-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, R3J9OCA7k+udjdiz1OUwsrtDu9oR570I6jbsC1iUeoNbugEDEPEdO8uTMUDZljEa iC6MVtP4j6dF9cHpn53Kkw== 0000823392-95-000005.txt : 19950516 0000823392-95-000005.hdr.sgml : 19950516 ACCESSION NUMBER: 0000823392-95-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIPSCO INDUSTRIES INC CENTRAL INDEX KEY: 0000823392 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 351719974 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09779 FILM NUMBER: 95538473 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, 1995 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ________________ Commission file number 1-9779 NIPSCO Industries, Inc. (Exact name of registrant as specified in its charter) Indiana 35-1719974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5265 Hohman Avenue, Hammond, Indiana 46320-1775 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 853-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes _________ No __________ As of April 30, 1995, 63,615,273 common shares were outstanding. NIPSCO INDUSTRIES, INC. PART I. FINANCIAL INFORMATION Report Of Independent Public Accountants To The Board of Directors of NIPSCO Industries, Inc.: We have audited the accompanying consolidated balance sheet of NIPSCO Industries, Inc. (an Indiana corporation) and subsidiaries as of March 31, 1995, and December 31, 1994, and the related consolidated statements of income, common shareholders' equity and cash flows for the three and twelve month periods ended March 31, 1995, and 1994. 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, 1995, and December 31, 1994, and the results of their operations and their cash flows for the three and twelve month periods ended March 31, 1995, and 1994, in conformity with generally accepted accounting principles. As discussed in Notes 6 and 8 to the consolidated financial statements, effective January 1, 1993, NIPSCO Industries, Inc. and subsidiaries changed their methods of accounting for income taxes and postretirement benefits other than pensions. Arthur Andersen LLP Chicago, Illinois April 26, 1995
Consolidated Balance Sheet March 31, December 31, ASSETS 1995 1994 =========== =========== (Dollars in thousands) Utility Plant, at original cost (including construction work in progress of $228,889 and $221,830, respectively) (Note 2): Electric $ 3,886,700 $ 3,858,118 Gas 1,269,669 1,258,801 Common 322,505 316,120 ___________ ___________ 5,478,874 5,433,039 Less - Accumulated provision for depreciation and amortization 2,248,239 2,202,082 ___________ ___________ Total utility plant 3,230,635 3,230,957 ___________ ___________ Other Property and Investments: Other property, at cost, less accumulated provision for depreciation 127,058 126,632 Investments, at equity 27,337 27,023 Investments, at cost 17,363 10,355 Other investments 13,482 13,328 Total other property and investments 185,240 177,338 ___________ ___________ Current Assets: Cash and cash equivalents 36,157 40,441 Accounts receivable, less reserve of $5,512 and $4,899, respectively (Note 2) 117,253 86,299 Fuel adjustment clause (Note 2) 367 1,614 Gas cost adjustment clause (Note 2) - 25,972 Materials and supplies, at average cost 69,747 66,397 Electric production fuel, at average cost 24,935 18,347 Natural gas in storage, at last-in, first-out cost (Note 2) 22,028 77,794 Prepayments and other 12,647 11,081 ___________ ___________ Total current assets 283,134 327,945 ___________ ___________ Other Assets: Regulatory assets (Note 2) 196,012 195,449 Deferred charges and other noncurrent assets 15,716 15,449 ___________ ___________ Total other assets 211,728 210,898 ___________ ___________ $ 3,910,737 $ 3,947,138 =========== =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Balance Sheet March 31, December 31, CAPITALIZATION AND LIABILITIES 1995 1994 =========== =========== (Dollars in thousands) Capitalization: Common shareholders' equity (See accompanying statement) $ 1,134,786 $ 1,107,848 Cumulative preferred stocks (Note 10) - Northern Indiana Public Service Company: Series without mandatory redemption provisions (Note 11) 83,694 86,389 Series with mandatory redemption provisions (Note 12) 66,057 66,057 NIPSCO Industries Inc.: Series with mandatory redemption provisions (Note 12) 35,000 35,000 Long-term debt excluding amounts due within one year (Note 16) 1,183,925 1,180,338 ___________ ___________ Total capitalization 2,503,462 2,475,632 ___________ ___________ Current Liabilities: Obligations due within one year - Northern Indiana Public Service Company: Commercial paper 69,900 156,500 First mortgage bonds - Series N, 4-5/8% - due May 15, 1995 22,436 22,436 Notes payable - Issued at interest rates between 6.15% and 6.20% with a weighted average interest rate of 6.18% and various maturities between April 3, 1995 and May 8, 1995 28,400 92,700 NIPSCO Capital Markets Inc.: Commercial paper 3,200 49,600 Notes payable - Issued at interest rates of 6.26% and 6.28% with a weighted average interest rate of 6.26% and a maturity of April 10, 1995 14,400 12,700 Elm Energy and Recycling (UK), Ltd. Term loan facility 3,376 3,262 Standby loan facility 811 - NDC Douglas Properties, Inc. Notes payable 1,149 1,013 ___________ ___________ 183,672 338,211 ___________ ___________ Other current liabilities - Accounts payable 145,961 158,712 Sinking funds due within one year (Notes 12 and 16) 1,328 2,578 Dividends declared on common and preferred stocks 27,148 27,077 Customer deposits 9,364 9,291 Taxes accrued 98,472 43,625 Gas cost adjustment clause (Note 2) 21,346 - Interest accrued 16,789 10,561 Other accruals 71,972 54,419 ___________ ___________ 392,380 306,263 ___________ ___________ Total current liabilities 576,052 644,474 ___________ ___________ Other: Deferred income taxes (Note 6) 582,347 581,866 Deferred investment tax credits, being amortized over life of related property (Note 6) 121,313 123,181 Deferred credits 47,026 44,171 Accrued liability for postretirement benefits (Note 8) 53,852 48,548 Regulatory income tax liability (Note 6) 16,843 18,599 Other noncurrent liabilities 9,842 10,667 ___________ ___________ Total other 831,223 827,032 ___________ ___________ Commitments and Contingencies (Notes 3, 4, 5, 18 and 19) $ 3,910,737 $ 3,947,138 =========== =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Income Three Months Twelve Months Ended March 31, Ended March 31, ____________________ _______________________ 1995 1994 1995 1994 ========= ========= ========== ========== (Dollars in thousands) Operating Revenues: (Notes 2, 4 and 21) Gas $ 284,910 $ 318,580 $ 648,239 $ 743,175 Electric 237,588 246,971 985,109 978,601 _________ _________ _________ _________ 522,498 565,551 1,633,348 1,721,776 _________ _________ _________ _________ Cost of Energy: (Note 2) Gas costs 172,299 198,305 377,431 450,228 Fuel for electric generation 53,785 63,144 237,775 248,058 Power purchased 10,964 9,102 34,365 24,066 _________ _________ _________ _________ 237,048 270,551 649,571 722,352 _________ _________ _________ _________ Operating Margin 285,450 295,000 983,777 999,424 _________ _________ _________ _________ Operating Expenses and Taxes (except income): Operation 70,801 76,450 282,117 289,001 Maintenance (Note 2) 21,453 20,313 81,310 82,596 Depreciation and amortization (Note 2) 49,117 47,645 195,755 188,506 Taxes (except income) 20,432 20,834 71,825 72,225 _________ _________ _________ _________ 161,803 165,242 631,007 632,328 _________ _________ _________ _________ Operating Income Before Utility Income Taxes 123,647 129,758 352,770 367,096 _________ _________ _________ _________ Utility Income Taxes (Note 6) 37,574 37,802 97,504 99,730 _________ _________ _________ _________ Operating Income 86,073 91,956 255,266 267,366 _________ _________ _________ _________ Other Income (Deductions) (Note 2) (831) (1,066) 2,451 (2,272) _________ _________ _________ _________ Income Before Interest and Other Charges 85,242 90,890 257,717 265,094 _________ _________ _________ _________ Interest and Other Charges: Interest on long-term debt 19,661 21,149 76,804 81,589 Other interest 3,820 1,966 13,504 8,963 Allowance for borrowed funds used during construction (Note 2) (1,940) (727) (5,587) (1,969) Amortization of premium, reacquisition premium, discount and expense on debt, net 1,045 892 4,050 3,596 Dividend requirements on preferred stocks of subsidiary 2,325 2,569 9,669 10,292 _________ _________ _________ _________ 24,911 25,849 98,440 102,471 _________ _________ _________ _________ Net Income 60,331 65,041 159,277 162,623 Dividend requirements on preferred shares 766 766 3,063 3,063 _________ _________ _________ _________ Balance available for common shareholders $ 59,565 $ 64,275 $ 156,214 $ 159,560 ========= ========= ========= ========= Average common shares outstanding 64,103,491 65,621,433 64,445,752 66,120,693 Earnings per average common share $ 0.92 $ 0.97 $ 2.42 $ 2.42 ========= ========= ========= ========= Dividends declared per common share $ 0.39 $ 0.36 $ 1.50 $ 1.38 ========= ========= ========= ========= The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Common Shareholders' Equity Dollars in Thousands __________________________________________________ Additional Common Paid-in Retained Three Months Ended Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, January 1, 1994 $ 1,094,672 $ 870,930 $ 27,631 $ 380,888 Net income 65,041 65,041 Dividends: Preferred shares (766) (766) Common shares (23,539) (23,539) Treasury shares acquired (14,273) Issued: Employee stock purchase plan 305 158 Long-term incentive plan 420 (39) Other 603 (23) ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ 1,122,463 $ 870,930 $ 27,750 $ 421,601 =========== =========== =========== =========== Dollars in Thousands Shares _____________________________________ ___________ Currency Three Months Ended Treasury Unearned Translation Common (continued) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Balance, January 1, 1994 $ (180,212) $ (1,684) $ (2,881) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (14,273) Issued: Employee stock purchase plan 147 Long-term incentive plan 412 47 Other 123 503 ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ (193,926) $ (1,514) $ (2,378) 73,892,109 =========== =========== =========== =========== Shares ___________ Three Months Ended Treasury (continued) Shares ======================== =========== Balance, January 1, 1994 (8,063,271) Net income Dividends: Preferred shares Common shares Treasury shares acquired (466,344) Issued: Employee stock purchase plan 9,286 Long-term incentive plan 14,289 Other ___________ Balance, March 31, 1994 (8,506,040) =========== Dollars in Thousands __________________________________________________ Additional Three Months Ended Common Paid-in Retained (continued) Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, January 1, 1995 $ 1,107,848 $ 870,930 $ 29,657 $ 446,928 Net income 60,331 60,331 Dividends: Preferred shares (766) (766) Common shares (25,146) (25,146) Treasury shares acquired (10,448) Issued: Employee stock purchase plan 305 142 Long-term incentive plan 1,262 1,631 Other 1,400 376 (171) ___________ ___________ ___________ ___________ Balance, March 31, 1995 $ 1,134,786 $ 870,930 $ 31,806 $ 481,176 =========== =========== =========== =========== Dollars in Thousands Shares _____________________________________ ___________ Currency Three Months Ended Treasury Unearned Translation Common (continued) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Balance, January 1, 1995 $ (237,193) $ (970) $ (1,504) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (10,448) Issued: Employee stock purchase plan 163 Long-term incentive plan 7,256 (7,625) Other 573 622 ___________ ___________ ___________ ___________ Balance, March 31, 1995 $ (240,222) $ (8,022) $ (882) 73,892,109 =========== =========== =========== =========== Shares ___________ Three Months Ended Treasury (concluded) Shares ======================== =========== Balance, January 1, 1995 (9,986,720) Net income Dividends: Preferred shares Common shares Treasury shares acquired (333,999) Issued: Employee stock purchase plan 10,231 Long-term incentive plan 290,250 Other ___________ Balance, March 31, 1995 (10,020,238) =========== Dollars in Thousands __________________________________________________ Additional Common Paid-in Retained Twelve Months Ended Total Shares Capital Earnings ======================== =========== =========== =========== =========== Balance, April 1, 1993 $ 1,098,821 $ 870,930 $ 27,432 $ 352,844 Net income 162,623 162,623 Dividends: Preferred shares (3,063) (3,063) Common shares (90,945) (90,945) Treasury shares acquired (49,857) Issued: Employee stock purchase plan 574 296 Long-term incentive plan 3,880 24 Other 430 (2) 142 ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ 1,122,463 $ 870,930 $ 27,750 $ 421,601 ___________ ___________ ___________ ___________ Dollars in Thousands Shares _____________________________________ ___________ Currency Twelve Months Ended Treasury Unearned Translation Common (continued) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Balance, April 1, 1993 $ (148,249) $ (2,261) $ (1,875) 73,892,109 Net income Dividends: Preferred shares Common shares Treasury shares acquired (49,857) Issued: Employee stock purchase plan 278 Long-term incentive plan 3,902 (46) Other 793 (503) ___________ ___________ ___________ ___________ Balance, March 31, 1994 $ (193,926) $ (1,514) $ (2,378) 73,892,109 ___________ ___________ ___________ ___________ Shares ___________ Twelve Months Ended Treasury (continued) Shares ======================== =========== Balance, April 1, 1993 (7,100,036) Net income Dividends: Preferred shares Common shares Treasury shares acquired (1,597,183) Issued: Employee stock purchase plan 17,540 Long-term incentive plan 173,639 Other ___________ Balance, March 31, 1994 (8,506,040) ___________ Dollars in Thousands __________________________________________________ Additional Twelve Months Ended Common Paid-in Retained (concluded) Total Shares Capital Earnings ======================== =========== =========== =========== =========== Net income $ 159,277 $ $ $ 159,277 Dividends: Preferred shares (3,063) (3,063) Common shares (96,410) (96,410) Treasury shares acquired (54,892) Issued: Employee stock purchase plan 598 277 Long-term incentive plan 2,291 1,701 Other 4,522 2,078 (229) ___________ ___________ ___________ ___________ Balance, March 31, 1995 $ 1,134,786 $ 870,930 $ 31,806 $ 481,176 =========== =========== =========== =========== Dollars in Thousands Shares _____________________________________ ___________ Currency Twelve Months Ended Treasury Unearned Translation Common (concluded) Shares Compensation Adjustment Shares ======================== =========== =========== =========== =========== Net income $ $ $ Dividends: Preferred shares Common shares Treasury shares acquired (54,892) Issued: Employee stock purchase plan 321 Long-term incentive plan 8,275 (7,685) Other 1,177 1,496 ___________ ___________ ___________ ___________ Balance, March 31, 1995 $ (240,222) $ (8,022) $ (882) 73,892,109 =========== =========== =========== =========== Shares ___________ Twelve Months Ended Treasury (concluded) Shares ======================== =========== Net income Dividends: Preferred shares Common shares Treasury shares acquired (1,870,241) Issued: Employee stock purchase plan 20,193 Long-term incentive plan 335,850 Other ___________ Balance, March 31, 1995 (10,020,238) =========== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Cash Flows Three Months Twelve Months Ended March 31, Ended March 31, ________________________ ___________________________ 1995 1994 1995 1994 =========== =========== =========== =========== (Dollars in thousands) Cash flows from operating activities: Net income $ 60,331 $ 65,041 $ 159,277 $ 162,623 Adjustments to reconcile net income to net cash: Depreciation and amortization 49,117 47,645 195,755 188,506 Deferred federal and state operating income taxes, net (17,057) (15,068) (13,477) (1,582) Deferred investment tax credits, net (1,868) (962) (7,405) (6,558) Change in certain assets and liabilities* - Accounts receivable, net (30,954) (36,746) 34,622 (21,164) Electric production fuel (6,588) (1,920) (1,482) 17,251 Materials and supplies (3,350) (362) (2,265) 5,770 Natural gas in storage 55,766 44,741 (3,899) (5,809) Accounts payable (12,751) 9,534 (56,365) 40,368 Taxes accrued 70,915 44,806 7,205 1,642 Fuel adjustment clause 1,247 (2,837) 8,910 (4,316) Gas cost adjustment clause 47,318 35,659 18,514 20,139 Other accruals 17,645 10,776 6,212 (10,619) Other, net 13,047 16,669 16,632 7,056 ___________ ___________ ___________ ___________ Net cash provided by operating activities 242,818 216,976 362,234 393,307 ___________ ___________ ___________ ___________ Cash flows provided by (used in) investing activities: Utility construction expenditures (49,939) (52,822) (197,703) (199,233) Acquisition and construction expenditures related to Crossroads Pipeline Company (214) (1,067) (1,106) (25,428) Return of capital from equity investments 0 0 8,000 32,435 Other, net (8,036) 195 (27,798) (38,708) ___________ ___________ ___________ ___________ Net cash used in investing activities (58,189) (53,694) (218,607) (230,934) ___________ ___________ ___________ ___________ Cash flows provided by (used in) financing activities: Issuance of long-term debt 4,351 20,395 206,531 488,664 Issuance of short-term debt 270,861 87,401 1,204,237 1,106,507 Net change in commercial paper (93,000) (42,895) 81,100 8,000 Retirement of long-term debt (864) (5,042) (214,394) (382,070) Retirement of short-term debt (332,400) (147,401) (1,275,389) (1,215,358) Retirement of preferred stock (3,570) 0 (13,765) (2,010) Issuance of common shares 1,396 685 2,771 4,671 Acquisition of treasury shares (10,448) (14,273) (54,892) (49,857) Cash dividends paid on common shares (25,146) (23,676) (95,048) (90,225) Cash dividends paid on preferred shares (766) (766) (3,063) (3,063) Other, net 673 - 592 (1,487) ___________ ___________ ___________ ___________ Net cash used in financing activities (188,913) (125,572) (161,320) (136,228) ___________ ___________ ___________ ___________ Net increase (decrease) in cash and cash equivalents (4,284) 37,710 (17,693) 26,145 Cash and cash equivalents at beginning of period 40,441 16,140 53,850 27,705 ___________ ___________ ___________ ___________ Cash and cash equivalents at end of period $ 36,157 $ 53,850 $ 36,157 $ 53,850 =========== =========== =========== =========== *Net of effects from purchase of Northern Indiana Fuel and Light Company, Inc. The accompanying notes to consolidated financial statements are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) HOLDING COMPANY STRUCTURE: NIPSCO Industries, Inc. (Industries) is an Indiana corporation serving as the holding company for a number of subsidiaries, including three public utility operating companies: Northern Indiana Public Service Company (Northern Indiana), Kokomo Gas and Fuel Company (Kokomo Gas) and Northern Indiana Fuel and Light Company, Inc. (NIFL). Industries' major non-utility subsidiaries include NIPSCO Development Company, Inc. (Development), NIPSCO Energy Services, Inc. (Services), and NIPSCO Capital Markets, Inc. (Capital Markets). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Industries, its utility subsidiaries Northern Indiana, Kokomo Gas, NIFL and Crossroads Pipeline Company, a wholly owned subsidiary of Services (Utilities), and all non-utility subsidiaries. Investments for which Industries has at least a 20% interest and certain joint ventures are accounted for under the equity method of accounting. Investments with less than a 20% interest are accounted for under the cost method of accounting. The operating results of all non-utility subsidiaries are included in "Other Income (Deductions)" in the Consolidated Statement of Income. Interest on long-term debt, other interest, and amortization of debt discount and expense are reflected as a component of "Interest and Other Charges." All significant intercompany items have been eliminated in consolidation. Certain reclassifications were made to conform the prior years' financial statements to the current presentation. OPERATING REVENUES. Revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. DEPRECIATION AND MAINTENANCE. Northern Indiana provides depreciation on a straight-line method over the remaining service lives of the electric, gas, and common properties. The provisions as a percentage of the cost of depreciable utility plant were approximately 4.0% and 4.1%, for the three and twelve month periods ended March 31, 1995, respectively, and 4.0% for the three and twelve month periods ended March 31, 1994. The depreciation rates for electric and gas properties were 3.55% and 4.92%, respectively. Kokomo Gas provides depreciation on the original cost of utility plant in service using straight-line rates that averaged approximately 3.2% for the three and twelve month periods ended March 31, 1995, and March 31, 1994. NIFL provides depreciation on the original cost of utility plant in service using straight-line rates that averaged approximately 2.75% for the three and twelve month periods ended March 31, 1995, and March 31, 1994. The Utilities follow the practice of charging maintenance and repairs, including the cost of renewals of minor items of property, to maintenance expense accounts, except for repairs of transportation and service equipment which are charged to clearing accounts and redistributed to operating expense and other accounts. When property which represents a retirement unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. COAL RESERVES. Northern Indiana has a long-term mining contract to mine its coal reserves through the year 2001. The costs of these reserves are being recovered through the rate making process as such coal reserves are used to produce electricity. OIL AND NATURAL GAS ACCOUNTING. NIPSCO Fuel Company, Inc., a wholly-owned subsidiary of Services uses the full-cost method of accounting for its oil and natural gas production activities. Under this method all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized and amortized on the units-of-production basis. POWER PURCHASED. Power purchases and net interchange power with other electric utilities under interconnection agreements are included in Cost of Energy under the caption "Power purchased." ACCOUNTS RECEIVABLE. At March 31, 1995, Northern Indiana had sold $100 million of certain of its accounts receivable under a sales agreement which expires May 31, 1997. STATEMENT OF CASH FLOWS. For the purposes of the Consolidated Statement of Cash Flows, Industries considers temporary cash investments with an original maturity of three months or less to be cash equivalents. Cash paid during the periods reported for income taxes and interest was as follows:
