-----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, VCl8ijHlokgeNQZBeEvnOkPqEh5UhGFFX0paPEs67NYO+MUqX7j64ss1NabJEdJN 3kGc5Pvw2zHhY2J3PE83OQ== 0000072843-99-000002.txt : 19990517 0000072843-99-000002.hdr.sgml : 19990517 ACCESSION NUMBER: 0000072843-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622934 BUSINESS ADDRESS: STREET 1: 5265 HOHMAN AVE CITY: HAMMOND STATE: IN ZIP: 46320-1775 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ________________ Commission file number 1-4125 NORTHERN INDIANA PUBLIC SERVICE COMPANY (Exact name of registrant as specified in its charter) Indiana 35-0552990 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5265 Hohman Avenue, Hammond, Indiana 46320-1775 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 853-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of April 30, 1999, 73,282,258 common shares were outstanding. NORTHERN INDIANA PUBLIC SERVICE COMPANY PART 1. FINANCIAL INFORMATION Item I. FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of NORTHERN INDIANA PUBLIC SERVICE COMPANY: We have audited the accompanying consolidated balance sheets of Northern Indiana Public Service Company (an Indiana corporation and a wholly owned subsidiary of NiSource Inc.) and subsidiaries as of March 31, 1999, and December 31, 1998, and the related consolidated statements of income, retained earnings and cash flows for the three and twelve month periods ended March 31, 1999 and 1998. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northern Indiana Public Service Company and subsidiaries as of March 31, 1999, and December 31, 1998, and the results of their operations and their cash flows for the three and twelve month periods ended March 31, 1999 and 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois April 28, 1999
CONSOLIDATED BALANCE SHEETS March 31, December 31, ASSETS 1999 1998 ============ ============ (Dollars in thousands) UTILITY PLANT, AT ORIGINAL COST (INCLUDING CONSTRUCTION WORK IN PROGRESS OF $156,433 AND $149,426 RESPECTIVELY) (NOTE 2): Electric $ 4,171,978 $ 4,154,060 Gas 1,280,268 1,272,483 Common 361,077 364,822 ------------ ------------ 5,813,323 5,791,365 Less - Accumulated depreciation and amortization 2,849,548 2,804,720 ------------ ------------ Total Utility Plant 2,963,775 2,986,645 ------------ ------------ OTHER PROPERTY AND INVESTMENTS 519 519 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents 23,330 19,541 Accounts receivable, less reserve of $7,395 and $4,458, respectively (Note 2) 131,120 104,445 Gas cost adjustment clause (Note 2) 0 44,044 Materials and supplies, at average cost 53,854 51,554 Electric production fuel, at average cost 25,179 32,402 Natural gas in storage, at last-in, first-out cost (Note 2) 19,639 50,859 Prepayments and other 36,624 31,056 ------------ ------------ Total Current Assets 289,746 333,901 ------------ ------------ OTHER ASSETS: Regulatory assets (Note 2) 202,964 203,722 Prepayments and other (Note 5) 124,771 127,162 ------------ ------------ Total Other Assets 327,735 330,884 ------------ ------------ $ 3,581,775 $ 3,651,949 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS March 31, December 31, CAPITALIZATION AND LIABILITIES 1999 1998 ============ ============ (Dollars in thousands) CAPITALIZATION: Common stock - without par value - authorized 75,000,000 shares, issued and outstanding 73,282,258 shares (Note 11) $ 859,488 $ 859,488 Additional paid-in capital 12,524 12,524 Retained earnings (see accompanying statement) (Note 10) 158,465 146,138 ------------ ------------ Common shareholder's equity 1,030,477 1,018,150 Cumulative preferred stocks, (excluding amounts due within one year) (Note 7) Series without mandatory redemption provisions (Note 8) 81,116 81,116 Series with mandatory redemption provisions (Note 9) 56,435 56,435 Long-term debt excluding amounts due within one year (Note 13) 1,072,072 1,077,959 ------------ ------------ Total Capitalization 2,240,100 2,233,660 ------------ ------------ CURRENT LIABILITIES - Current portion of long-term debt (Note 14) 8,000 2,000 Short-term borrowings (Note 15) 18,000 126,100 Accounts payable 103,824 142,414 Dividends declared on common and preferred stocks 56,103 63,101 Customer deposits 20,911 20,178 Taxes accrued 153,396 88,401 Interest accrued 17,010 9,118 Gas cost adjustment clause 5,196 0 Fuel adjustment clause 4,023 6,279 Accrued employment costs 35,042 44,223 Other accruals 33,609 28,546 ------------ ------------ Total Current Liabilities 455,114 530,360 ------------ ------------ OTHER: Deferred income taxes (Note 4) 604,497 608,935 Deferred investment tax credits, being amortized over life of related property (Note 4) 90,911 92,693 Deferred credits 50,082 48,084 Accrued liability for postretirement benefits (Note 6) 129,909 127,115 Other noncurrent liabilities 11,162 11,102 ------------ ------------ Total Other Liabilities 886,561 887,929 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 3, 16 and 17) $ 3,581,775 $ 3,651,949 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENT OF INCOME Three Months Twelve Months Ended March 31, Ended March 31, ---------------------- ---------------------- 1999 1998 1999 1998 ========== ========== ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2 and 20) Gas $ 246,703 $ 218,730 $ 600,458 $ 648,355 Electric 259,883 240,186 1,095,815 1,011,445 ---------- ---------- ---------- ---------- 506,586 458,916 1,696,273 1,659,800 ---------- ---------- ---------- ---------- Cost of Energy: (Note 2) Gas costs 137,966 123,170 335,829 378,871 Fuel for electric generation 58,298 55,594 253,353 235,734 Power purchased 16,782 3,647 55,125 31,961 ---------- ---------- ---------- ---------- 213,046 182,411 644,307 646,566 ---------- ---------- ---------- ---------- Operating Margin 293,540 276,505 1,051,966 1,013,234 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 67,655 62,103 251,472 261,589 Maintenance (Note 2) 18,253 16,694 66,861 68,209 Depreciation and amortization (Note 2) 58,138 56,520 230,165 224,293 Taxes (except income) 20,719 19,137 73,809 70,732 ---------- ---------- ---------- ---------- 164,765 154,454 622,307 624,823 ---------- ---------- ---------- ---------- Operating Income Before Utility Income Taxes 128,775 122,051 429,659 388,411 ---------- ---------- ---------- ---------- Utility Income Taxes (Note 4) 39,700 35,917 124,569 109,009 ---------- ---------- ---------- ---------- Operating Income 89,075 86,134 305,090 279,402 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) (1,071) (608) (4,052) (3,858) ---------- ---------- ---------- ---------- Interest: Interest on long-term debt 16,720 17,850 68,542 71,060 Other interest 857 849 4,532 5,218 Amortization of premium, reacquisition premium, discount and expense on debt, net 1,035 1,053 4,166 4,204 ---------- ---------- ---------- ---------- 18,612 19,752 77,240 80,482 ---------- ---------- ---------- ---------- Net Income 69,392 65,774 223,798 195,062 Dividend requirements on preferred shares 2,065 2,116 8,284 8,488 ---------- ---------- ---------- ---------- Balance available for common shares $ 67,327 $ 63,658 $ 215,514 $ 186,574 ========== ========== ========== ========== Dividends declared $ 55,000 $ 46,000 $ 221,000 $ 189,775 ========== ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Three Months Twelve Months Ended March 31, Ended March 31, ------------------- ------------------- 1999 1998 1999 1998 ========= ========= ========= ========= (Dollars in thousands) BALANCE AT BEGINNING OF PERIOD $ 146,138 $ 146,293 $ 163,951 $ 167,152 ADD: Net income 69,392 65,774 223,798 195,062 --------- --------- --------- --------- 215,530 212,067 387,749 362,214 --------- --------- --------- --------- LESS: Dividends Cumulative Preferred stocks - 4-1/4% series 222 222 889 889 4-1/2% series 91 91 360 360 4.22% series 113 113 448 448 4.88% series 122 122 488 488 7.44% series 77 77 312 312 7.50% series 66 66 261 261 8.85% series 138 166 543 654 7-3/4% series 70 81 308 352 8.35% series 113 125 460 509 6.50% series 698 698 2,795 2,795 Adjustable Rate, Series A 355 355 1,420 1,420 Common shares 55,000 46,000 221,000 189,775 --------- --------- --------- --------- 57,065 48,116 229,284 198,263 --------- --------- --------- --------- BALANCE AT END OF PERIOD $ 158,465 $ 163,951 $ 158,465 $ 163,951 ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, ------------------------ 1999 1998 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 69,392 $ 65,774 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 58,138 56,520 Deferred federal and state income taxes, net (26,784) (26,666) Deferred investment tax credits, net (1,781) (1,782) Advance contract payment 475 475 Change in certain assets and liabilities - Accounts receivable, net (26,675) (3,722) Electric production fuel 7,223 (2,404) Materials and supplies (2,300) (1,314) Natural gas in storage 31,220 27,563 Accounts payable (29,839) (16,531) Taxes accrued 84,387 78,658 Fuel adjustment clause (2,256) 1,568 Gas cost adjustment clause 49,240 50,064 Accrued employment costs (9,181) (13,824) Other accruals 5,063 (3,163) Other, net 11,917 4,912 ---------- ---------- Net cash provided by operating activities 218,239 216,128 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (33,473) (33,310) Other, net (8,927) (9,350) ---------- ---------- Net cash used in investing activities (42,400) (42,660) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Net change in short-term debt (108,100) (100,500) Cash dividends paid on common shares (62,000) (55,000) Cash dividends paid on preferred shares (2,063) (2,114) Other, net 113 121 ---------- ---------- Net cash used in financing activities (172,050) (157,493) ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,789 15,975 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,541 9,800 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,330 $ 25,775 ========== ========== Twelve Months Ended March 31, ------------------------ 1999 1998 ========== ========== (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 223,798 $ 195,062 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 230,165 224,293 Deferred federal and state operating income taxes, net (32,692) (27,065) Deferred investment tax credits, net (7,159) (7,193) Advance contract payment 1,900 1,900 Change in certain assets and liabilities - Accounts receivable, net (32,647) 12,078 Electric production fuel (3,938) 2,891 Materials and supplies 1,126 1,760 Natural gas in storage (1,322) (3,493) Accounts payable 2,939 (30,186) Taxes accrued 29,848 36,842 Fuel adjustment clause 5,134 11,819 Gas cost adjustment clause 41,652 48,388 Accrued employment costs (2,229) 709 Other accruals 2,721 (21,215) Other, net (9,875) 9,620 ---------- ---------- Net cash provided by operating activities 449,421 456,210 ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Construction expenditures (176,786) (162,120) Other, net (1,272) (12,077) ---------- ---------- Net cash used in investing activities (178,058) (174,197) ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 500 139,000 Net change in short-term debt (500) (151,500) Retirement of long-term debt (51,509) (67,247) Retirement of preferred shares (2,413) (2,407) Cash dividends paid on common shares (212,000) (187,775) Cash dividends paid on preferred shares (8,341) (8,505) Other, net 455 (497) ---------- ---------- Net cash used in financing activities (273,808) (278,931) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,445) 3,082 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,775 22,693 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,330 $ 25,775 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) HOLDING COMPANY STRUCTURE: NiSource Inc. formerly NIPSCO Industries, Inc. (NiSource) was incorporated in Indiana on September 22, 1987 and became the parent of Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988. NIPSCO Industries, Inc. changed it name to NiSource Inc. on April 14, 1999 to reflect its new direction as a multi-state supplier of energy and water resources and related services. Northern Indiana is a public utility operating company supplying electricity and gas to the public in the northern third of Indiana. Northern Indiana is subject to regulation with respect to rates, accounting and certain other matters which are governed by the Indiana Utility Regulatory Commission (IURC) and the Federal Energy Regulatory Commission (FERC), collectively called the "Commissions." (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION. The Consolidated Financial Statements include the accounts of Northern Indiana and subsidiaries, after elimination of all significant intercompany items. Certain reclassifications were made to conform the prior years' financial statements to the current presentation. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OPERATING REVENUES. Revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on a straight-line method over the remaining service lives of the electric, gas and common properties. The approximated weighted average remaining lives for major components of electric and gas plant are as follows: Electric: -------- Electric generation plant 24 years Transmission plant 26 years Distribution plant 25 years Other electric plant 24 years Gas: ---- Gas storage plant 18 years Transmission plant 34 years Distribution plant 27 years Other gas plant 24 years The depreciation provision for electric utility plant, as a percentage of the original cost, was 3.7% for the three-month and twelve-month periods ended March 31, 1999 and was 3.6% for the three-month and twelve-month periods ended March 31, 1998. The depreciation provision for gas utility plant, as a percentage of the original cost, was 5.4% for the three-month and twelve-month periods ended March 31, 1999 and March 31, 1998. Northern Indiana follows the practice of charging maintenance and repairs, including the cost of removal of minor items of property, to expense as incurred. When property that represents a retired unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. ACCOUNTING FOR COMPUTER SOFTWARE COSTS. External and incremental internal costs associated with computer software developed for internal use are capitalized. Capitalization of such costs commences upon the completion of the preliminary stage of the project. Once the installed software is ready for its intended use, such capitalized costs are amortized on a straight-line basis over a period of five to ten years which the FERC prescribes as reasonable useful life estimates for capitalized software. COAL RESERVES. The costs of reserves under a long-term mining contract to mine coal reserves through the year 2001 are being recovered through the rate-making process as such coal reserves are used to produce electricity. ACCOUNTS RECEIVABLE. At March 31, 1999, $100 million of accounts receivable have been sold under a sales agreement which expires on May 31, 2002. The March 31, 1999 and December 31, 1998 accounts receivable balances include approximately $12.0 million and $11.6 million, respectively, due from associated companies. COMPREHENSIVE INCOME. Northern Indiana adopted SFAS No. 130, "Reporting Comprehensive Income" effective January 1, 1998. This statement established standards for reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. The adoption of this statement did not impact Northern Indiana's consolidated financial statements for the periods presented. STATEMENTS OF CASH FLOWS. Temporary cash investments with an original maturity of three months or less are considered to be cash equivalents. Cash paid during the periods reported for income taxes and interest was as follows:
Three Months Twelve Months Ended March 31, Ended March 31, ------------------ ------------------ 1999 1998 1999 1998 ======== ======== ======== ======== (Dollars in thousands) Income taxes $ 46 $ 20 $135,171 $104,829 Interest, net of amounts capitalized $ 9,320 $ 7,534 $ 73,431 $ 75,811
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 cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the IURC 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. Under-recovery or over-recovery is recorded 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 IURC and remains in effect for a three-month period. GAS COST ADJUSTMENT CLAUSE. All metered gas sales rates contain an adjustment factor, which reflects the increases and decreases in the cost of purchased gas, contracted gas storage and storage transportation. The gas cost adjustment factor is subject to a quarterly hearing by the IURC 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. Any under-recovery or over-recovery is recorded as a current asset or current liability until such time it is billed or refunded to its customers. Northern Indiana's gas cost adjustment factor includes a gas cost incentive mechanism (GCIM) which allows for the sharing of any cost savings or cost increases with customers based upon a comparison of actual gas supply portfolio cost to a market-based benchmark price. NATURAL GAS IN STORAGE. Natural gas in storage is valued using the last-in, first-out (LIFO) inventory methodology. Based on the average cost of gas purchased in March 1999 and December 1998, the estimated replacement cost of gas in storage (current and non-current) at March 31, 1999 and December 31, 1998 exceeded the stated LIFO cost by $21.5 million and $33.7 million, respectively. AFFILIATED COMPANY TRANSACTIONS. Northern Indiana receives executive, financial, gas supply, sales and marketing, and administrative and general services from an affiliate, NiSource Management Services Company, formerly NIPSCO Industries Management Services Company (NIMSC), a wholly-owned subsidiary of NiSource. The costs of these services are charged to Northern Indiana based upon payroll costs and expenses incurred by NIMSC employees for the benefit of Northern Indiana. These costs, which totaled $4.8 million and $19.2 million for the three-month and twelve-month periods ended March 31, 1999, respectively, and totaled $7.0 million and $27.2 million for the three-month and twelve-month periods ended March 31, 1998, respectively, consist primarily of employee compensation and benefits. Northern Indiana purchased natural gas and transportation services from affiliated companies in the amounts of $3.6 million and $22.5 million represented 3.6% and 7.2% of Northern Indiana's total gas costs for the three-month and twelve-month periods ended March 31, 1999, respectively. Northern Indiana purchased natural gas and transportation services from affiliated companies in the amounts of $1.9 million and $9.1 million, which represented 2.2% and 2.0% of Northern Indiana's total gas costs for the three-month and twelve-month periods ended March 31, 1998, respectively. Northern Indiana subleases a portion of its office facilities to affiliated companies for a monthly fee, which includes operating expenses, based on space utilization. DERIVATIVES. A variety of commodity-based derivative financial instruments are utilized to reduce (hedge) the price risk inherent in natural gas and electric operations. The gains and losses on these derivative financial instruments are deferred as assets or liabilities and are recognized in earnings concurrent with the disposition of the underlying physical commodity. In certain circumstances, a derivative financial instrument will serve to hedge the acquisition cost of natural gas injected into storage. In this situation, the gain or loss on the derivative financial instrument is deferred as part of the cost basis of gas in storage and recognized upon the ultimate disposition of the gas. If a derivative financial instrument contract is terminated early because it is probable that a transaction or forecasted transaction will not occur, any gain or loss as of such date is immediately recognized in earnings. If a derivative financial instrument is terminated for other economic reasons, any gain or loss of the termination date is deferred and recorded when the associated transaction or forecasted transaction affects earnings. ACCOUNTING FOR ENERGY TRADING ACTIVITIES. Energy trading contracts are accounted for in accordance with the Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Effective January 1, 1999, such contracts are recorded at fair value on the balance sheet, with the changes in their fair values included in earnings. This cumulative change in accounting effective January 1, 1999 was insignificant. Such contracts are recorded at their fair value with changes in their value included in earnings (other income and deductions). IMPACT OF ACCOUNTING STANDARDS. The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that a company recognize those items as assets or liabilities in the balance sheet and measure them at fair value. This statement generally provides for matching of the timing of gain or loss recognition of derivative instruments designated as a hedge with the recognition of changes in the fair value of the hedged asset or liability through earnings. The statement also provides that the effective portion of a hedging instrument's gain or loss on a forecasted transaction be initially reported in other comprehensive income and subsequently reclassified into earnings when the hedged forecasted transaction affects earnings. Northern Indiana expects to adopt this statement on January 1, 2000 and is currently assessing the impact of adoption on its financial position and results of operations. REGULATORY ASSETS. Northern Indiana's operations are subject to the regulation of the Commissions. Accordingly, Northern Indiana's accounting policies are subject to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Northern Indiana monitors changes in market and regulatory conditions and the resulting impact of such changes in order to continue to apply the provisions of SFAS No. 71 to some or all of its operations. As of March 31, 1999, and December 31, 1998, the regulatory assets identified below represent probable future revenues to Northern Indiana as these costs are recovered through the rate-making process. If a portion of Northern Indiana's operations becomes no longer subject to the provisions of SFAS No. 71, a write-off of certain regulatory assets might be required, unless some form of transition cost recovery is established by the appropriate regulatory body which would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. Regulatory assets were comprised of the following items:
March 31, December 31, 1999 1998 ============= ============= (Dollars in thousands) Unamortized reacquisition premium on debt (Note 13) $ 42,097 $ 42,962 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 61,274 62,329 Bailly scrubber carrying charges and deferred depreciation (See below) 8,711 8,945 Deferral of SFAS No. 106 expense not recovered (Note 6) 76,968 78,367 FERC Order No. 636 transition costs 18,864 22,093 Regulatory income tax asset, net (Note 4) 24,430 21,635 ------------- ------------- 232,344 236,331 Less: Current portion of regulatory assets 29,380 32,609 ------------- ------------- $ 202,964 $ 203,722 ============= =============
