-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LLMv5tCpLDz47ZkP41ujI2u7niRWO5wXVpUXkkIEb3IYNvj6Z2vb94eHLYbDIb7Q 3JoyYR4ce3r6JPh4N95saA== 0000823392-98-000006.txt : 19980814 0000823392-98-000006.hdr.sgml : 19980814 ACCESSION NUMBER: 0000823392-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIPSCO INDUSTRIES INC CENTRAL INDEX KEY: 0000823392 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 351719974 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09779 FILM NUMBER: 98684399 BUSINESS ADDRESS: STREET 1: 5265 HOHMAN AVE CITY: HAMMOND STATE: IN ZIP: 46320 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-9779 NIPSCO Industries, Inc. (Exact name of registrant as specified in its charter) Indiana 35-1719974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 East 86th Avenue, Merrillville, Indiana 46410 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (219) 853-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of July 31, 1998, 120,145,573 common shares were outstanding. NIPSCO Industries, Inc. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Report of Independent Public Accountants To The Board of Directors of NIPSCO Industries, Inc.: We have audited the accompanying consolidated balance sheet of NIPSCO Industries, Inc. (an Indiana corporation) and subsidiaries as of June 30, 1998, and December 31, 1997, and the related consolidated statements of income, common shareholders' equity and cash flows for the three, six and twelve month periods ended June 30, 1998 and 1997. These consolidated financial statements are the responsibility of Industries' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NIPSCO Industries, Inc. and subsidiaries as of June 30, 1998, and December 31, 1997, and the results of their operations and their cash flows for the three, six and twelve month periods ended June 30, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois July 29, 1998
Consolidated Balance Sheet June 30, December 31, Assets 1998 1997 ========== ========== (In thousands) Property, Plant and Equipment: Utility Plant, (Note 2)(including Construction Work in Progress of $223,222 and $188,710, respectively) Electric $ 4,106,198 $ 4,066,568 Gas 1,418,126 1,395,140 Water 634,375 604,018 Common 352,333 351,350 -------------- -------------- 6,511,032 6,417,076 Less -Accumulated provision for depreciation and amortization 2,857,453 2,759,945 -------------- -------------- Total Utility Plant 3,653,579 3,657,131 -------------- -------------- Other property, at cost, net of accumulated provision for depreciation 80,266 96,028 -------------- -------------- Total Property, Plant and Equipment 3,733,845 3,753,159 -------------- -------------- Investments: Investments, at equity (Note 2) 104,632 82,855 Investments, at cost 44,586 31,771 Other investments 27,144 24,499 -------------- -------------- Total Investments 176,362 139,125 -------------- -------------- Current Assets: Cash and cash equivalents 36,684 30,780 Accounts receivable, less reserve of $5,995 and $5,887, respectively (Note 2) 231,073 231,580 Other receivables (Note 24) 33,165 107,231 Fuel adjustment clause (Note 2) - 2,679 Gas cost adjustment clause (Note 2) 26,825 89,991 Materials and supplies, at average cost 60,625 60,085 Electric production fuel, at average cost 16,499 18,837 Natural gas in storage (Note 2) 37,576 61,436 Prepayments and other 32,787 28,089 -------------- -------------- Total Current Assets 475,234 630,708 -------------- -------------- Other Assets: Regulatory assets (Note 2) 204,343 211,513 Intangible assets, net of accumulated amortization (Note 2) 66,179 68,175 Prepayments and other (Note 9) 158,039 134,353 -------------- -------------- Total Other Assets 428,561 414,041 -------------- -------------- $ 4,814,002 $ 4,937,033 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Balance Sheet June 30, December 31, Capitalization and Liabilities 1998 1997 ========== ========== (In thousands) Capitalization: Common shareholders' equity (See accompanying statement) $ 1,203,889 $ 1,264,788 Cumulative preferred stocks (Note 11) - Series without mandatory redemption provisions (Note 12) 85,614 85,620 Series with mandatory redemption provisions (Note 13) 57,591 58,841 Long-term debt excluding amounts due within one year (Note 19) 1,670,852 1,667,925 -------------- -------------- Total Capitalization 3,017,946 3,077,174 -------------- -------------- Current Liabilities: Current portion of long-term debt (Note 20) 20,733 54,621 Short-term borrowings (Note 21) 252,828 212,639 Accounts payable 201,083 226,751 Dividends declared on common and preferred stocks 30,267 30,784 Customer deposits 23,057 22,091 Taxes accrued 61,041 77,573 Interest accrued 19,197 19,124 Fuel adjustment clause 625 - Accrued employment costs 40,854 58,799 Other