-----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, TCZBlF4sFNyF4EV6Y7qI8RTkqcYku5z3+AJPAR8ZQ40vTpIqkcLL5fMl5FfjZyzb cQpAWfGtbZvF4X+s76ycdA== 0000823392-97-000013.txt : 19970814 0000823392-97-000013.hdr.sgml : 19970814 ACCESSION NUMBER: 0000823392-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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: 97658901 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 June 30, 1997 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ________________ Commission file number 1-9779 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 July 31, 1997, 62,746,483 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 June 30, 1997, and December 31, 1996, and the related consolidated statements of income, common shareholders' equity and cash flows for the three, six, and twelve month periods ended June 30, 1997 and 1996. These consolidated financial statements are the responsibility of 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 June 30, 1997, and December 31, 1996, and the results of their operations and their cash flows for the three, six, and twelve month periods ended June 30, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois July 29, 1997
CONSOLIDATED BALANCE SHEET June 30, December 31, ASSETS 1997 1996 ============= ============ (Dollars in thousands) PROPERTY, PLANT AND EQUIPMENT: Utility Plant, (Note 2)(including Construction Work in Progress of $169,983 and $166,812, respectively) Electric $ 4,077,005 $ 4,050,084 Gas 1,365,216 1,344,230 Common 350,680 346,636 Water 548,321 0 ------------ ------------ 6,341,222 5,740,950 Less - Accumulated provision for depreciation and amortization 2,722,767 2,546,162 ------------ ------------ Total Utility Plant 3,618,455 3,194,788 ------------ ------------ Other property, at cost, net of accumulated provision for depreciation 142,611 147,370 ------------ ------------ Total Property, Plant and Equipment 3,761,066 3,342,158 ------------ ------------ INVESTMENTS: Investments, at equity (Note 2) 81,745 52,260 Investments, at cost 31,249 30,424 Other investments 23,411 20,090 ------------ ------------ Total Investments 136,405 102,774 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents 29,391 26,333 Accounts receivable, less reserve of $7,676 and $5,569, respectively (Note 2) 175,147 165,441 Other receivables (Note 23) 111,536 42,184 Fuel adjustment clause (Note 2) 8,257 9,149 Gas cost adjustment clause (Note 2) 47,055 100,214 Materials and supplies, at average cost 62,667 59,859 Electric production fuel, at average cost 28,632 26,483 Natural gas in storage (Note 2) 35,127 65,093 Prepayments and other 29,850 28,491 ------------ ------------ Total Current Assets 527,662 523,247 ------------ ------------ OTHER ASSETS: Regulatory assets (Note 2) 227,685 236,205 Intangible assets (Note 2) 86,023 0 Prepayments and other (Note 10) 117,506 84,499 ------------ ------------ Total Other Assets 431,214 320,704 ------------ ------------ $ 4,856,347 $ 4,288,883 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED BALANCE SHEET June 30, December 31, CAPITALIZATION AND LIABILITIES 1997 1996 ============ ============ (Dollars in thousands) CAPITALIZATION: Common shareholders' equity (See accompanying statement) $ 1,258,417 $ 1,100,501 Cumulative preferred stocks (Note 12) - Series without mandatory redemption provisions (Note 13) 85,620 81,126 Series with mandatory redemption provisions (Note 14) 59,996 61,246 Long-term debt excluding amounts due within one year (Note 18) 1,608,345 1,127,106 ------------ ------------ Total Capitalization 3,012,378 2,369,979 ------------ ------------ CURRENT LIABILITIES: Current portion of long-term debt (Note 19) 189,796 144,552 Short-term borrowings (Note 20) 168,781 425,985 Accounts payable 177,930 251,730 Sinking funds due within one year (Notes 14 and 18) 3,328 3,328 Dividends declared on common and preferred stocks 29,439 28,308 Customer deposits 28,913 17,580 Taxes accrued 91,236 78,723 Interest accrued 15,405 7,557 Accrued employment costs 44,739 44,186 Other accruals 49,572 30,054 ------------ ------------ Total Current Liabilities 799,139 1,032,003 ------------ ------------ OTHER: Deferred income taxes (Note 9) 632,297 602,745 Deferred investment tax credits, being amortized over life of related property (Note 9) 109,279 108,258 Deferred credits 56,845 37,338 Customer advances and contributions in aid of construction (Note 2) 103,012 15,830 Accrued liability for postretirement benefits (Note 11) 129,182 109,429 Other noncurrent liabilities 14,215 13,301 ------------ ------------ Total Other 1,044,830 886,901 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 6, 8, 21, 22 and 23) $ 4,856,347 $ 4,288,883 ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME Three Months Six Months Ended June 30, Ended June 30, ---------------------- ---------------------- 1997 1996 1997 1996 ========== ========== ========== ========== (Dollars in thousands, except for per share amounts) Operating Revenues: (Notes 2, 7, and 25) Gas $ 121,010 $ 120,738 $ 454,410 $ 448,342 Electric 244,054 244,232 489,878 492,656 Water 18,795 0 18,795 0 Products and Services 139,535 33,772 220,054 73,165 ---------- ---------- ---------- ---------- 523,394 398,742 1,183,137 1,014,163 ---------- ---------- ---------- ---------- Cost of Sales: (Note 2) Gas costs 61,961 67,438 276,801 266,696 Fuel for electric generation 54,609 53,184 113,017 110,386 Power purchased 10,518 14,322 19,478 26,283 Products and Services 113,795 17,900 179,109 41,153 ---------- ---------- ---------- ---------- 240,883 152,844 588,405 444,518 ---------- ---------- ---------- ---------- Operating Margin 282,511 245,898 594,732 569,645 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 108,200 81,400 191,884 170,648 Maintenance (Note 2) 15,094 22,849 35,598 43,854 Depreciation and amortization (Note 2) 64,414 58,710 122,759 115,136 Taxes (except income) 20,291 17,587 41,600 38,593 ---------- ---------- ---------- ---------- 207,999 180,546 391,841 368,231 ---------- ---------- ---------- ---------- Operating Income 74,512 65,352 202,891 201,414 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) 3,897 2,228 10,885 2,185 ---------- ---------- ---------- ---------- Interest and Other Charges: Interest on long-term debt 28,814 21,899 49,609 43,368 Other interest 1,000 3,343 5,390 6,592 Amortization of premium, reacquisition premium, discount and expense on debt, net 1,200 1,167 2,333 2,326 Dividend requirements on preferred stocks of subsidiaries 2,179 2,178 4,346 4,377 ---------- ---------- ---------- ---------- Income before income taxes 45,216 38,993 152,098 146,936 ---------- ---------- ---------- ---------- Income taxes 16,980 15,564 53,024 56,021 ---------- ---------- ---------- ---------- Net Income 28,236 23,429 99,074 90,915 Dividend requirements on preferred shares 0 0 0 119 ---------- ---------- ---------- ---------- Balance available for common shareholders $ 28,236 $ 23,429 $ 99,074 $ 90,796 ========== ========== ========== ========== Average common shares outstanding 62,827,620 61,234,350 61,202,013 61,649,509 Earnings per average common share $ 0.44 $ 0.38 $ 1.61 $ 1.47 ========== ========== ========== ========== Dividends declared per common share $ 0.45 $ 0.42 $ 0.90 $ 0.84 ========== ========== ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement. CONSOLIDATED STATEMENT OF INCOME Twelve Months Ended June 30, ---------------------- 1997 1996 ========== ========== (Dollars in thousands, except for per share amounts) Operating Revenues: (Notes 2, 7, and 25) Gas $ 805,463 $ 740,275 Electric 1,019,453 1,040,088 Water 18,795 0 Products and Services 313,212 103,892 ---------- ---------- 2,156,923 1,884,255 ---------- ---------- Cost of Sales: (Note 2) Gas costs 493,882 428,451 Fuel for electric generation 235,846 243,026 Power purchased 46,946 47,831 Products and Services 239,196 46,090 ---------- ---------- 1,015,870 765,398 ---------- ---------- Operating Margin 1,141,053 1,118,857 ---------- ---------- Operating Expenses and Taxes (except income): Operation 358,055 350,405 Maintenance (Note 2) 75,085 82,033 Depreciation and amortization (Note 2) 241,617 219,315 Taxes (except income) 78,511 74,894 ---------- ---------- 753,268 726,647 ---------- ---------- Operating Income 387,785 392,210 ---------- ---------- Other Income (Deductions) (Note 2) 20,687 4,415 ---------- ---------- Interest and Other Charges: Interest on long-term debt 91,623 84,914 Other interest 14,534 14,140 Amortization of premium, reacquisition premium, discount and expense on debt, net 4,613 4,625 Dividend requirements on preferred stocks of subsidiaries 8,681 8,833 ---------- ---------- Income before income taxes 289,021 284,113 ---------- ---------- Income taxes 104,128 105,012 ---------- ---------- Net Income 184,893 179,101 Dividend requirements on preferred shares 0 1,651 ---------- ---------- Balance available for common shareholders $ 184,893 $ 177,450 ========== ========== Average common shares outstanding 60,967,583 62,219,569 Earnings per average common share $ 3.03 $ 2.85 ========== ========== Dividends declared per common share $ 1.77 $ 1.65 ========== ========== 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 Treasury Three Months Ended Total Shares Capital Earnings Shares ======================== =========== =========== =========== ========== ========== Balance, April 1, 1996 $ 1,126,350 $ 870,930 $ 32,541 $ 560,401 $ (330,942) Net income 23,429 23,429 Dividends: Preferred shares Common shares (25,684) (25,684) Treasury shares acquired (9,548) (9,548) Issued: Employee stock purchase plan 146 84 62 Long-term incentive plan 675 30 755 Amortization of unearned compensation 574 Unrealized gain(loss) on available for sale securities 258 Other 28 19 (70) ----------- ----------- ----------- ---------- ---------- Balance, June 30, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076 $ (339,673) =========== =========== =========== ========== ========== Balance, April 1, 1997 $ 1,297,116 $ 870,930 $ 88,118 $ 635,900 $ (295,980) Net income 28,236 28,236 Dividends: Preferred shares Common shares (29,962) (29,962) Treasury shares acquired (45,938) (45,938) Issued: IWC Resources acquisition (130) (34) (96) Acquisition of minority interest 5,469 1,351 4,118 Employee stock purchase plan 165 98 67 Long-term incentive plan 1,343 22 1,413 Amortization of unearned compensation 479 Unrealized gain (loss) on available for sale securities 1,268 Other 371 1 (91) ----------- ----------- ----------- ----------- ---------- Balance, June 30, 1997 $ 1,258,417 $ 870,930 $ 89,556 $ 634,083 $ (336,416) =========== =========== =========== =========== ========== Dollars in Thousands Shares ------------------------- ------------------------- Currency Three Months Ended Translation Common Treasury (continued) Adjustment Other Shares Shares ======================== =========== =========== =========== ============ Balance, April 1, 1996 $ (2,070) $ (4,510) 73,892,109 (12,503,363) Net income Dividends: Preferred shares Common shares Treasury shares acquired (266,067) Issued: Employee stock purchase plan 