-----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, WwSxOWc9dHEEOLXsyo1J9qGOR+Qmyat19m9EOCGLNeigH5BT4OPazaqlZ4AvTC3O Zzvk8XZSoSdxIYdkAsR+sQ== 0000072843-97-000020.txt : 19970815 0000072843-97-000020.hdr.sgml : 19970815 ACCESSION NUMBER: 0000072843-97-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN INDIANA PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000072843 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 350552990 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04125 FILM NUMBER: 97660747 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 June 30, 1997 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ________________ Commission file number 1-4125 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 July 31, 1997, 73,282,258 common shares were outstanding. NORTHERN INDIANA PUBLIC SERVICE COMPANY FINANCIAL INFORMATION Item I. FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of NORTHERN INDIANA PUBLIC SERVICE COMPANY: We have audited the accompanying consolidated balance sheet of Northern Indiana Public Service Company (an Indiana corporation and a wholly owned subsidiary of NIPSCO Industries, Inc.) and subsidiaries as of June 30, 1997, and December 31, 1996, and the related consolidated statements of income, retained earnings and cash flows for the three, six, and twelve month periods ended June 30, 1997 and 1996. These consolidated financial statements are the responsibility of 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 June 30, 1997 and December 31, 1996, and the results of their operations and their cash flows for the three, six, and twelve month periods ended June 30, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois July 29, 1997
CONSOLIDATED BALANCE SHEET June 30, December 31, ASSETS 1997 1996 ============ ============ (Dollars in thousands) UTILITY PLANT, AT ORIGINAL COST (INCLUDING CONSTRUCTION WORK IN PROGRESS OF $131,019 AND $162,123, RESPECTIVELY) (NOTE 2): Electric $ 4,077,005 $ 4,050,084 Gas 1,195,822 1,176,871 Common 350,680 346,636 ------------ ------------ 5,623,507 5,573,591 Less - Accumulated provision for depreciation and amortization 2,583,598 2,499,687 ------------ ------------ Total Utility Plant 3,039,909 3,073,904 ------------ ------------ OTHER PROPERTY AND INVESTMENTS 8,734 8,971 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents 11,720 8,279 Accounts receivable, less reserve of $5,962 and $4,568, respectively (Note 2) 79,754 111,866 Fuel adjustment clause (Note 2) 8,257 9,149 Gas cost adjustment clause (Note 2) 44,629 98,167 Materials and supplies, at average cost 56,348 56,796 Electric production fuel, at average cost 28,632 26,483 Natural gas in storage, at last-in, first-out cost (Note 2) 26,263 50,409 Prepayments and other 25,384 25,826 ------------ ------------ Total Current Assets 280,987 386,975 ------------ ------------ OTHER ASSETS: Regulatory assets (Note 2) 222,098 239,547 Prepayments and other (Note 7) 79,098 64,883 ------------ ------------ Total Other Assets 301,196 304,430 ------------ ------------ $ 3,630,826 $ 3,774,280 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED BALANCE SHEET June, 30 December 31, CAPITALIZATION AND LIABILITIES 1997 1996 ============ ============ (Dollars in thousands) CAPITALIZATION: Common stock - without par value - authorized 75,000,000 shares, issued and outstanding 73,282,258 shares (Note 13) $ 859,488 $ 859,488 Additional paid-in capital 12,522 12,521 Retained earnings (see accompanying statement) (Note 12) 152,752 145,987 ------------ ------------ Common shareholder's equity 1,024,762 1,017,996 Cumulative preferred stocks (Note 9) Series without mandatory redemption provisions (Note 10) 81,123 81,126 Series with mandatory redemption provisions (Note 11) 59,996 61,246 Long-term debt excluding amounts due within one year (Note 15) 1,055,540 992,008 ------------ ------------ Total Capitalization 2,221,421 2,152,376 ------------ ------------ CURRENT LIABILITIES - Current portion of long-term debt (Note 16) 100,747 65,747 Short-term borrowings (Note 17) 80,450 272,905 Accounts payable 116,713 190,182 Sinking funds due within one year (Notes 11 and 15) 3,328 3,328 Dividends declared on common and preferred stocks 45,223 54,255 Customer deposits 18,691 16,768 Taxes accrued 91,158 78,806 Interest accrued 6,338 5,851 Accrued employment costs 38,965 40,915 Other accruals 35,932 26,106 ------------ ------------ Total Current Liabilities 537,545 754,863 ------------ ------------ OTHER: Deferred income taxes (Note 6) 594,380 597,105 Deferred investment tax credits, being amortized over life of related property (Note 6) 103,472 107,058 Deferred credits 51,224 50,058 Accrued liability for postretirement benefits (Note 8) 112,978 104,123 Other noncurrent liabilities 9,806 8,697 ------------ ------------ Total Other 871,860 867,041 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 18, and 19) $ 3,630,826 $ 3,774,280 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME Three Months Six Months Ended June 30, Ended June 30, ---------------------- ---------------------- 1997 1996 1997 1996 ========== ========== ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 4, and 21) Gas $ 108,541 $ 108,497 $ 414,215 $ 410,382 Electric 244,054 244,232 489,878 492,656 ---------- ---------- ---------- ---------- 352,595 352,729 904,093 903,038 ---------- ---------- ---------- ---------- Cost of Energy: (Note 2) Gas costs 55,645 61,017 252,380 244,219 Fuel for electric generation 54,609 53,184 113,017 110,386 Power purchased 10,518 14,322 19,478 26,283 ---------- ---------- ---------- ---------- 120,772 128,523 384,875 380,888 ---------- ---------- ---------- ---------- Operating Margin 231,823 224,206 519,218 522,150 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 70,084 68,919 139,873 144,627 Maintenance (Note 2) 17,534 19,354 34,872 36,874 Depreciation and amortization (Note 2) 56,237 53,375 111,489 105,964 Taxes (except income) 17,500 16,855 37,657 36,913 ---------- ---------- ---------- ---------- 161,355 158,503 323,891 324,378 ---------- ---------- ---------- ---------- Operating Income Before Utility Income Taxes 70,468 65,703 195,327 197,772 ---------- ---------- ---------- ---------- Utility Income Taxes (Note 6) 17,899 15,996 54,906 56,064 ---------- ---------- ---------- ---------- Operating Income 52,569 49,707 140,421 141,708 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) (1,036) (953) (1,445) (1,947) ---------- ---------- ---------- ---------- Interest and Other Charges: Interest on long-term debt 16,962 17,620 33,179 35,555 Other interest 1,858 2,149 4,991 4,144 Allowance for borrowed funds used during construction and carrying charges (Note 2) (61) (215) (343) (445) Amortization of premium, reacquisition premium, discount and expense on debt, net 1,046 1,076 2,089 2,155 ---------- ---------- ---------- ---------- 19,805 20,630 39,916 41,409 ---------- ---------- ---------- ---------- Net Income 31,728 28,124 99,060 98,352 Dividend requirements on preferred shares 2,128 2,178 4,295 4,377 ---------- ---------- ---------- ---------- Balance available for common shares $ 29,600 $ 25,946 $ 94,765 $ 93,975 ========== ========== ========== ========== Dividends declared $ 44,000 $ 45,000 $ 88,000 $ 89,250 ========== ========== ========== ========== Twelve Months Ended June 30, ---------------------- 1997 1996 ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 4, and 21) Gas $ 735,707 $ 676,996 Electric 1,019,453 1,040,088 ---------- ---------- 1,755,160 1,717,084 ---------- ---------- Cost of Energy: (Note 2) Gas costs 452,302 392,655 Fuel for electric generation 235,846 243,026 Power purchased 46,946 47,831 ---------- ---------- 735,094 683,512 ---------- ---------- Operating Margin 1,020,066 1,033,572 ---------- ---------- Operating Expenses and Taxes (except income): Operation 276,312 288,227 Maintenance (Note 2) 66,727 74,453 Depreciation and amortization (Note 2) 217,070 206,815 Taxes (except income) 72,813 72,157 ---------- ---------- 632,922 641,652 ---------- ---------- Operating Income Before Utility Income Taxes 387,144 391,920 ---------- ---------- Utility Income Taxes (Note 6) 107,893 107,313 ---------- ---------- Operating Income 279,251 284,607 ---------- ---------- Other Income (Deductions) (Note 2) 742 (3,988) ---------- ---------- Interest and Other Charges: Interest on long-term debt 66,422 71,816 Other interest 12,072 8,154 Allowance for borrowed funds used during construction and carrying charges (Note 2) (703) (688) Amortization of premium, reacquisition premium, discount and expense on debt, net 4,184 4,314 ---------- ---------- 81,975 83,596 ---------- ---------- Net Income 198,018 197,023 Dividend requirements on preferred shares 8,630 8,833 ---------- ---------- Balance available for common shares $ 189,388 $ 188,190 ========== ========== Dividends declared $ 186,200 $ 186,250 ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ------------------- ------------------- ------------------- 1997 1996 1997 1996 1997 1996 ========= ========= ========= ========= ========= ========= (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 167,152 $ 168,618 $ 145,987 $ 144,839 $ 149,564 $ 147,624 ADD: Net income 31,728 28,124 99,060 98,352 198,018 197,023 --------- --------- --------- --------- --------- --------- 198,880 196,742 