accruals 39,337 47,930 -------------- -------------- Total Current Liabilities 689,022 750,312 -------------- -------------- Other: Deferred income taxes (Note 8) 636,101 651,815 Deferred investment tax credits, being amortized over life of related property (Note 8) 101,895 105,538 Deferred credits 82,833 73,715 Customer advances and contributions in aid of construction (Note 2) 109,771 110,145 Accrued liability for postretirement benefits (Note 10) 136,681 132,919 Other noncurrent liabilities 39,753 35,415 -------------- -------------- Total Other 1,107,034 1,109,547 -------------- -------------- Commitments and Contingencies (Notes 5, 7, 22, 23 and 24) $ 4,814,002 $ 4,937,033 ========== ========== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Income (Dollars in thousands, except for per share amounts) Three Months Six Months Ended June 30, Ended June 30, --------------------- --------------------- 1998 1997 1998 1997 ======== ======== ======== ======== Operating Revenues: (Notes 2, 6 and 26) Gas $ 110,345 $ 121,010 $ 353,080 $ 454,410 Electric 345,639 271,657 669,473 532,314 Water 20,857 18,795 38,566 18,795 Products and Services 175,567 111,725 370,633 177,618 ---------- ---------- ---------- ---------- 652,408 523,187 1,431,752 1,183,137 ---------- ---------- ---------- ---------- Cost of Sales: (Note 2) Gas costs 60,754 61,961 199,182 276,801 Fuel for electric generation 65,423 54,609 121,017 113,017 Power purchased 95,845 38,403 186,288 62,291 Products and Services 147,531 85,910 323,476 136,296 ---------- ---------- ---------- ---------- 369,553 240,883 829,963 588,405 ---------- ---------- ---------- ---------- Operating Margin 282,855 282,304 601,789 594,732 ---------- ---------- ---------- ---------- Operating Expenses and Taxes (except income): Operation 98,048 103,450 194,219 189,154 Maintenance (Note 2) 21,011 19,844 39,958 38,328 Depreciation and amortization (Note 2) 63,643 64,415 126,917 122,759 Taxes (except income) 21,110 20,647 44,538 41,957 ---------- ---------- ---------- ---------- 203,812 208,356 405,632 392,198 ---------- ---------- ---------- ---------- Operating Income 79,043 73,948 196,157 202,534 ---------- ---------- ---------- ---------- Other Income (Deductions) (Note 2) (931) 4,308 7,517 13,711 ---------- ---------- ---------- ---------- Interest and Other Charges: Interest on long-term debt 27,749 27,151 55,023 46,954 Other interest 2,222 3,077 4,130 8,045 Amortization of premium, reacquisition premium, discount and expense on debt, net 1,144 1,200 2,292 2,333 Dividend requirements on preferred stock of subsidiaries 2,128 2,179 4,295 4,346 ---------- --------- ---------- ---------- 33,243 33,607 65,740 61,678 ---------- ---------- ---------- ---------- Income before income taxes 44,869 44,649 137,934 154,567 ---------- ---------- ---------- ---------- Income taxes 15,424 16,413 47,767 55,493 ---------- ---------- ---------- ---------- Net Income $ 29,445 $ 28,236 $ 90,167 $ 99,074 ======== ======== ======== ======== Average common shares outstanding - basic 122,180,915 125,655,240 123,022,091 122,404,026 Basic Earnings per average common share $ 0.24 $ 0.22 $ 0.73 $ 0.80 ======== ======== ======== ======== Diluted Earnings per average common share $ 0.24 $ 0.22 $ 0.73 $ 0.80 ======== ======== ======== ======== Dividends declared per common share $ 0.240 $ 0.225 $ 0.480 $ 0.450 ======== ======== ======== ======== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Income (Dollars in thousands, except for per share amounts) Twelve Months Ended June 30, --------------------- 1998 1997 ======== ======== Operating Revenues: (Notes 2, 6 and 26) Gas $ 705,909 $ 805,463 Electric 1,323,490 1,061,890 Water 80,514 18,795 Products and Services 725,243 270,775 ---------- ---------- 2,835,156 2,156,923 ---------- ---------- Cost of Sales: (Note 2) Gas costs 417,668 493,882 Fuel for electric generation 246,548 235,846 Power purchased 329,028 89,759 Products and Services 623,928 196,383 ---------- ---------- 1,617,172 1,015,870 ---------- ---------- Operating Margin 1,217,984 1,141,053 ---------- ---------- Operating Expenses and Taxes (except income): Operation 395,318 360,166 Maintenance (Note 2) 78,182 72,974 Depreciation and amortization (Note 2) 253,962 241,617 Taxes (except income) 86,346 78,868 ---------- ---------- 813,808 753,625 ---------- ---------- Operating Income 404,176 387,428 ---------- ---------- Other Income (Deductions) (Note 2) 9,574 23,686 ---------- ---------- Interest and Other Charges: Interest on long-term debt 113,567 88,002 Other interest 6,476 18,155 Amortization of premium, reacquisition premium, discount and expense on debt, net 4,677 4,613 Dividend requirements on preferred stock of subsidiaries 8,640 8,681 ---------- ---------- 133,360 119,451 ---------- ---------- Income