Three Months Twelve Months Ended March 31, Ended March 31, ___________________ ____________________ 1995 1994 1995 1994 ======== ======= ========= ======= (Dollars in thousands) Income taxes $ 0 $ 2,435 $ 119,050 $ 92,248 Interest, net of amounts capitalized $ 15,909 $ 11,356 $ 87,291 $ 82,870
FUEL ADJUSTMENT CLAUSE. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect increases and decreases in the cost of fuel and the fuel cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the Indiana Utility Regulatory Commission (Commission) applicable to metered retail rates, the adjustment factor has been calculated based on the estimated cost of fuel and the fuel cost of purchased power in a future three-month period. If two statutory requirements relating to expense and return levels are satisfied, any under or overrecovery 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 or overrecovery as a current asset or current liability until such time as it is billed or refunded to its customers. The fuel adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. GAS COST ADJUSTMENT CLAUSE. All metered gas rates contain an adjustment factor which reflects the cost of purchased gas, contracted gas storage and storage transportation charges. The Utilities record any under or overrecovery as a current asset or current liability until such time as it is billed or refunded to their customers. The gas cost adjustment factor for Northern Indiana is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. The gas cost adjustment factors for Kokomo Gas and NIFL are subject to a semi-annual hearing by the Commission and remain in effect for a six-month period. If the statutory requirement relating to the level of return is satisfied, any under or overrecovery caused by variances between estimated and actual cost in a given three or six month period will be included in a future filing. See Note 4, Rate Matters (Take-or-Pay Pipeline Gas Costs) and (FERC Order No. 636) for a discussion of take-or-pay charges and gas transition cost charges. NATURAL GAS IN STORAGE. Based on the average cost of gas purchased in March, 1995, and December, 1994, the estimated replacement cost of gas in storage (current and non-current) at March 31, 1995, and December 31, 1994, exceeded the stated LIFO cost by approximately $38 million, respectively. REGULATORY ASSETS. The Utilities' operations are subject to the regulation of the Commission and the Federal Energy Regulatory Commission (FERC). Accordingly, the Utilities' accounting policies are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation". The regulatory assets below represent probable future revenue to the Utilities associated with certain incurred costs as these costs are recovered through the rate making process. Regulatory assets were comprised of the following items, and were reflected in the Consolidated Balance Sheet as follows:
March 31, December 31, 1995 1994 ============= ============= (Dollars in thousands) Unamortized reacquisition premium on debt (Note 16) $ 53,461 $ 54,265 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 78,144 79,198 Bailly scrubber carrying charges and deferred depreciation (See below) 8,852 7,864 Deferral of SFAS No. 106 expense not recovered (Note 8) 47,372 43,939 FERC Order No. 636 transition costs (Note 4) 43,265 56,153 ____________ _____________ 231,094 241,419 ____________ _____________ Less: Current portion of regulatory assets 35,082 45,970 ____________ _____________ $ 196,012 $ 195,449 ============= =============
In March, 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement imposes stricter criteria for retention of regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Northern Indiana anticipates adopting this standard on January 1, 1996, and does not expect that adoption will have a material impact on its financial position or results of operations based on the current regulatory structure in which Northern Indiana operates. 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 began capitalizing carrying charges and deferring depreciation and certain operating expenses relating to its scrubber service agreement upon completion of the flue gas desulfurization plant in June, 1992, at Northern Indiana's Bailly Generating Station in accordance with an order of the Commission. Capitalization of carrying charges and deferral of depreciation and certain operating expenses will continue until the earlier of December 31, 1995, or the date a final order considering the costs in rates is approved by the Commission. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds used during construction (AFUDC) is charged to construction work in progress during the period of construction and represents the net cost of borrowed funds used for construction purposes and a reasonable rate upon other (equity) funds. Under established regulatory rate practices, after the construction project is placed in service, Northern Indiana is permitted to include in the rates charged for utility services (a) a fair return on and (b) depreciation of such AFUDC included in plant in service. At January 1, 1993, a pretax rate of 3.7% for all construction was being used; effective January 1, 1994, the rate increased to 5.0% and effective January 1, 1995, the rate increased to 7.0%. FOREIGN CURRENCY TRANSLATION. Translation gains or losses are based upon the end-of-period exchange rate and are recorded as a separate component of shareholders' equity. INCOME TAXES. Deferred income taxes are recognized as costs in the rate making process by the commissions having jurisdiction over the rates charged by the Utilities. Deferred income taxes are provided as a result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. These taxes are reversed by a debit or credit to deferred income tax expense as the temporary differences reverse. Investment tax credits have been deferred and are being amortized to income over the life of the related property. (3) PENDING TAX MATTER: On August 1, 1991, the Internal Revenue Service (IRS) issued a notice of deficiency for Northern Indiana's taxes for the years 1982 through 1985 ($3,785,250 per year plus interest) relating to interest payments on $70 million of 17-1/4% Notes issued in 1981 by Northern Indiana's former foreign subsidiary, Northern Indiana Public Service Finance N.V. (Finance). The IRS believes that interest paid on the Notes should have been subject to United States tax withholding. The Notes were redeemed in 1985 and Finance was subsequently liquidated. On October 25, 1991, Northern Indiana filed its petition challenging the assessment in the United States Tax Court. The matter was tried on May 31 and June 1, 1994, and briefing was completed September 30, 1994. Northern Indiana estimates that the IRS' claim approximates $47 million of principal and interest at March 31, 1995. Northern Indiana's management and general counsel believe Northern Indiana will be successful in establishing that no tax withholding was required for the period. (4) RATE MATTERS: TAKE-OR-PAY PIPELINE GAS COSTS. The FERC has allowed certain interstate pipeline suppliers to pass on to their customers a portion of costs for contracted gas not purchased (take-or-pay), contract reformation and associated interest charges through direct billing to their customers, including the Utilities. Northern Indiana records take-or-pay costs as they are billed by the respective pipeline, and in an order dated September 28, 1988, the Commission allowed Northern Indiana to recover these additional gas costs on a volumetric basis from all customers, including transport customers. The Utilities have recovered approximately $194.1 million of take-or-pay costs and interest from their customers through March 31, 1995. As of March 31, 1995, an additional $6.1 million was scheduled to be billed to the Utilities and recovered from customers over a period of one to four years. FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636 which required interstate pipelines to restructure their services. Under the Order, existing pipeline sales services have been "unbundled" such that gas supplies are being sold separately from interstate transportation services. The Utilities' interstate pipeline suppliers have filed new tariffs with the FERC to implement Order No. 636, and the Utilities have contracted for a mix of transportation and storage services which allows them to meet the needs of their customers. Customers of the pipelines, such as the Utilities, are expected to benefit from enhanced access to competitively priced gas supplies as well as from more flexible transportation services. Pipelines are seeking to recover from their customers certain transition costs associated with restructuring under the Order No. 636 regulation. Any such recovery is subject to established review procedures at the FERC. Also, mandated changes in pipeline rate design could increase the cost of firm transportation service on interstate pipelines. All interstate pipelines are now operating under Order No. 636 regulation. The Utilities' pipeline suppliers have made certain filings with the FERC for the collection of their respective transition costs. The Utilities expect that the total transition costs from all suppliers will approximate $139 million. However, the ultimate level of costs will depend on future events, including the market price of natural gas. Approximately $67 million of such costs have been recorded, a portion of which has been paid to the pipeline suppliers, subject to refund. On November 2, 1994, the Commission issued an order which approved the recovery of these FERC-allowed transition costs on a volumetric basis from Northern Indiana's sales and transportation customers (which is consistent with what the Commission authorized for the recovery of take-or-pay pipeline gas costs). Certain industrial customers have appealed the November 2, 1994, order to the Indiana Court of Appeals. Regulatory assets, in amounts corresponding to the costs recorded, have been recorded to reflect the ultimate recovery of these costs. (5) ENVIRONMENTAL MATTERS: 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 acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants, which may require significant capital expenditures for control of these emissions. Northern Indiana is evaluating a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate making process. The Utilities have an ongoing program to remain aware of laws and regulations involved with hazardous waste. It is the Utilities' intent to continue to evaluate their facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has received notices from the Environmental Protection Agency (EPA) that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, 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 and SARA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the site and avoid the imposition of fines or added costs. While all of the remedial costs at these sites are not determinable, Northern Indiana's analysis indicates its share of such costs with other PRPs should not have a significant impact on its financial position or the results of future operations. The Utilities have instituted a program to investigate former manufactured gas plants where one of them is the current or former owner. The Utilities have identified twenty-seven of these sites and made visual inspections of these sites. The Utilities have conducted initial samplings at eight sites. Follow-up investigations have been conducted at three sites and potential remedial measures are being evaluated. The Utilities will continue their program to assess sites during 1995. During the follow-up investigation of the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted the presence of hydrocarbons in the Elkhart River. Northern Indiana reported this finding to the Indiana Department of Environmental Management (IDEM) and the EPA. Northern Indiana is evaluating this site to determine what remedial measures, if any, may be needed. Northern Indiana was notified by the IDEM of the release of a petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a former manufactured gas plant formerly owned by Northern Indiana. In cooperation with IDEM, Northern Indiana has taken steps to investigate and contain the substance. Northern Indiana has remediated part of the Fort Wayne site. The remainder of the site is being evaluated to determine what further remedial measures, if any, may be needed. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have each notified the other about five former manufactured gas plants at which both companies or their predecessors were former owners or operators. Northern Indiana is discussing various matters with Indiana Gas, including past and future steps to further investigate or remediate these sites and potential cost allocation for this activity. One of these sites was the Lafayette site which Indiana Gas had previously notified Northern Indiana was being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified 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. The possibility that exposure to electric and magnetic fields emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental and media attention. A considerable amount of scientific research has been conducted on this topic without definitive results. Research is continuing to resolve scientific uncertainties. (6) INCOME TAXES. Effective January 1, 1993, Industries adopted SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for income taxes. Under the liability method, deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. To implement SFAS No. 109, certain adjustments were made to deferred income taxes. To the extent such income taxes are recoverable or payable through future rates, regulatory assets and liabilities have been recorded in the Consolidated Balance Sheet. These adjustments include the amounts reflecting the Utilities' obligation to credit to ratepayers deferred income taxes provided at rates higher than the current federal tax rate which are currently being credited to ratepayers using the average rate assumption method required by the Tax Reform Act of 1986 and the Commission. The Consolidated Balance Sheet at March 31, 1995, and December 31, 1994, reflects a net regulatory income tax liability of $16.8 million and $18.6 million, respectively. The net regulatory income tax liability is derived from regulatory assets primarily attributable to undepreciated AFUDC-equity and the cumulative net amount of other income tax timing differences for which deferred taxes had not been provided in the past, when regulators did not recognize such taxes as costs in the rate making process, and regulatory liabilities primarily attributable to deferred taxes provided at rates in excess of the current statutory rate, as discussed above, and unamortized deferred investment tax credits. The components of the net deferred income tax liability at March 31, 1995, and December 31, 1994, are as follows:
March 31, 1995 December 31, 1994 =============== ================== (Dollars in thousands) Deferred tax liabilities - Accelerated depreciation and other property differences $ 694,473 $ 691,319 AFUDC-equity 41,890 42,447 Adjustment clauses - 10,596 Take-or-pay gas costs 1,887 2,045 Other regulatory assets 22,671 22,125 Reacquisition premium on debt 20,278 20,580 Deferred tax assets - Deferred investment tax credits (45,995) (46,703) Removal costs (108,596) (105,671) Adjustment clauses (7,056) - FERC Order No. 636 transition costs (4,703) (5,461) Other postretirement benefits (24,672) (22,712) Regulatory income tax liability (6,388) (7,054) Other, net (18,096) (20,231) ___________ ___________ 565,693 581,280 Less: Deferred income taxes related to current assets and liabilities (16,654) (586) ___________ ___________ Deferred income taxes - noncurrent $ 582,347 $ 581,866 =========== ===========
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, ____________________ ____________________ 1995 1994 1995 1994 ========= ========= ========= ========= (Dollars in thousands) Current income taxes - Federal $ 49,378 $ 46,797 $ 102,902 $ 93,925 State 7,121 7,035 15,484 13,945 _________ _________ _________ _________ 56,499 53,832 118,386 107,870 _________ _________ _________ _________ Deferred income taxes, net- Federal and State- Accelerated depreciation and other property differences 2,012 3,277 7,063 13,630 Removal costs (2,851) (2,809) (12,135) (8,644) Adjustment clauses (10,946) (13,838) (14,133) (6,555) FERC Order No. 636 transition costs (5,447) - 5,946 - Take-or-pay gas costs (160) (1,106) (1,243) (6,431) Reacquisition premium on debt (307) (258) 2,738 2,827 Other 642 (334) (1,713) 3,591 _________ _________ _________ _________ (17,057) (15,068) (13,477) (1,582) _________ _________ _________ _________ Deferred investment tax credits, net (1,868) (962) (7,405) (6,558) _________ _________ _________ _________ Total utility operating income taxes 37,574 37,802 97,504 99,730 Income tax applicable to non- operating activities and income of non-utility subsidiaries (2,056) (1,677) (16,712) (5,699) _________ _________ _________ _________ Total income taxes $ 35,518 $ 36,125 $ 80,792 $ 94,031 ========= ========= ========= =========
A reconciliation of total tax expense to an amount computed by applying the statutory federal income tax rate to pretax income is as follows:
Three Months Twelve Months Ended March 31, Ended March 31, ___________________ ____________________ 1995 1994 1995 1994 ======== ========= ========= ========= (Dollars in thousands) Net Income $ 60,331 $ 65,041 $ 159,277 $ 162,623 Add-Income taxes 35,518 36,125 80,792 94,031 Dividend requirements on preferred stocks of subsidiary 2,325 2,569 9,669 10,292 ________ _________ _________ _________ Income before preferred dividend requirements of subsidiary and income taxes $ 98,174 $ 103,735 $ 249,738 $ 266,946 ======== ========= ========= ========= Amount derived by multiplying pretax income by the statutory rate $ 34,361 $ 36,307 $ 87,409 $ 94,376 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 1,004 967 4,081 3,881 Amortization of deferred investment tax credits (1,868) (1,928) (7,406) (7,524) State income taxes, net of federal income tax benefit 3,185 3,377 8,643 8,734 Fair market value of property donated in excess of book value - - (7,753) - Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,360) (1,298) (5,869) (4,997) Other, net 196 (1,300) 1,687 (439) ________ _________ _________ _________ Total income taxes $ 35,518 $ 36,125 $ 80,792 $ 94,031 ======== ========= ========= =========
(7) Pension Plans. Industries and its subsidiaries have three noncontributory, defined benefit retirement plans covering substantially all employees. Benefits under the plans reflect the employees' compensation, years of service and age at retirement. The plans' funded status as of January 1, 1995, and 1994 are as follows:
1995 1994 ========= ========= (Dollars in thousands) Vested benefit obligation $ 449,043 $ 481,755 Nonvested benefit 97,138 86,373 _________ _________ Accumulated benefit obligation $ 546,181 $ 568,128 ========= ========= Projected benefit obligation for service rendered to date $ 613,094 $ 657,068 Plan assets at fair market value 571,624 605,379 _________ _________ Projected benefit obligation in excess of plan assets 41,470 51,689 Unrecognized transition obligation at January 1, being recognized over 17 years (48,906) (54,055) Unrecognized prior service cost (29,847) (31,464) Unrecognized gains 47,788 51,154 _________ _________ Accrued pension costs $ 10,505 $ 17,324 ========= =========
The accumulated benefit obligation is the present value of future pension benefit payments and is based on the plan benefit formula without considering expected future salary increases. The projected benefit obligation considers estimated future salary increases. Discount rates of 8.75% and 7.50% and rates of increase in compensation levels of 5.5% were used to determine the accumulated benefit obligation and projected benefit obligation at January 1, 1995, and 1994, respectively. The decrease in the accumulated benefit obligation as of January 1, 1995, is mainly caused by the increase in the discount rate to 8.75% and was partially offset by changes in other plan assumptions. The following items are the components of provisions for pensions for the three months ended March 31, 1995, and March 31, 1994:
March 31, March 31, 1995 1994 ========== ========== (Dollars in thousands) Service costs $ 3,299 $ 3,627 Interest costs 13,338 12,050 Estimated return on plan assets (12,864) (11,931) Amortization of transition obligation 1,355 1,347 Other net amortization and deferral 659 621 __________ __________ $ 5,787 $ 5,714 ========== ==========
Assumptions used in the valuation and determination of 1995 and 1994 pension expenses were as follows:
1995 1994 ======= ======= Discount rate 8.75% 7.50% Rate of increase in compensation levels 5.50% 5.50% Expected long-term rate of return on assets 9.00% 8.25%
The plans' assets are invested primarily in common stocks, bonds and notes. Industries recorded provisions for pension costs as follows:
March 31, March 31, 1995 1994 ========== ========== (Dollars in thousands) Three months ended $ 5,787 $ 5,714 Twelve months ended $ 21,307 $ 22,944
(8) POSTRETIREMENT BENEFITS. Industries provides certain health care and life insurance benefits for retired employees. Substantially all of Industries' employees may become eligible for those benefits if they reach retirement age while working for Industries. Those and similar benefits for active employees are provided through insurance plans whose premiums are based on the benefits to active employees and retirees paid during the year. Prior to January 1, 1993, the Utilities recognized the cost of providing those benefits by expensing insurance premiums, which is consistent with current rate making practices. Effective January 1, 1993, Industries adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which establishes accounting and reporting standards for such postretirement benefits. This standard requires the accrual of the expected cost of such benefits during the employee's years of service. The assumptions and calculations involved in determining the accrual closely parallel pension accounting requirements. The following table sets forth the plans' accumulated postretirement benefit obligation as of January 1, 1995, and January 1, 1994.