245,047 243,191 347,582 344,647 --------- --------- --------- --------- --------- --------- LESS: Dividends Cumulative Preferred stocks - 4-1/4% series 223 223 445 445 889 890 4-1/2% series 89 89 180 180 360 360 4.22% series 111 111 224 224 448 448 4.88% series 122 122 244 244 488 488 7.44% series 79 79 156 156 312 312 7.50% series 65 65 131 131 261 261 8.85% series 156 184 350 406 737 848 7-3/4% series 92 102 183 204 374 427 8.35% series 137 150 275 301 546 601 6.50% series 699 699 1,397 1,397 2,795 2,795 Adjustable Rate, Series A 355 354 710 689 1,420 1,403 Common shares 44,000 45,000 88,000 89,250 186,200 186,250 --------- --------- --------- --------- --------- --------- 46,128 47,178 92,295 93,627 194,830 195,083 --------- --------- --------- --------- --------- --------- BALANCE AT END OF PERIOD $ 152,752 $ 149,564 $ 152,752 $ 149,564 $ 152,752 $ 149,564 ========= ========= ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended June 30, ------------------------ 1997 1996 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 31,728 $ 28,124 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 56,237 53,375 Deferred federal and state operating income taxes, net (21,170) (2,153) Deferred investment tax credits, net (1,793) (1,660) Advance contract payment 475 475 Change in certain assets and liabilities - Accounts receivable, net 37,234 53,910 Electric production fuel (4,500) (10,951) Materials and supplies 392 3,191 Natural gas in storage (11,439) (11,795) Accounts payable (17,447) (19,681) Taxes accrued (28,207) (35,832) Fuel adjustment clause 4,673 (3,156) Gas cost adjustment clause 40,215 1,916 Accrued employment costs 2,403 (179) Other accruals (14,323) (21,801) Other, net 8,773 (3,442) ---------- ---------- Net cash provided by operating activities 83,251 30,341 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (55,956) (43,746) Other, net 256 1,183 ---------- ---------- Net cash used in investing activities (55,700) (42,563) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 99,000 0 Issuance of short-term debt 151,080 184,600 Net change in commercial paper (57,100) 71,000 Retirement of short-term debt (183,530) (200,500) Retirement of preferred shares (1,252) (1,446) Cash dividends paid on common shares (44,000) (44,250) Cash dividends paid on preferred shares (2,139) (2,193) Other, net (583) 139 ---------- ---------- Net cash provided by (used in) financing activities (38,524) 7,350 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,973) (4,872) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,693 13,251 --------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,720 $ 8,379 ========== ========== Six Months Ended June 30, ------------------------ 1997 1996 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 99,060 $ 98,352 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 111,489 105,964 Deferred federal and state operating income taxes, net (29,185) 12,734 Deferred investment tax credits, net (3,587) (3,321) Advance contract payment 950 (18,050) Change in certain assets and liabilities - Accounts receivable, net 32,112 29,751 Electric production fuel (2,149) (16,639) Materials and supplies 448 4,224 Natural gas in storage 24,146 30,669 Accounts payable (55,065) (2,454) Taxes accrued 35,097 6,451 Fuel adjustment clause 892 (1,322) Gas cost adjustment clause 53,538 (44,993) Accrued employment costs (1,950) (8,170) Other accruals 9,846 (9,556) Other, net 25,864 1,290 ---------- ---------- Net cash provided by operating activities 301,506 184,930 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (101,377) (80,353) Other, net (208) 1,653 ---------- ---------- Net cash used in investing activities (101,585) (78,700) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 99,000 0 Issuance of short-term debt 331,480 458,000 Net change in commercial paper (148,505) 43,600 Retirement of short-term debt (375,430) (512,600) Retirement of preferred shares (1,253) (1,446) Cash dividends paid on common shares (97,000) (92,750) Cash dividends paid on preferred shares (4,304) (4,412) Other, net (468) 279 ---------- ---------- Net cash used in financing activities (196,480) (109,329) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,441 (3,099) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,279 11,478 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,720 $ 8,379 ========== ========== Twelve Months Ended June 30, ------------------------ 1997 1996 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 198,018 $ 197,023 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 217,070 206,815 Deferred federal and state operating income taxes, net (15,802) 31,602 Deferred investment tax credits, net (7,593) (7,039) Advance contract payment 1,900 (18,050) Change in certain assets and liabilities - Accounts receivable, net (13,429) (5,583) Electric production fuel 2,265 (11,179) Materials and supplies 3,252 6,029 Natural gas in storage (3,519) 11,858 Accounts payable (17,094) 26,105 Taxes accrued 43,274 (37,420) Fuel adjustment clause 3,366 (8,703) Gas cost adjustment clause 4,477 (77,794) Accrued employment costs 1,364 (2,172) Other accruals 4,914 (17,050) Other, net 31,536 (218) ---------- ---------- Net cash provided by operating activities 453,999 294,224 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (200,221) (166,276) Other, net 1,215 1,605 ---------- ---------- Net cash used in investing activities (199,006) (164,671) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 99,000 0 Issuance of short-term debt 1,045,630 1,014,500 Net change in commercial paper (43,000) 88,400 Retirement of long-term debt (80,000) (98,422) Retirement of short-term debt (1,074,780) (950,300) Retirement of preferred shares (2,411) (3,210) Cash dividends paid on common shares (187,200) (186,040) Cash dividends paid on preferred shares (8,658) (7,402) Other, net (233) 672 ---------- ---------- Net cash used in financing activities (251,652) (141,802) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,341 (12,249) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,379 20,628 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,720 $ 8,379 ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) was incorporated in Indiana on September 22, 1987 and became the parent of Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988. Northern Indiana is a public utility operating company supplying electricity and gas to the public in the northern third of Indiana. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Northern Indiana and its two subsidiaries, Shore Line Shops, Inc. and NIPSCO Exploration Company, Inc. All significant intercompany items have been eliminated in consolidation. Certain reclassifications were made to conform the prior years' financial statements to the current presentation. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OPERATING REVENUES. Revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on a straight-line method over the remaining service lives of the electric, gas, and common properties. The provisions, as a percentage of the cost of depreciable utility plant, were approximately 4.3% for the three-month, six-month, and twelve-month periods ended June 30, 1997, respectively; and 4.3%, 4.2%, and 4.1% for the three-month, six-month, and twelve-month periods ended June 30, 1996. 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. AMORTIZATION OF SOFTWARE COSTS. Northern Indiana amortizes capitalized software costs using the straight-line method based on estimated economic lives. 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 June 30,1997, Northern Indiana had sold $100 million of its accounts receivable under a sales agreement which expires May 31, 2002. The June 30, 1997 and December 31, 1996 accounts receivable balances include approximately $6.9 million and $7.1 million, respectively, due from associated companies. 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 Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (Dollars in thousands) Income taxes $ 50,000 $ 54,168 $ 50,000 $ 54,168 $ 69,463 $134,348 Interest, net of amounts capitalized $ 28,992 $ 27,966 $ 35,800 $ 36,851 $ 77,217 $ 81,374