before income taxes 280,390 291,663 ---------- ---------- Income taxes 98,448 106,770 ---------- ---------- Net Income $ 181,942 $ 184,893 ======== ======== Average common shares outstanding - basic 124,156,903 121,935,166 Basic Earnings per average common share $ 1.46 $ 1.51 ======== ======== Diluted Earnings per average common share $ 1.46 $ 1.51 ======== ======== Dividends declared per common share $ 0.945 $ 0.885 ======== ======== The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement Of Common Shareholders' Equity Additional (Dollars in thousands) Common Treasury Paid-in Retained Three Months Ended Shares Shares Capital Earnings Other ======================== ========== ========== ========== ========== ========== Balance, April 1, 1997 $ 870,930 $(295,980) $ 88,118 $ 635,900 $ (4,128) Comprehensive Income: Net income 28,236 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $775) Realized gain Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (29,962) Treasury shares acquired (46,034) (34) Issued: IWC Resources Corporation acquisition NEM Acquisition 4,118 1,351 Employee stock purchase plan 67 98 Long-term incentive plan 1,413 22 (92) Amortization of unearned compensation 479 Other 1 (91) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1997 $ 870,930 $(336,416) $ 89,556 $ 634,083 $ (3,741) ========== ========== ========== ========== ========== Balance, April 1, 1998 $ 870,930 $(384,009) $ 89,878 $ 697,928 $ (2,159) Comprehensive Income: Net income 29,445 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $77) Realized gain (net of income tax of $620) Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (28,708) Treasury shares acquired (74,684) Issued: IWC Resources Corporation acquisition NEM Acquisition Employee stock purchase plan 94 237 Long-term incentive plan 2,581 587 (1,096) Amortization of unearned compensation 293 Other 2 (32) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1998 $ 870,930 $(456,018) $ 90,704 $ 698,633 $ (2,962) ========== ========== ========== ========== ==========
Accumulated Shares Other ------------------------ Three Months Ended Comprehensive Comprehensive Common Treasury (continued) Income Total Income Shares Shares ======================== ========== ========== ========== ========== ========== Balance, April 1, 1997 $ 2,276 $1,297,116 $ - 147,784,218 (20,363,752) Comprehensive Income: Net income 28,236 28,236 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $775) 1,268 1,268 1,268 Realized gain Gain (loss) on foreign currency translation: Unrealized 461 461 461 Realized - ---------- Total Comprehensive Income $ 29,965 Dividends: ========== Common shares (29,962) Treasury shares acquired (46,068) (2,325,078) Issued: IWC Resources Corporation acquisition NEM Acquisition 5,469 270,064 Employee stock purchase plan 165 8,416 Long-term incentive plan 1,343 93,366 Amortization of unearned compensation 479 Other (90) ---------- ---------- ---------- ---------- Balance, June 30, 1997 $ 4,005 $1,258,417 147,784,218 (22,316,984) ========== ========== ========== ========== Balance, April 1, 1998 $ 3,962 $1,276,530 $ - 147,784,218 (24,177,926) Comprehensive Income: Net income 29,445 29,445 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $77) 130 130 130 Realized gain (net of income tax of $620) (1,016) (1,016) (1,016) Gain (loss) on foreign currency translation: Unrealized (660) (660) (660) Realized 186 186 186 ---------- Total Comprehensive Income $ 28,085 Dividends: ========== Common shares (28,708) Treasury shares acquired (74,684) (2,716,853) Issued: IWC Resources Corporation acquisition NEM acquisition Employee stock purchase plan 331 11,830 Long-term incentive plan 2,072 132,800 Amortization of unearned compensation 293 Other (30) ---------- ---------- ---------- ---------- Balance, June 30, 1998 $ 2,602 $1,203,889 147,784,218 (26,750,149) ========== ========== ========== ==========
Consolidated Statement Of Common Shareholders' Equity Additional (Dollars in thousands) Common Treasury Paid-in Retained Six Months Ended Shares Shares Capital Earnings Other ======================== ========== ========== ========== ========== ========== Balance, January 1, 1997 $ 870,930 $(392,995) $ 32,868 $ 591,370 $ (4,280) Comprehensive Income: Net income 99,074 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,033) Realized gain Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (56,235) Treasury shares acquired (102,521) 2 Issued: IWC Resources Corporation acquisition 152,405 55,007 NEM Acquisition 4,118 1,351 Employee stock purchase plan 142 211 Long-term incentive plan 2,435 116 (443) Amortization of unearned compensation 982 Other 1 (126) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1997 $ 870,930 $ 336,416) $ 89,556 $ 634,083 $ (3,741) ========== ========== ========== ========== ========== Balance, January 1, 1998 $ 870,930 $(363,943) $ 89,768 $ 667,790 $ (2,624) Comprehensive Income: Net income 90,167 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $761) Realized gain (net of income tax of $620) Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (58,637) Treasury shares acquired (97,982) 2 Issued: IWC Resources Corporation acquisition NEM Acquisition Employee stock purchase plan 151 357 Long-term incentive plan 5,756 575 (1,130) Amortization of unearned compensation 792 Other 2 (687) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1998 $ 870,930 $(456,018) $ 90,704 $ 698,633 $ (2,962) ========== ========== ========== ========== ==========
