-----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, Ue5dOtafXdA03TXWYg4PYX9aIEGKyRsGartpkl25/W0/PpX/2EH3UwJgBFhjQsRN 3rUsDsey0LXExpho9tg3ug== 0000072843-97-000023.txt : 19971113 0000072843-97-000023.hdr.sgml : 19971113 ACCESSION NUMBER: 0000072843-97-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN INDIANA PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000072843 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 350552990 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04125 FILM NUMBER: 97716231 BUSINESS ADDRESS: STREET 1: 5265 HOHMAN AVE CITY: HAMMOND STATE: IN ZIP: 46320-1775 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 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 October 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 September 30, 1997, and December 31, 1996, and the related consolidated statements of income, retained earnings and cash flows for the three, nine and twelve month periods ended September 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 September 30, 1997 and December 31, 1996, and the results of their operations and their cash flows for the three, nine and twelve month periods ended September 30, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois October 29, 1997
CONSOLIDATED BALANCE SHEET September 30, December 31, ASSETS 1997 1996 ============ ============ (Dollars in thousands) UTILITY PLANT, AT ORIGINAL COST (INCLUDING CONSTRUCTION WORK IN PROGRESS OF $134,693 AND $162,123, RESPECTIVELY) (NOTE 2): Electric $ 4,089,701 $ 4,050,084 Gas 1,207,885 1,176,871 Common 350,432 346,636 ------------ ------------ 5,648,018 5,573,591 Less - Accumulated provision for depreciation and amortization 2,628,238 2,499,687 ------------ ------------ Total Utility Plant 3,019,780 3,073,904 ------------ ------------ OTHER PROPERTY AND INVESTMENTS 8,729 8,971 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents 11,993 8,279 Accounts receivable, less reserve of $5,740 and $4,568, respectively (Note 2) 40,453 111,866 Fuel adjustment clause (Note 2) 3,806 9,149 Gas cost adjustment clause (Note 2) 57,019 98,167 Materials and supplies, at average cost 55,822 56,796 Electric production fuel, at average cost 17,148 26,483 Natural gas in storage, at last-in, first-out cost (Note 2) 57,891 50,409 Prepayments and other 22,068 25,826 ------------ ------------ Total Current Assets 266,200 386,975 ------------ ------------ OTHER ASSETS: Regulatory assets (Note 2) 212,627 239,547 Prepayments and other (Note 7) 86,880 64,883 ------------ ------------ Total Other Assets 299,507 304,430 ------------ ------------ $ 3,594,216 $ 3,774,280 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED BALANCE SHEET September 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) 139,853 145,987 ------------ ------------ Common shareholder's equity 1,011,863 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) 59,396 61,246 Long-term debt excluding amounts due within one year (Note 15) 1,094,885 992,008 ------------ ------------ Total Capitalization 2,247,267 2,152,376 ------------ ------------ CURRENT LIABILITIES - Current portion of long-term debt (Note 16) 35,000 65,747 Short-term borrowings (Note 17) 91,125 272,905 Accounts payable 101,318 190,182 Sinking funds due within one year (Notes 11 and 15) 3,328 3,328 Dividends declared on common and preferred stocks 45,985 54,255 Customer deposits 19,170 16,768 Taxes accrued 85,434 78,806 Interest accrued 16,545 5,851 Accrued employment costs 41,729 40,915 Other accruals 31,077 26,106 ------------ ------------ Total Current Liabilities 470,711 754,863 ------------ ------------ OTHER: Deferred income taxes (Note 6) 592,577 597,105 Deferred investment tax credits, being amortized over life of related property (Note 6) 101,678 107,058 Deferred credits 54,721 50,058 Accrued liability for postretirement benefits (Note 8) 117,247 104,123 Other noncurrent liabilities 10,015 8,697 ------------ ------------ Total Other 876,238 867,041 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 18 and 19) $ 3,594,216 $ 3,774,280 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME Three Months Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 1997 1996 1997 1996 ========== ========== ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 4 and 21) Gas $ 81,506 $ 71,846 $ 495,721 $ 482,228 Electric 279,221 276,776 769,099 769,432 ---------- ---------- ---------- ---------- 360,727 348,622 1,264,820 1,251,660 ---------- ---------- ---------- ---------- Cost of Energy: (Note 2) Gas costs 49,940 39,400 302,320 283,619 Fuel for electric generation 65,008 62,346 178,025 172,732 Power purchased 13,143 15,356 32,621 41,639 ---------- ---------- ---------- ---------- 128,091 117,102 512,966 497,990 ---------- ---------- ---------- ---------- Operating Margin 232,636 231,520 751,854 753,670 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 69,151 68,772 209,024 213,399 Maintenance (Note 2) 15,767 16,674 50,639 53,548 Depreciation and amortization (Note 2) 56,561 54,157 168,050 160,121 Taxes (except income) 16,372 16,481 54,029 53,394 ---------- ---------- ---------- ---------- 157,851 156,084 481,742 480,462 ---------- ---------- ---------- ---------- Operating Income Before Utility Income Taxes 74,785 75,436 270,112 273,208 ---------- ---------- ---------- ---------- Utility Income Taxes (Note 6) 19,282 18,422 74,188 74,486 ---------- ---------- ---------- ---------- Operating Income 55,503 57,014 195,924 198,722 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) (1,041) 2,196 (2,486) 249 ---------- ---------- ---------- ---------- Interest and Other Charges: Interest on long-term debt 18,221 16,943 51,400 52,498 Other interest 1,189 3,019 5,837 6,718 Amortization of premium, reacquisition premium, discount and expense on debt, net 1,053 1,051 3,142 3,206 ---------- ---------- ---------- ---------- 20,463 21,013 60,379 62,422 ---------- ---------- ---------- ---------- Net Income 33,999 38,197 133,059 136,549 Dividend requirements on preferred shares 2,123 2,174 6,418 6,551 ---------- ---------- ---------- ---------- Balance available for common shares $ 31,876 $ 36,023 $ 126,641 $ 129,998 ========== ========== ========== ========== Dividends declared $ 44,775 $ 45,200 $ 132,775 $ 134,450 ========== ========== ========== ========== Twelve Months Ended September 30, ---------------------- 1997 1996 ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 