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect increases and decreases in the cost of fuel and the fuel cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the Indiana Utility Regulatory Commission (Commission) applicable to metered retail rates, the adjustment factor has been calculated based on the estimated cost of fuel and the fuel cost of purchased power in a future three-month period. If two statutory requirements relating to expense and return levels are satisfied, any under-recovery or over-recovery caused by variances between estimated and actual cost in a given three-month period will be included in a future filing. Northern Indiana records any under-recovery or over-recovery as a current asset or current liability until such time as it is billed or refunded to its customers. The fuel adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment factor which reflects the cost of purchased gas, contracted gas storage, and storage transportation charges. Northern Indiana records any under-recovery or over-recovery as a current asset or current liability until such time as it is billed or refunded to its customers. The gas cost adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. If the statutory requirement relating to the level of return is satisfied, any under-recovery or over-recovery caused by variances between estimated and actual cost in a given three-month period will be included in a future filing. See Note 4, FERC Order No. 636 for a discussion of gas transition cost charges. NATURAL GAS IN STORAGE. Natural gas in storage is valued using the last-in, first-out (LIFO) inventory methodology. Based on the average cost of gas purchased in June 1997 and December 1996 the estimated replacement cost of gas in storage (current and non-current) at June 30, 1997 and December 31, 1996 exceeded the stated LIFO cost by approximately $32 million and $96 million, respectively. AFFILIATED COMPANY TRANSACTIONS. Pursuant to agreement, effective July 1, 1996, Northern Indiana receives executive, financial, gas supply, sales and marketing, and administrative and general services from an affiliate, NIPSCO Industries Management Services Company (Services), a wholly-owned subsidiary of Industries. The costs of these services are charged to Northern Indiana based on payroll and expenses incurred by Services' employees for the benefit of Northern Indiana. These costs which totalled $8.6 million, $17.2 million, and $34.6 million for the three-month, six-month, and twelve-month periods ended June 30, 1997, respectively, consist primarily of employee compensation and benefits. Northern Indiana purchased natural gas and transportation services from affiliated companies in the amounts of $1.0 million, $4.0 million, and $11.4 million representing 1.2%, 1.8%, and 2.5% of Northern Indiana's total gas costs for the three-month, six-month, and twelve-month periods ended June 30, 1997, respectively. Northern Indiana subleases a portion of office facilities to affiliated companies for a monthly fee, which includes operating expenses, based on space utilization. HEDGING ACTIVITIES. Northern Indiana uses commodity futures contracts to hedge the impact of natural gas price fluctuations related to its business activities. Gains and losses on these futures contracts are deferred and recognized in income concurrent with the related purchases and sales of natural gas. As of June 30, 1997 Northern Indiana had open futures contracts representing hedges of natural gas sales of 0.3 billion cubic feet (Bcf). REGULATORY ASSETS. Northern Indiana's operations are subject to the regulation of 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." Northern Indiana monitors changes in market and regulatory conditions and the resulting impact of such changes in order to continue to apply the provisions of SFAS No. 71 to some or all of its operations. As June 30, 1997 and December 31, 1996, the regulatory assets identified below represent probable future revenue to Northern Indiana associated with certain incurred costs as these costs are recovered through the rate-making process. If a portion of Northern Indiana's operations becomes no longer subject to the provisions of SFAS No. 71, a write-off of certain of the regulatory assets identified below might be required, unless some form of transition cost recovery is established by the appropriate regulatory body which would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. Regulatory assets were comprised of the following items and were reflected in the Consolidated Balance Sheet as follows:
June 30, December 31, 1997 1996 ============= ============= (Dollars in thousands) Unamortized reacquisition premium on debt (Note 15) $ 48,158 $ 49,890 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 68,655 70,763 Bailly scrubber carrying charges and deferred depreciation (See below) 10,348 10,816 Deferral of SFAS No. 106 expense not recovered (Note 8) 86,764 87,005 FERC Order No. 636 transition costs (Note 4) 30,386 47,399 Regulatory income tax asset (Note 6) 11,360 9,002 ------------- ------------- 255,671 274,875 Less: Current portion of regulatory assets 33,573 35,328 ------------- ------------- $ 222,098 $ 239,547 ============= =============
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges and deferred depreciation in accordance with orders of the Commission until the cost of each unit was allowed in rates. Such carrying charges and deferred depreciation are being amortized over the remaining life of each unit. Northern Indiana has capitalized carrying charges and deferred depreciation and certain operating expenses relating to its scrubber service agreement for its Bailly Generating Station in accordance with an order of the Commission. Pursuant to such order, capitalization of carrying charges and deferral of depreciation and certain operating expenses ceased on December 31, 1995. The accumulated balance of the deferred costs and related carrying charges is being amortized over the remaining life of the scrubber service agreement. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds used during construction (AFUDC) is charged to construction work in progress during the period of construction and represents the net cost of borrowed funds used for construction purposes and a reasonable rate upon other (equity) funds. Under established regulatory rate practices, after the construction project is placed in service, Northern Indiana is permitted to include in the rates charged for utility services (a) a fair return on and (b) depreciation of such AFUDC included in plant in service. At January 1, 1995 a pre-tax rate of 6.0% for all construction was being used; effective January 1, 1996 the rate decreased to 5.5%; and effective January 1, 1997 the rate increased to 6.0%. 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 maintained that interest paid on the Notes should have been subject to United States tax withholding. The Notes were redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991, Northern Indiana challenged the assessment in the United States Tax Court (Tax Court) and the matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor of Northern Indiana, finding that the interest paid on the Notes was not subject to United States tax withholding. On March 13, 1996, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit (Court of Appeals), and on March 25, 1996 Northern Indiana filed its cross appeal. On June 6, 1997, the Court of Appeals issued an order affirming in full the Tax Court order. The IRS has until September 4, 1997 to appeal the decision of the Court of Appeals. Northern Indiana's management and general general counsel do expect the IRS to appeal. However, if the IRS does appeal, Northern Indiana's management and general counsel believe the Tax Court's decision will prevail. (4) FERC ORDER NO. 636. Northern Indiana has recorded approximately $128 million of interstate pipeline transition costs to reflect the impact of FERC Order No. 636, a majority of which costs have been paid to the pipeline suppliers. Northern Indiana expects that additional transition costs will not be significant. The Commission has approved the recovery of these FERC-allowed transition costs on a volumetric basis from sales and transportation customers. Regulatory assets, in amounts corresponding to the costs recorded but not yet collected, have been recorded to reflect the ultimate recovery of these costs. (5) ENVIRONMENTAL MATTERS: Northern Indiana has an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. It is Northern Indiana's intent to continue to evaluate its facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has recorded a reserve of approximately $17 million to cover probable corrective actions as of June 30, 1997; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, Northern Indiana believes that any corrective actions required, after consideration of insurance coverages and contributions from other potentially responsible parties, will not have a significant impact on the financial position or results of operations of Northern Indiana. On December 19, 1996, the Environmental Protection Agency (EPA) promulgated rules for the second phase of the Acid Rain nitrogen oxides reduction program. Northern Indiana is evaluating compliance strategies to meet the reduced emission limitations found in the final rule. Additional controls may be needed to meet the requirements. A compliance plan must be submitted to the EPA by December 31, 1997 with details of the plan to meet the new limits by January 1, 2000. Because of major investments made in modern environmental control facilities and the use of low-sulfur coal, all of Northern Indiana's electric production facilities now comply with the sulfur dioxide limitations contained in the acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants which may require significant capital expenditures for control of these emissions. Northern Indiana is pursuing a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate-making process. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. Northern Indiana has instituted a program to investigate former manufactured-gas plants where it is the current or former owner. Northern Indiana has identified twenty-four of these sites and made visual inspections of these sites. Initial samplings have been conducted at fifteen sites. Follow-up investigations have been conducted at seven sites and remedial measures have been selected at four sites. Northern Indiana will continue its program to assess and cleanup sites. During the course of various investigations, Northern Indiana has identified impacts to soil, groundwater, sediment, and surface water from former manufactured-gas plants. At three sites where residues were noted seeping into rivers, Northern Indiana notified the Indiana Department of Environmental Management (IDEM) and the EPA and immediately took steps to contain the material. Northern Indiana has worked with IDEM or the EPA on investigation or remedial activities at several sites. Two of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. Northern Indiana anticipates placing additional sites in the VRP after remedial measures have been selected. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered into an agreement covering cost sharing and management of investigation and remediation programs at five former manufactured-gas plant sites at which both companies or their predecessors were former operators or owners. One of these sites is the Lafayette site which Indiana Gas had previously notified Northern Indiana is being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of seven former manufactured-gas plants at which Northern Indiana had conducted or was planning investigation or remediation activities. In December 1996, Northern Indiana sent a written demand to Cinergy related to one of these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern Indiana has already incurred and to be incurred to implement the needed remedy at the Goshen site. In 1994, Northern Indiana approached various companies that provided insurance coverage which Northern Indiana believes covers costs related to actions taken at former manufactured-gas plants. In September 1995, certain of the insurance companies initiated a suit in Indiana state court against Northern Indiana seeking a ruling that denied coverage. Later that same month, Northern Indiana initiated a similar suit in federal court and the state court action was stayed. After the dismissal of the federal court action on procedural grounds in May 1997, Northern Indiana filed claims in the state court action against various insurance companies, seeking coverage for costs associated with several former manufactured gas plants and damages for alleged misconduct by some of the insurance companies. The state court action is now proceeding. Northern Indiana has received cash settlements from several of the insurance companies. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances, and other electric sources may result in adverse health effects has been the subject of public, governmental, and media attention. The U.S. National Research Council of the National Academy of Sciences concluded in a report, after examining more than 500 EMF studies spanning seventeen years, that among other things, there is insufficient evidence to consider EMF a threat to human health. Despite the report's findings, future research appropriations are continuing to be dedicated to explore this issue. (6) INCOME TAXES: Northern Indiana uses the liability method of accounting for income taxes under which deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. To the extent certain deferred income taxes are recoverable or payable through future rates, regulatory assets and liabilities have been established. Regulatory assets are primarily attributable to undepreciated AFUDC-equity and the cumulative net amount of other income tax timing differences for which deferred taxes had not been provided in the past, when regulators did not recognize such taxes as costs in the rate-making process. Regulatory liabilities are primarily attributable to Northern Indiana's obligation to credit to ratepayers deferred income taxes provided at rates higher than the current federal tax rate currently being credited to ratepayers using the average rate assumption method and unamortized deferred investment tax credits. Northern Indiana joins in the filing of consolidated tax returns with Industries and currently pays to Industries its separate return tax liability as defined in the Tax Sharing Agreement between Industries and its subsidiaries. The components of the net deferred income tax liability at June 30, 1997 and December 31, 1996 are as follows:
June 30, December 31, 1997 1996 ============= ============= (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 722,309 $ 719,197 AFUDC-equity 36,506 37,713 Adjustment clauses 20,057 40,700 Take-or-pay gas costs 489 765 Other regulatory assets 33,562 39,440 Reacquisition premium on debt 18,264 18,921 Deferred tax assets - Deferred investment tax credits (39,242) (40,602) Removal costs (138,109) (131,718) FERC Order No. 636 transition costs (2,780) (8,144) Other postretirement/postemployment benefits (42,847) (42,434) Other, net (10,265) (10,433) ------------- ------------- 597,944 623,405 Less: Deferred income taxes related to current assets and liabilities 3,564 26,300 ------------- ------------- Deferred income taxes - noncurrent $ 594,380 $ 597,105 ============= =============
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Six Months Ended June 30, Ended June 30, -------------------- -------------------- 1997 1996 1997 1996 ========= ========= ========= ========= (Dollars in thousands) Current income taxes - Federal $ 35,675 $ 17,065 $ 76,420 $ 40,300 State 5,187 2,744 11,258 6,351 --------- --------- --------- --------- 40,862 19,809 87,678 46,651 --------- --------- --------- --------- Deferred income taxes, net - Federal (19,591) (2,063) (27,042) 11,603 State (1,579) (90) (2,143) 1,131 --------- --------- --------- --------- (21,170) (2,153) (29,185) 12,734 --------- --------- --------- --------- Deferred investment tax credits, net (1,793) (1,660) (3,587) (3,321) --------- --------- --------- --------- Total utility operating income taxes 17,899 15,996 54,906 56,064 Income tax applicable to non- operating activities and income of subsidiaries (612) (617) (1,032) (1,257) --------- --------- --------- --------- Total income taxes $ 17,287 $ 15,379 $ 53,874 $ 54,807 ========= ========= ========= ========= Twelve Months Ended June 30, -------------------- 1997 1996 ========= ========= (Dollars in thousands) Current income taxes - Federal $ 114,067 $ 71,510 State 17,221 11,240 --------- --------- 131,288 82,750 --------- --------- Deferred income taxes, net - Federal (14,828) 28,916 State (974) 2,686 --------- --------- (15,802) 31,602 --------- --------- Deferred investment tax credits, net (7,593) (7,039) --------- --------- Total utility operating income taxes 107,893 107,313 Income tax applicable to non- operating activities and income of subsidiaries (711) (2,564) --------- --------- Total income taxes $ 107,182 $ 104,749 ========= =========
A reconciliation of total tax expense to an amount computed by applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Six Months Ended June 30, Ended June 30, -------------------- -------------------- 1997 1996 1997 1996 ========= ========= ========= ========= (Dollars in thousands) Net income $ 31,728 $ 28,124 $ 99,060 $ 98,352 Add-Income taxes 17,287 15,379 53,874 54,807 --------- --------- --------- --------- Net income before income taxes $ 49,015 $ 43,503 $ 152,934 $ 153,159 ========= ========= ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 17,155 $ 15,226 $ 53,527 $ 53,606 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 1,044 1,030 2,088 2,013 Amortization of deferred investment tax credits (1,793) (1,660) (3,587) (3,321) State income taxes, net of federal income tax benefit 1,747 1,647 5,111 5,165 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,518) (1,145) (3,036) (2,819) Other, net 652 281 (229) 163 --------- --------- --------- --------- Total income taxes $ 17,287 $ 15,379 $ 53,874 $ 54,807 ========= ========= ========= ========= Twelve Months Ended June 30, -------------------- 1997 1996 ========= ========= (Dollars in thousands) Net income $ 198,018 $ 197,023 Add-Income taxes 107,182 104,749 --------- --------- Net income before income taxes $ 305,200 $ 301,772 ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 106,820 $ 105,621 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 4,696 4,022 Amortization of deferred investment tax credits (7,593) (7,039) State income taxes, net of federal income tax benefit 10,186 9,793 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (6,861) (5,765) Other, net (66) (1,883) --------- --------- Total income taxes $ 107,182 $ 104,749 ========= =========
(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, 1997 and 1996 is as follows:
1997 1996 ========= ========= (Dollars in thousands) Vested benefit obligation $(534,416) $(542,516) Nonvested benefit (103,284) (104,054) --------- --------- Accumulated benefit obligation $(637,700) $(646,570) ========= ========= Projected benefit obligation for service rendered to date $(732,870) $(749,204) Plan assets at fair market value 782,162 698,698 --------- --------- Plan assets in excess of (or less than) projected benefit obligation 49,292 (50,506) Unrecognized transition obligation at January 1, being recognized over seventeen years 38,418 43,907 Unrecognized prior service cost 23,736 25,656 Unrecognized gains (67,111) (4,808) --------- --------- Prepaid pension costs $ 44,335 $ 14,249 ========= =========
