-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, B34zGv5MK4J7tudEUiBCNxah7bclzKKT40LtQH8M7sJftvgdnccSimLtEBuun8QX G1b5xMALfvraRKmyE2CofQ== 0000823392-94-000003.txt : 19940520 0000823392-94-000003.hdr.sgml : 19940520 ACCESSION NUMBER: 0000823392-94-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIPSCO INDUSTRIES INC CENTRAL INDEX KEY: 0000823392 STANDARD INDUSTRIAL CLASSIFICATION: 4931 IRS NUMBER: 351719974 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09779 FILM NUMBER: 94527861 BUSINESS ADDRESS: STREET 1: 5265 HOHMAN AVE CITY: HAMMOND STATE: IN ZIP: 46320 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 10-Q 1 DOCUMENT 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, 1994 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 1-9779 NIPSCO Industries, Inc. (Exact name of registrant as specified in its charter) Indiana 35-1719974 (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. X Yes _________ No __________ As of April 30, 1994, 65,349,209 common shares were outstanding. NIPSCO Industries, Inc. Part I. Financial Information Report Of Independent Public Accountants To The Board of Directors of NIPSCO Industries, Inc.: We have audited the accompanying consolidated balance sheet of NIPSCO Industries, Inc. (an Indiana corporation) and subsidiaries as of March 31, 1994, and December 31, 1993, and the related consolidated statements of income, common shareholders' equity and cash flows for the three and twelve month periods ended March 31, 1994, and 1993. These consolidated financial statements are the responsibility of Industries' 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 NIPSCO Industries, Inc. and subsidiaries as of March 31, 1994, and December 31, 1993, and the results of their operations and their cash flows for the three and twelve month periods ended March 31, 1994, and 1993, in conformity with generally accepted accounting principles. As discussed in Notes 7 and 9 to the consolidated financial statements, effective January 1, 1993, NIPSCO Industries, Inc. and subsidiaries changed their methods of accounting for income taxes and postretirement benefits other than pensions. Arthur Andersen & Co. Chicago, Illinois April 27, 1994
Consolidated Balance Sheet March 31, December 31, ASSETS 1994 1993 ============== ============= (Dollars in thousands) Utility Plant, at original cost (including construction work in progress of $201,006 and $189,634, respectively) (Notes 2 and 4): Electric $ 3,807,174 $ 3,778,016 Gas 1,226,845 1,216,178 Common 297,865 289,242 _____________ _____________ 5,331,884 5,283,436 Less - Accumulated provision for depreciation and amortization 2,095,231 2,052,221 _____________ _____________ Total utility plant 3,236,653 3,231,215 _____________ _____________ Other Property and Investments: Other property, at cost, less accumulated provision for depreciation 125,081 124,184 Investments, at equity (Note 1) 17,332 19,142 Investments, at cost (Note 1) 7,118 6,189 _____________ ____________ Total other property and investments 149,531 149,515 _____________ ____________ Current Assets: Cash and cash equivalents 53,850 16,140 Accounts receivable, less reserve of $6,252 and $4,855, respectively (Note 2) 151,875 115,129 Fuel adjustment clause (Note 2) 9,277 6,440 Gas cost adjustment clause (Note 2) - 35,659 Materials and supplies, at average cost 67,482 67,120 Electric production fuel, at average cost 23,453 21,533 Natural gas in storage, at last-in, first-out cost (Note 2) 18,129 62,870 Prepayments and other 11,123 11,118 _____________ ____________ Total current assets 335,189 336,009 _____________ ____________ Other Assets: Regulatory assets (Note 2) 195,720 177,728 Deferred charges and other 18,940 17,857 _____________ _____________ Total other assets 214,660 195,585 _____________ ____________ $ 3,936,033 $ 3,912,324 ============= ============ The accompanying notes to consolidated financial statements are an integral part of this statement. /TABLE
Consolidated Balance Sheet March 31, December 31, CAPITALIZATION AND LIABILITIES 1994 1993 =========== ============= (Dollars in thousands) Capitalization: Common shareholders' equity (See accompanying statement) $ 1,122,463 $ 1,094,672 Cumulative preferred stocks (Note 11) - Northern Indiana Public Service Company: Series without mandatory redemption provisions (Note 12) 97,750 97,753 Series with mandatory redemption provisions (Note 13) 68,462 68,462 NIPSCO Industries Inc.: Series with mandatory redemption provisions (Note 13) 35,000 35,000 Long-term debt excluding amounts due within one year (Note 17) 1,214,568 1,192,500 ____________ ___________ Total capitalization 2,538,243 2,488,387 ____________ ___________ Current Liabilities: Obligations due within one year - Northern Indiana Public Service Company: Commercial paper - 27,895 Medium-term note - 9.15% - due April 11, 1994 60,000 65,000 Note Payable - 4.05% - due April 4, 1994 50,000 110,000 NIPSCO Capital Markets Inc.: Commercial paper 32,000 47,000 Elm Energy and Recycling (UK), Ltd. Term loan facility 3,840 3,766 ____________ ___________ 145,840 253,661 ____________ ___________ Other current liabilities - Accounts payable 202,077 192,543 Sinking funds due within one year (Notes 13 and 17) 3,620 3,413 Dividends declared on common and preferred stocks 26,797 26,165 Customer deposits 9,097 9,471 Taxes accrued 119,368 74,562 Gas cost adjustment clause 2,832 - Interest accrued 23,384 12,253 Other accruals 56,072 45,296 ____________ ___________ 443,247 363,703 ____________ ___________ Total current liabilities 589,087 617,364 ____________ ___________ Other: Deferred income taxes (Note 7) 574,314 576,071 Deferred investment tax credits, being amortized over life of related property (Note 7) 128,719 129,681 Deferred credits 35,472 37,767 Regulatory income tax liability (Note 7) 24,713 25,371 Other noncurrent liabilities (Note 7) 45,485 37,683 ___________ ____________ Total other 808,703 806,573 ___________ ____________ Commitments and Contingencies (Notes 3, 5, 6, 19 and 20) $ 3,936,033 $ 3,912,324 =========== ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
Part I. Financial Information
Consolidated Statement of Income Three Months Twelve Months Ended March 31, Ended March 31, _______________________ _______________________ 1994 1993 1994 1993 ========== ========== ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 5 and 22) Gas $ 318,580 $ 289,634 $ 743,175 $ 706,525 Electric 246,971 232,013 978,601 923,461 __________ __________ __________ __________ 565,551 521,647 1,721,776 1,629,986 __________ __________ __________ __________ Cost of Energy: (Note 2) Gas costs 198,305 177,722 450,228 427,766 Fuel for electric generation 63,144 59,638 248,058 242,973 Power purchased 9,102 3,261 24,066 10,771 __________ __________ __________ __________ 270,551 240,621 722,352 681,510 __________ __________ __________ __________ Operating Margin 295,000 281,026 999,424 948,476 __________ __________ __________ __________ Operating Expenses and Taxes (except income): Operation 76,450 71,855 289,001 269,807 Maintenance (Note 2) 20,313 21,265 82,596 79,748 Depreciatiation and amortization (Note 2) 47,645 46,139 188,506 183,996 Taxes (except income) 20,834 20,230 72,225 70,605 __________ __________ __________ __________ 165,242 159,489 632,328 604,156 __________ __________ __________ __________ Operating Income Before Utility Income Taxes 129,758 121,537 367,096 344,320 __________ __________ __________ __________ Utility Income Taxes (Note 7) 37,802 34,902 99,730 87,559 __________ __________ __________ __________ Operating Income 91,956 86,635 267,366 256,761 __________ __________ __________ __________ Other Income (Deductions): Allowance for funds, other than borrowed funds, used during construction (Note 2) - 1 - 29 Other, net (Note 2) (1,066) (865) (2,272) 230 __________ __________ __________ __________ (1,066) (864) (2,272) 259 __________ __________ __________ __________ Income Before Interest and Other Charges 90,890 85,771 265,094 257,020 __________ __________ __________ __________ Interest and Other Charges: Interest on long-term debt 21,149 21,681 81,589 86,414 Other interest 1,966 2,241 8,963 10,279 Allowance for borrowed funds used during construction (Note 2) (727) (205) (1,969) (418) Amortization of premium, reacquisition premium, discount and expense on debt, net 892 878 3,596 3,348 Dividend requirements on preferred stocks of subsidiary 2,569 2,618 10,292 10,438 __________ __________ __________ __________ 25,849 27,213 102,471 110,061 __________ __________ __________ __________ Net Income 65,041 58,558 162,623 146,959 Dividend requirements on preferred shares 766 766 3,063 3,063 __________ __________ __________ __________ Balance available for common shareholders $ 64,275 $ 57,792 $ 159,560 $ 143,896 ========== ========== ========== ========== Average common shares outstanding 65,621,433 65,685,115 66,120,693 66,426,386 Earnings per average common share $ 0.97 $ 0.87 $ 2.41 $ 2.16 ========== ========== ========== ========== Dividends declared per common share $ 0.36 $ 0.33 $ 1.38 $ 1.28 ========== ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement. /TABLE