3,920 Long-term incentive plan (110) 28,150 Amortization of unearned compensation 574 Unrealized gain (loss) on available for sale securities 258 Other 79 ----------- ----------- ----------- ------------ Balance, June 30, 1996 $ (1,991) $ (3,788) 73,892,109 (12,737,360) =========== =========== =========== ============ Balance, April 1, 1997 $ (501) $ (1,351) 73,892,109 (10,181,876) Net income Dividends: Preferred shares Common shares Treasury shares acquired (1,159,751) Issued: IWC Resources acquisition (2,786) Acquisition of minority interest 135,032 Employee stock purchase plan 4,208 Long-term incentive plan (92) 46,683 Amortization of unearned compensation 479 Unrealized gain (loss) on available for sale securities 1,268 Other 461 ----------- ----------- ----------- ------------ Balance, June 30, 1997 $ (40) $ 304 73,892,109 (11,158,490) =========== =========== =========== ============ Dollars in Thousands --------------------------------------------------------------- Additional Common Paid-in Retained Treasury Six Months Ended Total Shares Capital Earnings Shares ======================== =========== =========== =========== =========== ========== Balance, January 1, 1996 $ 1,122,215 $ 870,930 $ 32,210 $ 518,837 $ (293,223) Net income 90,915 90,915 Dividends: Preferred shares (119) (119) Common shares (51,478) (51,478) Treasury shares acquired (48,036) (48,036) Issued: Employee stock purchase plan 449 261 188 Long-term incentive plan 1,010 184 1,398 Amortization of unearned compensation 1,188 Unrealized gain (loss) on available for sale securities 205 Other (121) 19 (79) ----------- ----------- ---------- ----------- ---------- Balance, June 30, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076 $ (339,673) =========== =========== =========== =========== ========== Balance, January 1, 1997 $ 1,100,501 $ 870,930 $ 32,868 $ 591,370 $ (392,995) Net income 99,074 99,074 Dividends: Preferred shares 0 0 Common shares (56,235) (56,235) Treasury shares acquired (102,529) (102,529) Issued: IWC Resources acquisition 207,422 55,009 152,413 Acquisition of minority interest 5,469 1,351 4,118 Employee stock purchase plan 353 211 142 Long-term incentive plan 2,108 116 2,435 Amortization of unearned compensation 982 Unrealized gain (loss) on available for sale securities 1,297 Other (25) 1 (126) ----------- ----------- ---------- ----------- ---------- Balance, June 30, 1997 $ 1,258,417 $ 870,930 $ 89,556 $ 634,083 $ (336,416) =========== =========== ========== =========== ========== Dollars in Thousands Shares ------------------------ -------------------------- Currency Six Months Ended Translation Common Treasury (continued) Adjustment Other Shares Shares ======================== =========== ========== =========== ============ Balance, January 1, 1996 $ (1,930) $ (4,609) 73,892,109 (11,512,513) Net income Dividends: Preferred shares Common shares Treasury shares acquired (1,289,744) Issued: Employee stock purchase plan 11,847 Long-term incentive plan (572) 53,050 Amortization of unearned compensation 1,188 Unrealized gain on available for sale securities 205 Other (61) ----------- ---------- ----------- ------------ Balance, June 30, 1996 $ (1,991) $ (3,788) 73,892,109 (12,737,360) ----------- ---------- ----------- ------------ Balance, January 1, 1997 $ (140) $ (1,532) 73,892,109 (14,086,448) Net income Dividends: Preferred shares Common shares Treasury shares acquired (2,589,358) Issued: IWC Resources acquisition 5,291,089 Acquisition of minority interest 135,032 Employee stock purchase plan 8,962 Long-term incentive plan (443) 82,233 Amortization of unearned compensation 982 Unrealized gain (loss) on available for sale securities 1,297 Other 100 ----------- ---------- ----------- ------------ Balance, June 30, 1997 $ (40) $ 304 73,892,109 (11,158,490) =========== ========== =========== ============ Dollars in Thousands --------------------------------------------------------------- Additional Common Paid-in Retained Treasury Twelve Months Ended Total Shares Capital Earnings Shares ======================== =========== =========== =========== =========== ========== Balance, July 1, 1995 $ 1,116,208 $ 870,930 $ 31,950 $ 482,823 $ (260,485) Net income 179,101 179,101 Dividends: Preferred shares (1,651) (1,651) Common shares (102,053) (102,053) Treasury shares acquired (84,980) (84,980) Issued: Employee stock purchase plan 748 420 328 Long-term incentive plan 5,078 186 5,464 Amortization of unearned compensation 2,439 Unrealized gain (loss) on available for sale securities 1,874 Other (536) 118 (144) ----------- ----------- ---------- ----------- ---------- Balance, June 30, 1996 $ 1,116,228 $ 870,930 $ 32,674 $ 558,076 $ (339,673) ----------- ----------- ---------- ----------- ---------- Net income 184,893 184,893 Dividends: Preferred shares 0 0 Common shares (108,738) (108,738) Treasury shares acquired (159,991) (159,991) Issued: IWC Resources acquisition 207,422 55,009 152,413 Acquisition of minority interest 5,469 1,351 4,118 Employee stock purchase plan 687 404 283 Long-term incentive plan 6,109 118 6,434 Amortization of unearned compensation 2,364 Unrealized gain (loss) on available for sale securities 2,171 Other 1,803 (148) ----------- ----------- ---------- ----------- ---------- Balance, June 30, 1997 $ 1,258,417 $ 870,930 $ 89,556 $ 634,083 $ (336,416) =========== =========== ========== =========== ========== Dollars in Thousands Shares ------------------------ -------------------------- Currency Twelve Months Ended Translation Common Treasury (continued) Adjustment Other Shares Shares ======================== =========== ========== =========== ============ Balance, July 1, 1995 $ (1,481) $ (7,529) 73,892,109 (10,627,573) Net income Dividends: Preferred shares Common shares Treasury shares acquired (2,344,075) Issued: Employee stock purchase plan 20,638 Long-term incentive plan (572) 213,650 Amortization of unearned compensation 2,439 Unrealized gain on available for sale securities 1,874 Other (510) ----------- ---------- ----------- ------------ Balance, June 30, 1996 $ (1,991) $ (3,788) 73,892,109 (12,737,360) ----------- ---------- ----------- ------------ Net income Dividends: Preferred shares Common shares Treasury shares acquired (4,093,218) Issued: IWC Resources acquisition 5,291,089 Acquisition of minority interest 135,032 Employee stock purchase plan 17,784 Long-term incentive plan (443) 228,183 Amortization of unearned compensation 2,364 Unrealized gain (loss) on available for sale securities 2,171 Other 1,951 ----------- ---------- ----------- ------------ Balance, June 30, 1997 $ (40) $ 304 73,892,109 (11,158,490) =========== ========== =========== ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Six Months Ended June 30, Ended June 30, ---------------------- ---------------------- (Dollars in thousands) 1997 1996 1997 1996 ========= ========= ========= ========= CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 28,236 $ 23,429 $ 99,074 $ 90,915 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 64,414 58,710 122,759 115,136 Deferred federal and state income taxes, net (20,884) (1,937) (33,360) 12,802 Deferred investment tax credits, net (1,833) (1,668) (3,635) (3,338) Advance contract payment 475 475 950 (18,050) Change in certain assets and liabilities - * Accounts receivable, net (24,065) 62,940 (50,289) 29,165 Electric production fuel (4,500) (10,951) (2,149) (16,639) Materials and supplies (237) 2,412 (17) 3,078 Natural gas in storage (17,109) (17,624) 29,966 31,354 Accounts payable (115,801) (24,109) (60,151) 7,042 Taxes accrued (42,513) (38,276) 35,249 6,180 Fuel adjustment clause 4,673 (3,156) 892 (1,322) Gas cost adjustment clause 40,931 151 53,159 (47,523) Accrued employment costs 2,896 (236) (1,925) (9,029) Other accruals (12,612) (21,074) 12,899 (8,767) Other, net 19,568 (25,164) 23,335 (29,981) --------- --------- --------- --------- Net cash provided by (used in) operating activities (78,361) 3,922 226,757 161,023 --------- --------- --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Utility construction expenditures (62,025) (45,203) (108,421) (82,512) Construction expenditures related to Crossroads Pipeline Company (65) (279) (250) (364) IWCR construction expenditures (14,241) 0 (14,241) 0 Acquisition of IWC Resources Corporation, net of cash acquired 0 0 (288,932) 0 Acquisition of minority interest (5,641) 0 (5,641) 0 Customer advances for construction, net of refunds 134 0 134 0 Proceeds from disposition of assets 275 0 29,775 0 Other, net (559) (652) (19,911) (14,569) --------- --------- --------- --------- Net cash used in investing activities (82,122) (46,134) (407,487) (97,445) --------- --------- --------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 271,960 1,153 408,262 77,450 Issuance of short-term debt 321,050 258,720 575,095 598,408 Net change in commercial paper (113,250) 79,100 (255,555) 55,000 Retirement of long-term debt (38) (7,620) (1,507) (8,737) Retirement of short-term debt (312,875) (263,300) (598,495) (648,035) Retirement of preferred shares (1,252) (1,446) (1,253) (36,446) Issuance of common shares 6,847 806 215,333 1,414 Acquisition of treasury shares (45,938) (9,548) (102,529) (48,036) Cash dividends paid on common shares (28,323) (25,784) (55,095) (51,993) Cash dividends paid on preferred shares 0 0 0 (119) Other, net (583) 139 (468) 280 --------- --------- --------- --------- Net cash provided by (used in) financing activities 97,598 32,220 183,788 (60,814) --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (62,885) (9,992) 3,058 2,764 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,276 41,252 26,333 28,496 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,391 $ 31,260 $ 29,391 $ 31,260 ========= ========= ========= ========= *Net of effect from purchase of IWC Resources Corporation. The accompanying notes to consolidated financial statements are an integral part of this statement. CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Ended June 30, ----------------------- (In thousands) 1997 1996 ========= ========= CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 184,893 $ 179,101 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 241,617 219,315 Deferred federal and state income taxes, net (25,036) 34,092 Deferred investment tax credits, net (7,705) (7,117) Advance contract payment 1,900 (18,050) Change in certain assets and liabilities - * Accounts receivable, net (135,897) (15,427) Electric production fuel 2,265 (11,179) Materials and supplies 2,090 6,943 Natural gas in storage (5,597) 8,800 Accounts payable 13,820 39,545 Taxes accrued 39,543 (32,991) Fuel adjustment clause 3,366 (8,703) Gas cost adjustment clause 1,891 (84,097) Accrued employment costs 4,595 (2,567) Other accruals 8,163 (15,037) Other, net 37,811 (38,857) --------- --------- Net cash provided by (used in) operating activities 367,719 253,771 --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Utility construction expenditures (210,008) (171,385) Construction expenditures related to Crossroads Pipeline Company (4,642) (2,644) IWCR construction expenditures (14,241) 0 Acquisition of IWC Resources Corporation, net of cash acquired (288,932) 0 Acquisition of minority interest (5,641) 0 Customer advances for construction, net of refunds 134 0 Proceeds from disposition of assets 29,775 0 Other, net (32,562) (57,883) --------- --------- Net cash used in investing activities (526,117) (231,912) --------- --------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of long-term debt 409,178 83,031 Issuance of short-term debt 1,558,897 1,481,242 Net change in commercial paper (118,850) 133,400 Retirement of long-term debt (82,562) (104,886) Retirement of short-term debt (1,560,194) (1,412,693) Retirement of preferred shares (2,411) (38,210) Issuance of common shares 219,635 5,975 Acquisition of treasury shares (159,991) (84,980) Cash dividends paid on common shares (106,292) (101,014) Cash dividends paid on preferred shares (647) (1,651) Other, net (234) 517 --------- --------- Net cash provided by (used in) financing activities 156,529 (39,269) --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,869) (17,410) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,260 48,670 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,391 $ 31,260 ========= ========= *Net of effect from purchase 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, natural gas, and water to the public through its six wholly-owned regulated subsidiaries ("Utilities"): Northern Indiana Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline Company (Crossroads); Indianapolis Water Company (IWC); and Harbour Water Corporation (Harbour). 