4 and 21) Gas $ 745,367 $ 682,431 Electric 1,021,898 1,020,133 ---------- ---------- 1,767,265 1,702,564 ---------- ---------- Cost of Energy: (Note 2) Gas costs 462,842 397,059 Fuel for electric generation 238,508 235,760 Power purchased 44,733 50,061 ---------- ---------- 746,083 682,880 ---------- ---------- Operating Margin 1,021,182 1,019,684 ---------- ---------- Operating Expenses and Taxes (except income): Operation 276,691 285,992 Maintenance (Note 2) 65,820 72,576 Depreciation and amortization (Note 2) 219,474 211,014 Taxes (except income) 72,704 71,521 ---------- ---------- 634,689 641,103 ---------- ---------- Operating Income Before Utility Income Taxes 386,493 378,581 ---------- ---------- Utility Income Taxes (Note 6) 108,753 100,789 ---------- ---------- Operating Income 277,740 277,792 ---------- ---------- Other Income (Deductions) (Note 2) (2,495) (836) ---------- ---------- Interest and Other Charges: Interest on long-term debt 67,700 70,632 Other interest 9,539 9,458 Amortization of premium, reacquisition premium, discount and expense on debt, net 4,186 4,287 ---------- ---------- 81,425 84,377 ---------- ---------- Net Income 193,820 192,579 Dividend requirements on preferred shares 8,579 8,776 ---------- ---------- Balance available for common shares $ 185,241 $ 183,803 ========== ========== Dividends declared $ 185,775 $ 182,950 ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS Three Months Nine Months Twelve Months Ended September 30, Ended September 30, Ended September 30, ------------------- ------------------- ------------------- 1997 1996 1997 1996 1997 1996 ========= ========= ========= ========= ========= ========= (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 152,752 $ 149,564 $ 145,987 $ 144,839 $ 140,387 $ 139,534 ADD: Net income 33,999 38,197 133,059 136,549 193,820 192,579 --------- --------- --------- --------- --------- --------- 186,751 187,761 279,046 281,388 334,207 332,113 --------- --------- --------- --------- --------- --------- LESS: Dividends Cumulative Preferred stocks - 4-1/4% series 222 222 667 667 889 889 4-1/2% series 90 90 270 270 360 360 4.22% series 113 113 337 337 448 448 4.88% series 122 122 366 366 488 488 7.44% series 77 77 233 233 312 312 7.50% series 65 65 196 196 261 261 8.85% series 166 193 516 599 710 820 7-3/4% series 92 103 275 307 363 417 8.35% series 122 134 397 435 534 585 6.50% series 699 699 2,096 2,096 2,795 2,795 Adjustable Rate, Series A 355 356 1,065 1,045 1,419 1,401 Common shares 44,775 45,200 132,775 134,450 185,775 182,950 --------- --------- --------- --------- --------- --------- 46,898 47,374 139,193 141,001 194,354 191,726 --------- --------- --------- --------- --------- --------- BALANCE AT END OF PERIOD $ 139,853 $ 140,387 $ 139,853 $ 140,387 $ 139,853 $ 140,387 ========= ========= ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended September 30, ------------------------ 1997 1996 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 33,999 $ 38,197 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 56,561 54,157 Deferred federal and state operating income taxes, net (959) 1,611 Deferred investment tax credits, net (1,793) (1,974) Advance contract payment 475 475 Change in certain assets and liabilities - Accounts receivable, net 39,301 15,299 Electric production fuel 11,484 (301) Materials and supplies 526 2,930 Natural gas in storage (31,628) (42,878) Accounts payable (11,513) (3,246) Taxes accrued (8,144) (22,487) Fuel adjustment clause 4,451 1,816 Gas cost adjustment clause (12,390) (9,462) Accrued employment costs 2,764 (335) Other accruals (1,355) (1,817) Other, net 20,510 20,541 ---------- ---------- Net cash provided by operating activities 102,289 52,526 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (39,838) (45,193) Other, net 274 1,134 ---------- ---------- Net cash used in investing activities (39,564) (44,059) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 40,000 0 Issuance of short-term debt 65,175 376,700 Net change in commercial paper 32,100 (400) Retirement of long-term debt (66,247) (80,000) Retirement of short-term debt (86,600) (254,200) Retirement of preferred shares (600) (600) Cash dividends paid on common shares (44,000) (45,000) Cash dividends paid on preferred shares (2,125) (2,176) Other, net (155) 121 ---------- ---------- Net cash used in financing activities (62,452) (5,555) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 273 2,912 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,720 8,379 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,993 $ 11,291 ========== ========== Nine Months Ended September 30, ------------------------ 1997 1996 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 133,059 $ 136,549 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 168,050 160,121 Deferred federal and state operating income taxes, net (30,144) 14,345 Deferred investment tax credits, net (5,380) (5,295) Advance contract payment 1,425 (17,575) Change in certain assets and liabilities - Accounts receivable, net 71,413 45,050 Electric production fuel 9,335 (16,940) Materials and supplies 974 7,154 Natural gas in storage (7,482) (12,209) Accounts payable (66,578) (5,701) Taxes accrued 26,953 (16,036) Fuel adjustment clause 5,343 494 Gas cost adjustment clause 41,148 (54,455) Accrued employment costs 814 (8,505) Other accruals 4,971 (11,373) Other, net 49,894 21,831 ---------- ---------- Net cash provided by operating activities 403,795 237,455 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (141,215) (125,545) Other, net 66 2,787 ---------- ---------- Net cash used in investing activities (141,149) (122,758) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 139,000 0 Issuance of short-term debt 396,655 834,700 Net change in commercial paper (116,405) 43,200 Retirement of long-term debt (66,247) (80,000) Retirement of short-term debt (462,030) (766,800) Retirement of preferred shares (1,853) (2,046) Cash dividends paid on common shares (141,000) (137,750) Cash dividends paid on preferred shares (6,429) (6,588) Other, net (623) 400 ---------- ---------- Net cash used in financing activities (258,932) (114,884) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,714 (187) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,279 11,478 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,993 $ 11,291 ========== ========== Twelve Months