Consolidated Statement of Common Shareholders' Equity Dollars in Thousands __________________________________________________ Additional Common Paid-in Retained Three Months Ended Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, January 1, 1993 $ 1,034,530 $ 870,930 $ 20,775 $ 317,195 Net income 58,558 58,558 Dividends: Preferred shares (766) (766) Common shares (21,978) (21,978) Treasury shares acquired (5,146) Issued: Employee stock purchase plan 164 Long-term incentive plan 2,206 NIFL acquisition 30,172 6,655 Other 1,081 2 (165) ___________ ___________ ___________ ___________ Balance, March 31, 1993 $ 1,098,821 $ 870,930 $ 27,432 $ 352,844 =========== =========== =========== =========== Dollars in Thousands Shares _____________________________________ ___________ Currency Three Months Ended Treasury Unearned Translation Common (continued) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Balance, January 1, 1993 $ (168,990) $ (3,034) $ (2,346) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (5,146) Issued: Employee stock purchase plan 164 Long-term incentive plan 2,206 NIFL acquisition 23,517 Other 773 471 ___________ ___________ ___________ ___________ Balance, March 31, 1993 $ (148,249) $ (2,261) $ (1,875) 73,892,109 =========== =========== =========== =========== Shares ___________ Three Months Ended Treasury (continued) Shares ======================== =========== Balance, January 1, 1993 (8,133,759) Net income Dividends: Preferred shares Common shares Treasury shares acquired (194,246) Issued: Employee stock purchase plan 10,307 Long-term incentive plan 104,800 NIFL acquisition 1,112,862 Other ___________ Balance, March 31, 1993 (7,100,036) =========== Dollars in Thousands __________________________________________________ Additional Three Months Ended Common Paid-in Retained (continued) Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, January 1, 1994 $ 1,094,672 $ 870,930 $ 27,631 $ 380,888 Net income 65,041 65,041 Dividends: Preferred shares (766) (766) Common shares (23,539) (23,539) Treasury shares acquired (14,273) Issued: Employee stock purchase plan 305 158 Long-term incentive plan 420 (39) Other 603 (23) ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ 1,122,463 $ 870,930 $ 27,750 $ 421,601 =========== =========== =========== =========== Dollars in Thousands Shares _____________________________________ ___________ Currency Three Months Ended Treasury Unearned Translation Common (continued) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Balance, January 1, 1994 $ (180,212) $ (1,684) $ (2,881) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (14,273) Issued: Employee stock purchase plan 147 Long-term incentive plan 412 47 Other 123 503 ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ (193,926) $ (1,514) $ (2,378) 73,892,109 =========== =========== =========== =========== Shares ___________ Three Months Ended Treasury (concluded) Shares ======================== =========== Balance, January 1, 1994 (8,063,271) Net income Dividends: Preferred shares Common shares Treasury shares acquired (466,344) Issued: Employee stock purchase plan 9,286 Long-term incentive plan 14,289 Other ___________ Balance, March 31, 1994 (8,506,040) =========== Dollars in Thousands __________________________________________________ Additional Common Paid-in Retained Twelve Months Ended Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, April 1, 1992 $ 1,049,452 $ 870,930 $ 22,208 $ 296,406 Net income 146,959 146,959 Dividends: Preferred shares (3,063) (3,063) Common shares (86,234) (86,234) Treasury shares acquired (41,514) Issued: Employee stock purchase plan 330 Long-term incentive plan 5,254 51 NIFL acquisition 30,172 6,655 Other (2,535) (1,482) (1,224) ___________ ___________ ___________ ___________ Balance, March 31, 1993 $ 1,098,821 $ 870,930 $ 27,432 $ 352,844 =========== =========== =========== =========== Dollars in Thousands Shares _____________________________________ ___________ Currency Twelve Months Ended Treasury Unearned Translation Common (continued) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Balance, April 1, 1992 $ (136,234) $ (3,420) $ (438) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (41,514) Issued: Employee stock purchase plan 330 Long-term incentive plan 5,652 (449) NIFL acquisition 23,517 Other 1,608 (1,437) ___________ ___________ ___________ ___________ Balance, March 31, 1993 $ (148,249) $ (2,261) $ (1,875) 73,892,109 =========== =========== =========== =========== Shares ___________ Twelve Months Ended Treasury (continued) Shares ======================== =========== Balance, April 1, 1992 (6,909,529) Net income Dividends: Preferred shares Common shares Treasury shares acquired (1,598,612) Issued: Employee stock purchase plan 20,762 Long-term incentive plan 274,525 NIFL acquisition 1,112,862 Other (44) ___________ Balance, March 31, 1993 (7,100,036) =========== Dollars in Thousands __________________________________________________ Additional Twelve Months Ended Common Paid-in Retained (continued) Total Shares Capital Earnings ======================== =========== =========== =========== =========== Net income $ 162,623 $ $ $ 162,623 Dividends: Preferred shares (3,063) (3,063) Common shares (90,945) (90,945) Treasury shares acquired (49,857) Issued: Employee stock purchase plan 574 296 Long-term incentive plan 3,880 24 Other 430 (2) 142 ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ 1,122,463 $ 870,930 $ 27,750 $ 421,601 =========== =========== =========== =========== Dollars in Thousands Shares _____________________________________ ___________ Currency Twelve Months Ended Treasury Unearned Translation Common (continued) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Net income $ $ $ Dividends: Preferred shares Common shares Treasury shares acquired (49,857) Issued: Employee stock purchase plan 278 Long-term incentive plan 3,902 (46) Other 793 (503) ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ (193,926) $ (1,514) $ (2,378) 73,892,109 =========== =========== =========== =========== Shares ___________ Twelve Months Ended Treasury (concluded) Shares ======================== =========== Net income Dividends: Preferred shares Common shares Treasury shares acquired (1,597,183) Issued: Employee stock purchase plan 17,540 Long-term incentive plan 173,639 Other ___________ Balance, March 31, 1994 (8,506,040) =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Cash Flows Three Months Twelve Months Ended March 31, Ended March 31, ________________________ _________________________ 1994 1993 1994 1993 =========== =========== =========== =========== (Dollars in thousands) Cash flows from operating activities: Net income $ 65,041 $ 58,558 $ 162,623 $ 146,959 Adjustments to reconcile net income to net cash: Depreciation and amortization 47,645 46,139 188,506 183,996 Deferred federal and state operating income taxes, net (15,068) (11,364) (1,582) (42) Deferred investment tax credits, net (962) (1,850) (6,558) (7,439) Change in certain assets and liabilities* - Accounts receivable, net (36,746) (27,837) (21,164) (17,902) Electric production fuel (1,920) 1,241 17,251 (8,699) Materials and supplies (362) 1,212 5,770 3,033 Natural gas in storage 44,741 25,865 (5,809) 1,351 Accounts payable 9,534 (7,327) 40,368 17,032 Taxes accrued 44,806 43,705 1,642 30,082 Fuel adjustment clause (2,837) (626) (4,316) 2,217 Gas cost adjustment clause 35,659 26,161 20,139 (18,412) Other accruals 10,776 21,395 (10,619) 9,284 Other, net 16,669 21,075 7,056 18,895 ___________ ___________ ___________ ___________ Net cash provided by operating activities 216,976 196,347 393,307 360,355 ___________ ___________ ___________ ___________ Cash flows provided by (used in) investing activities: Utility construction expenditures (52,822) (34,441) (199,233) (172,406) Acquisition and construction expenditures related to Crossroads Pipeline Company (1,067) - (25,428) - Purchase of Northern Indiana Fuel and Light Company, Inc., net of cash acquired - (30,137) - (30,137) Return of capital to Harbor Coal Company - - 32,435 - Other, net 195 (14,158) (38,708) (45,942) ___________ ___________ ___________ ___________ Net cash used in investing activities (53,694) (78,736) (230,934) (248,485) ___________ ___________ ___________ ___________ Cash flows provided by (used in) financing activities: Issuance of long-term debt 20,395 - 488,664 50,486 Issuance of short-term debt 87,401 235,401 1,106,507 1,612,364 Issuance of preferred shares - - - 43,000 Net change in commercial paper (42,895) (52,500) 8,000 24,000 Retirement of long-term debt (5,042) (41) (382,070) (68,017) Retirement of short-term debt (147,401) (320,251) (1,215,358) (1,657,163) Retirement of preferred stock - (160) (2,010) (30,422) Issuance of common shares 685 32,378 4,671 35,748 Acquisition of treasury shares (14,273) (5,146) (49,857) (41,514) Cash dividends paid on common shares (23,676) (21,665) (90,225) (83,810) Cash dividends paid on preferred shares (766) (766) (3,063) (3,063) Other, net - 1,487 (1,487) 911 ___________ ___________ ___________ ___________ Net cash used in financing activities (125,572) (131,263) (136,228) (117,480) ___________ ___________ ___________ ___________ Net increase (decrease) in cash and cash equivalents 37,710 (13,652) 26,145 (5,610) Cash and cash equivalents at beginning of period 16,140 41,357 27,705 33,315 ___________ ___________ ___________ ___________ Cash and cash equivalents at end of period $ 53,850 $ 27,705 $ 53,850 $ 27,705 =========== =========== =========== =========== *Net of effects from purchase of Northern Indiana Fuel and Light Company, Inc. The accompanying notes to consolidated financial statements are an integral part of this statement.