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". On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's subsidiaries include two regulated water utilities (IWC and Harbour)and five non-utility companies providing utility-related services including installation, repair and maintenance of underground pipelines and utility line locating and marking. The two primary non-utility subsidiaries are Miller Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P). Industries' also provides non-regulated energy/utility-related services including energy marketing and trading; power generation; gas transmission, supply and storage; installation, repair and maintenance of underground pipelines; utility line locating and marking; and related products targeted at customer segments principally through the following wholly-owned subsidiares: NIPSCO Development Company, Inc. (Development); NIPSCO Energy Services, Inc. (Services); Primary Energy, Inc. (Primary); NIPSCO Capital Markets, Inc. (Capital Markets); Miller ; and SM&P. These subsidiaries are referred to collectively as "Products and Services". (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION. The consolidated financial statements include the accounts of majority-owned subsidiaries of Industries after the elimination of significant intercompany accounts and transactions. Investments for which Industries has at least a 20% interest and certain joint ventures are accounted for under the equity method. Investments with less than a 20% interest are accounted for under the cost method. Certain reclassifications were made to conform the prior years' financial statements to the current presentation. The prior period operating results related to "Products and Services" were previously reported under the caption "Other Income (Deductions)" in the Consolidated Statement of Income. Accordingly, these results have been reclassified to conform to the current presentation. The operating results of IWCR for the three-month period ended June 30, 1997 are reported in the accompanying consolidated financial statements of Industries. 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. Utility revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. Construction revenues are recognized on the percentage of completion method whereby revenues are recognized in proportion to costs incurred over the life of each project. DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on a straight-line method over the remaining service lives of the electric, gas, and common properties. The provisions, as a percentage of the cost of depreciable utility plant, were approximately 4.3% for the three-month, six-month and twelve-month periods ended June 30, 1997; and 4.3%, 4.2% and 4.1% for the three-month, six-month and twelve-month periods ended June 30, 1996, respectively. 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, six-month and twelve-month periods ended June 30, 1997; and 3.1% for the three-month, six-month and twelve-month periods ended June 30, 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, six-month and twelve-month periods ended June 30, 1997 and June 30, 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, six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996. IWC and Harbour provide depreciation on the original cost of utility plant in service using a composite annual rate of 1.9% and 2.0%, respectively. 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 retired unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. 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 $170.4 million (see Note 4) and $40.6 million at June 30, 1997 and December 31, 1996, respectively, and are being amortized over a forty-year period from the 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. Industries acquired the minority interest in NESI Energy Marketing, L.L.C.(NEM) in April 1997. The excess of the purchase price over the fair value of the tangible net assets associated with this acquisition has been recorded as an intangible asset and is being amortized over a twenty-year period from the date of acquisition. Industries assesses the recoverability of its intangible assets on a periodic basis to confirm that expected future cash flows will be sufficient to support the recorded intangible assets. COAL RESERVES. Northern Indiana has a long-term mining contract to mine its coal reserves through the year 2001. The costs of these reserves are being recovered through the rate-making process as such coal reserves are used to produce electricity. POWER PURCHASED. Power purchases and net interchange power with other electric utilities under interconnection agreements are included in Cost of Sales under the caption "Power purchased." ACCOUNTS RECEIVABLE. At June 30, 1997, Northern Indiana had sold $100 million of its accounts receivable under a sales agreement which expires May 31, 2002. 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 Six Months Twelve Months (In thousands) Ended June 30, Ended June 30, Ended June 30, ------------------- ------------------- ------------------- 1997 1996 1997 1996 1997 1996 Income taxes $ 61,700 $ 55,748 $ 61,700 $ 55,748 $ 81,747 $124,088 Interest, net of amounts capitalized $ 32,544 $ 30,544 $ 44,655 $ 40,948 $ 90,988 $ 89,337
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 June 1997 and December 1996 the estimated replacement cost of gas in storage (current and non-current) at June 30, 1997 and December 31, 1996 exceeded the stated LIFO cost by approximately $32 million and $96 million, respectively. Certain other subsidiaries of Industries have natural gas in storage valued at average cost. HEDGING ACTIVITIES. Industries utilizes a variety of commodity-based derivative financial instruments to reduce the price risk inherent in its natural gas and electric power marketing activities. The gains and losses on these derivative financial instruments are deferred (Other Current Assets or Other Current Liabilities) pursuant to an identified risk reduction strategy. Such deferrals are recognized in income concurrent with the disposition of the underlying physical commodity. In certain circumstances, a derivative financial instrument will serve to hedge the acquisition cost of gas injected into storage. In this situation, the gain or loss on the derivative financial instrument is deferred as part of the cost basis of gas in storage and recognized upon the ultimate disposition of the natural gas. If a derivative financial instrument contract is terminated early because it is probable that a transaction or forecasted transaction will not occur, any gain or loss as of such date is immediately recognized in earnings. If a derivative financial instrument contract is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and recorded when the associated transaction or forecasted transaction affects earnings. Industries' gas subsidiaries use commodity futures contracts, options and swaps to hedge the impact of natural gas price fluctuations related to its business activities, including price risk related to the physical location of the natural gas (basis risk). As of June 30, 1997, Industries had open derivative financial instruments representing hedges of natural gas sales of 4.5 billion cubic feet (Bcf) and net basis differentials of 3.3 Bcf. The net deferred gain on these derivative financial instruments as of June 30, 1997 was not material. Industries purchases options to hedge price risk associated with a portion of its fixed price purchase and sale commitments related to electricity. The net deferred loss on these options as of June 30, 1997 was 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. In July 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions or other economic events during the period other than transactions with shareholders. Industries will be required to display items of other comprehensive income including, but not limited to, changes in its unrealized holding gains or losses on its available-for-sale securities and foreign currency translation adjustments. Industries will adopt this statement effective January 1, 1998. REGULATORY ASSETS. The Utilities' operations are subject to the regulation of the Commission and, in the case of the "Energy Utilities", 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 their operations. As of June 30, 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, unless some form of transition cost recovery is established by the appropriate regulatory body which would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. Regulatory assets were comprised of the following items and were reflected in the Consolidated Balance Sheet as follows:
June 30, December 31, (In thousands) 1997 1996 ============= ============ Unamortized reacquisition premium on debt (Note 18) $ 48,505 $ 50,262 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 68,655 70,763 Bailly scrubber carrying charges and deferred depreciation (See below) 10,348 10,816 Deferred SFAS No. 106 expense not recovered (Note 11) 90,512 87,557 FERC Order No. 636 transition costs (Note 7) 30,386 47,399 Regulatory income tax asset (Note 9) 8,521 4,736 Other 4,331 0 ------------- ------------ 261,258 271,533 Less: Current portion of regulatory assets 33,573 35,328 ------------- ------------ $ 227,685 $ 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. Development invests 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 $31.2 million and $24.1 million relating to affordable housing projects at June 30, 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 maintained that interest paid on the Notes should have been subject to United States tax withholding. The Notes were redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991, Northern Indiana challenged the assessment in the United States Tax Court (Tax Court) and the matter was tried in 1994. On November 6, 1995, the Tax Court ruled in favor of Northern Indiana, finding that the interest paid on the Notes was not subject to United States tax withholding. On March 13, 1996, the IRS appealed the Tax Court's decision to the U. S. Court of Appeals for the Seventh Circuit (Court of Appeals), and on March 25, 1996 Northern Indiana filed its cross appeal. On June 6, 1997 the Court of Appeals issued an order affirming in full the Tax Court order. The IRS has until September 4, 1997 to appeal the decision of the Court of Appeals. Northern Indiana's management and general counsel do not expect the IRS to appeal. However, if the IRS does appeal, Northern Indiana's management and general counsel believe the Tax Court's decision will prevail. (4) PURCHASE OF IWC RESOURCES CORPORATION: 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. 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 80,572 Other noncurrent assets 22,350 --------- 612,661 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 67,623 --------- 322,124 --------- Net assets acquired $ 290,537 =========
On a proforma basis, the acquisition of IWCR does not have a material impact on Industries' consolidated operating results. (5) ELM ENERGY AND RECYCLING (UK) LTD.: Development is a 85% 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 $49.3 million at June 30, 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 June 30, 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 in 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 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 $130 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. 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 approximately $17 million to cover probable corrective actions as of June 30, 1997; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, 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 eighteen 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. In 1994, the Energy Utilities approached 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 of the insurance companies initiated a suit in Indiana state court against Northern Indiana seeking a ruling that denied coverage. Later that same month, Northern Indiana initiated a similar suit in federal court, and the state court action was stayed. After the dismissal of the federal court action on procedural grounds in May 1997, Northern Indiana filed claims in the state court action against various insurance companies, seeking coverage for costs associated with several former manufactured gas plants and damages for alleged misconduct by some of the insurance companies. The state court action is now proceeding. Northern Indiana has received cash settlements from several of the insurance companies. The possibility that exposure to electric and magnetic fields 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. 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 (SDWA), the Water Utilities are subject to regulation by the EPA for the quality of water sold and treatment techniques used to make the water potable. 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 their 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 June 30, 1997 and December 31, 1996, are as follows:
June 30, December 31, 1997 1996 ============= ============ (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 769,392 $ 727,528 AFUDC-equity 36,506 37,713 Adjustment clauses 20,804 41,181 Take-or-pay gas costs 601 877 Other regulatory assets 33,580 39,458 Reacquisition premium on debt 19,002 19,041 Deferred tax assets - Deferred investment tax credits (41,433) (41,046) Removal costs (138,109) (131,718) FERC Order No. 636 transition costs (2,780) (8,144) Other postretirement/postemployment benefits (44,949) (43,446) Other, net (16,341) (11,987) ------------- ------------ 636,273 629,457 Less: Deferred income taxes related to current assets and liabilities 3,976 26,712 ------------- ------------ Deferred income taxes - noncurrent $ 632,297 $ 602,745 ============= ============
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ------------------ ------------------ ------------------ (In thousands) 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== Current income taxes - Federal $ 34,241 $ 16,390 $ 78,016 $ 40,089 $118,553 $ 66,552 State 5,456 2,781 12,003 6,469 18,315 11,486 -------- -------- -------- -------- -------- -------- 39,697 19,171 90,019 46,558 136,868 78,038 -------- -------- -------- -------- -------- -------- Deferred income taxes, net - Federal (19,344) (1,833) (30,898) 11,709 (23,325) 31,284 State (1,540) (104) (2,462) 1,093 (1,711) 2,808 -------- -------- -------- -------- -------- -------- (20,884) (1,937) (33,360) 12,802 (25,036) 34,092 -------- -------- -------- -------- -------- -------- Deferred investment tax credits, net (1,833) (1,670) (3,635) (3,339) (7,704) (7,118) -------- -------- -------- -------- -------- -------- Income taxes 16,980 15,564 53,024 56,021 104,128 105,012 Income taxes applicable to non-operating activities and equity investments (311) 46 2,558 (569) 2,920 (1,696) -------- -------- -------- -------- -------- -------- Total income taxes $ 16,669 $ 15,610 $ 55,582 $ 55,452 $107,048 $103,316 ======== ======== ======== ======== ======== ========
A reconciliation of total tax expense to an amount computed by applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, -------------------- -------------------- -------------------- 1997 1996 1997 1996 1997 1996 ========= ========= ========= ========= ========= ========= Net income $ 28,236 $ 23,429 $ 99,074 $ 90,915 $ 184,893 $ 179,101 Add-Income taxes 16,669 15,610 55,582 55,452 107,048 103,316 Dividend requirements on preferred stocks of subsidiary 2,179 2,178 4,346 4,377 8,681 8,833 --------- --------- --------- --------- --------- --------- Income before preferred dividend requirements of subsidiary and income taxes $ 47,084 $ 41,217 $ 159,002 $ 150,744 $ 300,622 $ 291,250 ========= ========= ========= ========= ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 16,480 $ 14,426 $ 55,651 $ 52,760 $ 105,218 $ 101,938 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 1,044 1,030 2,088 2,013 4,696 4,022 Amortization of deferred investment tax credits (1,833) (1,670) (3,635) (3,339) (7,704) (7,118) State income taxes, net of federal income tax benefit 2,832 1,706 6,339 5,391 11,548 10,171 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,518) (1,145) (3,036) (2,819) (6,861) (5,765) Other, net (336) 1,263 (1,885) 1,446 151 68 --------- --------- --------- --------- --------- --------- Total income taxes $ 16,669 $ 15,610 $ 55,582 $ 55,452 $ 107,048 $ 103,316 ========= ========= ========= ========= ========= =========
(10)PENSION PLANS: Industries and its subsidiaries have four noncontributory, defined benefit retirement plans covering the majority of their 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:
(In thousands) 1997 1996 ========= ========= 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. Discount rates of 7.75% and 7.25% and rates of increase in compensation levels of 5.50% were used to determine the accumulated benefit obligation and projected benefit obligation at January 1, 1997 and 1996, respectively. The following items are the components of provisions for pensions for the three-month, six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996:
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (In thousands) Service costs $ 4,809 $ 4,321 $ 9,382 $ 10,588 $ 15,094 $ 16,222 Interest costs 16,816 13,078 33,352 32,129 54,700 57,964 Estimated return on plan assets (20,977) (15,499) (41,480) (38,103) (90,784) (147,618) Amortization of transition obligation 1,765 1,321 3,353 3,263 5,512 5,974 Other net amortization and deferral 950 636 1,900 1,550 26,810 86,397 -------- -------- -------- -------- -------- -------- $ 3,363 $ 3,857 $ 6,507 $ 9,427 $ 11,332 $ 18,939 ======== ======== ======== ======== ======== ========
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. On July 22, 1997, a substantial portion of the plans' domestic equity investments were hedged against substantial movements in the S&P 500 Index. The hedge will expire on December 31, 1997. IWCR participates in several industry-wide, multi-employer pension plans for certain of its union employees at 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. Contributions of $0.5 million were made to these plans for the three-month period ended June 30, 1997. The relative position of each employer participating in these plans with respect to the actuarial present value of accumulated plan benefits and net assets available for benefits is not available. (11)POSTRETIREMENT BENEFITS: Industries provides certain health care and life insurance benefits for retired employees. The majority 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 could be reflected in the rate-making process. On June 11, 1997, the Commission issued an order approving the inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with the dates. IWC's current rates include postretirement benefit costs on an accrual basis, including amortization of the regulatory asset that arose prior to inclusion of these costs in the rates. IWC currently remits to a grantor trust amounts collected in rates. The following table sets forth the plans' accumulated postretirement benefit obligation as of January 1, 1997 and 1996:
January 1, January 1, 1997 1996 ========== ========== (In thousands) Postretirement Benefit Obligation for: 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 amended its plan to implement a 3% cap on its share of retiree cost increases for pre-Medicare benefits for certain non-bargaining retirees who retire after February 1, 1997. This plan amendment reduced the APBO and the unrecognized transition obligation by $9.6 million at January 1, 1997. Net periodic postretirement benefits costs for the three-month, six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996 include the following components:
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ------------------ ------------------ ------------------ 1997 1996 1997 1996 1997 1996 ======== ======== ======== ======== ======== ======== (In thousands) Service costs $ 1,589 $ 1,620 $ 3,049 $ 3,240 $ 7,161 $ 6,264 Interest costs 4,798 5,079 9,258 10,159 17,410 19,700 Amortization of transition obligation over twenty years 2,970 3,095 5,734 6,190 11,137 11,985 Amortization of unrecognized actuarial gain (1,014) (582) (2,022) (1,165) (1,411) (2,262) -------- -------- -------- -------- -------- -------- $ 8,343 $ 9,212 $ 16,019 $ 18,424 $ 34,297 $ 35,687 ======== ======== ======== ======== ======== ========