Ended September 30, ------------------------ 1997 1996 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 193,820 $ 192,579 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 219,474 211,014 Deferred federal and state operating income taxes, net (18,372) 29,014 Deferred investment tax credits, net (7,412) (7,153) Advance contract payment 1,900 (17,575) Change in certain assets and liabilities - Accounts receivable, net 10,573 3,341 Electric production fuel 14,050 (14,395) Materials and supplies 848 7,756 Natural gas in storage 7,731 (2,191) Accounts payable (25,361) 21,630 Taxes accrued 57,617 (41,410) Fuel adjustment clause 6,001 (1,124) Gas cost adjustment clause 1,549 (83,738) Accrued employment costs 4,463 (3,607) Other accruals 1,856 (18,146) Other, net 35,025 9,093 ---------- ---------- Net cash provided by operating activities 503,762 285,088 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (194,866) (173,133) Other, net 355 577 ---------- ---------- Net cash used in investing activities (194,511) (172,556) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 139,000 0 Issuance of short-term debt 734,105 1,326,800 Net change in commercial paper (10,500) 45,700 Retirement of long-term debt (66,247) (81,124) Retirement of short-term debt (907,180) (1,204,500) Retirement of preferred shares (2,411) (2,802) Cash dividends paid on common shares (186,200) (187,065) Cash dividends paid on preferred shares (8,607) (6,565) Other, net (509) 539 ---------- ---------- Net cash used in financing activities (308,549) (109,017) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 702 3,515 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,291 7,776 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,993 $ 11,291 ========== ========== 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, nine-month and twelve-month periods ended September 30, 1997; and 4.3%, 4.2% and 4.2% for the three-month, nine-month and twelve-month periods ended September 30, 1996, respectively. 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 September 30,1997, Northern Indiana had sold $100 million of its accounts receivable under a sales agreement which expires May 31, 2002. The September 30, 1997 and December 31, 1996 accounts receivable balances include approximately $2.7 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 Nine Months Twelve Months Ended September 30, Ended September 30, Ended September 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (Dollars in thousands) Income taxes $ 20,700 $ 19,305 $ 70,700 $ 73,473 $ 70,858 $123,153 Interest, net of amounts capitalized $ 8,946 $ 11,900 $ 44,746 $ 48,751 $ 74,263 $ 79,725
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 September 1997 and December 1996 the estimated replacement cost of gas in storage (current and non-current) at September 30, 1997 and December 31, 1996 exceeded the stated LIFO cost by approximately $54 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 $4.1 million, $21.3 million, and $30.3 million for the three-month, nine-month and twelve-month periods ended September 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 $3.2 million, $7.2 million, and $10.4 million representing 5.6%, 2.6% and 2.6% of Northern Indiana's total gas costs for the three-month, nine-month and twelve-month periods ended September 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 September 30, 1997 Northern Indiana had open futures contracts representing hedges of natural gas sales of 1.6 billion cubic feet (Bcf) and natural gas purchases of 1.0 Bcf. The net deferred gain on these open futures contracts as of September 30, 1997 was not material. 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 of September 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:
September 30, December 31, 1997 1996 ============= ============= (Dollars in thousands) Unamortized reacquisition premium on debt (Note 15) $ 47,292 $ 49,890 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 67,600 70,763 Bailly scrubber carrying charges and deferred depreciation (See below) 10,114 10,816 Deferral of SFAS No. 106 expense not recovered (Note 8) 85,364 87,005 FERC Order No. 636 transition costs (Note 4) 27,521 47,399 Regulatory income tax asset, net (Note 6) 12,773 9,002 ------------- ------------- 250,664 274,875 Less: Current portion of regulatory assets 38,037 35,328 ------------- ------------- $ 212,627 $ 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) RESOLUTION OF TAX MATTER: In 1991, the Internal Revenue Service (IRS) issued a notice of deficiency for Northern Indiana's taxes for the years 1982 through 1985 ($3,785,250 per year plus interest) relating to interest payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's former foreign subsidiary, Northern Indiana Public Service Finance N.V. (Finance). The IRS maintained that interest paid on the Notes should have been subject to United States tax withholding. Northern Indiana challenged the assessment in the United States Tax Court (Tax Court) and the Tax Court ruled in favor of Northern Indiana, finding that the interest paid on the Notes was not subject to United States tax withholding. The IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Seventh Circuit (Court of Appeals) and Northern Indiana filed a cross appeal. On June 6, 1997, the Court of Appeals issued an order affirming in full the Tax Court order. The IRS did not appeal the decision of the Court of Appeals. (4) FERC ORDER NO. 636. Northern Indiana has recorded approximately $133 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 $19 million to cover probable corrective actions as of September 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 results of operations or financial position 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 issued final rules on July 18, 1997 revising the National Ambient Air Quality Standards for ozone and particulate matter. The revised standards begin a regulatory process that may lead to reductions in sulfur dioxide and nitrogen oxide emissions from coal-fired boilers (including Northern Indiana's generating stations) beyond reductions required in the Acid Rain provisions of the CAAA. Northern Indiana cannot predict the costs of complying with future control requirements to meet these new standards. Northern Indiana will continue to closely monitor developments in this area and anticipates the exact nature of the impact of the new standards on its operations will not be known for some time. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. 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. Three of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. Northern Indiana anticipates placing additional sites in the VRP after remedial measures have been selected. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered into an agreement covering cost sharing and management of investigation and remediation programs at five former manufactured-gas plant sites at which both companies or their predecessors were former operators or owners. One of these sites is the Lafayette site which Indiana Gas had previously notified Northern Indiana is being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of seven former manufactured-gas plants at which Northern Indiana had conducted or was planning investigation or remediation activities. In December 1996, Northern Indiana sent a written demand to Cinergy related to one of these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern Indiana has already incurred and to be incurred to implement the needed remedy at the Goshen site. In August 1997, Northern Indiana filed suit in Indiana state court against Cinergy seeking recovery of those costs. In 1994, Northern Indiana approached various companies that provided insurance coverage which Northern Indiana believes covers costs related to actions taken at former manufactured-gas plants. 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. Recently, researchers from the National Cancer Institute and the Childhood Cancer Group reported they found no evidence magnetic fields in homes increase the risk of childhood leukemia. This study follows an EMF report released late last year by the U.S. National Research Council of the National Academy of Sciences, which concluded, after examining more than 500 EMF studies spanning seventeen years, that among other things, there was insufficient evidence to consider EMF a threat to human health. Despite the report's findings, future research appropriations are continuing to be dedicated to explore this issue. (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 September 30, 1997 and December 31, 1996 are as follows:
September 30, December 31, 1997 1996 ============= ============= (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 723,865 $ 719,197 AFUDC-equity 35,903 37,713 Adjustment clauses 23,027 40,700 Take-or-pay gas costs 384 765 Other regulatory assets 30,252 39,440 Reacquisition premium on debt 17,935 18,921 Deferred tax assets - Deferred investment tax credits (38,561) (40,602) Removal costs (141,305) (131,718) FERC Order No. 636 transition costs (10,437) (8,144) Other postretirement/postemployment benefits (48,136) (42,434) Other, net 5,634 (10,433) ------------- ------------- 598,561 623,405 Less: Deferred income taxes related to current assets and liabilities 5,984 26,300 ------------- ------------- Deferred income taxes - noncurrent $ 592,577 $ 597,105 ============= =============
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Nine Months Ended September 30, Ended September 30, -------------------- -------------------- 1997 1996 1997 1996 ========= ========= ========= ========= (Dollars in thousands) Current income taxes - Federal $ 19,003 $ 16,109 $ 95,423 $ 56,409 State 3,031 2,676 14,289 9,027 --------- --------- --------- --------- 22,034 18,785 109,712 65,436 --------- --------- --------- --------- Deferred income taxes, net - Federal (942) 1,412 (27,984) 13,015 State (17) 199 (2,160) 1,330 --------- --------- --------- --------- (959) 1,611 (30,144) 14,345 --------- --------- --------- --------- Deferred investment tax credits, net (1,793) (1,974) (5,380) (5,295) --------- --------- --------- --------- Total utility operating income taxes 19,282 18,422 74,188 74,486 Income tax applicable to non- operating activities and income of subsidiaries 2,696 1,352 1,664 95 --------- --------- --------- --------- Total income taxes $ 21,978 $ 19,774 $ 75,852 $ 74,581 ========= ========= ========= ========= Twelve Months Ended September 30, -------------------- 1997 1996 ========= ========= (Dollars in thousands) Current income taxes - Federal $ 116,961 $ 68,003 State 17,576 10,925 --------- --------- 134,537 78,928 --------- --------- Deferred income taxes, net - Federal (17,182) 26,500 State (1,190) 2,514 --------- --------- (18,372) 29,014 --------- --------- Deferred investment tax credits, net (7,412) (7,153) --------- --------- Total utility operating income taxes 108,753 100,789 Income tax applicable to non- operating activities and income of subsidiaries 633 (556) --------- --------- Total income taxes $ 109,386 $ 100,233 ========= =========
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 Nine Months Ended September 30, Ended September 30, -------------------- -------------------- 1997 1996 1997 1996 ========= ========= ========= ========= (Dollars in thousands) Net income $ 33,999 $ 38,197 $ 133,059 $ 136,549 Add-Income taxes 21,978 19,774 75,852 74,581 --------- --------- --------- --------- Net income before income taxes $ 55,977 $ 57,971 $ 208,911 $ 211,130 ========= ========= ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 19,592 $ 20,290 $ 73,119 $ 73,896 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 1,021 1,007 3,109 3,020 Amortization of deferred investment tax credits (1,793) (1,974) (5,380) (5,295) State income taxes, net of federal income tax benefit 1,889 2,025 7,000 7,190 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,033) (1,409) (4,069) (4,228) Other, net 2,302 (165) 2,073 (2) --------- --------- --------- --------- Total income taxes $ 21,978 $ 19,774 $ 75,852 $ 74,581 ========= ========= ========= ========= Twelve Months Ended September 30, -------------------- 1997 1996 ========= ========= (Dollars in thousands) Net income $ 193,820 $ 192,579 Add-Income taxes 109,386 100,233 --------- --------- Net income before income taxes $ 303,206 $ 292,812 ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 106,122 $ 102,485 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 4,710 4,024 Amortization of deferred investment tax credits (7,412) (7,153) State income taxes, net of federal income tax benefit 10,050 9,549 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (6,485) (5,814) Other, net 2,401 (2,858) --------- --------- Total income taxes $ 109,386 $ 100,233 ========= =========