Notes to Consolidated Financial Statements (1) Holding Company Structure: NIPSCO Industries, Inc. (Industries) was incorporated in Indiana on September 22, 1987, and became the parent of Northern Indiana Public Service Company (Northern Indiana) on March 3, 1988, after the shareholders of Northern Indiana approved a corporate restructuring pursuant to which Northern Indiana's outstanding common shares were exchanged on a share-for-share basis with common shares of Industries. The other securities of Northern Indiana, including its first mortgage bonds, pollution control notes and bonds, other debt securities and each series of preferred stock, were not changed by the restructuring and they continue to be outstanding obligations and securities of Northern Indiana. Northern Indiana is a public utility operating company supplying electricity and gas to the public in the northern third of Indiana. At March 31, 1994, Industries had five direct, wholly-owned subsidiaries in addition to Northern Indiana, which are all Indiana corporations: NIPSCO Development Company, Inc. (Development), NIPSCO Energy Services, Inc. (Services), NIPSCO Capital Markets, Inc. (Capital Markets), Kokomo Gas and Fuel Company(Kokomo Gas) and Northern Indiana Fuel and Light Company, Inc. (NIFL). Kokomo Gas is a public utility operating company incorporated in Indiana in 1917, engaged in supplying natural gas to the public. It operates in the city of Kokomo, Indiana and the surrounding area in six counties having a population of approximately 100,000 and served approximately 31,200 customers at March 31, 1994. The Kokomo Gas service territory is contiguous to Northern Indiana's gas service territory. On March 31, 1993, Industries acquired NIFL, a natural gas utility headquartered in Auburn, Indiana, that served approximately 28,900 customers at March 31, 1994, in the northeast corner of the state, contiguous to Northern Indiana's service territory. Industries issued 1,112,862 common shares and $26,311 cash in exchange for all of the common shares of NIFL. Development makes various investments, including real estate. Services coordinates the energy-related diversification ventures and has four wholly-owned subsidiaries: NIPSCO Fuel Company, Inc. (Fuel) which makes investments in gas and oil exploration and development ventures; NIPSCO Energy Trading Corp.(NETCO) which is engaged in gas and other energy brokering businesses; NI-TEX, Inc. (NI-TEX) which is an intrastate natural gas transmission and supply company; and Crossroads Pipeline Company (Crossroads), a natural gas transmission company. Capital Markets handles financing for the ventures of Industries other than Northern Indiana. In December 1993, Services entered into a Letter of Intent with Eastex Energy Inc. (Eastex) to sell its entire ownership interest in NETCO and its 51% ownership interest in Triumph Natural Gas, Inc. (Triumph), in exchange for a combination of Eastex common and preferred stock, representing an equity ownership of approximately 25%. On March 31, 1994, the definitive agreement of Services and Eastex expired with no further obligations on either party. Development is a 95% shareholder in Elm Energy and Recycling (UK) Ltd.(Elm Energy), which was formed to develop, own, and operate a waste-to-energy generating plant in Wolverhampton, England. The 30 megawatt, tire-fueled generating station is expected to use about 8-10 million automobile and truck tires a year and began operations in late 1993. Northern Indiana has two subsidiaries: Shore Line Shops, Inc. (Shore Line) and NIPSCO Exploration Company, Inc. (Exploration). Shore Line undertakes the purchase and sale of transferred employees' residences on behalf of Northern Indiana. Exploration has investment interests, which are subject to Indiana Utility Regulatory Commission (Commission) rate treatment, in off-shore Gulf of Mexico oil and gas leases. (2) Summary of Significant Accounting Policies: Principles of Consolidation. The consolidated financial statements include the accounts of NIPSCO Industries, Inc., its utility subsidiaries Northern Indiana, Kokomo Gas, NIFL and Crossroads (Utilities), and all non-utility subsidiaries. In addition, the consolidated financial statements of Northern Indiana include its consolidated subsidiaries, Shore Line and Exploration. The operating results of all non-utility subsidiaries are included in "Other, net" under the caption "Other Income (Deductions)" in the Consolidated Statement of Income (except for Exploration's net results of operations, which are reported as a component of "Gas costs," since Exploration is subject to Commission rate treatment). Interest on long-term debt, other interest, and amortization of debt discount and expense are reflected as a component of "Interest and Other Charges." All significant intercompany items have been eliminated in consolidation. Certain reclassifications were made to conform the prior years' financial statements to the current presentation. Operating Revenues. Revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. Depreciation and Maintenance. Northern Indiana provides depreciation on a straight-line method over the remaining service lives of the electric, gas, and common properties. The provisions as a percentage of the cost of depreciable utility plant were approximately 4.0%, for the three and twelve month periods ended March 31, 1994, and March 31, 1993. The depreciation rates for electric and gas properties were 3.55% and 4.92%, respectively. Kokomo Gas provides depreciation on the original cost of utility plant in service using straight-line rates that averaged approximately 3.4% for the three and twelve month periods ended March 31, 1994, and March 31, 1993, respectively. NIFL provides depreciation on the original cost of utility plant in service using straight-line rates that averaged approximately 2.75%. The Utilities follow the practice of charging maintenance and repairs, including the cost of renewals of minor items of property, to maintenance expense accounts, except that repairs of transportation and service equipment are charged to clearing accounts and redistributed to operating expense and other accounts. When property which represents a retirement unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. Coal Reserves. Northern Indiana has a long-term mining contract to mine its coal reserves through the year 2001. The costs of these reserves are being recovered through the rate making process as such coal reserves are used to produce electricity. Oil and Natural Gas Accounting. Fuel uses the full cost method of accounting for its oil and natural gas production activities. Under this method all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized and amortized on the units of production basis. Power Purchased. Power purchases and net interchange power with other electric utilities under interconnection agreements are included in Cost of Energy under the caption "Power purchased." Accounts Receivable. At March 31, 1994, Northern Indiana had sold $100 million of certain of its accounts receivable under a sales agreement which expires May 31, 1997. Statement of Cash Flows. For the purposes of the Consolidated Statement of Cash Flows, Industries considers temporary cash investments with an original maturity of three months or less to be cash equivalents. Cash paid during the periods reported for income taxes and interest was as follows:
Three Months Twelve Months Ended March 31, Ended March 31, ------------------ ------------------- 1994 1993 1994 1993 ======== ======= ========= ======= (Dollars in thousands) Income taxes $ 2,435 $ 3,342 $ 92,248 $ 65,656 Interest, net of amounts capitalized $ 11,356 $ 16,232 $ 82,870 $ 97,207
Fuel Adjustment Clause. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect increases and decreases in the cost of fuel and the fuel cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the Commission applicable to metered retail rates, the adjustment factor has been calculated based on the estimated cost of fuel and the fuel cost of purchased power in a future three-month period. If two statutory requirements relating to expense and return levels are satisfied, any under or overrecovery caused by variances between estimated and actual cost in a given three month priod will be included in a future filing. Northern Indiana records any under or overrecovery as a current asset or current liability until such time as it is billed or refunded to its customers. The fuel adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. Gas Cost Adjustment Clause. All metered gas rates contain an adjustment factor which reflects the cost of purchased gas, contracted gas storage and storage transportation charges. The Utilities record any under or overrecovery as a current asset or current liability until such time as it is billed or refunded to their customers. The gas cost adjustment factor for Northern Indiana is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. The gas cost adjustment factors for Kokomo Gas and NIFL are subject to a semi-annual hearing by the Commission and remain in effect for a six-month period. If the statutory requirement relating to the level of return is satisfied, any under or overrecovery caused by variances between estimated and actual cost in a given three or six month period will be included in a future filing. See Note 5, Rate Matters (Take-or-Pay Pipeline Gas Costs) for a discussion of take-or-pay charges. Natural Gas in Storage. Based on the average cost of gas purchased in March, 1994, and December, 1993, the estimated replacement cost of gas in storage (current and non-current) at March 31, 1994, and December 31, 1993, exceeded the stated LIFO cost by approximately $37 million and $55 million, respectively. Regulatory Assets. The Utilities' operations are subject to the regulation of the Commission and the Federal Energy Regulatory Commission (FERC). Accordingly,the Utilities' accounting policies are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation." The regulatory assets below represent probable future revenue to the Utilities' associated with certain incurred costs as these costs are recovered through the rate making process. Regulatory assets were comprised of the following items, and were reflected in the Consolidated Balance Sheet as follows:
March 31, December 31, 1994 1993 =========== ============= (Dollars in thousands) Unamortized reacquisition premium on debt (Note 17) $ 47,386 $ 48,033 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (see below) 78,144 79,198 Bailly scrubber carrying charges and deferred depreciation (see below) 5,453 4,711 Deferral of SFAS No. 106 expense not recovered (Note 9) 27,902 22,410 FERC Order No. 636 transition costs (Note 5) 36,835 23,376 ___________ ___________ $ 195,720 $ 177,728 =========== ===========
Carrying Charges and Deferred Depreciation. Upon completin of R. M. Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges and deferred depreciation in accordance with orders of the Commission until the cost of each unit was allowed in rates. Such carrying charges and deferred depreciation are being amortized over the remaining life of each unit. Northern Indiana began capitalizing carrying charges and deferring depreciation and certain operating expenses relating to its scrubber service agreement upon completion of the flue gas desulfurization plant in June, 1992, at Northern Indiana's Bailly Generating Station in accordance with an order of the Commission. Capitalization of carrying charges and deferral of depreciation and certain operating expenses will continue until the earlier of December 31, 1995, or the date a final order considering the costs in rates is approved by the Commission. Allowance for Funds Used During Construction. Allowance for funds used during construction (AFUDC) is charged to construction work in progress during the period of construction and represents the net cost of borrowed funds used for construction purposes and a reasonable rate upon other (equity) funds. Under established regulatory rate practices, after the construction project is placed in service, Northern Indiana is permitted to include in the rates charged for utility services (a) a fair return on and (b) depreciation of such AFUDC included in plant in service. At January 1, 1992, a pretax rate of 4.0% for all construction was being used; effective January 1, 1993, the rate decreased to 3.7% and effective January 1, 1994, the rate increased to 5.0%. Foreign Currency Translation. Translation gains or losses are based upon the end-of-period exchange rate and are recorded as a separate component of shareholders' equity. Income Taxes. Deferred income taxes are recognized as costs in the rate making process by the commissions having jurisdiction over the rates charged by the Utilities. Deferred income taxes are provided as a result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. These taxes are reversed by a debit or credit to deferred income tax expense as the temporary differences reverse. Investment tax credits have been deferred and are being amortized to income over the life of the related property. For additional information relating to income taxes, including information related to Industries' adoption of SFAS No. 109 effective January 1, 1993, which requires an asset and liability approach to accounting for income taxes, see Note 7. (3) Pending Tax Matter: On August 1, 1991, the Internal Revenue Service (IRS) issued a notice of deficiency for Northern Indiana's taxes for the years 1982 through 1985 ($3,785,250 per year plus interest) relating to interest payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's foreign subsidiary, Northern Indiana Public Service Finance N.V. (Finance). The IRS believes that interest paid on the Notes should have been subject to United States tax withholding. The Notes were redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991, Northern Indiana filed its petition challenging the assessment in the United States Tax Court and trial is set to begin May 31, 1994. Northern Indiana estimates that the IRS claim approximates $41 million of principal and interest at March 31, 1994. Northern Indiana's management and general counsel believe Northern Indiana will be successful in establishing that no tax withholding was required for the period. (4) Acquisition of NIFL: On March 31, 1993, Industries acquired NIFL. Industries issued 1,112,862 common shares and $26,311 cash in exchange for all of the common shares of NIFL. The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. The excess of the total acquisition costs over the recorded value of net assets acquired (approximately $17 million) was recorded as a plant acquisition adjustment. (5) Rate Matters: Take-or-Pay Pipeline Gas Costs. The FERC has allowed certain interstate pipeline suppliers to pass on to their customers a portion of costs for contracted gas not purchased (take-or-pay), contract reformation and associated interest charges through direct billing to their customers, including the Utilities. Northern Indiana records take-or-pay costs as they are billed by the respective pipeline, and in an order dated September 28, 1988, the Commission allowed Northern Indiana to recover these additional gas costs on a volumetric basis from all customers, including transport customers. The Utilities have