January 1, January 1, 1995 1994 ========== ========== (Dollars in thousands) Retirees $ 96,676 $ 89,650 Fully eligible active plan participants 20,008 30,501 Other active plan participants 105,991 150,215 _________ _________ Accumulated postretirement benefit obligation 222,675 270,366 Unrecognized transition obligation at January 1, being recognized over 20 years (208,681) (220,274) Unrecognized actuarial gain (loss) 45,496 (20,737) _________ _________ Accrued liability for postretirement benefits $ 59,490 $ 29,355 ========= =========
A discount rate of 8.75% and a pre-Medicare medical trend rate of 11% declining to a long-term rate of 7% and a discount rate of 7.5% and a pre-Medicare medical trend rate of 12% declining to a long-term rate of 7% were used to determine the accumulated postretirement benefit obligation at January 1, 1995, and 1994, respectively. The transition obligation at January 1, 1993, for accumulated postretirement benefits earned and not recognized is being amortized over twenty years as allowed by SFAS No. 106. Net periodic postretirement benefits costs for the three and twelve months ended March 31, 1995, and March 31, 1994, include the following components:
Three Months Twelve Months Ended March 31, Ended March 31, ________________ ________________ 1995 1994 1995 1994 ======= ======= ======= ======= (Dollars in thousands) Service costs $ 1,526 $ 2,045 $ 7,753 $ 7,207 Interest costs 4,745 4,962 19,728 18,654 Amortization of transition obligation over 20 years 2,899 2,882 11,610 11,596 Amortization of unrecognized actuarial (gain) (541) 0 (541) 0 _______ _______ _______ _______ $ 8,629 $ 9,889 $38,550 $37,457 ======= ======= ======= =======
The net periodic postretirement benefit costs for 1995 were determined assuming a 8.75% discount rate, a 5% rate of compensation increase and a pre-Medicare medical trend rate of 11% declining to a long-term rate of 7%. The effect of a 1% increase in the assumed health care cost trend rates for each future year would increase the accumulated postretirement benefit obligation at January 1, 1995, by approximately $32.0 million and increase the aggregate of the service and interest cost components of plan costs by approximately $1.2 million for the three months ended March 31, 1995. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates or plan changes. On December 30, 1992, the Commission authorized the accrual method of accounting for postretirement benefits for rate making purposes and authorized the deferral, as a regulatory asset to be recovered through future revenues, of the net increase in cost until such time as the new accrual cost method may be reflected in the rate making process in the next general rate proceeding. The Commission stated that a deferral period of four years or less would be rebuttably presumed to be reasonable and also indicated each utility would have to demonstrate its postretirement benefit costs were prudent and reasonably incurred at the time such costs were proposed to be recovered in the rate making process. Northern Indiana expects to request recovery of such costs within that period. In addition, while the Commission stated it was hopeful something less than full accrual of such costs in rates would be possible under generally accepted accounting principles, Northern Indiana believes the Commission recognizes the full accrual of such postretirement benefits may be required in future rate proceedings in order to avoid any negative impact on a utility's earnings. Northern Indiana is deferring as a regulatory asset the difference between the amount that would have been charged to expense under pay-as-you-go accounting and the amount accrued in accordance with the new standard. Accordingly, Northern Indiana believes SFAS No. 106 will not have a material effect on future results of operations. (9) POSTEMPLOYMENT BENEFITS. Effective January 1, 1994, Industries adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which requires Industries to accrue the estimated cost of benefits provided to former or inactive employees after employment but before retirement. Adoption of SFAS No. 112 did not have a material impact on financial position or results of operations. (10) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS: Industries - 20,000,000 shares - Preferred - without par value Effective March 2, 1990, 2,000,000 shares of Industries' Series A Junior Participating Preferred Shares were reserved for issuance pursuant to the Share Purchase Rights Plan described in Note 14, Common Shares. Northern Indiana - 2,400,000 shares - Cumulative Preferred - $100 par value 3,000,000 shares - Cumulative Preferred - no par value 2,000,000 shares - Cumulative Preference - $50 par value (none outstanding) 3,000,000 shares - Cumulative Preference - no par value (none issued) Note 11 sets forth the preferred stocks which are redeemable solely at the option of the issuer, and Note 12 sets forth the preferred stocks which are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The Preferred shareholders of Industries and Northern Indiana have no voting rights, except in the event of default on the payment of four consecutive quarterly dividends, or as required by Indiana law to authorize additional preferred shares, or by the Articles of Incorporation in the event of certain merger transactions. (11) PREFERRED STOCKS, REDEEMABLE SOLELY AT THE OPTION OF THE ISSUER, OUTSTANDING AT MARCH 31, 1995, AND DECEMBER 31, 1994 (SEE NOTE 10):
Redemption Price at March 31, December 31, March 31, 1995 1994 1995 ======== =========== ========== (Dollars in thousands) Northern Indiana Public Service Company Cumulative preferred stock - $100 par value - 4-1/4% series - 209,216 and 211,266 shares outstanding, respectively $ 20,922 $ 21,127 $ 101.20 4-1/2% series - 79,996 shares outstanding 8,000 8,000 100.00 4.22% series - 106,200 shares outstanding 10,620 10,620 101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 102.00 7.44% series - 41,900 shares outstanding 4,190 4,190 101.00 7.50% series - 34,842 shares outstanding 3,484 3,484 101.00 Premium on preferred stock 254 254 Cumulative preferred stock - no par value - Adjustable rate (6.00% at March 31, 1995), Series A (stated value $50 per share) - 524,485 and 574,285 shares outstanding, respectively 26,224 28,714 50.00 _________ _________ $ 83,694 $ 86,389 ========= =========
During the period April 1, 1993, to March 31, 1995, there were no issuances of the above preferred stocks. The foregoing preferred stocks are redeemable in whole or in part at any time upon 30 days notice at the option of Northern Indiana at the redemption prices shown, except that the redemption price for the Adjustable Rate Preferred will be reduced periodically in the future. (12) REDEEMABLE PREFERRED STOCKS OUTSTANDING AT MARCH 31, 1995, AND DECEMBER 31, 1994 (SEE NOTE 10):
March 31, December 31, 1995 1994 ========== ============= (Dollars in thousands) Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of issuer: Northern Indiana Public Service Company: Cumulative preferred stock - $100 par value - 8.85% series - 100,000 shares outstanding, excluding sinking fund payments due within one year $ 10,000 $ 10,000 7-3/4% series - 55,568 shares outstanding, excluding sinking fund payments due within one year 5,557 5,557 8.35% series - 75,000 shares outstanding, excluding sinking fund payments due within one year 7,500 7,500 Cumulative preferred stock - no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ________ ________ 66,057 66,057 ________ ________ NIPSCO Industries, Inc.: Cumulative preferred shares - without par value - 8.75% series (stated value - $100 per share), 350,000 shares outstanding 35,000 35,000 ________ ________ $101,057 $101,057 ======== ========
The redemption prices at March 31, 1995, as well as sinking fund provisions for the cumulative preferred stock subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana and Industries are as follows:
Series Redemption Price Per Share Annual Sinking Fund Provisions ====== ========================== ============================== Northern Indiana Public Service Company: Cumulative preferred stock - $100 par value - 8.85% $102.22, reduced periodically 12,500 shares on or before April 1. 8.35% $104.43, reduced periodically 3,000 shares on or before July 1; 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.76, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year. Cumulative preferred stock - no par value - 6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002. NIPSCO Industries, Inc.: Cumulative preferred shares - without par value - 8.75% $100.00 on January 14, 1996 350,000 shares on January 14, 1996.
Sinking fund requirements with respect to redeemable preferred stocks outstanding at March 31, 1995, for each of the twelve month periods subsequent to March 31, 1996, are as follows:
Twelve Months Ended March 31:* =================================================== 1997 $ 1,827,700 1998 $ 1,827,700 1999 $ 1,827,700 2000 $ 1,827,700 * Table does not reflect redemptions made after March 31, 1995.