(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, nine-month and twelve-month periods ended September 30, 1997 and September 30, 1996:
Three Months Nine Months Twelve Months Ended Ended Ended September 30, September 30, September 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (Dollars in thousands) Service costs $ 6,271 $ 4,423 $ 15,203 $ 14,766 $ 16,314 $ 17,044 Interest costs 31,156 17,345 63,807 49,094 67,501 61,388 Estimated return on plan assets (39,806) (20,689) (80,422) (58,447) (108,597) (154,030) Amortization of transition obligation 3,055 1,808 6,263 5,104 6,647 6,476 Other net amortization and deferral 1,974 809 3,799 2,284 27,748 85,566 -------- -------- -------- -------- -------- -------- $ 2,650 $ 3,696 $ 8,650 $ 12,801 $ 9,613 $ 16,444 ======== ======== ======== ======== ======== ========
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 could be reflected in the rate-making process. On June 11, 1997, the Commission issued an order approving the inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with these dates. The following table sets forth the plans' accumulated postretirement benefit obligation as of January 1, 1997 and 1996:
January 1, January 1, 1997 1996 ========== ========== (Dollars in thousands) Postretirement Benefit Obligation for: 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%, a pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%, 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, nine- month and twelve-month periods ended September 30, 1997 and September 30, 1996 include the following components:
Three Months Nine Months Twelve Months Ended Ended Ended September 30, September 30, September 30, ---------------- ---------------- ---------------- 1997 1996 1997 1996 1997 1996 ======= ======= ======= ======= ======= ======= (Dollars in thousands) Service costs $ 931 $ 1,209 $ 2,789 $ 3,913 $ 4,729 $ 5,198 Interest costs 4,376 4,973 13,128 14,920 16,181 19,573 Amortization of transition obligation over twenty years 2,702 3,033 8,106 9,099 10,355 11,936 Amortization of unrecognized actuarial gain (993) (579) (2,979) (1,736) (1,740) (2,277) ------- ------- ------- ------- ------- ------- $ 7,016 $ 8,636 $21,044 $26,196 $29,525 $34,430 ======= ======= ======= ======= ======= =======
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 $3.3 million for the three-month and nine-month periods ended September 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 SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 9):
Redemption Price at September 30, December 31, September 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 September 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 October 1, 1995 to September 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 SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 9):
September 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 - 57,000 and 63,000 shares outstanding, respectively, excluding sinking fund payments due within one year 5,700 6,300 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ------------ ------------ $ 59,396 $ 61,246 ============ ============
The redemption prices at September 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% $103.69, reduced periodically 3,000 shares on or before July 1; increasing to 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.41, 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 September 30, 1997 for each of the twelve-month periods subsequent to September 30, 1998 are as follows:
Twelve Months Ended September 30,* ================================== 1999 $1,827,700 2000 $1,827,700 2001 $1,827,700 2002 $1,827,700 * Table does not reflect redemptions made after September 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 September 30, 1997, Northern Indiana had approximately $139.9 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 September 30, 1997, there were 4,578 shares and 1,939,750 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 September 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 271,333 and 262,000 restricted shares outstanding at September 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, $0.5 and $0.7 million for the three-month, nine-month and twelve-month periods ending September 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 Nine Months Twelve Months Ended Ended Ended September 30, September 30, September 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (Dollars in thousands) Net Income: As reported $ 33,999 $ 38,197 $133,059 $136,549 $193,820 $192,579 Pro forma $ 33,783 $ 38,025 $132,430 $136,062 $192,984 $191,929
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, nine-month and twelve-month periods ended September 30, 1997 and September 30, 1996: risk-free interest rate of 6.29% and 6.39%, respectively; expected dividend yield per share of $1.74 and $1.68, respectively; expected option term of five and one-quarter years and five years, respectively; and expected volatilities of 12.7% and 13.2%, respectively. The weighted average fair value of options granted to all plan participants was $5.32 for the twelve-month period ended September 30, 1997 and $5.00 for twelve-month period ended September 30, 1996. There were 266,800 non-qualified stock options granted to all plan participants for the twelve-month period ended September 30, 1997. (15) LONG-TERM DEBT: At September 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 --------------------------- September 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 39,500 40,000 Series NN, 7.10%, due July 1, 2017 55,000 55,000 ------------ ------------ Total 109,009 109,509 ------------ ------------ 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 - 3.77% weighted average at September 30, 1997, due November 1, 2016 130,000 130,000 Series 1988 Bonds - Jasper County - Series D - 3.77% weighted average at September 30, 1997, due November 1, 2007 24,000 24,000 Series 1994 Bonds - Jasper County - Series A - 3.80% at September 30, 1997, due August 1, 2010 10,000 10,000 Series 1994 Bonds - Jasper County - Series B - 3.80% at September 30, 1997, due June 1, 2013 18,000 18,000 Series 1994 Bonds - Jasper County - Series C - 3.80% at September 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 August 4, 2027 748,025 644,025 ------------ ------------ Unamortized premium and discount on long-term debt, net (4,149) (3,526) ------------ ------------ Total long-term debt excluding amounts due in one year $ 1,094,885 $ 992,008 ============ ============
