-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JbcRmBcAniCsjHlBYz/3RctPgBefEoLaOI+GVWK4/zGsbogQp53MJcqmItxBk3Ol SLSRH9Ux7dijGYXdx2zOQw== 0000823392-97-000004.txt : 19970514 0000823392-97-000004.hdr.sgml : 19970514 ACCESSION NUMBER: 0000823392-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIPSCO INDUSTRIES INC CENTRAL INDEX KEY: 0000823392 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [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: 97602949 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 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, 1997 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ________________ Commission file number 1-9779 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. Yes X No -------- -------- As of April 30, 1997, 62,820,977 common shares were outstanding. NIPSCO INDUSTRIES, INC. Part I. FINANCIAL INFORMATION Item I. FINANCIAL STATEMENTS 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, 1997, and December 31, 1996, and the related consolidated statements of income, common shareholders' equity and cash flows for the three and twelve month periods ended March 31, 1997 and 1996. 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, 1997, and December 31, 1996, and the results of their operations and their cash flows for the three and twelve month periods ended March 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois April 28, 1997
CONSOLIDATED BALANCE SHEET March 31, December 31, ASSETS 1997 1996 ============= ============ (Dollars in thousands) UTILITY PLANT, (INCLUDING CONSTRUCTION WORK IN PROGRESS OF $147,860 AND $166,812, RESPECTIVELY) (Note 2): Electric $ 4,063,203 $ 4,050,084 Gas 1,351,511 1,344,230 Common 348,637 346,636 Water 537,202 0 ------------ ------------ 6,300,553 5,740,950 Less - Accumulated provision for depreciation and amortization 2,679,411 2,546,162 ------------ ------------ Total Utility Plant 3,621,142 3,194,788 ------------ ------------ OTHER PROPERTY AND INVESTMENTS: Other property, at cost, less accumulated provision for depreciation 158,330 147,370 Investments, at equity (Note 2) 61,233 52,260 Investments, at cost (Note 2) 30,476 30,424 Other investments 20,596 20,090 ------------ ------------ Total Other Property and Investments 270,635 250,144 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents 92,276 26,333 Accounts receivable, less reserve of $6,911 and $5,569, respectively (Note 2) 180,423 165,441 Other receivables 82,195 42,184 Fuel adjustment clause (Note 2) 12,930 9,149 Gas cost adjustment clause (Note 2) 87,986 100,214 Materials and supplies, at average cost 62,430 59,859 Electric production fuel, at average cost 24,132 26,483 Natural gas in storage (Note 2) 18,018 65,093 Prepayments and other 31,930 28,491 ------------ ------------ Total Current Assets 592,320 523,247 ------------ ------------ OTHER ASSETS: Regulatory assets (Note 2) 241,824 236,205 Intangible assets (Note 2) 80,488 0 Prepayments and other 104,164 84,499 ------------ ------------ Total Other Assets 426,476 320,704 ------------ ------------ $ 4,910,573 $ 4,288,883 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED BALANCE SHEET March 31, December 31, CAPITALIZATION AND LIABILITIES 1997 1996 ============ ============ (Dollars in thousands) CAPITALIZATION: Common shareholders' equity (See accompanying statement) $ 1,297,116 $ 1,100,501 Cumulative preferred stocks (Note 12) - Series without mandatory redemption provisions (Note 13) 85,622 81,126 Series with mandatory redemption provisions (Note 14) 61,246 61,246 Long-term debt excluding amounts due within one year (Note 18) 1,372,086 1,127,106 ------------ ------------ Total Capitalization 2,816,070 2,369,979 ------------ ------------ CURRENT LIABILITIES: Current portion of long-term debt (Note 19) 153,143 144,552 Short-term borrowings (Note 20) 273,807 425,985 Accounts payable 299,840 251,730 Sinking funds due within one year (Notes 14 and 18) 3,328 3,328 Dividends declared on common and preferred stocks 27,948 28,308 Customer deposits 20,196 17,580 Taxes accrued 151,607 78,723 Interest accrued 19,121 7,557 Accrued employment costs 41,843 44,186 Other accruals 62,184 30,054 ------------ ------------ Total Current Liabilities 1,053,017 1,032,003 ------------ ------------ OTHER: Deferred income taxes (Note 9) 632,657 602,745 Deferred investment tax credits, being amortized over life of related property (Note 9) 111,111 108,258 Deferred credits 56,861 37,338 Customer advances and contributions in aid of construction (Note 2) 101,976 15,830 Accrued liability for postretirement benefits (Note 11) 124,041 109,429 Other noncurrent liabilities 14,840 13,301 ------------ ------------ Total Other 1,041,486 886,901 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 6, 8, 21, 22 and 23) $ 4,910,573 $ 4,288,883 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME Three Months Twelve Months Ended March 31, Ended March 31, ---------------------- ---------------------- 1997 1996 1997 1996 ========== ========== ========== ========== (Dollars in thousands, except for per share amounts) Operating Revenues: (Notes 2, 7, and 25) Gas $ 333,400 $ 327,604 $ 805,191 $ 734,096 Electric 245,824 248,424 1,019,631 1,041,759 ---------- ---------- ---------- ---------- 579,224 576,028 1,824,822 1,775,855 ---------- ---------- ---------- ---------- Cost of Energy: (Note 2) Gas costs 214,840 199,258 499,359 426,072 Fuel for electric generation 58,408 57,202 234,421 245,754 Power purchased 8,960 11,961 50,750 44,678 ---------- ---------- ---------- ---------- 282,208 268,421 784,530 716,504 ---------- ---------- ---------- ---------- Operating Margin 297,016 307,607 1,040,292 1,059,351 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 73,510 79,148 288,602 299,298 Maintenance (Note 2) 17,622 17,796 69,849 74,636 Depreciation and amortization (Note 2) 56,139 53,456 217,711 205,476 Taxes (except income) 20,895 20,745 74,454 73,765 ---------- ---------- ---------- ---------- 168,166 171,145 650,616 653,175 ---------- ---------- ---------- ---------- Operating Income Before Utility Income Taxes 128,850 136,462 389,676 406,176 ---------- ---------- ---------- ---------- Utility Income Taxes (Note 9) 38,268 41,467 107,796 112,342 ---------- ---------- ---------- ---------- Operating Income 90,582 94,995 281,880 293,834 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) 9,304 461 14,536 (2,949) ---------- ---------- ---------- ---------- Interest and Other Charges: Interest on long-term debt 20,795 21,469 84,708 84,463 Other interest 5,287 3,374 19,362 12,335 Allowance for borrowed funds used during construction and carrying charges (Note 2) (334) (231) (999) (1,969) Amortization of premium, reacquisition premium, discount and expense on debt, net 1,133 1,159 4,579 4,516 Dividend requirements on preferred stocks of subsidiary 2,167 2,199 8,680 8,920 ---------- ---------- ---------- ----------- 29,048 27,970 116,330 108,265 ---------- ---------- ---------- ---------- Net Income 70,838 67,486 180,086 182,620 Dividend requirements on preferred shares 0 119 0 2,416 ---------- ---------- ---------- ---------- Balance available for common shareholders $ 70,838 $ 67,367 $ 180,086 $ 180,204 ========== ========== ========== ========== Average common shares outstanding 59,558,343 62,064,667 60,570,358 62,776,503 Earnings per average common share $ 1.18 $ 1.08 $ 2.97 $ 2.87 ========== ========== ========== ========== Dividends declared per common share $ 0.45 $ 0.42 $ 1.74 $ 1.62 ========== ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY Dollars in Thousands --------------------------------------------------- Additional Common Paid-in Retained Three Months Ended Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, January 1, 1996 $ 1,122,215 $ 870,930 $ 32,210 $ 518,837 Net income 67,486 67,486 Dividends: Preferred shares (119) (119) Common shares (25,794) (25,794) Treasury shares acquired (38,488) Issued: Employee stock purchase plan 303 177 Long-term incentive plan 335 154 Amortization of unearned compensation 614 Unrealized gain(loss) on available for sale securities (53) Other (149) (9) ----------- ----------- ----------- ----------- Balance, March 31, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401 =========== =========== =========== =========== Balance, January 1, 1997 $ 1,100,501 $ 870,930 $ 32,868 $ 591,370 Net income 70,838 70,838 Dividends: Preferred shares Common shares (26,273) 26,273) Treasury shares acquired (56,591) Issued: IWC Resources acquisition 207,552 55,043 Employee stock purchase plan 188 113 Long-term incentive plan 765 94 Amortization of unearned compensation 503 Unrealized gain (loss) on available for sale securities 29 Other (396) (35) ----------- ----------- ----------- ----------- Balance, March 31, 1997 $ 1,297,116 $ 870,930 $ 88,118 $ 635,900 =========== =========== =========== =========== Dollars in Thousands Shares --------------------------------------- ----------- Currency Three Months Ended Treasury Translation Common (continued) Shares Adjustment Other Shares ======================== =========== =========== =========== =========== Balance, January 1, 1996 $ (293,223) $ (1,930) $ (4,609) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (38,488) Issued: Employee stock purchase plan 126 Long-term incentive plan 643 (462) Amortization of unearned compensation 614 Unrealized gain (loss) on available for sale securities (53) Other (140) ----------- ----------- ----------- ----------- Balance, March 31, 1996 $ (330,942) $ (2,070) $ (4,510) 73,892,109 =========== =========== =========== =========== Balance, January 1, 1997 $ (392,995) $ (140) $ (1,532) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (56,591) Issued: IWC Resources acquisition 152,509 Employee stock purchase plan 75 Long-term incentive plan 1,022 (351) Amortization of unearned compensation 503 Unrealized gain (loss) on available for sale securities 29 Other (361) ----------- ----------- ----------- ----------- Balance, March 31, 1997 $ (295,980) $ (501) $ (1,351) 73,892,109 =========== =========== =========== =========== Shares ----------- Three Months Ended Treasury (continued) Shares ======================== =========== Balance, January 1, 1996 (11,512,513) Net income Dividends: Preferred shares Common shares Treasury shares acquired (1,023,677) Issued: Employee stock purchase plan 7,927 Long-term incentive plan 24,900 Amortization of unearned compensation Other ----------- Balance, March 31, 1996 (12,503,363) =========== Balance, January 1, 1997 (14,086,448) Net income Dividends: Common shares Treasury shares acquired (1,429,607) Issued: IWC Resources acquisition 5,293,875 Employee stock purchase plan 4,754 Long-term incentive plan 35,550 Amortization of unearned compensation Unrealized gain on available for sale securities Other ------------ Balance, March 31, 1997 (10,181,876) ============ Dollars in Thousands ------------------------------------------------------ Additional Common Paid-in Retained Twelve Months Ended Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, April 1, 1995 $ 1,134,786 $ 870,930 $ 31,806 $ 481,176 Net income 182,620 182,620 Dividends: Preferred shares (2,416) (2,416) Common shares (100,880) (100,880) Treasury shares acquired (97,223) Issued: Employee stock purchase plan 602 336 Long-term incentive plan 5,858 179 Amortization of unearned compensation 2,454 Unrealized gain (loss) on available for sale securities 1,616 Other (1,067) 220 (99) ----------- ----------- ---------- ----------- Balance, March 31, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401 ----------- ----------- ---------- ----------- Net income 180,086 180,086 Dividends: Preferred shares 0 0 Common shares (104,460) (104,460) Treasury shares acquired (123,601) Issued: IWC Resources acquisition 207,552 55,043 Employee stock purchase plan 668 390 Long-term incentive plan 5,441 126 Amortization of unearned compensation 2,459 Unrealized gain (loss) on available for sale securities 1,161 Other 1,460 18 (127) ----------- ----------- ---------- ----------- Balance, March 31, 1997 $ 1,297,116 $ 870,930 $ 88,118 $ 635,900 =========== =========== ========== =========== Dollars in Thousands Shares -------------------------------------- ----------- Currency Twelve Months Ended Treasury Translation Common (continued) Shares Adjustment Other Shares ======================== =========== =========== ========== =========== Balance, April 1, 1995 $ (240,222) $ (882) $ (8,022) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (97,223) Issued: Employee stock purchase plan 266 Long-term incentive plan 6,237 (558) Amortization of unearned compensation 2,454 Unrealized gain on available for sale securities 1,616 Other (1,188) ----------- ----------- ---------- ----------- Balance, March 31, 1996 $ (330,942) $ (2,070) $ (4,510) 73,892,109 ----------- ----------- ---------- ----------- Net income Dividends: Preferred shares Common shares Treasury shares acquired (123,601) Issued: IWC Resources acquisition 152,509 Employee stock purchase plan 278 Long-term incentive plan 5,776 (461) Amortization of unearned compensation 2,459 Unrealized gain (loss) on available for sale securities 1,161 Other 1,569 ----------- ----------- ---------- ----------- Balance, March 31, 1997 $ (295,980) $ (501) $ (1,351) 73,892,109 =========== =========== ========== =========== Shares ----------- Twelve Months Ended Treasury (continued) Shares ======================== =========== Balance, April 1, 1995 (10,020,238) Net income Dividends: Preferred shares Common shares Treasury shares acquired (2,747,343) Issued: Employee stock purchase plan 16,718 Long-term incentive plan 247,500 Amortization of unearned compensation Other ----------- Balance, March 31, 1996 (12,503,363) ----------- Net income Dividends: Preferred shares Common shares Treasury shares acquired (3,199,534) Issued: IWC Resources acquisition 5,293,875 Employee stock purchase plan 17,496 Long-term incentive plan 209,650 Amortization of unearned compensation Unrealized gain on available for sale securities Other ----------- Balance, March 31, 1997 (10,181,876) =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, ----------------------- 1997 1996 ========= ========= (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 70,838 $ 67,486 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 56,139 53,456 Deferred federal and state operating income taxes, net (7,838) 14,991 Deferred investment tax credits, net (1,802) (1,670) Advance contract payment 475 (18,525) Change in certain assets and liabilities - * Accounts receivable, net (26,224) (44,955) Electric production fuel 2,351 (5,688) Materials and supplies 220 666 Natural gas in storage 47,075 48,978 Accounts payable 55,650 31,150 Taxes accrued 71,234 44,456 Fuel adjustment clause (3,781) 1,834 Gas cost adjustment clause 12,228 (47,674) Accrued employment costs (4,821) (8,793) Other accruals 25,511 12,307 Other, net 7,863 9,081 --------- --------- Net cash provided by operating activities 305,118 157,100 --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Utility construction expenditures (46,396) (37,308) Construction expenditures related to Crossroads Pipeline Company (185) (85) Acquisition of IWC Resources Corporation, net of cash acquired (288,932) 0 Proceeds from disposition of assets 29,500 0 Other, net (19,352) (13,917) --------- --------- Net cash used in investing activities (325,365) (51,310) --------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 136,302 76,297 Issuance of short-term debt 254,045 339,688 Net change in commercial paper (142,305) (24,100) Retirement of long-term debt (1,469) (1,117) Retirement of short-term debt (285,620) (384,735) Retirement of preferred shares (1) (35,000) Issuance of common shares 208,486 608 Acquisition of treasury shares (56,591) (38,488) Cash dividends paid on common shares (26,772) (26,209) Cash dividends paid on preferred shares 0 (119) Other, net 115 141 --------- --------- Net cash provided by (used in) financing activities 86,190 (93,034) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 65,943 12,756 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,333 28,496 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 92,276 $ 41,252 ========= ========= *Net of effect from purchase of IWC Resources Corporation. Twelve Months Ended March 31, ----------------------- 1997 1996 ========= ========= (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 180,086 $ 182,620 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 217,711 205,476 Deferred federal and state operating income taxes, net 4,590 29,367 Deferred investment tax credits, net (7,540) (7,317) Advance contract payment 1,900 (18,525) Change in certain assets and liabilities - * Accounts receivable, net (37,712) (48,106) Electric production fuel (4,186) 4,989 Materials and supplies 4,739 4,402 Natural gas in storage (6,112) 10,122 Accounts payable 105,513 32,859 Taxes accrued 43,780 (35,661) Fuel adjustment clause (4,463) (8,100) Gas cost adjustment clause (38,889) (70,443) Accrued employment costs 1,463 (960) Other accruals (299) 12,436 Other, net (10,578) 8,594 --------- --------- Net cash provided by operating activities 450,003 301,753 --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Utility construction expenditures (193,187) (173,102) Construction expenditures related to Crossroads Pipeline Company (4,856) (3,083) Acquisition of IWC Resources Corporation, net of cash acquired (288,932) 0 Proceeds from disposition of assets 29,500 0 Other, net (32,655) (57,630) --------- --------- Net cash used in investing activities (490,130) (233,815) --------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 138,371 251,501 Issuance of short-term debt 1,496,567 1,359,800 Net change in commercial paper 73,500 (15,700) Retirement of long-term debt (90,144) (122,358) Retirement of short-term debt (1,510,619) (1,304,585) Retirement of preferred shares (2,605) (38,525) Issuance of common shares 213,594 6,601 Acquisition of treasury shares (123,601) (97,223) Cash dividends paid on common shares (103,753) (100,106) Cash dividends paid on preferred shares (647) (2,416) Other, net 488 168 --------- --------- Net cash provided by (used in) financing activities 91,151 (62,843) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 51,024 5,095 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41,252 36,157 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 92,276 $ 41,252 ========= ========= *Net of effect of IWC Resources Corporation. 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) is an energy/utility based holding company providing electric energy and natural gas to the public through its four regulated subsidiaries: Northern Indiana Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); and Crossroads Pipeline Company (Crossroads). Industries' non-utility businesses are primarily energy or utility related. These include energy marketing and trading; power generation; oil and gas exploration and development; gas transmission, supply and storage; and related products targeted at customer segments. On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's subsidiaries currently include two regulated water utilities and non-regulated companies providing utility-related services including utility line locating and marking and installation, and repair and maintenance of underground pipelines. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Industries; its regulated subsidiaries and all non-utility subsidiaries. Industries' regulated subsidiaries, including Indianapolis Water Company (IWC) and Harbour Water Company (Harbour), are referred to as "Utilities". Industries' regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy Utilities"; and regulated water subsidiaries (IWC and Harbour) are referred to as "Water Utilities". Investments for which Industries has at least a 20% interest and certain joint ventures are accounted for under the equity method of accounting. Investments with less than a 20% interest are accounted for under the cost method of accounting. The operating results of the non-utility subsidiaries, as well as the non-operating results of the Utilities, are included under the caption "Other Income (Deductions)" in the Consolidated Statement of Income. 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. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OPERATING REVENUES. Revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on a straight-line method over the remaining service lives of the electric, gas, and common properties. The provisions, as a percentage of the cost of depreciable utility plant, were approximately 4.3% for the three-month and twelve-month periods ended March 31, 1997, respectively; and 4.2% and 4.1% for the three-month and twelve-month periods ended March 31, 1996. 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 3.2% for the three-month and twelve-month periods ended March 31, 1997; and 3.1% for the three-month and twelve-month periods ended March 31, 1996. NIFL provides depreciation on the original cost of utility plant in service using straight-line rates that averaged approximately 2.75% for the three-month and twelve-month periods ended March 31, 1997 and March 31, 1996. Crossroads provides depreciation on the original cost of utility plant in service using straight-line rates that averaged approximately 2.5% for the three-month and twelve-month periods ended March 31, 1997 and March 31, 1996. 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 for repairs of transportation and service equipment which are charged to clearing accounts and redistributed to operating expense and other accounts. When property which represents a retirement unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. AMORTIZATION OF SOFTWARE COSTS. Industries amortizes capitalized software costs using the straight-line method based on estimated economic lives. PLANT ACQUISITION ADJUSTMENTS. Utility plant includes amounts representing the excess of purchase price over underlying book values associated with the acquisitions of Kokomo Gas, NIFL, IWC and Harbour. These amounts are $171.2 million (see Note 4) and $40.6 million at March 31, 1997 and December 31, 1996, respectively, and are being amortized over a forty-year period from their respective dates of acquisition. INTANGIBLE ASSETS. The excess of cost over the fair value of the net assets of non-utility subsidiaries acquired as part of the IWCR acquisition (see Note 4) has been recorded as goodwill and is being amortized over a forty-year period from the date of acquisition. 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. NIPSCO Fuel Company, Inc., a wholly-owned subsidiary of Services, 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, 1997, Northern Indiana had sold $100 million of its accounts receivable under a sales agreement which expires May 31, 1997, and is expected to be renewed. CUSTOMER ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION. IWC allows developers to install and provide for the installation of water main extensions, which are to be transferred to IWC upon completion. The cost of the main extensions and the amount of any funds advanced for the cost of water mains installed are included in customer advances for construction and are generally refundable to the customer over a period of ten years. Advances not refunded within ten years are permanently transferred to contributions in aid of construction. 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, ------------------- ------------------- 1997 1996 1997 1996 ======== ======== ======== ======== (Dollars in thousands) Income taxes $ 0 $ 0 $ 75,795 $117,940 Interest, net of amounts capitalized $ 12,111 $ 10,404 $ 88,988 $ 83,816