recovered approximately $188.5 million of take-or-pay costs and interest from their customers through March 31, 1994. As of March 31, 1994, an additional $10.2 million was scheduled to be billed to the Utilities and recovered from customers over a period of one to five years. FERC Order No. 636. On April 8, 1992, the FERC issued Order No. 636 which required interstate pipelines to restructure their services. Under the Order, existing pipeline sales services have "unbundled" such that gas supplies are being sold separately from interstate transportation services. The Utilities' interstate pipeline suppliers have filed new tariffs with the FERC to implement Order No. 636, and the Utilities have contracted for a mix of transportation and storage services which allows them to meet the needs of their customers. Customers, such as the Utilities, are expected to benefit from enhanced access to competitively priced gas supplies as well as from more flexible transportation services. Pipelines are seeking to recover certain transition costs associated with restructuring under the Order No. 636 regulation from their customers. Any such recovery is subject to established review procedures at the FERC. Also, mandated changes in pipeline rate design could increase the cost of firm transportation service on interstate pipelines. All interstate pipelines are now operating under Order No. 636 regulation. The Utilities' pipeline suppliers have made certain filings with the FERC to begin collecting their respective transition costs. The Utilities expect that the total transition costs from all suppliers will approximate $96-$107 million. However, the ultimate level of costs will depend on future events, including the market price of natural gas. Approximately $37 million of such costs have been recorded, a portion of which has been paid to the pipeline suppliers, subject to refund. The Utilities believe that any transition costs which the FERC would allow the Utilities' pipeline suppliers to collect would be recoverable by the Utilities from their customers. Northern Indiana has filed a petition with the Commission seeking recovery of the transition costs from its sales and transport customers on a volumetric basis, (which is consistent with what the Commission authorized for the recovery of take-or-pay pipeline gas costs), which petition is now pending. Accordingly, regulatory assets, in amounts corresponding to the costs recorded, have been recorded to reflect the anticipated recovery. (6) Environmental Matters: Because of major investments made in modern environmental control facilities and the use of low sulfur coal, substantially all of Northern Indiana's electric production facilities already comply with the sulfur dioxide limitations contained in acid rain provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana has successfully tested the use of low sulfur coal at Unit 12 at the Michigan City Generating Station, the only generating unit not in compliance with the future sulfur dioxide limitations, and expects that unit to be able to meet the limits with low sulfur coal. Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to strict limitations on emissions of nitrogen oxides and "air toxics", which may require significant capital expenditures for control of these emissions. Northern Indiana cannot predict the costs of complying with them, but Northern Indiana believes that any such mandated costs would be recoverable through the rate making process. The Environmental Protection Agency (EPA) and Indiana have promulgated an air operating permit program to meet the requirements of the CAAA. This permit program increases the fees associated with operating permits for air emissions. Northern Indiana has received notices from the EPA that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation and analysis to determine the amount of remedial costs necessary to clean up the sites. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA and SARA,will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the site and avoid the imposition of fines or added costs. While remedial costs at these sites are not presently determinable, Northern Indiana's preliminary analysis indicates its share of such costs should not have a significant impact on the results of future operations. Northern Indiana was notified by the Indiana Department of Environmental Management (IDEM) of the release of a petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a former manufactured gas plant formerly owned by Northern Indiana. In cooperation with IDEM, Northern Indiana has taken steps to investigate and contain the substance. Northern Indiana is continuing to monitor and investigate the site to determine what further remedial action, if any, will be required. Northern Indiana was notified by Indiana Gas Company, Inc. (Indiana Gas) that the site of a former manufactured gas plant in Lafayette, Indiana, believed to have been formerly owned by Northern Indiana, was being investigated and partially remediated by Indiana Gas pursuant to an administrative order issued by IDEM. Northern Indiana is investigating its potential liability and evaluating appropriate action. The Utilities have an ongoing program to remain aware of laws and regulations involved with hazardous waste. It is the Utilities' intent to continue to evaluate their facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has commenced a voluntary program of investigating its former manufactured gas plant sites in order to determine what, if any, remediation of any potential remaining waste materials may be required. Since this program is in its early stages, it is not possible at this time to estimate what, if any, remediation costs may be incurred. The possibility that exposure to electric and magnetic fields emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental and media attention. A considerable amount of scientific research has been conducted on this topic without definitive results. Research is continuing to resolve scientific uncertainties. (7) Income Taxes. Effective January 1, 1993, Industries adopted SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for income taxes. Under the liability method, deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. To implement SFAS No. 109, certain adjustments were made to deferred income taxes. To the extent such income taxes are recoverable or payable through future rates, regulatory assets and liabilities have been recorded in the Consolidated Balance Sheet. These adjustments include the amounts reflecting the Utilities' obligation to credit to ratepayers deferred income taxes provided at rates higher than the current federal tax rate which are currently being credited to ratepayers using the average rate assumption method required by the Tax Reform Act of 1986 and the Commission. The initial application of this statement was reflected in the January 1, 1993, Consolidated Balance Sheet, with no impact on results of operations or cash flow. The effect of the implementation entry on regulated activities was to record a net decrease in deferred income taxes and provide a net regulatory income tax liability of approximately $52 million. On August 10, 1993, the Federal statutory income tax rate was increased to 35%, a change of 1%, effective January 1, 1993. The impact of this change reduced the balance of the net regulatory liability approximately $22.1 million during 1993. The net regulatory income tax liability is derived from regulatory assets primarily attributable to undepreciated AFUDC-equity and the cumulative net amount of other income tax timing differences for which deferred taxes had not been provided in the past when regulators did not recognize such taxes as costs in the rate making process and regulatory liabilities primarily attributable to deferred taxes provided at rates in excess of the current statutory rate, as discussed above, and unamortized deferred investment tax credits. The components of the net deferred income tax liability at March 31, 1994, and December 31, 1993, are as follows:
March 31, 1994 December 31, 1993 ================ ================== (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 679,656 $ 677,493 AFUDC-equity 44,278 44,863 Adjustment clauses 3,038 16,876 Take-or-pay gas costs 3,128 4,234 Reacquisition premium on debt 16,586 16,844 Deferred tax assets - Deferred investment tax credits (48,801) (49,174) Removal costs (96,160) (93,279) Regulatory income tax liability (9,327) (9,582) Other, net (19,118) (20,757) ____________ ___________ 573,280 587,518 Less: Deferred income taxes related to current assets and liabilities (1,034) 11,447 ____________ ___________ Deferred income taxes - noncurrent $ 574,314 $ 576,071 ============ ===========
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Twelve Months Ended March 31, Ended March 31, ------------------ ------------------ 1994 1993 1994 1993 ========= ======== ======== ======== (Dollars in thousands) Current income taxes - Federal $ 46,797 $ 41,894 $ 93,925 $ 81,754 State 7,035 6,222 13,945 13,286 _________ ________ ________ ________ 53,832 48,116 107,870 95,040 _________ ________ ________ ________ Deferred income taxes, net- Federal and State- Accelerated depreciation and other property differences 3,277 2,858 13,630 10,781 Removal costs (2,809) (2,925) (8,644) (11,436) Adjustment clauses (13,838) (9,749) (6,555) 6,247 Take-or-pay gas costs (1,106) (474) (6,431) 1,092 Minimum tax credit deferral - - - 730 Reacquisition premium on debt (258) (261) 2,827 (1,284) Other (334) (813) 3,591 (6,172) ________ _______ _______ _______ (15,068) (11,364) (1,582) (42) ________ _______ _______ _______ Deferred investment tax credits, net (962) (1,850) (6,558) (7,439) ________ _______ _______ _______ Total utility operating income taxes 37,802 34,902 99,730 87,559 Income tax applicable to non- operating activities and income of non-utility subsidiaries (1,677) (1,515) (5,699) (4,275) ________ ________ ________ ________ Total income taxes $ 36,125 $ 33,387 $ 94,031 $ 83,284 ======== ======== ======== ========
A reconciliation of total tax expense to an amount computed by applying the statutory federal income tax rate to pretax income is as follows:
Three Months Twelve Months Ended March 31, Ended March 31, ------------------- --------------------- 1994 1993 1994 1993 ========= ======== ======== ========= (Dollars in thousands) Net Income $ 65,041 $ 58,559 $ 162,623 $ 146,959 Add-Income taxes 36,125 33,387 94,031 83,284 Dividend requirements on preferred stocks of subsidiary 2,569 2,618 10,292 10,438 _________ ________ _________ _________ Income before preferred dividend requirements of subsidiary and income taxes $ 103,735 $ 94,564 $ 266,946 $ 240,681 ========= ======== ========= ========= Amount derived by multiplying pretax income by statutory rate $ 36,307 $ 32,152 $ 94,376 $ 81,833 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 967 979 3,881 4,254 Amortization of deferred investment tax credits (1,928) (1,850) (7,524) (7,439) State income taxes, net of federal income tax benefit 3,377 3,211 8,734 8,579 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,298) (1,381) (4,997) (5,436) Other, net (1,300) 276 (439) 1,493 _________ ________ ________ ________ Total income taxes $ 36,125 $ 33,387 $ 94,031 $ 83,284 ========= ======== ======== ========
(8) Pension Plans. Industries and its subsidiaries have four noncontributory, defined benefit retirement plans covering substantially all employees. Benefits under the plans reflect the employees' compensation, years of service and age at retirement. The plans' funded status as of January 1, 1994 and 1993 are as follows:
1994 1993 ========= ========= (Dollars in thousands) Vested benefit obligation $ 481,755 $ 429,359 Nonvested benefit 86,373 75,815 _________ _________ Accumulated benefit obligation $ 568,128 $ 505,174 ========= ========= Projected benefit obligation for service rendered to date $ 657,068 $ 588,800 Plan assets at fair market value 605,379 539,387 _________ _________ Projected benefit obligation in excess of plan assets 51,689 49,413 Unrecognized transition obligation at January 1, being recognized over 17 years (54,055) (59,933) Unrecognized prior service cost (31,464) (23,100) Unrecognized gains 51,154 50,033 _________ _________ Accrued pension costs $ 17,324 $ 16,413 ========= =========
The accumulated benefit obligation is the present value of future pension benefit payments and is based on the plan benefit formula without considering expected future salary increases. The projected benefit obligation considers estimated future salary increases. Discount rates of 7.50% and 7.75% and rates of increase in compensation levels of 5.5% were used to determine the accumulated benefit obligation and projected benefit obligation at January 1, 1994, and 1993, respectively. The reduction of the discount rate, as discussed above, along with certain plan changes increased the accumulated benefit obligation as of January 1, 1994, by approximately $31 million. The following items are the components of provisions for pensions for the three months ended March 31, 1994, and March 31, 1993:
March 31, March 31, 1994 1993 ========== ========== (Dollars in thousands) Service costs $ 3,627 $ 3,329 Interest costs 12,050 11,328 Estimated return on plan assets (11,931) (11,045) Amortization of transition obligation 1,347 1,347 Other net amortization and deferral 621 719 __________ _________ $ 5,714 $ 5,678 ========== =========
Assumptions used in the valuation and determination of 1994 and 1993 pension expenses were as follows:
1994 1993 ======= ======= Discount rate 7.50% 7.75% Rate of increase in compensation levels 5.50% 5.50% Expected long-term rate of return on assets 8.25% 8.25%
The plans' assets are invested primarily in common stocks, bonds, notes and real estate investment funds. Industries recorded provisions for pension costs as follows:
March 31, March 31, 1994 1993 ========== ========== (Dollars in thousands) Three months ended $ 5,714 $ 5,678 Twelve months ended $ 22,944 $ 21,820
(9) Postretirement Benefits. Industries provides certain health care and life insurance benefits for retired employees. Substantially all of Industries' employees may become eligible for those benefits if they reach retirement age while working for Industries. Those and similar benefits for active employees are provided through an insurance company whose premiums are based on the benefits to active employees and retirees paid during the year.Prior to January 1, 1993, the Utilities recognized the cost of providing those benefits by expensing insurance premiums, which is consistent with current rate making practices. The annual cost of providing those benefits for retirees and/or their surviving spouses was $6.3 million for the year ended December 31, 1992. Effective January 1, 1993, Industries adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which establishes accounting and reporting standards for such postretirement benefits. This standard requires the accrual of the expected cost of such benefits during the employee's years of service. The assumptions and calculations involved in determining the accrual closely parallel pension accounting requirements. The following table sets forth the plans' accumulated postretirement benefit obligation as of January 1, 1994, and January 1, 1993.
