-----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, LVhrjPb+GX9Y+IrHlccyF7RpGn1Uk1n5Jumr+6RVREja7xrHTlBEfo/3pIFUYmTP DbxGQGxRTqmKPKRX1p8MBQ== 0000823392-98-000004.txt : 19980515 0000823392-98-000004.hdr.sgml : 19980515 ACCESSION NUMBER: 0000823392-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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: SEC FILE NUMBER: 001-09779 FILM NUMBER: 98620721 BUSINESS ADDRESS: STREET 1: 5265 HOHMAN AVE CITY: HAMMOND STATE: IN ZIP: 46320 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 [ ] 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.) 801 East 86th Avenue, Merrillville, Indiana 46410 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 853-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of April 30, 1998, 122,106,038 common shares were outstanding. NIPSCO Industries, Inc. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Report of Independent Public Accountants To The Board of Directors of NIPSCO Industries, Inc.: We have audited the accompanying consolidated balance sheet of NIPSCO Industries, Inc. (an Indiana corporation) and subsidiaries as of March 31, 1998, and December 31, 1997, and the related consolidated statements of income, common shareholders' equity and cash flows for the three and twelve month periods ended March 31, 1998 and 1997. These consolidated financial statements are the responsibility of Industries' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NIPSCO Industries, Inc. and subsidiaries as of March 31, 1998, and December 31, 1997, and the results of their operations and their cash flows for the three and twelve month periods ended March 31, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois April 28, 1998
Consolidated Balance Sheet March 31, December 31, Assets 1998 1997 ========== ========== (In thousands) Property, Plant and Equipment: Utility Plant, (Note 2)(including Construction Work in Progress of $205,460 and $188,710, respectively) Electric $ 4,082,197 $ 4,066,568 Gas 1,403,152 1,395,140 Water 618,279 604,018 Common 349,531 351,350 --------------- ----------------- 6,453,159 6,417,076 Less -Accumulated provision for depreciation and amortization 2,806,186 2,759,945 --------------- ----------------- Total Utility Plant 3,646,973 3,657,131 --------------- ----------------- Other property, at cost, net of accumulated provision for depreciation 76,264 96,028 --------------- ----------------- Total Property, Plant and Equipment 3,723,237 3,753,159 --------------- ----------------- Investments: Investments, at equity (Note 2) 108,008 82,855 Investments, at cost 33,212 31,771 Other investments 26,729 24,499 --------------- ----------------- Total Investments 167,949 139,125 --------------- ----------------- Current Assets: Cash and cash equivalents 40,376 30,780 Accounts receivable, less reserve of $5,727 and $5,887, respectively (Note 2) 243,971 231,580 Other receivables (Note 24) 127,821 107,231 Fuel adjustment clause (Note 2) 1,111 2,679 Gas cost adjustment clause (Note 2) 37,972 89,991 Materials and supplies, at average cost 62,081 60,085 Electric production fuel, at average cost 21,241 18,837 Natural gas in storage (Note 2) 21,023 61,436 Prepayments and other 32,248 28,089 --------------- ----------------- Total Current Assets 587,844 630,708 --------------- ----------------- Other Assets: Regulatory assets (Note 2) 208,074 211,513 Intangible assets, net of accumulated amortization (Note 2) 67,436 68,175 Prepayments and other (Note 9) 145,952 134,353 --------------- ----------------- Total Other Assets 421,462 414,041 --------------- ----------------- $ 4,900,492 $ 4,937,033 =============== ================ The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Balance Sheet March 31, December 31, Capitalization and Liabilities 1998 1997 =========== =========== (In thousands) Capitalization: Common shareholders' equity (See accompanying statement) $ 1,276,530 $ 1,264,788 Cumulative preferred stocks (Note 11) - Series without mandatory redemption provisions (Note 12) 85,619 85,620 Series with mandatory redemption provisions (Note 13) 58,841 58,841 Long-term debt excluding amounts due within one year (Note 19) 1,670,761 1,667,925 ----------------- ----------------- Total Capitalization 3,091,751 3,077,174 ----------------- ----------------- Current Liabilities: Current portion of long-term debt (Note 20) 55,729 54,621 Short-term borrowings (Note 21) 142,802 212,639 Accounts payable 203,890 226,751 Dividends declared on common and preferred stocks 30,926 30,784 Customer deposits 22,684 22,091 Taxes accrued 137,086 77,573 Interest accrued 23,823 19,124 Accrued employment costs 42,503 58,799 Other accruals 43,924 47,930 ----------------- ----------------- Total Current Liabilities 703,367 750,312 ----------------- ----------------- Other: Deferred income taxes (Note 8) 642,865 651,815 Deferred investment tax credits, being amortized over life of related property (Note 8) 103,717 105,538 Deferred credits 78,017 73,715 Customer advances and contributions in aid of construction (Note 2) 110,674 110,145 Accrued liability for postretirement benefits (Note 10) 134,365 132,919 Other noncurrent liabilities 35,736 35,415 ----------------- ----------------- Total Other 1,105,374 1,109,547 ----------------- ----------------- Commitments and Contingencies (Notes 5, 7, 22, 23 and 24) $ 4,900,492 $ 4,937,033 ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Income (Dollars in thousands, except for per share amounts) Three Months Twelve Months Ended March 31, Ended March 31, ---------------------------------------------------- 1998 1997 1998 1997 ======== ======== ======== ======== Operating Revenues: (Notes 2, 6 and 26) Electric $ 323,834 $ 260,657 $ 1,249,508 $ 1,034,464 Gas 242,735 333,400 716,574 805,191 Water 17,709 0 78,452 0 Products and Services 195,066 65,893 661,401 192,822 ---------------------------- ---------------------------- 779,344 659,950 2,705,935 2,032,477 ---------------------------- ---------------------------- Cost of Sales: (Note 2) Fuel for electric generation 55,594 58,408 235,734 234,421 Power purchased 90,443 23,888 271,586 65,678 Gas costs 138,428 214,840 418,875 499,359 Products and Services 175,945 50,386 562,307 128,374 ---------------------------- ---------------------------- 460,410 347,522 1,488,502 927,832 ---------------------------- ---------------------------- Operating Margin 318,934 312,428 1,217,433 1,104,645 ---------------------------- ---------------------------- Operating Expenses and Taxes (except income): Operation 96,171 85,704 400,720 340,168 Maintenance (Note 2) 18,947 18,484 77,015 73,926 Depreciation and amortization (Note 2) 63,274 58,344 254,734 235,911 Taxes (except income) 23,428 21,310 85,883 75,808 ---------------------------- ---------------------------- 201,820 183,842 818,352 725,813 ---------------------------- ---------------------------- Operating Income 117,342 128,586 399,309 378,832 ---------------------------- ---------------------------- Other Income (Deductions) (Note 2) 8,448 9,403 14,813 21,156 ---------------------------- ---------------------------- Interest and Other Charges: Interest on long-term debt 27,274 19,803 112,969 82,499 Other interest 1,908 4,968 7,331 18,672 Amortization of premium, reacquisition premium, discount and expense on debt, net 1,148 1,133 4,733 4,579 Dividend requirements on preferred stock of subsidiaries 2,167 2,167 8,691 8,680 ---------------------------- ---------------------------- 32,497 28,071 133,724 114,430 ---------------------------- ---------------------------- Income before income taxes 93,065 109,918 280,170 285,558 ---------------------------- ---------------------------- Income taxes 32,343 39,080 99,437 105,472 ---------------------------- ---------------------------- Net Income $ 60,722 $ 70,838 $180,733 $180,086 ======== ======== ======== ======== Average common shares outstanding - basic 123,872,613 119,116,686 125,021,821 121,140,716 Earnings per average common share - basic $ 0.49 $ 0.59 $ 1.44 $ 1.48 ======== ======== ======== ======== Earnings per average common share - diluted $ 0.48 $ 0.59 $ 1.44 $ 1.48 ======== ======== ======== ======== Dividends declared per common share $ 0.240 $ 0.225 $ 0.930 $ 0.870 ======== ======== ======== ======== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement Of Common Shareholders= Equity Additional (Dollars in thousands) Common Treasury Paid-in Retained Three Months Ended Shares Shares Capital Earnings Other ======================== ========== ========== ========== ========== ========== Balance, January 1, 1997 $ 870,930 $ (392,995) $ 32,868 $ 591,370 $ (4,280) Comprehensive Income: Net income 70,838 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $18) Gain (loss) on foreign currency translation: Unrealized Total Comprehensive Income Dividends: Common shares (26,273) Treasury shares acquired (56,491) 35 Issued: IWC Resources Corporation acquisition 152,409 55,008 Employee stock purchase plan 75 113 Long-term incentive plan 1,022 94 (351) Amortization of unearned compensation 503 Other (35) ----------- ----------- ---------- ---------- ---------- Balance, March 31, 1997 $ 870,930 $ (295,980) $ 88,118 $ 635,900 $ (4,128) ========== =========== ========== ========== ========== Balance, January 1, 1998 $ 870,930 $ (363,943) $ 89,768 $ 667,790 $ (2,624) Comprehensive Income: Net income 60,722 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $684) Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (29,929) Treasury shares acquired (23,298) 2 Issued: Employee stock purchase plan 57 120 Long-term incentive plan 3,175 (12) (34) Amortization of unearned compensation 499 Other (655) ----------- ----------- ---------- ---------- ---------- Balance, March 31, 1998 $ 870,930 $ 384,009) $ 89,878 $ 697,928 $ (2,159) ========== ========== ========== =========== ========== Accumulated Shares Other -------------------------- Three Months Ended Comprehensive Comprehensive Common Treasury (continued) Income Total Income Shares Shares ======================== ========== ========== ========== ========== ========== Balance, January 1, 1997 $ 2,608 $ 1,100,501 147,784,218 (28,172,896) Comprehensive Income: Net income 70,838 70,838 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $18) 29 29 29 Gain (loss) on foreign currency translation: Unrealized (361) (361) (361) ---------- Total Comprehensive Income $ 70,506 ========== Dividends: Common shares (26,273) Treasury shares acquired (56,456) (2,852,228) Issued: IWC Resources Corporation acquisition 207,417 10,580,764 Employee stock purchase plan 188 9,508 Long-term incentive plan 765 71,100 Amortization of unearned compensation 503 Other (35) ---------- ------------ ----------- ----------- Balance, March 31, 1997 $ 2 ,276 $ 1,297,116 147,784,218 (20,363,752) ========== ============ ============ =========== Balance, January 1, 1998 $ 2,867 $ 1,264,788 147,784,218 (23,471,554) Comprehensive Income: Net income 60,722 $ 60,722 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $684) 1,119 1,119 1,119 Gain (loss) on foreign currency translation: Unrealized 162 162 162 Realized (186) (186) (186) ----------- Total Comprehensive Income $ 61,817 =========== Dividends: Common shares (29,929) Treasury shares acquired (23,296) (910,574) Issued: Employee stock purchase plan 177 7,158 Long-term incentive plan 3,129 197,044 Amortization of unearned compensation 499 Other (655) ------------ -------------- ------------- ------------ Balance, March 31, 1998 $ 3,962 $ 1,276,530 147,784,218 (24,177,926) ============ ============= ============= ============ Additional (Dollars in thousands) Common Treasury Paid-in Retained Twelve Months Ended Shares Shares Capital Earnings Other ======================== ========== ========== ========== ========== ========== Balance, April 1, 1996 $ 870,930 $ (330,942) $ 32,541 $ 560,401 $ (6,126) Comprehensive Income: Net income 180,086 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $709) Gain (loss) on foreign currency translation: Unrealized Total Comprehensive Income Dividends: Common shares (104,460) Treasury shares acquired (123,501) 35 Issued: IWC Resources Corporation acquisition 152,409 55,008 Employee stock purchase plan 278 390 Long-term incentive plan 5,776 126 (461) Amortization of unearned compensation 2,459 Other 18 (127) ----------- ------------- ------------ ------------ ------------ Balance, March 31, 1997 $ 870,930 $ (295,980) $ 88,118 $ 635,900 $ (4,128) ----------- ------------- ------------ ------------ ------------ Net income 180,733 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,699) Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (117,959) Treasury shares acquired (99,884) (33) Issued: Acquisition of minority interest 4,118 1,351 Employee stock purchase plan 255 431 Long-term incentive plan 7,482 12 (126) Amortization of unearned compensation 2,095 Other (1) (746) ----------- ------------ ------------ ------------ ------------ Balance, March 31, 1998 $ 870,930 $ (384,009) $ 89,878 $ 697,928 $ (2,159) ========== ========== =========== =========== =========== Accumulated Shares Other --------------------------- Three Months Ended Comprehensive Comprehensive Common Treasury (continued) Income Total Income Shares Shares ======================== ========== ========== ========== ========== ========== Balance, April 1, 1996 $ (454) $ 1,126,350 147,784,218 (25,006,726) Comprehensive Income: Net income 180,086 $ 180,086 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $709) 1,161 1,161 1,161 Gain (loss) on foreign currency translation: Unrealized 1,569 1,569 1,569 ------------ Total Comprehensive Income $ 182,816 ============ Dividends: Common shares (104,460) Treasury shares acquired (123,466) (6,392,082) Issued: IWC Resources Corporation acquisition 207,417 10,580,764 Employee stock purchase plan 668 34,992 Long-term incentive plan 5,441 419,300 Amortization of unearned compensation 2,459 Other (109) ------------ ------------ ------------ ------------ Balance, March 31, 1997 $ 2,276 $ 1,297,116 147,784,218 (20,363,752) ------------ ------------ ------------ ------------ Comprehensive Income: Net income 180,733 $ 180,733 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,699) 2,779 2,779 2,779 Gain (loss) on foreign currency translation: Unrealized (907) (907) (907) Realized (186) (186) (186) ----------- Total Comprehensive Income $ 182,419 =========== Dividends: Common shares (117,959) Treasury shares acquired (99,917) (4,595,274) Issued: Acquisition of minority interest 5,469 270,064 Employee stock purchase plan 686 32,026 Long-term incentive plan 7,368 479,010 Amortization of unearned compensation 2,095 Other (747) ------------ ------------ ------------ ------------ Balance, March 31, 1998 $ 3,962 $ 1,276,530 147,784,218 (24,177,926) ============ =========== ============ ============ The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Cash Flows (In thousands) Three Months Twelve Months Ended March 31, Ended March 31, --------------------- ---------------------- 1998 1997 1998 1997 ======== ======== ======== ======== Cash flows from operating activities: Net income $ 60,722 $ 70,838 $ 180,733 $ 180,086 Adjustments to reconcile net income to net cash: Depreciation and amortization 63,274 58,344 254,734 238,756 Deferred federal and state income taxes, net (30,040) (12,343) (19,345) (5,229) Deferred investment tax credits, net (1,821) (1,802) (7,395) (7,541) Advance contract payment 475 475 1,900 1,900 Change in certain assets and liabilities -* Accounts receivable, net (12,391) 13,787 (63,547) 21,897 Other receivables (20,590) (40,011) (45,626) (59,609) Electric production fuel (2,404) 2,351 2,891 (4,186) Materials and supplies (1,996) 220 349 4,739 Natural gas in storage 40,413 47,075 (3,005) (6,112) Accounts payable (13,470) 55,650 (87,687) 105,513 Taxes accrued 80,313 77,762 5,940 43,780 Fuel adjustment clause 1,568 (3,781) 11,819 (4,463) Gas cost adjustment clause 52,019 12,228 50,014 (38,889) Accrued employment costs (16,296) (4,821) 660 1,463 Other accruals (4,006) 25,511 (20,088) (299) Other, net (6,207) 3,635 50,555 (21,803) ------------- ------------- -------------- -------------- Net cash provided by operating activities 189,563 305,118 312,902 450,003 -------------- -------------- -------------- -------------- Cash flows used in investing activities: Utilities construction expenditures (48,203) (46,581) (220,553) (198,043) Acquisition of IWC Resources Corporation, net of cash acquired 0 (288,932) 0 (288,932) Acquisition of minority interest 0 0 (5,641) 0 Proceeds from disposition of assets 9,705 29,500 16,198 29,500 Proceeds from settlement of litigation 0 0 41,069 0 Other, net (25,916) (19,352) (61,384) (32,655) -------------- -------------- -------------- -------------- Net cash used in investing activities (64,414) (325,365) (230,311) (490,130) -------------- -------------- -------------- -------------- Cash flows provided by (used in) financing activities: Issuance of long-term debt 6,371 136,302 528,301 138,371 Issuance of short-term debt 276,921 254,045 1,052,384 1,496,567 Net change in commercial paper (40,000) (142,305) (122,340) 73,500 Retirement of long-term debt (2,547) (1,469) (325,682) (90,144) Retirement of short-term debt (306,673) (285,620) (1,063,277) (1,510,619) Retirement of preferred shares (1) (1) (2,408) (2,605) Issuance of common shares 3,340 208,486 13,427 213,594 Acquisition of treasury shares (23,296) (56,591) (99,789) (123,601) Cash dividends paid on common shares (29,789) (26,772) (114,610) (103,753) Cash dividends paid on preferred shares 0 0 0 (647) Other, net 121 115 (497) 488 -------------- ------------- -------------- -------------- Net cash provided by (used in) financing activities (115,553) 86,190 (134,491) 91,151 -------------- ------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents 9,596 65,943 (51,900) 51,024 Cash and cash equivalents at Beginning of period 30,780 26,333 92,276 41,252 -------------- ------------- -------------- -------------- Cash and cash equivalents at End of period $ 40,376 $ 92,276 $ 40,376 $ 92,276 ============= ============ ============ =========== *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." Industries also provides non-regulated energy/utility-related services including gas marketing and trading; wholesale power marketing; 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 subsidiaries: NIPSCO Development Company, Inc. (Development); NI Energy Services, Inc. (Services) (formerly known as NIPSCO Energy Services, Inc.); Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller); and SM&P Utility Resources, Inc. (SM&P). NIPSCO Capital Markets, Inc. (Capital Markets) handles financing for Industries and its subsidiaries, other than Northern Indiana. These subsidiaries, other than the wholesale power marketing operations of Services, are referred to collectively as "Products and Services." 