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect increases and decreases in the cost of fuel and the fuel cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the Indiana Utility Regulatory Commission (Commission) applicable to metered retail rates, the adjustment factor has been calculated based on the estimated cost of fuel and the fuel cost of purchased power in a future three-month period. If two statutory requirements relating to expense and return levels are satisfied, any under-recovery or over-recovery caused by variances between estimated and actual cost in a given three-month period will be included in a future filing. Northern Indiana records any under-recovery or over-recovery as a current asset or current liability until such time as it is billed or refunded to its customers. The fuel adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment factor which reflects the cost of purchased gas, contracted gas storage, and storage transportation charges. The Energy Utilities record any under- recovery or over-recovery 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 semi-annual hearings 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-recovery or over-recovery caused by variances between estimated and actual cost in a given three-month or six-month period will be included in a future filing. See Note 7, FERC Order No. 636 for a discussion of gas transition cost charges. NATURAL GAS IN STORAGE. Northern Indiana's natural gas in storage is valued using the last-in, first-out (LIFO) inventory methodology. Based on the average cost of gas purchased in March 1997 and December 1996 the estimated replacement cost of gas in storage (current and non-current) at March 31, 1997 and December 31, 1996 exceeded the stated LIFO cost by approximately $20 million and $96 million, respectively. Certain other subsidiaries of Industries have natural gas in storage valued at average cost. HEDGING ACTIVITIES. Industries' gas subsidiaries use commodity futures contracts, options and swaps (derivative financial instruments) to hedge the impact of natural gas price fluctuations related to its business activities. Gains and losses on these derivative financial instruments are deferred and recognized in income concurrent with the related purchases and sales of natural gas. As of March 31, 1997, Industries had open derivative financial instruments representing hedges of natural gas sales of 5.5 billion cubic feet (Bcf) and net basis differentials of 3.3 Bcf. The deferred gain on these derivative financial instruments at March 31, 1997 was not material. NESI Power Marketing, Inc., a subsidiary of Services, uses options to hedge price risk associated with a portion of its fixed price purchase and sale commitments related to electricity. Unrealized gains (losses) on these option contracts at March 31, 1997 are not material. IMPACT OF ACCOUNTING STANDARDS. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This statement specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock. Its objective is to simplify the computation of earnings per share and to make the U.S. standard for computing earnings per share more compatible with the standards of other countries and with that of the International Accounting Standards Committee. This statement is effective for fiscal years ending after December 15, 1997. Industries will adopt this statement at year-end 1997 and does not expect adoption of the statement to have a significant impact on its current earnings per share calculation. 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 SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." The Utilities monitor changes in market and regulatory conditions and the resulting impact of such changes in order to continue to apply the provisions of SFAS No. 71 to some or all of its operations. As of March 31, 1997 and December 31, 1996, the regulatory assets identified below represent probable future revenue to the Utilities associated with certain incurred costs as these costs are recovered through the rate-making process. If a portion of the Utilities' operations becomes no longer subject to the provisions of SFAS No. 71, a write-off of certain of the regulatory assets identified below might be required. Regulatory assets were comprised of the following items and were reflected in the Consolidated Balance Sheet as follows:
March 31, December 31, 1997 1996 ============= ============ (Dollars in thousands) Unamortized reacquisition premium on debt (Note 18) $ 49,384 $ 50,262 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 69,709 70,763 Bailly scrubber carrying charges and deferred depreciation (See below) 10,582 10,816 Deferral of SFAS No. 106 expense not recovered (Note 11) 91,965 87,557 FERC Order No. 636 transition costs (Note 7) 40,357 47,399 Regulatory income tax asset (Note 9) 7,728 4,736 Other 4,456 0 ------------- ------------ 274,181 271,533 Less: Current portion of regulatory assets 32,357 35,328 ------------- ------------ $ 241,824 $ 236,205 ============= ============
CARRYING CHARGES AND DEFERRED DEPRECIATION. Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges and deferred depreciation in accordance with orders of the Commission until the cost of each unit was allowed in rates. Such carrying charges and deferred depreciation are being amortized over the remaining life of each unit. Northern Indiana has capitalized carrying charges and deferred depreciation and certain operating expenses relating to its scrubber service agreement for its Bailly Generating Station in accordance with an order of the Commission. Pursuant to such order, capitalization of carrying charges and deferral of depreciation and certain operating expenses ceased on December 31, 1995. The accumulated balance of the deferred costs and related carrying charges is being amortized over the remaining life of the scrubber service agreement. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds used during construction (AFUDC) is charged to construction work in progress during the period of construction and represents the net cost of borrowed funds used for construction purposes and a reasonable rate upon other (equity) funds. Under established regulatory rate practices, after the construction project is placed in service, Northern Indiana is permitted to include in the rates charged for utility services (a) a fair return on and (b) depreciation of such AFUDC included in plant in service. At January 1, 1995, a pre-tax rate of 6.0% for all construction was being used; effective January 1, 1996 the rate decreased to 5.5%; and effective January 1, 1997, the rate increased to 6.0%. FOREIGN CURRENCY TRANSLATION. Translation gains or losses are based upon the end-of-period exchange rate and are recorded as a separate component of common shareholders' equity. INVESTMENTS IN REAL ESTATE. NIPSCO Development Company, Inc. (Development), a wholly-owned subsidiary of Industries, has invested in a series of affordable housing projects in the Utilities' service territories. These investments include certain tax benefits, including low-income housing tax credits and tax deductions for operating losses of the housing projects. Development accounts for these investments using the equity method. Investments, at equity, include $31.3 million and $24.1 million relating to affordable housing projects at March 31, 1997 and December 31, 1996, respectively. 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. (3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service (IRS) issued a notice of deficiency for Northern Indiana's taxes for the years 1982 through 1985 ($3,785,250 per year plus interest) relating to interest payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's former foreign subsidiary, Northern Indiana Public Service Finance N.V. (Finance). The IRS believes that interest paid on the Notes should have been subject to United States tax withholding. The Notes were redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991, Northern Indiana challenged the assessment in the United States Tax Court (Tax Court) and the matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor of Northern Indiana, finding that the interest paid on the Notes was not subject to United States tax withholding. On March 13, 1996, the IRS appealed the Tax Court's decision to the U. S. Court of Appeals for the Seventh Circuit, and on March 25, 1996 Northern Indiana filed its cross appeal. The case was argued on February 20, 1997. Northern Indiana's management and general counsel believe the favorable ruling of the Tax Court will prevail. (4) PURCHASE OF IWC RESOURCES CORPORATION: On March 25, 1997, Industries acquired all the outstanding common stock of IWC Resources Corporation (IWCR) for $290.5 million. Industries financed this transaction with debt of approximately $83.0 million and issuance of approximately 5.3 million Industries' common shares. Industries accounted for the acquisition as a purchase, and the purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. The accompanying consolidated financial statements reflect a preliminary allocation of the purchase price (see Note 2) as the purchase price allocation has not been finalized. Following is a summary of the assets acquired and liabilities assumed in the acquisition of IWCR: (Dollars in thousands) Assets acquired: Utility plant (net of accumulated depreciation) $ 448,387 Other property and investments 26,526 Other current assets 34,826 Intangible assets 80,020 Other noncurrent assets 22,350 --------- 612,109 Less: Liabilities assumed: Long-term debt 112,185 Preferred stock 4,497 Short-term debt 28,329 Other current liabilities 23,315 Customer advances and contributions in aid of construction 86,175 Other noncurrent liabilities 67,071 --------- 321,572 --------- Net assets acquired $ 290,537 =========
On a pro forma basis, the acquisition of IWCR would not have a significant effect on Industries' consolidated results of operations. (5) ELM ENERGY AND RECYCLING (UK) LTD.: Development is a 95% shareholder in Elm Energy and Recycling (UK) Ltd. (Elm), which owns and operates a tire- fueled electric generating plant in Wolverhampton, England (Project). In 1995, the Project failed certain performance and reliability tests which had been established under a contract between Elm and TBV Power Limited (TBV), a company jointly owned by subsidiaries of the Tarmac PLC Group and Black & Veatch. Elm "rejected" the Project in accordance with the contract, and the independent Project engineer then certified that 29.6 million British Pounds Sterling (approximately $48.5 million at March 31, 1997) were to be reimbursed by TBV to Elm. TBV filed suit in the English courts to enjoin enforcement of the decision and to allege certain breaches of the underlying construction contract. Elm has counterclaimed, and Elm and Development are also seeking additional remedies at law, in both the United States and the United Kingdom, for damages and/or sanctions against TBV, Tarmac PLC Group, Black & Veatch and its chairman. Black & Veatch has counterclaimed against Elm and Development. Development believes that the claims made against it and Elm are meritless and that remedies, in conjunction with Elm's rights under the construction contract, will be sufficient to mitigate any losses which Elm and/or Development may otherwise incur. Elm is continuing to operate the Project, and the banks which provide the non-recourse financing for the Project are continuing to support its operations. However, because of ongoing defaults under the Project financing (resulting from the Project's poor performance and the pending litigation), and the uncommitted nature of a working capital facility provided by the banks, the banks have the right to ask that the operation of the Project be terminated at any time. In that event, some or all of Industries' investment in Elm may be at risk. Industries' investment in Elm, however, was not material at March 31, 1997. (6) NESI ENERGY MARKETING CANADA LTD. LITIGATION: On October 31, 1996, Services' wholly-owned subsidiary NIPSCO Energy Services Canada Ltd.(NESI Canada) acquired 70% of the outstanding shares of Chandler Energy Inc., a gas marketing and trading company located in Calgary, Alberta, and subsequently renamed it NESI Energy Marketing Canada Ltd.(NEMC). Between November 1 and November 27, 1996, gas prices in the Calgary market increased dramatically. As a result, NEMC was selling gas, pursuant to contracts entered into prior to the acquisition date, at prices substantially below its costs to acquire such gas. On November 27, 1996, NEMC ceased doing business and sought protection from its creditors under the Companies' Creditors Arrangement Act, a Canadian corporate reorganization statute. In December 1996 and January 1997, certain creditors of NEMC filed claims against Industries, Services, Capital Markets and NESI Canada, alleging certain misrepresentations relating to NEMC's financial condition and claiming damages. Industries and its affiliates intend to vigorously defend against such claims and any other claims seeking to assert that any party other than NEMC is responsible for NEMC's liabilities. Industries has fully reserved its equity investment in NEMC. Management believes that any additional loss relating to NEMC would not be material to the results of operations or financial position of Industries. (7) FERC ORDER NO. 636. The Energy Utilities have recorded approximately $135 million of interstate pipeline transition costs to reflect the impact of FERC Order No. 636, a majority of which costs have been paid to the pipeline suppliers. The Energy Utilities expect that additional transition costs will not be significant; however, the ultimate level of costs will depend on future events, including the market price of natural gas. The Commission has approved the recovery of these FERC-allowed transition costs on a volumetric basis from sales and transportation customers. Regulatory assets, in amounts corresponding to the costs recorded but not yet collected, have been recorded to reflect the ultimate recovery of these costs. (8) ENVIRONMENTAL MATTERS: The Utilities have an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. 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. The Utilities have recorded a reserve of $16.9 million to cover probable corrective actions as of March 31, 1997; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, the Utilities believe that any corrective actions required, after consideration of insurance coverages and contributions from other potentially responsible parties, will not have a significant impact on the financial position or results of operations of Industries. On December 19, 1996, the Environmental Protection Agency (EPA) promulgated rules for the second phase of the Acid Rain nitrogen oxides reduction program. Northern Indiana is evaluating compliance strategies to meet the reduced emission limitations found in the final rule. Additional controls may be needed to meet the requirements. A compliance plan must be submitted to the EPA by December 31, 1997 with details of the plan to meet the new limits by January 1, 2000. Because of major investments made in modern environmental control facilities and the use of low-sulfur coal, all of Northern Indiana's electric production facilities now comply with the sulfur dioxide limitations contained in the acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants which may require significant capital expenditures for control of these emissions. Northern Indiana is pursuing a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate-making process. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. The Energy Utilities have instituted a program to investigate former manufactured-gas plants where one of them is the current or former owner. The Energy Utilities have identified twenty-eight of these sites and made visual inspections of these sites. Initial samplings have been conducted at seventeen sites. Follow-up investigations have been conducted at seven sites and remedial measures have been selected at four sites. The Energy Utilities will continue their program to assess and cleanup sites. During the course of various investigations, the Energy Utilities have identified impacts to soil, groundwater, sediment and surface water from former manufactured-gas plants. At three sites where residues were noted seeping into rivers, Northern Indiana notified the Indiana Department of Environmental Management (IDEM) and the EPA and immediately took steps to contain the material. The Energy Utilities have worked with IDEM or the EPA on investigation or remedial activities at several sites. Two of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. The Energy Utilities anticipate placing additional sites in the VRP after remedial measures have been selected. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered into an agreement covering cost sharing and management of investigation and remediation programs at five former manufactured-gas plant sites at which both companies or their predecessors were former operators or owners. One of these sites is the Lafayette site which Indiana Gas had previously notified Northern Indiana is being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of seven former manufactured-gas plants at which Northern Indiana had conducted or was planning investigation or remediation activities. In December 1996, Northern Indiana sent a written demand to Cinergy related to one of these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern Indiana has already incurred and to be incurred to implement the needed remedy at the Goshen site. The Energy Utilities have met with various companies that provided insurance coverage which the Energy Utilities believe covers costs related to actions taken at former manufactured-gas plants. In September 1995, certain insurance companies initiated a suit in Indiana state court against Northern Indiana to deny coverage. Later in September 1995, Northern Indiana filed a more comprehensive suit in Federal Court in Indiana against those insurers and several other insurance companies, seeking coverage for costs associated with several former manufactured-gas plant sites. The state court action is stayed pending resolution of the Northern Indiana suit in Federal Court. Both sides have motions pending in the Federal Court lawsuit that would be dispositive of the case. Northern Indiana has obtained cash settlements from some of its insurers. The possibility that exposure to electric and magnetic fields emanating (EMF) from power lines, household appliances, and other electric sources may result in adverse health effects has been the subject of public, governmental, and media attention. Recently, the U.S. National Research Council of the National Academy of Sciences concluded in a report, after examining more than 500 EMF studies spanning 17 years, that among other things, there is insufficient evidence to consider EMF a threat to human health. Despite the report's findings, future research appropriations are continuing to be dedicated to explore this issue. The Water Utilities are subject to pollution control and water quality control regulations, including those issued by the EPA, IDEM, the Indiana Water Pollution Control Board, and the Indiana Department of Natural Resources. Under the Federal Clean Water Act and Indiana's regulations, IWC must obtain National Pollutant Discharge Elimination System (NPDES) permits for discharges from its water treatment stations. Application for renewal of any expiring permits have been filed and are the subject of ongoing discussions with, but not finalized by, IDEM. These permits continue in effect pending review of the applications. Under the Federal Safe Drinking Water Act (SWDA), the Water Utilities are subject to regulation by the EPA for the quality of water sold and treatment techniques used to make the water portable. The EPA promulgates nationally applicable maximum contaminant levels (MCLs) for contaminants found in drinking water. Management believes its water utilities are currently in compliance with all MCLs promulgated to date. The EPA has continuing authority, however, to issue additional regulations under the SDWA. In August 1996, Congress amended the SDWA to allow the EPA more authority to weigh the costs and benefits of regulations being considered in some (but not all) cases. The 1996 amendments do not, however, reduce the number of new standards required by the 1986 amendments. Such standards promulgated could be costly and require substantial changes in the Water Utilities' operations. The Water Utilities would expect to recover the costs of such changes through its water rates; however, such recovery may not necessarily be timely. Under a 1991 law enacted by the Indiana Legislature, a water utility may petition the Commission for prior approval of its plans and estimated expenditures required to comply with provisions of, and regulations under, the Federal Clean Water Act and SDWA. Upon obtaining such approval, a water utility may include, to the extent of its estimated costs as approved by the Commission, such costs in its rate base for rate-making purposes and recover its costs of developing and implementing the approved plans if statutory standards are met. The capital costs for such new systems, equipment or facilities or modifications of existing facilities may be included in a water utility's rate base upon completion of construction of the project or any part thereof. While use of this statute is voluntary on the part of a water utility, if utilized, it should allow water utilities a greater degree of confidence in recovering major costs incurred to comply with environmentally related laws on a timely basis. (9) INCOME TAXES: Industries uses the liability method of accounting for income taxes under which deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. To the extent certain deferred income taxes of the Utilities are recoverable or payable through future rates, regulatory assets and liabilities have been established. Regulatory assets are primarily attributable to undepreciated AFUDC-equity and the cumulative net amount of other income tax timing differences for which deferred taxes had not been provided in the past, when regulators did not recognize such taxes as costs in the rate-making process. Regulatory liabilities are primarily attributable to the Utilities' obligation to credit to ratepayers deferred income taxes provided at rates higher than the current federal tax rate currently being credited to ratepayers using the average rate assumption method and unamortized deferred investment tax credits. The components of the net deferred income tax liability at March 31, 1997 and December 31, 1996, are as follows:
March 31, December 31, 1997 1996 ============= ============ (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 768,283 $ 727,528 AFUDC-equity 37,109 37,713 Adjustment clauses 37,562 41,181 Take-or-pay gas costs 737 877 Other regulatory assets 40,476 39,458 Reacquisition premium on debt 19,346 19,041 Deferred tax assets - Deferred investment tax credits (42,131) (41,046) Removal costs (134,914) (131,718) FERC Order No. 636 transition costs (7,022) (8,144) Other postretirement/postemployment benefits (48,585) (43,446) Other, net (16,370) (11,987) ------------- ------------ 654,491 629,457 Less: Deferred income taxes related to current assets and liabilities 21,834 26,712 ------------- ------------ Deferred income taxes - noncurrent $ 632,657 $ 602,745 ============= ============
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, -------------------- -------------------- 1997 1996 1997 1996 ========= ========= ========= ========= (Dollars in thousands) Current income taxes - Federal $ 41,698 $ 24,374 $ 95,857 $ 78,220 State 6,210 3,772 14,889 12,072 --------- --------- --------- --------- 47,908 28,146 110,746 90,292 --------- --------- --------- --------- Deferred income taxes, net - Federal (7,289) 13,760 3,966 26,906 State (549) 1,231 624 2,461 --------- --------- --------- --------- (7,838) 14,991 4,590 29,367 --------- --------- --------- --------- Deferred investment tax credits, net (1,802) (1,670) (7,540) (7,317) --------- --------- --------- --------- Total utility operating income taxes 38,268 41,467 107,796 112,342 Income tax applicable to non- operating activities and income of non-utility subsidiaries 645 (1,625) (1,807) (8,819) --------- --------- --------- --------- Total income taxes $ 38,913 $ 39,842 $ 105,989 $ 103,523 ========= ========= ========= =========
A reconciliation of total tax expense to an amount computed by applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Twelve Months Ended March 31, Ended March 31, -------------------- -------------------- 1997 1996 1997 1996 ========= ========= ========= ========= (Dollars in thousands) Net income $ 70,838 $ 67,486 $ 180,086 $ 182,620 Add-Income taxes 38,913 39,842 105,989 103,523 Dividend requirements on preferred stocks of subsidiary 2,167 2,199 8,680 8,920 --------- --------- --------- --------- Income before preferred dividend requirements of subsidiary and income taxes $ 111,918 $ 109,527 $ 294,755 $ 295,063 ========= ========= ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 39,171 $ 38,334 $ 103,164 $ 103,272 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 1,044 983 4,682 3,997 Amortization of deferred investment tax credits (1,802) (1,670) (7,540) (7,317) State income taxes, net of federal income tax benefit 3,567 3,683 10,424 9,812 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,518) (1,674) (6,488) (5,979) Other, net (1,549) 186 1,747 (262) --------- --------- --------- --------- Total income taxes $ 38,913 $ 39,842 $ 105,989 $ 103,523 ========= ========= ========= =========
(10) 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, 1997 and 1996 are as follows:
1997 1996 ========= ========= (Dollars in thousands) Vested benefit obligation $(550,151) $(549,234) Nonvested benefit (105,339) (104,814) --------- --------- Accumulated benefit obligation $(655,490) $(654,048) ========= ========= Projected benefit obligation for service rendered to date $(759,406) $(759,681) Plan assets at fair market value 806,888 706,320 --------- --------- Plan assets in excess of (or less than) projected benefit obligation 47,482 (53,361) Unrecognized transition obligation at January 1, being recognized over seventeen years 37,401 43,484 Unrecognized prior service cost 25,528 27,242 Unrecognized gains (66,611) (4,217) --------- --------- Prepaid pension costs $ 43,800 $ 13,148 ========= =========
The accumulated benefit obligation is the present value of future pension benefit payments and is based on a plan benefit formula without considering expected future salary increases. The projected benefit obligation considers estimated future salary increases. Rates used to determine the accumulated benefit obligation and projected benefit obligation at January 1, 1997 and January 1, 1996 were as follows:
1997 1996 ===== ===== Discount rate 7.75% 7.25% Rate of increase in compensation levels 5.50% 5.50%
The following items are the components of provisions for pensions for the three-month and twelve-month periods ended March 31, 1997 and March 31, 1996 excluding IWCR and its subsidiaries:
Three Months Twelve Months Ended Ended March 31, March 31, ------------------ ------------------- 1997 1996 1997 1996 ======== ======== ======== ======== (Dollars in thousands) Service costs $ 4,573 $ 6,267 $ 14,606 $ 15,199 Interest costs 16,536 19,051 50,962 58,224 Estimated return on plan assets (20,503) (22,604) (85,306) (144,983) Amortization of transition obligation 1,588 1,942 5,068 6,009 Other net amortization and deferral 950 914 26,496 86,420 -------- -------- -------- -------- $ 3,144 $ 5,570 $ 11,826 $ 20,869 ======== ======== ======== ========
Assumptions used in the valuation and determination of 1997 and 1996 pension expenses were as follows:
1997 1996 ===== ===== Discount rate 7.75% 7.25% Rate of increase in compensation levels 5.50% 5.50% Expected long-term rate of return on assets 9.00% 9.00%
The plans' assets are invested primarily in common stocks, bonds, and notes. IWCR participates in several industry-wide, multi-employer pension plans for certain of its union employees at Miller Pipeline Corporation (Miller). These plans provide for monthly benefits based on length of service. Specified amounts per compensated hour for each employee are contributed to the trustees of these plans. (11) 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. The expected cost of such benefits is accrued during the employees' years of service. Northern Indiana's rate-making has historically included the cost of providing these benefits based on the related insurance premiums. On December 30, 1992, the Commission authorized the accrual method of accounting for postretirement benefits for rate-making purposes consistent with SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions," and authorized the deferral of the differences between the net periodic postretirement benefit costs and the insurance premiums paid for such benefits (OPRB) as a regulatory asset until such time as the accrual cost method may be reflected in the rate-making process. The Commission stated that a deferral period of four years or less would be rebuttably presumed to be reasonable and also indicated each utility would have to demonstrate its postretirement benefit costs were prudent and reasonably incurred at the time such costs were proposed to be recovered in the rate-making process. Northern Indiana has been deferring as a regulatory asset the difference between the amount that would have been charged to expense under pay-as-you-go accounting and the amount accrued in accordance with the standard in anticipation of approval for these costs in the rate-making process. On November 20, 1996, Northern Indiana filed with the Commission for inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with the dates above and consistent with its original proposal. Hearings were held during March 1997 and the matter is pending before the Commission for decision. Northern Indiana expects a decision during the second quarter of 1997. Management believes that Northern Indiana will ultimately be successful in obtaining such approval. IWC's current rate-making process includes postretirement benefit costs on an accrual basis, including amortization of the regulatory asset that arose prior to inclusion of these costs in the rate-making process. IWC currently remits to a grantor trust amounts collected in the rate-making process in excess of current cash requirements. The following table sets forth the plans' accumulated postretirement benefit obligation as of January 1, 1997 and 1996:
January 1, January 1, 1997 1996 ========== ========== (Dollars in thousands) Retirees $ (85,308) $ (99,453) Fully eligible active plan participants (19,448) (23,084) Other active plan participants (115,383) (136,322) ---------- ---------- Accumulated postretirement benefit obligation (220,139) (258,859) Unrecognized transition obligation at January 1, being recognized over twenty years 188,229 197,088 Unrecognized actuarial gain (91,023) (23,439) ---------- ---------- Accrued liability for postretirement benefits $ (122,933) $ (85,210) ========== ==========
A discount rate of 7.75% and a pre-Medicare medical trend rate of 9% declining to a long-term rate of 6% and a discount rate of 7.25%, and a pre-Medicare medical trend rate of 10% declining to a long-term rate of 6% were used to determine the accumulated postretirement benefit obligation at January 1, 1997 and 1996, respectively. The decrease in the accumulated postretirement benefit obligation (APBO) and the related increase in unrecognized actuarial gain at January 1, 1997 were primarily attributable to favorable claim experience and the increase in the discount rate to 7.75%. Additionally, Industries implemented a 3% cap on its share of retiree cost increases for pre-Medicare benefits for certain non- bargaining retirees who retire after February 1, 1997. This plan amendment reduced the APBO and the unrecognized transition obligation by $9.6 million at January 1, 1997. Net periodic postretirement benefits costs for the three-month and twelve-month periods ended March 31, 1997 and March 31, 1996 include the following components:
Three Months Twelve Months Ended Ended March 31, March 31, ------------------ ------------------ 1997 1996 1997 1996 ======== ======== ======== ======== (Dollars in thousands) Service costs $ 1,460 $ 1,620 $ 7,192 $ 6,170 Interest costs 4,460 5,080 17,691 19,366 Amortization of transition obligation over twenty years 2,764 3,095 11,262 11,789 Amortization of unrecognized actuarial gain (1,008) (583) (979) (2,221) -------- -------- -------- -------- $ 7,676 $ 9,212 $ 35,166 $ 35,104 ======== ======== ======== ========
The net periodic postretirement benefit costs for 1997 were determined assuming a 7.75% discount rate, a 5% rate of compensation increase, and a pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%. The effect of a 1% increase in the assumed health care cost trend rates for each future year would increase the accumulated postretirement benefit obligation at January 1, 1997 by approximately $31.4 million, and increase the aggregate of the service and interest cost components of plan costs by approximately $1.1 million for the three-month period ended March 31, 1997. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates, or plan changes. (12) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS: INDUSTRIES - 20,000,000 shares - Preferred - without par value Effective March 2, 1990, 2,000,000 of Industries' Series A Junior Participating Preferred Shares were reserved for issuance pursuant to the Share Purchase Rights Plan described in Note 16, 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) INDIANAPOLIS WATER COMPANY - 300,000 shares - Cumulative Preferred - $100 par value Note 13 sets forth the preferred stocks which are redeemable solely at the option of the issuer, and Note 14 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, Northern Indiana and IWC 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. (13) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER, OUTSTANDING AT MARCH 31, 1997 AND DECEMBER 31, 1996 (SEE NOTE 12):
Redemption Price at March 31, December 31, March 31, 1997 1996 1997 ============= ============= ============= (Dollars in thousands) NORTHERN INDIANA PUBLIC SERVICE COMPANY: Cumulative preferred stock - $100 par value - 4-1/4% series - 209,141 and 209,145 shares outstanding, respectively $ 20,914 $ 20,915 $101.20 4-1/2% series - 79,996 shares outstanding 8,000 8,000 $100.00 4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00 7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00 7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00 Premium on preferred stock 254 254 Cumulative preferred stock - no par value - Adjustable rate (6.00% at March 31, 1997), Series A (stated value $50 per share) 473,285 shares outstanding 23,664 23,664 $50.00 INDIANAPOLIS WATER COMPANY: Cumulative preferred stock - $100 par value - Rates ranging from 4.00% to 5.00%, 44,966 shares outstanding 4,497 - $100 - $105 ------------ ------------ $ 85,622 $ 81,126 ============ ============
During the period April 1, 1995 to March 31, 1997, there were no additional issuances of the above preferred stocks. The foregoing preferred stocks are redeemable in whole or in part at any time upon thirty days' notice at the option of the issuer at the redemption prices shown. (14) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1997 AND DECEMBER 31, 1996 (SEE NOTE 12):
March 31, December 31, 1997 1996 ============= ============= (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 - 75,000 shares outstanding, excluding sinking fund payments due within one year $ 7,500 $ 7,500 7-3/4% series - 44,460 shares outstanding, excluding sinking fund payments due within one year 4,446 4,446 8.35% series - 63,000 shares outstanding, excluding sinking fund payments due within one year 6,300 6,300 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ------------- ------------ $ 61,246 $ 61,246 ============= ============
The redemption prices at March 31, 1997, as well as sinking fund provisions for the cumulative preferred stock subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana, are as follows:
Sinking Fund Or Mandatory Redemption Series Redemption Price Per Share Provisions ====== ========================== =========================== Cumulative preferred stock - $100 par value - 8.85% $101.48, reduced periodically 12,500 shares on or before April 1. 8.35% $103.93, reduced periodically 3,000 shares on or before July 1; increasing to 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.41, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year. Cumulative preferred stock - no par value - 6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
Sinking fund requirements with respect to redeemable preferred stocks outstanding at March 31, 1997 for each of the twelve-month periods subsequent to March 31, 1998 are as follows:
Twelve Months Ended March 31,* ================================== 1999 $1,827,700 2000 $1,827,700 2001 $1,827,700 2002 $1,827,700 * Table does not reflect redemptions made after March 31, 1997.
(15) COMMON SHARE DIVIDEND: During the next few years, Industries expects that the 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, 1997, Northern Indiana had approximately $167.2 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. (16) 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 (Board) 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 Series A Junior Participating Preferred Share, 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 merged 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 has authorized the repurchase of Industries' common shares. At March 31, 1997, Industries had purchased approximately 20.2 million shares at an average price of $27.14 per share since 1989. Including 5.0 million shares authorized on April 9, 1997, approximately 5.9 million additional common shares may be repurchased under the Board's authorization. (17) LONG-TERM INCENTIVE PLAN: Industries has two Long-Term Incentive Plans for key management employees that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13, 1994 (1994 Plan), each of which provides for the issuance of up to 2.5 million of Industries' common shares to key employees through 1998 and 2004, respectively. At March 31, 1997, there were 4,911 shares and 2,205,550 shares reserved for future awards under the 1988 Plan and 1994 Plan, respectively. The 1988 Plan and 1994 Plan permit the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights, and performance units. No incentive stock options or performance units were outstanding at March 31, 1997. Under both Plans, the exercise price of each option equals the market price of Industries' stock on the date of grant. Each option's maximum term is ten years and vests one year from the date of grant. The stock appreciation rights (SARs) may be exercised only in tandem with stock options on a one-for-one basis and are payable in cash, Industries stock, or a combination thereof. Restricted stock awards are restricted as to transfer and are subject to forfeiture for specific periods from the date of grant. Restrictions on shares awarded in 1995 lapse five years from date of grant and vesting is variable from 0% to 200% of the number awarded, subject to specific earnings per share and stock appreciation goals. Restrictions on shares awarded in 1996 and 1997 lapse two years from date of grant and vesting is variable from 0% to 100% of the number awarded, subject to specific performance goals. If a participant's employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. There were 271,000 and 262,000 restricted shares outstanding at March 31, 1997 and December 31, 1996, respectively. 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 March 31, 1997, 30,750 shares were issued under the Plan. Industries accounts for these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for non- qualified stock options. The compensation cost that has been charged against income for restricted stock awards was $0.5, and $2.0 million for the three-month and twelve-month periods ending March 31, 1997, respectively. Had compensation cost for stock options been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," Industries' net income and earnings per share would have been reduced to the following pro forma amounts:
Three Months Twelve Months Ended Ended March 31, March 31, ------------------ -------------------- 1997 1996 1997 1996 ================== ==================== (Dollars in thousands, except per share data) Net Income: As reported $ 70,838 $ 67,486 $ 180,086 $ 182,620 Pro forma $ 70,539 $ 67,319 $ 179,340 $ 182,204 Earnings Per Share: As reported $ 1.18 $ 1.08 $ 2.97 $ 2.87 Pro forma $ 1.18 $ 1.08 $ 2.96 $ 2.86
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation costs may not be representative of that to be expected in future years. The fair value of each option granted used to determine pro forma net income is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the three-month and twelve-month periods ended March 31, 1997 and March 31, 1996, respectively: risk-free interest rate of 6.39% and 6.24%; expected dividend yield of $1.68 and $1.56 per share; expected option term of five years; and expected volatility of 13.2% and 13.0%. Changes in outstanding shares under option and SARs for the three-month, and twelve-month periods ended March 31, 1997 and 1996 are as follows:
NONQUALIFIED STOCK OPTIONS ------------------------------------------- Weighted Weighted Average Average Three Months Ended Option Option March 31, 1997 Price 1996 Price =========================== ========= ======== ========= ======== Balance beginning of period 1,187,150 $ 30.58 1,107,750 $ 28.55 Exercised (26,550) $ 28.03 (12,900) $ 28.96 Canceled (10,850) $ 37.81 (3,000) $ 32.69 --------- --------- Balance end of period 1,149,750 $ 30.57 1,091,850 $ 28.53 ========= ========= Shares exercisable 886,300 $ 28.42 821,400 $ 27.25 ========= ========= NONQUALIFIED STOCK OPTIONS ------------------------------------------- Weighted Weighted Average Average Twelve Months Ended Option Option March 31, 1997 Price 1996 Price =========================== ========= ======== ========= ======== Balance beginning of period 1,091,850 $ 28.53 1,059,700 $ 26.86 Granted 278,300 $ 37.81 277,450 $ 32.44 Exercised (197,650) $ 28.90 (232,500) $ 25.76 Canceled (22,750) $ 35.83 (12,800) $ 25.13 --------- --------- Balance end of period 1,149,750 $ 30.57 1,091,850 $ 28.53 ========= ========= Shares exercisable 886,300 $ 28.42 821,400 $ 27.25 ========= ========= Weighted average fair value of options granted $ 5.00 $ 3.87 ========= ========= NONQUALIFIED STOCK OPTIONS WITH SARs ------------------------------------------- Three Months Ended Option Option March 31, 1997 Price 1996 Price =========================== ========= ======== ========= ======== Balance beginning of period 5,600 $ 10.94 5,600 $ 10.94 Exercised 0 0 --------- --------- Balance end of period 5,600 $ 10.94 5,600 $ 10.94 ========= ========= Shares exercisable 5,600 $ 10.94 5,600 $ 10.94 ========= ========= NONQUALIFIED STOCK OPTIONS WITH SARs ------------------------------------------- Twelve Months Ended Option Option March 31, 1997 Price 1996 Price =========================== ========= ======== ========= ======== Balance beginning of period 5,600 $ 10.94 9,900 $ 10.94 Exercised 0 (4,300) $ 10.94 --------- --------- Balance end of period 5,600 $ 10.94 5,600 $ 10.94 ========= ========= Shares exercisable 5,600 $ 10.94 5,600 $ 10.94 ========= =========
The following table summarizes information about non-qualified stock options at March 31, 1997:
OPTIONS OUTSTANDING - -------------------------------------------------------------------------- Number Weighted Average Range of Outstanding at Remaining Weighted Average Option Price March 31, 1997 Contractual Life Option Price ================ ============== ================== ================= $10.94 to $17.94 90,800 2.80 years $16.62 $22.94 to $28.75 382,750 6.07 years $26.53 $30.31 to $37.81 676,200 8.21 years $34.73 - ---------------- --------- ---------- ------ $10.94 to $37.81 1,149,750 7.07 years $30.57 ========= OPTIONS EXERCISABLE - -------------------------------------------------------------------------- Number Range of Exercisable at Weighted Average Option Price March 31, 1997 Option Price ================ ================== ================= $10.94 to $17.94 90,800 $16.62 $22.94 to $28.75 382,750 $26.53 $30.31 to $33.19 412,750 $32.76 - ---------------- --------- ------ $10.94 to $33.19 886,300 $28.42 =========
(18) LONG-TERM DEBT: At March 31, 1997 and December 31, 1996, Industries' long-term debt, excluding amounts due within one year, issued and not retired or canceled was as follows:
AMOUNT OUTSTANDING --------------------------- March 31, December 31, 1997 1996 ============= ============ (Dollars in thousands) First mortgage bonds - Interest rates between 5.20% and 9.83% with a weighted average interest rate of 7.21% and various maturities between October 1, 1998 and December 1, 2022 $ 202,109 $ 109,509 Pollution control notes and bonds - Interest rates between 3.47% and 5.70% with a weighted average interest rate of 3.75% and various maturities between October 1, 2003 and April 1, 2019 242,000 242,000 Medium-term notes - Interest rates between 5.83% and 7.99% with a weighted average interest rate of 6.99% and various maturities between April 6, 1998 and January 19, 2024 772,025 644,025 Subordinated Debentures - 7-3/4%, due March 31, 2026 75,000 75,000 Notes payable - Interest rates between 6.31% and 8.25% with a weighted average interest rate of 7.24% and various maturities between June 30, 1998 and April 1, 2006 39,010 19,522 Variable bank loan - 6.44% - due August, 2003 5,600 - Term Loan Facility-weighted average interest rate of 8.12% at March 31, 1997, due December 31, 2004 39,753 40,576 Unamortized premium and discount on long-term debt, net (3,411) (3,526) ------------ ----------- Total long-term debt, excluding amounts due in one year $ 1,372,086 $ 1,127,106 ============ ===========
The sinking fund requirements of long-term debt outstanding at March 31, 1997 (including the maturity of Northern Indiana's first mortgage bonds: Series P, 6-7/8%, due October 1, 1998; Northern Indiana's medium-term notes due from April 6, 1998 to August 15, 2001; Lake Erie Land Company's notes payable due June 30, 1998; NDC Douglas Properties, Inc.'s notes payable due December 22, 1999; IWC's first mortgage bonds: Series 5.20%, due May 1, 2001 and Series 8.00%, due December 15, 2001;and IWCR's senior note payable, due March 15, 2001), for each of the twelve-month periods subsequent to March 31, 1998 are as follows:
Twelve Months Ended March 31, ================================ 1999 $ 62,469,026 2000 $ 19,007,933 2001 $ 176,321,825 2002 $ 43,745,375
Unamortized debt expense, premium and discount on long-term debt applicable to outstanding bonds are being amortized over the lives of such bonds. Reacquisition premiums are being deferred and amortized. These premiums are not earning a return during the recovery period. Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented, securing the first mortgage bonds issued by Northern Indiana, constitutes a direct first mortgage lien upon substantially all property and franchises, other than expressly excepted property, owned by Northern Indiana. IWC's first mortgage bonds are secured by its utility plant. Provisions of trust indentures related to the 5-7/8% Series Bonds and the 8% Series Bonds require annual sinking or improvement payments amounting to 1/2% of the maximum aggregate amount outstanding. As permitted, this requirement has been satisfied by substituting a portion of permanent additions to utility plant. On February 13, 1996, Capital Markets issued $75 million of 7-3/4% Junior Subordinated Deferrable Interest Debentures, Series A, due March 31, 2026 (Debentures) pursuant to an underwritten public offering. Proceeds from the sale of the Debentures were used to pay short-term debt incurred to redeem on January 12, 1996 Industries' $35 million of 8.75% Preferred Shares, pursuant to mandatory redemption, and to pay other short-term debt of Capital Markets. On February 14, 1997, Capital Markets was authorized to issue and sell up to $300 million of medium-term notes. As of March 31, 1997, $128 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used for the purchase of IWCR and to pay other outstanding short-term obligations of Capital Markets. As of April 25, 1997, an additional $118 million of medium-term notes were 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. 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, was approximately $1.2 billion at March 31, 1997. (19) CURRENT PORTION OF LONG-TERM DEBT: At March 31, 1997 and December 31, 1996, Industries' current portion of long-term debt due within one year was as follows:
March 31, December 31, 1997 1996 ============= ============ (Dollars in thousands) First Mortgage Bonds - Interest rates of 5-7/8% and 6-3/8% with a weighted average interest rate of 6.27% and maturities of August 1, 1997 and September 1, 1997 $ 32,522 $ 25,747 Medium-term notes - Interest rate of 5.85% and maturities of July 25, 1997 and July 28, 1997 40,000 40,000 Zero Coupon notes - 7.57%, $72,500 at maturity - due December 1, 1997 69,005 67,731 Notes payable - Interest rates between 6.72% and 9.00% with a a weighted average interest rate of 8.32% and maturities between April 1, 1997 and March 1, 1998 5,833 5,033 Term loan facility - Interest rate of 8.12% 5,783 6,041 ------------ ------------ Total current portion of long-term debt $ 153,143 $ 144,552 ============ ============
Capital Markets expects to refinance its 7.57% Zero Coupon Notes maturing in the amount of $72.5 million on December 1, 1997. Northern Indiana expects to refinance certain maturities of its Medium- term Notes, Series B and Series D, and First Mortgage Bonds, Series N, Series O, and Series P during the second quarter of 1997. (20) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999 unless extended by its terms. As of March 31, 1997, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1997 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 fees to a combination of fees which are mutually satisfactory to both parties. As of March 31, 1997, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1997 and December 31, 1996, there were $67.5 million and $79.0 million of borrowings, respectively, outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1997, there were no borrowings outstanding under this facility. Northern Indiana and Capital Markets make use of commercial paper to fund short-term working capital requirements. As of March 31, 1997 and December 31, 1996, Northern Indiana had $102.5 million and $193.9 million of commercial paper outstanding, respectively. At March 31, 1997, the weighted average interest rate of commercial paper outstanding was 5.41%. Capital Markets has a $150 million revolving Credit Agreement which will terminate August 19, 1999, 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, 1997, there were no borrowings outstanding under this agreement. Capital Markets also has $95 million of money market lines of credit. As of March 31, 1997 and December 31, 1996, $6.9 million and $27.0 million, respectively, of borrowings were outstanding under these lines of credit. As of March 31, 1997 and December 31, 1996, Capital Markets had $68.4 million and $119.3 million of commercial paper outstanding, respectively. At March 31, 1997, the weighted average interest rate of commercial paper outstanding was 5.49%. As of March 31, 1997, IWCR and its subsidiaries had lines of credit with banks aggregating $47.9 million. As of March 31, 1997, $21.6 million of borrowings were outstanding under these lines of credit. At March 31, 1997 and December 31, 1996, Industries' short-term borrowings were as follows:
March 31, December 31, 1997 1996 ============= ============ (Dollars in thousands) Commercial paper $ 170,900 $ 313,205 Notes payable 96,012 106,000 Standby loan facility 5,302 4,949 Revolving loan facility 1,593 1,831 ----------- ----------- Total short-term borrowings $ 273,807 $ 425,985 =========== ===========
(21) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a twenty-year agreement for the rental of office facilities from Development at a current annual rental payment of approximately $3.3 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, 1997:
Twelve Months Ended March 31, ================================= (Dollars in thousands) 1998 $ 14,862 1999 14,731 2000 13,655 2001 13,464 2002 13,409 Later years 129,722 -------- Total minimum payments required $199,843 ========
The consolidated financial statements include rental expense for all operating leases as follows:
March 31, March 31, 1997 1996 ============= ============= (Dollars in thousands) Three months ended $ 2,248 $ 2,031 Twelve months ended $ 8,338 $ 8,653