January 1, January 1, 1994 1993 ============== ============== (Dollars in thousands) Retirees $ 89,650 $ 86,318 Fully eligible active plan participants 30,501 26,748 Other active plan participants 150,215 118,802 __________ __________ Accumulated postretirement benefit obligation 270,366 231,868 Unrecognized transition obligation (220,274) (231,868) Unrecognized prior actuarial loss (20,737) - __________ __________ Accrued liability for postretirement health care benefit obligation $ 29,355 $ - ========== ==========
Discount rates of 7.5% and 8% at January 1, 1994, and January 1, 1993, respectively, and a pre-Medicare medical trend rate of 13% declining to a long-term rate of 7% were used to determine the accumulated postretirement benefit obligation at January 1, 1994, and January 1, 1993. The transition obligation at January 1, 1993, for accumulated postretirement benefits earned and not recognized is being amortized over twenty years as allowed by SFAS No. 106. Net periodic postretirement benefits costs for the three months ended March 31, 1994, and 1993, include the following components:
March 31, March 31, 1994 1993 ========== ========== (Dollars in thousands) Service costs $ 2,045 $ 1,701 Interests costs 4,962 4,532 Amortization of transition obligation over 20 years 2,882 2,880 _________ _________ $ 9,889 $ 9,113 ========= =========
Industries recorded net periodic postretirement benefit costs of $37,457,000 for the twelve months ended March 31, 1994. The net periodic postretirement benefit costs were determined assuming a 7.5% discount rate for 1994 and an 8% discount rate for 1993, a 5% rate of compensation increase and a pre-Medicare medical trend rate of 13% declining to a long-term rate of 7%. The effect of a 1% increase in the assumed health care cost trend rates for each future year would increase the accumulated postretirement benefit obligation at January 1, 1994, by approximately $45 million and increase the aggregate of the service and interest cost components of plan costs by approximately $1.2 million for the three month period ended March 31, 1994. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates or plan changes. Northern Indiana joined with other Indiana utilities and requested that the Commission conduct generic hearings to approve the accrual method of accounting for postretirement benefits for rate making purposes and to authorize the deferral, as a regulatory asset to be recovered through future revenues, of the net increase in cost until such time as the new accrual cost method may be reflected in the rate making process in the next general rate proceeding. Generic hearings were conducted by the Commission during October, 1992, and, in an order issued on December 30, 1992, the Commission authorized the deferral accounting requested but stated such deferral period should not exceed four years; the Utilities expect to request recovery of such costs within that period. The Commission also indicated each utility would have to demonstrate its postretirement benefit costs were prudent and reasonably incurred at the time such costs were proposed to be recovered in the rate making process. In addition, while the Commission stated it was hopeful something less than full accrual of such costs in rates would be possible under generally accepted accounting principles, the Utilities believe the Commission recognizes the full accrual of such postretirement benefits may be required in future rate proceedings in order to avoid any negative impact on a utility's earnings. The Utilities will defer as a regulatory asset the difference between the amount that would have been charged to expense under pay-as-you-go accounting and the amount accrued in accordance with the new standard. Accordingly, the Utilities believe SFAS No. 106 will not have a material effect on future results of operations. (10) Postemployment Benefits. In November, 1992, the FASB issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits", which requires Industries to accrue the estimated cost of benefits provided to former or inactive employees after employment but before retirement. Industries adopted SFAS No. 112 effective January 1, 1994, and its adoption did not have a material impact on financial position or results of operations. (11) Authorized Classes of Cumulative Preferred and Preference Stocks: Industries - 20,000,000 shares - Preferred - without par value Effective March 2, 1990, 2,000,000 shares of Industries' Series A Junior Participating Preferred Shares were reserved for issuance pursuant to the Share Purchase Rights Plan described in Note 15, Common Shares. 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 12 sets forth the preferred stocks which are redeemable solely at the option of the issuer, and Note 13 sets forth the preferred stocks which are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The Preferred shareholders of Industries and Northern Indiana have no voting rights except in the event of default on the payment of four consecutive quarterly dividends or as required by Indiana law to authorize additional preferred shares or by the Articles of Incorporation in the event of certain merger transactions. (12) Preferred Stocks, Redeemable Solely at the Option of the Issuer, Outstanding at March 31, 1994, and December 31, 1993 (see Note 11):
Redemption Price at March 31, December 31, March 31, 1994 1993 1994 ========== ============= ============ (Dollars in thousands) Northern Indiana Public Service Company Cumulative preferred stock - $100 par value - 4-1/4% series - 211,271 and 211,298 shares outstanding, respectively $ 21,127 $ 21,130 $ 101.20 4-1/2% series - 79,996 shares outstanding 8,000 8,000 100.00 4.22% series - 106,200 shares outstanding 10,620 10,620 101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 102.00 7.44% series - 41,900 shares outstanding 4,190 4,190 101.00 7.50% series - 34,842 shares outstanding 3,484 3,484 101.00 Premium on preferred stock 254 254 Cumulative preferred stock - no par value - Adjustable rate (6.00% at March 31, 1994),Series A (stated value $50 per share) - 801,500 shares outstanding 40,075 40,075 50.00 ________ _________ $ 97,750 $ 97,753 ======== =========
During the period April 1, 1992, to March 31, 1994, there were no issuances of the above preferred stocks. The foregoing preferred stocks are redeemable in whole or in part at any time upon 30 days notice at the option of Northern Indiana at the redemption prices shown, except that the redemption price for the Adjustable Rate Preferred will be reduced periodically in the future. (13) Redeemable Preferred Stocks Outstanding at March 31, 1994, and December 31, 1993 (see Note 11):
March 31, December 31, 1994 1993 ========== ============= (Dollars in thousands) Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of issuer: Northern Indiana Public Service Company: Cumulative preferred stock - $100 par value - 8.85% series - 112,500 shares outstanding, excluding sinking fund payments due within one year $ 11,250 $ 11,250 7-3/4% series - 61,122 shares outstanding, excluding sinking fund payments due within one year 6,112 6,112 8.35% series - 81,000 shares outstanding, excluding sinking fund payments due within one year 8,100 8,100 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 _________ __________ 68,462 68,462 _________ __________ NIPSCO Industries, Inc.: Cumulative preferred shares - without par value - 8.75% series (stated value - - $100 per share), 350,000 shares outstanding 35,000 35,000 _________ __________ $ 103,462 $ 103,462 ========= ==========
On October 13, 1992, Northern Indiana issued and sold through an underwritten public offering 430,000 shares of 6.50% Series Cumulative Preferred Stock for $43 million. The shares are subject to mandatory redemption in whole by Northern Indiana on October 14, 2002. The redemption prices at March 31, 1994, as well as sinking fund provisions for the cumulative preferred stock subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana and Industries are as follows:
Series Redemption Price Per Share Annual Sinking Fund Provisions ====== ========================== ============================== Northern Indiana Public Service Company: Cumulative preferred stock - $100 par value - 8.85% $102.95, reduced periodically 12,500 shares on or before April 1. 8.35% $104.67, reduced periodically 3,000 shares on or before July 1; 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.94, 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. NIPSCO Industries, Inc.: Cumulative preferred shares - without par value - 8.75% $100.00 on January 14, 1996 350,000 shares on January 14, 1996.
Sinking fund requirements with respect to redeemable preferred stocks outstanding at March 31, 1994, for each of the twelve month periods subsequent to March 31, 1995, are as follows:
Twelve Months Ended March 31:* =================================================== 1996 $ 36,827,700 1997 $ 1,827,700 1998 $ 1,827,700 1999 $ 1,827,700 * Table does not reflect redemptions made after March 31, 1994.