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 including Miller and SM&P. On December 16, 1997, the Board of Directors authorized a two-for-one split of Industries' common stock. The stock split was paid February 20, 1998, to shareholders of record at the close of business January 30, 1998. All references to number of shares reported for the period including per share amounts and stock option data of Industries' common stock reflect the two-for-one stock split as if it had occurred at the beginning of the earliest period. On December 18, 1997, Industries and Bay State Gas Company signed a definitive merger agreement under which Industries will acquire all of the common stock of Bay State Gas Company in a stock-for-stock transaction. Refer to "Purchase of Bay State Gas Company" in Note 4 to Consolidated Financial Statements for a more detailed discussion of the proposed acquisition. (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 accompanying consolidated financial statements of Industries include the operating results of IWCR for the three and twelve months periods ended March 31, 1998. 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. Gas marketing revenues are recognized as the related commodity is delivered to customers. 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. Industries records provisions for losses on construction contracts, if any, in the period in which such losses become probable. Depreciation and Maintenance. The Utilities provide depreciation on a straight-line method over the remaining service lives of the electric, gas, water and common properties. The approximated weighted average remaining lives for major components of each electric, gas and water plant are as follows: Electric: Electric generation plant 24 years Transmission plant 26 years Distribution plant 25 years Other electric plant 24 years The provision of depreciable electric utility plant, as a percentage of the original cost, was 3.60% for the three-month and twelve-month periods ended March 31, 1998 and March 31, 1997. Gas: Gas storage plant 18 years Transmission plant 34 years Distribution plant 27 years Other gas plant 24 years The provision of depreciable gas utility plant, as a percentage of the original cost, was 5.15% for the three and twelve months ended March 31, 1998 and 5.06% for the three and twelve months ended March 31, 1997. Water: Water source and treatment plant 34 years Distribution plant 68 years Other water plant 13 years The provision of depreciable water utility plant, as a percentage of the original cost, was 1.9% and 1.5% for the three-month and twelve-month periods ended March 31, 1998, 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. 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 being amortized over a forty-year period from the respective dates of acquisition. The plant acquisition adjustments net of accumulated amortization were $189.1 million and $190.4 million at March 31, 1998 and December 31, 1997, respectively. Amortization of Software Costs. Industries has capitalized software relating to various technology functions. At the date of installation, Industries estimated that the specific software will have a useful life between five and ten years. The Federal Energy Regulatory Commission (FERC) prescribes certain amortization periods, and Industries' management has determined that, on average, these are reasonable useful life estimates for the portfolio of capitalized software. The Energy Utilities include these amortization estimates, based on useful life, in their quarterly filings with the Indiana Utility Regulatory Commission (Commission). Intangible Assets. The excess of cost over the fair value of the net assets of non-utility subsidiaries acquired is reported as goodwill and is being amortized on a straight-line basis over a weighted average period of 34 years. Other intangible assets approximating $7.7 million are being amortized over a period of eight years. 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. Accumulated amortization of intangibles at March 31, 1998 and December 31, 1997, was approximately $2.6 million and $1.1 million, respectively. 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 and wholesale power purchases are included in Cost of Sales under the caption "Power purchased." Accounts Receivable. At March 31, 1998, 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. Comprehensive Income. Industries adopted SFAS No. 130, "Reporting Comprehensive Income" effective January 1, 1998. The objective of the statement is to report comprehensive income which is a measure of all changes in equity of an enterprise which result from transactions or other economic events during the period other than transactions with shareholders. Industries' components of other comprehensive income includes unrealized gains (losses) on available for sale securities and unrealized gains (losses) on foreign currency translation adjustments. The accumulated amounts for these components, respectively, were $1.6 million and $(2.1) million as of April 1, 1996; $2.7 million and $(0.1) million as of January 1, 1997; and $4.4 million and $(1.5) million as of January 1, 1998. This information is disclosed in Industries' Consolidated Statement of Common Shareholders' Equity. Statement of Cash Flows. For the purposes of the Consolidated Statement of Cash Flows, Industries considers temporary cash investments with an original maturity of three months or less to be cash equivalents. Cash paid during the periods reported for income taxes and interest was as follows:
Three Months Twelve Months Ended March 31, Ended March 31, -------- ------- ------- --------- (In thousands) 1998 1997 1998 1997 ======= ======= ======= ======= Income taxes $ 0 $ 0 $ 116,849 $ 75,795 Interest, net of amounts capitalized 23,549 12,111 113,799 88,988
Fuel Adjustment Clause. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect increases and decreases in the cost of fuel and the fuel cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the Commission applicable to metered retail rates, the adjustment factor has been calculated based on the estimated cost of fuel and the fuel cost of purchased power in a future three-month period. If two statutory requirements relating to expense and return levels are satisfied, any under-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 6, FERC Order No. 636 for a discussion of gas transition cost charges. Natural Gas in Storage. Northern Indiana's natural gas in storage is valued using the last-in, first-out (LIFO) inventory methodology. Based on the average cost of gas purchased in March 1998 and December 1997 the estimated replacement cost of gas in storage (current and non-current) at March 31, 1998 and December 31, 1997 exceeded the stated LIFO cost by approximately $29 million and $42 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 anticipated 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 anticipated transaction affects earnings. Industries uses 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 March 31, 1998, Industries had open derivative financial instruments representing hedges of natural gas sales of 11.9 billion cubic feet (Bcf), natural gas purchases of 9.1 Bcf and net basis differentials of 35.8 Bcf. The net deferred gains on these derivative financial instruments as of March 31, 1998 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 deferred premiums paid on these options as of March 31, 1998 were not material. Regulatory Assets. The Utilities' operations are subject to the regulation of the Commission and, in the case of the Energy Utilities, the 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 March 31, 1998 and December 31, 1997, 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 regulatory assets might be required, unless some form of transition cost recovery is established by the appropriate regulatory body which would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. Regulatory assets were comprised of the following items:
March 31, December 31, (In thousands) 1998 1997 ========== ========== Unamortized reacquisition premium on debt (Note 19) $ 45,869 $ 46,748 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 65,492 66,546 Bailly scrubber carrying charges and deferred depreciation (See below) 9,647 9,880 Deferred SFAS No. 106 expense not recovered (Note 10) 86,158 87,653 FERC Order No. 636 transition costs (Note 6) 25,771 28,744 Regulatory income tax asset, net (Note 8) 7,218 6,941 Other 4,207 4,261 ------------ ----------- 244,362 250,773 Less: Current portion of regulatory assets 36,288 39,260 ------------ ----------- $ 208,074 $ 211,513 ============ ===========
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. 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, 1996, a pre-tax rate of 5.5% for all construction was being used; effective January 1, 1997 the rate remained at 5.5%; and effective January 1, 1998, 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 within 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 $35.5 million and $30.1 million relating to affordable housing projects at March 31, 1998 and December 31, 1997, 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) 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 10.6 million Industries' common shares. Industries accounted for the acquisition as a purchase. The purchase price was allocated to the assets and liabilities acquired based on their fair values. (4) Purchase of Bay State Gas Company: On December 18, 1997, Industries and Bay State Gas Company (Bay State) signed a definitive merger agreement under which Industries will acquire all of the common stock of Bay State in a stock-for-stock transaction valued at $40 per Bay State share. The transaction is valued at approximately $551 million. Bay State shareholders will have the option of taking up to 50 percent of the total purchase price in cash. Consummation of the merger is subject to certain closing conditions, including the approval by the shareholders of Bay State as well as the Securities and Exchange Commission, FERC and state regulatory agencies in Massachusetts, New Hampshire and Maine. The transaction is expected to be completed in late 1998. Bay State, one of the largest natural gas utilities in New England, provides natural gas distribution service to more than 300,000 customers in Massachusetts, New Hampshire and Maine. The combined company will be one of the 10 largest natural gas distribution systems in the nation, servicing more than 1 million gas customers. In addition, Industries and Bay State anticipate entering into a joint marketing agreement in 1998 that will expand the operations of Bay State's non-regulated energy service companies. (5) 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. NEMC was declared bankrupt as of December 12, 1996. Certain creditors of NEMC have 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. (6) FERC Order No. 636: Since December 1993, the Energy Utilities have paid approximately $139 million of interstate pipeline transition costs to pipeline suppliers to reflect the impact of FERC Order No. 636. 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. (7) Environmental Matters: The Utilities have an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. The Utilities intend 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 $20 million to cover probable corrective actions as of March 31, 1998; 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 results of operations or financial position of Industries. 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). Reflecting this compliance, on December 31, 1997, the Indiana Department of Environmental Management (IDEM) issued the Phase II Acid Rain permits for all four of Northern Indiana's electric generating stations. As discussed below, however, other provisions of the CAAA impose additional requirements on Northern Indiana. On December 19, 1996, the Environmental Protection Agency (EPA) promulgated rules for Phase II of the Acid Rain nitrogen oxides (NOx) reduction program. For Phase I, during the summer of 1997, the EPA formally approved the Acid Rain Early Election permits for the pulverized coal units at D. H. Mitchell and R. M. Schahfer stations. The permits establish the Phase I limits for the NOx emissions on these units until 2007. On December 23, 1997, Northern Indiana submitted an Acid Rain Phase II NOx Compliance Plan to IDEM which included additional controls for two cyclone fired boilers and a plan for emission averaging to achieve the NOx limits for the system by 2000. Northern Indiana plans a project to demonstrate a cost effective combustion control technique on the Unit 12 cyclone fired boiler at Michigan City during 1998. The CAAA also contain other provisions that could lead to limitations on emissions of hazardous air pollutants which may require significant capital expenditures for control of these emissions. Northern Indiana cannot predict what these requirements will be or the costs of complying with these potential requirements. On October 10, 1997, the EPA proposed a rule under the nonattainment provisions of the CAAA to reduce emissions transported across state boundaries that allegedly are contributing to nonattainment of the one hour ozone standard in downwind states. Because NOx is considered a precursor or cause of ozone formation, the EPA proposed significant NOx reductions for 22 states, including Indiana, to address the ozone transport issue. These proposals, and any resulting NOx emission limitations, arise under different provisions of the CAAA than the Acid Rain NOx program and can result in additional, more restrictive emission limitations than are imposed under the Acid Rain Program. The EPA has encouraged states to achieve the reductions by requiring controls on electric utilities and large boilers. Northern Indiana is evaluating the EPA's proposal and evaluating potential requirements that could result from any final rule. The EPA issued final rules on July 18, 1997, revising the National Ambient Air Quality Standards for ozone and particulate matter. The revised standards begin a regulatory process that may lead to reductions in particulate, NOx emissions and possibly sulfur dioxide emissions from coal-fired boilers (including Northern Indiana's generating stations) beyond current CAAA requirements. Northern Indiana cannot predict the costs of complying with future control requirements to meet these new standards. Northern Indiana will continue to closely monitor developments in this area and anticipates the exact nature of the impact of the new standards on its operations will not be known for some time. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159 nations formally agreed to targets reducing worldwide levels of greenhouse gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would impose an obligation on the United States to reduce its emissions of greenhouse gas to a level seven percent below 1990 levels during the period of 2008 to 2012. The impact of this agreement on Northern Indiana is uncertain. Northern Indiana, as a charter member of the Department of Energy's Climate Challenge Program, the electric industries' voluntary reduction effort, has already implemented over 21 projects to voluntarily reduce greenhouse gases emissions. Northern Indiana continues to investigate methods to address reduction in carbon dioxide emissions and will monitor the development of U. S. climate change policy. 