(22) COMMITMENTS: The Utilities estimate that approximately $974 million will be expended for construction purposes for the period from January 1, 1997 to December 31, 2001. Substantial commitments have been made by the Utilities in connection with their programs. The Water Utilities will use a major portion of their budgeted capital expenditures for new mains and distribution and plant facilities and other operating equipment. Northern Indiana has entered into a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and Mitsubishi Heavy Industries America, Inc., under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating Station. Services under this contract commenced on June 15, 1992 with annual charges approximating $20 million. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminates the agreement prior to the end of the twenty-year contract period. Northern Indiana has entered into an agreement with Integrated Systems Solutions Corporation (ISSC), a wholly-owned subsidiary of IBM, for ISSC to perform all data center, application development and maintenance, and desktop management of Northern Indiana. (23) PRIMARY ENERGY: Primary Energy, a wholly-owned subsidiary of Industries, is the parent of subsidiaries including Harbor Coal Company (Harbor Coal), North Lake Energy Corporation (North Lake), Lakeside Energy Corporation (LEC), Portside Energy Corporation (Portside), and Cokenergy, Inc (CE). Primary arranges energy-related projects with large industrial customers and has entered into certain commitments in connection with these projects. Harbor Coal 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 for use in the operation of its 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. North Lake has entered into a lease for the use of a 75-megawatt energy facility located at Inland Steel Company. The facility uses steam generated by Inland Steel to produce electricity which is delivered to Inland Steel. The facility began commercial operation in May 1996. Industries has guaranteed North Lake's obligations relative to the lease and certain obligations to Inland Steel relative to the project. LEC has entered into a lease for the use of a 161-megawatt energy facility to be located at USS Gary Works. The facility will process high-pressure steam into electricity and low-pressure steam to be delivered to USX Corporation-US Steel Group. The fifteen-year lease with a third-party lessor will commence once the facility is fully constructed. LEC is currently acting as the agent for the lessor to design, construct, and start up the energy facility. Capital Markets has guaranteed LEC obligations to the lessor during the construction period. Capital Markets also guarantees LEC's security deposit obligations relative to the lease and certain limited LEC obligations to the lessor. Construction of the project began in January 1996. The facility is scheduled to be operational in May 1997. Portside has entered into an agreement with National Steel Corporation (National) to utilize a new 63-megawatt energy facility at National's Midwest Division to process natural gas into electricity, process steam and heated water for a fifteen-year period. Portside intends to lease this facility, once constructed, from a third party. Additionally, Portside has entered into an interim agreement, which expires when the lease is established with the third-party lessor, under which Portside is acting as agent for the lessor to design, construct, and start up the energy facility. Industries has guaranteed certain Portside obligations to the lessor during construction. Capital Markets anticipates guaranteeing certain Portside obligations relative to the anticipated lease. Construction of the project began in June 1996. The facility is scheduled to be operational in August 1997. CE has entered into a fifteen-year service agreement with Inland Steel Company and the Indiana Harbor Coke Company, LP (Harbor Coke), a subsidiary of Sun Company, Inc. This agreement provides that CE will utilize a new energy facility at Inland's Indiana Harbor Works to scrub flue gases and recover waste heat from the coke facility being constructed by Harbor Coke and produce process steam and electricity from the recovered heat which will be delivered to Inland. CE intends to lease these facilities, once constructed, from a third party. Additionally, CE has entered into an interim agreement, which expires when the lease is established with the third party lessor, under which CE is acting as agent to design, construct and start up the facilities. Capital Markets anticipates guaranteeing certain CE obligations relative to the anticipated lease. Construction of the project began January, 1997. The facility is scheduled to be operational in July, 1998. Primary has advanced approximately $82 million and $42 million, at March 31, 1997 and December 31, 1996, respectively, to the lessors of the energy related projects discussed above. These net advances are included in "Other Receivables" in the Consolidated Balance Sheet and "Other, net" as a component of operating activities in the Consolidated Statement of Cash Flows. (24) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short maturity of those instruments. Investments: The fair value of some investments is estimated based on market prices for those or similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock is estimated based on the quoted market prices for the same or similar issues or on the rates offered to 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 (excluding derivatives) are as follows:
March 31, 1997 December 31, 1996 ---------------------- ---------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ========== ========== ========== ========== (Dollars in thousands) Cash and cash equivalents $ 92,276 $ 92,276 $ 26,333 $ 26,333 Investments $ 30,507 $ 33,649 $ 30,003 $ 33,019 Long-term debt (including current portion) $1,526,729 $1,385,856 $1,273,158 $1,220,492 Preferred stock $ 148,696 $ 128,272 $ 144,200 $ 126,379
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. (25) CUSTOMER CONCENTRATIONS: Industries' utility subsidiaries supply natural gas, electric energy and water. Natural gas and electric energy are supplied to the northern third of Indiana. The water utilities serve Indianapolis, Indiana and surrounding areas. Although the Energy Utilities have a diversified base of residential and commercial customers, a substantial portion of their electric and gas industrial deliveries are dependent upon the basic steel industry. The basic steel industry accounted for 4% of gas revenue (including transportation services) and 22% of electric revenue for the twelve months ended March 31, 1997 and March 31, 1996. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS HOLDING COMPANY - NIPSCO Industries, Inc. (Industries) is an energy/utility based holding company providing electric energy and natural gas to the public through its four regulated subsidiaries: Northern Indiana Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); and Crossroads Pipeline Company (Crossroads). Industries' non-utility businesses are primarily energy or utility based. These include energy marketing and trading; power generation; oil and gas exploration and development; gas transmission, supply and storage; and related products targeted at customer segments. On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's subsidiaries currently include two regulated water utilities and non-regulated companies providing utility-related services including utility line locating and marking and installation, and repair and maintenance of underground pipelines. The following discussion, except where noted, is attributable to the operations of Northern Indiana, Kokomo Gas, NIFL, and Crossroads (Energy Utilities). REVENUES - Total operating revenues for the twelve months ended March 31, 1997 increased $49.0 million as compared to the twelve months ended March 31, 1996. Gas revenues increased $71.1 million and electric revenues decreased $22.1 million as compared to the same period in 1996. The increase in gas revenues was largely attributable to increased sales to industrial and wholesale customers, increased deliveries of gas transported for others, increased gas transition costs, and increased gas costs per dekatherm (dth). The decrease in electric revenues was mainly due to decreased sales to residential customers resulting from the cooler summer in 1996 and decreased sales to industrial and wholesale customers. Total operating revenues for the three months ended March 31, 1997 increased $3.2 million as compared to the three months ended March 31, 1996. Gas revenues increased $5.8 million and electric revenues decreased $2.6 million as compared to the same period in 1996. The increase in gas revenues was mainly due to increased gas costs per dth and increased gas transition costs, partially offset by decreased sales to residential and commercial customers as a result of milder weather. The decrease in electric revenues was mainly due to decreased sales to industrial and wholesale customers. The basic steel industry accounted for 31% of natural gas delivered (including volumes transported) and 35% of electric sales during the twelve months ended March 31, 1997. The components of the variations in gas and electric revenues are shown in the following table:
Variations from Prior Periods --------------------------------- March 31, 1997 Compared to March 31, 1996 Three Twelve Months Months ========= ========= (Dollars in thousands) Gas Revenue - Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ 28,432 $ 29,497 Gas transition costs 3,114 32,591 Changes in sales levels (26,165) 8,172 Gas transported 415 835 --------- --------- Gas Revenue Change 5,796 71,095 --------- --------- Electric Revenue - Pass through of net changes in fuel costs 1,241 3,058 Changes in sales levels (3,841) (25,186) --------- --------- Electric Revenue Change (2,600) (22,128) --------- --------- Total Revenue Change $ 3,196 $ 48,967 ========= =========
See Note 7 to Notes to Consolidated Financial Statements regarding FERC Order No. 636 transition costs. GAS COSTS - The Energy Utilities' gas costs increased $15.6 and $73.3 million for the three-month and twelve-month periods ended March 31, 1997, respectively. Gas costs increased for the three-month period due to increased gas costs per dth, and increased gas transition costs, partially offset by decreased purchases. Gas costs increased for the twelve-month period due to increased gas costs per dth, increased gas transition costs, and increased purchases. The average cost for the Energy Utilities' purchased gas for the three-month and twelve-month periods ended March 31, 1997, after adjustment for gas transition costs billed to transport customers, was $3.45 and $3.19 per dth, respectively, as compared to $3.00 and $2.72 per dth for the same periods in 1996. FUEL AND PURCHASED POWER - The cost of fuel for electric generation decreased for the twelve-month period ended March 31, 1997, compared to the 1996 period, mainly as a result of decreased production of electricity. Power purchased increased $6.1 million for the twelve-month period ended March 31, 1997 as a result of increased bulk power purchases. Power purchases decreased $3.0 million for the three-month period. OPERATING MARGINS - Operating margins for the twelve months ended March 31, 1997 decreased $19.1 million from the same period a year ago. The operating margin from gas deliveries decreased $2.2 million due to decreased sales to residential and commercial customers reflecting milder weather, partially offset by increased sales to wholesale customers and increased deliveries of gas transported for others. The operating margin from electric sales decreased $16.9 million due to decreased sales to residential customers, reflecting milder 1996 summer weather, and decreased sales to industrial and wholesale customers. Operating margins for the three-months ended March 31, 1997 decreased $10.6 million from the same period a year ago. Gas operating margin decreased $9.8 million due to decreased sales to residential and commercial customers reflecting milder weather during the period, and decreased sales to industrial and wholesale customers, partially offset by increased deliveries of gas transported for others. Operating margin from electric sales decreased $0.8 million due to decreased sales to industrial and wholesale customers, which were partially offset by increased sales to residential and commercial customers. OPERATING EXPENSES AND TAXES - Operation expenses decreased $10.7 million for the twelve-month period ended March 31, 1997 reflecting decreased employee costs and decreased electric production pollution control facility costs, partially offset by increased environmental costs. Operation expenses decreased $5.6 million for the three-month period mainly reflecting decreased employee related costs, decreased electric production pollution control facility costs, and various other decreased operating costs. Maintenance expenses decreased $4.8 million for the twelve-month period ended March 31, 1997 mainly reflecting decreased maintenance activity at the electric production facilities and decreased maintenance on the transmission and distribution facilities. Depreciation and amortization expense increased $2.7 and $12.2 million for the three-month and twelve-month periods ended March 31, 1997, respectively, resulting from plant additions, increased amortization of computer software, amortization of deferred costs related to scrubber services provided by Pure Air at the Bailly Generating Station, and amortization of SFAS No. 106 costs effective February 1, 1997. Utility income taxes decreased for the three-month and twelve-month periods ended March 31, 1997 mainly as a result of decreased pre-tax income. OTHER INCOME (DEDUCTIONS) - Other Income (Deductions) for the twelve-month period increased $17.5 million mainly resulting from improved results from non-regulated operations, the disposition of certain oil and natural gas properties, and the sale of Crescent Dunes Lakeshore property to the National Park Service. Other Income (Deductions) increased $8.8 million for the three-month period ended March 31, 1997 due to improved results for non-regulated operations and the disposition of certain oil and natural gas properties. INTEREST AND OTHER CHARGES - Interest and other charges increased for the three-month and twelve-month periods ended March 31, 1997 reflecting the issuance of $169,275,000 of Northern Indiana's Medium-Term Notes, Series D, and $75 million of Capital Markets' Junior Subordinated Deferrable Interest Debentures, Series A. See Note 2 to Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies) for a discussion of Regulatory Assets, Carrying Charges and Deferred Depreciation, and Allowance for Funds Used During Construction. Also see Notes 7, 9, and 11 for a discussion of FERC Order No. 636, Income Taxes and Postretirement Benefits. NET INCOME- Industries' net income for the twelve-month period ended March 31, 1997 was $180.1 million compared to $182.6 million for the twelve-month period ended March 31, 1996. Net income for the three months ended March 31, 1997 was $70.8 million compared to $67.4 million for the three months ended March 31, 1996. ENVIRONMENTAL MATTERS - The Utilities have an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. 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. The Utilities have recorded a reserve of $16.9 million to cover probable corrective actions as of March 31, 1997; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, the Utilities believe that any corrective actions required, after consideration of insurance coverages and contributions from other potentially responsible parties, will not have a significant impact on the financial position or results of operations of Industries. On December 19, 1996, the Environmental Protection Agency (EPA) promulgated rules for the second phase of the Acid Rain nitrogen oxides reduction program. Northern Indiana is evaluating compliance strategies to meet the reduced emission limitations found in the final rule. Additional controls may be needed to meet the requirements. A compliance plan must be submitted to the EPA by December 31, 1997 with details of the plan to meet the new limits by January 1, 2000. Because of major investments made in modern environmental control facilities and the use of low-sulfur coal, all of Northern Indiana's electric production facilities now comply with the sulfur dioxide limitations contained in the acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants which may require significant capital expenditures for control of these emissions. Northern Indiana is pursuing a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate-making process. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. The Energy Utilities have instituted a program to investigate former manufactured-gas plants where one of them is the current or former owner. The Energy Utilities have identified twenty-eight of these sites and made visual inspections of these sites. Initial samplings have been conducted at seventeen sites. Follow-up investigations have been conducted at seven sites and remedial measures have been selected at four sites. The Energy Utilities will continue their program to assess and cleanup sites. During the course of various investigations, the Energy Utilities have identified impacts to soil, groundwater, sediment and surface water from former manufactured-gas plants. At three sites where residues were noted seeping into rivers, Northern Indiana notified the Indiana Department of Environmental Management (IDEM) and the EPA and immediately took steps to contain the material. The Energy Utilities have worked with IDEM or the EPA on investigation or remedial activities at several sites. Two of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. The Energy Utilities anticipate placing additional sites in the VRP after remedial measures have been selected. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered into an agreement covering cost sharing and management of investigation and remediation programs at five former manufactured-gas plant sites at which both companies or their predecessors were former operators or owners. One of these sites is the Lafayette site which Indiana Gas had previously notified Northern Indiana is being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of seven former manufactured-gas plants at which Northern Indiana had conducted or was planning investigation or remediation activities. In December 1996, Northern Indiana sent a written demand to Cinergy related to one of these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern Indiana has already incurred and to be incurred to implement the needed remedy at the Goshen site. The Energy Utilities have met with various companies that provided insurance coverage which the Energy Utilities believe covers costs related to actions taken at former manufactured-gas plants. In September 1995, certain insurance companies initiated a suit in Indiana state court against Northern Indiana to deny coverage. Later in September 1995, Northern Indiana filed a more comprehensive suit in Federal Court in Indiana against those insurers and several other insurance companies, seeking coverage for costs associated with several former manufactured-gas plant sites. The state court action is stayed pending resolution of the Northern Indiana suit in Federal Court. Both sides have motions pending in the Federal Court lawsuit that would be dispositive of the case. Northern Indiana has obtained cash settlements from some of its insurers. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances, and other electric sources may result in adverse health effects has been the subject of public, governmental, and media attention. Recently, the U.S. National Research Council of the National Academy of Sciences concluded in a report, after examining more than 500 EMF studies spanning 17 years, that among other things, there is insufficient evidence to consider EMF a threat to human health. Despite the report's findings, future research appropriations are continuing to be dedicated to explore this issue. The Water Utilities are subject to pollution control and water quality control regulations, including those issued by the EPA, IDEM, the Indiana Water Pollution Control Board, and the Indiana Department of Natural Resources. Under the Federal Clean Water Act and Indiana's regulations, IWC must obtain National Pollutant Discharge Elimination System (NPDES) permits for discharges from its water treatment stations. Application for renewal of any expiring permits have been filed and are the subject of ongoing discussions with, but not finalized by, IDEM. These permits continue in effect pending review of the applications. Under the Federal Safe Drinking Water Act (SWDA), the Water Utilities are subject to regulation by the EPA for the quality of water sold and treatment techniques used to make the water portable. The EPA promulgates nationally applicable maximum contaminant levels (MCLs) for contaminants found in drinking water. Management believes its' water utilities are currently in compliance with all MCLs promulgated to date. The EPA has continuing authority, however, to issue additional regulations under the SDWA. In August 1996, Congress amended the SDWA to allow the EPA more authority to weigh the costs and benefits of regulations being considered in some (but not all) cases. The 1996 amendments do not, however, reduce the number of new standards required by the 1986 amendments. Such standards promulgated could be costly and require substantial changes in the Water Utilities' operations. The Water Utilities would expect to recover the costs of such changes through its water rates; however, such recovery may not necessarily be timely. Under a 1991 law enacted by the Indiana Legislature, a water utility may petition the Commission for prior approval of its plans and estimated expenditures required to comply with provisions of, and regulations under, the Federal Clean Water Act and SDWA. Upon obtaining such approval, a water utility may include, to the extent of its estimated costs as approved by the Commission, such costs in its rate base for ratemaking purposes and recover its costs of developing and implementing the approved plans if statutory standards are met. The capital costs for such new systems, equipment or facilities or modifications of existing facilities may be included in a water utility's rate base upon completion of construction of the project or any part thereof. While use of this statute is voluntary on the part of a water utility, if utilized, it should allow water utilities a greater degree of confidence in recovering major costs incurred to comply with environmentally related laws on a timely basis. LIQUIDITY AND CAPITAL RESOURCES - During the next few years, it is anticipated that the majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. See Note 15 of Notes to Consolidated Financial Statements for a discussion of the Common Share dividend. On February 13, 1996, Capital Markets issued $75 million of 7-3/4% Junior Subordinated Deferrable Interest Debentures, Series A, due March 31, 2026 (Debentures), pursuant to an underwritten public offering. Proceeds from the sale of the Debentures were used to pay short-term debt incurred to redeem on January 12, 1996 Industries' $35 million of 8.75% Preferred Shares, pursuant to mandatory redemption, and to pay other short-term debt of Capital Markets. On February 14, 1997, Capital Markets was authorized to issue and sell up to $300 million of medium-term notes. As of March 31, 1997, $128 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used for the purchase of IWCR and to pay other outstanding short-term obligations of Capital Markets. As of April 25, 1997, an additional $118 million of medium-term notes were issued. Capital Markets expects to refinance its 7.57% Zero Coupon Notes maturing in the amount of $72.5 million on December 1, 1997. On March 25, 1997, Industries acquired all the outstanding common stock of IWCR for $290.5 million. Industries financed this transaction with debt of approximately $83.0 million and issuance of approximately 5.3 million Industries' common shares. Industries accounted for the acquisition as a purchase, and the purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. See Note 2 of Notes to Consolidated Financial Statements for a discussion of the preliminary allocation of the purchase price. Capital Markets has a $150 million revolving Credit Agreement which will terminate August 19, 1998, unless extended by its terms. This facility provides short-term financing flexibility to Industries and also serves as the backup instrument for a commercial paper program. As of March 31, 1997, there were no borrowings outstanding under this agreement. Capital Markets also has $95 million of money market lines of credit. As of March 31, 1997, $6.9 million of borrowings were outstanding under these lines of credit. As of March 31, 1997 and December 31, 1996, Capital Markets had $68.4 million and $119.3 million of commercial paper outstanding, respectively. At March 31, 1997, the weighted average interest rate of commercial paper outstanding was 5.49%. 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. 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 $1.2 billion at March 31, 1997. 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, 1997 and December 31, 1996, Northern Indiana had $102.5 million and $193.9 million of commercial paper outstanding, respectively. At March 31, 1997, the weighted average interest rate of commercial paper outstanding was 5.41%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999 unless extended by its terms. As of March 31, 1997, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1997, 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 fees to a combination of fees which are mutually satisfactory to both parties. As of March 31, 1997, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1997, $67.5 million of borrowings were outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1997, there were no borrowings outstanding under this facility. Northern Indiana expects to refinance certain maturities of its Medium- term Notes, Series B and Series D, and First Mortgage Bonds, Series N, Series O, and Series P during the second quarter of 1997. 