(14) Common Share Dividend: During the next few years, Industries expects that the great majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. Northern Indiana's Indenture provides that it will not declare or pay any dividends on any class of capital stock (other than preferred or preference stock) except out of earned surplus or net profits of Northern Indiana. At March 31, 1994, Northern Indiana had approximately $168.2 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. (15) Common Shares: Industries has 200,000,000 common shares authorized without par value. Share Purchase Rights Plan. On February 27, 1990, the Board of Directors of Industries declared a dividend distribution of one Right for each outstanding common share of Industries to shareholders of record on March 12, 1990. The Rights are not currently exercisable. Each Right, when exercisable, would initially entitle the holder to purchase from Industries one one-hundredth of a share of Series A Junior Participating Preferred Shares, without par value, of Industries at a price of $60 per one one-hundredth of a share. In certain circumstances, if an acquirer obtained 25% of Industries' outstanding shares, or merged into Industries or Industries into the acquirer, the Rights would entitle the holders to purchase Industries' or the acquirer's common shares for one-half of the market price. The Rights will not dilute Industries' common shares nor affect earnings per share unless they become exercisable for common shares. The Plan was not adopted in response to any specific attempt to acquire control of Industries. Common Share Repurchases. The Board of Directors of Industries has authorized the repurchase of up to approximately 10.7 million common shares in addition to those required in connection with the acquisitions of Kokomo Gas and NIFL. At March 31, 1994, Industries had purchased 12,363,373 shares at an average price of $22.00 per share of which 1,848,588 shares and 1,112,862 shares were reissued in connection with the Kokomo Gas and NIFL acquisitions, respectively. Approximately 1.3 million additional common shares may be repurchased under the Board's authorizations. (16) Long-Term Incentive Plan: Industries' Long-Term Incentive Plan (the 1988 Plan) for key management employees, which was approved by shareholders on April 13, 1988, provides for the issuance of up to 2,500,000 of Industries' common shares to key employees through 1998. At March 31, 1994, there were 785,000 shares reserved for future awards under the 1988 Plan. The 1988 Plan permits 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, 1994. The stock appreciation rights (SARs) may be exercised only in tandem with stock options on a one-for-one basis and are payable in cash, Industries stock or a combination thereof. Restricted stock awards are restricted as to transfer and subject to forfeiture for specific periods from the date of grant. Restrictions on the shares awarded during 1990 and 1991 lapse five years from date of grant and vest subject to specific share price appreciation conditions. If a participant's employment is terminated other than by reason of death, disability or retirement, restricted shares are forfeited. There were 150,500 and 157,500 restricted shares outstanding at March 31, 1994, and December 31, 1993, respectively. Changes in outstanding shares under option and SARs for three and twelve month periods ended March 31, 1994, and 1993, are as follows:
Nonqualified Stock Options ___________________________________________________ Three Months Ended Option Option March 31, 1994 Price 1993 Price ================== ======================= ======================= Balance beginning of period 890,800 $10.94-$33.19 869,150 $10.94-$26.06 Granted - - Exercised (18,250) $10.94-$26.06 (104,800) $10.94-$22.94 Cancelled (8,300) $33.19 (1,500) $26.06 _______ ________ Balance end of period 864,250 $10.94-$33.19 762,850 $10.94-$26.06 ======= ======== Shares exercisable 584,050 $10.94-$26.06 470,950 $10.94-$22.94 Nonqualified Stock Options With SARs _________________________________________________ Three Months Ended Option Option March 31, 1994 Price 1993 Price ================== ======================= ===================== Balance beginning of period 9,900 $10.94 11,500 $10.94 Granted - - Exercised - - Cancelled - - _______ ________ Balance end of period 9,900 $10.94 11,500 $10.94 ======= ======== Shares exercisable 9,900 $10.94 11,500 $10.94 Nonqualified Stock Options ___________________________________________________ Twelve Months Ended Option Option March 31, 1994 Price 1993 Price ==================== ======================= ======================= Balance beginning of period 762,850 $10.94-$26.06 756,925 $10.94-$22.94 Granted 288,500 $33.19 293,400 $26.06 Exercised (174,600) $10.94-$26.06 (254,775) $10.94-$22.94 Cancelled (12,500) $26.06-$33.19 (32,700) $10.94-$26.06 _______ ________ Balance end of period 864,250 $10.94-$33.19 762,850 $10.94-$26.06 ======= ======== Shares exercisable 584,050 $10.94-$26.06 470,950 $10.94-$22.94 Nonqualified Stock Options With SARs ___________________________________________________ Twelve Months Ended Option Option March 31, 1994 Price 1993 Price =================== ======================= ======================= Balance beginning of period 11,500 $10.94 39,000 $10.94 Granted - - Exercised - (27,500) $10.94 Cancelled (1,600) $10.94 - _______ _______ Balance end of period 9,900 $10.94 11,500 $10.94 ======= ======== Shares exercisable 9,900 $10.94 11,500 $10.94
Industries' 1994 Long-Term Incentive Plan (1994 Plan) was adopted by the shareholders on April 13, 1994. It is similar to the 1988 Plan and provides an additional 2.5 million common shares available for issuance to key employees through 2004. No shares have been issued under the 1994 Plan. The Industries Nonemployee Director Stock Incentive Plan, which was approved by shareholders, provides for the issuance of up to 100,000 of Industries' common shares to nonemployee directors of Industries. The Plan provides for awards of common shares which vest in 20% per year increments, with full vesting after five years. The Plan also allows the award of nonqualified stock options in the future. If a director's service on the Board is terminated for any reason other than death or disability, any common shares not vested as of the date of termination are forfeited. As of April 13, 1994, 24,750 shares were issued under the Plan. (17) Long-term Debt: At March 31, 1994, and December 31, 1993, the long-term debt of Industries' consolidated subsidiaries, excluding amounts due within one year, issued and not retired or cancelled was as follows:
Amount Outstanding ___________________________ March 31, December 31, 1994 1993 ============= ============= (Dollars in thousands) Northern Indiana Public Service Company First mortgage bonds Series N, 4-5/8%, due May 15, 1995 $ 22,436 $ 22,436 Series O, 6-3/8%, due September 1, 1997 27,300 27,507 Series P, 6-7/8%, due October 1, 1998 15,671 15,671 Series S, 8-1/8%, due May 1, 2001 41,000 41,000 Series T, 7-1/2%, due April 1, 2002 40,643 40,643 Series U, 8-1/8%, due July 15, 2003 55,739 55,739 Series Y, 8-3/8%, due October 15, 2006 50,575 50,575 Series Z, 8-1/8%, due August 15, 2007 43,069 43,069 Series AA, 8-1/2%, due November 1, 2007 33,407 33,407 Series LL, 7-1/2%, due October 15, 2014 41,000 41,000 Series MM, 7-1/2%, due October 15, 2004 10,000 10,000 Series NN, 7.10%, due July 1, 2017 55,000 55,000 ___________ __________ Total 435,840 436,047 ___________ __________ Pollution control notes and bonds Series A note - City of Michigan City, 5.70% due October 1, 2003 21,500 21,500 Series 1978 note - County of Jasper, 6.70% due November 1, 2008 18,000 18,000 Series 1988 bonds - Jasper County - Series A, B and C 2.53% weighted average at March 31, 1994, due November 1, 2016 130,000 130,000 Series 1988 bonds - Jasper County - Series D 2.41% weighted average at March 31, 1994, due November 1, 2007 24,000 24,000 ___________ __________ Total 193,500 193,500 ___________ __________ Medium-term notes - Issued at interest rates between 5.83% and 7.64% with a weighted average interest rate of 6.85% and various maturities between April 6, 1998 and August 17, 2023 474,750 454,200 Unamortized premium and discount on long-term debt, net (4,733) (4,663) ___________ __________ Total long-term debt of Northern Indiana Public Service Company 1,099,357 1,079,084 ___________ __________ NIPSCO Capital Markets, Inc. Medium-term note - 9.95% - due June 10, 1996 7,500 7,500 Unamortized discount (14) (16) Zero coupon notes - 7.57%, $72,500 at maturity, due December 1, 1997 55,211 54,191 ___________ __________ Total long-term debt of NIPSCO Capital Markets, Inc. 62,697 61,675 ___________ __________ NIPSCO Development Company, Inc. Lake Erie Land Company - Notes Payable - Interest rates between 6.25% and 7.25% with a weighted average interest rate of 6.68% and various maturities between July 5, 1996 and June 30, 1998 3,212 3,256 Elm Energy and Recycling (UK), Ltd. Term Loan Facility - 6.79% - due December 31, 2004 42,394 41,577 Metals Technology Corporation - Notes Payable - Mortgage note, 6.50% - due September 25, 2005 108 108 ___________ __________ Total long-term debt of NIPSCO Development Company, Inc. 45,714 44,941 ___________ __________ Northern Indiana Fuel and Light Company, Inc. Sinking Fund Debentures - Series G, 9.50%, - due August 1, 2001 3,000 3,000 Series H, 10.80%, - due August 1, 2008 3,800 3,800 ___________ __________ Total long-term debt of Northern Indiana Fuel and Light Company, Inc. 6,800 6,800 ___________ __________ Total long-term debt, excluding amounts due in one year $ 1,214,568 $1,192,500 =========== ==========
The sinking fund requirements of long-term debt outstanding at March 31, 1994, (including the maturity of Northern Indiana's first mortgage bonds: Series N, 4-5/8%, due May 15, 1995; Series O, 6-3/8%, due September 1, 1997; Series P, 6-7/8% due October 1, 1998; Northern Indiana's medium-term notes due from April 6, 1998 to April 13, 1998; NIPSCO Capital Markets' medium-term note due June 10, 1996, and Zero Coupon Notes due December 1, 1997; and Lake Erie Land Company's notes payable due July 5, 1996 to June 30, 1998), for each of the twelve month periods subsequent to March 31, 1995, are as follows:
Twelve Months Ended March 31, ============================== 1996 $ 28,033,643 1997 $ 17,200,678 1998 $ 34,922,423 1999 $ 130,722,423