(13) COMMON SHARE DIVIDEND: During the next few years, Industries expects that the great majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. Northern Indiana's Indenture provides that it will not declare or pay any dividends on any class of capital stock (other than preferred or preference stock) except out of earned surplus or net profits of Northern Indiana. At March 31, 1995, Northern Indiana had approximately $161.7 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. (14) COMMON SHARES: Industries has 200,000,000 common shares authorized without par value. SHARE PURCHASE RIGHTS PLAN. On February 27, 1990, the Board of Directors of Industries declared a dividend distribution of one Right for each outstanding common share of Industries to shareholders of record on March 12, 1990. The Rights are not currently exercisable. Each Right, when exercisable, would initially entitle the holder to purchase from Industries one one-hundredth of a share of Series A Junior Participating Preferred Shares, without par value, of Industries at a price of $60 per one one-hundredth of a share. In certain circumstances, if an acquirer obtained 25% of Industries' outstanding shares, or merged into Industries or Industries into the acquirer, the Rights would entitle the holders to purchase Industries' or the acquirer's common shares for one-half of the market price. The Rights will not dilute Industries' common shares nor affect earnings per share unless they become exercisable for common shares. The Plan was not adopted in response to any specific attempt to acquire control of Industries. COMMON SHARE REPURCHASES. The Board of Directors of Industries has authorized the repurchase of approximately 14.6 million common shares in addition to those required in connection with the acquisitions of Kokomo Gas and NIFL. At March 31, 1995, Industries had purchased approximately 14.2 million shares at an average price of $22.96 per share of which 1,848,588 shares and 1,112,862 shares were reissued in connection with the Kokomo Gas and NIFL acquisitions, respectively. Approximately 3.3 million additional common shares may be repurchased under the Board's authorization. (15) LONG-TERM INCENTIVE PLAN: Industries' Long-Term Incentive Plan (the 1988 Plan) for key management employees, which was approved by shareholders on April 13, 1988, provides for the issuance of up to 2.5 million of Industries' common shares to key employees through 1998. At March 31, 1995, there were 255,961 shares reserved for future awards under the 1988 Plan. On April 13, 1994, shareholders adopted Industries' 1994 Long-Term Incentive Plan (1994 Plan). It is similar to the 1988 plan and provides an additional 2.5 million common shares available for issuance to key employees through 2004. No awards have been issued under the 1994 Plan. 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, 1995. The stock appreciation rights (SARs) may be exercised only in tandem with stock options on a one-for-one basis and are payable in cash, Industries stock or a combination thereof. Restricted stock awards are restricted as to transfer and subject to forfeiture for specific periods from the date of grant. Restrictions on the shares awarded during 1990 and 1991 lapse five years from date of grant and vest subject to specific share price appreciation conditions. Restrictions on shares awarded in 1995 vest five years from date of grant and will vest subject to specific earnings per share and stock appreciation goals. If a participant's employment is terminated other than by reason of death, disability or retirement, restricted shares are forfeited. There were 400,500 and 150,500 restricted shares outstanding at March 31, 1995, and December 31, 1994, respectively. Changes in outstanding shares under option and SARs for three and twelve month periods ended March 31, 1995, and 1994, are as follows:
Nonqualified Stock Options _______________________________________________ Three Months Ended Option Option March 31, 1995 Price 1994 Price ================== ======================== ======================== Balance beginning of period 1,097,550 $10.94-$33.19 890,800 $10.94-$33.19 Granted 5,000 $30.31-$30.31 0 Exercised (40,250) $10.94-$26.06 (18,250) $10.94-$26.06 Cancelled (2,600) $28.75-$33.19 (8,300) $33.19 _________ ________ Balance end of period 1,059,700 $10.94-$33.19 864,250 $10.94-$33.19 ========= ======= Shares exercisable 765,900 $10.94-$33.19 584,050 $10.94-$26.06 Nonqualified Stock Options With SARs ______________________________________________ Three Months Ended Option Option March 31, 1995 Price 1994 Price ================== ===================== ===================== Balance beginning of period 9,900 $10.94 9,900 $10.94 Granted 0 0 Exercised 0 0 Cancelled 0 0 _______ _______ Balance end of period 9,900 $10.94 9,900 $10.94 ======= ======= Shares exercisable 9,900 $10.94 9,900 $10.94 Nonqualified Stock Options _______________________________________________ Twelve Months Ended Option Option March 31, 1995 Price 1994 Price ================== ===================== ===================== Balance beginning of period 864,250 $10.94-$33.19 762,850 $10.94-$26.06 Granted 299,650 $28.75-$30.31 288,500 $33.19 Exercised (83,850) $10.94-$26.06 (174,600) $10.94-$26.06 Cancelled (20,350) $28.75-$33.19 (12,500) $26.06-$33.19 _________ ________ Balance end of period 1,059,700 $10.94-$33.19 864,250 $10.94-$33.19 ========= ======== Shares exercisable 765,900 $10.94-$33.19 584,050 $10.94-$26.06 Nonqualified Stock Options With SARs ______________________________________________ Twelve Months Ended Option Option March 31, 1995 Price 1994 Price ================== ===================== ===================== Balance beginning of period 9,900 $10.94 11,500 $10.94 Granted 0 0 Exercised 0 0 Cancelled 0 (1,600) $10.94 _______ _______ Balance end of period 9,900 $10.94 9,900 $10.94 ======= ======= Shares exercisable 9,900 $10.94 9,900 $10.94
The Industries Nonemployee Director Stock Incentive Plan, which was approved by shareholders, provides for the issuance of up to 100,000 of Industries' common shares to nonemployee directors of Industries. The Plan provides for awards of common shares which vest in 20% per year increments, with full vesting after five years. The Plan also allows the award of nonqualified stock options in the future. If a director's service on the Board is terminated for any reason other than death or disability, any common shares not vested as of the date of termination are forfeited. As of April 12, 1995, 27,750 shares were issued under the Plan. (16) LONG-TERM DEBT: At March 31, 1995, and December 31, 1994, Industries' long-term debt, excluding amounts due within one year, issued and not retired or cancelled was as follows:
Amount Outstanding _____________________________ March 31, December 31, 1995 1994 =========== =========== (Dollars in thousands) Northern Indiana Public Service Company First mortgage bonds - Series O, 6-3/8%, due September 1, 1997 $ 25,747 $ 25,747 Series P, 6-7/8%, due October 1, 1998 14,509 14,509 Series T, 7-1/2%, due April 1, 2002 40,543 40,543 Series U, 8-1/8%, due July 15, 2003 55,239 55,239 Series Z, 8-1/8%, due August 15, 2007 39,559 39,569 Series NN, 7.10%, due July 1, 2017 55,000 55,000 ___________ ___________ Total 230,597 230,607 ___________ ___________ Pollution control notes and bonds - Series A Note - City of Michigan City, 5.70% due October 1, 2003 20,750 20,750 Series 1988 Bonds - Jasper County - Series A, B and C 4.11% weighted average at March 31, 1995, due November 1, 2016 130,000 130,000 Series 1988 Bonds - Jasper County - Series D 4.14% weighted average at March 31, 1995, due November 1, 2007 24,000 24,000 Series 1994 Bonds - Jasper County - Series A - 4.50% weighted average at March 31, 1995, due August 1, 2010 10,000 10,000 Series 1994 Bonds - Jasper County - Series B - 4.50% weighted average at March 31, 1995, due June 1, 2013 18,000 18,000 Series 1994 Bonds - Jasper County - Series C - 4.50% weighted average at March 31, 1995, due April 1, 2019 41,000 41,000 ___________ ___________ Total 243,750 243,750 ___________ ___________ Medium-term notes - Issued at interest rates between 4.94% and 7.64% with a weighted average interest rate of 6.47% and various maturities between July 25, 1996 and January 19, 2024 594,750 594,750 ___________ ___________ Unamortized premium and discount on long-term debt, net (3,657) (3,756) ___________ ___________ Total long-term debt of Northern Indiana Public Service Company 1,065,440 1,065,351 ___________ ___________ NIPSCO Capital Markets, Inc. Medium-term note - 9.95% - due June 10, 1996 7,500 7,500 Unamortized discount (8) (9) Zero coupon notes - $7.57%, $72,500 at maturity, due December 1, 1997 59,472 58,373 ___________ ___________ Total long-term debt of NIPSCO Capital Markets, Inc. 66,964 65,864 ___________ ___________ NIPSCO Development Company, Inc. Lake Erie Land Company - Notes Payable - Interest rates between 9.00% and 10.00% with a weighted average interest rate of 9.41% and various maturities between July 5, 1996 and June 30, 1998 3,103 3,155 Elm Energy and Recycling (UK), Ltd. Term Loan Facility - 6.79% - due December 31, 2004 37,858 34,606 Metals Technology Corporation - Notes Payable - Mortgage note, 9.50% - due September 25, 2005 98 98 NDC Douglas Properties, Inc. Notes Payable - Interest rates of 6.72% and 7.94% with a weighted average interest rate of 7.57% and maturities through January 1, 2005 10,462 11,264 ____________ ____________ Total long-term debt of NIPSCO Development Company,Inc. 51,521 49,123 ____________ ____________ Total long-term debt, excluding amounts due in one year $ 1,183,925 $ 1,180,338 ============ ============
The sinking fund requirements of long-term debt outstanding at March 31, 1995, (including the maturity of Northern Indiana's first mortgage bonds: Series O, 6-3/8%, due September 1, 1997; Series P, 6-7/8%, due October 1, 1998; Northern Indiana's medium-term notes due from April 6, 1998 to March 24, 2000; Capital Markets' medium-term note due June 10, 1996, and Zero Coupon Notes due December 1, 1997; and Lake Erie Land Company's notes payable due July 5, 1996 to June 30, 1998; and NDC Douglas Properties, Inc. notes payable due December 22, 1999), for each of the twelve month periods subsequent to March 31, 1996, are as follows:
Twelve Months Ended March 31, ============================= 1997 $ 97,123,358 1998 147,059,687 1999 58,326,302 2000 15,044,297
Unamortized debt expense, premium and discount on long-term debt, applicable to outstanding bonds are being amortized over the lives of such bonds. Reacquisition premiums are being deferred and amortized. Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented, securing the first mortgage bonds issued by Northern Indiana, constitutes a direct first mortgage lien upon substantially all property and franchises, other than expressly excepted property, owned by Northern Indiana. On March 4, 1994, the Commission authorized Northern Indiana to issue up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30 years, for purposes of refinancing certain first mortgage bonds and paying short-term debt used to pay at maturity medium-term notes due in January and April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating $125.5 million, through the use of working capital and the proceeds of short-term debt. A total of $120.0 million of the Medium-Term Notes, Series D, were issued to complete the permanent refinancing of those first mortgage bonds. As of March 31, 1995, an additional $169,275,000 of Medium-term Notes, Series D, can be issued in the future. On August 25, 1994, Jasper County, Indiana issued Pollution Control Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due June 1, 2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The proceeds of these issuances were loaned to Northern Indiana under similar terms. The initial interest rate on Series 1994 Bonds was 3.10%, which resets daily. The proceeds of the Series 1994A and Series 1994C were used to retire on October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due October 15, 2004 and $41 million of Series LL First Mortgage Bonds, 7-1/2%, due October 15, 2014. The proceeds of the Series 1994B Bonds were used to retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994. The Series 1994 Bonds are secured by Letters of Credit from Union Bank of Switzerland. The obligations of Capital Markets are subject to a Support Agreement between Industries and Capital Markets, under which Industries has committed to make payments of interest and principal on Capital Markets' securities in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' investors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse to holders of Capital Markets' securities. The carrying value of those assets other than Northern Indiana, reflected in the consolidated financial statements of Industries, is approximately $343.6 million at March 31, 1995. (17) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1997, unless extended by its terms. As of March 31, 1995, 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, 1995, which are expected to be renewed for the subsequent twelve month period. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fee to a combination of fees which are mutually satisfactory to both parties. As of March 31, 1995, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuances of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1995, $28.4 million of borrowings were outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1995, there were no borrowings outstanding under this facility. Northern Indiana uses commercial paper to fund short-term working capital requirements. As of March 31, 1995, Northern Indiana had $69.9 million in commercial paper outstanding, having a weighted average interest rate of 6.13%. Capital Markets has a $150 million revolving Credit Agreement which will terminate August 19, 1997, unless extended by its terms. This facility provides short-term financing flexibility to Industries and also serves as the back-up instrument for a commercial paper program. As of March 31, 1995, there were no borrowings outstanding under this agreement. Capital Markets also has $105 million of money market lines of credit. As of March 31, 1995, $14.4 million of borrowings were outstanding under these lines of credit. As of March 31, 1995, Capital Markets had $43.2 million in commercial paper outstanding, having a weighted average interest rate of 6.20%. (18) OPERATING LEASES: On April 1, 1990, Northern Indiana entered into a 20-year agreement for the rental of office facilities from Development at a current annual rental payment of approximately $3.1 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, 1995:
Twelve Months Ended March 31, ============================================ (Dollars in thousands) 1996 $ 4,893 1997 3,901 1998 3,469 1999 2,286 2000 1,773 Later years 22,412 ________ Total minimum payments required $ 38,734 ========
The consolidated financial statements include rental expense for all operating leases as follows:
March 31, March 31, 1995 1994 ========== ========== (Dollars in thousands) Three months ended $ 1,828 $ 1,857 Twelve months ended $ 7,861 $ 7,379
(19) COMMITMENTS: Northern Indiana estimates that approximately $774 million will be expended for construction purposes for the period from January 1, 1995, to December 31, 1999. Substantial commitments have been made by Northern Indiana in connection with this program. Northern Indiana has entered into a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and Mitsubishi Heavy Industries America, Inc., under which Pure Air will provide scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating Station. Services under this contract commenced on June 15, 1992, with annual charges approximating $20 million. The scrubber project will receive $14.4 million in government funding for operating and maintenance expenses during a three-year demonstration period. Pure Air is required to meet certain performance standards during the demonstration period commencing with the date above. During this period, either Northern Indiana or Pure Air can terminate this agreement unilaterally. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminates the agreement prior to the end of the 20-year contract period. Harbor Coal Company (Harbor Coal), a wholly-owned subsidiary of Development, has invested in a partnership to finance, construct, own and operate a $65 million pulverized coal injection facility which began commercial operation in August, 1993. The facility receives raw coal, pulverizes it and delivers it to Inland Steel Company 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. (20) 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 investments are estimated based on market prices for those or similar investments. LONG-TERM DEBT/PREFERRED STOCK: The fair value of long-term debt and preferred stock are estimated based on the quoted market prices for the same or similar issues or on the rates offered to Industries for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. The carrying values and estimated fair values of Industries' financial instruments are as follows:
March 31, 1995 December 31, 1994 _______________________ ______________________ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ========== =========== ========== ========== (Dollars in thousands) Cash and cash equivalents $ 36,157 $ 36,157 $ 40,441 $ 40,441 Investments $ 30,845 $ 31,717 $ 23,863 $ 24,612 Long-term debt (including current portion) $1,189,210 $1,152,199 $1,207,936 $1,102,019 Preferred stock $ 185,329 $ 159,441 $ 189,274 $ 156,591
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. (21) CUSTOMER CONCENTRATIONS: Northern Indiana is a public utility operating company supplying natural gas and electrical energy in the northern third of Indiana. Although Northern Indiana has a diversified base of residential and commercial customers, a substantial portion of its electric and gas industrial deliveries are dependent upon the basic steel industry. The basic steel industry accounted for 4% of gas revenue (including transportation services) and 25% of electric revenue for the twelve months ended March 31, 1995, as compared to 2% and 24%, respectively, for the twelve months ended March 31, 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS HOLDING COMPANY - NIPSCO Industries, Inc. (Industries), an Indiana corporation, became a holding company on March 3, 1988. Northern Indiana Public Service Company (Northern Indiana), Northern Indiana Fuel and Light Company, Inc. (NIFL), Kokomo Gas and Fuel Company (Kokomo Gas), NIPSCO Development Company, Inc., (Development), NIPSCO Energy Services, Inc. (Services), and NIPSCO Capital Markets, Inc. (Capital Markets) are subsidiaries of Industries. NIPSCO Fuel Company, Inc. (Fuel), NI-TEX Inc. (NI-TEX), NIPSCO Energy Trading Corp. (NETCO) and Crossroads Pipeline Company (Crossroads) are direct subsidiaries of Services. The following discussion, except where noted, is attributable to the utility operations of Northern Indiana, Kokomo Gas, NIFL and Crossroads (the Utilities). REVENUES - Total operating revenues for the twelve months ended March 31, 1995, decreased $88.4 million as compared to the twelve months ended March 31, 1994. Gas revenues decreased $94.9 million and electric revenues increased $6.5 million. The decrease in gas revenues was largely attributable to decreased sales to residential and commercial customers due to milder weather, partially offset by increased deliveries of gas transported to others and decreased purchase gas cost per dekatherm (dth). Gas transportation customers purchase much of their gas directly from producers and marketers and then pay a transportation fee to have their gas delivered over the Utilities' systems. The Utilities had approximately 697,400 gas customers at March 31, 1995. The increase in electric revenues for the twelve months ended March 31, 1995, was mainly due to increased sales to industrial customers and was partially offset by lower fuel cost per kilowatt-hour (kwh) and decreased sales to wholesale customers. At March 31, 1995, Northern Indiana had approximately 402,000 electric customers. Total operating revenue for the three months ended March 31, 1995, decreased $43.1 million as compared to the three months ended March 31, 1994. Gas revenues decreased $33.7 million and electric revenues decreased $9.4 million as compared to the same period in 1994. The decrease in gas revenues was mainly due to warmer weather. The decrease in electric revenue for the three months ended March 31, 1995, was mainly due to warmer weather and transitional rate adjustments to industrial customers signing new five-yearr contracts, partially offset by increased commercial and industrial sales. The basic steel industry accounted for 38% of natural gas delivered (including volumes transported) and 40% of electric sales during the twelve months ended March 31, 1995. The components of the variations in gas and electric revenues are shown in the following tables:
Variations from Prior Periods ________________________________ March 31, 1995 Compared to March 31, 1994 Three Months Twelve Months ============= ============= (Dollars in thousands) Gas Revenue - Pass through of net changes in purchased gas costs, gas storage and storage transportation costs $ (26,361) $ (52,713) Take-or-pay costs and transition costs 20,321 30,256 Changes in sales levels (28,095) (75,066) Gas transport levels 465 2,587 ___________ ____________ Gas Revenue Change $ (33,670) $ (94,936) ___________ ____________ Electric Revenue - Pass through of net changes in fuel costs $ (8,255) $ (7,828) Changes in sales levels (1,128) 14,336 ___________ ____________ Electric Revenue Change $ (9,383) $ 6,508 ___________ ____________ Total Revenue Change $ (43,053) $ (88,428) =========== ============ See Note 4 to the consolidated financial statements (Rate Matters), regarding gas take-or-pay and FERC Order No. 636 transition costs.
GAS COSTS - The Utilities' gas costs decreased $72.8 million for the twelve month period ended March 31, 1995, due to decreased purchases due to lower sales and lower gas costs per dth. The average cost for the Utilities purchased gas for the three and twelve month periods ended March 31, 1995, after adjustment for take-or-pay charges billed to transport customers, was $2.95 and $2.89 per dth, respectively, as compared to $3.10 and $3.23 per dth for the same periods in 1994. FUEL AND PURCHASED POWER - The cost of fuel for electric generation decreased for the three and twelve month periods ended March 31, 1995, compared to 1994 periods, mainly as the result of decreased production. Power purchased increased $1.9 and $10.3 million for the three and twelve month periods ended March 31, 1995, respectively. Power purchased increased mainly for the twelve months ended March 31, 1995, due to purchases required to replace R. M. Schahfer Generating Station Unit 15 generation from February 1 to July 5, 1994, while this unit was down on an extended outage as part of the Powder River Basin coal conversion project. OPERATING MARGINS - Operating margins decreased $15.6 million for the twelve months ended March 31, 1995, from the same period a year ago. The operating margin from gas deliveries decreased $22.1 million, due to decreased sales to residential and commercial customers as a result of milder weather this year compared to the twelve month period ended March 31, 1994. The operating margins from electric sales increased $6.5 million, due to increased sales to industrial customers,partially offset by decreased sales to wholesale customers. Operating margins decreased $9.6 million for the three months ended March 31, 1995, from the same period a year ago. Gas operating margin decreased $7.7 million due to warmer weather. Operating margins on electric sales decreased $1.9 million due to warmer weather and transitional rate adjustments to industrial customers signing new five year contracts, partially offset by increased commercial and industrial sales. OPERATING EXPENSES AND TAXES - Operation expenses decreased $5.6 and $6.9 million for the three and twelve month periods ended March 31, 1995, respectively. Operation expenses decreased for the twelve month period mainly due to decreased employee related and environmental costs. Maintenance expenses increased $1.1 million for the three month period ended March 31, 1995, mainly as a result of a higher level of overall maintenance activity at the electric production facilities. Depreciation and amortization expense increased for the three and twelve month periods ended March 31, 1995, as a result of net plant additions. Utility income taxes decreased for the three and twelve month periods ended March 31, 1995, as a result of decreased pre-tax income. The after tax effects of the Northern Indiana land donation to the Shafer and Freeman Lakes Environmental Conservation Corporation are included in "Other Income (Deductions)" for the twelve month period ended March 31, 1995. The operating results of all non-utility subsidiaries are included in "Other Income (Deduction)." Interest charges (net) decreased for the three and twelve month periods ended March 31, 1995, reflecting Northern Indiana's continued refinancing to reduce interest rates on long-term debt outstanding and deferred carrying charges on FERC Order No. 636 transition costs. See Notes to Consolidated Financial Statements (Summary of Significant Accounting Policies) for a discussion of Carrying Charges and Deferred Depreciation and Allowance for Funds Used During Construction. Also, see Notes 4, 6, 8 and 9 for a discussion of FERC Order No. 636, Income Taxes, Postretirement Benefits, and Postemployment Benefits, respectively. NET INCOME - Industries' net income for the twelve month period ended March 31, 1995, was $159.3 million compared to $162.6 million for the twelve month period ended March 31, 1994. Net income for the three months ended March 31, 1995, was $60.3 million compared to $65.0 million for the three months ended March 31, 1994. ENVIRONMENTAL MATTERS - 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 acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Northern Indiana estimates that total costs of compliance with the CAAA sulfur dioxide regulations will impact electric rates by less than 5% in the future. The CAAA contain provisions that could lead to