The accumulated benefit obligation is the present value of future pension benefit payments and is based on a plan benefit formula without considering expected future salary increases. The projected benefit obligation considers estimated future salary increases. Discount rates of 7.75% and 7.25% and rates of increase in compensation levels of 5.50% were used to determine the accumulated benefit obligation and projected benefit obligation at January 1, 1997 and 1996, respectively. The following items are the components of provisions for pensions for the three-month, six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996:
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (Dollars in thousands) Service costs $ 4,466 $ 4,198 $ 8,932 $ 10,343 $ 14,466 $ 15,817 Interest costs 16,325 12,888 32,651 31,749 53,690 57,223 Estimated return on plan assets (20,308) (15,327) (40,616) (37,758) (89,480) (146,078) Amortization of transition obligation 1,604 1,338 3,208 3,296 5,400 6,040 Other net amortization and deferral 913 599 1,825 1,475 26,583 85,371 -------- -------- -------- -------- -------- -------- $ 3,000 $ 3,696 $ 6,000 $ 9,105 $ 10,659 $ 18,373 ======== ======== ======== ======== ======== ========
Assumptions used in the valuation and determination of 1997 and 1996 pension expenses were as follows:
1997 1996 ===== ===== Discount rate 7.75% 7.25% Rate of increase in compensation levels 5.50% 5.50% Expected long-term rate of return on assets 9.00% 9.00%
Plan assets are invested primarily in common stocks, bonds, and notes. On July 22, 1997, a substantial portion of the plan's domestic equity investments were hedged against substantial movements in the S&P 500 Index. The hedge will expire on December 31, 1997. (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. The expected cost of such benefits is accrued during the employees' years of service. Northern Indiana's rate-making has historically included the cost of providing these benefits based on the related insurance premiums. On December 30, 1992, the Commission authorized the accrual method of accounting for postretirement benefits for rate-making purposes consistent with SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions," and authorized the deferral of the differences between the net periodic postretirement benefit costs and the insurance premiums paid for such benefits (OPRB) as a regulatory asset until such time as the accrual cost method may be reflected in the rate-making process. On June 11, 1997, the Commission issued an order approving the inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with the dates. The following table sets forth the plans' accumulated postretirement benefit obligation as of January 1, 1997 and 1996:
January 1, January 1, 1997 1996 ========== ========== (Dollars in thousands) Retirees $ (74,786) $ (97,693) Fully eligible active plan participants (18,441) (21,760) Other active plan participants (101,710) (133,205) ---------- ---------- Accumulated postretirement benefit obligation (194,937) (252,658) Unrecognized transition obligation at January 1, being recognized over twenty years 171,962 192,917 Unrecognized actuarial gain (88,784) (23,168) ---------- ---------- Accrued liability for postretirement benefits $ (111,759) $ (82,909) ========== ==========
A discount rate of 7.75% and a pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%, and a discount rate of 7.25% and a pre-Medicare medical trend rate of 10% declining to a long-term rate of 6% were used to determine the accumulated postretirement benefit obligation at January 1, 1997 and 1996, respectively. The decrease in the accumulated postretirement benefit obligation (APBO) and the related increase in unrecognized actuarial gain at January 1, 1997 were primarily attributable to favorable claim experience and the increase in the discount rate to 7.75%. Additionally, Northern Indiana implemented a 3% cap on its share of retiree cost increases for pre-Medicare benefits for certain non-bargaining retirees who retire after February 1, 1997. This plan amendment reduced the APBO and the unrecognized transition obligation by $9.6 million at January 1, 1997. Net periodic postretirement benefits costs for the three-month, six- month, and twelve-month periods ended June 30, 1997 and June 30, 1996 include the following components:
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ---------------- ---------------- ---------------- 1997 1996 1997 1996 1997 1996 ======= ======= ======= ======= ======= ======= (Dollars in thousands) Service costs $ 941 $ 1,267 $ 1,858 $ 2,704 $ 5,007 $ 5,365 Interest costs 4,376 4,973 8,752 9,947 16,778 19,251 Amortization of transition obligation over twenty years 2,702 3,033 5,404 6,066 10,686 11,740 Amortization of unrecognized actuarial gain (993) (578) (1,986) (1,157) (1,326) (2,239) ------- ------- ------- ------- ------- ------- $ 7,026 $ 8,695 $14,028 $17,560 $31,145 $34,117 ======= ======= ======= ======= ======= =======
The net periodic postretirement benefit costs for 1997 were determined assuming a 7.75% discount rate, a 5% rate of compensation increase, and a pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%. The effect of a 1% increase in the assumed health care cost trend rates for each future year would increase the accumulated postretirement benefit obligation at January 1, 1997 by approximately $28.5 million, and increase the aggregate of the service and interest cost components of plan costs by approximately $1.1 million and $2.2 million for the three-month and six-month periods ended June 30, 1997, respectively. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates, or plan changes. (9) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS OF NORTHERN INDIANA: 2,400,000 shares - Cumulative Preferred - $100 par value 3,000,000 shares - Cumulative Preferred - no par value 2,000,000 shares - Cumulative Preference - $50 par value (none outstanding) 3,000,000 shares - Cumulative Preference - no par value (none issued) Note 10 sets forth the preferred stocks which are redeemable solely at the option of Northern Indiana, and Note 11 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. (10) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF NORTHERN INDIANA, OUTSTANDING AT JUNE 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 9):
Redemption Price at June 30, December 31, June 30, 1997 1996 1997 ============ ============ ============ (Dollars in thousands) Cumulative preferred stock - $100 par value - 4-1/4% series - 209,123 and 209,145 shares outstanding, respectively $ 20,912 $ 20,915 $101.20 4-1/2% series - 79,996 shares outstanding 8,000 8,000 $100.00 4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00 7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00 7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00 Premium on preferred stock 254 254 Cumulative preferred stock - no par value - Adjustable rate (6.00% at June 30, 1997), Series A (stated value $50 per share) 473,285 shares outstanding 23,664 23,664 $50.00 ------------ ------------ $ 81,123 $ 81,126 ============ ============
During the period July 1, 1995 to June 30, 1997 there were no additional issuances of the above preferred stocks. The foregoing preferred stocks are redeemable in whole or in part at any time upon thirty days' notice at the option of Northern Indiana at the redemption prices shown. (11) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT JUNE 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 9):
June 30, December 31, 1997 1996 ============ ============ (Dollars in thousands) Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of Northern Indiana: Cumulative preferred stock - $100 par value - 8.85% series - 62,500 and 75,000 shares outstanding, respectively, excluding sinking fund payments due within one year $ 6,250 $ 7,500 7-3/4% series - 44,460 shares outstanding, excluding sinking fund payments due within one year 4,446 4,446 8.35% series - 63,000 shares outstanding, excluding sinking fund payments due within one year 6,300 6,300 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ------------ ------------ $ 59,996 $ 61,246 ============ ============
The redemption prices at June 30, 1997, as well as sinking fund provisions for the cumulative preferred stock subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana, are as follows:
Sinking Fund Or Mandatory Redemption Series Redemption Price Per Share Provisions ====== ========================== ============================= Cumulative preferred stock - $100 par value - 8.85% $101.48, reduced periodically 12,500 shares on or before April 1. 8.35% $103.93, reduced periodically 3,000 shares on or before July 1; increasing to 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.41, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year. Cumulative preferred stock - no par value - 6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
Sinking fund requirements with respect to redeemable preferred stocks outstanding at June 30, 1997 for each of the twelve-month periods subsequent to June 30, 1998 are as follows:
Twelve Months Ended June 30,* ================================== 1999 $1,827,700 2000 $1,827,700 2001 $1,827,700 2002 $1,827,700 * Table does not reflect redemptions made after June 30, 1997.