The sinking fund requirements of long-term debt outstanding at September 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 September 30, 1998 are as follows:
Twelve Months Ended September 30, ================================= 1999 $ 16,009,000 2000 $157,000,000 2001 $ 18,000,000 2002 $ 58,000,000
Unamortized debt expense, premium and discount on long-term debt applicable to outstanding bonds are being amortized over the lives of such bonds. Reacquisition premiums are being deferred and amortized. These premiums are not earning a return during the recovery period. Northern Indiana's Indenture 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 September 30, 1997, $139.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. (16) CURRENT PORTION OF LONG-TERM DEBT: At September 30, 1997 and December 31, 1996, Northern Indiana's current portion of long-term debt due within one year was as follows:
September 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 $ 0 $ 25,747 Medium-term notes - Interest rate of 5.83% and 5.95% with a weighted average interest rate of 5.86% and various maturities between April 6, 1998 and April 13, 1998 35,000 40,000 ------------ ------------ Total current portion of long-term debt $ 35,000 $ 65,747 ============ ============
(17) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999. As of September 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 September 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 September 30, 1997 and December 31, 1996, there were $13.6 million and $79.0 million of borrowings, respectively, outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At September 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 September 30, 1997 and December 31, 1996, Northern Indiana's short- term borrowings were as follows:
September 30, December 31, 1997 1996 ============ ============ (Dollars in thousands) NORTHERN INDIANA PUBLIC SERVICE COMPANY: Commercial paper - Weighted average interest rate of 5.59% at September 30, 1997 $ 77,500 $ 193,905 Notes payable - 5.67% - due October 20, 1997 13,625 79,000 ------------ ------------ Total short-term borrowings $ 91,125 $ 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 September 30, 1997:
Twelve Months Ended September 30, ================================= (Dollars in thousands) 1998 $ 4,357 1999 3,497 2000 3,055 2001 3,055 2002 3,055 Later years 33,907 -------- Total minimum payments required $ 50,926 ========
The consolidated financial statements include rental expense for all operating leases as follows:
September 30, September 30, 1997 1996 ============ ============ (Dollars in thousands) Three months ended $ 1,810 $ 2,196 Nine months ended $ 5,837 $ 7,088 Twelve months ended $ 7,998 $ 9,931
(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 IBM 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 or similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock is estimated based on the quoted market prices for the same or similar issues or on the rates offered to Northern Indiana for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. The carrying values and estimated fair values of Northern Indiana's financial instruments are as follows:
September 30, 1997 December 31, 1996 ---------------------- ---------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ========== ========== ========== ========== (Dollars in thousands) Cash and cash equivalents $ 11,993 $ 11,993 $ 8,279 $ 8,279 Investments $ 256 $ 256 $ 256 $ 256 Long-term debt (including current portion) $1,131,385 $1,124,985 $1,059,255 $1,026,743 Preferred stock $ 142,347 $ 127,749 $ 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 21% of electric revenue for the twelve months ended September 30, 1997 as compared to 2% and 22%, respectively, for the twelve months ended September 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 September 30, 1997 increased $64.7 million as compared to the twelve months ended September 30, 1996. Gas revenues increased $62.9 million and electric revenues increased $1.8 million as compared to the same period in 1996. The increase in gas revenues was largely attributable to increased gas costs per dekatherm (dth) and increased sales to wholesale customers, partially offset by decreased gas transition costs. The increase in electric revenues was mainly due to increased sales to residential customers, increased fuel cost per kilowatt- our (kwh), partially offset by decreased sales to industrial and wholesale customers. Total operating revenues for the nine months ended September 30, 1997 increased $13.2 million as compared to the nine months ended September 30, 1996. Gas revenues increased $13.5 million and electric revenues decreased $0.3 million as compared to the same period in 1996. The increase in gas revenues was mainly due to increased gas costs per dth, increased sales to wholesale customers and increased deliveries of gas transported for others, partially offset by decreased sales to residential and commercial customers and decreased gas transition costs. The decrease in electric revenues was mainly due to decreased sales to industrial and wholesale customers, partially offset by increased sales to residential customers and increased fuel cost per kwh. Total operating revenues for the three months ended September 30, 1997 increased $12.1 million as compared to the three months ended September 30, 1996. Gas revenues increased $9.7 million and electric revenues increased $2.4 million as compared to the same period in 1996. The increase in gas revenues was mainly due to increased gas costs per dth, increased sales to wholesale customers and increased deliveries of gas transported for others, partially offset by decreased gas transition costs. The increase in electric revenues was mainly due to increased sales to residential customers and increased fuel costs per kwh, partially offset by decreased sales to commercial, industrial and wholesale customers. The basic steel industry accounted for 36% of natural gas delivered (including volumes transported) and 34% of electric sales during the twelve months ended September 30, 1997. The components of the variations in gas and electric revenues are shown in the following table:
Variations from Prior Periods --------------------------------- September 30, 1997 Compared to September 30, 1996 Three Nine Twelve Months Months Months ========= ========= ========= (Dollars in thousands) Gas Revenue - Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ 9,288 $ 20,551 $ 64,755 Gas transition costs (1,874) (833) (5,503) Changes in sales levels 1,668 (8,188) 1,712 Gas transported 578 1,963 1,972 --------- --------- --------- Gas Revenue Change $ 9,660 $ 13,493 $ 62,936 --------- --------- --------- Electric Revenue - Pass through of net changes in fuel costs $ 7,075 $ 8,468 $ 8,769 Changes in sales levels (4,630) (8,801) (7,004) --------- --------- --------- Electric Revenue Change $ 2,445 $ (333) $ 1,765 --------- --------- --------- Total Revenue Change $ 12,105 $ 13,160 $ 64,701 ========= ========= =========
See Note 4 to Notes to Consolidated Financial Statements regarding FERC Order No. 636 transition costs. GAS COSTS - Gas costs increased $10.5, $18.7 and $65.8 million for the three-month, nine-month and twelve-month periods ended September 30, 1997, respectively. Gas costs increased for the three-month, nine-month and twelve-month periods due to increased gas costs per dth, partially offset by decreased gas transition costs. The average cost of purchased gas for the three-month, nine-month and twelve-month periods ended September 30, 1997, after adjustment for gas transition costs billed to transport customers, was $3.03, $3.03 and $3.16 per dth, respectively, as compared to $2.63, $2.83, and $2.69 per dth for the same periods in 1996. FUEL AND PURCHASED POWER - The cost of fuel for electric generation increased $2.7, $5.3 and $2.7 million for the three-month, nine-month and twelve-month periods ended September 30, 1997, respectively, compared to 1996 periods, mainly as a result of increased production of electricity. Power purchased decreased $2.2, $9.0 and $5.3 million for the three- month, nine-month and twelve-month periods ended September 30, 1997, respectively, as a result of decreased bulk power purchases. OPERATING MARGINS - Operating margins for the twelve months ended September 30, 1997 increased $1.5 million from the same period a year ago. The operating margin from gas deliveries decreased $2.8 million due to decreased sales to residential and commercial customers reflecting milder weather, partially offset by increased sales to wholesale customers. The operating margin from electric sales increased $4.3 million due to increased sales to residential customers, partially offset by decreased sales to industrial and wholesale customers. Operating margins for the nine-months ended September 30, 1997 decreased $1.8 million from the same period a year ago. Gas operating margin decreased $5.2 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 $3.4 million as a result of increased sales to residential customers, partially offset by decreased sales to industrial and wholesale customers. Operating margins for the three-months ended September 30, 1997 increased $1.1 million from the same period a year ago. Gas operating margin decreased $0.9 million due to decreased sales to residential customers, partially offset by increased sales to wholesale customers and increased deliveries of gas transported for others. Operating margin from electric sales increased $2.0 million due to increased sales to residential customers, which were partially offset by decreased sales to commercial, industrial and wholesale customers. OPERATING EXPENSES AND TAXES - Operation expenses decreased $9.3 million for the twelve-month period ended September 30, 1997 mainly reflecting decreased electric production pollution control facility costs of $5.2 million and decreased environmental cleanup costs of $4.4 million partially offset by increased employee related costs. Operation expenses decreased $4.4 million for the nine-month period ended September 30, 1997 mainly reflecting decreased electric production pollution control facility costs of $4.3 million and decreased environmental cleanup costs of $5.3 million partially offset by increased employee related costs. Operation expenses increased $0.3 million for the three-month period ended September 30, 1997. Maintenance expenses decreased $6.8 million for the twelve-month period ended September 30, 1997 mainly reflecting decreased maintenance activity at the electric production facilities of $5.7 million and decreased maintenance of $0.9 million on the gas transmission and distribution facilities. Maintenance expenses decreased $2.9 million for the nine-month period reflecting decreased maintenance on electric production facilities. Maintenance expenses decreased $0.9 million for the three-month period reflecting decreased maintenance on electric production facilities, partially offset by increased maintenance activity on transmission and distribution facilities. Depreciation and amortization expense increased $2.4, $7.9 and $8.5, million for the three-month, nine-month and twelve-month periods ended September 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 increased for the twelve-month period ended September 30, 1997 mainly as a result of increased pretax income and increased effective tax rate. Utility income taxes decreased for the nine-month period ended September 30, 1997 mainly as a result of decreased pretax income. Utility income taxes increased for the three-month period ended September 30, 1997 mainly as a result of increased effective tax rate. OTHER INCOME (DEDUCTIONS) - Other Income (Deductions) decreased for the three-month, nine-month, and twelve-month periods ended September 30, 1997 mainly as a result of the sale of Cresent Dunes Lakeshore property to the National Park Service during the third quarter of 1996. INTEREST CHARGES - Interest charges decreased for the nine-month period ended September 30, 1997 reflecting decreased long-term debt outstanding and short-term borrowings during the period. For the twelve-month period ended September 30, 1997 interest charges decreased reflecting decreased long-term debt outstanding during the period. Interest charges decreased for the three-month period ended September 30, 1997 reflecting decreased short-term borrowings, partially offset by increased long-term debt. 