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 eight sites and remedial measures have been selected at five 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 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. Three of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. 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 August 1997, Northern Indiana filed suit in federal court against Cinergy seeking recovery of those costs. 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. There has been litigation between Northern Indiana and various insurance companies over covered costs. Northern Indiana has filed claims in state court against various insurance companies, seeking coverage for costs associated with several former manufactured-gas plants and damages for alleged misconduct by some of the insurance companies. The state court action is now proceeding. Northern Indiana has received cash settlements from several of the insurance companies. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of public, governmental and media attention. Recently, researchers from the National Cancer Institute and the Childhood Cancer Group reported they found no evidence magnetic fields in homes increase the risk of childhood leukemia. This study follows an EMF report released late last year by the U.S. National Research Council of the National Academy of Sciences, which concluded, after examining more than 500 EMF studies spanning 17 years, that, among other things, there was insufficient evidence to consider EMF a threat to human health. Despite the reports' 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. Applications for renewal of any expiring permits have been filed and are the subject of ongoing discussions with, but have not been finalized by, IDEM. These permits continue in effect pending review of the current 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 the 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 previously required. 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. (8) Income Taxes: Industries uses the liability method of accounting for income taxes under which deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. To the extent certain deferred income taxes of the Utilities are recoverable or payable through future rates, regulatory assets and liabilities have been established. Regulatory assets are primarily attributable to undepreciated AFUDC-equity and the cumulative net amount of other income tax timing differences for which deferred taxes had not been provided in the past, when regulators did not recognize such taxes as costs in the rate-making process. Regulatory liabilities are primarily attributable to the Utilities' obligation to credit to ratepayers deferred income taxes provided at rates higher than the current federal tax rate currently being credited to ratepayers using the average rate assumption method and unamortized deferred investment tax credits. The components of the net deferred income tax liability at March 31, 1998 and December 31, 1997, are as follows:
March 31, December 31, (In thousands) 1998 1997 =========== =========== Deferred tax liabilities - Accelerated depreciation and other property differences $ 781,738 $ 779,223 AFUDC-equity 34,675 35,282 Adjustment clauses 14,822 35,253 Take-or-pay gas costs 496 496 Other regulatory assets 31,331 31,862 Reacquisition premium on debt 18,012 18,335 Deferred tax assets - Deferred investment tax credits (39,339) (40,017) Removal costs (147,209) (144,111) Other postretirement/postemployment benefits (45,856) (45,298) Other, net (10,960) (3,565) ------------ --------- 637,710 667,460 Less: Deferred income taxes related to current assets and liabilities (5,155) 15,645 ----------- ----------- Deferred income taxes -noncurrent $ 642,865 $ 651,815 =========== ===========
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Twelve Months Ended March 31, Ended March 31, -------- -------- ------- ------- (In thousands) 1998 1997 1998 1997 ======== ======= ======= ======= Current income taxes - Federal $ 55,917 $ 46,333 $ 107,709 $ 102,345 State 8,287 6,892 18,468 15,897 ------------ ------------ ------------ ------------ 64,204 53,225 126,177 118,242 ------------ ------------ ------------ ------------ Deferred income taxes, net - Federal (27,806) (11,432) (18,145) (5,020) State (2,234) (911) (1,200) (209) ------------ ------------ ------------ ------------ (30,040) (12,343) (19,345) (5,229) ------------ ------------ ------------ ------------ Deferred investment tax credits, net (1,821) (1,802) (7,395) (7,541) ------------ ------------ ------------ ------------ Total income taxes $ 32,343 $ 39,080 $ 99,437 $ 105,472 ========== ========== ========== ===========
A reconciliation of total income tax expense to an amount computed by applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Twelve Months Ended March 31, Ended March 31, ------------ ------------ ------------ ----------- (In thousands) 1998 1997 1998 1997 =========== =========== ============ =========== Net income $ 60,722 $ 70,838 $ 180,733 $ 180,086 Add-Income taxes 32,343 39,080 99,437 105,472 Dividend requirements on preferred stocks of subsidiaries 2,167 2,167 8,691 8,680 ------------ ------------ ------------ ----------- Income before preferred dividend requirements of subsidiaries and income taxes $ 95,232 $ 112,085 $ 288,861 $ 294,238 =========== ========== =========== ========== Amount derived by multiplying pre-tax income by the statutory rate $ 33,331 $ 39,230 $ 101,101 $ 102,983 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 998 1,044 4,026 4,682 Amortization of deferred investment tax credits (1,821) (1,802) (7,395) (7,541) State income taxes, net of federal income tax benefit 3,300 3,567 11,597 10,424 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,271) (1,518) (3,816) (6,488) Low-income housing credits (960) (764) (3,252) (2,491) Nondeductible amounts related to amortization of intangible assets and plant acquisition adjustments 629 96 2,173 385 Other, net (1,863) (773) (4,997) 3,518 ------------ ------------ ------------ ----------- Total income taxes $ 32,343 $ 39,080 $ 99,437 $ 105,472 =========== =========== ============ ===========
(9) 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 change in the benefit obligation for 1997 and 1996 is as follows:
(In thousands) 1997 1996 ======== ======== Benefit obligation at beginning of year (January 1,) $ 743,634 $ 759,557 Service cost 14,714 16,300 Interest cost 57,938 53,477 Plan amendments 25,096 0 Actuarial (gain) loss 73,818 (39,024) Acquisition of IWCR 15,722 0 Benefits paid (55,166) (46,676) ----------- ---------- Benefit obligation at end of the year (December 31,)$ 875,756 $ 743,634 ========= ==========
The change in the fair value of the plans' assets for the years 1997 and 1996 is as follows:
(In thousands) 1997 1996 ======== ======== Fair value of plan assets at beginning of year (January 1,) $ 790,978 $ 705,541 Actual return on plans' assets 126,695 87,407 Employer contributions 46,440 44,706 Acquisition of IWCR 15,910 0 Benefits paid (55,166) (46,676) ---------- ---------- Plan assets at fair value at end of the year (December 31,) $ 924,857 $ 790,978 ========== ==========
The plans' assets are invested primarily in common stocks, bonds and notes. The plans' funded status as of January 1, 1998 and January 1, 1997 is as follows:
January 1, January 1, (In thousands) 1998 1997 ========= ========= Plan assets in excess of benefit obligation $49,100 $ 47,344 Unrecognized net actuarial loss (46,959) (66,976) Unrecognized prior service cost 47,114 25,172 Unrecognized transition amount 32,107 38,062 ----------- ----------- Prepaid pension costs $ 81,362 $ 43,602 =========== ===========
The benefit obligation is the present value of future pension benefit payments and is based on a plan benefit formula which considers expected future salary increases. Discount rates of 7.00% and 7.75% and rates of increase in compensation levels of 4.5% and 5.5% were used to determine the benefit obligation at January 1, 1998 and 1997, respectively. The increase in the benefit obligation at January 1, 1998 is mainly caused by the decrease in the discount rate from 7.75% to 7.00%. Prepaid pension costs were $90.4 million as of March 31, 1998. The following items are the components of provisions for pensions for the three-month and twelve-month periods ended March 31, 1998 and March 31, 1997:
Three Months Twelve Months Ended March 31, Ended March 31, --------- --------- --------- --------- (In thousands) 1998 1997 1998 1997 ======= ======= ======= ======= Service costs $ 4,934 $ 4,573 $14,799 $14,606 Interest costs 19,324 16,536 60,433 50,962 Expected return on plan assets (24,733) (20,503) (76,483) (61,528) Amortization of transition obligation 1,760 1,588 5,498 5,068 Amortization of prior service costs 1,676 950 4,227 2,718 -------- --------- ------- -------- $ 2,961 $ 3,144 $ 8,474 $ 11,826 ======== ========= ======= =======
Assumptions used in the valuation and determination of 1998 and 1997 pension expense were as follows:
1998 1997 ====== ====== Discount rate 7.00% 7.75% Rate of increase in compensation levels 4.50% 5.50% Expected long-term rate of return on assets 9.00% 9.00%
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 $0.4 million and $2.1 million were made to these plans for the three-month and twelve-month periods ended March 31, 1998. 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. (10) 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 had 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 as a regulatory asset. On June 11, 1997, the Commission issued an order approving the inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with these dates. 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 change in the plans' accumulated postretirement benefit obligation (APBO) for the years 1997 and 1996:
(In thousands) 1997 1996 ========= ======== Accumulated postretirement benefit obligation at beginning of year (January 1,) $ 200,790 $ 257,915 Service cost 5,034 7,352 Interest cost 16,215 18,310 Plan amendments 4,015 (10,482) Actuarial (gain) (10,242) (65,718) Acquisition of IWCR 18,505 0 Benefits paid (10,409) (6,587) --------- --------- Accumulated postretirement benefit obligation at end of the year (December 31,) $ 223,908 $ 200,790 ========= =========
The change in the fair value of the plans' assets for the years 1997 and 1996 is as follows:
(In thousands) 1997 1996 ======== ======== Fair value of plan assets at beginning of year (January 1,) $ 0 $ 0 Employer contributions 12,809 6,587 Benefits paid (10,409) (6,587) ----------- ----------- Plan assets at fair value at end of the year (December 31,) $ 2,400 $ 0 =========== ===========
Following is the funded status for postretirement benefits as of January 1, 1998 and January 1, 1997:
January 1, January 1, (In thousands) 1998 1997 ========= ========= Funded status $ (221,508) $(200,790) Unrecognized net actuarial gain (99,118) (89,547) Unrecognized prior service cost 4,195 0 Unrecognized transition amount 176,464 175,012 ---------- --------- Accrued liability for postretirement benefits $ (139,966) $(115,325) ========== =========
A discount rate of 7.00%, a pre-Medicare medical trend rate of 8% declining to a long-term rate of 5%, a discount rate of 7.75% and a pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%, were used to determine the APBO at January 1, 1998 and 1997, respectively. The increase in the APBO at January 1, 1998 was primarily attributable to the inclusion of IWCR's APBO and the decrease in the discount rate from 7.75% to 7.00%. The accrued liability for postretirement benefits was $139.2 million at March 31, 1998. Net periodic postretirement benefits costs, before consideration of the rate-making discussed previously, for the three-month and twelve-month periods ended March 31, 1998 and March 31, 1997 include the following components:
Three Months Twelve Months Ended March 31, Ended March 31, (In thousands) 1998 1997 1998 1997 ====== ====== ====== ====== Service costs $1,187 $ 1,460 $4,631 $7,192 Interest costs 4,073 4,460 15,491 17,691 Expected return on plan assets (50) 0 (50) 0 Amortization of transition obligation 2,929 2,764 11,723 11,262 Amortization of prior service cost 75 0 354 0 Amortization of (gain) loss (1,393) (1,008) (6,229) (979) ------- -------- -------- -------- $ 6,821 $ 7,676 $ 25,920 $ 35,166 ======= ======== ======== ========
Assumptions used in the determination of 1998 and 1997 net periodic postretirement benefit costs were as follows:
1998 1997 ====== ====== Discount rate 7.00% 7.75% Rate of increase in compensation levels 4.50% 5.50%
The pre-Medicare medical trend rates used for 1998 and 1997 were 8% declining to a long-term rate of 5% and 9% declining to a long-term rate of 6%, respectively. 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, 1998 by approximately $27.1 million, and increase the aggregate of the service and interest cost components of plan costs by approximately $0.7 million for the three-month period ended March 31, 1998. The effect of a 1% decrease in the assumed health care cost trend rates for each future year would decrease the accumulated postretirement benefit obligation at January 1, 1998 by approximately $22.2 million, and decrease the aggregate of the service and interest cost components of plan costs by approximately $0.6 million for the three-month period ended March 31, 1998. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates, or plan changes. (11) Authorized Classes of Cumulative Preferred and Preference Stocks: Industries - 20,000,000 shares -Preferred -without par value 4,000,000 of Industries' Series A Junior Participating Preferred Shares are reserved for issuance pursuant to the Share Purchase Rights Plan described in Note 17, 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 12 sets forth the preferred stocks which are redeemable solely at the option of the issuer, and Note 13 sets forth the preferred stocks which are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The Preferred shareholders of 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. (12) Preferred Stocks, Redeemable Solely at the Option of the Issuer, Outstanding at March 31, 1998 and December 31, 1997 :
Redemption Price at March 31, December 31, March 31, (Dollars in thousands) 1998 1997 1998 =========== =========== =========== Northern Indiana Public Service Company: Cumulative preferred stock - $100 par value - 4-1/4% series - 209,107 and 209,118 shares outstanding, respectively $ 20,911 $ 20,912 $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 N/A Cumulative preferred stock - no par value - Adjustable rate (6.00% at March 31, 1998), 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 4,497 $100 - $105 ----------- ----------- $ 85,619 $ 85,620 =========== ===========
During the period April 1, 1996 to March 31, 1998, 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. (13) Redeemable Preferred Stocks Outstanding at March 31, 1998 and December 31, 1997 : Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of issuer, excluding sinking fund payments due within one year are as follows:
March 31, December 31, (Dollars in thousands) 1998 1997 ========= ========== Northern Indiana Public Service Company: Cumulative preferred stock -$100 par value - 8.85% series - 62,500 shares outstanding $ 6,250 $ 6,250 7-3/4% series - 38,906 shares outstanding 3,891 3,891 8.35% series - 57,000 shares outstanding 5,700 5,700 Cumulative preferred stock -no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ---------- ---------- $ 58,841 $ 58,841 ========== ==========
The redemption prices at March 31, 1998, 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 Series Redemption Price Per Share Mandatory Redemption Provisions === ======== ====================== ====================================== Cumulative preferred stock -$100 par value - 8.85% $101.11, reduced periodically 12,500 shares on or before April 1. 8.35% $103.69, reduced periodically 3,000 shares on or before July 1; increasing to 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.23, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year. Cumulative preferred stock -no par value - 6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
Sinking fund requirements with respect to redeemable preferred stocks outstanding at March 31, 1998 for each of the twelve-month periods subsequent to March 31, 1999 are as follows:
Twelve Months Ended March 31,* ============================ 2000 $1,827,700 2001 $1,827,700 2002 $1,827,700 2003 $1,827,700 * Table does not reflect redemptions made after March 31, 1998.