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. As of March 31, 1997, IWCR and its subsidiaries had lines of credit with banks aggregating $47.9 million. As of March 31, 1997, $21.6 million of borrowings were outstanding under these lines of credit. 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 Energy Utilities do not anticipate the need to file for gas and electric base rate increases in the near future. EMPLOYEE RELATIONS At March 31, 1997, approximately 74% of Northern Indiana's employees (physical and clerical workers) were represented by two local unions of the United Steelworkers of America, AFL-CIO-CLC. The bargaining unit employees' current contracts expire May 31, 1997. Northern Indiana has begun to negotiate new agreements with the two local unions, but cannot predict the timing or terms of new agreements. COMPETITION The Energy Policy Act of 1992 (Energy Act) allowed FERC to order electric utilities to grant access to transmission systems by third-party power producers. The Energy Act specifically prohibits federally mandated wheeling of power for retail customers. On April 24, 1996, the FERC issued its Order No. 888 which opens wholesale power sales to competition and requires public utilities owning, controlling, or operating transmission lines to file non-discriminatory open access tariffs that offer others the same transmission service they provide themselves. Order No. 888 also provides for the full recovery of stranded costs - that is, costs that were prudently incurred to serve power customers and that could go unrecovered if these customers use open access to move to another supplier. FERC expects this rule will accelerate competition and bring lower prices and more choices to wholesale energy customers. Although wholesale customers represent a relatively small portion of Northern Indiana's sales, Northern Indiana will continue its efforts to retain and add customers by offering competitive rates. In January 1997, legislation was introduced to the Indiana General Assembly addressing electric utility competition and deregulation. Under the proposed legislation, an electric utility would be required to separate its production and marketing functions from the transmission and distribution functions to eliminate a competitive market advantage related to organizational structure. There would be a transition period from October 1, 1999 through June 30, 2004, during which an electric utility's cost of service rates would transition to a target price based upon Indiana utility averages. Amounts collected by an electric utility above the target price during the transition period would provide for recovery of transition costs. Under the proposed legislation, each electric utility company would be required to file a proposed distribution comparability tariff for unbundled electric service. Customers would have the right to choose their electricity supplier effective with the transition period. During the transition period, access charges would be billed to those customers choosing a new supplier. Regulatory assets not recovered during the transition period and not included as part of the cost-based transmission and distribution function would not be recoverable from customers. After the transition period, customers would be required to make an affirmative election as to their electricity supplier; if no election is made, the Commission would assign a supplier. This proposed legislation has not been adopted, however a study commission on electric competition and deregulation was established by the Indiana General Assembly. Operating in a competitive environment will place added pressures on utility profit margins and credit quality. Increasing competition in the electric utility industry has already led the credit rating agencies to apply more stringent guidelines in making credit rating determinations. Competition within the electric utility industry will create opportunities to compete for new customers and revenues, as well as increase the risk of the loss of customers. Industries' management has taken steps to make the company more competitive and profitable in the changing utility environment, including partnering on energy projects with major industrial customers and conversions of some of its generating units to allow use of lower cost, low sulfur coal. FERC Order No. 636 shifted primary responsibility for gas acquisition, transportation, and peak days' supply from pipelines to local gas distribution companies such as the Energy Utilities. Although pipelines continue to transport gas, they no longer provide sale service. The Energy Utilities believe they have taken appropriate steps to ensure the continued acquisition of adequate gas supplies at reasonable prices. The mix of gas revenues from retail sales, interruptible retail sales, firm transportation service, and interruptible transportation services has changed significantly over the past several years. The deregulation of the gas industry, since the mid-1980's, allows large industrial and commercial customers to purchase their gas supplies directly from producers and use the Energy Utilities' facilities to transport the gas. Transportation customers pay the Energy Utilities only for transporting their gas from the pipeline to the customers' premises. Northern Indiana filed a petition for an Alternative Regulatory Plan (ARP) with the Commission on November 29, 1995. The purpose of the ARP is to create a business and regulatory environment and structure which will permit increased choice for gas customers, competition among suppliers, and improved natural gas service. In its ARP, Northern Indiana proposes to implement new rates and services that would include, but not be limited to, further unbundling of services for additional customer classes which would include increased customer choice for sources of natural gas supply, negotiated services and prices, and incentive gas and storage cost mechanisms. The Commission will hold hearings on the ARP during the second quarter of 1997. To date, the Energy Utilities' system has not been materially affected by competition, and management does not foresee substantial adverse effects in the near future, unless the current regulatory structure is substantially altered. The Energy Utilities believe the steps they are taking to deal with increased competition will have significant, positive effects in the next few years. Part II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. Industries and Northern Indiana are parties to various pending proceedings, including suits and claims against them for personal injury, death and property damage, but, in the opinion of their counsel, the nature of such proceedings and suits, and the amounts involved, do not depart from the ordinary routine litigation and proceedings incidental to the kind of business conducted by Industries and Northern Indiana, except as described under Note 3 (Pending Tax Matter), Note 5 (Elm Energy and Recycling (UK) Ltd.), Note 6 (NESI Energy Marketing Canada Ltd.) and Note 8 (Environmental Matters) in the Notes to Consolidated Financial Statements under Part I, Item 1 of this report on Form 10-Q. To the knowledge of Industries no other material legal proceedings against Industries, Northern Indiana or their subsidiaries are contemplated by governmental authorities and other parties. Item 2. CHANGES IN SECURITIES. None Item 3. DEFAULTS UPON SENIOR SECURITIES. None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 9, 1997, at the Annual Meeting of Shareholders of the registrant, shareholders of the registrant elected Arthur J. Decio, Gary L. Neale, and Robert J. Welsh as directors to serve until the 2000 Annual Meeting of Shareholders. Directors whose terms of office as director continue after the 1997 Annual Meeting of Shareholders are Steven C. Beering, Ernestine M. Raclin, and Denis E. Ribordy, whose terms expire at the 1998 Annual Meeting of Shareholders, and Ian M. Rolland, John W. Thompson and Edmund A. Schroer, whose terms expire at the 1999 Annual Meeting of Shareholders. There were no abstentions or 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: Votes Votes Received Withheld ========== ========== Arthur J. Decio 47,228,178 1,678,164 Gary L. Neale 47,202,010 1,704,332 Robert J. Welsh 47,241,299 1,665,043 Additionally at the Annual Meeting of Shareholders, shareholders of the registrant approved an amendment to the Articles of Incorporation to increase the number of directors from nine to ten. The number of votes cast for, or withheld, was as follows: Votes Votes Votes For Against Abstain ========== ========== ========== 46,920,431 1,596,638 389,273 At the meeting of the Board of Directors of Industries following the Annual Meeting of the Shareholders, the Directors elected James T. Morris, Chairman, Chief Executive Officer, and President of IWCR, to fill the newly created position as a Director, for a term to expire in 1998. Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 3(a) - Articles of Incorporation Exhibit 3(b) - By-laws of Registrant effective April 9, 1997 Exhibit 11.1 - Computation of Per Share Earnings Three-Month and Twelve-Month Periods Ended March 31, 1997. Exhibit 11.2 - Computation of Per Share Earnings Three-Month and Twelve-Month Periods Ended March 31, 1997. Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. A report on Form 8-K was filed under the date of February 14, 1997. All events were reported under Item 5, Other Events. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIPSCO Industries, Inc. (Registrant) /s/Jerry M. Springer Controller and Chief Accounting Officer Date May 13, 1997 EX-11 2 EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS Three-Month and Twelve-Month Periods Ended March 31, 1997 Fully Three Months Ended March 31, 1997: Primary Diluted ====================================== ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at March 31, 1997 59,558,343 59,558,343 Dilutive Effect for Nonqualified Stock Options at March 31, 1997 259,364 259,364 ---------- ---------- Weighted Average Shares at March 31, 1997 59,817,707 59,817,707 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 70,838 $ 70,838 Dividend Requirements on Preferred Shares 0 0 ---------- ---------- Balance Available for Common Shareholders $ 70,838 $ 70,838 ========== ========== Earnings Per Average Common Share $ 1.18(a) $ 1.18(a) ========== ========== Fully Twelve Months Ended March 31, 1997: Primary Diluted ======================================= ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at March 31, 1997 60,570,358 60,570,358 Dilutive Effect for Nonqualified Stock Options at March 31, 1997 236,433 257,080 ---------- ---------- Weighted Average Shares at March 31, 1997 60,806,791 60,827,438 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 180,086 $ 180,086 Dividend Requirements on Preferred Shares 0 0 ---------- ---------- Balance Available for Common Shareholders $ 180,086 $ 180,086 ========== ========== Earnings Per Average Common Share $ 2.96(a) $ 2.96(a) ========== ========== (a) This calculation is submitted in accordance with regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EX-11 3 EXHIBIT 11.2
COMPUTATION OF PER SHARE EARNINGS Three-Month and Twelve-Month Periods Ended March 31, 1996 Fully Three Months Ended March 31, 1996: Primary Diluted ====================================== ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at March 31, 1996 62,064,667 62,064,667 Dilutive Effect for Nonqualified Stock Options at March 31, 1996 277,295 277,295 ---------- ---------- Weighted Average Shares at March 31, 1996 62,341,962 62,341,962 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 67,486 $ 67,486 Dividend Requirements on Preferred Shares 119 119 ---------- ---------- Balance Available for Common Shareholders $ 67,367 $ 67,367 ========== ========== Earnings Per Average Common Share $ 1.08(a) $ 1.08(a) ========== ========== Fully Twelve Months Ended March 31, 1996: Primary Diluted ======================================= ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at March 31, 1996 62,776,503 62,776,503 Dilutive Effect for Nonqualified Stock Options at March 31, 1996 181,895 255,287 ---------- ---------- Weighted Average Shares at March 31, 1996 62,958,398 63,031,790 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 182,620 $ 182,620 Dividend Requirements on Preferred Shares 2,416 2,416 ---------- ---------- Balance Available for Common Shareholders $ 180,204 $ 180,204 ========== ========== Earnings Per Average Common Share $ 2.86(a) $ 2.86(a) ========== ========== (a) This calculation is submitted in accordance with regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EX-23 4 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-Q into Industries' previously filed Form S-8 Registration Statement No. 33-30619; Form S-8 Registration Statement No. 33-30621; Form S-8 Registration Statement No. 333-08263;Form S-8 Registration Statement No. 333-19981; Form S-8 Registration Statement No. 333-19983; Form S-8 Registration Statement No. 333-19985; and Form S-3 Registration Statement No. 333-22347. /s/ Arthur Andersen LLP Chicago, Illinois May 13, 1997 EX-27 5
UT This schedule contains summary financial information extracted from the financial statements of NIPSCO Industries, Inc. for three months ended March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1996 JAN-01-1997 MAR-31-1997 PER-BOOK 3,621,142 270,635 592,320 104,164 322,312 4,910,573 574,950 86,767 635,399 1,297,116 61,246 85,622 496,698 102,907 875,388 170,900 154,643 1,828 0 0 1,664,225 4,910,573 579,224 38,268 450,374 488,642 90,582 9,304 99,886 29,048 70,838 0 70,838 26,273 0 305,118 1.18 1.18
EX-3 6 EXHIBIT 3(a) NIPSCO INDUSTRIES, INC. BY-LAWS Effective April 9, 1997 ARTICLE I. OFFICES. SECTION 1.1. REGISTERED OFFICE. The registered office of the Corporation in the State of Indiana shall be at 5265 Hohman Avenue, in the City of Hammond, County of Lake. SECTION 1.2. PRINCIPAL BUSINESS OFFICE. The principal business office of the Corporation shall be at 801 East 86th Avenue, in the Town of Merrillville, County of Lake, in the State of Indiana. ARTICLE II. SHAREHOLDERS' MEETINGS. SECTION 2.1. PLACE OF MEETINGS. Meetings of the shareholders of the Corporation shall be held at such place, within or without the State of Indiana, as may be specified by the Board of Directors in the notice of such meeting, but if no such designation is made, then at the principal business office of the Corporation. SECTION 2.2. ANNUAL MEETINGS. The annual meeting of the shareholders shall be held in each year on the second Wednesday in the month of April, if not a legal holiday, and if a legal holiday, then on the next succeeding business day that is not a legal holiday or on such other day as the Board of Directors may determine; at the hour of ten o'clock a.m. or at such other time as the Board of Directors may determine, for the purpose of electing Directors and for the transaction of such other business as may legally come before the meeting. If for any reason any annual meeting shall not be held at the time herein provided, the same may be held at any time thereafter, upon notice as hereinafter provided, or the business thereof may be transacted at any special meeting of shareholders called for that purpose. SECTION 2.3. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Chairman, the President, or the Board of Directors, and shall be called by the Chairman at the request in writing of a majority of the Board of Directors, or at the request in writing of the shareholders holding at least one-fourth of all the shares outstanding and entitled to vote on the business proposed to be transacted thereat. All requests for special meetings of shareholders shall state the time, place and the purpose or purposes thereof. SECTION 2.4. NOTICE OF SHAREHOLDERS' MEETINGS. Notice of each meeting of shareholders, stating the date, time and place, and, in the case of special meetings, the purpose or purposes for which such meeting is called, shall be given to each shareholder entitled to vote thereat not less than 10 nor more than 60 days before the date of the meeting unless otherwise prescribed by statute. SECTION 2.5. RECORD DATES. (a) In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a future date as the record date, which shall not be more than 60 nor less than 10 days before the date of such meeting or any other action requiring a determination by shareholders. (b) If a record date has not been fixed as provided in preceding subsection (a), then: (i) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (ii) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (c) Only those who shall be shareholders of record on the record date so fixed as aforesaid shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend or other distribution, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding the transfer of any shares on the books of the Corporation after the applicable record date; provided, however, the Corporation shall fix a new record date if a meeting is adjourned to a date more than 120 days after the date originally fixed for the meeting. SECTION 2.6. QUORUM AND ADJOURNMENT. The holders of a majority of all the capital shares issued and outstanding and entitled to vote at any meeting of the shareholders, represented by the holders thereof in person or by proxy, shall be requisite at all meetings of the shareholders to constitute a quorum for the election of Directors or for the transaction of other business, unless otherwise provided by law or by the Corporation's Articles of Incorporation, as amended (the "Articles of Incorporation"). Whether or not there is such a quorum, the chairman of the meeting or the shareholders present or represented by proxy representing a majority of the shares present or represented may adjourn the meeting from time to time without notice other than an announcement at the meeting. At such adjourned meeting at which the requisite number of voting shares shall be present or represented, any business may be transacted which might have been transacted at the meeting originally called. SECTION 2.7. VOTING BY SHAREHOLDERS; PROXIES. Every shareholder shall have the right at every shareholders' meeting to one vote for each share standing in his name on the books of the Corporation, except as otherwise provided by law or by the Articles of Incorporation, and except that no share shall be voted at any meeting upon which any installment is due and unpaid, or which belongs to the Corporation. Election of directors at all meetings of the shareholders at which directors are to be elected shall be by ballot, and a plurality of the votes cast thereat shall be necessary to elect any Director. If a quorum exists, action on a matter (other than the election of directors) submitted to shareholders entitled to vote thereon at any meeting shall be approved if the votes cast favoring the action exceed the votes cast opposing the action, unless a greater number of affirmative votes is required by law or by the Articles of Incorporation. A shareholder may vote either in person or by proxy executed in writing by the shareholder or a duly authorized attorney in fact. No proxy shall be valid after eleven months from the date of its execution unless a longer time is expressly provided therein. All voting at meetings of shareholders shall be by ballot, except that the presiding officer of the meeting may call for a viva voce vote on any matter other than the election of directors, unless the holder or holders of ten percent (10%) or more of the shares entitled to vote demands or demand a vote by ballot. SECTION 2.8. LIST OF SHAREHOLDERS. The Secretary shall make, or cause the agent having charge of the stock transfer books of the Corporation to make, at least five (5) days before each meeting of shareholders, a complete list of the shareholders entitled by the Articles of Incorporation to vote at said meeting, arranged in alphabetical order, with the address and number of shares so entitled to vote held by each, which list shall be on file at the principal business office of the Corporation and subject to inspection by any shareholder within the usual business hours during said five (5) days either at the principal business office of the corporation or a place in the city where the meeting is to be held, which place shall be specified in the notice of meeting, or, if not so specified, at the place where said meeting is to be held. Such list shall be produced and kept open at the time and place of the meeting and subject to the inspection of any shareholder during the holding of such meeting. SECTION 2.9. CONDUCT OF BUSINESS. (a) PRESIDING OFFICER. The Chairman, when present, and in the absence of the Chairman the President, shall be the presiding officer at all meetings of shareholders, and in the absence of the Chairman and the President, the Board of Directors shall choose a presiding officer. The presiding officer of the meeting shall have plenary power to determine procedure and rules of order and make definitive rulings at meetings of the shareholders. (b) ANNUAL MEETINGS OF SHAREHOLDERS. (i) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (A) pursuant to the Corporation's notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this Section 2.9, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.9. (ii) For nominations or other business to be properly brought before any annual meeting by a shareholder pursuant to clause (C) of paragraph (b)(i) of this Section 2.9, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal business office of the Corporation not later than 150 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder to be timely must be so delivered not later than the 150th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice shall set forth (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (x) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner and (y)the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (iii) The notice procedures of this Section 2.9 shall not apply to any annual meeting if (A) with respect to annual meetings of shareholders subsequent to the 1994 annual meeting of shareholders, the Corporation shall not have set forth in its proxy statement for the preceding annual meeting of shareholders the date by which notice of nominations by shareholders of persons for election as directors or of other business proposed to be brought by shareholders at the next annual meeting of shareholders must be received by the Corporation to be considered timely pursuant to this Section 2.9 or (B) with respect to the 1994 annual meeting of shareholders, the Corporation shall have failed to issue a public announcement setting forth such information not less than 30 days prior to the date by which a shareholder's notice must be received by the Corporation to be considered timely pursuant to this Section 2.9. (c) SPECIAL MEETINGS OF SHAREHOLDERS. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the Corporation's notice of meeting (A) by or at the direction of the Board of Directors or (B) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section 2.9, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.9. Nominations by shareholders of persons for election to the Board of Directors may be made at such a special meeting of shareholders if a shareholder's notice containing the information set forth in paragraph (b)(ii) of this Section 2.9 shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the 150th day prior to such Special Meeting or the 10th day following the date on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (d) GENERAL. (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.9 shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.9. The presiding officer at the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 2.9 and, if any proposed nomination or business is not in compliance with this Section 2.9, to declare that such defective proposal shall be disregarded. (ii) For purposes of this Section 2.9, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 2.9, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.9. Nothing in this Section 2.9 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 2.10. ORGANIZATION OF MEETINGS. The Secretary, who may call on any officer or officers of the Corporation for assistance, shall make all necessary and appropriate arrangements for all meetings of shareholders, receive all proxies and ascertain and report to each meeting of shareholders the number of shares present, in person and by proxy. In the absence of the Secretary, the Assistant Secretary shall perform the foregoing duties. The certificate and report of the Secretary or Assistant Secretary, as to the regularity of such proxies and as to the number of shares present, in person and by proxy, shall be received as prima facie evidence of the number of shares present in person and by proxy for the purpose of establishing the presence of a quorum at such meeting and for organizing the same, and for all other purposes. SECTION 2.11. INSPECTORS. At every meeting of shareholders it shall be the duty of the presiding officer to appoint three (3) shareholders of the Corporation inspectors of election to receive and count the votes of shareholders. Each inspector shall take an oath to fairly and impartially perform the duties of a inspector of the election and to honestly and truly report the results thereof. Such inspectors shall be responsible for tallying and certifying the vote taken on any matter at each meeting which is required to be tallied and certified by them in the resolution of the Board of Directors appointing them or the appointment of the presiding officer at such meeting as the case may be. Except as otherwise provided by these By-Laws or by law, such inspectors shall also decide all questions touching upon the qualification of voters, the validity of proxies and ballots, and the acceptance and rejection of votes. The Board of Directors shall have the authority to make rules establishing presumptions as to the validity and sufficiency of proxies. SECTION 2.12. MINUTES OF SHAREHOLDER MEETINGS. The presiding officer, secretary, and inspectors of election serving at a shareholders' meeting shall constitute a committee to correct and approve the minutes of such meeting. The approval thereof shall be evidenced by an endorsement thereon signed by a majority of the committee. ARTICLE III. BOARD OF DIRECTORS. SECTION 3.1. POWERS. The Board of Directors shall have the general direction, management and control of all the property, business and affairs of the Corporation and shall exercise all the powers that may be exercised or performed by the Corporation, under the statutes, the Articles of Incorporation, and these By-Laws. SECTION 3.2. NUMBER, ELECTION AND TERM OF OFFICE. The Board of Directors shall consist of ten (10) members, classified with respect to the time for which they shall severally hold office by dividing them into three classes, and after being so classified one-third (1/3) of the Directors, or as near as may be shall be elected annually for a term of three (3) years. SECTION 3.3. VACANCIES. Any vacancy in the Board of Directors caused by death, resignation or other reason shall be filled for the remainder of the Director's term by a majority vote of the remaining Directors although less than a quorum, or by the sole remaining director, and any director so chosen shall hold office for a term expiring at the annual meeting of shareholders at which the term of office of the class of directors to which such director has been elected expires. All Directors of the Corporation shall hold office until their successors are duly elected and qualified. SECTION 3.4. ANNUAL MEETINGS. A meeting of the Directors whose terms have not expired and the newly elected Directors, to be known as the annual meeting of the Board of Directors, for the election of officers and for the transaction of such other business as may properly come before the meeting, shall be held on the same day as the annual meeting of the shareholders, at that time and place determined by the Board of Directors or at such date, time and place otherwise set by the Chairman. SECTION 3.5. REGULAR MEETINGS. Regular monthly meetings of the Board of Directors shall be held from time to time (either within or without the state) as the Board may by resolution determine, without call and without notice, and unless otherwise determined all such regular monthly meetings shall be held at the principal business office of the Corporation on the fourth Tuesday of each and every month at 10:30 a.m. SECTION 3.6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman, by the President, or by the Chairman upon the written request of any four (4) Directors by giving, or causing the Secretary to give, to each Director, notice in accordance with Article IV of these By-Laws. SECTION 3.7. QUORUM. At all meetings of the Board of Directors, a majority of the Directors shall constitute a quorum for the transaction of business and the act of a majority of those present shall be necessary and sufficient for the taking of any action thereat, but a less number may adjourn the meeting from time to time until a quorum is present. SECTION 3.8. ACTION BY WRITTEN CONSENT. Unless otherwise restricted by statute, the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all directors or by all members of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or of such committee. SECTION 3.9. ATTENDANCE BY CONFERENCE TELEPHONE. Members of the Board of Directors or any committee thereof may participate in a meeting of such Board of Directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 3.10. COMMITTEES. (a) The Board of Directors may from time to time, in its discretion, by resolution passed by a majority of the Board, designate, and appoint, from the directors, committees of one or more persons which shall have and may exercise such lawfully delegable powers and duties conferred or authorized by the resolutions of designation and appointment. The Board of Directors shall have power at any time to change the members of any such committee, to fill vacancies, and to discharge any such committee. (b) Unless the Board of Directors shall provide otherwise, the presence of one-half of the total membership of any committee of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of such committee and the act of a majority of those present shall be necessary and sufficient for the taking of any action thereat. ARTICLE IV. NOTICES. SECTION 4.1. NOTICES. Notices to directors and shareholders shall be in writing and delivered personally or mailed to their addresses appearing on the records of the Corporation or, if to directors, by telegram, cable, telephone, telecopy, facsimile or a nationally recognized overnight delivery service. Notice to directors of special meetings by mail shall be given at least two days before the meeting. Notice to directors of special meetings by telegram, cable, personal delivery, telephone, telecopy or facsimile shall be given a reasonable time before the meeting, but in no event less than one hour before the meeting. Notice by mail or recognized overnight delivery service shall be deemed to be given when sent to the director at his or her address appearing on the records of the Corporation. Notice by telegram or cable shall be deemed to be given when the telegram or cable addressed to the director at his or her address appearing on the records of the Corporation is delivered to the telegraph company. Notice by telephone, telecopy or facsimile shall be deemed to be given when transmitted by telephone, telecopy or facsimile to the telephone, telecopy or facsimile number appearing on the records of the Corporation for the director (regardless of whether the director shall have personally received such telephone call or telecopy or facsimile message). SECTION 4.2. WAIVER OF NOTICE. Whenever any notice is required, a waiver thereof signed by the person entitled to such notice, whether before or after the time stated therein, and filed with the minutes or corporate records, shall be deemed equivalent thereto. Attendance of any person at any meeting of shareholders or directors shall constitute a waiver of notice of such meeting, except when such person attends only for the express purpose of objecting, at the beginning of the meeting (or in the case of a director's meeting, promptly upon such director's arrival), to the transaction of any business at the meeting and does not thereafter vote for or assent to action taken at the meeting. ARTICLE V. OFFICERS. SECTION 5.1. DESIGNATION; NUMBER; ELECTION. The officers of the Corporation shall be chosen by the Board of Directors and may consist of a Chairman, a President, one or more Vice Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, a Controller and one or more Assistant Controllers. One person may hold any two offices except those of Chairman or President, and Secretary. SECTION 5.2. TERM OF OFFICE; VACANCIES; REMOVAL. Such officers shall be elected by the Board of Directors at its annual meeting, and shall hold office for one year and/or until their respective successors shall have been duly elected. The Board of Directors may from time to time, elect or appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as may be prescribed by the Board of Directors. Vacancies among the officers of the Corporation shall be filled by the Board of Directors. Any officer or agent elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the whole Board of Directors. SECTION 5.3. COMPENSATION OF OFFICERS. The Board of Directors or a committee of the Board shall have the authority to fix the compensation of the officers of the Corporation. SECTION 5.4. CHAIRMAN. The Chairman shall be the chief executive officer of the Company and shall have general authority and supervision over the management and direction of the affairs of the Company, and supervision of all departments and of all officers of the Company. The Chairman shall, subject to the other provisions of these by-laws, have such other powers and perform such other duties as usually devolve upon the chief executive officer of a company or as may be prescribed by the Board of Directors, and shall, when present, preside at all meetings of the shareholders and of the Board of Directors. When the Board of Directors is not in session, the Chairman shall have authority to suspend the authority of any other officer or officers, subject, however, to the pleasure of the Board of Directors at its next meeting. In case of the absence, disability, death, resignation or removal from office of the Chairman, the powers and duties of the Chairman shall for the time being devolve upon and be exercised by the President, unless otherwise ordered by the Board of Directors. SECTION 5.5. PRESIDENT. The President shall be the chief operating officer of the Corporation and shall have such general authority and supervision over the management and direction of the affairs of the Corporation, subject to the authority of the Chairman, as shall usually devolve upon a chief operating officer of a corporation. The President shall, subject to the other provisions of these By-Laws, have such other powers and perform such other duties as usually devolve upon the President of a corporation, and such further duties as may be prescribed for the President by the Chairman or the Board of Directors. In case of the absence, disability, death, resignation or removal from office of the President, the powers and duties of the President shall, for the time being, devolve upon and be exercised by the Chairman, and in case of the absence, disability, death, resignation, or removal from office of both the Chairman and the President, the powers and duties of the President shall for the time being devolve upon and be exercised by the Vice President so appointed by the Board of Directors. SECTION 5.6. VICE PRESIDENTS. Each of the Vice Presidents shall have such powers and duties as may be prescribed by the Board of Directors, the Chairman or the President. SECTION 5.7. SECRETARY. The Secretary shall attend and keep the minutes of all meetings of the Board of Directors and of the shareholders. The Secretary shall have charge and custody of the corporate records and corporate seal of the Corporation, and shall in general perform all the duties incident to the office of secretary of a corporation, subject at all times to the direction and control of the Board of Directors, the Chairman and the President. SECTION 5.8. ASSISTANT SECRETARIES. Each of the Assistant Secretaries shall have such duties and powers as may be prescribed by the Board of Directors or be delegated by the Chairman or the President. In the absence or disability of the Secretary, the powers and duties of the Secretary shall devolve upon such one of the Assistant Secretaries as the Board of Directors, the Chairman or the President may designate, or, if there be but one Assistant Secretary, then upon such Assistant Secretary; and such Assistant Secretary shall thereupon have and exercise such powers and duties during such absence or disability of the Secretary. SECTION 5.9. TREASURER. The Treasurer shall have charge of, and shall be responsible for, the collection, receipt, custody and disbursement of the funds of the Corporation, and shall also have the custody of all securities belonging to the Corporation. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper receipts or making proper vouchers for such disbursements, and shall at all times preserve the same during the term of office. When necessary or proper, the Treasurer shall endorse, on behalf of the Corporation, all checks, notes, or other obligations payable to the Corporation or coming into possession of the Treasurer for and on behalf of the Corporation, and shall deposit the funds arising therefrom, together with all other funds of the Corporation coming into possession of the Treasurer, in the name and to the credit of the Corporation in such bank or banks as the Board of Directors shall from time to time by resolution direct. The Treasurer shall perform all duties which are incident to the office of treasurer of a corporation, subject at all time to the direction and control of the Board of Directors, the Chairman and the President. The Treasurer shall give the Corporation a bond if required by the Board of Directors in a sum, and with one or more sureties, satisfactory to the Board, for the faithful performance of the duties of the office of Treasurer, and for the restoration to the Corporation, in case of the death, resignation, retirement or removal from office of the Treasurer, of all books, papers, vouchers, money or other property of whatever . kind in the possession or under the control of the Treasurer belonging to the Corporation. SECTION 5.10. ASSISTANT TREASURERS. Each of the Assistant Treasurers shall have such powers and duties as may be prescribed by the Board of Directors or be delegated by the Chairman or the President. In the absence or disability of the Treasurer, the powers and duties shall devolve upon such one of the Assistant Treasurers as the Board of Directors, the Chairman or the President may designate, or, if there be but one Assistant Treasurer, then upon such Assistant Treasurer who shall thereupon have and exercise such powers and duties during such absence or disability of the Treasurer. Each Assistant Treasurer shall likewise give the Corporation a bond if required by the Board of Directors upon like terms and conditions as the bond required of the Treasurer. SECTION 5.11. CONTROLLER. The Controller shall have control over all accounts and records pertaining to moneys, properties, materials and supplies. The Controller shall have executive direction of the bookkeeping and accounting departments, and shall have general supervision over the records in all other departments pertaining to moneys, properties, materials and supplies. The Controller shall have charge of the preparation of the financial budget, and such other powers and duties as are commonly incident to the office of controller of a corporation, subject at all times to the direction and control of the Board of Directors, the Chairman and the President. SECTION 5.12. ASSISTANT CONTROLLERS. Each of the Assistant Controllers shall have such powers and duties as may be prescribed by the Board of Directors or be delegated by the Chairman or the President. In the absence or disability of the Controller, the powers and duties of the Controller shall devolve upon such one of the Assistant Controllers as the Board of Directors, the Chairman or the President may designate, or, if there be but one Assistant Controller, then upon such Assistant Controller who shall thereupon have and exercise such powers and duties during such absence or disability of the Controller. ARTICLE VI. CONDUCT OF BUSINESS. SECTION 6.1. CONTRACTS, DEEDS AND OTHER INSTRUMENTS. All agreements evidencing obligations of the Corporation, including but not limited to contracts, trust deeds, promissory notes, sight drafts, time drafts and letters of credit (including applications therefor), may be signed by any one of the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary, any Assistant Secretary, any other person authorized by a resolution of the Board of Directors, and any other person authorized by the Chairman, as evidenced by a written instrument of delegation. Any such authorization by the Board of Directors or the Chairman shall remain in effect until rescinded by action of the Board of Directors or (in the case of a delegation by the Chairman) by the Chairman and, where it identifies the authorized signatory by office rather than by name, shall not be rescinded solely by virtue of a change in the person holding that office or a temporary vacancy in that office. A certified copy of these By-Laws and/or any authorization given hereunder may be furnished as evidence of the authorities herein granted, and all persons shall be entitled to rely on such authorities in the case of a specific contract, conveyance or other transaction without the need of a resolution of the Board of Directors specifically authorizing the transaction involved. SECTION 6.2. CHECKS. Checks and other negotiable instruments for the disbursement of Corporation funds may be signed by any one of the Chairman, the President, any Vice President, the Treasurer, the Controller and the Secretary in such manner as shall from time to time be determined by resolution of the Board of Directors. Electronic or wire transfers to funds may be authorized by any officer of the Corporation who is authorized pursuant to this Section 6.2 to disburse Corporation funds by check or other negotiable instrument. SECTION 6.3. DEPOSITS. Securities, notes and other evidences of indebtedness shall be kept in such places, and deposits of checks, drafts and funds shall be made in such banks, trust companies or depositories, as shall be recommended and approved by any two of the Chairman, the President, any Vice President and the Treasurer. SECTION 6.4. VOTING OF STOCK. Unless otherwise ordered by the Board of Directors, the Chairman, the President or any Vice President shall have the power to execute and deliver on behalf of the Corporation proxies on stock owned by the Corporation appointing a person or persons to represent and vote such stock at any meeting of stockholders, with full power of substitution, and shall have power to alter or rescind such. appointment. Unless otherwise ordered by the Board of Directors, the Chairman, the President or any Vice President shall have the power on behalf of the Corporation to attend and to act and vote at any meeting of stockholders of any corporation in which the Corporation holds stock and shall possess and may exercise any and all rights and powers incident to the ownership of such stock, which, as the owner thereof, the Corporation might have possessed and exercised if present. The Board may confer like powers upon any other person or persons. SECTION 6.5. TRANSFER OF STOCK. Such form of transfer or assignment customary or necessary to effect a transfer of stocks or other securities standing in the name of the Corporation shall be signed by the Chairman, the President, any Vice President or the Treasurer, and the Secretary or an Assistant Secretary shall sign as witness if required on the form. A corporation or person transferring any such stocks or other securities pursuant to a form of transfer or assignment so executed shall be fully protected and shall be under no duty to inquire whether the Board of Directors has taken action in respect thereof. ARTICLE VII. SHARE CERTIFICATES AND THEIR TRANSFER. SECTION 7.1. SHARE CERTIFICATES. Certificates for shares of the Corporation shall be signed by the Chairman, the President or any Vice President, and by the Secretary or any Assistant Secretary, and shall not be valid unless so signed. Such certificates shall be appropriately numbered and contain the name of the registered holder, the number of shares and the date of issue. If such certificate is countersigned (a) by a transfer agent other than the Corporation or its employee, or (b) by a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he, she or it were such officer, transfer agent, or registrar at the date of issue. SECTION 7.2. TRANSFER OF SHARES. Upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation and such transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction. No certificate shall be issued in exchange for any certificate until the former certificate for the same number of shares of the same class and series shall have been surrendered and cancelled, except as provided in Section 7.4. SECTION 7.3. REGULATIONS. The Board of Directors shall have authority to make rules and regulations concerning the issue, transfer and registration of certificates for shares of the Corporation. SECTION 7.4. LOST, STOLEN AND DESTROYED CERTIFICATES. The Corporation may issue a new certificate or certificates for shares in place of any issued certificate alleged to have been lost, stolen or destroyed upon such terms and conditions as the Board of Directors may prescribe. SECTION 7.5. REGISTERED SHAREHOLDERS. The Corporation shall be entitled to treat the holder of record (according to the books of the Corporation) of any share or shares as the holder in fact thereof and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other party whether or not the Corporation shall have express or other notice thereof, except as expressly provided by law. SECTION 7.6. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may from time to time appoint a transfer agent and a registrar in one or more cities, may require all certificates evidencing shares of the Corporation to bear the signatures of a transfer agent and a registrar, may provide that such certificates shall be transferable in more than one city, and may provide for the functions of transfer agent and registrar to be combined in one agency. ARTICLE VIII. INDEMNIFICATION. SECTION 8.1. LITIGATION BROUGHT BY THIRD PARTIES. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, formal or informal (other than an action by or in the right of the Corporation) (an "Action") by reasons of the fact that he or she is or was a director, officer, employee or agent of the Corporation (a "Corporate Person"), or is or was serving at the request of the Corporation as a director, officer, employee, agent, partner, trustee or member or in another authorized capacity (collectively, an "Authorized Capacity") of or for another corporation, unincorporated association, business trust, partnership, joint venture, trust, individual or other legal entity, whether or not organized or formed for profit (collectively, "Another Entity"), against expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such Action ("Expenses") if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any Action by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, that the person had reasonable cause to believe his or her conduct was unlawful. SECTION 8.2. LITIGATION BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any action by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was a Corporate Person, or is or was serving at the request of the Corporation in an Authorized Capacity of or for Another Entity against Expenses actually and reasonably incurred by him or her in connection with that defense or settlement of such action if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for willful negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that a court of equity or the court in which such action was pending shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court of equity or other court shall deem proper. SECTION 8.3. SUCCESSFUL DEFENSE. To the extent that a person who is or was a Corporate Person or is or was serving in an Authorized Capacity of Another Entity at the request of the Corporation and has been successful on the merits or otherwise in defense of any action, referred to in Section 8.1 or 8.2 of this Article, or in defense of any claim, issue or matter therein, he or she shall be indemnified against Expenses actually and reasonably incurred by him or her in connection therewith. SECTION 8.4 DETERMINATION OF CONDUCT. Any indemnification under Section 8.1 or 8.2 of this Article (unless ordered by a court) shall be made by the Corporation only upon a determination that indemnification of the person is proper in the circumstances because he or she has met the applicable standard of conduct set forth in said Section 8.1 or 8.2. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to such action, suit or proceeding, or (b) if a quorum cannot be obtained, by a majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate) consisting of two or more directors not at the time parties to such action, suit or proceeding, or (c) by special legal counsel, or (d) by the shareholders; provided, however, that shares owned by or voted under the control of persons who are at the time parties to such action, suit or proceeding may not be voted on the determination. SECTION 8.5. ADVANCE PAYMENT. The Corporation shall advance Expenses reasonably incurred by any Corporate Person in any Action in advance of the final disposition thereof upon the undertaking of such party to repay the advance unless it is ultimately determined that such party is entitled to indemnification hereunder, if (a) the indemnitee furnishes the Corporation a written affirmation of his or her good faith belief that he or she has satisfied the standard of conduct in Section 8.1 or 8.2 and (b) a determination is made by those making the decision pursuant to Section 8.4 that the facts then known would not preclude indemnification under these By-Laws. SECTION 8.6. BY-LAW NOT EXCLUSIVE. The indemnification provided by this Article 8 shall not be deemed exclusive of any other rights to which any person may be entitled under any by-law, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 8.7. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Corporate Person or is or was serving at the request of the Corporation in an Authorized Capacity of or for Another Entity against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article 8 or the Indiana Business Corporation Law. SECTION 8.8. EFFECT OF INVALIDITY. The invalidity or unenforceability of any provision of this Article 8 shall not affect the validity or enforceability of the remaining provisions of this Article 8. SECTION 8.9. DEFINITION OF CORPORATION. For purposes of this Article 8, references to "the Corporation" shall include, in addition to the surviving or resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger. SECTION 8.10. CHANGE IN LAW. Notwithstanding the foregoing provisions of Article 8, the Corporation shall indemnify any person who is or was a Corporate Person or is or was serving at the request of the Corporation in an Authorized Capacity of or for Another Entity to the full extent permitted by the Indiana Business Corporation Law or by any other applicable law, as may from time to time be in effect. ARTICLE IX. GENERAL. SECTION 9.