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana carrying charges and deferred depreciation were capitalized in accordance with orders of the IURC 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 IURC. 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. AFUDC was calculated using a pre-tax rate of 6.0% in 1999, 5.75% in 1998 and 5.5% in 1997. INCOME TAXES. The liability method of accounting is used 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 book and tax bases of assets and liabilities. (3) ENVIRONMENTAL MATTERS: GENERAL. The operations of Northern Indiana are subject to extensive and evolving federal, state and local environmental laws and regulations intended to protect the public health and the environment. Such environmental laws and regulations affect Northern Indiana's operations as they relate to impacts on air, water and land. SUPERFUND. Because Northern Indiana is a "potentially responsible party" (PRP), under Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), at several waste disposal sites as well as at former manufactured-gas plant sites which it, or its corporate predecessors, owned and operated, it may be required to share in the costs of clean up of such sites. A program was instituted to investigate former manufactured-gas plant sites where it is the current or former owner, which investigation has identified twenty-four of these sites. Initial sampling has been conducted at seventeen sites. Follow-up investigations have been conducted at twelve sites and remedial measures have been selected at five sites. Northern Indiana intends to continue to evaluate its facilities and properties with respect to environmental laws and regulations and take any required corrective action. In an effort to recover a portion of the remediation costs to be incurred at the manufactured gas plants, various companies that provided insurance coverage which Northern Indiana believed covered costs related to actions taken and to be taken at former manufactured-gas plant sites were approached. Northern Indiana has filed claims in Indiana state court against various insurance companies, seeking coverage for costs associated with several manufactured-gas plant sites and damages for alleged misconduct by some of the insurance companies. Cash settlements have been received from several insurance companies. Additionally, agreements have been reached with other utilities relating to cost sharing and management of the investigation and remediation of several former manufactured-gas plant sites at which Northern Indiana and such utilities or their predecessors were operators or owners. As of March 31, 1999, a reserve of approximately $20 million has been recorded to cover probable corrective actions. The ultimate liability in connection with those sites will depend upon many factors, including the volume of material contributed to the site, the number of other PRP's and their financial viability, and the extent of corrective actions required. Based upon investigations and management's understanding of current environmental laws and regulations, Northern Indiana believes that any corrective actions required, after consideration of insurance coverages and contributions from other PRP's, will not have a significant impact on its financial position or results of operations. CLEAN AIR ACT. The Clean Air Act Amendments of 1990 (CAAA) impose limits to control acid rain on the emission of sulfur dioxide and nitrogen oxides (NOx) which become fully effective in 2000. All of Northern Indiana's facilities are already in compliance with sulfur dioxide limits. Northern Indiana has already taken most of the steps necessary to meet the NOx limits. The CAAA also contain other provisions that could lead to limitations on emissions of hazardous air pollutants and other air pollutants (including NOx as discussed below), which may require significant capital expenditures for control of these emissions. Until specific rules have been issued that affect Northern Indiana's facilities, what these requirements will be or the costs of complying with these potential requirements cannot be predicted. NITROGEN OXIDES. During 1998, the Environmental Protection Agency (EPA) issued a final rule, the NOx State Implementation Plan (SIP) call, requiring certain states, including Indiana, to reduce NOx levels from industrial and utility boilers. The EPA stated that the intent of the rule is to lower regional transport of ozone impacting other states' ability to attain the federal ozone standard. According to the rule, the State of Indiana, as well as some other states has until September 1999 to issue regulations implementing the control program. The State of Indiana, as well as some other states, filed a legal challenge in December 1998 to the EPA NOx SIP call rule. Lawsuits have also been filed against the rule by various groups, including industry, labor, cities and towns and chambers of commerce. Northern Indiana will participate in the legal challenge as a member of a utility industry group. Any resulting NOx emissions limitations could be more restrictive than those imposed on electric utilities under the Acid Rain NOx reduction program described above. Northern Indiana is evaluating the EPA's final rule and any potential requirements that could result from the final rule as implemented by the State of Indiana. Northern Indiana believes that the costs relating to compliance with the new standards may be substantial, but such costs depend upon the outcome of the current litigation and the ultimate control program agreed to by the targeted states and the EPA. Northern Indiana will continue to closely monitor developments in this area. The EPA issued final rules revising the National Ambient Air Quality Standards for ozone and particulate matter in July 1997. The revised standards could require additional reductions in sulfur dioxide, particulate matter and NOx emissions from coal-fired boilers (including Northern Indiana's generating stations) beyond measures discussed above. Final implementation methods will be set by the EPA as well as state regulatory authorities. Northern Indiana believes that the costs relating to compliance with any new limits may be substantial but are dependent upon the ultimate control program agreed to by the targeted states and the EPA. Northern Indiana will continue to closely monitor developments in this area and anticipates the exact nature of the impact of the new limits on its operations will not be known for some time. CARBON DIOXIDE. Initiatives are being discussed both in the United States and worldwide to reduce so-called "greenhouse gases" such as carbon dioxide and other by-products of burning fossil fuels. Reduction of such emissions could result in significant capital outlays or operating expenses to Northern Indiana. CLEAN WATER ACT AND RELATED MATTERS. Northern Indiana's wastewater and water operations are subject to pollution control and water quality control regulations, including those issued by the EPA and the State of Indiana. Under the Federal Clean Water Act and Indiana's regulations, Northern Indiana must obtain National Discharge Elimination System (NPDES) permits for water discharges from various water discharges from various facilities, including electric generating and water treatment stations. These facilities either have permits for their water discharge or they have applied for a permit renewal of any expiring permits. These permits continue in effect pending review of the current applications. (4) INCOME TAXES: Deferred income taxes are recognized as costs in the rate-making process by the Commissions having jurisdiction over 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 Consolidated 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. 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 NiSource and currently pays to NiSource its separate return tax liability as defined in the Tax Sharing Agreement between NiSource and its subsidiaries. The components of the net deferred income tax liability at March 31, 1999 and December 31, 1998 were as follows:
March 31, December 31, 1999 1998 ============= ============= (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 734,275 $ 735,589 AFUDC-equity 32,475 33,029 Adjustment clauses 0 14,322 Other regulatory assets 29,190 29,721 Prepaid pension and other benefits 33,644 34,170 Reacquisition premium on debt 15,965 16,293 Deferred tax assets - Deferred investment tax credits (34,478) (35,154) Removal costs (161,400) (157,728) Adjustment clauses (3,496) 0 Other postretirement/postemployment benefits (49,268) (48,208) Other, net (22,385) (23,682) ------------- ------------- 574,522 598,352 Less: Deferred income taxes related to current assets and liabilities (29,975) (10,583) ------------- ------------- Deferred income taxes - noncurrent $ 604,497 $ 608,935 ============= =============
Federal and state income taxes as set forth in the Consolidated Statement of Income were comprised of the following:
Three Months Twelve Months Ended March 31, Ended March 31, -------------------- -------------------- 1999 1998 1999 1998 ========= ========= ========= ========= (Dollars in thousands) Current income taxes - Federal $ 59,582 $ 56,129 $ 143,817 $ 124,286 State 8,683 8,236 20,603 18,981 --------- --------- --------- --------- 68,265 64,365 164,420 143,267 --------- --------- --------- --------- Deferred income taxes, net - Federal (24,746) (24,648) (30,388) (25,195) State (2,038) (2,018) (2,304) (1,870) --------- --------- --------- --------- (26,784) (26,666) (32,692) (27,065) --------- --------- --------- --------- Deferred investment tax credits, net (1,781) (1,782) (7,159) (7,193) --------- --------- --------- --------- Total utility operating income taxes 39,700 35,917 124,569 109,009 Income tax applicable to non- operating activities and income of subsidiaries (644) (405) (2,176) (3,437) --------- --------- --------- --------- Total income taxes $ 39,056 $ 35,512 $ 122,393 $ 105,572 ========= ========= ========= =========
A reconciliation of total income tax expense to an amount computed by applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Twelve Months Ended March 31, Ended March 31, -------------------- -------------------- 1999 1998 1999 1998 ========= ========= ========= ========= (Dollars in thousands) Net income $ 69,392 $ 65,774 $ 223,798 $ 195,062 Add-Income taxes 39,056 35,512 122,393 105,572 --------- --------- --------- --------- Net income before income taxes $ 108,448 $ 101,286 $ 346,191 $ 300,634 ========= ========= ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 37,957 $ 35,450 $ 121,167 $ 105,222 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 969 998 3,963 4,026 Amortization of deferred investment tax credits (1,781) (1,782) (7,159) (7,193) State income taxes, net of federal income tax benefit 3,606 3,335 11,088 10,468 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (721) (1,271) (3,834) (3,816) Other, net (974) (1,218) (2,832) (3,135) --------- --------- --------- --------- Total income taxes $ 39,056 $ 35,512 $ 122,393 $ 105,572 ========= ========= ========= =========
(5) PENSION PLANS: NiSource has a noncontributory, defined benefit retirement plan covering substantially all employees of Northern Indiana. Benefits under the plan reflect the employees' compensation, years of service and age at retirement. The change in the benefit obligation for 1998 and 1997 was as follows:
1998 1997 ========= ========= (Dollars in thousands) Benefit obligation at beginning $ 843,049 $ 732,870 of year (January 1,) Service cost 15,347 13,325 Interest cost 58,336 55,920 Plan amendments 14,655 25,096 Actuarial loss 37,248 67,975 Benefits paid (54,362) (52,137) --------- --------- Benefit obligation at end of the year (December 31,) $ 914,273 $ 843,049 ========= =========
The change in the fair value of the plan's assets for years 1998 and 1997 was as follows:
1998 1997 ========= ========= (Dollars in thousands) Fair value of plan assets at $ 896,950 $ 782,162 beginning of year January 1,) Actual return on plan's assets 82,547 122,537 Employer contributions 33,300 44,388 Benefits paid (54,362) (52,137) --------- --------- Plan assets at fair value at end of the year (December 31,) $ 958,435 $ 896,950 ========= =========
Plan assets are invested primarily in common stocks, bonds and notes. The plan's funded status as of 1998 and 1997 is as follows:
1998 1997 ========= ========= (Dollars in thousands) Plan assets in excess of $ 44,162 $ 53,901 benefit obligation Unrecognized net actuarial loss (16,162) (51,191) Unrecognized prior service cost 55,761 45,502 Unrecognized transition amount being recognized over seventeen years 27,442 32,930 --------- --------- Prepaid pension costs $ 111,203 $ 81,142 ========= =========
The benefit obligation is the present value of future pension benefit payments and is based on a plan benefit formula which considers expected future salary increases. A discount rate of 7.00% and rate of increase in compensation levels of 4.5% were used to determine the benefit obligation at December 31, 1998 and December 31, 1997, respectively. Northern Indiana prepaid pension costs were $114.3 million at March 31, 1999, and are reported under the caption "Prepayments and Other" in the Consolidated Balance Sheet. The following items are the components of provisions for pensions for the three-month and twelve-month periods ended March 31, 1999 and March 31, 1998:
Three Months Twelve Months Ended Ended March 31, March 31, ------------------ ------------------ 1999 1998 1999 1998 ======== ======== ======== ======== (Dollars in thousands) Service costs $ 4,583 $ 5,996 $ 13,934 $ 14,855 Interest costs 15,644 21,073 52,908 60,668 Expected return on plan assets (21,109) (27,970) (73,468) (78,144) Amortization of transition obligation 1,372 1,902 4,958 5,786 Amortization of prior service costs 1,385 1,525 4,257 3,942 -------- -------- -------- -------- $ 1,875 $ 2,526 $ 2,589 $ 7,107 ======== ======== ======== ========
Assumptions used in the valuation and determination of 1999 and 1998 pension expense were as follows:
1999 1998 ===== ===== Discount rate 7.00% 7.00% Rate of increase in compensation levels 4.50% 4.50% Expected long-term rate of return on assets 9.00% 9.00%
(6) POSTRETIREMENT BENEFITS: Certain health care and life insurance benefits for retired employees are provided. Substantially all 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. Current rates include postretirement benefit costs on an accrual basis, including amortization of the regulatory assets that arose prior to inclusion of these costs in rates. The following table sets forth the change in the plan's accumulated postretirement benefit obligation (APBO) as of December 31, 1998 and 1997:
1998 1997 ========= ========= (Dollars in thousands) Accumulated postretirement $ 195,003 $ 194,937 benefit obligation at beginning of year (January 1,) Service cost 3,314 3,068 Interest cost 13,685 14,523 Plan amendments 0 4,015 Actuarial (gain) loss 6,260 (12,534) Benefits paid (11,183) (9,006) --------- --------- Accumulated postretirement benefit obligation at end of the year (December 31,) $ 207,079 $ 195,003 ========= =========
The change in the fair value of the plan's assets for the years 1998 and 1997 was as follows:
1998 1997 ========= ========= (Dollars in thousands) Fair value of plan assets at $ 2,400 $ 0 beginning of year (January 1,) Actual return on plan assets 1,103 0 Employer contributions 9,301 11,406 Participant contributions 1,282 0 Benefits paid (11,183) (9,006) --------- --------- Plan assets at fair value at end of the year (December 31,) $ 2,903 $ 2,400 ========= =========
Following is the funded status for postretirement benefits as of December 31, 1998 and December 31, 1997:
1998 1997 ========= ========= (Dollars in thousands) Funded status $(204,176) $(192,603) Unrecognized actuarial gain (90,700) (99,262) Unrecognized prior service cost 3,458 3,737 Unrecognized transition amount being recognized over twenty years 150,466 161,214 --------- --------- Accrued liability for postretirement benefits $(140,952) $(126,914) ========= =========
A discount rate of 7%, a pre-Medicare medical trend rate of 7% declining to a long-term rate of 5%; a discount rate of 7%, and a pre-Medicare medical trend rate of 8% declining to a long-term rate of 5%, were used to determine the APBO at December 31, 1998, and December 31, 1997, respectively. The accrued liability for postretirement benefits was $138.9 million at March 31, 1999. Net periodic postretirement benefits costs, before consideration of the rate-making discussed above, for the three-month and twelve-month periods ended March 31, 1999 and March 31, 1998 include the following components:
Three Months Twelve Months Ended Ended March 31, March 31, ---------------- ---------------- 1999 1998 1999 1998 ======= ======= ======= ======= (Dollars in thousands) Service costs $ 477 $ 737 $ 3,054 $ 2,888 Interest costs 3,850 3,650 13,885 13,797 Expected return on plan assets (50) (50) (216) (50) Amortization of transition obligation over twenty years 2,675 2,675 10,748 10,720 Amortization of prior service cost 75 75 279 354 Amortization of actuarial (gain) (1,150) (1,375) (5,561) (6,160) ------- ------- ------- ------- $ 5,877 $ 5,712 $22,189 $21,549 ======= ======= ======= =======
Assumptions used in the determination of 1999 and 1998 net periodic postretirement benefit costs were as follows:
1999 1998 ===== ===== Discount rate 7.00% 7.00% Rate of increase in compensation levels 4.50% 4.50% Assumed annual rate of increase in health care benefits 7.00% 8.00% Assumed ultimate trend rate 5.00% 5.00%
The effect of a 1% increase in the assumed health care cost trend rates for each future year would increase the APBO at January 1, 1998 by approximately $25.8 million, and increase the aggregate of the service and interest cost components of plan costs by approximately $0.6 million for the three-month period ended March 31,1999. The effect of a 1% decrease in the assumed health care cost trend rates for each future year would decrease the APBO at January 1, 1999 by approximately $20.0 million, and decrease the aggregate of the service and interest cost components of plan costs by approximately $0.5 million for the three-month period ended March 31, 1999. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates, or plan changes. (7) 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 8 sets forth the preferred stocks which are redeemable solely at the option of Northern Indiana and Note 9 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 a 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. (8) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF NORTHERN INDIANA, OUTSTANDING AT MARCH 31, 1999 AND DECEMBER 31, 1998 (SEE NOTE 7):
Redemption Price at March 31, December 31, March 31, 1999 1998 1999 ============ ============ ============ (Dollars in thousands) Cumulative preferred stock - $100 par value - 4-1/4% series - 209,051 shares outstanding $ 20,905 $ 20,905 $101.20 4-1/2% series - 79,996 shares outstanding 8,000 8,000 $100.00 4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00 7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00 7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00 Premium on preferred stock 254 254 Cumulative preferred stock - no par value - Adjustable rate (6.00% at March 31, 1999), Series A (stated value $50 per share) 473,285 shares outstanding 23,664 23,664 $50.00 ------------ ------------ $ 81,116 $ 81,116 ============ ============
During the period April 1, 1997 to March 31, 1999 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. (9) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1999 AND DECEMBER 31, 1998 (SEE NOTE 7): Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of Northern Indiana, excluding sinking fund payments due within one year were as follows:
March 31, December 31, 1999 1998 ============ ============ (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 - 50,000 shares outstanding, excluding sinking fund payments due within one year $ 5,000 $ 5,000 7-3/4% series - 33,352 shares outstanding, excluding sinking fund payments due within one year 3,335 3,335 8.35% series - 51,000 shares outstanding, excluding sinking fund payments due within one year 5,100 5,100 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ------------ ------------ $ 56,435 $ 56,435 ============ ============
The redemption prices at March 31, 1999, as well as sinking fund provisions for the cumulative preferred stocks subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana, were as follows:
Sinking Fund Or Mandatory Redemption Series Redemption Price Per Share Provisions ====== ========================== ============================= Cumulative preferred stock - $100 par value - 8.85% $100.74, reduced periodically 12,500 shares on or before April 1. 8.35% $103.44, 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% $104.06, 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 for the next five years, not reflecting redemptions made after March 31, 1999, were as follows:
Twelve Months Ended March 31, ================================== (Dollars in thousands) 2000 $ 1,828 2001 $ 1,828 2002 $ 1,828 2003 $44,828 2004 $ 1,828
Sinking fund payments due within one year are reported under the caption "Other accruals" in the Consolidated Balance Sheets. (10) COMMON SHARE DIVIDEND: Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented (Indenture), provides that it will not declare or pay any dividends on any class of capital stock (other than preferred or preference stock) except out of earned surplus or net profits of Northern Indiana. At March 31, 1999, Northern Indiana had approximately $158.5 million of retained earnings (earned surplus) available for the payment of dividends. Future dividends will depend upon adequate retained earnings, adequate future earnings and the absence of adverse developments. (11) COMMON SHARES: Effective with the exchange of common shares on March 3, 1988, all of Northern Indiana's common shares are owned by NiSource. (12) LONG-TERM INCENTIVE PLAN: NiSource has two long-term incentive plans for key management employees, including management of Northern Indiana, that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13, 1994 (1994 Plan), each of which provides for the issuance of up to 5.0 million NiSource common shares to key employees through April 1998 and April 2004, respectively. The 1988 Plan, as amended and restated, and the 1994 Plan, as amended and restated, were re-approved by shareholders at NiSource's 1999 Annual Meeting of Shareholders, held April 14, 1999. At March 31, 1999, there were 2,495,350 shares reserved for future awards under the 1994 Plan. The Plans permit the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights and performance units. No incentive stock options or performance units were outstanding at March 31, 1999. Under the Plans, the exercise price of each option equals the market price of NiSource's common stock on the date of grant. Each option has a maximum term of ten years and vests one year from the date of grant. Stock appreciation rights (SARs) may be granted only in tandem with stock options on a one-for-one basis and are payable in cash, NiSource's common shares, or a combination thereof. There were no SARs outstanding at March 31, 1999. 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 varies from 0% to 200% of the number awarded, subject to specific earnings per share and stock appreciation goals. Restrictions on shares awarded in 1997 and 1998 lapse two years from date of grant and vesting is variable from 0% to 100% of the number awarded, subject to specific performance goals. If a participant's employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. There were 537,166 and 534,666 restricted shares outstanding at March 31, 1999 and December 31, 1998, 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 charged against income for restricted stock awards was $0.2 and $0.8 million and $0.2 and $0.7 million for the three-month and twelve-month periods ending March 31, 1999 and March 31, 1998, respectively. Had compensation cost for non-qualified stock options been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," Northern Indiana's net income would have been reduced to the following pro forma amounts:
Three Months Twelve Months Ended Ended March 31, March 31, ------------------ ------------------ 1999 1998 1999 1998 ======== ======== ======== ======== (Dollars in thousands) Net Income: As reported $ 69,392 $ 65,774 $223,798 $195,062 Pro forma $ 68,985 $ 65,553 $222,483 $194,198
The fair value of each option granted as 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 twelve-month periods ended March 31, 1999 and March 31, 1998: risk-free interest rate of 5.29% and 6.19%, respectively; expected dividend yield per share of $0.96 and $0.90, respectively; expected option term of 5.4 and 5.5 years, respectively; and expected volatilities of 13.1% and 12.2%, respectively. The weighted average fair value of options granted to all plan participants was $4.28 and $2.66 for the twelve-month periods ended March 31, 1999 and March 31, 1998, respectively. There were 607,000 and 533,600 non-qualified stock options granted to all plan participants for the twelve-month periods ended March 31, 1999 and March 31, 1998, respectively. (13) LONG-TERM DEBT: At March 31, 1999 and December 31, 1998, the long-term debt of Northern Indiana, excluding amounts due within one year, issued and not retired or canceled was as follows:
AMOUNT OUTSTANDING --------------------------- March 31, December 31, 1999 1998 ============ ============ (Dollars in thousands) First mortgage bonds - Series T, 7-1/2%, due April 1, 2002 $ 39,000 $ 39,000 Series NN, 7.10%, due July 1, 2017 55,000 55,000 ------------ ------------ Total 94,000 94,000 ------------ ------------ Pollution control notes and bonds - Series A Note - City of Michigan City, 5.70% due October 1, 2003 16,500 16,500 Series 1988 Bonds - Jasper County - Series A, B and C - 2.99% weighted average at March 31, 1999, due November 1, 2016 130,000 130,000 Series 1988 Bonds - Jasper County - Series D - 2.93% weighted average at March 31, 1999, due November 1, 2007 24,000 24,000 Series 1994 Bonds - Jasper County - Series A - 3.15% at March 31, 1999, due August 1, 2010 10,000 10,000 Series 1994 Bonds - Jasper County - Series B - 3.15% at March 31, 1999, due June 1, 2013 18,000 18,000 Series 1994 Bonds - Jasper County - Series C - 3.15% at March 31, 1999, due April 1, 2019 41,000 41,000 ------------ ------------ Total 239,500 239,500 ------------ ------------ Medium-term notes - Interest rates between 6.10% and 7.69% with a weighted average interest rate of 7.00% and various maturities between March 20, 2000 and August 4, 2027 742,025 748,025 ------------ ------------ Unamortized premium and discount on long-term debt, net (3,453) (3,566) ------------ ------------ Total long-term debt excluding amounts due in one year $ 1,072,072 $ 1,077,959 ============ ============
The sinking fund requirements and maturities of long-term debt for the next five years were as follows as of March 31, 1999:
Twelve Months Ended March 31, ================================= (Dollars in thousands) 2000 $ 8,000 2001 $152,000 2002 $ 19,000 2003 $ 79,000 2004 $110,500
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, pursuant to which first mortgage bonds have been issued, constitutes a direct first mortgage lien upon substantially all of Northern Indiana's property and franchises, other than expressly excepted property. Northern Indiana is authorized to issue and sell up to $217,692,000 of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of March 31, 1999, $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. (14) CURRENT PORTION OF LONG-TERM DEBT: At March 31, 1999 and December 31, 1998, Northern Indiana's current portion of long-term debt due within one year was as follows:
March 31, December 31, 1999 1998 ============ ============ (Dollars in thousands) First mortgage bonds - Series P, 6-7/8% - due October 1, 1998 $ 0 $ 14,509 Medium-term notes - Interest rate 6.38% and 6.45% with a weighted average interest rate of 6.42% and maturities of March 20, 2000 and March 24, 2000 6,000 35,000 Sinking funds due within one year 2,000 1,500 ------------ ------------ Total current portion of long-term debt $ 8,000 $ 51,009 ============ ============
(15) SHORT-TERM BORROWINGS: Northern Indiana entered into a five-year $100 million credit agreement and a 364-day $100 million revolving credit agreement with several banks. These agreements terminate on September 23, 2003 and September 23, 1999, respectively. The 364-day agreement may be extended at expiration for additional periods of 364-days upon the request of Northern Indiana and agreements by the banks. Under these agreements, funds are borrowed at a floating rate of interest or, under certain circumstances, at a fixed rate of interest for a short-term periods. These agreements provide financing flexibility and may be used to support the issuance of commercial paper. As of March 31, 1999, there were no borrowings outstanding under these agreements. In addition, Northern Indiana has $14.2 million in lines of credit which run until May 31, 1999. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. As of March 31, 1999, there were no borrowings under these lines of credit. The credit agreements and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1999, there were no borrowings outstanding under these lines of credit. As of December 31, 1998, there was $40.5 million of borrowings outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1999 and December 31, 1998, there were no borrowings outstanding under this facility. At March 31, 1999 and December 31, 1998, Northern Indiana's short- term borrowings were as follows:
March 31, December 31, 1999 1998 ============ ============ (Dollars in thousands) Commercial paper - Interest rate of 4.93% at March 31, 1999 $ 18,000 $ 85,600 Notes payable - Issued at interest rates between 5.83% and 5.95% with a weighted average interest rate of 5.86% and various maturities between April 11, 1999 and January 21, 1999 0 40,500 ------------ ------------ Total short-term borrowings $ 18,000 $ 126,100 ============ ============
(16) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a twenty-year agreement for the rental of office facilities from NiSource Development Company, Inc., formerly NIPSCO Development Company, Inc., a subsidiary of NiSource, at a current annual rental payment of approximately $3.4 million. The following is a schedule, by years, of future minimum rental payments, excluding those to associated companies, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of March 31, 1999:
Twelve Months Ended March 31, ============================= (Dollars in thousands) 2000 $ 6,084 2001 5,114 2002 5,000 2003 5,000 2004 4,837 Later years 29,324 -------- Total minimum payments required $ 55,359 ========
The consolidated financial statements include rental expense for all operating leases as follows:
March 31, March 31, 1999 1998 ============ ============ (Dollars in thousands) Three months ended $ 2,666 $ 2,148 Twelve months ended $ 9,909 $ 7,733
(17) COMMITMENTS: Northern Indiana estimates that approximately $802 million will be expended for construction purposes for the period from January 1, 1999 to December 31, 2003. 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 its 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. During 1995, Northern Indiana entered into a ten-year agreement with IBM to perform all data center, application development and maintenance, and desktop management. Annual fees under this agreement are estimated at $20 million. (18) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: A variety of commodity-based derivative financial instruments are utilized to reduce the price risk inherent in natural gas and electric operations, as well as for energy trading activities. The use of these derivative financial instruments is governed by a risk management policy, which includes as its objective that commodity-based derivative financial instruments will be used primarily for hedging. The risk management policy also governs energy trading activities and is generally designed to allow for such activities within defined risk limits. NATURAL GAS COMMODITY RISK MANAGEMENT. Commodity futures, options and swaps are used to hedge the impact of natural gas price fluctuations related to business activities, including price risk related to the physical location of the natural gas (basis risk). As of March 31, 1999, there were no open derivative financial instruments representing hedges of natural gas sales, natural gas purchases and inventories. ENERGY TRADING ACTIVITIES. Energy trading contracts, which include forwards, futures, options and swaps, are used in connection with energy trading activities and may involve the delivery of energy. The net open positions for these energy trading contracts were not significant as of March 31, 1999. (19) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value: CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value due to the short maturity of those instruments. INVESTMENTS. Investments are carried at cost, which approximates market value. LONG-TERM DEBT AND PREFERRED STOCK. The fair value of long-term debt and preferred stock is estimated using 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 financial instruments were as follows:
March 31, 1999 December 31, 1998 ---------------------- ---------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ========== ========== ========== ========== (Dollars in thousands) Cash and cash equivalents $ 23,330 $ 23,330 $ 19,541 $ 19,541 Investments $ 251 $ 251 $ 251 $ 251 Long-term debt (including current portion) $1,080,072 $1,090,634 $1,079,959 $1,137,657 Preferred stock (including current portion) $ 139,379 $ 130,716 $ 139,379 $ 136,316
Northern Indiana is subject to regulation, and gains or losses may be included in rates over a prescribed amortization period, if in fact settled at amounts approximating those above. (20) CUSTOMER CONCENTRATIONS: Northern Indiana is a public utility operating company supplying natural gas and electrical energy in the northern third of Indiana. Although Northern Indiana has a diversified base of residential and commercial customers, a substantial portion of its electric and gas industrial deliveries are dependent upon the basic steel industry. The basic steel industry accounted for 3% of gas revenues (including transportation services) and 17% of electric revenues for the twelve months ended March 31, 1999 as compared to 3% and 19%, respectively, for the twelve months ended March 31, 1998. (21) BUSINESS SEGMENTS: SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" was adopted during 1998. SFAS No. 131 establishes standards for reporting information about operating segments in financial statements and disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Northern Indiana's reportable operating segments include regulated gas and electric services. Northern Indiana supplies gas and electric services to residential, commercial and industrial customers. The other category includes gas exploration, real estate transactions, and non-utility revenues and expenses. Reportable segments are operations that are managed separately and meet the quantitative thresholds required by SFAS No. 131. Revenues for each segments are attributable to customers in the United States. The following tables provide information about business segments. In addition, adjustments have been made to the segment information to arrive at information included in the results of operations and financial position. These adjustments include unallocated corporate assets, revenues and expenses. The accounting policies of the operating segments are the same as those described in Note 2, "Summary of Significant Accounting Policies."