(14) Stock Split: On December 16, 1997, the Board of Directors authorized a two-for-one split of Industries' common stock. The stock split was paid February 20, 1998, to shareholders of record at the close of business January 30, 1998. All references to number of shares reported for the period including per share amounts and stock option data of Industries' common stock reflect the two-for-one stock split as if it had occurred at the beginning of the earliest period. (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 dated August 1, 1939, as amended and supplemented (Indenture), provides that it will not declare or pay any dividends on any class of capital stock (other than preferred or preference stock) except out of earned surplus or net profits of Northern Indiana. At March 31, 1998, Northern Indiana had approximately $164.0 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) Earnings Per Share: At December 31, 1997, Industries adopted SFAS No. 128 "Earnings per Share" The adoption of this statement required Industries to present basic earnings per share and diluted earnings per share in place of primary earnings per share. Basic earnings per share was computed by dividing net income, reduced for preferred dividends, by the average number of common shares outstanding during the period. The diluted earnings per share calculation assumes conversion of nonqualified stock options into common shares. As a result of adopting the statement, previously reported earnings per share information was restated. The effect of this accounting change on previously reported earnings per share data was insignificant. The net income, preferred dividends and shares used to compute basic and diluted earnings per share is presented in the following table:
Three Months Twelve Months Ended March 31, Ended March 31, (Dollars in thousands, except per share amounts) 1998 1997 1998 1997 Basic Weighted Average Number of Shares: Average Common Shares Outstanding 123,872,613 119,116,686 125,021,821 121,140,716 Net Income to be Used to Compute Basic Earnings per Share: Net Income $ 60,722 $ 70,838 $ 180,733 $ 180,086 Basic Earnings per Average Common Share $ 0.49 $ 0.59 $ 1.44 $ 1.48 Diluted Weighted Average Number of Shares: Average Common Shares Outstanding 123,872,613 119,116,686 125,021,821 121,140,716 Dilutive effect for Nonqualified Stock Options 511,358 311,027 304,907 242,047 Weighted Average Shares 124,383,971 119,427,713 125,326,728 121,382,763 Net Income to be Used to Compute Diluted Earnings per Share: Net Income $ 60,722 $ 70,838 $ 180,733 $ 180,086 Diluted Earnings per Average Common Share $ 0.48 $ 0.59 $ 1.44 $ 1.48
(17) Common Shares: On April 8, 1998, shareholders approved an increase in the number of authorized common shares without par value from 200,000,000 shares to 400,000,000 shares. 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 two-hundredth of a Series A Junior Participating Preferred Share, without par value, of Industries at a price of $30 per one two-hundredth of a share. In certain circumstances, if an acquirer obtained 25% of Industries' outstanding shares, or merged into Industries or merged Industries into the acquirer, the Rights would entitle the holders to purchase Industries' or the acquirer's common shares for one-half of the market price. The Rights will not dilute Industries' common shares nor affect earnings per share unless they become exercisable for common shares. The Plan was not adopted in response to any specific attempt to acquire control of Industries. Common Share Repurchases. The Board has authorized the repurchase of Industries' common shares. At March 31, 1998, Industries had purchased approximately 45.0 million shares since 1989 at an average price of $14.41 per share. Approximately 17.1 million additional common shares may be repurchased under the Board's authorization. (18) 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 5.0 million of Industries' common shares to key employees through 1998 and 2004, respectively. At March 31, 1998, there were 12,912 shares and 3,837,500 shares reserved for future awards under the 1988 Plan and 1994 Plan, respectively. The 1988 Plan and 1994 Plan permit the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights and performance units. No incentive stock options or performance units were outstanding at March 31, 1998. Under both Plans, the exercise price of each option equals the market price of Industries' stock on the date of grant. Each option has a maximum term of 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 1997 and 1998 lapse two years from date of grant and vesting is variable from 0% to 100% of the number awarded, subject to specific performance goals. If a participant's employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. There were 558,666 and 542,666 restricted shares outstanding at March 31, 1998 and December 31, 1997, respectively. The Industries Nonemployee Director Stock Incentive Plan, which was approved by shareholders, provides for the issuance of up to 200,000 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 April 8, 1998, 138,100 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 $0.5 and $1.9 million for the three-month and twelve-month periods ending March 31, 1998, respectively. Had compensation cost for non-qualified stock options been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," Industries' net income and earnings per share would have been reduced to the following pro forma amounts:
Three Months Twelve Months Ended March 31, Ended March 31, ----------------- ------------------- 1998 1997 1998 1997 ======= ======= ======== ======== (Dollars in thousands, except per share data) Net Income: As reported $ 60,722 $ 70,838 $ 180,733 $ 180,086 Pro forma 60,501 70,631 179,869 179,341 Earnings Per Average Common Share: Basic: As reported $ 0.49 $ 0.59 $ 1.44 $ 1.48 Pro forma 0.49 0.59 1.43 1.48 Diluted: As reported $ 0.48 $ 0.59 $ 1.43 $ 1.48 Pro forma 0.48 0.59 1.43 1.47
The fair value of each option granted used to determine pro forma net income is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the three-month and twelve-month periods ended March 31, 1998 and March 31, 1997: risk-free interest rate of 6.29% and 6.39%, respectively; expected dividend yield per share of $0.87 and $0.84, respectively; expected option term of five and one-quarter years and five years, respectively; and expected volatilities of 12.7% and 13.2%, respectively. Changes in outstanding shares under option and SARs for the three-month and twelve-month periods ended March 31, 1998 and March 31, 1997 are as follows:
NONQUALIFIED STOCK OPTIONS ---------------------------------------------- Weighted Weighted Average Average Option Option Three Months Ended March 31, 1998 Price 1997 Price ============================ ========== ======= ======== ======= Balance, beginning of period 2,535,400 $ 16.41 2,360,900 $ 15.33 Granted 0 0 Exercised (200,800) 12.55 (53,100) 14.02 Canceled 0 (23,700) 18.91 ----------- ---------- Balance, end of period 2,334,600 16.74 2,284,100 15.33 =========== ========== Shares exercisable 1,806,000 15.60 1,759,200 14.26 =========== ========== NONQUALIFIED STOCK OPTIONS --------------------------------------------- Weighted Weighted Average Average Option Option Twelve Months Ended March 31, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 2,284,100 $ 15.33 2,166,300 $ 14.30 Granted 533,600 20.64 556,600 18.91 Exercised (478,100) 14.28 (395,300) 14.45 Canceled (5,000) 20.64 (43,500) 18.12 ---------- --------- Balance, end of period 2,334,600 16.74 2,284,100 15.33 ========== ========= Shares exercisable 1,806,000 15.60 1,759,200 14.26 ========== ========= Weighted average fair value of options granted $ 2.66 $ 2.50 ======== ======== NONQUALIFIED STOCK OPTIONS WITH SARs ---------------------------------------------- Option Option Three Months Ended March 31, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47 Exercised 0 0 ---------- --------- Balance, end of period 11,200 5.47 11,200 5.47 ======== ======== Shares exercisable 11,200 5.47 11,200 5.47 ======== ======== NONQUALIFIED STOCK OPTIONS WITH SARs -------------------------------------------- Option Option Twelve Months Ended March 31, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47 Exercised 0 0 ---------- --------- Balance, end of period 11,200 5.47 11,200 5.47 ======== ======== Shares exercisable 11,200 5.47 11,200 5.47 ======== ========
The following table summarizes information about non-qualified stock options at March 31, 1998:
OPTIONS OUTSTANDING -------------------------------------------------------------------------------- Number Weighted Average Range of Outstanding at Remaining Weighted Average Option Price March 31, 1998 Contractual Life Option Price ============= =============== =============== =============== $ 5.47 to $ 8.97 102,200 1.79 years $ 8.29 $11.47 to $15.16 594,600 5.21 years $13.41 $16.22 to $20.64 1,637,800 7.96 years $18.48 - ---------------- ------------ ------------ ---------- $5.47 to $20.64 2,334,600 6.99 years $16.74 =========== OPTIONS EXERCISABLE - -------------------------------------------------------------------------------- Number Range of Exercisable at Weighted Average Option Price March 31, 1998 Option Price ============= =============== ============== $ 5.47 to $ 8.97 102,200 $ 8.29 $11.47 to $15.16 594,600 $13.41 $16.22 to $18.91 1,109,200 $17.45 - ---------------- ---------- ------- $ 5.47 to $18.91 1,806,000 $15.60 ==========
(19) Long-Term Debt: At March 31, 1998 and December 31, 1997, Industries' outstanding long-term debt, excluding amounts due within one year, issued and not retired or canceled was as follows:
March 31, December 31, (Dollars in thousands) 1998 1997 ========== ========== First mortgage bonds - Interest rates between 5.20% and 9.83% with a weighted average interest rate of 7.22% and various maturities between May 1, 2001 and September 1, 2025 $ 187,100 $ 187,100 Pollution control notes and bonds- Interest rates between 3.58% and 5.70% with a weighted average interest rate of 4.07% and various maturities between October 1, 2003 and April 1, 2019 241,000 241,000 Medium-term notes - Interest rates between 6.10% and 7.99% with a weighted average interest rate of 7.19% and various maturities between April 5, 2000 and August 4, 2027 1,048,025 1,048,025 Subordinated Debentures - 7-3/4%, due March 31, 2026 75,000 75,000 Senior Notes Payable - 6.78%, due December 1, 2027 75,000 75,000 Notes payable - Interest rates between 6.31% and 9.00% with a weighted average interest rate of 7.34% and various maturities between August 31, 1999 and January 1, 2008 42,944 40,229 Variable bank loan - 6.50% -due August, 2003 5,600 5,600 Unamortized premium and discount on long-term debt, net (3,908) (4,029) ---------- ---------- Total long-term debt, excluding amounts due in one year $1,670,761 $1,667,925 ========= ==========
The sinking fund requirements of long-term debt outstanding at March 31, 1998 (including the maturity of Northern Indiana's first mortgage bonds: Series T, 7.50%, due April 1, 2002; Northern Indiana's medium-term notes due from March 20, 2000 to March 31, 2003; NDC Douglas Properties, Inc.'s notes payable due December 22, 1999 thru January 29, 2003; 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 March 31, 1999 are as follows:
Twelve Months Ended March 31, =========================== 2000 $ 14,661,785 2001 172,120,004 2002 39,584,457 2003 84,625,802
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, 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 $217.7 million of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of March 31, 1998, $139.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. IWC's first mortgage bonds are secured by its utility plant. Provisions of trust indentures related to 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. Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold $300 million of medium-term notes 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. In December 1997, Capital Markets issued and sold $75 million of 6.78% senior notes payable which mature December 1, 2027. The holders of the notes have the right to require Capital Markets to repurchase all or a portion of the notes on December 1, 2007 at a purchase price of the principal amount plus accrued interest thereon. The proceeds from these issuances were primarily used for the payment of Capital Markets Zero Coupon Notes which matured December 1, 1997. The remaining net proceeds were used for general corporate purposes. 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' obligations in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' creditors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse for the benefit of Capital Markets' creditors. The carrying value of the assets of Industries, other than the assets of Northern Indiana, reflected in the consolidated financial statements of Industries, was approximately $1.3 billion at March 31, 1998. (20) Current Portion of Long-Term Debt: At March 31, 1998 and December 31, 1997, Industries' current portion of long-term debt due within one year was as follows:
March 31, December 31, (Dollars in thousands) 1998 1997 =========== ========== First Mortgage Bonds $ 14,509 $ 14,509 Medium-term notes - Interest rates of 5.83% and 5.95% with a weighted average interest rate of 5.86% and various maturities between April 6, 1998 and April 13, 1998 35,000 35,000 Notes payable - Interest rates between 6.72% and 9.00% with a weighted average interest rate of 7.76% and maturities between August 31, 1998 and January 1, 1999 4,720 3,612 Sinking funds due within one year 1,500 1,500 ----------- ---------- Total current portion of long-term debt $ 55,729 $ 54,621 =========== =========
(21) Short-Term Borrowings: Northern Indiana and Capital Markets make use of commercial paper to fund short-term working capital requirements. As of March 31, 1998 and December 31, 1997, Northern Indiana had $18.5 million and $71.5 million of commercial paper outstanding, respectively. At March 31, 1998, the interest rate of commercial paper outstanding was 5.60%. As of March 31, 1998 and December 31, 1997 Capital Markets had $30.0 million and $17.0 million of commercial paper outstanding. At March 31, 1998, the weighted average interest rate of commercial paper outstanding was 5.76%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999. As of March 31, 1998, 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 March 31, 1998, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1998 there were no borrowings under these lines of credit. At December 31, 1997, there was $47.5 million of borrowings outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1998, there were no borrowings outstanding under this facility. Capital Markets has a $150 million revolving Credit Agreement which will terminate August 19, 1999. This facility provides short-term financing flexibility to Industries and also serves as the back-up instrument for a commercial paper program. As of March 31, 1998, there were no borrowings outstanding under this agreement. Capital Markets also has $130 million of money market lines of credit. As of March 31, 1998 and December 31, 1997, $28.0 million and $20.1 million, respectively, of borrowings were outstanding under these lines of credit. IWCR and its subsidiaries had lines of credit with banks aggregating $78.7 million. As of March 31, 1998 and December 31, 1997, $60.1 million and $48.9 million of borrowings were outstanding under these lines of credit, respectively. At March 31, 1998 and December 31, 1997, Industries' short-term borrowings were as follows:
March 31, December 31, (In thousands) 1998 1997 =========== =========== Commercial paper $ 48,500 $ 88,500 Notes payable 94,302 116,469 Revolving loan facility 0 7,670 ----------- ----------- Total short-term borrowings $ 142,802 $ 212,639 =========== ===========
(22) 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 March 31, 1998:
Twelve Months Ended March 31, ====================================== (In thousands) 1999 $ 15,959 2000 13,600 2001 13,343 2002 13,334 2003 49,796 Later years 80,081 --------- Total minimum payments required $186,113 =========
The consolidated financial statements include rental expense for all operating leases as follows:
March 31, March 31, (In thousands) 1998 1997 ========== ========== Three months ended $ 4,949 $ 2,248 Twelve months ended 11,540 8,338
(23) Commitments: The Utilities estimate that approximately $1.019 billion will be expended for construction purposes for the period from January 1, 1998 to December 31, 2002. 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 IBM to perform all data center, application development and maintenance, and desktop management of Northern Indiana. (24) Primary Energy: Primary arranges energy-related projects for large energy-intensive facilities and has entered into certain commitments in connection with these projects. Primary offers large energy customers, nationwide, expertise in managing the engineering, construction, operation and maintenance of these energy-related projects. Primary is the parent of the following subsidiaries: Harbor Coal Company (Harbor Coal); North Lake Energy Corporation (North Lake); Lakeside Energy Corporation (LEC); Portside Energy Corporation (Portside); and Cokenergy, Inc. (CE). 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 (Inland Steel) 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. 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 tolling agreement with US Steel commenced on April 16, 1997 when the facility was placed in commercial operation. Capital Markets 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 has entered into a lease with a third-party lessor for use of the facility. Industries has guaranteed certain Portside obligations to the lessor. Construction of the project began in June 1996 and the facility began commercial operation on September 26, 1997. CE has entered into a fifteen-year service agreement with Inland Steel 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 Steel'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 Steel. 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 in January 1997. The facility is scheduled to be operational in June 1998. Primary has advanced approximately $128 million and $107 million, at March 31, 1998 and December 31, 1997, respectively, to the lessors of the energy related projects discussed above. These net advances are included in "Other Receivable" in the Consolidated Balance Sheet and as a component of operating activities in the Consolidated Statement of Cash Flows. Primary is evaluating other potential projects with Northern Indiana customers as well as with potential customers outside of Northern Indiana's service territory. Projects under consideration include those which use industrial by-product fuels and natural gas to produce electricity. (25) Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short maturity of those instruments. Investments: The fair value of some investments is estimated based on market prices for those or similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock is estimated based on the quoted market prices for the same or similar issues or on the rates offered to Industries for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. The carrying values and estimated fair values of Industries' financial instruments (excluding derivatives) are as follows:
March 31, 1998 December 31, 1997 ---------------------------- ------------------------ Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value ======== ========= ========= ========== Cash and cash equivalents $ 40,376 $ 40,376 $ 30,780 $ 30,780 Investments 34,771 34,068 32,625 32,886 Long-term debt (including current portion) 1,726,490 1,759,879 1,722,546 1,718,897 Preferred stock 146,288 135,732 146,289 139,814
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. (26) 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 2% and 4% of gas revenue (including transportation services) and 19% and 22% of electric revenue for the twelve months ended March 31, 1998 and March 31, 1997, respectively. (27) Business Segments: Industries adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" during the first quarter of 1998. SFAS No. 131 establishes standards for reporting information about operating segments in financial statements and disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Industries has four reportable operating segments: Gas, Electric, Water and Gas Marketing. The Gas segment includes regulated gas utilities which provide natural gas distribution services to the public. The Electric segment is comprised principally of Northern Indiana, a regulated electric utility, which generates, transmits and distributes electricity. In addition, the Electric segment includes a wholesale power marketing operation which markets wholesale power to other utilities and electric power marketers. The Water segment includes regulated water utilities which provide distribution of water supply to the public. The Gas Marketing segment provides natural gas marketing and sales to wholesale and industrial customers. The Other Products and Services category includes a variety of energy-related businesses, such as installation, repair and maintenance of underground pipelines; utility line locating and marking; transmission of natural gas through pipelines; the arrangement of energy-related projects for large energy-intensive facilities; and other energy-related products. Industries' reportable segments are operations that are managed separately and meet the quantitative thresholds required by SFAS No. 131. Revenues for each of Industries' segments are principally attributable to customers in the United States. Additional revenues, which are insignificant to Industries' consolidated revenues, are attributable to customers in Canada and the United Kingdom. The following tables provides information about Industries' business segments. Industries uses income before interest and other charges and income taxes as its primary measurement for each of the reported segments. Adjustments have been made to the segment information to arrive at information included in the results of operations and financial position of Industries. Such adjustments include unallocated corporate revenues and expenses and the elimination of intercompany transactions, a majority of which are intercompany receivables. The accounting policies of the operating segments are the same as those described in Note 2, "Summary of Significant Accounting Policies."