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the 1st day of January and end on the 31st day of December in each year. SECTION 9.2. CORPORATE SEAL. The corporate seal shall be circular in form and shall have inscribed thereon the words "NIPSCO Industries, Inc. - Corporate Seal - Indiana." SECTION 9.3. AMENDMENTS. These By-Laws may be altered, amended or repealed in whole or in part, and new By-Laws may be adopted, at any annual, regular or special meeting of the Board of Directors by the affirmative vote of a majority of a quorum of the Board of Directors. SECTION 9.4. DIVIDENDS. Subject to any provisions of any applicable statute or of the Articles of Incorporation, dividends may be declared upon the capital stock of the Corporation by the Board of Directors at any regular or special meeting thereof; and such dividends may be paid in cash, property or shares of the Corporation. SECTION 9.5. CONTROL SHARES. The Terms "control shares" and "control share acquisition" used in this Section 9.5 shall have the meanings set forth in Indiana Business Corporation Law Section 23-1-42-1, et seq. (the "Act"). Control shares of the Corporation acquired in a control share acquisition shall have only such voting rights as are conferred by the Act. Control shares of the Corporation acquired in a control share acquisition with respect to which the acquiring person has not filed with the Corporation the Statement required by the Act may, at any time during the period ending sixty days after the last acquisition of control shares by the acquiring person, be redeemed by the Corporation at the fair value thereof pursuant to procedures authorized by a resolution of the Board of Directors. Such authority may be exercised generally or confined to specific instances. Control shares of the Corporation acquired in a control share acquisition with respect to which the acquiring person was not granted full voting rights by the shareholders as provided in the Act may, at any time after the shareholder vote required by the Act, be redeemed by the Corporation at the fair value thereof pursuant to procedures authorized by a resolution of the Board of Directors. Such authority may be exercised generally or confined to specific instances. EX-3 7 EXHIBIT 3(b) ARTICLES OF INCORPORATION OF NIPSCO INDUSTRIES, INC. The undersigned incorporator desiring to form a corporation (hereinafter referred to as the "Corporation) pursuant to the provisions of the Indiana Business Corporation Law, as amended (the "Act"), executives the following Articles of Incorporation: ARTICLE I Name The name of the Corporation is NIPSCO Industries, Inc. ARTICLE II Period of Duration The period during which the Corporation shall continue is perpetual. ARTICLE III Purpose and Powers Purpose. The purpose for which the Corporation is formed is the transaction of any or all lawful business for which corporations may be incorporated under the Act. Powers. The Corporation shall have the capacity to act possessed by natural persons and, subject to any limitations or restrictions imposed by the Act, other law or the Articles of Incorporation, shall have the power to do all acts and things necessary, convenient or expedient to carry out the purposes for which it is formed. ARTICLE IV Registered Office and Agent The street address of the Corporation's initial registered office in Indiana and the name of its initial registered agent at that office is Edmund A. Schroer, 5265 Hohman Avenue, Hammond, Indiana 46320. ARTICLE V Authorized Shares A. Authorized Capital Shares The total number of shares which the Corporation shall have the authority to issue shall be 220,000,000 shares, of which 200,000,000 shares shall be Common Shares without par value and 20,000,000 shares shall be Preferred Shares without par value. B. Preferred Shares Preferred Shares may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated. All shares of any one series of the Preferred Shares shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences and relative, participating, optional and other rights of each, such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any other series at any time outstanding. Subject to the provisions of Section C of this ARTICLE V, the Board of Directors is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of each particular series of Preferred Shares, the designation, powers, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions thereof, if any, of such series, including, but without limiting the generality of the foregoing, the following: (a) the distinctive designation of, and the number of Preferred Shares which shall constitute the series, which number may be increased (except as otherwise fixed by the Board of Directors) or decreased, (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors. (b) the rate and times at which, and the terms and conditions upon which, dividends, if any, on shares of the series shall be paid, the extent of preferences or relations, if any, of such dividends to the dividends payable on any other class or classes of shares of the Corporation, or on any series of Preferred Shares or of any other class or classes of shares of the Corporation and whether such dividends shall be cumulative or noncumulative: (c) the right, if any, of the holders of shares of the series to convert the same into, or exchange the same for, shares of any other class or classes of shares of the Corporation, or any series of Preferred Shares, and the terms and conditions of such conversion or exchange: (d) whether shares of the series shall be subject to a redemption price or prices including, without limitation, a redemption price or prices payable in Common Shares and the time or times at which, and the terms and conditions upon which shares of the series may be redeemed; (e) the rights, if any, of the holders of shares of the series upon voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets dissolution or winding up of the Corporation; (f) the terms of the sinking fund or redemption or purchase account, if any, to be provided for shares of the series; and (g) the voting powers, if any, of the holders of shares of the series which may, without limiting the generality of the foregoing, include (i) the right to more or less than one vote per share on any or all matters voted upon by the shareholders and (ii) the right to vote. as a series by itself or together with other series of Preferred Shares or together with all series of Preferred Shares as a class, upon such matters, under such circumstances and upon such conditions as the Board of Directors may fix, including, without limitation, the right, voting as a series by itself or together with other series of Preferred Shares or together with all series of Preferred Shares as a class, to elect one or more directors of this Corporation in the event there shall have been a default in the payment of dividends on any one or more series of Preferred Shares or under such other circumstances and upon such conditions as the Board of Directors may determine. No holder of any shares of any series of Preferred Shares shall be entitled to vote for the election of directors or in respect of any other matter except as may be required by the Indiana Business Corporation Law, as amended, or as is permitted by the resolution or resolutions adopted by the Board of Directors, authorizing the issue of such series of Preferred Shares. C. Common Shares 1. After the requirements with respect to the preferential dividends on Preferred Shares (fixed in accordance with the provisions of Section B of this ARTICLE V), if any, shall have been met and after this Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of Section B of this ARTICLE V) and subject further to any other conditions which may be fixed in accordance with the provisions of Section B of this ARTICLE V, then, but not otherwise, the holders of Common Shares shall be entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors. 2. After distribution in full of the preferential amount (fixed in accordance with the provisions of Section B of this ARTICLE V), if any, to be distributed to the holders of Preferred Shares in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the Corporation, the holders of the Common Shares shall be entitled to receive all the remaining assets of the Corporation, tangible and intangible, of whatever kind available for distribution to shareholders, ratably in proportion to the number of Common Shares held by each. 3. Except as may otherwise be required by law, these Articles of Incorporation or the provisions of the resolution or resolutions as may be adopted by the Board of Directors pursuant to Section B of the ARTICLE V, each holder of Common Shares shall have one vote in respect of each Common Shares held by such holder on each matter voted upon by the shareholders and any such right to vote shall not be cumulative. D. Other Provisions. 1. The relative powers, preferences, and rights of each series of Preferred Shares in relation to the powers, preferences and right of each other series of Preferred Shares shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in Section B of this ARTICLE V, and the consent by class or series vote or otherwise, of the holders of the Preferred Shares or such of the series of the Preferred Shares as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Shares whether the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, powers, preferences and rights of such outstanding series, or any of them, provided, however, that the Board of Directors may provide in such resolution or resolutions adopted with respect to any series of Preferred Shares that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Shares. 2. Subject to the provisions of Paragraph 1 of this Section D, shares of any series of Preferred Shares may be issued from time to time as the Board of Directors shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 3. Common Shares may be issued from time to time as the Board of Directors shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 4. No holder of any of the shares of any class or series of shares or securities convertible into such shares of any class or series of shares, or of options, warrants or other rights to purchase or acquire shares of any class or series of shares or of other securities of the Corporation shall have any preemptive right to purchase, acquire or subscribe for any unissued shares of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital shares of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for shares or any class or series, or carrying any right to purchase or acquire shares of any class or series, but any such unissued shares, additional authorized issue of shares of any class or series of shares or securities convertible into or exchangeable for shares, or carrying any right to purchase or acquire shares, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. 5. The Corporation reserves the right to increase or decrease its authorized capital shares, or any class or series thereof, or to reclassify the same and to amend, alter, change or repeal any provision contained in the Articles of Incorporation, or in any amendment thereto, in the manner now or hereafter prescribed by law, but subject to such conditions and limitations as are hereinbefore prescribed, and all right conferred upon shareholders in the Articles of Incorporation of this Corporation, or any amendment thereto, are granted subject to this reservation. 6. Unless any statute of the State of Indiana shall expressly provide to the contrary and subject to the limitations hereinbefore set forth in this ARTICLE V, the Corporation may acquire, hold and dispose of any of its shares of any class heretofore issued and outstanding. E. Series A Junior Participating Preferred Shares 1. This Section E of the ARTICLE V hereby creates a series of Preferred Shares and hereby states the designation and number of shares, and fixes the relative powers, preferences and rights of such series. 2. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Shares" (the "Series A Preferred Shares") and the number of shares constituting the Series A Preferred Shares shall be 2,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of Series A Preferred Shares to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Shares. 3. Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Preferred Shares (or any similar shares) ranking prior and superior to the Series A Preferred Shares with respect to dividends, the holders of Series A Preferred Shares, in preference to the holders of Common Shares and of any other junior shares, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 20th day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Shares, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $26 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by reclassification or otherwise), declared on the Common Shares since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any Series A Preferred Share or fraction of a Series A Preferred Share. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the amount to which holders of Series A Preferred Shares were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Shares as provided in paragraph 3(a) of the Section E immediately after it declares a dividend or distribution on the Common Shares (other than a dividend payable in Common Shares); provided that, in the event no dividend or distribution shall have been declared on the Common Shares during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $26 per share on the Series A Preferred Shares shall be nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Series A Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series A Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 4. Voting Rights. The holders of Series A Preferred Shares will have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each Series A Preferred Share shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the number of votes per share to which holders of Series A Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (b) Except as otherwise provided herein, in any other provisions of the Articles of Incorporation of the Corporation creating a series of Preferred Shares or any similar shares, or by law, the holders of Series A Preferred Shares and the holders of Common Shares and any other capital shares of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (c) If at the time of any annual meeting of shareholders for the election of directors a "default in preference dividends" on the Series A Preferred Shares shall exist, the number of directors constituting the Board of Directors of the Company shall be increased by two (2), and the holders of the Preferred Shares of all series (whether or not the holders of such series of Preferred Shares would be entitled to vote for the election of directors if such default in preference dividends did not exist) shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Shares, to elect two (2) directors of the Company to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Preferred Shares. Each director elected by the holders of Preferred Shares (a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding Preferred Shares voting together as a single class without regard to series, at a meeting of the shareholders or of the holders of Preferred Shares called for the purpose. So long as a default in any preference dividends on the Preferred Shares shall exist (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Company and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding Preferred Shares voting together as a single class without regard to series, at the same meeting at which such removal shall voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors of the Company shall be reduced by two (2). For the purposes hereof, a "default in preference dividends" on the Preferred Shares shall be deemed to have occurred whenever the amount of accrued dividends upon any series of the Preferred Shares shall be equivalent to six (6) full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all Preferred Shares of each and every series then outstanding shall have been paid to the end of the last preceding quarterly dividend period. (d) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extend they are entitled to vote with holders of Common Shares as set forth herein) for taking any corporate action. 5. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Shares as provided in paragraph 3 of this Section E are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series A Preferred Shares outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares; (ii) declare or pay dividends, or make any other distributions, on any shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Shares, except dividends paid ratably on the Series A Preferred Shares and all such parity shares on which dividends are payable or in arrears in proportion to the total amount to which the holders of all such shares are then entitled: (iii) redeem or purchase or otherwise acquire for consideration any shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior shares in exchange for any shares of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Shares; or (iv) redeem or purchase or otherwise acquire for consideration any Series A Preferred Shares, or any shares ranking on a parity with the Series A Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of the Corporation unless the Corporation could, under paragraph 5(a) of the Section E, purchase or otherwise acquire such shares at such time and in such manner. 6. Reacquired Shares. Any Series A Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Preferred Shares and may be reissued as part of a new series of Preferred Shares subject to the conditions and restrictions on issuance set forth in the Articles of Incorporation of the Corporation creating a series of Preferred Shares or any similar shares or as otherwise required by law. 7. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares unless, prior thereto, the holders of Series A Preferred Shares shall have received $6,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of Series A Preferred Shares shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares, or (b) to the holders of shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Shares, except distributions made ratably on the Series A Preferred Shares and all such parity shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the aggregate amount to which holders of Series A Preferred Shares were entitled immediately prior to such event under the provision in clause (A) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of a Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 8. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other shares or securities, cash and/or any other property, then in any such case each Series A Preferred Share shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of shares, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series A Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 9. No Redemption. The Series A Preferred Shares shall not be redeemable. 10. CONVERSION. The Series A Preferred Shares shall not be convertible into Common Shares or shares of any other series of any other class of Preferred Shares. 11. RANK. The Series A Preferred Shares shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of Preferred Shares, unless the terms of any such series shall provide otherwise. 12. AMENDMENT. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding Series A Preferred Shares, voting together as a single class. F. 8.75% SERIES CUMULATIVE PREFERRED SHARES. 1. This Section F of this ARTICLE V hereby creates a series of Preferred Shares and hereby states the designation and number of shares, and fixes the powers, preferences and relative participating, optional and other rights of such series, and the qualifications, limitation and restrictions thereof. 2. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "8.75% Series Cumulative Preferred Shares (Liquidation Preference $100 Per Share)" (the "8.75% Series Preferred Shares") and the number of shares constituting the 8.75% Series Preferred Shares shall be 350,000. 3. DIVIDENDS. (a) The holders of 8.75% Series Preferred Shares, in preference to the holders of the Series A Preferred Shares, the Common Shares and of any other junior shares hereafter created, shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the purpose, cumulative quarterly dividends at the rate of 8.75% per annum, computed on the liquidation preference of the 8.75% Series Preferred Shares (using for such computation a month of 30 days and a year of 360 days), payable in arrears in cash on the 14th day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date") to the holders of record as of the 14th day of the month prior to such respective dates, commencing on January 14, 1991. Dividends shall accumulate on a daily basis. Holders of 8.75% Series Preferred Shares shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided on such shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 8.75% Series Preferred Shares that may be in arrears. The initial dividend shall be that proportion of a quarterly dividend that the number of days (using a month of 30 days and a year of 360 days) from the date of sale and delivery of such shares (including such date) to January 14, 1991, (excluding such date) bears to ninety days. (B) Except as set forth in the next sentence, no dividends shall be declared, paid or set apart for payment on, or any other distributions made in respect of, shares of any class or series ranking, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, on a parity with the 8.75% Series Preferred Shares, unless full cumulative dividends have been or contemporaneously are declared and paid on the 8.75% Series Preferred Shares through the most recent Quarterly Dividend Payment Date. When dividends are not paid in full as aforesaid, upon the 8.75% Series Preferred Shares, or on any such parity shares through the most recent respective dividend payment date(s) thereof, all dividends declared upon the 8.75% Series Preferred Shares and such parity shares shall be declared contemporaneously and pro rate so that the amount of dividends declared per share on the 8.75% Series Preferred Shares and such parity shares shall in all cases bear to each other the same ratio that accumulated dividends per share on the 8.75% Series Preferred Shares and such other shares bear to each other (for purposes of the foregoing, the amount of dividends declared per share shall be based on the applicable dividend rate for such shares for the dividend period(s) for which dividends were not paid in full). 4. VOTING RIGHTS. The holders of 8.75% Series Preferred Shares shall have voting rights only as provided by law or as specifically set forth in Section F. (a) Each 8.75% Series Preferred Share shall entitle the holder thereof to one vote on all matters on which the shares may be voted. (b) If at the time of any annual meeting of shareholders for the election of directors a "default in preference dividends" on the 8.75% Series Preferred Shares, or on any series of Preferred Shares, ranking on a parity with the 8.75% Series Preferred Shares as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall exist, the holders of the 8.75% Series Preferred Shares and such parity shares shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Shares and all other securities of the Corporation, to elect two (2) directors of the Corporation. Such right shall continue until there are no dividends in arrears upon the 8.75% Series Preferred Shares. Each director elected by the holders of Preferred Shares as aforesaid and any such parity shares (a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding 8.75% Series Preferred Shares and any such parity shares voting together as a single class without regard to series, at a meeting of the shareholders or of the holders of 8.75% Series Preferred Shares and any such parity shares called for the purpose. So long as a default in any preference dividends on the 8.75% Series Preferred Shares or any such parity shares shall exist, (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause [ii]) by an instrument in writing signed by the remaining Preferred Director and filed with the Company and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding 8.75% Series Preferred Shares and any such parity shares voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. For the purposes hereof, a "default in preference dividends" shall be deemed to have occurred whenever the amount of accumulated dividends upon the 8.75% Series Preferred Shares or any series of shares ranking on a parity therewith as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up shall be equivalent to four (4) full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accumulated dividends on all 8.75% Series Preferred Shares and any such parity shares then outstanding shall have been paid to the end of the last preceding quarterly dividend period or equivalent thereof. (c) The Corporation shall not, without the vote or consent of the holders of two-thirds of the outstanding 8.75% Series Preferred Shares and Preferred Shares ranking on a parity with the 8.75% Series Preferred Shares as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, amend its Articles of Incorporation to create or authorize any class or series of shares, or any class or series of securities convertible into any class or series of shares, which would rank prior to the 8.75% Series Preferred Shares and such parity shares as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up. 5. CERTAIN RESTRICTIONS. (a) Whenever quarterly dividends payable on the 8.75% Series Preferred Shares as provided in paragraph 3 of this Section F are in arrears, or in the event the Corporation shall have failed to redeem the 8.75% Series Preferred Shares on January 14, 1996, in accordance with the provisions of Section 8 hereof, thereafter and until all accumulated and unpaid dividends, whether or not earned or declared, on 8.75% Series Preferred Shares outstanding shall have been paid in full, or until such redemption shall have been effected, as the case may be, the Corporation shall not: (i) declare, pay or set apart for payment dividends, or make any other distributions, on any shares ranking junior (either as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up) to the 8.75% Series Preferred Shares; (ii) redeem or purchase or otherwise acquire for consideration any shares ranking junior (either as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up) to the 8.75% Series Preferred Shares, provided that the Corporation may at any time redeem, purchase or otherwise acquire any such junior shares in exchange for any shares of the Corporation ranking junior (either as to the payment of dividends or as to the distribution of assets upon dissolution, liquidation or winding up) to the 8.75% Series Preferred Shares; or (iii) redeem or purchase or otherwise acquire for consideration any 8.75% Series Preferred Shares, or any shares ranking on a parity with the 8.75% Series Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of all such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of the Corporation unless the Corporation could, under paragraph 5(a) of this Section F, purchase or otherwise acquire such shares at such time and in such manner. 