limitations on emissions of nitrogen oxides and hazardous air pollutants, which may require significant capital expenditures for control of these emissions. Northern Indiana is evaluating a nitrogen oxide control program to meet future requirements. Northern Indiana cannot predict the costs of complying with CAAA requirements, but Northern Indiana believes that any such mandated costs would be recoverable through the rate making process. The Utilities have an ongoing program to remain aware of the laws and regulations involved with hazardous waste. It is the Utilities' intent to continue to evaluate their facilities and properties with respect to these rules and identify any sites that would require corrective action. Northern Indiana has received notices from the Environmental Protection Agency (EPA) that it is a"potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, 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 and SARA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the site and avoid the imposition of fines or added costs. While all of the remedial costs at these sites are not determinable, Northern Indiana's analysis indicates its share of such costs with other PRPs should not have a significant impact on its financial position or the results of future operations. The Utilities have instituted a program to investigate former manufactured gas plants where one of them is the current or former owner. The Utilities have identified twenty-seven of these sites and made visual inspections of these sites. The Utilities have conducted initial samplings at eight sites. Follow-up investigations have been conducted at three sites and potential remedial measures are being evaluated. The Utilities will continue their program to assess sites during 1995. During the follow-up investigation of the former manufactured gas plant in Elkhart, Indiana, Northern Indiana noted the presence of hydrocarbons in the Elkhart River. Northern Indiana reported this finding to the Indiana Department of Environmental Management (IDEM) and the EPA. Northern Indiana is evaluating this site to determine what remedial measurers, if any, may be needed. Northern Indiana was notified by the IDEM of the release of a petroleum substance into the St. Mary's River in Fort Wayne, Indiana, from the site of a former manufactured gas plant formerly owned by Northern Indiana. In cooperation with IDEM, Northern Indiana has taken steps to investigate and contain the substance. Northern Indiana has remediated part of the Fort Wayne site. The remainder of the site is being evaluated to determine what further remedial measures, if any, may be needed. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have each notified the other about five former manufactured gas plants at which both companies or their predecessors were former owners or operators. Northern Indiana is discussing various matters with Indiana Gas, including past and future steps to further investigate or remediate these sites and potential cost allocation for this activity. One of these sites was the Lafayette site which Indiana Gas had previously notified Northern Indiana was being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified 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. The possibility that exposure to electric and magnetic fields emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental and media attention. A considerable amount of scientific research has been conducted on this topic without definitive results. Research is continuing to resolve scientific uncertainties. LIQUIDITY AND CAPITAL RESOURCES - During the next few years, it is anticipated that the great majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. See Notes to Consolidated Financial Statements for a discussion of the Common Share Dividend. On March 4, 1994, the Commission authorized Northern Indiana to issue up to $289,275,000 of its Medium-Term Notes, Series D, due from 1 year to 30 years, for purposes of refinancing certain first mortgage bonds and paying short-term debt used to pay at maturity medium-term notes due in January and April, 1994. On May 23, 1994, Northern Indiana exercised its option to redeem all the outstanding First Mortgage Bonds, Series S, Y and AA aggregating $125.5 million, through the use of working capital and the proceeds of short-term debt. A total of $120.0 million of the Medium-Term Notes, Series D, were issued to complete the permanent refinancing of those first mortgage bonds. As of March 31, 1995, an additional $169,275,000 of Medium-term Notes, Series D, can be issued in the future. On August 25, 1994, Jasper County, Indiana issued Pollution Control Refunding Revenue Bonds, Series 1994 (Northern Indiana Public Service Company Project) (the "Series 1994 Bonds"), including $10 million of Series 1994A Bonds, due August 1, 2010; $18 million of Series 1994B Bonds, due June 1, 2013; and $41 million of Series 1994C Bonds, due April 1, 2019. The proceeds of these issuances were loaned to Northern Indiana under similar terms. The initial interest rate on Series 1994 Bonds was 3.10%, which resets daily. The proceeds of the Series 1994A and Series 1994C were used to retire on October 15, 1994, $10 million of Series MM First Mortgage Bonds, 7-1/2%, due October 15, 2004 and $41 million of Series LL First Mortgage Bonds, 7-1/2%, due October 15, 2014. The proceeds of the Series 1994B Bonds were used to retire the $18 million Series 1978 Notes, 6.70%, on August 25, 1994. The Series 1994 Bonds are secured by Letters of Credit from Union Bank of Switzerland. Capital Markets has a $150 million revolving Credit Agreement which terminates August 19, 1997, unless extended by its terms. This facility provides short-term financing flexibility at the holding company level and also serves as the back-up instrument for a commercial paper program. As of March 31, 1995, there were no borrowings outstanding under this agreement. Capital Markets also has $105 million of money market lines of credit. As of March 31, 1995, $14.4 million of borrowings were outstanding under these lines of credit. As of March 31, 1995, Capital Markets had $43.2 million in commercial paper outstanding, having a weighted average interest rate of 6.20%. The obligations of Capital Markets are subject to a Support Agreement between Industries and Capital Markets, under which Industries has committed to make payments of interest and principal on Capital Markets securities in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' investors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse to holders of Capital Markets' securities. The carrying value of those assets other than Northern Indiana, reflected in the consolidated financial statements of Industries, is approximately $343.6 million at March 31, 1995. 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, 1995, Northern Indiana had $69.9 million in commercial paper outstanding, having a weighted average interest rate of 6.13%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1997, unless extended by its terms. As of March 31, 1995, 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, 1995, which are expected to be renewed for the subsequent twelve month period. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fee to a combination of fees which are mutually satisfactory to both parties. As of March 31, 1995, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuances of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of March 31, 1995, $28.4 million of borrowings were outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At March 31, 1995, 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. The Utilities do not expect the effects of inflation at current levels to have a significant impact on their results of operations, ability to contain cost increases or need to seek timely and adequate rate relief. The Utilities do not anticipate the need to file for gas or electric base rate increases in the near future. 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. That authority lies with the individual states, several of which are considering opening the transmission network to retail customers. The Energy Act will stimulate greater competition in the wholesale electric markets. This competition will create opportunities to compete for new customers and revenues, as well as increase the risk of the loss of customers. Although wholesale customers represent a relatively small portion of Northern Indiana's sales (4% for 1994), Northern Indiana will continue its efforts to retain and add customers by offering competitive rates. Competitive forces have also begun to influence retail pricing in the industry. In some instances, industrial customers, threatening to pursue cogeneration, self-generation, retail wheeling, or relocation to other service territories, have obtained price concessions from utilities. 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. Northern Indiana's 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 effective in late 1993 shifted primary responsibility for gas acquisition, transportation and peak days' supply from pipelines to local gas distribution companies, such as the Utilities. Although pipelines continue to transport gas, they no longer provide sale service. The Utilities believe they have taken appropriate steps to insure the continued acquisition of adequate gas supplies at reasonable prices. The mix of gas revenues from retail sales, interruptible retail sales, firm transportation service, and interruptible transportation services, has changed significantly over the past several years. The deregulation of the gas industry, since the mid-1980's, allows large industrial and commercial customers to purchase their gas supplies directly from producers and use the Utilities' facilities to transport the gas. Transportation customers pay the Utilities only for transporting their gas from the pipeline to the customers' premises. To date, the Utilities' system has not been materially affected by competition, and management does not foresee substantial adverse effect in the near future, unless the current regulatory structure is substantially altered. Northern Indiana believes the steps it is taking to deal with increased competition will have significant, positive effects in the next few years. ITEM 1. LEGAL PROCEEDINGS. Industries and Northern Indiana are parties to various legal or administrative proceedings before courts and agencies with respect to matters occurring in the ordinary course of business. Although management of Industries cannot predict the ultimate outcome of these matters,it believes the final disposition of these matters will not have a material adverse effect on the financial position or results of operations of Industries. Information regarding various matters involving federal and state environmental laws and regulations and a pending tax matter is included in Notes 5 and 3, respectively, of Industries' financial statements under Part I, Item 1 of this Report on Form 10-Q. Item 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. On April 12, 1995, at the Annual Meeting of Shareholders of the registrant, shareholders of the registrant elected Steven C. Beering, Ernestine M. Raclin and Denis E. Ribordy as directors to serve until the 1998 Annual Meeting of Shareholders. Directors whose terms of office as director continue after the 1995 Annual Meeting of Shareholders are Ian M. Rolland, Edmund A. Schroer and John W. Thompson, whose terms expire at the 1996 Annual Meeting of Shareholders, and Arthur J. Decio, Gary L. Neale and Robert J. Welsh, Jr., whose terms expire at the 1997 Annual Meeting of Shareholders. There were no abstentions and no broker non-votes for any of the nominees for directors. The number of votes cast for, or withheld, for each nominee for director was as follows:
Votes Votes Received Withheld ========== ========== Steven C. Beering 53,516,169 691,484 Ernestine M. Raclin 53,528,974 678,679 Denis E. Ribordy 53,537,053 670,600
Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 23-Consent of Arthur Andersen LLP (b) Reports on Form 8-K. None Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIPSCO Industries, Inc. (Registrant) /s/Jerry M. Springer ___________________________ Jerry M. Springer, Controller and Chief Accounting Officer Date May 11, 1995 EX-23 2 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-Q into Industries' previously filed Form S-8 Registration Statement, No. 33-3019; Form S-8 Registration Statement, No. 33-30619; and Form S-8 Registration Statement, No. 33-30621. /s/_______________________ Arthur Andersen & Co. Chicago, Illinois May 11, 1995 EX-27 3
UT This schedule contains summary financial information extracted from the financial statements of NIPSCO Industries, Inc. for the three months ended March 31, 1995, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 PER-BOOK 3,230,635 185,240 283,134 15,716 196,012 3,910,737 630,708 23,784 480,294 1,134,786 101,057 83,694 449,940 43,611 733,985 113,100 27,849 578 0 0 1,222,137 3,910,737 522,498 37,574 398,851 436,425 86,073 (831) 85,242 24,911 60,331 766 59,565 25,146 0 244,493 0.92 0.92
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