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 $31.3 million, and increase the aggregate of the service and interest cost components of plan costs by approximately $1.3 million and $2.4 million for the three-month and six-month periods ended June 30, 1997, respectively. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates, or plan changes. (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 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 JUNE 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 12):
Redemption Price at June 30, December 31, June 30, (Dollars in thousands) 1997 1996 1997 ============= ============= ============= NORTHERN INDIANA PUBLIC SERVICE COMPANY: Cumulative preferred stock - $100 par value - 4-1/4% series - 209,123 and 209,145 shares outstanding, respectively $ 20,912 $ 20,915 $101.20 4-1/2% series - 79,996 shares outstanding 8,000 8,000 $100.00 4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00 7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00 7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00 Premium on preferred stock 254 254 Cumulative preferred stock - no par value - Adjustable rate (6.00% at June 30, 1997), Series A (stated value $50 per share) 473,285 shares outstanding 23,664 23,664 $50.00 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 ------------ ------------ $ 85,620 $ 81,126 ============ ============
During the period July 1, 1995 to June 30, 1997, there were no additional issuances of the above preferred stocks. The foregoing preferred stocks are redeemable in whole or in part at any time upon thirty days' notice at the option of the issuer at the redemption prices shown. (14)REDEEMABLE PREFERRED STOCKS OUTSTANDING AT JUNE 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 12): Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of issuer are as follows:
June 30, December 31, (Dollars in thousands) 1997 1996 =========== =========== NORTHERN INDIANA PUBLIC SERVICE COMPANY: Cumulative preferred stock - $100 par value - 8.85% series - 62,500 and 75,000 shares outstanding, respectively, excluding sinking fund payments due within one year $ 6,250 $ 7,500 7-3/4% series - 44,460 shares outstanding, excluding sinking fund payments due within one year 4,446 4,446 8.35% series - 63,000 shares outstanding, excluding sinking fund payments due within one year 6,300 6,300 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ----------- ----------- $ 59,996 $ 61,246 =========== ===========
The redemption prices at June 30, 1997, as well as sinking fund provisions for the cumulative preferred stock subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana, are as follows:
Sinking Fund Or Mandatory Redemption Series Redemption Price Per Share Provisions ====== ========================== =========================== Cumulative preferred stock - $100 par value - 8.85% $101.48, reduced periodically 12,500 shares on or before April 1. 8.35% $103.93, reduced periodically 3,000 shares on or before July 1; increasing to 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.41, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year. Cumulative preferred stock - no par value - 6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
Sinking fund requirements with respect to redeemable preferred stocks outstanding at June 30, 1997 for each of the twelve-month periods subsequent to June 30, 1998 are as follows:
Twelve Months Ended June 30,* ================================== 1999 $1,827,700 2000 $1,827,700 2001 $1,827,700 2002 $1,827,700 * Table does not reflect redemptions made after June 30, 1997.
(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 June 30, 1997, Northern Indiana had approximately $152.8 million of retained earnings (earned surplus) available for the payment of dividends. Future dividends will depend upon adequate retained earnings, adequate future earnings, and the absence of adverse developments. (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 June 30, 1997, Industries had purchased approximately 21.3 million shares since 1989 at an average price of $27.83 per share. 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 June 30, 1997, there were 4,578 shares and 2,206,550 shares reserved for future awards under the 1988 Plan and 1994 Plan, respectively. The 1988 Plan and 1994 Plan permit the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights, and performance units. No incentive stock options or performance units were outstanding at June 30, 1997. Under both Plans, the exercise price of each option equals the market price of Industries' stock on the date of grant. Each option's maximum term is ten years and vests one year from the date of grant. The stock appreciation rights (SARs) may be exercised only in tandem with stock options on a one-for-one basis and are payable in cash, Industries' common shares, or a combination thereof. Restricted stock awards are restricted as to transfer and are subject to forfeiture for specific periods from the date of grant. Restrictions on shares awarded in 1995 lapse five years from date of grant and vesting is variable from 0% to 200% of the number awarded, subject to specific earnings per share and stock appreciation goals. Restrictions on shares awarded in 1996 and 1997 lapse two years from date of grant and vesting is variable from 0% to 100% of the number awarded, subject to specific performance goals. If a participant's employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. There were 271,000 and 262,000 restricted shares outstanding at June 30, 1997 and December 31, 1996, respectively. 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. 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 June 30, 1997, 32,750 shares had been 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 $0.4, $0.9, and $1.9 million for the three-month, six-month, and twelve-month periods ending June 30, 1997, respectively. Had compensation cost for stock options been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," Industries' net income and earnings per share would have been reduced to the following pro forma amounts:
Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ------------------ -------------------- -------------------- 1997 1996 1997 1996 1997 1996 ======== ======== ========= ========= ========= ========= (Dollars in thousands, except per share data) Net Income: As reported $ 28,236 $ 23,429 $ 99,074 $ 90,915 $ 184,893 $ 179,101 Pro forma $ 28,029 $ 23,267 $ 98,660 $ 90,590 $ 184,102 $ 178,532 Earnings Per Share: As reported $ 0.44 $ 0.38 $ 1.61 $ 1.47 $ 3.03 $ 2.85 Pro forma $ 0.44 $ 0.38 $ 1.61 $ 1.47 $ 3.02 $ 2.84
The fair value of each option granted used to determine pro forma net income is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the three-month, six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996, respectively: risk-free interest rate of 6.39% and 6.24%, respectively; expected dividend yield of $1.68 and $1.56 per share, respectively; expected option term of five years; and expected volatility of 13.2% and 13.0%, respectively. Changes in outstanding shares under option and SARs for the three-month, six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996 are as follows:
NONQUALIFIED STOCK OPTIONS ------------------------------------------- Weighted Weighted Average Average Three Months Ended Option Option June 30, 1997 Price 1996 Price =========================== ========= ======== ========= ======== Balance beginning of period 1,149,750 $ 30.57 1,089,850 $ 28.52 Exercised (44,350) $ 28.24 (25,150) $ 24.36 Canceled (1,000) $ 37.81 (4,000) $ 32.44 --------- --------- Balance end of period 1,104,400 $ 30.66 1,060,700 $ 28.61 ========= ========= Shares exercisable 841,950 $ 28.43 796,250 $ 27.34 ========= ========= NONQUALIFIED STOCK OPTIONS ------------------------------------------- Weighted Weighted Average Average Six Months Ended Option Option June 30, 1997 Price 1996 Price =========================== ========= ======== ========= ======== Balance beginning of period 1,187,150 $ 30.58 1,107,750 $ 28.55 Exercised (70,900) $ 28.16 (38,050) $ 25.92 Canceled (11,850) $ 37.81 (9,000) $ 32.52 --------- --------- Balance end of period 1,104,400 $ 30.66 1,060,700 $ 28.61 ========= ========= Shares exercisable 841,950 $ 28.43 796,250 $ 27.34 ========= ========= NONQUALIFIED STOCK OPTIONS ------------------------------------------- Weighted Weighted Average Average Twelve Months Ended Option Option June 30, 1997 Price 1996 Price =========================== ========= ======== ========= ======== Balance beginning of period 1,060,700 $ 28.61 995,900 $ 27.07 Granted 278,300 $ 37.81 277,450 $ 32.44 Exercised (216,850) $ 29.29 (198,650) $ 25.96 Canceled (17,750) $ 37.09 (14,000) $ 32.49 --------- --------- Balance end of period 1,104,400 $ 30.66 1,060,700 $ 28.61 ========= ========= Shares exercisable 841,950 $ 28.43 796,250 $ 27.34 ========= ========= Weighted average fair value of options granted $ 5.00 $ 3.87 ========= ========= NONQUALIFIED STOCK OPTIONS WITH SARs ------------------------------------------- Three Months Ended Option Option June 30, 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 ------------------------------------------- Six Months Ended Option Option June 30, 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 June 30, 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 June 30, 1997:
OPTIONS OUTSTANDING - -------------------------------------------------------------------------- Number Weighted Average Range of Outstanding at Remaining Weighted Average Option Price June 30, 1997 Contractual Life Option Price ================ ============== ================== ================= $10.94 to $17.94 88,500 2.54 years $16.60 $22.94 to $28.75 359,150 5.84 years $26.58 $30.31 to $37.81 656,750 7.97 years $34.78 - ---------------- --------- ---------- ------ $10.94 to $37.81 1,104,400 6.84 years $30.66 ========= OPTIONS EXERCISABLE - -------------------------------------------------------------------------- Number Range of Exercisable at Weighted Average Option Price June 30, 1997 Option Price ================ ================== ================= $10.94 to $17.94 88,500 $16.60 $22.94 to $28.75 359,150 $26.58 $30.31 to $33.19 394,300 $32.77 - ---------------- --------- ------ $10.94 to $33.19 841,950 $28.43 =========
(18)LONG-TERM DEBT: At June 30, 1997 and December 31, 1996, Industries' long-term debt, excluding amounts due within one year, issued and not retired or canceled was as follows:
AMOUNTS OUTSTANDING --------------------------- June 30, December 31, (Dollars in thousands) 1997 1996 ============= ============ 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 September 1, 2025 $ 202,109 $ 109,509 Pollution control notes and bonds- Interest rates between 3.78% and 5.70% with a weighted average interest rate of 4.01% and various maturities between October 1, 2003 and April 1, 2019 242,000 242,000 Medium-term notes - Interest rates between 6.10% and 7.99% with a weighted average interest rate of 7.20% and various maturities between March 20, 2000 and June 27, 2027 1,008,025 644,025 Subordinated Debentures - 7-3/4%, due March 31, 2026 75,000 75,000 Notes payable - Interest rates between 6.31% and 8.15% with a weighted average interest rate of 7.23% and various maturities between December 22, 1999 and April 1, 2006 38,497 19,522 Variable bank loan - 6.81% - due August, 2003 5,600 - Term Loan Facility-weighted average interest rate of 8.81% at June 30, 1997, due December 31, 2004 41,108 40,576 Unamortized premium and discount on long-term debt, net (3,994) (3,526) ------------ ----------- Total long-term debt, excluding amounts due in one year $ 1,608,345 $ 1,127,106 ============ ===========