6. REACQUIRED SHARES. Any 8.75% Series Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Preferred Shares and may be reissued as part of a new series of Preferred Shares subject to the conditions and restrictions on issuance set forth herein and in the Articles of Incorporation of the Corporation creating a series of Preferred Shares or any similar shares or as otherwise required by law. 7. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of 8.75% Series Preferred Shares will be entitled to receive and to be paid out of the assets of the Corporation available for distribution to its shareholders, before any payment or distribution shall be made on the Common Shares or on any other class of shares of the Corporation ranking junior to the 8.75% Series Preferred Shares as to the distribution of assets upon liquidation, dissolution or winding up, an amount equal to the liquidation preference with respect to such shares plus an amount equal to all dividends thereon (whether or not earned or declared) accumulated but unpaid to the date of final distribution. The liquidation preference for 8.75% Series Preferred Shares shall be $100.00 per share. After the payment to the holders of 8.75% Series Preferred Shares of the full preferential amounts provided for as described herein, the holders of 8.75% Series Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation. In the event the assets of the Corporation available for distribution to the holders of 8.75% Series Preferred Shares upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled, no such distribution shall be made on account of any shares of any other class or series of Preferred Shares ranking on a parity with the 8.75% Series Preferred Shares upon such liquidation, dissolution or winding up unless proportionate distributive amounts shall be paid on account of the shares of 8.75% Series Preferred Shares, ratable, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such liquidation. Subject to the rights of the holders of shares of any series or class or classes of shares ranking on a parity with the 8.75% Series Preferred Shares with respect to the distribution of assets upon liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the holders of the 8.75% Series Preferred Shares as described herein, but not prior thereto, any other series or class or classes of shares ranking junior to the 8.75% Series Preferred Shares with respect to the distribution of assets upon liquidation, dissolution or winding up shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the 8.75% Series Preferred Shares shall not be entitled to share therein. 8. REDEMPTION. (a) The 8.75% Series Preferred Shares shall be redeemed in whole by the Corporation on January 14, 1996, at the redemption price of $100 per share plus all unpaid cumulative dividends accumulated thereon to the date of redemption, whether or not earned or declared. The Corporation shall give notice of such redemption to the holders of the 8.75% Series Preferred Shares by mail not more than sixty (60) but not less than thirty (30) days prior to the redemption date, but failure to so mail such notice or any defect therein or in the mailing thereof shall not affect the validity of such redemption. (b) The Corporation shall, after giving notice of redemption as herein provided, or after giving to the bank or trust company hereinafter referred to irrevocable authority to give due notice, deposit at any time on or prior to the redemption date specified in such notice, and after the earliest date on which notice of redemption may be given as herein provided, the amount of the aggregate redemption price plus all unpaid cumulative dividends accumulated to the redemption date (whether or not earned or declared) on the 8.75% Series Preferred Shares to be redeemed, with a bank or trust company having a capital and surplus of at least five million dollars and its principal office in the City of Chicago, Illinois, designated in such notice, in trust for the holders of such shares so to be redeemed, payable to the holders thereof on the date fixed for redemption, and then, from and after the date of such deposit, such shares, notwithstanding that any certificate for such shares so called for redemption shall not have been surrendered for cancellation, shall no longer be deemed outstanding and shall be deemed canceled and retired, and each holder thereof shall not thereafter be entitled to receive any further dividends or be entitled to exercise any rights as a holder of such shares, excepting only the right to receive the redemption price thereof plus all unpaid cumulative dividends accumulated theron to the date of redemption (whether or not earned or declared), but without interest thereon. The moneys so deposited for the redemption of such shares shall be paid to the holders of such shares upon the surrender to the Corporation for cancellation of the certificates representing such shares, properly endorsed in blank for transfer or accompanied by proper instruments of assignment in blank (if required by the Corporation) and bearing all necessary stock transfer tax stamps thereto affixed and canceled. (c) In case the holder of any certificate for any 8.75% Series Preferred Shares which shall have been redeemed shall not, within six (6) years after such redemption date, claim the amount deposited for the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amount and shall thereupon be relieved of all responsibility in respect therof; provided such bank or trust company, before being required to make any such payment, may (at the expense of the Corporation) cause to be published once a week on any business day of the week for two (2) consecutive weeks in a newspaper of general circulation in the city of Chicago, Illinois, customarily published on each business day, a notice that such moneys have not been so called for and that after a date named therein such moneys will be returned to the Corporation. 9. CONVERSION. The 8.75% Series Preferred Shares shall not be convertible into Common Shares or shares of any other class or series of the Corporation. 10. RANK. The 8.75% Series Preferred Shares shall rank, with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, on a parity with all series of Preferred Shares, unless the terms of any such series shall provide otherwise. The Series A Preferred Shares shall rank junior to the 8.75% Series Preferred Shares both as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up. 11. AMENDMENT. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the designation, rights or preferences of the 8.75% Series Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of such shares then outstanding. ARTICLE VI DIRECTORS. 1. The Board of Directors of the Corporation shall consist of ten (10) directors. The directors shall be divided into three classes, and each class shall consist of one-third, or as near as may be, of the total number of directors constituting the Board of Directors. At the 1988 and at each succeeding annual meeting of shareholders, successors to the class of directors whose terms expire at that annual meeting shall be elected to hold office for a three-year term, so that the term of office of one class of directors shall expire in each year. In the event that the holders of Preferred Shares are entitled at any shareholders meeting to elect directors, then the term of office of all persons who may be directors shall terminate upon the election of their successors at such meeting of shareholders. 2. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, age and service limitations as may be set forth in the Bylaws, disqualification or removal from office. Any vacancy on the Board of Directors shall be filled by a majority of the Board of Directors then in office even if less than a quorum, or by a sole remaining director. Any director elected by the Board of Directors shall hold office until the annual meeting for the year in which the term for that Class of Directors shall expire. 3. A director may be removed by the directors or the shareholders, but only for cause. If by directors, such action may be taken only at a meeting of the Board, the meeting notice for which must state that the purpose, or one of the purposes, of the meeting is the removal of the director, and the affirmative vote of two-thirds of the remaining directors is necessary to remove the director. If removal is by vote of the shareholders, it may only be considered at an annual meeting of shareholders, and the affirmative vote of two-thirds of the shares then entitled to vote for the election of directors is necessary to remove the director. For purposes of this section, cause for removal shall be construed to exist only if a director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to appeal, or has been adjudged by a court of competent jurisdiction to be liable for willful misconduct in the performance of his or her duty to the Corporation in a matter of substantial importance to the Corporation and such adjudication is no longer subject to appeal. ARTICLE VII Business Combinations A. Market Value Required. Notwithstanding any other provision of these Articles, the Corporation may not engage in any Business Combination (hereinafter defined) with any Interested Shareholder (hereinafter defined) of the Corporation unless the Business Combination meets the requirement specified in either paragraphs 1, 2, 3 following: 1. A Business Combination approved by the Board of Directors of the Corporation before the Interested Shareholders Acquisition Date, or as to which the purchase of shares made by the Interested Shareholder on the Interested Shareholder's Acquisition Date had been approved by the Board of Directors of the Corporation before the Interested Shareholder's Acquisition Date. 2. A Business Combination approved by the affirmation vote of the holders of a majority of the outstanding voting shares not beneficially owned by the Interested Shareholder proposing the Business Combination, or any Affiliate or Associate of the Interested Shareholder proposing the Business Combination, at a meeting called for that purpose no earlier than five (5) years after the Interested Shareholder's Acquisition Date. 3. A Business Combination that meets all of the following conditions: (a) The aggregate amount of cash and the Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of Common Shares in such Business Combination, shall be at least equal to the highest amount determined under clauses (i) and (ii) below: (i) the highest per share price paid by or behalf of the Interested Shareholder when the Interested Shareholder was the beneficial owner (directly or indirectly) of five percent (5%) of the outstanding voting shares for any Common Share in connection with the acquisition by the Interested Shareholder of beneficial ownership of Common Shares (x) within the five-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date") or (y) in the transaction in which it became an Interested Shareholder, whichever is higher, plus, in either case, interest compounded annually from the earliest date on which the highest per share acquisition price was paid through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (ii) the Market Value per Common Share on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (the "Acquisition Date"), whichever is higher, plus interest compounded annually from that date through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (b) The aggregate amount of cash and the Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Preferred Shares in such Business Combination shall be at least equal to the highest amount determined under clauses (i), (ii) and (iii) below: (i) the highest per share price paid by or on behalf of the Interested Shareholder at a time when the Interested Shareholder was the beneficial owner, directly or indirectly, of five percent (5%) or more of the outstanding voting shares of the Corporation for any share of such class or series of Preferred Shares in connection with the acquisition by the Interested Shareholder of beneficial ownership of shares of such class or series of Preferred Shares (x) within the five-year period immediately prior to the Announcement Date or (y) in the transaction in which it became an Interested Shareholder, whichever is higher, plus in either case, interest compounded annually from the earliest date on which the highest per share acquisition price was paid through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (ii) The Market Value per share of such class or series of Preferred Shares on the Announcement Date or on the Acquisition Date, whichever is higher, plus interest compounded annually from that date through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (iii) the highest preferential amount per share to which the holders of shares of such class or series of Preferred Shares would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, plus the aggregate amount of any dividends declared or due as to which the holders are entitled before payment of dividends on some other class or series of shares, unless the aggregate amount of the dividends is included in the preferential amount. (c) The consideration to be received by holders of a particular class or series of outstanding Capital Shares shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Shareholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of Capital Shares. If the consideration previously paid by the Interested Shareholder to acquire shares of any class or series of Capital Shares varied among the recipients thereof as to form, the form of consideration to be paid for such class or series of Capital Shares in connection with the Business Combination shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of Capital Shares previously acquired by the Interested Shareholder, and the consideration shall be distributed promptly. (d) After the Interested Shareholder's Acquisition Date and before the Consummation Date with respect to the Business Combination, the Interested Shareholder has not become the Beneficial Owner of any additional voting shares of the Corporation except: (1) as part of the transaction that resulted in the Interested Shareholder becoming an Interested Shareholder; (ii) by virtue of proportionate share splits, share dividends, or other distributions of shares in respect of shares not constituting a Business Combination; (iii) through a Business Combination meeting all of the conditions of the Articles or (iv) through purchase by the Interested Shareholder at any price that, if the price had been paid in an otherwise permissible Business Combination the Announcement Date and Consummation Date of which were the date of the purchase, would have satisfied the requirements of these Articles. B. Exceptions. The provisions of the preceding Section A shall not be applicable to any particular Business Combination if, in addition to any affirmative vote required by law or these Articles of Incorporation, such Business Combination shall be approved by the affirmative vote of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all the outstanding Voting Shares (hereinafter defined), voting together as a single class. Such Affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or in any agreement with any national securities exchange or otherwise. C. Definitions. The following definitions shall apply with respect to this ARTICLE VII: 1. The term "Business Combination" shall mean: (a) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Shareholder or (ii) any other corporation (whether or not itself an Interested Shareholder) which is or after such merger or consolidation would be an Affiliate or Associate of an Interested Shareholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) with or for the benefit of any Interested Shareholder or any Affiliate of Associate of any Interested Shareholder involving any assets, securities or commitments of the Corporation or any Subsidiary (i) having an aggregate Market Value equal to ten percent (10%) or more of the aggregate Market Value of (x) all the assets, determined on a consolidated basis, of the Corporation, or (y) all the outstanding shares of the Corporation or (ii) representing ten percent (10%) or more of the earning power or net income, determined on a consolidated basis, of the Corporation; or (c) the issuance or transfer by the Corporation or any Subsidiary of the Corporation (in one (1) transaction or a series on transactions) of any shares of the Corporation or any subsidiary of the Corporation that have an aggregate market value equal to five percent (5%) or more of the aggregate market value of all the outstanding shares of the Corporation to the Interested Shareholder or an affiliate or the associate of the Interested Shareholder except under the exercise of warrants or rights to purchase shares offered, or a dividend or distribution paid or made pro rata to all shareholders of the Corporation; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation which is voted for or consented to by any Interested Shareholder or any Affiliate or Associate thereof; or (e) any reclassification of securities (including any share split, share dividend, or other distribution of shares in respect of shares, or reverse share split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation, with any of its Subsidiaries, or any other transaction (whether or not with or otherwise involving an Interested Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of outstanding shares of any class or series of voting shares or any securities convertible into voting shares of the Corporation or any Subsidiary, that is beneficially owned by an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; or (f) any receipt by the Interested Shareholder or any Affiliate or Associate of the Interested Shareholder of the benefit (directly or indirectly, except proportionately as a shareholder of the Corporation), of any loans, advances, guarantees, pledges, or other financial assistance or any tax credits or other tax advantages provided by or through the Corporation. 2. The term "Capital Shares" shall mean all capital shares of the Corporation authorized to be issued from time to time under ARTICLE V of these Articles of Incorporation, and the term "Voting Shares" shall mean all Capital Shares that by its terms may be voted on all matters submitted to shareholders of the Corporation generally. 3. The term "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who (i) is the beneficial owner directly or indirectly of Voting Shares representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding Voting Shares or (ii) is an Affiliate or Associate of the Corporation and at any time within the five-year period immediately prior to the Announcement Date was the beneficial owner of Voting Shares representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding Voting Shares. For the purpose of the number of Voting Shares of the Corporation considered to be outstanding includes shares considered to be beneficially owned by the person, but does not include any other unissued shares of Voting Shares of the Corporation that may be issuable under any agreement, arrangement, or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 4. A person shall be a "Beneficial Owner" of any Capital Shares (i) which such person individually or any of its Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such person individually or any of its Affiliates or Associates has, directly or indirectly, (x) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise on conversion rights, exchange rights, warrants or options, or otherwise, or (y) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of Capital Shares. 5. The term "Associate" when used to indicate a relationship with any person, means: (1) Any corporation or organization of which the person is an officer or partner or is, directly or indirectly, the Beneficial Owner of ten percent (10%) or more of any class or voting shares; (2) Any trust or other estate in which the person has a substantial beneficial interest, or as to which the person serves as trustee or in a similar fiduciary capacity; and (3) Any relative or spouse of the person, or any relative of the spouse, who has the same home as the person. 6. The term "Affiliate" means a person that directly or indirectly through one (1) or more intermediaries, controls, is controlled by, or is under common control with a specified person. 7. The term "Subsidiary" of the Corporation means any other corporation of which voting shares constituting a majority of the outstanding voting shares of the other corporation entitled to be cast are owned (directly or indirectly) by the Corporation. 8. The term "Market Value" means (i) in the case of shares, the highest closing sale price during the 30-day period immediately preceding the date in question of such a share on the Composite Tape for New York Stock Exchange listed shares, or, if such shares are not quoted on the Composite Tape, on the New York Stock Exchange, or, if such shares are not listed on such Exchange, on the principal United States securities exchange on which such shares are listed, or, if such shares are not listed on any such exchange, the highest closing bid quotation with respect to such a share during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the Market Value on the date in question of such a share as determined by a majority of the directors in good faith; and (ii) in the case of property other than cash or shares, the Market Value of such property on the date in question as determined in good faith by a majority of the directors. 9. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraphs 3(a) and 3(b) of Section A of this ARTICLE VII shall include the Common Shares and/or the shares of any other class or series of Capital Shares retained by the holders of such shares. ARTICLE VIII Indemnification Each director and each officer of the Corporation shall be indemnified by the Corporation to the fullest extent permitted by law against expenses (including attorney's fees) judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection within the defense of any proceeding in which he or she was or is a party or is threatened to be made a party by reason of being or having been a director or an officer of the Corporation. Such right of indemnification is not exclusive of any other rights to which such director or officer may be entitled under any now or hereafter existing statute, any other provision of there Articles, bylaw, agreement, vote of shareholders or otherwise. If the Indiana Business Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Indiana Business Corporation Law, as so amended. Any repeal or modification of this Article VIII by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE IX Amendments The Corporation reserves the right to amend, alter, change or repeal any provision in these Articles of Incorporation as permitted by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provision of Articles VI, VII, VIII and this Article IX may not be amended, altered, change or repealed unless such amendment, alteration, change or repeal is approved by the affirmative vote of the holders of not less than seventy-five percent (75%) of the outstanding shares entitled to vote thereon. ARTICLE X Incorporator The name and post office address of the Incorporator of the Corporation is as follows: Richard M. Schumacher Eichhorn, Eichhorn & Link 200 Russell Street P.O. Box 6328 Hammond, IN 46325 This document must be signed by all Incorporators. /s/Richard M. Schumacher -----END PRIVACY-ENHANCED MESSAGE-----