(In thousands) Other For the three months ended March 31, 1998 Gas Products Gas Electric Water Marketing & Services Adjustments Total Operating revenues $242,735 $323,834 $ 17,709 $174,866 $ 53,875 $ (33,675) $ 779,344 Other Income (Deductions) $ 606 $ 89 $ (111) $ 517 $ 7,250 $ 97 $ 8,448 Depreciation and amortization $ 18,714 $ 38,768 $ 2,793 $ 66 $ 2,880 $ 53 $ 63,274 Income before Interest and Other Charges and Income Taxes $ 48,728 $ 73,760 $ 3,674 $ 133 $ 2,537 $ (3,270) $ 125,562 Assets $903,257 $2,515,774 $568,453 $88,156 $1,435,329 $(610,477) $4,900,492 (In thousands) Other For the three months ended March 31, 1997 Gas Products Gas Electric Water Marketing & Services Adjustments Total Operating revenues $333,401 $260,657 $ 0 $ 88,786 $ 25,339 $(48,233) $ 659,950 Other Income (Deductions) $ 385 $ 204 $ 0 $ 794 $ 8,076 $ (56) $ 9,403 Depreciation and amortization $17,858 $ 38,282 $ 0 $ 14 $ 2,140 $ 50 $ 58,344 Income before Interest and Other Charges and Income Taxes $ 59,000 $ 69,896 $ 0 $ 3,372 $ 7,052 $(1,331) $ 137,989 Assets $960,226 $2,573,497 $517,592 $50,685 $1,065,418 $(256,845) $4,910,573 (In thousands) Other For the twelve months ended March 31, 1998 Gas Products Gas Electric Water Marketing &Services Adjustments Total Operating revenues $716,574 $1,249,508 $ 78,571 $567,066 $240,501 $(146,285) $2,705,935 Other Income (Deductions) $ 1,008 $ 519 $ 1,354 $ 2,989 $ 9,208 $ (265) $ 14,813 Depreciation and amortization $73,703 $ 154,331 $11,033 $ 284 $15,179 $ 204 $ 254,734 Income before Interest and Other Charges and Income Taxes $ 78,643 $ 316,105 $ 23,885 $ 4,105 $ 6,614 $(15,458) $413,894 Assets $903,257 $2,515,774 $568,453 $88,156$1,435,329 $(610,477) $4,900,492 (In thousands) Other For the twelve months ended March 31, 1997 Gas Products Gas Electric Water Marketing &Services Adjustments Total Operating revenues $805,191 $1,034,464 $ 0 $244,414 $ 94,550 $(146,142 ) $2,032,477 Other Income (Deductions) $ 756 $ 1,046 $ 0 $ 2,958 $ 15,226 $ 1,170 $ 21,156 Depreciation and amortization $69,368 $ 148,343 $ 0 $ 42 $17,986 $ 172 $235,911 Income before Interest and Other Charges and Income Taxes $85,796 $ 305,138 $ 0 $11,292 $ 3,377 $(5,615) $399,988 Assets $960,226 $2,573,497 $517,592 $50,685$1,065,418 $(256,845 ) $4,910,573
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." Industries also provides non-regulated energy/utility-related products and services including gas marketing and trading; wholesale power marketing; 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 subsidiaries: NIPSCO Development Company, Inc. (Development); NI Energy Services, Inc. (Services); Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller); and SM&P Utility Resources, Inc.(SM&P). NIPSCO Capital Markets, Inc. (Capital Markets) handles financing for Industries and its subsidiaries, other than Northern Indiana. These subsidiaries, other than the wholesale power marketing operations of Services, are referred to collectively as "Products and Services." 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 and SM&P. Industries results of operations include three and twelve months of operating results from IWCR for the three-month and twelve-month periods ended March 31, 1998. 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 March 31, 1998 increased $673.5 million as compared to the twelve months ended March 31, 1997. The increase includes $200.7 million reflecting twelve months of operating revenues from IWCR for the period. Gas revenues decreased $88.6 million, electric revenues increased $215.0 million and Products and Services revenues, excluding IWCR, increased $346.3 million, as compared to the same period in 1997. The decrease in gas revenues was largely attributable to decreased gas costs per dekatherm (dth), decreased sales to residential and commercial customers due to unusually warm weather during the first quarter of 1998, decreased sales to industrial customers and decreased gas transition costs which were partially offset by increased wholesale sales and increased deliveries of gas transported for others. The increase in electric revenues was mainly due to increased wholesale electric marketing activities and wholesale transactions, and increased sales to residential and commercial customers which were partially offset by decreased fuel costs per kilowatt hour (kwh) and decreased sales to industrial customers. Increased volumes in gas marketing to existing and new customers resulted in an increase of $344.5 million in Products and Services revenues for the twelve-month period ended March 31, 1998. For the twelve months ended March 31, 1998, volumes in gas marketing were 193.1 million dth, an increase of 125.7 million dth over the same period in 1997. Total operating revenues for the three months ended March 31, 1998 increased $119.4 million as compared to the three months ended March 31, 1997. The increase includes $41.0 million reflecting three months of operating revenues from IWCR for the current period. Gas revenues decreased $90.7 million, electric revenues increased $63.2 million and Products and Services revenues, excluding IWCR, increased $105.9 million compared to the same period in 1997. The decrease in gas revenues was mainly due to decreased gas costs per dth, decreased sales to residential and commercial customers due to unusually warm weather during the first quarter of 1998, decreased sales to industrial customers and decreased gas transition costs which were partially offset by increased sales to wholesale customers. The increase in electric revenues was mainly due to increased wholesale electric marketing activities and wholesale transactions which were partially offset by decreased sales to industrial customers and decreased fuel costs per kwh. Increased volumes in gas marketing resulted in an increase of $105.5 million in Products and Services revenues for the three-month period ended March 31, 1998. For the three months ended March 31, 1998, gas marketing volumes were 68.1 million dth, an increase of 44.4 million dth compared to the three months ended March 31, 1997. The basic steel industry accounted for 31% of natural gas delivered (including volumes transported) and 32% of electric sales for the Energy Utilities during the twelve months ended March 31, 1998. The components of the variations in gas, electric, water and Products and Services revenues are shown in the following table:
Variations from Prior Periods --------------------------------------------------------------------- March 31, 1998 Compared to March 31, 1997 --------------------------------------------------------------------- Three Twelve (In thousands) Months Months ======= ======= Gas Revenue - Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ (44,453) $ (55,177) Gas transition costs (7,483) (13,195) Changes in sales levels (39,719) (24,712) Gas transported 990 4,467 ----------- ----------- Gas Revenue Change (90,665) (88,617) ----------- ----------- Electric Revenue - Pass through of net changes in fuel costs (4,960) (3,339) Changes in sales levels (678) (4,847) Wholesale electric marketing 68,815 223,229 ----------- ------------ Electric Revenue Change 63,177 215,043 ----------- ------------ Water Revenue Change 17,709 78,452 ----------- ------------ Products and Services Revenues - Gas marketing 105,529 344,474 Pipeline construction 11,151 58,326 Locate and marking 11,286 59,640 Other 1,207 6,140 ------------ ------------ Products and Services Revenue Change 129,173 468,580 ------------ ------------ Total Revenue Change $ 119,394 $ 673,458 =========== ============
See Note 6 to Notes to Consolidated Financial Statements regarding FERC Order No. 636 transition costs. Gas Costs - The Energy Utilities' gas costs decreased $76.4 million and $80.5 million for the three-month and twelve-month periods ended March 31, 1998, respectively. Gas costs decreased for the three-month and twelve-month periods due to decreased gas purchases, decreased gas costs per dth and decreased gas transition costs. The average cost for the Energy Utilities' purchased gas for the three-month and twelve-month periods ended March 31, 1998, after adjustment for gas transition costs billed to transport customers, was $2.60 and $2.90 per dth, respectively, as compared to $3.45 and $3.19 per dth for the same periods in 1997. Fuel and Purchased Power - The cost of fuel for electric generation increased $1.3 million for the twelve-month period ended March 31, 1998, compared to the 1997 periods, mainly as a result of increased production of electricity. The cost of fuel for electric generation decreased $2.8 million for the three months ended March 31, 1998 compared to the three months ended March 31, 1997 due to decreased production of electricity. Power purchased increased $66.6 million and $205.9 million for the three-month and twelve-month periods ended March 31, 1998, respectively, reflecting increased purchases of wholesale power for marketing activities which were partially offset by decreased bulk power purchases at Northern Indiana. For the twelve months ended March 31, 1998, electric power marketing purchases were 10.7 million kwh, an increase of 9.8 million kwh compared to the same period in 1997. Electric power marketing purchases increased 2.8 million kwh for the three months ended March 31, 1998 compared to March 31, 1997. Cost of Products and Services - The cost of sales for Products and Services increased $433.9 million for the twelve months ended March 31, 1998. The increase includes $85.0 million reflecting twelve months of cost of sales from IWCR for the period. Increased volumes in gas marketing activities increased cost of sales $321.2 million for the twelve-months ended March 31, 1998, compared to March 31, 1997. The cost of sales for Products and Services increased $125.6 million for the three-months ended March 31, 1998, compared to the 1997 period. The increase includes $17.9 million related to the cost of sales for IWCR in the current period. Increased volumes in gas marketing activities increased cost of sales $109.4 million for the three months ended March 31, 1998, compared to March 31, 1997. Operating Margins - Operating margins for the twelve months ended March 31, 1998 increased $112.8 million from the same period a year ago. The increase in operating margins includes $115.7 million related to twelve months of IWCR operations in the period. The operating margin from gas deliveries decreased $8.1 million due to decreased sales to residential and commercial customers reflecting unusually warm weather in the first quarter of 1998 and decreased industrial sales which were partially offset by increased sales to wholesale customers. Electric operating margin increased $7.8 million due to increased sales to commercial customers and increased wholesale transactions. The operating margin for Products and Services, excluding IWCR, decreased $2.9 million, primarily from a decrease in gas marketing margin offset by an increase in operating margin from the LEC and Portside operations. Operating margins for the three months ended March 31, 1998 increased $6.5 million from the same period a year ago. The increase in operating margins includes $23.1 million related to three months of IWCR operations in the current period. Gas operating margin decreased $14.3 million due to decreased sales to residential and commercial customers reflecting unusually mild weather during the period and decreased industrial sales, partially offset by increased wholesale sales and gas transported for others. Electric operating margin increased $2.5 million mainly as a result of increased wholesale transactions. The operating margin for Products and Services, excluding IWCR, decreased $1.8 million, primarily reflecting a decrease in gas marketing margin. Operating Expenses and Taxes - Operation expenses increased $60.6 million for the twelve-month period ended March 31, 1998. Operation expense includes an increase of $62.4 million reflecting operations of IWCR in the current twelve-month period. New operations at LEC and Portside increased operation expenses approximately $10.8 million. This increase was offset by decreased environmental cleanup costs of $4.2 million, decreased employee costs of $3.8 million and decreased pollution control facility costs of $2.2 million at Northern Indiana. Operation expenses, excluding IWCR, for the three-month period ended March 31, 1998 decreased $11.6 million. Employee costs at Northern Indiana decreased $4.3 million for the three months ended March 31, 1998 compared to the same period in 1997. Maintenance expenses increased $3.1 million for the twelve-month period ended March 31, 1998, mainly reflecting maintenance expenses of the Water Utilities. Maintenance expenses decreased $0.5 million for the three-month period ended March 31, 1998. Depreciation and amortization expense increased $4.9 million and $18.8 million for the three-month and twelve-month periods ended March 31, 1998, respectively, primarily reflecting depreciation and amortization at IWCR. Other Income (Deductions) - Other Income (Deductions) decreased $6.3 million due to a loss on disposition of property during the twelve months ended March 31, 1998 and a gain on the disposition of property during the same period a year ago. Interest and Other Charges - Interest and other charges increased for the three-month and twelve-month periods ended March 31, 1998 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 interest expense at IWCR. See Notes to Consolidated Financial Statements for a discussion of accounting policies and transactions impacting this analysis. Net Income - Industries' net income for the twelve-month period ended March 31, 1998 was $180.7 million compared to $180.1 million for the twelve-month period ended March 31, 1997. Net income for the three months ended March 31, 1998 was $60.7 million compared to $70.8 million for the three months ended March 31, 1997. 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 $20 million to cover probable corrective actions as of March 31, 1998; 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 results of operations or financial position of Industries. 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. Refer to Note 7 "Environmental Matters" for a more detailed discussion of the status of certain environmental issues. 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. Cash flow from operations has provided sufficient liquidity to meet current operating requirements. Because of the seasonal nature of the utility business and the construction program, Northern Indiana makes use of commercial paper intermittently as short-term financing. As of March 31, 1998 and December 31, 1997, Northern Indiana had $18.5 million and $71.5 million of commercial paper outstanding, respectively. At March 31, 1998, the 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. As of March 31, 1998, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fees to a combination of fees which are mutually satisfactory to both parties. As of March 31, 1998, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1998 there were no borrowing outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1998, there were no borrowings outstanding under this facility. During recent years, Northern Indiana has been able to finance its construction program with internally generated funds and expects to be able to meet future commitments through such funds. As of March 31, 1998 and December 31, 1997, Capital Markets had $30.0 million and $17.0 million of commercial paper outstanding. At March 31, 1998, the weighted average interest rate of commercial paper outstanding was 5.76%. Capital Markets has a $150 million revolving Credit Agreement which will terminate August 19, 1999. This facility provides short-term financing flexibility to Industries and also serves as the backup instrument for a commercial paper program. As of March 31, 1998, there were no borrowings outstanding under this agreement. Capital Markets also has $130 million of money market lines of credit. As of March 31, 1998 and December 31, 1997, $28.0 million and $20.1 million, respectively, of borrowings were outstanding under these lines of credit. Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold $300 million of medium-term notes 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' obligations in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' creditors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse for the benefit of Capital Markets' creditors. The carrying value of the assets of Industries, other than the assets of Northern Indiana, reflected in the consolidated financial statements of Industries, was approximately $1.3 billion at March 31, 1998. 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 10.6 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 fair values. IWCR and its subsidiaries had lines of credit with banks aggregating $78.7 million. At March 31, 1998, $60.1 million of borrowings were outstanding under these lines of credit. Industries does not expect the effects of inflation at current levels to have a significant impact on its results of operations, ability to contain cost increases, or the Utilities' 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. Year 2000 Costs- Industries has several major projects underway to modify portions of its systems for proper functioning in the year 2000. These include a project to evaluate Industries' proprietary software and to work with each of Industries' software vendors to assure that appropriate steps are being take to mitigate the problem in each vendor's software or, in some cases, to replace software with year 2000 compliant software; a project to identify and mitigate any problems wherever they exist in Industries' systems ranging from equipment used in Northern Indiana's generating stations to Industries' phone system that have date information within them; and an initiative to assure that each entity that electronically receives information from Industries or sends information to Industries is aware of the steps that Industries is taking and is taking appropriate steps of its own to address the problem. Consistent with its plan, Industries expects to be year 2000 compliant with some systems as early as the third quarter 1998 and other systems no later than the third quarter of 1999. Industries estimates that costs to become year 2000 compliant will be approximately $17-$26 million, including acquisition costs of new systems which will be capitalized consistent with Industries' accounting policies. Costs related to maintenance or modification of Industries' systems have been and will be expensed as incurred. Industries does not anticipate the related costs will have a material impact on its results of operations, nor does Industries currently anticipate any disruption of its ability to deliver service as a result of the year 2000 issue. 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-A 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. Northern Indiana filed its tariff as did virtually all other transmission owners subject to FERC jurisdiction. Order No. 888-A 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. On November 25, 1997, FERC issued Order No. 888-B on rehearing, affirming in all important respects its earlier Order No. 888-A. 