For the Three Months Adjust- Ended March 31, 1999 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $246,703 $ 259,883 $ 0 $ 0 $ 506,586 Other income (deductions)$ 613 $ 128 $ (1,812) $ 0 $ (1,071) Depreciation and amortization $ 18,563 $ 39,575 $ 0 $ 0 $ 58,138 Income before interest and utility income taxes $ 55,690 $ 73,826 $ (1,812) $ 0 $ 127,704 Assets $893,747 $2,688,028 $ 0 $ 0 $3,581,775 Capital expenditures $ 9,195 $ 24,278 $ 0 $ 0 $ 33,473 For the Three Months Adjust- Ended March 31, 1998 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $218,730 $ 240,186 $ 0 $ 0 $ 458,916 Other income (deductions)$ 582 $ 85 $ (1,244) $ (31) $ (608) Depreciation and amortization $ 17,753 $ 38,767 $ 0 $ 0 $ 56,520 Income before interest and utility income taxes $ 45,309 $ 77,409 $ (1,308) $ 33 $ 121,443 Assets $922,968 $2,681,095 $ 0 $ 0 $3,604,063 Capital expenditures $ 9,213 $ 24,097 $ 0 $ 0 $ 33,310 For the Twelve Months Adjust- Ended March 31, 1999 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $600,458 $1,095,815 $ 0 $ 0 $1,696,273 Other income (deductions)$ 1,428 $ 592 $ (5,952) $ (120) $ (4,052) Depreciation and amortization $ 72,517 $ 157,648 $ 0 $ 0 $ 230,165 Income before interest and utility income taxes $ 69,746 $ 361,933 $ (5,993) $ (79) $ 425,607 Assets $893,747 $2,688,028 $ 0 $ 0 $3,581,775 Capital expenditures $ 56,528 $ 120,258 $ 0 $ 0 $ 176,786 For the Twelve Months Adjust- Ended March 31, 1998 Gas Electric Other ments Total - ------------------------ -------- ---------- -------- -------- ---------- (Dollars in thousands) Operating revenues $648,355 $1,011,445 $ 0 $ 0 $1,659,800 Other income (deductions)$ 938 $ 506 $ (5,160) $ (142) $ (3,858) Depreciation and amortization $ 69,964 $ 154,329 $ 0 $ 0 $ 224,293 Income before interest and utility income taxes $ 70,473 $ 319,382 $ (5,286) $ (16) $ 384,553 Assets $922,968 $2,681,095 $ 0 $ 0 $3,604,063 Capital expenditures $ 54,188 $ 107,932 $ 0 $ 0 $ 162,120
The following table reconciles total reportable segment income before interest and utility income taxes to net income for three-month and twelve- month periods ended March 31, 1999 and 1998:
Three Months Twelve Months Ended March 31, Ended March 31, ------------------ ------------------ 1999 1998 1999 1998 ======== ======== ======== ======== (Dollars in thousands) Income before interest and utility income taxes $127,704 $121,443 $425,607 $384,553 Interest 18,612 19,752 77,240 80,482 Utility income taxes 39,700 35,917 124,569 109,009 -------- -------- -------- -------- Net income $ 69,392 $ 65,774 $223,798 $195,062 ======== ======== ======== ========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OPERATING REVENUES - TWELVE MONTHS ENDED MARCH 31, 1999. Total operating revenues for the twelve months ended March 31, 1999 were $36.5 million higher than for the twelve months ended March 31, 1998, representing a 2.2% increase. Gas revenues were $600.5 million, which represented a $47.9 million decrease from the comparable period for 1998. This decrease occurred mainly due to decreased sales to residential and commercial customers as a result of unusually warm weather during the fourth quarter of 1998, decreased gas cost per dekatherm (dth) and decreased gas transition costs, partially offset by increased wholesale sales and increased deliveries of gas transported for others. Electric revenues were $1,095.8 million, which represented a $84.4 million increase from the comparable period for 1998. This increase occurred mainly due to increased sales to residential and commercial customers as a result of warmer weather during the second and third quarter of 1998 and increased wholesale transactions, partially offset by decreased sales to industrial customers and decreased fuel costs. THREE MONTHS ENDED MARCH 31, 1999. Total operating revenues for the three months ended March 31, 1999 were $47.7 million higher than for the three months ended March 31, 1999, representing a 10.4% increase. Gas revenues were $246.7 million, which represented a 12.8% increase from the comparable period for 1998. This increase occurred primarily due to increased sales to residential and commercial customers as a result of colder weather during the period, increased deliveries of gas transported for others and increased sales for resale partially offset by decreased gas costs per dth and decreased gas transition costs. Electric revenues were $259.9 million, which represented a $19.7 million increase from the comparable period for 1998. This increase was mainly attributable to increased sales to residential and commercial customers, increased wholesale transactions and increased fuel costs partially offset by decreased industrial sales. The basic steel industry accounted for 40% of natural gas delivered (including volumes transported) and 27% of electric sales during the twelve months ended March 31, 1999. The components of the variations in gas and electric revenues are shown in the following table:
Variations from Prior Periods --------------------------------- March 31, 1999 Compared to March 31, 1998 Three Twelve Months Months ========= ========= (Dollars in thousands) Gas Revenue Changes Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ (16,952) $ (42,297) Gas transition costs (1,148) (15,702) Changes in sales levels 42,525 527 Gas transported 3,548 9,575 --------- --------- Total Gas Revenue Change $ 27,973 $ (47,897) --------- --------- Electric Revenue Changes Pass through of net changes in fuel costs $ 684 $ (4,015) Changes in sales levels 6,975 30,573 Wholesale electric 12,038 57,812 --------- --------- Total Electric Revenue Change $ 19,697 $ 84,370 --------- --------- Total Revenue Change $ 47,670 $ 36,473 ========= =========
You can find information about the gas adjustment factor that Northern Indiana applies to its sales rates in Note 2, "Summary of Accounting Policies - - Gas Cost Adjustment Clause" to the Consolidated Financial Statements. COST OF SALES - Cost of sales consists of gas costs, costs of fuel for electric production and costs of power purchased. GAS COSTS. Gas costs for the twelve months ended March 31, 1999, decreased by $43.0 million, or by 11.4%, from the twelve months ended March 31, 1998. This decrease resulted due to decreased gas costs per dth and decreased gas transition costs, partially offset by increased gas purchased. The average cost of purchased gas for the twelve months ended March 31, 1999, after adjustment for gas transition costs billed to transport customers, decreased from $2.81 per dth, to $2.34 for the comparable period for 1998. Gas costs for the three months ended March 31, 1999 increased by $14.8 million, or by 12.0%, from the three months ended March 31, 1998. This increase occurred as a result of increased gas purchases during the period, partially offset by decreased gas costs per dth and decreased gas transition costs. The average cost of purchased gas for the three months ended March 31, 1999, after adjustment for gas transition costs billed to transport customers, decreased from $2.46 per dth, to $2.06 for the comparable period for 1998. FUEL AND PURCHASED POWER. The cost of fuel used for electric generation during the twelve months ended March 31, 1999 was $17.6 million higher than the cost of fuel used during the twelve months ended March 31, 1998, mainly due to increased electric generation of 8.7%. The average cost per kilowatt- our (kwh) generated decreased by 1.1% from 1.54 cents per kwh during the twelve months ended March 31, 1998, to 1.52 cents per kwh for the comparable period for 1999. The cost of fuel used for electric generation during the three months ended March 31, 1999 was $2.7 million higher than the cost of fuel used during the twelve months ended March 31, 1998, mainly due to increased electric generation of 5.2%. The average cost per kwh generated during the three months ended March 31, 1999 remained relatively unchanged from the comparable period for 1998. Northern Indiana spent $23.2 million more during the twelve months ended March 31, 1999 than during the comparable period in 1998 to purchase power, primarily due to increased purchases of 66.5% and increased cost per kwh of 3.6%. Power purchased increased by $13.1 million for the three-month period ended March 31, 1998 reflecting increased bulk power purchases of 418.4%, partially offset by an 11.2% decrease in the cost per kwh. OPERATING MARGINS - TWELVE MONTHS ENDED MARCH 31, 1999. Operating margins for the twelve months ended March 31, 1999 were $38.7 million higher than for the twelve months ended March 31, 1998, representing a 3.8% increase. Gas operating margin was $4.9 million lower than in the comparable period for 1998. This decrease occurred mainly as a result of decreased sales to residential and commercial customers, reflecting unusually warm weather during the fourth quarter of 1998 and decreased sales to industrial customers, partially offset by increased wholesale sales and increased deliveries of gas transported for others. Electric operating margin was $787.3 million, which represented a $43.6 million increase from the comparable for 1998. This increase occurred mainly due to increased sales to residential and commercial customers due to warmer weather during the second and third quarter of 1998 and increased wholesale transactions. THREE MONTHS ENDED MARCH 31, 1999. Operating margins for the three months ended March 31, 1999 were $17.0 million higher than the three months ended March 31, 1998, representing a 6.2% increase. Gas operating margin was $13.2 million higher than in the comparable period for 1998. This increase occurred mainly as a result of increased sales to residential and commercial customers reflecting colder weather during the first quarter of 1999, increased wholesale sales and increased deliveries of gas transported for others. Electric operating margin was $184.8 million, which represented a $3.8 million increase from the comparable period for 1998. This increase occurred mainly due to increased sales to residential and commercial customers, partially offset by decreased industrial sales and wholesale transactions. OPERATING EXPENSES AND TAXES - Operating expenses and taxes (except income) consists of operations expenses, maintenance expenses, depreciation and amortization expenses and taxes (except income). OPERATIONS EXPENSE. Operation expenses for the twelve months ended March 31, 1999 were $10.1 million lower than in the twelve months ended March 31, 1998. Operation expenses were lower primarily as a result of decreased employee related costs of $6.8 million, decreased electric and gas distribution system operations costs of $3.1 million, decreased electric production facility operations costs of $2.5 million and decreased environmental cleanup costs of $2.6 million. Operation expenses for the three months ended March 31, 1999 were $5.6 million higher than for the three months ended March 31, 1998. Operation expenses were higher in the three-month period primarily as a result of increased employee related costs of $3.8 million, increased electric production facility costs of $0.4 million and increased electric distribution facility costs of $0.4 million. MAINTENANCE EXPENSE. Maintenance expenses for the twelve months ended March 31, 1999 were $1.3 million lower than in the twelve months ended March 31, 1998. Maintenance expenses were lower primarily as a result of decreased electric production facility maintenance costs of $0.8 million and decreased gas distribution facility maintenance. Maintenance expenses for the three months ended March 31, 1999 were $1.6 million higher than for the three months ended March 31, 1998. Maintenance expenses were higher in the three- month period primarily as a result of electric production facility maintenance costs of $1.0 million and electric transmission and distribution facility maintenance costs of $0.5 million. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expenses for the twelve months ended March 31, 1999 were $5.9 million higher than in the comparable period for 1998. These higher expenses primarily related to increased depreciation expense as a result of increased depreciable plant. Depreciation and amortization expenses for the three months ended March 31, 1999 were $1.6 million higher than in the comparable period for 1998. These higher expenses primarily related to increased depreciation expense as a result of increased depreciable plant. OTHER INCOME (DEDUCTIONS) Other Income (Deductions) for the three-month and twelve-month periods ended March 31, 1999 were relatively unchanged from the comparable periods for 1998. INTEREST CHARGES - Interest charges for the three-month and twelve-month periods ended March 31, 1999 were $1.1 and $3.2 million, respectively, lower than in the comparable periods for 1998. These decreases resulted primarily due to decreased long term debt outstanding during the three-month and twelve-month periods ended March 31, 1999. You can find information about Northern Indiana's accounting policies and the transactions affected by and considered in these policies in the sections entitled "Summary of Significant Accounting Policies and Long-Term Debt" in the Notes to the Consolidated Financial Statements. NET INCOME - Northern Indiana's net income for the twelve months ended March 31,1999 was $223.8 million, which represented a $28.7 million increase over net income for the comparable period in 1998. Northern Indiana's net income for the three months ended March 31,1999 was $69.4 million, which represented a $3.6 million increase over net income for the comparable period in 1998. LIQUIDITY AND CAPITAL RESOURCES - Generally, cash flow from operations has provided sufficient liquidity to meet current operating requirements. But because the utility and utility construction business is seasonal in nature, commercial paper is occasionally issued for short-term financing. As of March 31, 1999 and December 31, 1998, $18.0 million and $85.6 million of commercial paper was outstanding, respectively. The interest rate of commercial paper outstanding as of March 31, 1999 was 4.93%. Northern Indiana entered into a five-year $100 million credit agreement and a 364-day $100 million revolving credit agreement with several banks. These agreements terminate on September 23, 2003 and September 23, 1999, respectively. The 364-day agreement may be extended at expiration for additional periods of 364-days upon the request of Northern Indiana and agreements by the banks. Under these agreements, funds are borrowed at a floating rate of interest or, under certain circumstances, at a fixed rate of interest for a short-term periods. These agreements provide financing flexibility and may be used to support the issuance of commercial paper. As of March 31, 1999, there were no borrowings outstanding under these agreements. In addition, Northern Indiana has $14.2 million in lines of credit which run until May 31, 1999. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. As of March 31, 1999, there were no borrowings under these lines of credit. The credit agreements and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1999, there were no borrowings outstanding under these lines of credit. As of December 31, 1998, there was $40.5 million of borrowings outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1999 and December 31, 1998, there were no borrowings outstanding under this facility. CONSTRUCTION PROGRAM. Northern Indiana expects that it will continue to meet its future commitments with respect to its construction program through internally generated funds. MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS - See Note 18, "Financial Instruments and Risk Management," to the Consolidated Financial Statements for a discussion of the types of commodity- based derivative financial instruments used. Two primary market risks, commodity price risk and interest rate risk, are addressed by a risk management policy. COMMODITY PRICE RISK. Price risk management activities are designed to address price fluctuations in electricity and natural gas commodity prices that are sensitive to changes in supply and demand. These changes are actively monitored and derivative financial and commodity instruments are used to reduce, or hedge, exposure to price risks. Part of these price risks includes differences in price based on geography. Geographic price differentials result primarily from transportation costs and local supply and demand factors. To hedge a portion of this exposure, basis swaps are used from time to time. However, all basis exposure is not hedged. Generally, customer sales contracts are based upon a fixed sales price with varying volumes that ultimately depend on a customer's supply requirements. Financial derivatives are used based on modeling techniques in order to anticipate future supply requirements. Nonetheless, Northern Indiana remains exposed to price risk for the difference between a customer's actual supply requirements and those requirements predicted by the models. Currently, commodity price risk of Northern Indiana business is relatively limited, since current regulations allow Northern Indiana to recoup any prudently incurred fuel and gas costs through rate-making. As the utility industry undergoes deregulation, however, Northern Indiana will be providing services without the benefit of the traditional rate-making and, therefore, will be more exposed to commodity price risk. Because derivative financial and commodity instruments are substantially the same commodities that are bought and sold in the physical market, Northern Indiana believes that its price management activities do not require any special correlation studies, other than monitoring the degree of convergence between the derivative and cash markets. INTEREST RATE RISK. Long-term debt is utilized as a primary source of capital. A significant portion of this long-term debt consists of medium-term notes. In addition, longer term fixed-price debt instruments have been used that in the past have been refinanced when interest rates decreased. To the extent that such refinancing is economical, refinancing these fixed-price instruments will continue. Information about long-term debt is in Note 13 to the Consolidated Financial Statements, "Long-term Debt." Information about the current market valuation of long-term debt is in Note 19 to the Consolidated Financial Statements "Fair Value of Financial Instruments." YEAR 2000 COSTS - RISKS. Year 2000 issues address the ability of electronic processing equipment to process date sensitive information and recognize the last two digits of a date as occurring in or after the year 2000. Any failure in any system may result in material operational and financial risks. Possible scenarios include a system failure in a generating plant, an operating disruption or delay in transmission or distribution, or an inability to interconnect with the systems of other utilities. In addition, while it is anticipated that mission-critical systems will be year 2000 compliant in a timely fashion, it cannot guarantee the compliance of systems operated by other companies upon which it depends. For example, the ability of an electric company to provide electricity to its customers depends upon a regional electric transmission grid, which connects the systems of neighboring utilities to support the reliability of electric power within the region. If one company's system is not year 2000 compliant, then a failure could affect the reliability of all providers within the grid, including Northern Indiana. Similarly, gas operations depend on natural gas pipelines that are not own or controlled, and any non-compliance by a company owning or controlling those pipelines may affect Northern Indiana's ability to provide gas to its customers. Failure to achieve year 2000 readiness could have a material adverse affect on results of operations, financial position and cash flows. The program to address risks associated with the year 2000 is continuing. The focus is on both information technology (IT) and non-IT systems, and substantial progress has been made in preparing these systems for proper functioning in the year 2000. STATE OF READINESS. The year 2000 program consists of four phases: inventory (identifying systems potentially affected by the year 2000), assessment (testing identified systems), remediation (correcting or replacing non-compliant systems) and validation (evaluating and testing remediated systems to confirm compliance). Northern Indiana has completed the remediation and validation phases for all of its mission-critical systems. Northern Indiana has completed the inventory and assessment phases for all of its non-IT mission-critical systems and has scheduled remediation (including replacement) and validation for its non-IT mission-critical systems throughout 1999. Substantial completion of mission-critical year 2000 efforts is expected by June 30, 1999, with the year 2000 program concluding in the fourth quarter of 1999. Because outside suppliers and vendors with similar year 2000 issues are depended upon, the ability of those suppliers and vendors to provide it with an uninterrupted supply of goods and services is being assessed. Critical