The sinking fund requirements of long-term debt outstanding at June 30, 1997 (including the maturity of Northern Indiana's first mortgage bonds: Series P, 6-7/8%, due October 1, 1998 and Series T, 7.50%, due April 1, 2002; Northern Indiana's medium-term notes due from March 20, 2000 to June 12, 2002; 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 notes payable, due March 15, 2001), for each of the twelve-month periods subsequent to June 30, 1998 are as follows:
Twelve Months Ended June 30, ================================= 1999 $ 27,281,577 2000 167,945,193 2001 38,958,443 2002 86,746,993
Unamortized debt expense, premium and discount on long-term debt applicable to outstanding bonds are being amortized over the lives of such bonds. Reacquisition premiums are being deferred and amortized. These premiums are not earning a return during the recovery period. Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented, securing the first mortgage bonds issued by Northern Indiana, constitutes a direct first mortgage lien upon substantially all property and franchises, other than expressly excepted property, owned by Northern Indiana. On May 28, 1997, Northern Indiana was authorized to issue and sell up to $217,692,000 of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of June 30, 1997, $99.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. 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 $35 million of Industries' 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 June 30, 1997, $300 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. 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 June 30, 1997. (19)CURRENT PORTION OF LONG-TERM DEBT: At June 30, 1997 and December 31, 1996, Industries' current portion of long-term debt due within one year was as follows:
June 30, December 31, (Dollars in thousands) 1997 1996 ============= ============ 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 5.83% and 5.95% with a weighted average interest rate of 5.85% and various maturities between July 4, 1997 and April 13, 1998 75,000 40,000 Zero Coupon notes - 7.57%, $72,500 at maturity - due December 1, 1997 70,296 67,731 Notes payable - Interest rates between 6.72% and 9.00% with a a weighted average interest rate of 8.26% and maturities between October 1, 1997 and April 1, 1998 5,894 5,033 Term loan facility - Interest rate of 8.81% 6,084 6,041 ------------ ------------ Total current portion of long-term debt $ 189,796 $ 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. (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 June 30, 1997, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1998. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fees to a combination of fees which are mutually satisfactory to both parties. As of June 30, 1997, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of June 30, 1997 and December 31, 1996, there were $35.1 million and $79.0 million of borrowings, respectively, outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At June 30, 1997, there were no borrowings outstanding under this facility. Northern Indiana and Capital Markets make use of commercial paper to fund short-term working capital requirements. As of June 30, 1997 and December 31, 1996, Northern Indiana had $45.4 million and $193.9 million of commercial paper outstanding, respectively. At June 30, 1997, the weighted average interest rate of commercial paper outstanding was 5.60%. 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 June 30, 1997, there were no borrowings outstanding under this agreement. Capital Markets also has $95 million of money market lines of credit. As of June 30, 1997 and December 31, 1996, $33.0 million and $27.0 million, respectively, of borrowings were outstanding under these lines of credit. As of June 30, 1997 and December 31, 1996, Capital Markets had $12.3 million and $119.3 million of commercial paper outstanding, respectively. At June 30, 1997, the weighted average interest rate of commercial paper outstanding was 5.80%. As of June 30, 1997, IWCR and its subsidiaries had lines of credit with banks aggregating $48.9 million. As of June 30, 1997, $34.2 million of borrowings were outstanding under these lines of credit. At June 30, 1997 and December 31, 1996, Industries' short-term borrowings were as follows:
June 30, December 31, 1997 1996 ============= ============ (Dollars in thousands) Commercial paper $ 57,650 $ 313,205 Notes payable 102,200 106,000 Standby loan facility 6,266 4,949 Revolving loan facility 2,665 1,831 ----------- ----------- Total short-term borrowings $ 168,781 $ 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 $3.4 million. The following is a schedule, by years, of future minimum rental payments, excluding those to associated companies, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 1997:
Twelve Months Ended June 30, ========================================== (In thousands) 1998 $ 14,845 1999 14,527 2000 13,665 2001 13,377 2002 51,636 Later years 88,146 -------- Total minimum payments required $196,196 ========
The consolidated financial statements include rental expense for all operating leases as follows:
June 30, June 30, (In thousands) 1997 1996 ========= ========= Three months ended $ 2,292 $ 1,693 Six months ended 4,540 3,724 Twelve months ended 8,937 8,187
(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. 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 located at USS Gary Works. The facility processes high-pressure steam into electricity and low-pressure steam for delivery to USX Corporation-US Steel Group. The fifteen-year lease with a third-party lessor commenced on April 16, 1997 when the facility was placed in commercial operation. Capital Markets has guaranteed LEC obligations relative to plant construction. Capital Markets also guarantees LEC's security deposit obligations relative to the lease and certain limited LEC obligations to the lessor. 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 $112 million and $42 million, at June 30, 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:
June 30, 1997 December 31, 1996 ---------------------- ---------------------- Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value ========== ========== ========== ========== Cash and cash equivalents $ 29,391 $ 29,391 $ 26,333 $ 26,333 Investments 32,953 36,953 30,003 33,019 Long-term debt (including current portion) 1,799,641 1,745,925 1,273,158 1,220,492 Preferred stock 147,444 130,594 144,200 126,379
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% and 3%, respectively, of gas revenue (including transportation services) and 22% of electric revenue for the twelve months ended June 30, 1997 and June 30, 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, natural gas, and water to the public through its six wholly- owned regulated subsidiaries ("Utilities"): Northern Indiana Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline Company (Crossroads); Indianapolis Water Company (IWC); and Harbour Water Corporation (Harbour). 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". On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's subsidiaries include two regulated water utilities (IWC and Harbour)and five non-utility companies providing utility-related products and services including installation, repair and maintenance of underground pipelines and utility line locating and marking. The two primary non-utility subsidiaries are Miller Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P). Industries also provides non-regulated energy/utility-related products and services including energy marketing and trading; power generation; gas transmission, supply and storage; installation, repair and maintenance of underground pipelines; utility line locating and marking; and related products targeted at customer segments principally through the following wholly-owned subsidiares: NIPSCO Development Company, Inc. (Development); NIPSCO Energy Services, Inc. (Services); Primary Energy, Inc. (Primary); NIPSCO Capital Markets, Inc. (Capital Markets); Miller ; and SM&P. These subsidiaries are referred to collectively as "Products and Services". Industries' results of operations include three months of operating results from IWCR for the three-month, six-month and twelve-month periods ended June 30, 1997. The discussion below excludes the comparative results of IWCR operations as such discussion would not be meaningful. REVENUES - Total operating revenues for the twelve months ended June 30, 1997 increased $272.7 million as compared to the twelve months ended June 30, 1996. The increase includes $51.6 million reflecting three months of operating revenues from IWCR for the current period. Gas revenues increased $65.2 million, electric revenues decreased $20.6 million, and Products and Services revenues increased $209.3 million, as compared to the same period in 1996. The increase in gas revenues was largely attributable to increased sales to wholesale customers, increased deliveries of gas transported for others, and increased gas costs per dekatherm (dth), partially offset by decreased gas transition costs. The decrease in electric revenues was mainly due to decreased sales to residential customers resulting from the cooler summer in 1996 and decreased sales to industrial and wholesale customers. Increased volumes in gas marketing resulted in an increase of $123.6 million in Products and Services revenue for the twelve-month period ended June 30, 1997. NESI Power Marketing, a wholly-owned subsidiary of Services, which was formed on December 11, 1996, markets wholesale power and provided an additional $42.4 million in operating revenue for Products and Services for the twelve months ended June 30, 1997. Total operating revenues for the six months ended June 30, 1997 increased $169.0 million as compared to the six months ended June 30, 1996. The increase includes $51.6 million reflecting three months of operating revenues from IWCR for the current period. Gas revenues increased $6.1 million, electric revenues decreased $2.8 million and Products and Services revenue increased $146.9 million, as compared to the same period in 1996. The increase in gas revenues was mainly due to increased sales to wholesale customers, increased deliveries of gas transported for others, increased gas transition costs, and increased gas costs per dth. The decrease in electric revenues was mainly due to decreased sales to industrial and wholesale customers. Increased gas and wholesale power marketing volumes resulted in an increase of $112.1 million in Products and Services revenue for the six-month period ended June 30, 1997. Total operating revenues for the three months ended June 30, 1997 increased $124.7 million as compared to the three months ended June 30, 1996. The increase includes $51.6 million reflecting three months of operating revenues from IWCR for the current period. Gas and electric revenues were consistent with the levels for the same period ended June 30, 1996. Increased volumes in gas and wholesale power marketing resulted in an increase of $72.3 million in Products and Services revenue for the three-month period ended June 30, 1997. The basic steel industry accounted for 30% of natural gas delivered (including volumes transported) and 35% of electric sales for the Energy Utilities during the twelve months ended June 30, 1997. The components of the variations in gas, electric, and products and services revenues are shown in the following table:
Variations from Prior Periods ---------------------------------------- June 30, 1997 Compared to June 30, 1996 ---------------------------------------- Three Six Twelve (In thousands) Months Months Months ========= ========== ========= Gas Revenue - Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ (13,387) $ 15,045 $ 62,072 Gas transition costs (1,620) 1,494 (8,023) Changes in sales levels 13,630 (12,535) 8,453 Gas transported 1,649 2,064 2,686 --------- --------- --------- Gas Revenue Change 272 6,068 65,188 --------- --------- --------- Electric Revenue - Pass through of net changes in fuel costs 152 1,393 (21) Changes in sales levels (330) (4,171) (20,614) --------- --------- --------- Electric Revenue Change (178) (2,778) (20,635) --------- --------- --------- Water Revenue Change 18,795 18,795 18,795 --------- --------- --------- Products and Services Revenue - Gas marketing 44,690 68,007 123,617 Wholesale power marketing 27,580 42,403 42,403 Pipeline construction 14,632 14,632 14,632 Locate and marking 17,204 17,204 17,204 Other 1,657 4,643 11,464 --------- --------- --------- Product and Services Revenue Change 105,763 146,889 209,320 --------- --------- --------- Total Revenue Change $ 124,652 $ 168,974 $ 272,668 ========= ========= =========
See Note 7 to Notes to Consolidated Financial Statements regarding FERC Order No. 636 transition costs. GAS COSTS - The Energy Utilities' gas costs decreased $5.5 million for the three-month period ended June 30, 1997. Gas costs increased $10.1 and $65.4 million for the six-month and twelve-month periods ended June 30, 1997, respectively. Gas costs decreased for the three-month period due to decreased gas costs per dth partially offset by increased purchases. Gas costs increased for the six-month and twelve-month periods due to increased gas costs per dth, increased gas transition costs, and increased purchases. The average cost for the Energy Utilities' purchased gas for the three-month, six-month and twelve-month periods ended June 30, 1997, after adjustment for gas transition costs billed to transport customers, was $2.61, $3.10 and $3.14 per dth, respectively, as compared to $2.84, $2.95 and $2.74 per dth for the same periods in 1996. FUEL AND PURCHASED POWER - The cost of fuel for electric generation decreased for the twelve-month period ended June 30, 1997, compared to the 1996 period, mainly as a result of decreased production of electricity. Power purchased decreased $3.8 million and $6.8 million for the three-month and six-month periods ended June 30, 1997, respectively, as a result of decreased bulk power purchases. COST OF PRODUCTS AND SERVICES - The cost of sales for Products and Services increased $193.1 million for the twelve months ended June 30, 1997. The increase includes $22.2 million reflecting three months of cost of sales from IWCR for the current period. Increased volumes in gas and wholesale power marketing increased cost of sales $167.8 million for the twelve-months ended June 30, 1997, compared to June 30, 1996. The cost of sales for Products and Services increased $138.0 million for the six- months ended June 30, 1997, compared to the 1996 period. The increase includes $22.2 million reflecting three months of cost of sales from IWCR for the current period. Increased volumes in gas and wholesale power marketing increased cost of sales $114.1 million for the six months ended June 30, 1997, compared to June 30, 1996. The cost of sales for Products and Services increased $95.9 million for the three- months ended June 30, 1997, compared to the 1996 period. The increase includes $22.2 million reflecting three months of cost of sales from IWCR for the current period. Increased volumes in gas and wholesale power marketing increased cost of sales $73.6 million for the three months ended June 30, 1997, compared to June 30, 1996. OPERATING MARGINS - Operating margins for the twelve months ended June 30, 1997 increased $22.2 million from the same period a year ago. The increase in operating margin includes $29.4 million related to three months of IWCR operations in the current period. The operating margin from gas deliveries decreased $0.2 million. The operating margin from electric sales decreased $12.6 million due to decreased sales to residential customers, reflecting milder 1996 summer weather, and decreased sales to industrial and wholesale customers. Operating margins for the six months ended June 30, 1997 increased $25.1 million from the same period a year ago. The increase in operating margin includes $29.4 million related to three months of IWCR operations in the current period. The operating margin from gas deliveries decreased $4.0 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 increased $1.4 million as a result of increased wholesale energy transactions. The operating margin for Products and Services, excluding IWCR, decreased $1.7 million resulting from a decrease in gas marketing margin. Operating margins for the three months ended June 30, 1997 increased $36.6 million from the same period a year ago. The increase in operating margin includes $29.4 million related to three months of IWCR operations in the current period. Gas operating margin increased $5.7 million due to increased sales to residential and commercial customers reflecting colder weather during the period, increased sales to wholesale customers, and increased deliveries of gas transported for others, partially offset by decreased sales to industrial customers. Operating margin from electric sales increased $2.2 million due to increased sales to residential and commercial customers, which were partially offset by decreased sales to industrial and wholesale customers. OPERATING EXPENSES AND TAXES - Operation expenses increased $7.7 million for the twelve-month period ended June 30, 1997. Operation expense includes an increase of $16.0 million reflecting three months of operations of IWCR in the current period. This increase was offset by decreased employee costs of $7.2 million and decreased electric production pollution control facility costs of $4.7 million at Northern Indiana. Operation expenses, excluding IWCR, increased $5.3 million for the six-month period ended June 30, 1997 reflecting operating expenses of North Lake and LEC which began operations in May 1996 and April 1997, respectively. Operation expenses increased $10.8 million for the three-month period ended June 30, 1997. Maintenance expenses decreased $6.9 million for the twelve-month period ended June 30, 1997 mainly reflecting decreased maintenance activity at the electric production facilities of $4.3 million and decreased maintenance of $2.6 million on the transmission and distribution facilities. Maintenance expenses decreased $8.3 million for the six- month period reflecting decreased maintenance on distribution facilities. Maintenance expenses decreased $7.8 million for the three-month period reflecting decreased maintenance on electric production and distribution facilities. Depreciation and amortization expense increased $5.7, $7.6 and $22.3 million for the three-month, six-month and twelve-month periods ended June 30, 1997, respectively, resulting from plant additions, increased amortization of computer software, amortization of deferred costs related to scrubber services provided by Pure Air at the Bailly Generating Station, and amortization of SFAS No. 106 costs effective February 1, 1997. The increase in depreciation and amortization also includes $3.1 million related to IWCR for the three-month, six-month and twelve-month periods ended June 30, 1997. OTHER INCOME (DEDUCTIONS) - Other Income (Deductions) for the twelve-month period increased $16.3 million mainly resulting from 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 $8.7 million for the six-month period ended June 30, 1997 mainly due to the disposition of certain oil and natural gas properties. Other Income (Deductions) increased $1.7 million for the three-month period ended June 30, 1997. INTEREST AND OTHER CHARGES - Interest and other charges increased for the three-month, six-month, and twelve-month periods ended June 30, 1997 reflecting the issuance of $300 million of Capital Markets' medium-term notes, $75 million of Capital Markets' Junior Subordinated Deferrable Interest Debentures, Series A and three months of interest expense at IWCR. 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 June 30, 1997 was $184.9 million compared to $179.1 million for the twelve-month period ended June 30, 1996. Net income for the six months ended June 30, 1997 was $99.1 million compared to $90.9 million for the six months ended June 30, 1996. Net income for the three months ended June 30, 1997 was $28.2 million compared to $23.4 million for the three months ended June 30, 1996. IMPACT OF ACCOUNTING STANDARDS - For a discussion of the impact of accounting standards not yet adopted on Industries' consolidated financial statements see Note 2, "Impact of Accounting Standards" in the Notes to the Consolidated Financial Statements. 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 approximately $17 million to cover probable corrective actions as of June 30, 1997; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, 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 eighteen 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. In 1994, the Energy Utilities approached 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 of the insurance companies initiated a suit in Indiana state court against Northern Indiana seeking a ruling that denied coverage. Later that same month, Northern Indiana initiated a similar suit in federal court, and the state court action was stayed. After the dismissal of the federal court action on procedural grounds in May 1997, Northern Indiana filed claims in the state court action against various insurance companies, seeking coverage for costs associated with several former manufactured gas plants and damages for alleged misconduct by some of the insurance companies. The state court action is now proceeding. Northern Indiana has received cash settlements from several of the insurance companies. The possibility that exposure to electric and magnetic fields 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. 