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 and January 1998, legislation was introduced in the Indiana General Assembly addressing electric utility competition and deregulation. Neither proposed legislation was adopted. Northern Indiana has begun discussions with other utilities and 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 sales 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-1980s, 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. On October 8, 1997, the Commission approved Northern Indiana's Alternative Regulatory Plan (ARP) which implements new rates and services that 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 gas cost incentive mechanism and a price protection program. The gas cost incentive mechanism, which gives Northern Indiana the opportunity to share any gas cost savings (or losses) with its customers based on a comparison of Northern Indiana's actual gas supply portfolio costs to a market based benchmark price, went into effect on Northern Indiana's system November 1, 1997. The first pilot program was launched in January 1998 and the first gas volumes flowed under this program in April 1998. The Commission order allows the natural gas marketing affiliate of Northern Indiana to participate as a supplier of choice to customers on the Northern Indiana system. 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. Forward Looking Statements - This report contains forward looking statements within the meaning of the securities laws. Forward looking statements include terms such as "may", "will", "expect", "believe", "plan" and other similar terms. Industries cautions that, while it believes such statements to be based on reasonable assumptions and makes such statements in good faith, there can be no assurance that the actual results will not differ materially from such assumptions or that the expectations set forth in the forward looking statements derived from such assumptions will be realized. Investors should be aware of important factors that could have a material impact on future results. These factors include, but are not limited to, weather, the federal and state regulatory environment, the economic climate, regional, commercial, industrial and residential growth in the service territories served by Industries' subsidiaries, customers' usage patterns and preferences, the speed and degree to which competition enters the utility industries, the timing and extent of changes in commodity prices, changing conditions in the capital and equity markets and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of Industries. Item 3. Quantitative and Qualitative Disclosures About Market Risk The primary market risks to which Industries is exposed and in connection with which Industries uses market risk sensitive instruments are commodity price risk and interest rate risk. Industries engages in price risk management activities related to electricity and natural gas. Price risk arises from fluctuations in energy commodity prices due to changes in supply and demand. Industries actively monitors and limits its exposure to commodity price risk. Industries' price risk management policy allows the use of derivative financial and commodity instruments to reduce (hedge) exposure to price risk of its supply and related purchase and sales commitments of energy, as well as related anticipated transactions. As part of this commodity price risk, Industries is exposed to geographic price differentials due primarily to transportation costs and local supply-demand factors. Industries uses basis swaps to hedge a portion of this exposure. For economic reasons or otherwise, Industries does not hedge all of its basis exposure. Industries enters into certain sales contracts with customers based upon a fixed sales price and varying volumes which are ultimately dependent upon the customer's supply requirements. Industries utilizes financial instruments to reduce the commodity price risk based on modeling techniques to anticipate these future supply requirements. Industries continues to be exposed to price risk for the difference between the ultimate supply requirements and those modeled. Although the Energy Utilities are subject to commodity price risk as part of their traditional operations, the current regulatory framework within which the Energy Utilities operate allows for full collection of fuel and gas costs in rate-making. Consequently, there is limited commodity price risk after consideration of the related rate-making. However, as the utility industry deregulates, Energy Utilities will be providing services without the benefit of the traditional rate-making allowances and will therefore be more exposed to commodity price risk. Because the commodities covered by Industries' derivative financial and commodity instruments are substantially the same commodities that Industries buys and sells in the physical market, no special correlation studies are deemed necessary other than monitoring the degree of convergence between the derivative and cash markets. Industries' daily net commodity position consists of natural gas inventories, commodity purchase and sales contracts and derivative financial and commodity instruments. The fair value of such positions is a summation of the fair values calculated for each commodity by valuing each net position at quotes from exchanges and over-the-counter counterparties and includes location differentials. Based on Industries' net commodity position at fair value at March 31, 1998, a 10% adverse movement in electric and natural gas market prices would have reduced net income by approximately $0.8 million. However, any such movements in prices is not indicative of actual results and is subject to change. Refer to Summary of Significant Accounting Policies-Hedging Activities for further discussion of Industries' hedging policies. Industries utilizes long-term debt as a primary source of capital in its business. A significant portion of the total debt portfolio includes a medium-term note program, the interest component of which resets on a periodic basis to reflect current market conditions. The Energy Utilities utilize longer term fixed price debt instruments which have been and will be refinanced at lower interest rates if Industries deems it to be economical. Refer to Notes to Consolidated Financial Statements for detailed information related to Industries' long-term debt outstanding and the fair value of financial instruments for the current market valuation of long-term debt. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Industries and its subsidiaries are parties to various pending proceedings, including suits and claims against them for personal injury, death and property damage. Such proceedings and suits, and the amounts involved are routine litigation and proceedings for the kinds of businesses conducted by Industries and its subsidiaries, except as described under Note 5 (NESI Energy Marketing Canada Ltd. Litigation) and Note 7 (Environmental Matters) in the Notes to Consolidated Financial Statements under Part I, Item 1 of this report on Form 10-Q, which notes are incorporated by reference. No other material legal proceedings against Industries or its subsidiaries are pending or, to the knowledge of Industries, contemplated by governmental authorities or other parties. Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. On April 8, 1998, at the Annual Meeting of Shareholders of the Registrant, shareholders of the Registrant elected Steven C. Beering, James T. Morris, Denis E. Ribordy and Carolyn Y. Woo as directors to serve until the 2001 Annual Meeting of Shareholders. Carolyn Y. Woo was elected to replace Ernestine M. Raclin, who retired at the expiration of her term. Directors whose term of office as director continue after the 1998 Annual Meeting of Shareholders are Ian M. Rolland, Edmund A. Schroer and John W. Thompson, whose terms expire at the 1999 Annual Meeting of Shareholders, and Arthur J. Decio, Gary L. Neale and Robert J. Welsh, whose terms expire at the 2000 Annual Meeting of Shareholders. There were no abstentions or broker non-votes for any of the nominees for directors. The number of vostes cast for, or withheld, for each nominee for director was as follows:
Votes Votes Received Withheld Steven C. Beering 101,325,618 1,223,579 James T. Morris 101,410,235 1,138,962 Denis E. Ribordy 101,368,173 1,181,024 Carolyn Y. Woo 101,230,143 1,319,053
Additionally at the Annual Meeting of Shareholders, shareholders of the Registrant approved an amendment to the Articles of Incorporation to increase the number of authorized Common Shares from 200,000,000 to 400,000,000. The number of votes cast for, or withheld, was as follows:
Votes Votes Votes For Against Abstain 98,201,052 3,487,304 860,840
Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 3(i) - Restated Articles of Incorporation Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Industries hereby agrees to furnish the Commission, upon request, any instrument defining the rights of holders of long-term debt of Industries not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of Industries and its subsidiaries on a consolidated basis. (b) Reports on Form 8-K. A report on Form 8-K was filed under the date of February 13, 1998. All events were reported under Item 5, Other Events. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIPSCO Industries, Inc. (Registrant) /s/ STEPHEN P. ADIK -------------------------------------------------- Stephen P. Adik Executive Vice President, Chief Financial Officer, Treasurer and Chief Accounting Officer Date: May 13, 1998 EX-3 2 EXHIBIT A AMENDED AND RESTATED ARTICLES OF INCORPORATION OF NIPSCO INDUSTRIES, INC. ARTICLE I Name The name of the Corporation is NIPSCO Industries, Inc. ARTICLE II Period of Duration The period during which the Corporation shall continue is perpetual. ARTICLE III Purpose and Powers Purpose. The purpose for which the Corporation is formed is the transaction of any or all lawful business for which corporations may be incorporated under the Act. Powers. The Corporation shall have the capacity to act possessed by natural persons and, subject to any limitations or restrictions imposed by the Act, other law or the Articles of Incorporation, shall have the power to do all acts and things necessary, convenient or expedient to carry out the purposes for which it is formed. ARTICLE IV Registered Office and Agent The street address of the Corporation's registered office in Indiana and the name of its registered agent at that office is Nina M. Rausch, 5265 Hohman Avenue, Hammond, Indiana 46320. ARTICLE V Authorized Shares A. Authorized Capital Shares. The total number of shares which the Corporation shall have the authority to issue shall be 420,000,000 shares, of which 400,000,000 shares shall be Common Shares without par value and 20,000,000 shares shall be Preferred Shares without par value. B. Preferred Shares. Preferred Shares may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated. All shares of any one series of the Preferred Shares shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences and relative, participating, optional and other rights of each such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any other series at any time outstanding. Subject to the provisions of Section C of this ARTICLE V, the Board of Directors is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of each particular series of Preferred Shares, the designation, powers, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions thereof, if any, of such series, including, but without limiting the generality of the foregoing, the following: (a) the distinctive designation of, and the number of Preferred Shares which shall constitute the series, which number may be increased (except as otherwise fixed by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (b) the rate and times at which, and the terms and conditions upon which, dividends, if any, on shares of the series shall be paid, the extent of preferences or relation, if any, of such dividends to the dividends payable on any other class or classes of shares of the Corporation, or on any series of Preferred Shares or of any other class or classes of shares of the Corporation and whether such dividends shall be cumulative or noncumulative; (c) the right, if any, of the holders of shares of the series to convert the same into, or exchange the same for, shares of any other class or classes of shares of the Corporation, or any series of Preferred Shares, and the terms and conditions of such conversion or exchange; (d) whether shares of the series shall be subject to a redemption price or prices including, without limitation, a redemption price or prices payable in Common Shares and the time or times at which, and the terms and conditions upon which shares of the series may be redeemed; (e) the rights, if any, of the holders of shares of the series upon voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding up of the Corporation; (f) the terms of the sinking fund or redemption or purchase account, if any, to be provided for shares of the series; and (g) the voting powers, if any, of the holders of shares of the series which may, without limiting the generality of the foregoing, include (i) the right to more or less than one vote per share on any or all matters voted upon by the shareholders and (ii) the right to vote, as a series by itself or together with other series of Preferred Shares or together with all series of Preferred Shares as a class, upon such matters, under such circumstances and upon such conditions as the Board of Directors may fix, including, without limitation, the right, voting as a series by itself or together with other series of Preferred Shares or together with all series of Preferred Shares as a class, to elect one or more directors of this Corporation in the event there shall have been a default in the payment of dividends on any one or more series of Preferred Shares or under such other circumstances and upon such conditions as the Board of Directors may determine. No holder of any shares of any series of Preferred Shares shall be entitled to vote for the election of directors or in respect of any other matter except as may be required by the Indiana Business Corporation Law, as amended, or as is permitted by the resolution or resolutions adopted by the Board of Directors authorizing the issue of such series of Preferred Shares. C. Common Shares. 1. After the requirements with respect to the preferential dividends on Preferred Shares (fixed in accordance with the provisions of Section B of this ARTICLE V), if any, shall have been met and after this Corporation shall have complied with all the requirements, if any, with respect to the setting aside of sums as sinking funds or redemption or purchase accounts (fixed in accordance with the provisions of Section B of this ARTICLE V) and subject further to any other conditions which may be fixed in accordance with the provisions of Section B of this ARTICLE V, then, but not otherwise, the holders of Common Shares shall be entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors. 2. After distribution in full of the preferential amount (fixed in accordance with the provisions of Section B of this ARTICLE V), if any, to be distributed to the holders of Preferred Shares in the event of voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of the Corporation, the holders of the Common Shares shall be entitled to receive all the remaining assets of the Corporation, tangible and intangible, of whatever kind available for distribution to shareholders, ratably in proportion to the number of Common Shares held by each. 3. Except as may otherwise be required by law, these Articles of Incorporation or the provisions of the resolution or resolutions as may be adopted by the Board of Directors pursuant to Section B of this ARTICLE V, each holder of Common Shares shall have one vote in respect of each Common Shares held by such holder on each matter voted upon by the shareholders and any such right to vote shall not be cumulative. D. Other Provisions. 1. The relative powers, preferences, and rights of each series of Preferred Shares in relation to the powers, preferences and right of each other series of Preferred Shares shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to authority granted in Section B of this ARTICLE V, and the consent by class or series vote or otherwise, of the holders of the Preferred Shares or such of the series of the Preferred Shares as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Shares whether the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, powers, preferences and rights of such outstanding series, or any of them, provided, however, that the Board of Directors may provide in such resolution or resolutions adopted with respect to any series of Preferred Shares that the consent of the holders of a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Shares. 2. Subject to the provisions of Paragraph 1 of this Section D, shares of any series of Preferred Shares may be issued from time to time as the Board of Directors shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 3. Common Shares may be issued from time to time as the Board of Directors shall determine and on such terms and for such consideration as shall be fixed by the Board of Directors. 4. No holder of any of the shares of any class or series of shares or securities convertible into such shares of any class or series of shares, or of options, warrants or other rights to purchase or acquire shares of any class or series of shares or of other securities of the Corporation shall have any preemptive right to purchase, acquire or subscribe for any unissued shares of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital shares of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for shares or any class or series, or carrying any right to purchase or acquire shares of any class or series, but any such unissued shares, additional authorized issue of shares of any class or series of shares or securities convertible into or exchangeable for shares, or carrying any right to purchase or acquire shares, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its sole discretion. 5. The Corporation reserves the right to increase or decrease its authorized capital shares, or any class or series thereof, or to reclassify the same and to amend, alter, change or repeal any provision contained in the Articles of Incorporation, or in any amendment thereto, in the manner now or hereafter prescribed by law, but subject to such conditions and limitations as are hereinbefore prescribed, and all right conferred upon shareholders in the Articles of Incorporation of this Corporation, or any amendment thereto, are granted subject to this reservation. 6. Unless any statute of the State of Indiana shall expressly provide to the contrary and subject to the limitations hereinbefore set forth in this ARTICLE V, the Corporation may acquire, hold and dispose of any of its shares of any class heretofore issued and outstanding. E. Series A Junior Participating Preferred Shares. 1. This Section E of the ARTICLE V hereby creates a series of Preferred Shares and hereby states the designation and number of shares, and fixes the relative powers, preferences and rights of such series. 2. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Shares" (the "Series A Preferred Shares") and the number of shares constituting the Series A Preferred Shares shall be 2,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of Series A Preferred Shares to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Shares. 3. Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Preferred Shares (or any similar shares) ranking prior and superior to the Series A Preferred Shares with respect to dividends, the holders of Series A Preferred Shares, in preference to the holders of Common Shares and of any other junior shares, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 20th day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Shares, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $26 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by reclassification or otherwise), declared on the Common Shares since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any Series A Preferred Share or fraction of a Series A Preferred Share. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the amount to which holders of Series A Preferred Shares were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Shares as provided in paragraph 3(a) of the Section E immediately after it declares a dividend or distribution on the Common Shares (other than a dividend payable in Common Shares); provided that, in the event no dividend or distribution shall have been declared on the Common Shares during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $26 per share on the Series A Preferred Shares shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Series A Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series A Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 4. Voting Rights. The holders of Series A Preferred Shares will have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each Series A Preferred Share shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the number of votes per share to which holders of Series A Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event; (b) Except as otherwise provided herein, in any other provisions of the Articles of Incorporation of the Corporation creating a series of Preferred Shares or any similar shares, or by law, the holders of Series A Preferred Shares and the holders of Common Shares and any other capital shares of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation; (c) If at the time of any annual meeting of shareholders for the election of directors a "default in preference dividends" on the Series A Preferred Shares shall exist, the number of directors constituting the Board of Directors of the Company shall be increased by two (2), and the holders of the Preferred Shares of all series (whether or not the holders of such series of Preferred Shares would be entitled to vote for the election of directors if such default in preference dividends did not exist) shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Shares, to elect two (2) directors of the Company to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Preferred Shares. Each director elected by the holders of Preferred Shares (a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding Preferred Shares voting together as a single class without regard to series, at a meeting of the shareholders or of the holders of Preferred Shares called for the purpose. So long as a default in any preference dividends on the Preferred Shares shall exist, (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Company and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding Preferred Shares voting together as a single class without regard to series, at the same meeting at which such removal shall voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors of the Company shall be reduced by two (2). For the purposes hereof, a "default in preference dividends" on the Preferred Shares shall be deemed to have occurred whenever the amount of accrued dividends upon any series of the Preferred Shares shall be equivalent to six (6) full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all Preferred Shares of each and every series then outstanding shall have been paid to the end of the last preceding quarterly dividend period; and (d) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extend they are entitled to vote with holders of Common Shares as set forth herein) for taking any corporate action; and 5. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Shares, as provided in paragraph 3 of this Section E, are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series A Preferred Shares outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares; (ii) declare or pay dividends, or make any other distributions, on any shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Shares, except dividends paid ratably on the Series A Preferred Shares and all such parity shares on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration any shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior shares in exchange for any shares of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Shares; or (iv) redeem or purchase or otherwise acquire for consideration any Series A Preferred Shares, or any shares ranking on a parity with the Series A Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of the Corporation unless the Corporation could, under paragraph 5(a) of this Section E, purchase or otherwise acquire such shares at such time and in such manner. 6. Reacquired Shares. Any Series A Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Preferred Shares and may be reissued as part of a new series of Preferred Shares subject to the conditions and restrictions on issuance set forth in the Articles of Incorporation of the Corporation creating a series of Preferred Shares or any similar shares or as otherwise required by law. 7. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares unless, prior thereto, the holders of Series A Preferred Shares shall have received $6,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of Series A Preferred Shares shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares, or (b) to the holders of shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Shares, except distributions made ratably on the Series A Preferred Shares and all such parity shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the aggregate amount to which holders of Series A Preferred Shares were entitled immediately prior to such event under the proviso in clause (A) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of a Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 8. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other shares or securities, cash and/or any other property, then in any such case each Series A Preferred Share shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of shares, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares) into a greater or lesser number of Common Shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series A Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 9. No Redemption. The Series A Preferred Shares shall not be redeemable. 10. Conversion. The Series A Preferred Shares shall not be convertible into Common Shares or shares of any other series of any other class of Preferred Shares. 11. Rank. The Series A Preferred Shares shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of Preferred Shares, unless the terms of any such series shall provide otherwise. 12. Amendment. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding Series A Preferred Shares, voting together as a single class. F. 8.75% Series Cumulative Preferred Shares. 1. This Section F of this ARTICLE V hereby creates a series of Preferred Shares and hereby states the designation and number of shares, and fixes the powers, preferences and relative participating, optional and other rights of such series, and the qualifications, limitation and restrictions thereof. 2. Designation And Amount. The shares of such series shall be designated as "8.75% Series Cumulative Preferred Shares (Liquidation Preference $100 Per Share)" (the "8.75% Series Preferred Shares") and the number of shares constituting the 8.75% Series Preferred Shares shall be 350,000. 3. Dividends. (a) The holders of 8.75% Series Preferred Shares, in preference to the holders of the Series A Preferred Shares, the Common Shares and of any other junior shares hereafter created, shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the purpose, cumulative quarterly dividends at the rate of 8.75% per annum, computed on the liquidation preference of the 8.75% Series Preferred Shares (using for such computation a month of 30 days and a year of 360 days), payable in arrears in cash on the 14th day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date") to the holders of record as of the 14th day of the month prior to such respective dates, commencing on January 14, 1991. Dividends shall accumulate on a daily basis. Holders of 8.75% Series Preferred Shares shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided on such shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on 8.75% Series Preferred Shares that may be in arrears. The initial dividend shall be that proportion of a quarterly dividend that the number of days (using a month of 30 days and a year of 360 days) from the date of sale and delivery of such shares (including such date) to January 14, 1991, (excluding such date) bears to ninety days. (b) Except as set forth in the next sentence, no dividends shall be declared, paid or set apart for payment on, or any other distributions made in respect of, shares of any class or series ranking, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, on a parity with the 8.75% Series Preferred Shares, unless full cumulative dividends have been or contemporaneously are declared and paid on the 8.75% Series Preferred Shares through the most recent Quarterly Dividend Payment Date. When dividends are not paid in full as aforesaid, upon the 8.75% Series Preferred Shares, or on any such parity shares through the most recent respective dividend payment date(s) thereof, all dividends declared upon the 8.75% Series Preferred Shares and such parity shares shall be declared contemporaneously and pro rate so that the amount of dividends declared per share on the 8.75% Series Preferred Shares and such parity shares shall in all cases bear to each other the same ratio that accumulated dividends per share on the 8.75% Series Preferred Shares and such other shares bear to each other (for purposes of the foregoing, the amount of dividends declared per share shall be based on the applicable dividend rate for such shares for the dividend period(s) for which dividends were not paid in full). 4. Voting Rights. The holders of 8.75% Series Preferred Shares shall have voting rights only as provided by law or as specifically set forth in this Section F. (a) Each 8.75% Series Preferred Share shall entitle the holder thereof to one vote on all matters on which the shares may be voted. (b) If at the time of any annual meeting of shareholders for the election of directors a "default in preference dividends" on the 8.75% Series Preferred Shares, or on any series of Preferred Shares, ranking on a parity with the 8.75% Series Preferred Shares as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall exist, the holders of the 8.75% Series Preferred Shares and such parity shares shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Shares and all other securities of the Corporation, to elect two (2) directors of the Corporation. Such right shall continue until there are no dividends in arrears upon the 8.75% Series Preferred Shares. Each director elected by the holders of Preferred Shares as aforesaid and any such parity shares (a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding 8.75% Series Preferred Shares and any such parity shares voting together as a single class without regard to series, at a meeting of the shareholders or of the holders of 8.75% Series Preferred Shares and any such parity shares called for the purpose. So long as a default in any preference dividends on the 8.75% Series Preferred Shares or any such parity shares shall exist, (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Company and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding 8.75% Series Preferred Shares and any such parity shares voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. For the purposes hereof, a "default in preference dividends" shall be deemed to have occurred whenever the amount of accumulated dividends upon the 8.75% Series Preferred Shares or any series of shares ranking on a parity therewith as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up shall be equivalent to four (4) full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accumulated dividends on all 8.75% Series Preferred Shares and any such parity shares then outstanding shall have been paid to the end of the last preceding quarterly dividend period or equivalent thereof. (c) The Corporation shall not, without the vote or consent of the holders of two-thirds of the outstanding 8.75% Series Preferred Shares and Preferred Shares ranking on a parity with the 8.75% Series Preferred Shares as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, amend its Articles of Incorporation to create or authorize any class or series of shares, or any class or series of securities convertible into any class or series of shares, which would rank prior to the 8.75% Series Preferred Shares and such parity shares as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up. 5. Certain Restrictions. (a) Whenever quarterly dividends payable on the 8.75% Series Preferred Shares, as provided in paragraph 3 of this Section F, are in arrears, or in the event the Corporation shall have failed to redeem the 8.75% Series Preferred Shares on January 14, 1996, in accordance with the provisions of Section 8 hereof, thereafter and until all accumulated and unpaid dividends, whether or not earned or declared, on 8.75% Series Preferred Shares outstanding shall have been paid in full, or until such redemption shall have been effected, as the case may be, the Corporation shall not: (i) declare, pay or set apart for payment dividends, or make any other distributions, on any shares ranking junior (either as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up) to the 8.75% Series Preferred Shares; (ii) redeem or purchase or otherwise acquire for consideration any shares ranking junior (either as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up) to the 8.75% Series Preferred Shares, provided that the Corporation may at any time redeem, purchase or otherwise acquire any such junior shares in exchange for any shares of the Corporation ranking junior (either as to the payment of dividends or as to the distribution of assets upon dissolution, liquidation or winding up) to the 8.75% Series Preferred Shares; or (iii) redeem or purchase or otherwise acquire for consideration any 8.75% Series Preferred Shares, or any shares ranking on a parity with the 8.75% Series Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of all such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of the Corporation unless the Corporation could, under paragraph 5(a) of this Section F, purchase or otherwise acquire such shares at such time and in such manner. 6. Reacquired Shares. Any 8.75% Series Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Preferred Shares and may be reissued as part of a new series of Preferred Shares subject to the conditions and restrictions on issuance set forth herein and in the Articles of Incorporation of the Corporation creating a series of Preferred Shares or any similar shares or as otherwise required by law. 7. Liquidation, Dissolution or Winding Up. Upon the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of 8.75% Series Preferred Shares will be entitled to receive and to be paid out of the assets of the Corporation available for distribution to its shareholders, before any payment or distribution shall be made on the Common Shares or on any other class of shares of the Corporation ranking junior to the 8.75% Series Preferred Shares as to the distribution of assets upon liquidation, dissolution or winding up, an amount equal to the liquidation preference with respect to such shares plus an amount equal to all dividends thereon (whether or not earned or declared) accumulated but unpaid to the date of final distribution. The liquidation preference for 8.75% Series Preferred Shares shall be $100.00 per share. After the payment to the holders of 8.75% Series Preferred Shares of the full preferential amounts provided for as described herein, the holders of 8.75% Series Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation. In the event the assets of the Corporation available for distribution to the holders of 8.75% Series Preferred Shares upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled, no such distribution shall be made on account of any shares of any other class or series of Preferred Shares ranking on a parity with the 8.75% Series Preferred Shares upon such liquidation, dissolution or winding up unless proportionate distributive amounts shall be paid on account of the shares of 8.75% Series Preferred Shares, ratable, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such liquidation. Subject to the rights of the holders of shares of any series or class or classes of shares ranking on a parity with the 8.75% Series Preferred Shares with respect to the distribution of assets upon liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the holders of the 8.75% Series Preferred Shares as described herein, but not prior thereto, any other series or class or classes of shares ranking junior to the 8.75% Series Preferred Shares with respect to the distribution of assets upon liquidation, dissolution or winding up shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the 8.75% Series Preferred Shares shall not be entitled to share therein. 8. Redemption. (a) The 8.75% Series Preferred Shares shall be redeemed in whole by the Corporation on January 14, 1996, at the redemption price of $100 per share plus all unpaid cumulative dividends accumulated thereon to the date of redemption, whether or not earned or declared. The Corporation shall give notice of such redemption to the holders of the 8.75% Series Preferred Shares by mail not more than sixty (60) but not less than thirty (30) days prior to the redemption date, but failure to so mail such notice or any defect therein or in the mailing thereof shall not affect the validity of such redemption. (b) The Corporation shall, after giving notice of redemption as herein provided, or after giving to the bank or trust company hereinafter referred to irrevocable authority to give due notice, deposit at any time on or prior to the redemption date specified in such notice, and after the earliest date on which notice of redemption may be given as herein provided, the amount of the aggregate redemption price plus all unpaid cumulative dividends accumulated to the redemption date (whether or not earned or declared) on the 8.75% Series Preferred Shares to be redeemed, with a bank or trust company having a capital and surplus of at least five million dollars and its principal office in the City of Chicago, Illinois, designated in such notice, in trust for the holders of such shares so to be redeemed, payable to the holders thereof on the date fixed for redemption, and then, from and after the date of such deposit, such shares, notwithstanding that any certificate for such shares so called for redemption shall not have been surrendered for cancellation, shall no longer be deemed outstanding and shall be deemed canceled and retired, and each holder thereof shall not thereafter be entitled to receive any further dividends or be entitled to exercise any rights as a holder of such shares, excepting only the right to receive the redemption price thereof plus all unpaid cumulative dividends accumulated thereon to the date of redemption (whether or not earned or declared), but without interest thereon. The moneys so deposited for the redemption of such shares shall be paid to the holders of such shares upon the surrender to the Corporation for cancellation of the certificates representing such shares, properly endorsed in blank for transfer or accompanied by proper instruments of assignment in blank (if required by the Corporation) and bearing all necessary stock transfer tax stamps thereto affixed and canceled. (c) In case the holder of any certificate for any 8.75% Series Preferred Shares which shall have been redeemed shall not, within six (6) years after such redemption date, claim the amount deposited for the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amount and shall thereupon be relieved of all responsibility in respect thereof; provided such bank or trust company, before being required to make any such payment, may (at the expense of the Corporation) cause to be published once a week on any business day of the week for two (2) consecutive weeks in a newspaper of general circulation in the city of Chicago, Illinois, customarily published on each business day, a notice that such moneys have not been so called for and that after a date named therein such moneys will be returned to the Corporation. 