TAXES - Operation expenses decreased $2.4 and $2.8 million for the nine and twelve month periods ended September 30, 1995, respectively, due to decreased employment related costs. Operation expenses increased $3.5 million for the three month period ended September 30, 1995, mainly due to increased electric production operating costs. Maintenance expenses decreased $1.3 and $4.8 million for the nine and twelve month periods ended September 30, 1995, respectively, mainly reflecting decreased maintenance activity at the electric production facilities. Depreciation and amortization expense increased for the three, nine, and twelve month periods ended September 30, 1995, as a result of net plant additions. Utility income taxes increased for the three, nine, and twelve month periods ended September 30, 1995, as a result of higher pre-tax income. The after tax effects of the Northern Indiana land donation to the Shafer and Freeman Lakes Environmental Conservation Corporation are included in "Other Income (Deductions)" for the twelve month period ended September 30, 1995. Interest charges (net) increased for the three month period ended September 30, 1995, reflecting the issuance of $169,275,000 of Medium-Term Notes, Series D, partially offset by decreased short-term borrowing rates. Interest charges (net) decreased for the nine months ended September 30, 1995, reflecting a decrease in short-term borrowings. Interest charges (net) decreased for the twelve months ended September 30, 1995, reflecting the refinancing of long-term debt at favorable rates, partially offset by an increase in short-term borrowing rates. See Note 2 to Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies) for a discussion of Regulatory Assets, Carrying Charges and Deferred Depreciation and Allowance for Funds Used During Construction. Also, see Notes 4, 6, 8 and 9 for a discussion of FERC Order No. 636, Income Taxes, Postretirement Benefits, and Postemployment Benefits, respectively. NET INCOME - Net income for the twelve month period ended September 30, 1995, was $189.7 million compared to $179.4 million for the twelve month period ended September 30, 1994. Net income for the nine months ended September 30, 1995, was $138.3 million compared to $128.5 million for the nine months ended September 30, 1994. Net income for the three months ended September 30, 1995, was $42.6 million compared to $33.0 million for the three months ended September 30, 1994. ENVIRONMENTAL MATTERS - Because of major investments made in modern environmental control facilities and the use of low sulfur coal, all of Northern Indiana's electric production facilities now comply with the sulfur dioxide limitations contained in acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants, which may require significant capital expenditures for control of these emissions. Northern Indiana is evaluating a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate making process. Northern Indiana has an ongoing program to remain aware of the laws and regulations involved with hazardous waste. 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 received notices from the Environmental Protection Agency (EPA) that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) 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 and SARA, 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. While all of the remedial costs at these sites are not determinable, Northern Indiana's analysis indicates its share of such costs with other PRPs should not have a significant impact on its financial position or the results of future operations. 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-three of these sites and made visual inspections of these sites. Northern Indiana has conducted initial samplings at ten sites. Follow-up investigations have been conducted at four sites and potential remedial measures are being evaluated. Northern Indiana will continue its program to assess sites. During the follow-up investigation of the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted the presence of hydrocarbons in the Elkhart River. Northern Indiana reported this finding to the Indiana Department of Environmental Management (IDEM) and the EPA. Northern Indiana has placed the Elkhart site in the IDEM Voluntary Remediation Program (VRP). The goal of placing the site in the VRP will be to obtain IDEM approval of the determination and subsequent implementation of what remedial measures, if any, may be needed. Northern Indiana was notified by the IDEM of the release of a petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a former manufactured gas plant formerly owned by Northern Indiana. In cooperation with IDEM, Northern Indiana has taken steps to investigate and contain the substance. Northern Indiana has remediated part of the Fort Wayne site. The remainder of the site is being evaluated to determine what further remedial measures, if any, may be needed. 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 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. Northern Indiana has met with various companies who provided insurance coverage which Northern Indiana believe covers costs related to actions taken at former manufactured gas plants. In September 1995, certain insurance companies initiated a suit in Indiana state court against Northern Indiana to deny coverage. Later in September 1995, Northern Indiana filed a more comprehensive suit in Federal Court in Indiana against those insurers and several other insurance companies, seeking coverage for costs associated with several former manufactured gas plant sites. The possibility that exposure to electric and magnetic fields 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. A considerable amount of scientific research has been conducted on this topic without definitive results. Research is continuing to resolve scientific uncertainties. LIQUIDITY AND CAPITAL RESOURCES - On March 4, 1994, the Commission authorized Northern Indiana to issue up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30 years, for purposes of refinancing certain first mortgage bonds and paying short-term debt used to pay at maturity medium-term notes due in January and April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating $125.5 million, through the use of working capital and the proceeds of short-term debt. During 1994, $120.0 million of the Medium-Term Notes, Series D, were issued to complete the permanent refinancing of those first mortgage bonds. As of June 12, 1995, the remaining $169,275,000 of Medium-Term Notes, Series D, were issued and part of the proceeds were used to redeem all of the outstanding First Mortgage Bonds, Series U and Z aggregating $94.8 million on July 3, 1995. On August 25, 1994, Jasper County, Indiana issued Pollution Control Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due June 1, 2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The proceeds of these issuances were loaned to Northern Indiana under similar terms. The initial interest rate on Series 1994 Bonds was 3.10%, which resets daily. The proceeds of the Series 1994A and Series 1994C were used to retire on October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due October 15, 2004 and $41 million of Series LL First Mortgage Bonds, 7-1/2%, due October 15, 2014. The proceeds of the Series 1994B Bonds were used to retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994. The Series 1994 Bonds are secured by Letters of Credit from Union Bank of Switzerland. Cash flow from operations has provided sufficient liquidity to meet current operating requirements. Because of the seasonal nature of the utility business and the construction program, Northern Indiana makes use of commercial paper intermittently as short-term financing. As of September 30, 1995, Northern Indiana had $42.3 million in commercial paper outstanding, having a weighted average interest of 5.85%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1998, unless extended by its terms. As of September 30, 1995, 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, 1996. 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 fee to a combination of fees which are mutually satisfactory to both parties. As of September 30, 1995, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuances of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of September 30, 1995, there were $64.4 million of borrowings were outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At September 30, 1995, 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 or electric base rate increases in the near future. COMPETITION The Energy Policy Act of 1992 (Energy Act) allows FERC to order electric utilities to grant access to transmission systems by third party power producers. The Energy Act specifically prohibits federally mandated wheeling of power for retail customers. That authority lies with the individual states, several of which are considering opening the transmission network to retail customers. The Energy Act will stimulate greater competition in the wholesale electric markets. This competition will create opportunities to compete for new customers and revenues, as well as increase the risk of the loss of customers. Although wholesale customers represent a relatively small portion of Northern Indiana's sales (4% for 1994), Northern Indiana will continue its efforts to retain and add customers by offering competitive rates. Competitive forces have also begun to influence retail pricing in the industry. In some instances,industrial customers, threatening to pursue cogeneration, self-generation, retail wheeling, or relocation to other service territories, have obtained price concessions from utilities. 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. Northern Indiana's management has taken steps to make the company more competitive and profitable in the changing utility environment, including utilizing new rate and contract flexibility to retain and attract customers as well as conversions of some of its generating units to allow use of lower cost low sulfur coal. FERC Order No. 636 effective in late 1993 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 sale service. Northern Indiana believes it has taken appropriate steps to insure 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. To date, Northern Indiana's system has not been materially affected by competition, and management does not foresee substantial adverse effects in the near future, unless the current regulatory structure is substantially altered. Northern Indiana believes the steps it is taking to deal with increased competition will have significant, positive effects in the next few years. Item 1. LEGAL PROCEEDINGS. Northern Indiana is party to various legal or administrative proceedings before courts and agencies with respect to matters occurring in the ordinary course of business. Although management of Northern Indiana cannot predict the ultimate outcome of these matters,it believes the final disposition of these matters will not have a material adverse effect on the financial position or results of operations of Northern Indiana. Information regarding various matters involving federal and state environmental laws and regulations and a pending tax matter is included in Notes 5 and 3, respectively, of Northern Indiana's financial statements under Part I, Item 1 of this Report on Form 10-Q. Item 2. CHANGES IN SECURITIES. None Item 3. DEFAULTS UPON SENIOR SECURITIES. None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None Item 5. OTHER INFORMATION. None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 23-Consent of Arthur Andersen LLP (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/Jerry M. Springer Vice President, Finance and Accounting /s/Arthur A. Paquin Controller and Chief Accounting Officer Date November 13, 1995 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. 33-77046. Arthur Andersen LLP Chicago, Illinois November 13, 1995 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 September 30, 1995, and is qualified in its entirety by reference to such Financial Statements. 1,000 3-MOS DEC-31-1995 JUL-01-1995 SEP-30-1995 PER-BOOK 3,100,233 9,150 232,107 5,010 202,872 3,549,372 859,488 12,492 139,534 1,011,514 64,207 81,525 354,577 64,400 704,775 42,300 80,793 1,828 0 0 1,143,453 3,549,372 363,142 24,946 274,367 299,313 63,829 (956) 62,873 20,232 42,641 2,231 40,410 48,500 0 59,291 0 0
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