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 (SDWA), the Water Utilities are subject to regulation by the EPA for the quality of water sold and treatment techniques used to make the water potable. 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 their 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. 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, $35 million of Industries' 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 May 7, 1997, $300 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. 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, 1999, 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 June 30, 1997, there were no borrowings outstanding under this agreement. Capital Markets also has $95 million of money market lines of credit. As of June 30, 1997, $33.0 million of borrowings were outstanding under these lines of credit. As of June 30, 1997 and December 31, 1996, Capital Markets had $12.3 million and $119.3 million of commercial paper outstanding, respectively. At June 30, 1997, the weighted average interest rate of commercial paper outstanding was 5.80%. 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 June 30, 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 June 30, 1997 and December 31, 1996, Northern Indiana had $45.4 million and $193.9 million of commercial paper outstanding, respectively. At June 30, 1997, the weighted average interest rate of commercial paper outstanding was 5.60%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999 unless extended by its terms. As of June 30, 1997, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1998. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fees to a combination of fees which are mutually satisfactory to both parties. As of June 30, 1997, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of June 30, 1997, $35.1 million of borrowings were outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At June 30, 1997, there were no borrowings outstanding under this facility. On May 28, 1997, Northern Indiana was authorized to issue and sell up to $217,692,000 of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of June 30, 1997, $99.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. During recent years, Northern Indiana has been able to finance its construction program with internally generated funds and expects to be able to meet future commitments through such funds. As of June 30, 1997, IWCR and its subsidiaries had lines of credit with banks aggregating $48.9 million. As of June 30, 1997, $34.2 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 June 30, 1997, approximately 73% 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 expired May 31, 1997. Employees are currently working without a contract. Northern Indiana continues to negotiate new agreements with the two local unions, but cannot predict the timing or terms of new agreements. COMPETITION The Energy Policy Act of 1992 (Energy Act) allows 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, FERC issued its Order No. 888 which opens wholesale power sales to competition and requires public utilities owning, controlling, or operating transmission lines to file non-discriminatory open access tariffs that offer others the same transmission service they provide themselves. Order No. 888 also provides for the full recovery of stranded costs - - that is, costs that were prudently incurred to serve power customers and that could go unrecovered if these customers use open access to move to another supplier. FERC expects this rule will accelerate competition and bring lower prices and more choices to wholesale energy customers. Although wholesale customers represent a relatively small portion of Northern Indiana's sales, Northern Indiana will continue its efforts to retain and add customers by offering competitive rates. In January 1997, legislation was introduced to the Indiana General Assembly addressing electric utility competition and deregulation. This proposed legislation has not been adopted, however, a study commission on electric competition and deregulation was established by the Indiana General Assembly. Industries has begun discussions with its largest customers on the technical and economic aspects of possible legislation to allow customer choice. Operating in a competitive environment will place added pressures on utility profit margins and credit quality. Increasing competition in the electric utility industry has already led the credit rating agencies to apply more stringent guidelines in making credit rating determinations. Competition within the electric utility industry will create opportunities to compete for new customers and revenues, as well as increase the risk of the loss of customers. 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. On May 9, 1997, Northern Indiana filed an Amended Stipulation and Agreement which proposed a modified ARP. Northern Indiana's proposal was supported by numerous parties including the Office of Utility Consumer Counselor, Citizens Action Coalition of Indiana, Inc. and major industrial customers of Northern Indiana. In its modified ARP, Northern Indiana proposes to implement new rates and services that would include, among other things, further unbundling of services for additional customer classes, increased customer choice for sources of natural gas supply, negotiated services and prices, an incentive gas cost mechanism and a price protection program. The Commission held a hearing on the ARP on June 12, 1997. Action by the Commission is expected during the fourth 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. None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit 11.1 - Computation of Per Share Earnings Three-Month, Six-Month, and Twelve-Month Periods Ended June 30, 1997. Exhibit 11.2 - Computation of Per Share Earnings Three-Month, Six-Month, and Twelve-Month Periods Ended June 30, 1996. Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIPSCO Industries, Inc. (Registrant) /s/Jerry M. Springer Controller and Chief Accounting Officer Date August 13, 1997 EX-11 2 EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS Three-Month, Six-Month and Twelve-Month Periods Ended June 30, 1997 Fully Three Months Ended June 30, 1997: Primary Diluted ====================================== ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at June 30, 1997 62,827,620 62,827,620 Dilutive Effect for Nonqualified Stock Options at June 30, 1997 265,673 298,340 ---------- ---------- Weighted Average Shares at June 30, 1997 63,093,293 63,125,960 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 28,236 $ 28,236 Dividend Requirements on Preferred Shares 0 0 ---------- ---------- Balance Available for Common Shareholders $ 28,236 $ 28,236 ========== ========== Earnings Per Average Common Share $ 0.44(a) $ 0.44(a) ========== ========== Fully Six Months Ended June 30, 1997: Primary Diluted ======================================= ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at June 30, 1997 61,202,013 61,202,013 Dilutive Effect for Nonqualified Stock Options at June 30, 1997 258,477 298,240 ---------- ---------- Weighted Average Shares at June 30, 1997 61,460,490 61,500,253 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 99,074 $ 99,074 Dividend Requirements on Preferred Shares 0 0 ---------- ---------- Balance Available for Common Shareholders $ 99,074 $ 99,074 ========== ========== Earnings Per Average Common Share $ 1.61(a) $ 1.61(a) ========== ========== Fully Twelve Months Ended June 30, 1997: Primary Diluted ======================================= ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at June 30, 1997 60,967,583 60,967,583 Dilutive Effect for Nonqualified Stock Options at June 30, 1997 241,303 298,340 ---------- ---------- Weighted Average Shares at June 30, 1997 61,208,886 61,265,923 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 184,893 $ 184,893 Dividend Requirements on Preferred Shares 0 0 ---------- ---------- Balance Available for Common Shareholders $ 184,893 $ 184,893 ========== ========== Earnings Per Average Common Share $ 3.02(a) $ 3.02(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, Six-Month and Twelve-Month Periods Ended June 30, 1996 Fully Three Months Ended June 30, 1996: Primary Diluted ====================================== ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at June 30, 1996 61,234,350 61,234,350 Dilutive Effect for Nonqualified Stock Options at June 30, 1996 342,993 406,438 ---------- ---------- Weighted Average Shares at June 30, 1996 61,577,343 61,640,788 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 23,429 $ 23,429 Dividend Requirements on Preferred Shares 0 0 ---------- ---------- Balance Available for Common Shareholders $ 23,429 $ 23,429 ========== ========== Earnings Per Average Common Share $ O.38(a) $ 0.38(a) ========== ========== Six Months Ended June 30, 1996: Primary Diluted ======================================= ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at June 30, 1996 61,649,509 61,649,509 Dilutive Effect for Nonqualified Stock Options at June 30, 1996 364,434 406,438 ---------- ---------- Weighted Average Shares at June 30, 1996 62,013,943 62,055,947 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 90,915 $ 90,915 Dividend Requirements on Preferred Shares 119 119 ---------- ---------- Balance Available for Common Shareholders $ 90,796 $ 90,796 ========== ========== Earnings Per Average Common Share $ 1.46(a) $ 1.46(a) ========== ========== Fully Twelve Months Ended June 30, 1996: Primary Diluted ======================================= ========== ========== Weighted Average Number of Shares: Average Common Shares Outstanding at June 30, 1996 62,219,569 62,219,569 Dilutive Effect for Nonqualified Stock Options at June 30, 1996 278,995 406,438 ---------- ---------- Weighted Average Shares at June 30, 1996 62,498,564 62,626,007 ========== ========== Net Income to Be Used to Compute Earnings Per Average Common Share: (Dollars in thousands) Net Income $ 179,101 $ 179,101 Dividend Requirements on Preferred Shares 1,651 1,651 ---------- ---------- Balance Available for Common Shareholders $ 177,450 $ 177,450 ========== ========== Earnings Per Average Common Share $ 2.84(a) $ 2.83(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 ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report 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; Form S-3 Registration Statement No. 333-22347; and Form S-3 Registration Statement No. 333-26847. /s/ Arthur Andersen LLP Chicago, Illinois August 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 June 30, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1996 APR-01-1997 JUN-30-1997 PER-BOOK 3,618,455 279,016 527,662 117,506 313,708 4,856,347 534,514 89,860 634,043 1,258,417 59,996 85,620 796,115 111,131 812,230 57,650 191,296 1,828 0 0 1,490,288 4,856,347 523,394 16,980 448,882 448,882 74,512 3,897 78,409 33,193 28,236 0 28,236 29,962 0 (78,361) 0.44 0.44
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