Unamortized debt expense, premium and discount on long-term debt, applicable to outstanding bonds are being amortized over the lives of such bonds. Reacquisition premiums are being deferred and amortized. Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented, securing the first mortgage bonds issued by Northern Indiana, constitutes a direct first mortgage lien upon substantially all property and franchises, other than expressly excepted property, owned by Northern Indiana. On April 5, 1993, Series V, First Mortgage Bonds, 8.90% due 2004; Series BB, First Mortgage Bonds, 9-7/8% due 2004; and the Series KK, First Mortgage Bonds, 9-1/4% due 2016 were redeemed in total at the option of Northern Indiana. Redemption was accomplished through the issuance of short-term debt. In April, 1993, Northern Indiana sold $125,000,000 in Medium-Term Notes, Series B, due from 1 year to 30 years from date of issue. The proceeds from the sale of the notes were used to repay short-term debt which was incurred to pay at maturity certain of Northern Indiana's previously outstanding medium-term notes and first mortgage bonds. On June 2, 1993, Northern Indiana received authorization from the Commission to issue up to $349,750,000 of Medium-Term Notes, Series C, due from 1 year to 30 years from date of issue for refinancing purposes and paying outstanding long-term debt at maturity. A portion of the proceeds was used to repay short-term debt which was incurred in connection with the first mortgage bonds redeemed on April 5, 1993, and a portion was used for early redemption on August 2, 1993, of $88 million of Northern Indiana's medium-term notes due in 1996. As of January 19, 1994, all of the Medium-Term Notes, Series C, have been issued. On March 4, 1994, the Commission authorized Northern Indiana to issue up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30 years, for purposes of refinancing certain first mortgage bonds and paying short-term debt used to pay at maturity medium-term notes due in January and April, 1994. As of March 31, 1994, none of the Medium-Term Notes, Series D, have been issued. The obligations of Capital Markets are subject to a Support Agreement between Industries and Capital Markets, under which Industries has committed to make payments of interest and principal on Capital Markets' securities in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' investors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse to holders of Capital Markets' securities. The carrying value of those assets other than Northern Indiana, reflected in the consolidated financial statements of Industries, is approximately $305.6 million at March 31, 1994. (18) Short-term Borrowings: Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates September 21, 1996, unless extended by its terms. As of March 31, 1994, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1994, which are expected to be renewed for the subsequent twelve month period. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fee to a combination of fees which are mutually satisfactory to both parties. As of March 31, 1994, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuances of commercial paper. Northern Indiana also has $173.5 million of money market lines of credit. As of March 31, 1994, there were no borrowings outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1994, there were no borrowings outstanding under this facility. On April 5, 1993, Northern Indiana executed a 364-day $50 million private placement loan. The loan was repaid April 4, 1994. Northern Indiana uses commercial paper to fund short-term working capital requirements. As of March 31, 1994, Northern Indiana had no commercial paper outstanding. Capital Markets has a $150 million revolving Credit Agreement which will terminate October 21, 1995, unless extended by its terms. This facility provides short-term financing flexibility to Industries and also serves as the back-up instrument for a commercial paper program. As of March 31, 1994, there were no borrowings outstanding under this agreement. Capital Markets also has $50 million of money market lines of credit. As of March 31, 1994, there were no borrowings outstanding under these lines of credit. As of March 31, 1994, Capital Markets had $32.0 million in commercial paper outstanding, having a weighted average interest rate of 3.83%. NIFL has an unsecured revolving credit agreement with a bank for $2 million. Borrowings bear interest at the bank's prevailing prime rate. As of March 31, 1994, there were no borrowings under this agreement. (19) Operating Leases: On April 1, 1990, Northern Indiana entered into a 20-year agreement for the rental of office facilities from Development at a current annual rental payment of approximately $3.0 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, 1994:
Twelve Months Ended March 31, ============================================= (Dollars in thousands) 1995 $ 5,650 1996 2,972 1997 1,896 1998 1,796 1999 1,761 Later years 24,169 _______ Total minimum payments required $38,244 =======
The consolidated financial statements include rental expense for all operating leases as follows:
March 31, March 31, 1994 1993 ========== ========== (Dollars in thousands) Three months ended $ 1,857 $ 1,729 Twelve months ended $ 7,379 $ 5,496
(20) Commitments: Northern Indiana estimates that approximately $738 million will be expended for construction purposes for the period from January 1, 1994, to December 31, 1998. Substantial commitments have been made by Northern Indiana in connection with this program. Northern Indiana has entered into a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and Mitsubishi Heavy Industries America, Inc., under which Pure Air will provide scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating Station. Services under this contract commenced on June 15, 1992, with annual charges approximating $20 million. The scrubber will receive $14.4 million in government funding for operating and maintenance expenses during a three-year demonstration period. Pure Air is required to meet certain performance standards during the demonstration period commencing with the date above. During this period, either Northern Indiana or Pure Air can terminate this agreement unilaterally. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminates the agreement prior to the end of the 20-year contract period. Harbor Coal Company (Harbor Coal), a wholly-owned subsidiary of Development, has invested in a partnership to finance, construct, own and operate a $65 million pulverized coal injection facility which began commercial operation in August, 1993. The facility receives raw coal, pulverizes it and delivers it to Inland Steel Company blast furnaces for use in the operation of their blast furnaces. Harbor Coal is a 50% partner in the project with an Inland Steel affiliate. Industries has guaranteed the payment and performance of the partnership's obligations under a sale and leaseback of a 50% undivided interest in the facility. (21) Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short maturity of those instruments. Investments at cost: The fair value of some investments are estimated based on market prices for those or similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock are estimated based on the quoted market prices for the same or similar issues or on the rates offered to Industries 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 Industries' financial instruments are as follows:
March 31, 1994 December 31, 1993 ________________________ ______________________ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ========== =========== ========== ========== (Dollars in thousands) Cash and cash equivalents $ 53,850 $ 53,850 $ 16,140 $ 16,140 Investments at cost 7,118 7,655 6,189 6,474 Long-term debt (including current portion) 1,280,381 1,206,159 1,263,029 1,267,728 Preferred stock 203,040 181,280 203,043 185,368
The majority of the long-term debt relates to utility operations. The Utilities are 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. (22) 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 2% of gas revenue (including transportation services) and 24% of electric revenue for the twelve months ended March 31, 1994, as compared to 2% and 25%, respectively, for twelve months ended March 31, 1993. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Holding Company - NIPSCO Industries, Inc. (Industries), an Indiana corporation, became a holding company on March 3, 1988. Northern Indiana Public Service Company (Northern Indiana), Northern Indiana Fuel and Light Company, Inc., (NIFL), Kokomo Gas and Fuel Company (Kokomo Gas), NIPSCO Development Company, Inc., (Development), NIPSCO Energy Services, Inc. (Services), and NIPSCO Capital Markets, Inc. (Capital Markets) are direct subsidiaries of Industries. NIPSCO Fuel Company, Inc. (Fuel), NI-TEX Inc. (NI-TEX) and NIPSCO Energy Trading Corp. (NETCO) are direct subsidiaries of Services. The following discussion, except where noted, is attributable to the utility operations of Northern Indiana, Kokomo Gas, NIFL and Crossroads Pipeline Company (Utilities). Revenues - Total operating revenues for the twelve months ended March 31, 1994, increased $91.8 million as compared to the twelve months ended March 31, 1993. Gas revenues increased $36.7 million and electric revenues increased $55.1 million. The increase in gas revenues was largely attributable to increased sales to residential and commercial customers due to colder weather, inclusion of NIFL for the entire twelve month period, higher purchase gas cost per dekatherm(dth), and was partially offset by decreased transportation revenue per dth delivered due to lower take-or-pay charges. Gas transportation customers purchase much of their gas directly from producers and marketers and then pay a transportation fee to have their gas delivered over the Utilities' systems. The Utilities had approximately 685,500 gas customers at March 31, 1994. The increase in electric revenues for the twelve months ended March 31, 1994, was mainly due to increased sales to residential and commercial customers as a result of warmer weather during the second and third quarters of 1993 and increased sales to industrial customers partially offset by decreased sales to wholesale customers. At March 31, 1994, Northern Indiana had approximately 396,100 electric customers. Total operating revenue for the three months ended March 31, 1994, increased $43.9 million as compared to the three months ended March 31, 1993. Gas revenues increased $28.9 million and electric revenues increased $15.0 million as compared to the same period in 1993. The increase in gas revenues was mainly due to increased sales due to colder weather this year. The increase in electric revenue for the three months ended March 31, 1994, was mainly due to higher sales to residential customers and increased industrial demands. The basic steel industry accounted for 39% of natural gas delivered (including volumes transported) and 40% of electric sales during the twelve months ended March 31, 1994. The components of the variations in gas and electric revenues are shown in the following tables:
Variations from Prior Periods __________________________________ March 31, 1994 Compared to March 31, 1993 Three Months Twelve Months ============= ============= (Dollars in thousands) Gas Revenue - Pass through of net changes in purchased gas costs, gas storage and storage transportation costs $ 5,088 $ 19,907 Take-or-pay costs 816 (16,340) Changes in sales levels 22,505 14,851 Gas transport levels 537 2,497 NIFL acquisition - 15,735 ________ _________ Gas Revenue Change $ 28,946 $ 36,650 ________ _________ Electric Revenue - Pass through of net changes in fuel costs $ 4,012 $ (2,679) Changes in sales levels 10,946 57,819 ________ _________ Electric Revenue Change $ 14,958 $ 55,140 ________ _________ Total Revenue Change $ 43,904 $ 91,790 ======== ========= See Note 5 to the consolidated financial statements (Rate Matters), regarding gas take-or-pay costs.