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 September 30, 1997 was $193.8 million compared to $192.6 million for the twelve-month period ended September 30, 1996. Net income for the nine months ended September 30, 1997 was $133.1 million compared to $136.5 million for the nine months ended September 30, 1996. Net income for the three months ended September 30, 1997 was $34.0 million compared to $38.2 million for the three months ended September 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 $19 million to cover probable corrective actions as of September 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 results of operations or financial position 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 issued final rules on July 18, 1997 revising the National Ambient Air Quality Standards for ozone and particulate matter. The revised standards begin a regulatory process that may lead to reductions in sulfur dioxide and nitrogen oxide emissions from coal-fired boilers (including Northern Indiana's generating stations) beyond reductions required in the Acid Rain provisions of the CAAA. Northern Indiana cannot predict the costs of complying with future control requirements to meet these new standards. Northern Indiana will continue to closely monitor developments in this area and anticipates the exact nature of the impact of the new standards on its operations will not be known for some time. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. 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. Three of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. Northern Indiana anticipates placing additional sites in the VRP after remedial measures have been selected. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered into an agreement covering cost sharing and management of investigation and remediation programs at five former manufactured-gas plant sites at which both companies or their predecessors were former operators or owners. One of these sites is the Lafayette site which Indiana Gas had previously notified Northern Indiana is being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of seven former manufactured-gas plants at which Northern Indiana had conducted or was planning investigation or remediation activities. In December 1996, Northern Indiana sent a written demand to Cinergy related to one of these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern Indiana has already incurred and to be incurred to implement the needed remedy at the Goshen site. In August 1997, Northern Indiana filed suit in Indiana state court against Cinergy seeking recovery of those costs. In 1994, Northern Indiana approached various companies that provided insurance coverage which Northern Indiana believes covers costs related to actions taken at former manufactured-gas plants. 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. Recently, researchers from the National Cancer Institute and the Childhood Cancer Group reported they found no evidence magnetic fields in homes increase the risk of childhood leukemia. This study follows an EMF report released late last year by the U.S. National Research Council of the National Academy of Sciences, which concluded, after examining more than 500 EMF studies spanning seventeen years, that among other things, there was insufficient evidence to consider EMF a threat to human health. Despite the report's findings, future research appropriations are continuing to be dedicated to explore this issue. 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 September 30, 1997, Northern Indiana had $77.5 million in commercial paper outstanding, having a weighted average interest of 5.59%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999. As of September 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 September 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 September 30, 1997, $13.6 million of borrowings were outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At September 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 September 30, 1997, $139.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. 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 September 30, 1997, approximately 74% 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. New contracts were ratified in October 1997. The new contracts have a term of two years, from June 1, 1997 thru May 31, 1999. YEAR 2000 COSTS - Northern Indiana has completed an assessment of its information systems to determine what modifications, if any, are necessary for proper functioning of these systems in the year 2000. Costs related to maintenance or modification of these systems will be expensed as incurred. Northern Indiana does not anticipate the related costs to have a material impact on its results of operations. 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 sales service. Northern Indiana believes it has taken appropriate steps to ensure the continued acquisition of adequate gas supplies at reasonable prices. The mix of gas revenues from retail sales, interruptible retail sales, firm transportation service and interruptible transportation services has changed significantly over the past several years. The deregulation of the gas industry, since the mid-1980's, allows large industrial and commercial customers to purchase their gas supplies directly from producers and use Northern Indiana's facilities to transport the gas. Transportation customers pay Northern Indiana only for transporting their gas from the pipeline to the customers' premises. 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 Indiana 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 cost mechanism and a price protection program. The Commission held a hearing on the ARP on June 12, 1997. On October 9, 1997, the Commission issued an order approving, in all respects, the modified ARP which became effective November 1, 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 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 November 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 November 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 September 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 PER-BOOK 3,019,780 8,729 266,200 86,880 212,627 3,594,216 859,488 12,522 139,853 1,011,863 59,396 81,123 327,860 13,625 767,025 77,500 36,500 1,828 0 0 1,217,496 3,594,216 360,727 19,282 285,942 305,224 55,503 (1,041) 54,462 20,463 33,999 2,123 31,876 44,775 0 102,289 0 0
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