vendors and suppliers have been contacted in order to investigate their year 2000 efforts. In addition, electricity and gas industry groups such as the North American Electric Reliability Council, the Electric Power Research Institute, and the American Gas Association are being worked with to discuss and evaluate the potential impact of year 2000 problems upon the electric grid systems and pipeline networks that interconnect within each of those industries. COSTS. The total cost of the year 2000 program is estimated to be $19 million. These costs have been, and will continue to be, funded from operations. Costs related to the maintenance or modification of existing systems are expensed as incurred. Costs related to the acquisition of replacement systems are capitalized. These costs are not anticipated to have a material impact on results of operations. CONTINGENCY PLANS. Northern Indiana currently is in the process of structuring its contingency plans to address the possibility that any mission- critical system upon which it depends, including those controlled by outside parties, will be non-compliant. This includes identifying alternative suppliers and vendors, conducting staff training and developing communication plans. In addition, the ability to maintain or restore service in the event of a power failure or operating disruption or delay is being evaluated, along with the limited ability to mitigate the effects of a network failure by isolating its own network from the non-compliant segments of the greater network. These contingency plans are expected to be completed during the second quarter 1999; however, the contingency plans will be under review during the third and fourth quarters of 1999. COMPETITION AND REGULATORY CHANGES - The regulatory frameworks applicable to Northern Indiana, at both state and federal levels, are in the midst of a period of fundamental change. These changes have impacted and will continue to impact the operations, structure and profitability. At the same time, competition within the electric and gas industries will create opportunities to compete for new customers and revenues. Management has taken steps to make the company more competitive and profitable in this changing environment, including converting some of its generating units to allow use of lower cost, low sulfur coal, providing its gas customers with increased customer choice for new products and services throughout the service territory. THE ELECTRIC INDUSTRY. At the Federal level, FERC issued Order No. 888-A in 1996 which required all public utilities owning, controlling, or operating transmission lines to file non-discriminatory open-access tariffs and offer wholesale electricity suppliers and marketers the same transmission service they provide themselves. In 1997, FERC approved Northern Indiana's open-access transmission tariff. Although wholesale customers currently represent a small portion of Northern Indiana's electricity sales, it intends to continue its efforts to retain and add wholesale customers by offering competitive rates and also intends to expand the customer base for which it provides transmission services. At the state level, it was announced in 1997 that if a consensus could be reached regarding electric utility restructuring legislation, a restructuring bill during the 1999 session of the Indiana General Assembly would be supported. During 1998, discussions were held with other investor- owned utilities in Indiana regarding the technical and economic aspects of possible legislation leading to greater customer choice. A consensus was not reached. Therefore, no legislation was supported regarding electric restructuring during the 1999 session of the Indiana General Assembly. During 1999, discussions will continue with all segments of the Indiana electric industry in an attempt to reach a consensus on electric restructuring legislation for introduction during the 2000 Session of the Indiana General Assembly. THE GAS INDUSTRY. At the Federal level, gas industry deregulation began in the mid-1980's when FERC required interstate pipelines to provide nondiscriminatory transportation services pursuant to unbundled rates. This regulatory change permitted large industrial and commercial customers to purchase their gas supplies either from Northern Indiana or directly from competing producers and marketers, which would then use Northern Indiana's facilities to transport the gas. More recently, the focus of deregulation in the gas industry has shifted to the states. At the state level, the Indiana Utility Regulatory Commission (IURC) approved in 1997 Northern Indiana's Alternative Regulatory Plan (ARP), which implemented new rates and services that included, among other things, unbundling of services for additional customer classes (primarily residential and commercial users), negotiated services and prices, a gas cost incentive mechanism, and a price protection program. The gas cost incentive mechanism allows Northern Indiana to share any cost savings or cost increases with its customers based upon a comparison of Northern Indiana's actual gas supply portfolio cost to a market-based benchmark price. Phase I of Northern Indiana's Customer Choice Pilot Program ended on March 31, 1999. This pilot program offered 82,000 residential customers within St. Joseph County and 10,000 commercial customers throughout the Northern Indiana service area the right to choose alternative gas suppliers. Phase II of Northern Indiana's Customer Choice Pilot Program will commence on April 1, 1999 and continue for a one-year period. During this phase, Northern Indiana plans to offer customer choice to all 660,000 residential and 50,000 commercial customers throughout its gas service territory. Only 150,000 residential and 20,000 commercial customers are eligible to enroll in Phase II of the program. The IURC order allows NiSource's natural gas marketing subsidiary to participate as a supplier of choice to Northern Indiana customers. In addition, as Northern Indiana has allowed residential and commercial customers to designate alternative gas suppliers, it has also offered new services to all classes of customers including, but not limited to, price protection, negotiated sales and services, gas lending and parking, and new storage services. 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 has had and will continue to have significant positive effects in the next few years. IMPACT OF ACCOUNTING STANDARDS - Information about the impact of anticipated accounting standards that have not yet been adopted upon the consolidated financial statements can be found in Note 2, "Summary of Significant Accounting Policies-Impact of Accounting Standards" to the Consolidated Financial Statements. FORWARD LOOKING STATEMENTS - This report contains forward looking statements within the meaning of the securities laws. Forward looking statements include terms such as "may," "will," "expect," "believe," "plan" and other similar terms. Northern Indiana cautions that, while it believes such statements to be based on reasonable assumptions and makes such statements in good faith, there can be no assurance that the actual results will not differ materially from such assumptions or that the expectations set forth in the forward looking statements derived from such assumptions will be realized. You should be aware of important factors that could have a material impact on future results. These factors include, but are not limited to, weather, the federal and state regulatory environment, year 2000 issues, the economic climate, regional, commercial, industrial and residential growth in the service territories served by Northern Indiana, customers' usage patterns and preferences, the speed and degree to which competition enters the utility industry, the timing and extent of changes in commodity prices, changing conditions in the capital and equity markets and other uncertainties, all of which are difficult to predict, and many of which are beyond Northern Indiana's control. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For a discussion of primary market risks and risk management policy, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Sensitive Instruments and Positions." PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. Northern Indiana is a party to various pending proceedings, including suits and claims against it for personal injury, death and property damage. Such proceedings and suits, and the amounts involved, are routine for the kind of business conducted by Northern Indiana, except as described under Note 4 "Environmental Matters," in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Report on Form 10-Q. To the knowledge of Northern Indiana, no other material legal proceedings against Northern Indiana or its subsidiaries are contemplated by governmental authorities and other parties. Item 2. CHANGES IN SECURITIES. None Item 3. DEFAULTS UPON SENIOR SECURITIES. None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 8, 1999, by a written consent in lieu of the Annual Meeting of Shareholders, the sole shareholder of Northern Indiana elected Ian M. Rolland and John W. Thompson as directors to serve until the 2002 Annual Meeting of Shareholders. Directors whose terms of office continue after the 1999 Annual Meeting of Shareholders are Arthur J. Decio, Gary L. Neale, and Robert W. Welsh, whose terms expire at the 2000 Annual Meeting of Shareholders, and Steven C. Beering, Denis E. Ribordy and Carolyn Y. Woo, whose terms expire at the 2001 Annual Meeting of Shareholders. Item 5. OTHER INFORMATION. None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Northern Indiana Public Service Company (Registrant) /s/ David J. Vajda --------------------------------------- David J. Vajda, Controller and Chief Accounting Officer Date May 13, 1999 EX-23 2 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-Q into Northern Indiana Public Service Company's previously filed Form S-3 Registration Statement No. 333-26847. /s/ Arthur Andersen LLP Chicago, Illinois May 13, 1999 EX-27 3
UT This schedule contains summary financial information extracted from the financial statements of Northern Indiana Public Service Company for three months ended March 31, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 PER-BOOK 2,963,775 519 289,746 202,964 124,771 3,581,775 859,488 12,524 158,465 1,030,477 56,991 81,435 313,547 00,000 760,025 18,000 8,000 1,828 0 0 1,312,347 3,581,775 506,586 39,700 377,811 417,511 89,075 (1,071) 88,004 18,612 69,392 2,065 67,327 55,000 0 218,239 0 0
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