9. Conversion. The 8.75% Series Preferred Shares shall not be convertible into Common Shares or shares of any other class or series of the Corporation. 10. Rank. The 8.75% Series Preferred Shares shall rank, with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, on a parity with all series of Preferred Shares, unless the terms of any such series shall provide otherwise. The Series A Preferred Shares shall rank junior to the 8.75% Series Preferred Shares both as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up. 11. Amendment. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the designation, rights or preferences of the 8.75% Series Preferred Shares so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of such shares then outstanding. ARTICLE VI Directors 1. The Board of Directors of the Corporation shall consist of ten (10) directors. The directors shall be divided into three classes, and each class shall consist of one-third, or as near as may be, of the total number of directors constituting the Board of Directors. At the 1988 and at each succeeding annual meeting of shareholders, successors to the class of directors whose terms expire at that annual meeting shall be elected to hold office for a three-year term, so that the term of office of one class of directors shall expire in each year. In the event that the holders of Preferred Shares are entitled at any shareholders meeting to elect directors, then the term of office of all persons who may be directors shall terminate upon the election of their successors at such meeting of shareholders. 2. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, age and service limitations as may be set forth in the Bylaws, disqualification or removal from office. Any vacancy on the Board of Directors shall be filled by a majority of the Board of Directors then in office even if less than a quorum, or by a sole remaining director. Any director elected by the Board of Directors shall hold office until the annual meeting for the year in which the term for that Class of Directors shall expire. 3. A director may be removed by the directors or the shareholders, but only for cause. If by directors, such action may be taken only at a meeting of the Board, the meeting notice for which must state that the purpose, or one of the purposes, of the meeting is the removal of the director, and the affirmative vote of two-thirds of the remaining directors is necessary to remove the director. If removal is by vote of the shareholders, it may only be considered at an annual meeting of shareholders, and the affirmative vote of two-thirds of the shares then entitled to vote for the election of directors is necessary to remove the director. For purposes of this section, cause for removal shall be construed to exist only if a director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to appeal, or has been adjudged by a court of competent jurisdiction to be liable for willful misconduct in the performance of his or her duty to the Corporation in a matter of substantial importance to the Corporation and such adjudication is no longer subject to appeal. ARTICLE VII Business Combinations A. Market Value Required. Notwithstanding any other provision of these Articles of Incorporation, the Corporation may not engage in any Business Combination (hereinafter defined) with any Interested Shareholder (hereinafter defined) of the Corporation unless the Business Combination meets the requirement specified in either paragraphs 1, 2, 3 following: 1. A Business Combination approved by the Board of Directors of the Corporation before the Interested Shareholders Acquisition Date, or as to which the purchase of shares made by the Interested Shareholder on the interested Shareholder's Acquisition Date had been approved by the Board of Directors of the Corporation before the Interested Shareholder's Acquisition Date. 2. A Business Combination approved by the affirmative vote of the holders of a majority of the outstanding voting shares not beneficially owned by the Interested Shareholder proposing the Business Combination, or any Affiliate or Associate of the Interested Shareholder proposing the Business Combination, at a meeting called for that purpose no earlier than five (5) years after the Interested Shareholder's Acquisition Date. 3. A Business Combination that meets all of the following conditions: (a) The aggregate amount of cash and the Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of Common Shares in such Business Combination, shall be at least equal to the highest amount determined under clauses (i) and (ii) below: (i) the highest per share price paid by or behalf of the Interested Shareholder when the Interested Shareholder was the beneficial owner (directly or indirectly) of five percent (5%) of the outstanding voting shares for any Common Share in connection with the acquisition by the Interested Shareholder of beneficial ownership of Common Shares (x) within the five-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date") or (y) in the transaction in which it became an Interested Shareholder, whichever is higher, plus, in either case, interest compounded annually from the earliest date on which the highest per share acquisition price was paid through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (ii) the Market Value per Common Share on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (the "Acquisition Date"), whichever is higher, plus interest compounded annually from that date through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (b) The aggregate amount of cash and the Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Preferred Shares in such Business Combination shall be at least equal to the highest amount determined under clauses (i), (ii) and (iii) below: (i) the highest per share price paid by or on behalf of the Interested Shareholder at a time when the Interested Shareholder was the beneficial owner, directly or indirectly, of five percent (5%) or more of the outstanding voting shares of the Corporation for any share of such class or series of Preferred Shares in connection with the acquisition by the Interested Shareholder of beneficial ownership of shares of such class or series of Preferred Shares (x) within the five-year period immediately prior to the Announcement Date or (y) in the transaction in which it became an Interested Shareholder, whichever is higher, plus in either case, interest compounded annually from the earliest date on which the highest per share acquisition price was paid through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (ii) the Market Value per share of such class or series of Preferred Shares on the Announcement Date or on the Acquisition Date, whichever is higher, plus interest compounded annually from that date through the consummation date at the rate specified in the Act less the aggregate amount of any cash dividends paid, and the market value of any dividends paid other than in cash, per common share since the earliest date, up to the amount of the interest. (iii) the highest preferential amount per share to which the holders of shares of such class or series of Preferred Shares would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, plus the aggregate amount of any dividends declared or due as to which the holders are entitled before payment of dividends on some other class or series of shares, unless the aggregate amount of the dividends is included in the preferential amount. (c) The consideration to be received by holders of a particular class or series of outstanding Capital Shares shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Shareholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of Capital Shares. If the consideration previously paid by the Interested Shareholder to acquire shares of any class or series of Capital Shares varied among the recipients thereof as to form, the form of consideration to be paid for such class or series of Capital Shares in connection with the Business Combination shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of Capital Shares previously acquired by the Interested Shareholder, and the consideration shall be distributed promptly. (d) After the Interested Shareholder's Acquisition Date and before the Consummation Date with respect to the Business Combination, the Interested Shareholder has not become the Beneficial Owner of any additional voting shares of the Corporation except: (i) as part of the transaction that resulted in the Interested Shareholder becoming an Interested Shareholder; (ii) by virtue of proportionate share splits, share dividends, or other distributions of shares in respect of shares not constituting a Business Combination; (iii) through a Business Combination meeting all of the conditions of the Articles of Incorporation or (iv) through purchase by the Interested Shareholder at any price that, if the price had been paid in an otherwise permissible Business Combination the Announcement Date and Consummation Date of which were the date of the purchase, would have satisfied the requirements of these Articles of Incorporation. B. Exceptions. The provisions of the preceding Section A shall not be applicable to any particular Business Combination if, in addition to any affirmative vote required by law or these Articles of Incorporation, such Business Combination shall be approved by the affirmative vote of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all the outstanding Voting Shares (hereinafter defined), voting together as a single class. Such Affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or in any agreement with any national securities exchange or otherwise. C. Definitions. The following definitions shall apply with respect to this ARTICLE VII: 1. The term "Business Combination" shall mean: (a) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Shareholder or (ii) any other corporation (whether or not itself an Interested Shareholder) which is or after such merger or consolidation would be an Affiliate or Associate of an Interested Shareholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) with or for the benefit of any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder involving any assets, securities or commitments of the Corporation or any Subsidiary (i) having an aggregate Market Value equal to ten percent (10%) or more of the aggregate Market Value of (x) all the assets, determined on a consolidated basis, of the Corporation, or (y) all the outstanding shares of the Corporation or (ii) representing ten percent (10%) or more of the earning power or net income, determined on a consolidated basis, of the Corporation; or c) the issuance or transfer by the Corporation or any Subsidiary of the Corporation (in one (1) transaction or a series on transactions) of any shares of the Corporation or any Subsidiary of the Corporation that have an aggregate market value equal to five percent (5%) or more of the aggregate market value of all the outstanding shares of the Corporation to the Interested Shareholder or an affiliate or the associate of the Interested Shareholder except under the exercise of warrants or rights to purchase shares offered, or a dividend or distribution paid or made pro rata to all shareholders of the Corporation; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation which is voted for or consented to by any Interested Shareholder or any Affiliate or Associate thereof; or (e) any reclassification of securities (including any share split, share dividend, or other distribution of shares in respect of shares, or reverse share split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation, with any of its Subsidiaries, or any other transaction (whether or not with or otherwise involving an Interested Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of outstanding shares of any class or series of voting shares or any securities convertible into voting shares of the Corporation or any Subsidiary, that is beneficially owned by an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; or (f) any receipt by the Interested Shareholder or any Affiliate or Associate of the Interested Shareholder of the benefit (directly or indirectly, except proportionately as a shareholder of the Corporation), of any loans, advances, guarantees, pledges, or other financial assistance or any tax credits or other tax advantages provided by or through the Corporation. 2. The term "Capital Shares" shall mean all capital shares of the Corporation authorized to be issued from time to time under ARTICLE V of these Articles of Incorporation, and the term "Voting Shares" shall mean all Capital Shares that by its terms may be voted on all matters submitted to shareholders of the Corporation generally. 3. The term "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who (i) is the beneficial owner directly or indirectly of Voting Shares representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding Voting Shares or (ii) is an Affiliate or Associate of the Corporation and at any time within the five-year period immediately prior to the Announcement Date was the beneficial owner of Voting Shares representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding Voting Shares. For the purpose of determining whether a person is an Interested Shareholder, the number of Voting Shares of the Corporation considered to be outstanding includes shares considered to be beneficially owned by the person, but does not include any other unissued shares of Voting Shares of the Corporation that may be issuable under any agreement, arrangement, or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 4. A person shall be a "Beneficial Owner" of any Capital Shares (i) which such person individually or any of its Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such person individually or any of its Affiliates or Associates has, directly or indirectly, (x) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (y) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of Capital Shares. 5. The term "Associate" when used to indicate a relationship with any person, means: (1) Any corporation or organization of which the person is an officer or partner or is, directly or indirectly, the Beneficial Owner of ten percent (10%) or more of any class of voting shares; (2) Any trust or other estate in which the person has a substantial beneficial interest or as to which the person serves as trustee or in a similar fiduciary capacity; and (3) Any relative or spouse of the person, or any relative of the spouse, who has the same home as the person. 6. The term "Affiliate" means a person that directly or indirectly through one (1) or more intermediaries, controls, is controlled by, or is under common control with a specified person. 7. The term "Subsidiary" of the Corporation means any other corporation of which voting shares constituting a majority of the outstanding voting shares of the other corporation entitled to be cast are owned (directly or indirectly) by the Corporation. 8. The term "Market Value" means (i) in the case of shares, the highest closing sale price during the 30-day period immediately preceding the date in question of such a share on the Composite Tape for New York Stock Exchange listed shares, or, if such shares are not quoted on the Composite Tape, on the New York Stock Exchange, or, if such shares are not listed on such Exchange, on the principal United States securities exchange on which such shares are listed, or, if such shares are not listed on any such exchange, the highest closing bid quotation with respect to such a share during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the Market Value on the date in question of such a share as determined by a majority of the directors in good faith; and (ii) in the case of property other than cash or shares, the Market Value of such property on the date in question as determined in good faith by a majority of the directors. 9. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraphs 3(a) and 3(b) of Section A of this ARTICLE VII shall include the Common Shares and/or the shares of any other class or series of Capital Shares retained by the holders of such shares. ARTICLE VIII Indemnification Each director and each officer of the Corporation shall be indemnified by the Corporation to the fullest extent permitted by law against expenses (including attorneys' fees) judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection within the defense of any proceeding in which he or she was or is a party or is threatened to be made a party by reason of being or having been a director or an officer of the Corporation. Such right of indemnification is not exclusive of any other rights to which such director or officer may be entitled under any now or hereafter existing statute, any other provision of these Articles of Incorporation, the by-laws, agreement, vote of shareholders or otherwise. If the Indiana Business Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Indiana Business Corporation Law, as so amended. Any repeal or modification of this ARTICLE VIII by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE IX Amendments The Corporation reserves the right to amend, alter, change or repeal any provision in these Articles of Incorporation as permitted by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provision of Articles VI, VII, VIII and this Article IX may not be amended, altered, changed or repealed unless such amendment, alteration, change or repeal is approved by the affirmative vote of the holders of not less than seventy-five percent (75%) of the outstanding shares entitled to vote thereon. EX-23 3 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; Form S-3 Registration Statement No. 333-26847; Form S-3 Registration Statement No. 333-39911 and Form S-4A Registration Statement No. 333-50537. /s/ Arthur Andersen LLP Chicago, Illinois May 13, 1998 EX-27 4 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT This schedule contains summary financial information extracted from the financial statements of NIPSCO Industries, Inc. for three months ended March 31, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 PER-BOOK 3,646,973 244,213 587,844 145,952 275,510 4,900,492 486,921 87,719 701,890 1,276,530 58,841 85,619 485,100 94,302 48,500 55,729 1,828 0 0 1,608,382 4,900,492 779,344 32,343 662,230 662,230 117,114 8,448 125,562 32,497 60,722 0 60,722 29,929 0 189,563 0.49 0.48
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