(12) 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 June 30, 1997, Northern Indiana had approximately $152.8 million of retained earnings (earned surplus) available for the payment of dividends. Future dividends will depend upon adequate retained earnings, adequate future earnings, and the absence of adverse developments. (13) COMMON SHARES: Northern Indiana's common shares are wholly-owned by Industries. (14) LONG-TERM INCENTIVE PLAN: Industries has two Long-Term Incentive Plans for key management employees, including management of Northern Indiana, that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13, 1994 (1994 Plan), each of which provides for the issuance of up to 2.5 million of Industries' common shares to key employees through 1998 and 2004, respectively. At June 30, 1997, there were 4,578 shares and 2,206,550 shares reserved for future awards under the 1988 Plan and 1994 Plan, respectively. The 1988 Plan and 1994 Plan permit the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights, and performance units. No incentive stock options or performance units were outstanding at June 30, 1997. Under both Plans, the exercise price of each option equals the market price of Industries' stock on the date of grant. Each option's maximum term is ten years and vests one year from the date of grant. The stock appreciation rights (SARs) may be exercised only in tandem with stock options on a one-for-one basis and are payable in cash, Industries common shares, or a combination thereof. Restricted stock awards are restricted as to transfer and are subject to forfeiture for specific periods from the date of grant. Restrictions on shares awarded in 1995 lapse five years from date of grant and vesting is variable from 0% to 200% of the number awarded, subject to specific earnings per share and stock appreciation goals. Restrictions on shares awarded in 1996 and 1997 lapse two years from date of grant and vesting is variable from 0% to 100% of the number awarded, subject to specific performance goals. If a participant's employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. There were 271,000 and 262,000 restricted shares outstanding at June 30, 1997 and December 31, 1996, respectively. Northern Indiana accounts for its allocable portion of these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for non-qualified stock options. The compensation cost that has been recognized in the Consolidated Statement of Income for restricted stock awards was $0.2, $0.3, and $0.8 million for the three-month, six-month, and twelve-month periods ending June 30, 1997, respectively. Had compensation cost for stock options been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," Northern Indiana's net income would have been reduced to the following pro forma amounts:
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (Dollars in thousands) Net Income: As reported $ 31,728 $ 28,124 $ 99,060 $ 98,352 $198,018 $197,023 Pro forma $ 31,521 $ 27,962 $ 98,646 $ 98,027 $197,228 $196,454
The fair value of each option granted used to determine pro forma net income is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the three-month, six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996, respectively: risk-free interest rate of 6.39% and 6.24%, respectively; expected dividend yield of $1.68 and $1.56 per share, respectively; expected option term of five years; and expected volatility of 13.2% and 13.0%, respectively. The weighted average fair value of options granted to all plan participants was $5.00 for the twelve-month period ended June 30, 1997 and $3.87 for twelve-month period ended June 30, 1996. There were 278,300 non-qualified stock options granted to all plan participants for the twelve-month period ended June 30, 1997. (15) LONG-TERM DEBT: At June 30, 1997 and December 31, 1996, the long-term debt of Northern Indiana, excluding amounts due within one year, issued and not retired or canceled was as follows:
AMOUNT OUTSTANDING --------------------------- June 30, December 31, 1997 1996 ============ ============ (Dollars in thousands) First mortgage bonds - Series P, 6-7/8%, due October 1, 1998 $ 14,509 $ 14,509 Series T, 7-1/2%, due April 1, 2002 40,000 40,000 Series NN, 7.10%, due July 1, 2017 55,000 55,000 ------------ ------------ Total 109,509 109,509 ------------ ------------ Pollution control notes and bonds - Series A Note - City of Michigan City, 5.70% due October 1, 2003 19,000 19,000 Series 1988 Bonds - Jasper County - Series A, B, and C - 3.79% weighted average at June 30, 1997, due November 1, 2016 130,000 130,000 Series 1988 Bonds - Jasper County - Series D - 3.78% weighted average at June 30, 1997, due November 1, 2007 24,000 24,000 Series 1994 Bonds - Jasper County - Series A - 4.05% at June 30, 1997, due August 1, 2010 10,000 10,000 Series 1994 Bonds - Jasper County - Series B - 4.05% at June 30, 1997, due June 1, 2013 18,000 18,000 Series 1994 Bonds - Jasper County - Series C - 4.05% at June 30, 1997, due April 1, 2019 41,000 41,000 ------------ ------------ Total 242,000 242,000 ------------ ------------ Medium-term notes - Interest rates between 6.10% and 7.69% with a weighted average interest rate of 7.00% and various maturities between April 5, 2000 and June 27, 2027 708,025 644,025 ------------ ------------ Unamortized premium and discount on long-term debt, net (3,994) (3,526) ------------ ------------ Total long-term debt excluding amounts due in one year $ 1,055,540 $ 992,008 ============ ============
The sinking fund requirements of long-term debt outstanding at June 30, 1997 (including the maturity of first mortgage bonds: Series P, 6-7/8%, due October 1, 1998 and Series T, 7.50%, due April 1, 2002; and medium-term notes due from March 20, 2000 to June 12, 2002 for each of the twelve-month periods subsequent to June 30, 1998 are as follows:
Twelve Months Ended June 30, ================================= 1999 $ 16,009,000 2000 $157,000,000 2001 $ 3,000,000 2002 $ 73,500,000
Unamortized debt expense, premium and discount on long-term debt applicable to outstanding bonds are being amortized over the lives of such bonds. Reacquisition premiums are being deferred and amortized. These premiums are not earning a return during the recovery period. Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented, securing the first mortgage bonds issued by Northern Indiana, constitutes a direct first mortgage lien upon substantially all property and franchises, other than expressly excepted property, owned by Northern Indiana. On May 28, 1997, Northern Indiana was authorized to issue and sell up to $217,692,000 of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of June 30, 1997, $99.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. (16) CURRENT PORTION OF LONG-TERM DEBT: At June 30, 1997 and December 31, 1996, Northern Indiana's current portion of long-term debt due within one year was as follows:
June 30, December 31, 1997 1996 ============ ============ (Dollars in thousands) NORTHERN INDIANA PUBLIC SERVICE COMPANY: First mortgage bonds - Series O, 6-3/8% - due September 1, 1997 $ 25,747 $ 25,747 Medium-term notes - Interest rate of 5.83% and 5.95% with a weighted average interest rate of 5.85% and various maturities between July 25, 1997 and April 13, 1998 75,000 40,000 ------------ ------------ Total current portion of long-term debt $ 100,747 $ 65,747 ============ ============
(17) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999 unless extended by its terms. As of June 30, 1997, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1998. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fees to a combination of fees which are mutually satisfactory to both parties. As of June 30, 1997, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of June 30, 1997 and December 31, 1996, there were $35.1 million and $79.0 million of borrowings, respectively, outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At June 30, 1997, there were no borrowings outstanding under this facility. Northern Indiana makes use of commercial paper to fund short-term working capital requirements. At June 30, 1997 and December 31, 1996, Northern Indiana's short- term borrowings were as follows:
June 30, December 31, 1997 1996 ============ ============ (Dollars in thousands) NORTHERN INDIANA PUBLIC SERVICE COMPANY: Commercial paper - Weighted average interest rate of 5.60% at June 30, 1997 $ 45,400 $ 193,905 Notes payable - Issued at interest rates between 5.62% and 6.10% with a weighted average interest rate of 5.73% and various maturities between July 7, 1997 and July 18, 1997 35,050 79,000 ------------ ------------ Total short-term borrowings $ 80,450 $ 272,905 ============ ============
(18) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a twenty-year agreement for the rental of office facilities from NIPSCO Development Company, Inc., a subsidiary of Industries, at a current annual rental payment of approximately $3.4 million. The following is a schedule, by years, of future minimum rental payments, excluding those to associated companies, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 1997:
Twelve Months Ended June 30, ================================= (Dollars in thousands) 1998 $ 4,148 1999 3,718 2000 3,055 2001 3,055 2002 3,055 Later years 34,671 -------- Total minimum payments required $ 51,702 ========
The consolidated financial statements include rental expense for all operating leases as follows:
June 30, June 30, 1997 1996 ============ ============ (Dollars in thousands) Three months ended $ 1,937 $ 2,282 Six months ended $ 4,027 $ 4,892 Twelve months ended $ 8,384 $10,579
(19) COMMITMENTS: Northern Indiana estimates that approximately $750 million will be expended for construction purposes for the period from January 1, 1997 to December 31, 2001. Substantial commitments have been made by Northern Indiana in connection with this program. Northern Indiana has entered into a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and Mitsubishi Heavy Industries America, Inc., under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating Station. Services under this contract commenced on June 15, 1992 with annual charges approximating $20 million. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminates the agreement prior to the end of the twenty-year contract period. Northern Indiana has entered into an agreement with Integrated Systems Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC to perform all data center, application development and maintenance, and desktop management of Northern Indiana. (20) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short maturity of those instruments. Investments: The fair value of some investments is estimated based on market prices for those of similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock is estimated based on the quoted market prices for the same or similar issues or on the rates offered to Northern Indiana for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. The carrying values and estimated fair values of Northern Indiana's financial instruments are as follows:
June 30, 1997 December 31, 1996 ---------------------- ---------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ========== ========== ========== ========== (Dollars in thousands) Cash and cash equivalents $ 11,720 $ 11,720 $ 8,279 $ 8,279 Investments $ 256 $ 256 $ 256 $ 256 Long-term debt (including current portion) $1,157,787 $1,128,539 $1,059,255 $1,026,743 Preferred stock $ 142,947 $ 126,097 $ 144,200 $ 126,379
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. (21) 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 22% of electric revenue for the twelve months ended June 30, 1997 as compared to 3% and 22%, respectively, for the twelve months ended June 30, 1996. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUES - Total operating revenues for the twelve months ended June 30, 1997 increased $38.1 million as compared to the twelve months ended June 30, 1996. Gas revenues increased $58.7 million and electric revenues decreased $20.6 million as compared to the same period in 1996. The increase in gas revenues was largely attributable to increased sales to wholesale customers, increased deliveries of gas transported for others, and increased gas costs per dekatherm (dth) partially offset by decreased gas transition costs. The decrease in electric revenues was mainly due to decreased sales to residential customers resulting from the cooler summer in 1996 and decreased sales to industrial and wholesale customers. Total operating revenues for the six months ended June 30, 1997 increased $1.0 million as compared to the six months ended June 30, 1996. Gas revenues increased $3.8 million and electric revenues decreased $2.8 million as compared to the same period in 1996. The increase in gas revenues was mainly due to increased sales to wholesale customers, increased deliveries of gas transported for others, increased gas transition costs, and increased gas costs per dth. The decrease in electric revenues was mainly due to decreased sales to industrial and wholesale customers. Total operating revenues for the three months ended June 30, 1997 decreased $0.1 million as compared to the three months ended June 30, 1996. Gas and electric revenues were consistent with the levels for the same period ended June 30, 1996. The basic steel industry accounted for 36% of natural gas delivered (including volumes transported) and 35% of electric sales during the twelve months ended June 30, 1997. The components of the variations in gas and electric revenues are shown in the following table:
Variations from Prior Periods --------------------------------- June 30, 1997 Compared to June 30, 1996 Three Six Twelve Months Months Months ========= ========= ========= (Dollars in thousands) Gas Revenue - Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ (14,852) $ 11,263 $ 56,200 Gas transition costs (656) 1,041 (8,474) Changes in sales levels 14,442 (9,856) 9,448 Gas transported 1,110 1,385 1,537 --------- --------- --------- Gas Revenue Change $ 44 $ 3,833 $ 58,711 --------- --------- --------- Electric Revenue - Pass through of net changes in fuel costs $ 152 $ 1,393 $ (21) Changes in sales levels (330) (4,171) (20,614) --------- --------- --------- Electric Revenue Change $ (178) $ (2,778) $ (20,635) --------- --------- --------- Total Revenue Change $ (134) $ 1,055 $ 38,076 ========= ========= =========
See Note 4 to Notes to Consolidated Financial Statements regarding FERC Order No. 636 transition costs. GAS COSTS - Gas costs decreased $5.4 million for the three-month period ended June 30. 1997. Gas costs increased $8.2 and $59.6 million for the six-month and twelve-month periods ended June 30, 1997, respectively. Gas costs decreased for the three-month period due to decreased gas costs per dth partially offset by increased purchases. Gas costs increased for the six- month and twelve-month periods due to increased gas costs per dth, increased gas transition costs, and increased purchases. The average cost of purchased gas for the three-month, six-month, and twelve-month periods ended June 30, 1997, after adjustment for gas transition costs billed to transport customers, was $2.54 $3.03, and $3.08 per dth, respectively, as compared to $2.78, $2.91, and $2.69 per dth for the same periods in 1996. FUEL AND PURCHASED POWER - The cost of fuel for electric generation decreased for the twelve-month period ended June 30, 1997, compared to 1996 period, mainly as a result of decreased production of electricity. Power purchased decreased $3.8 and $6.8 million for the three-month and six-month periods ended June 30, 1997, respectively, as a result of decreased bulk power purchases. OPERATING MARGINS - Operating margins for the twelve months ended June 30, 1997 decreased $13.5 million from the same period a year ago. The operating margin from gas deliveries decreased $0.9 million. The operating margin from electric sales decreased $12.6 million due to decreased sales to residential customers, reflecting milder 1996 summer weather, and decreased sales to industrial and wholesale customers. Operating margins for the six-months ended June 30, 1997 decreased $2.9 million from the same period a year ago. Gas operating margin decreased $4.3 million due to decreased sales to residential and commercial customers reflecting milder weather, partially offset by increased sales to wholesale customers and increased deliveries of gas transported for others. Operating margin from electric sales increased $1.4 million as a result of increased wholesale energy transactions. Operating margins for the three-months ended June 30, 1997 increased $7.6 million from the same period a year ago. Gas operating margin increased $5.4 million due to increased sales to residential and commercial customers reflecting colder weather during the period, increased sales to wholesale customers, and increased deliveries of gas transported for others, partially offset by decreased sales to industrial customers. Operating margin from electric sales increased $2.2 million due to increased sales to residential and commercial customers, which were partially offset by decreased sales to industrial and wholesale customers. OPERATING EXPENSES AND TAXES - Operation expenses decreased $11.9 million for the twelve-month period ended June 30, 1997 mainly reflecting decreased employee related costs of $7.2 million and decreased electric production pollution control facility costs of $4.7 million. Operation expenses decreased $4.8 million for the six-month period ended June 30, 1997 mainly reflecting decreased electric production pollution control facility costs of $3.7 million. Operation expenses increased $1.2 million for the three-month period ended June 30, 1997 reflecting increased employee costs of $1.1 million, partially offset by decreased electric production pollution control facility costs, and environmental cleanup costs. Maintenance expenses decreased $7.7 million for the twelve-month period ended June 30, 1997 mainly reflecting decreased maintenance activity at the electric production facilities of $4.3 million and decreased maintenance of $2.6 million on the transmission and distribution facilities. Maintenance expenses decreased $2.0 million for the six-month period reflecting decreased maintenance on distribution facilities. Maintenance expenses decreased $1.8 million for the three-month period reflecting decreased maintenance on electric production and distribution facilities. Depreciation and amortization expense increased $2.9, $5.5, and $10.3, million for the three-month, six-month, and twelve-month periods ended June 30, 1997, respectively, resulting from plant additions, increased amortization of computer software, amortization of deferred costs related to scrubber services provided by Pure Air at the Bailly Generating Station, and the amortization of SFAS No. 106 costs effective February 1, 1997. Utility income taxes decreased for the six-month period ended June 30, 1997 mainly as a result of decreased pretax income and lower effective tax rate. Utility income taxes increased for the three-month period ended June 30, 1997 mainly as a result of increased pretax income. OTHER INCOME (DEDUCTIONS) - Other Income (Deductions) increased for the twelve-month period ended June 30, 1997 reflects the sales of Crescent Dunes Lakeshore property to the National Park Service. INTEREST CHARGES - Interest charges decreased for the three-month, six-month, and twelve- month periods ended June 30, 1997 reflecting decreased long-term debt outstanding during the periods partially offset by increased short-term borrowings during the periods. 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, and 8 for a discussion of FERC Order No. 636, Income Taxes and Postretirement Benefits. NET INCOME - Net income for the twelve-month period ended June 30, 1997 was $198.0 million compared to $197.0 million for the twelve-month period ended June 30, 1996. Net income for the six months ended June 30, 1997 was $99.1 million compared to $98.4 million for the three months ended June 30, 1996. Net income for the three months ended June 30, 1997 was $31.7 million compared to $28.1 million for the three months ended June 30, 1996. ENVIRONMENTAL MATTERS - Northern Indiana has an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. It is Northern Indiana's intent to continue to evaluate its facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has recorded a reserve of approximately $17 million to cover probable corrective actions as of June 30, 1997; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, Northern Indiana believes that any corrective actions required, after consideration of insurance coverages and contributions from other potentially responsible parties, will not have a significant impact on the financial position or results of operations of Northern Indiana. On December 19, 1996, the Environmental Protection Agency (EPA) promulgated rules for the second phase of the Acid Rain nitrogen oxides reduction program. Northern Indiana is evaluating compliance strategies to meet the reduced emission limitations found in the final rule. Additional controls may be needed to meet the requirements. A compliance plan must be submitted to the EPA by December 31, 1997 with details of the plan to meet the new limits by January 1, 2000. Because of major investments made in modern environmental control facilities and the use of low-sulfur coal, all of Northern Indiana's electric production facilities now comply with the sulfur dioxide limitations contained in the acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants which may require significant capital expenditures for control of these emissions. Northern Indiana is pursuing a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate-making process. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. Northern Indiana has instituted a program to investigate former manufactured-gas plants where it is the current or former owner. Northern Indiana has identified twenty-four of these sites and made visual inspections of these sites. Initial samplings have been conducted at fifteen sites. Follow-up investigations have been conducted at seven sites and remedial measures have been selected at four sites. Northern Indiana will continue its program to assess and cleanup sites. During the course of various investigations, Northern Indiana has identified impacts to soil, groundwater, sediment, and surface water from former manufactured-gas plants. At three sites where residues were noted seeping into rivers, Northern Indiana notified the Indiana Department of Environmental Management (IDEM) and the EPA and immediately took steps to contain the material. Northern Indiana has worked with IDEM or the EPA on investigation or remedial activities at several sites. Two of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. Northern Indiana anticipates placing additional sites in the VRP after remedial measures have been selected. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered into an agreement covering cost sharing and management of investigation and remediation programs at five former manufactured-gas plant sites at which both companies or their predecessors were former operators or owners. One of these sites is the Lafayette site which Indiana Gas had previously notified Northern Indiana is being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of seven former manufactured-gas plants at which Northern Indiana had conducted or was planning investigation or remediation activities. In December 1996, Northern Indiana sent a written demand to Cinergy related to one of these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern Indiana has already incurred and to be incurred to implement the needed remedy at the Goshen site. In 1994, Northern Indiana approached various companies that provided insurance coverage which Northern Indiana believes covers costs related to actions taken at former manufactured-gas plants. In September 1995, certain of the insurance companies initiated a suit in Indiana state court against Northern Indiana seeking a ruling that denied coverage. Later that same month, Northern Indiana initiated a similar suit in federal court and the state court action was stayed. After the dismissal of the federal court action on procedural grounds in May 1997, Northern Indiana filed claims in the state court action against various insurance companies, seeking coverage for costs associated with several former manufactured gas plants and damages for alleged misconduct by some of the insurance companies. The state court action is now proceeding. Northern Indiana has received cash settlements from several of the insurance companies. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances, and other electric sources may result in adverse health effects has been the subject of public, governmental, and media attention. The U.S. National Research Council of the National Academy of Sciences concluded in a report, after examining more than 500 EMF studies spanning seventeen years, that among other things, there is insufficient evidence to consider EMF a threat to human health. Despite the report's findings, future research appropriations are continuing to be dedicated to explore this issue. LIQUIDITY AND CAPITAL RESOURCES - Cash flow from operations has provided sufficient liquidity to meet current operating requirements. Because of the seasonal nature of the utility business and the construction program, Northern Indiana makes use of commercial paper intermittently as short-term financing. As of June 30, 1997, Northern Indiana had $45.4 million in commercial paper outstanding, having a weighted average interest of 5.60%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999 unless extended by its terms. As of June 30, 1997, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1998. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fees to a combination of fees which are mutually satisfactory to both parties. As of June 30, 1997, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of June 30, 1997, $35.1 million of borrowings were outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At June 30, 1997, there were no borrowings outstanding under this facility. On May 28, 1997, Northern Indiana was authorized to issue and sell up to $217,692,000 of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of June 30, 1997, $99.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. During recent years, Northern Indiana has been able to finance its construction program with internally generated funds and expects to be able to meet future commitments through such funds. Northern Indiana does not expect the effects of inflation at current levels to have a significant impact on their results of operations, ability to contain cost increases or need to seek timely and adequate rate relief. Northern Indiana does not anticipate the need to file for gas and electric base rate increases in the near future. EMPLOYEE RELATIONS At June 30, 1997, approximately 73% of Northern Indiana's employees (physical and clerical worker) were represented by two local unions of the United Steelworkers of America, AFL-CIO-CLC. The bargaining unit employees' current contracts expired May 31, 1997. Employees are currently working without a contract. Northern Indiana continues to negotiate new agreements with the two local unions, but cannot predict the timing or terms of new agreements. COMPETITION The Energy Policy Act of 1992 (Energy Act) allowed FERC to order electric utilities to grant access to transmission systems by third-party power producers. The Energy Act specifically prohibits federally mandated wheeling of power for retail customers. On April 24, 1996, the FERC issued its Order No. 888 which opens wholesale power sales to competition and requires public utilities owning, controlling, or operating transmission lines to file non-discriminatory open access tariffs that offer others the same transmission service they provide themselves. Order No. 888 also provides for the full recovery of stranded costs - that is, costs that were prudently incurred to serve power customers and that could go unrecovered if these customers use open access to move to another supplier. FERC expects this rule will accelerate competition and bring lower prices and more choices to wholesale energy customers. Although wholesale customers represent a relatively small portion of Northern Indiana's sales, Northern Indiana will continue its efforts to retain and add customers by offering competitive rates. In January 1997, legislation was introduced to the Indiana General Assembly addressing electric utility competition and deregulation. This proposed legislation has not been adopted, however, a study commission on electric competition and deregulation was established by the Indiana General Assembly. Northern Indiana has begun discussions with its largest customers on the technical and economic aspects of possible legislation to allow customer choice. Operating in a competitive environment will place added pressures on utility profit margins and credit quality. Increasing competition in the electric utility industry has already led the credit rating agencies to apply more stringent guidelines in making credit rating determinations. Competition within the electric utility industry will create opportunities to compete for new customers and revenues, as well as increase the risk of the loss of customers. Northern Indiana's management has taken steps to make the company more competitive and profitable in the changing utility environment, including conversions of some of its generating units to allow use of lower cost, low-sulfur coal. FERC Order No. 636 shifted primary responsibility for gas acquisition, transportation, and peak days' supply from pipelines to local gas distribution companies, such as Northern Indiana. Although pipelines continue to transport gas, they no longer provide sale service. Northern Indiana believes it has taken appropriate steps to ensure the continued acquisition of adequate gas supplies at reasonable prices. The mix of gas revenues from retail sales, interruptible retail sales, firm transportation service, and interruptible transportation services has changed significantly over the past several years. The deregulation of the gas industry, since the mid-1980's, allows large industrial and commercial customers to purchase their gas supplies directly from producers and use Northern Indiana's facilities to transport the gas. Transportation customers pay Northern Indiana only for transporting their gas from the pipeline to the customers' premises. Northern Indiana filed a petition for an Alternative Regulatory Plan (ARP) with the Commission on November 29, 1995. The purpose of the ARP is to create a business and regulatory environment and structure which will permit increased choice for gas customers, competition among suppliers, and improved natural gas service. On May 9, 1997, Northern Indiana filed an Amended Stipulation and Agreement which proposed a modified ARP. Northern Indiana's proposal was supported by numerous parties including the Office of Utility Consumer Counselor, Citizens Action Coalition of Indiana, Inc. and major industrial customers of Northern Indiana. In its modified ARP, Northern proposes to implement new rates and services that would include, among other things, further unbundling of services for additional customer classes, increased customer choice for sources of natural gas supply, negotiated services and prices, an incentive gas and storage cost mechanisms, and a price protection program. The Commission held hearings a hearing on the ARP on June 12, 1997. Action by the Commission is expected during the third quarter of 1997. 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. Part II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. Northern Indiana is party to various pending proceedings, including suits and claims against it for personal injury, death and property damage, but in the opinion of counsel for Northern Indiana, the nature of such proceedings and suits, and the amounts involved, do not depart from the ordinary routine litigation and proceedings incidental to the kind of business conducted by Northern Indiana, except as described under Note 3 (Pending Tax Matter) and Note 5 (Environmental Matters), in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Report on Form 10-Q. To the knowledge of Northern Indiana no other material legal proceedings against Northern Indiana or its subsidiaries are contemplated by governmental authorities and other parties. Item 2. CHANGES IN SECURITIES. None Item 3. DEFAULTS UPON SENIOR SECURITIES. None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None Item 5. OTHER INFORMATION. None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Northern Indiana Public Service Company (Registrant) /s/ Jerry M. Springer --------------------------------------- Jerry M. Springer, Vice President, Finance and Accounting /s/ David J. Vajda --------------------------------------- David J. Vajda, Controller and Chief Accounting Officer Date August 13, 1997 EX-23 2 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-Q into Northern Indiana Public Service Company's previously filed Form S-3 Registration Statement No. 333-26847. /s/ Arthur Andersen LLP Chicago, Illinois August 13, 1997 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 June 30, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 PER-BOOK 3,039,909 8,734 280,987 79,098 222,098 3,630,826 859,488 12,522 152,752 1,024,762 59,996 81,123 328,515 35,050 727,025 45,400 100,747 1,828 0 0 1,226,380 3,630,826 352,595 17,899 282,127 300,026 52,569 (1,036) 51,533 19,805 31,728 2,128 29,600 44,000 0 83,251 0 0
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