Gas Costs - The Utilities' gas costs increased $22.5 million for the twelve month period ended March 31, 1994, due to increased purchases resulting from the colder weather during the twelve month period, increased gas costs per dth and the inclusion of purchased gas costs related to NIFL. The average cost for the Utilities purchased gas for the three and twelve month periods ended March 31, 1994, after adjustment for take-or-pay charges billed to transport customers, was $3.10 and $3.23 per dth as compared to $3.09 and $3.17 per dth for the same periods in 1993. Fuel and Purchased Power - The cost of fuel for electric generation increased for the three and twelve month periods ended March 31, 1994, compared to 1993 periods, mainly as the result of increased production. Operating Margins - Operating margins increased $51.0 million for the twelve months ended March 31, 1994, over the same period a year ago. The operating margin from gas deliveries increased $14.2 million, mainly due to the inclusion of NIFL for the entire twelve month period, increased sales to residential and commercial customers due to the colder weather and increased deliveries to gas transportation customers. The operating margins from electric sales increased $36.8 million, mainly due to increased sales to residential and commercial customers as a result of warmer weather in the second and third quarters of 1993 and increased sales to industrial customers, partially offset by decreased sales to wholesale customers. Operating margins increased $14.0 million for the three months ended March 31, 1994, over the same period a year ago. The operating margins from gas increased $8.4 million mainly reflecting increased sales to residential and commercial customers due to colder weather. Operating margins on electric sales increased $5.6 million mainly reflecting increased sales to residential and commercial customers and increased industrial demands. Operating Expenses and Taxes - Operation expenses increased $4.6 and $19.2 million for the three and twelve month periods ended March 31, 1994. Operation expense increased mainly due to higher employee related expenses and NIFL operating expenses for the entire twelve month period. Maintenance expenses decreased $1.0 million for the three month period ended March 31, 1994, mainly due to improved cost controls implemented at the electric production facilities. Maintenance expenses increased $2.8 million for the twelve month period ended March 31, 1994, mainly as a result of a higher level of overall maintenance activity. Depreciation and amortization expense increased for the three and twelve month periods ended March 31, 1994, as a result of net plant additions. Utility income taxes increased for the three and twelve month periods ended March 31, 1994, as a result of increased pre-tax income and the increased Federal income tax rate which was enacted into law in August, 1993, effective retroactively to January 1, 1993. The operating results of all non-utility subsidiaries are included in "Other, net" under the caption, "Other Income (Deductions)" in the Consolidated Statement of Income (except for Exploration's net results of operations, which are reported as a component of gas purchased for resale, since Exploration is subject to Commission rate treatment.) Capital Market's interest on long-term debt, other interest and amortization of debt discount and expense are reflected as components of "Interest and Other Charges." Interest charges (net) decreased for the three and twelve month periods ended March 31, 1994, reflecting Northern Indiana's reduced interest rates on long-term debt outstanding and favorable interest rates on short-term borrowings. See Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies) for a discussion of Carrying Charges and Deferred Depreciation and Allowance for Funds Used During Construction. Also, see Notes 5, 7, 9 and 10 for discussion of FERC Order No. 636, Income Taxes, Postretirement Benefits and Postemployment Benefits, respectively. Net Income - Industries' net income for the twelve month period ended March 31, 1994, was $162.6 million compared to $147.0 million for the twelve month period ended March 31, 1993. Net income for the three months ended March 31, 1994, was $65.0 million compared to $58.6 million for the three months ended March 31, 1993. Environmental Matters Because of major investments made in modern environmental control facilities and the use of low sulfur coal, substantially all of Northern Indiana's electric production facilities comply with the sulfur dioxide limitations contained in acid rain provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana has successfully tested the use of low sulfur coal at Unit 12 at the Michigan City Generating Station, the only generating unit not in compliance with the future sulfur dioxide limitations, and expects that unit to be able to meet the limits with low sulfur coal. Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to strict limitations on emissions of nitrogen oxides and "air toxics", which may require significant capital expenditures for control of these emissions. Northern Indiana cannot predict the costs of complying with them, but Northern Indiana believes that any such mandated costs would be recoverable through the rate making process. The Environmental Protection Agency (EPA) and Indiana have promulgated an air operating permit program to meet the requirements of the CAAA. This permit program increases the fees associated with operating permits for air emissions. Northern Indiana has received notices from the EPA that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation and analysis to determine the amount of remedial costs necessary to clean up the sites. At each of the sites Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA and SARA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the site and avoid the imposition of fines or added costs. While remedial costs at these sites are not presently determinable, Northern Indiana's preliminary analysis indicates its share of such costs should not have a significant impact on the results of future operations. Northern Indiana was notified by the Indiana Department of Environmental Management (IDEM) of the release of a petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a former manufactured gas plant formerly owned by Northern Indiana. In cooperation with IDEM, Northern Indiana has taken steps to investigate and contain the substance. Northern Indiana is continuing to monitor and investigate the site to determine what further remedial action, if any, will be required. Northern Indiana was notified by Indiana Gas Company, Inc. (Indiana Gas) that the site of a former manufactured gas plant in Lafayette, Indiana, believed to have been formerly owned by Northern Indiana, was being investigated and partially remediated by Indiana Gas pursuant to an administrative order issued by IDEM. Northern Indiana is investigating its potential liability and evaluating appropriate action. The Utilities have ongoing programs to remain aware of laws and regulations involved with hazardous waste. It is the Utilities' intent to continue to evaluate their facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has commenced a voluntary program of investigating its former manufactured gas plant sites in order to determine what, if any, remediation of any potential remaining waste materials may be required. Since this program is in its early stages, it is not possible at this time to estimate what, if any, remediation costs may be incurred. The possibility that exposure to electric and magnetic fields emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental and media attention. A considerable amount of scientific research has been conducted on this topic without definitive results. Research is continuing to resolve scientific uncertainties. Liquidity and Capital Resources During the next few years, it is anticipated that the great majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. See Notes to Consolidated Financial Statements for a discussion of the Common Share Dividend. On April 5, 1993, Series V, First Mortgage Bonds, 8.90% due 2004; Series BB, First Mortgage Bonds, 9-7/8% due 2004; and the Series KK, First Mortgage Bonds, 9-1/4% of 2016 were redeemed in total at the option of Northern Indiana. Redemption was accomplished through the issuance of short-term debt. In April, 1993, Northern Indiana sold $125,000,000 in Medium-Term Notes, Series B, due from 1 year to 30 years from date of issue. The proceeds from the sale of the notes were used to repay short-term debt which was incurred to pay at maturity certain of Northern Indiana's previously outstanding medium-term notes and first mortgage bonds. On June 2, 1993, Northern Indiana received authorization from the Commission to issue up to $349,750,000 of Medium-Term Notes, Series C, due from 1 year to 30 years from date of issue for refinancing purposes and paying outstanding long-term debt at maturity. A portion of the proceeds was used to repay short-term debt which was incurred in connection with the first mortgage bonds redeemed on April 5, 1993, and a portion was used for early redemption on August 2, 1993, of $88 million of Northern Indiana's medium-term notes due in 1996. As of January 19, 1994, all of the Medium-Term Notes, Series C, have been issued. On March 4, 1994, the Commission authorized Northern Indiana to issue up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30 years, for purposes of refinancing certain first mortgage bonds and paying short-term debt used to pay at maturity medium-term notes due in January and April, 1994. As of March 31, 1994, none of the Medium-Term Notes, Series D, have been issued. Capital Markets has a $150 million revolving Credit Agreement which will terminate October 21, 1995, unless extended by its terms. This facility provides short-term financing flexibility at the holding company level and also serves as the back-up instrument for a commercial paper program. As of March 31, 1994, there were no borrowings outstanding under this agreement. Capital Markets also has $50 million of money market lines of credit. As of March 31, 1994, there were no borrowings outstanding under these lines of credit. As of March 31, 1994, Capital Markets had $32.0 million in commercial paper outstanding, having a weighted average interest rate of 3.83%. The obligations of Capital Markets are subject to a Support Agreement between Industries and Capital Markets, under which Industries has committed to make payments of interest and principal on Capital Markets securities in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' investors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse to holders of Capital Markets' securities. The carrying value of those assets other than Northern Indiana, reflected in the consolidated financial statements of Industries, is approximately $305.6 million at March 31, 1994. NIFL has an unsecured revolving credit agreement with a bank for $2 million. Borrowings bear interest at the bank's prevailing prime rate. As of March 31, 1994, there were no borrowings under this agreement. Cash flow from operations has provided sufficient liquidity to meet current operating requirements. Because of the seasonal nature of the utility business and the construction program, Northern Indiana makes use of commercial paper intermittently as short-term financing. As of March 31, 1994, Northern Indiana had no commercial paper outstanding. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates September 21, 1996, unless extended by its terms. As of March 31, 1994, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1994, which are expected to be renewed for the subsequent twelve month period. As of March 31, 1994, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuances of commercial paper. Northern Indiana also has $173.5 million of money market lines of credit. As of March 31, 1994, there were no borrowings outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1994, there were no borrowings outstanding under this facility. On April 5, 1993, Northern Indiana executed a 364-day $50 million private placement loan. The loan was repaid on April 4, 1994. During recent years, Northern Indiana has been able to finance its construction program with internally generated funds and expects to be able to meet future commitments through such funds. The Utilities do not expect the effects of inflation at current levels to have a significant impact on their results of operations, ability to contain cost increases or need to seek timely and adequate rate relief. The Utilities do not anticipate the need to file for gas or electric base rate increases in the near future. Item 1. Legal Proceedings. Industries and Northern Indiana are parties to various legal or administrative proceedings before courts and agencies with respect to matters occurring in the ordinary course of business. Although management of Industries cannot predict the ultimate outcome of these matters, it believes the final disposition of these matters will not have a material adverse effect on the financial position or results of operations of Industries. Information regarding various matters involving federal and state environmental laws and regulations and pending tax matter is included in Notes 6 and 3, respectively, of Industries financial statements under Part I, Item 1 of this Report on Form 10-Q. Item 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. (a) On April 13, 1994, at the Annual Meeting of Shareholders of the registrant, shareholders of the registrant elected Arthur J. Decio, Gary L. Neale and Robert J. Welsh, Jr. as directors to serve until the 1997 Annual Meeting of Shareholders. Directors whose term of office as a director continue after the 1994 Annual Meeting of Shareholders are Steven C. Beering, Ernestine M. Raclin and Denis E. Ribordy whose terms expire at the 1995 Annual Meeting of Shareholders, and Ian M. Rolland, Edmund A. Schroer and John W. Thompson,whose terms expire at the 1996 annual Meeting of Shareholders. There were no abstentions and no broker non-votes for any of the nominees for directors. The number of votes cast for, or withheld, for each nominee for director was as follows.
For Withheld __________ ________ Arthur J. Decio 53,972,149 316,489 Gary L. Neale 53,954,131 334,507 Robert J. Welsh, Jr. 53,968,582 320,056
Also, on April 13, 1994, shareholders of the registrant approved the 1994 Long-Term Incentive Plan. There were no broker non-votes for the 1994 Long-Term Incentive Plan. The number of votes cast for, against, or withheld for the 1994 Long-Term Incentive Plan was 42,806,286 for, 10,843,205 against, and 639,147 abstained. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 23-Consent of Arthur Andersen & Co. (b) Reports on Form 8-K. None 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. NIPSCO Industries, Inc. (Registrant) /s/Jerry M. Springer _____________________________ Jerry M. Springer, Controller and Chief Accounting Officer Date May 11,1994 EX-23 2 EXHIBIT-23 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 NIPSCO Industries, Inc.'s previously filed Form S-8 Registration Statement, No. 33-30619; and Form S-8 Registration Statement, No. 33-30621. Arthur Andersen & Co. Chicago, Illinois May 11, 1994 -----END PRIVACY-ENHANCED MESSAGE-----