Accumulated Shares Other ------------------------ Six Months Ended Comprehensive Comprehensive Common Treasury (continued) Income Total Income Shares Shares ======================== ========== ========== ========== ========== ========== Balance, January 1, 1997 $ 2,608 $1,100,501 $ - 147,784,218 (28,172,896) Comprehensive Income: Net income 99,074 99,074 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,033) 1,297 1,297 1,297 Realized gain Gain (loss) on foreign currency translation: Unrealized 100 100 100 Realized - ---------- Total Comprehensive Income $ 100,471 Dividends: ========== Common shares (56,235) Treasury shares acquired (102,519) (5,177,306) Issued: IWC Resources Corporation acquisition 207,412 10,580,764 NEM Acquisition 5,469 270,064 Employee stock purchase plan 353 17,924 Long-term incentive plan 2,108 164,466 Amortization of unearned compensation 982 Other (125) ---------- ---------- ---------- ---------- Balance, June 30, 1997 $ 4 ,005 $1,258,417 147,784,218 (22,316,984) ========== ========== ========== ========== Balance, January 1, 1998 $ 2,867 $1,264,788 $ - 147,784,218 (23,471,554) Comprehensive Income: Net income 90,167 90,167 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $761) 1,249 1,249 1,249 Realized gain (net of income tax of $620) (1,016) (1,016) (1,016) Gain (loss) on foreign currency translation: Unrealized (684) (684) (684) Realized 186 186 186 ---------- Total Comprehensive Income $ 89,902 Dividends: ========== Common shares (58,637) Treasury shares acquired (97,980) (3,627,427) Issued: IWC Resources Corporation acquisition NEM Acquisition Employee stock purchase plan 508 18,988 Long-term incentive plan 5,201 329,844 Amortization of unearned compensation 792 Other (685) ---------- ---------- ---------- ---------- Balance, June 30, 1998 $ 2,602 $1,203,889 147,784,218 (26,750,149) ========== ========== ========== ==========
Consolidated Statement Of Common Shareholders' Equity Additional (Dollars in thousands) Common Treasury Paid-in Retained Twelve Months Ended Shares Shares Capital Earnings Other ======================== ========== ========== ========== ========== ========== Balance, July 1, 1996 $ 870,930 $ 339,673) $ 32,674 $ 558,076 $ (5,662) Comprehensive Income: Net income 184,893 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,326) Realized gain Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (108,738) Treasury shares acquired (159,983) 2 Issued: IWC Resources Corporation acquisition 152,405 55,007 NEM Acquisition 4,118 1,351 Employee stock purchase plan 283 404 Long-term incentive plan 6,434 116 (443) Amortization of unearned compensation 2,364 Other 2 (148) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1997 $ 870,930 $(336,416) $ 89,556 $ 634,083 $ (3,741) ---------- ---------- ---------- ---------- ---------- Net income 181,942 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,001) Realized gain (net income tax of $620) Gain (loss) on foreign currency translation: Unrealized Realized Total Comprehensive Income Dividends: Common shares (116,705) Treasury shares acquired (128,534) 1 Issued: IWC Resources Corporation acquisition NEM Acquisition Employee stock purchase plan 282 570 Long-term incentive plan 8,650 575 (1,130) Amortization of unearned compensation 1,909 Other 2 (687) ---------- ---------- ---------- ---------- ---------- Balance, June 30, 1998 $ 870,930 $(456,018) $ 90,704 $ 698,633 $ (2,962) ========== ========== ========== ========== ==========
Accumulated Shares Other ------------------------ Twelve Months Ended Comprehensive Comprehensive Common Treasury (continued) Income Total Income Shares Shares ======================== ========== ========== ========== ========== ========== Balance, July 1, 1996 $ (117) $1,116,228 $ - 147,784,218 (25,474,720) Comprehensive Income: Net income 184,893 184,893 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,326) 2,171 2,171 2,171 Realized gain Gain (loss) on foreign currency translation: Unrealized 1,951 1,951 1,951 Realized - ---------- Total Comprehensive Income $ 189,015 Dividends: ========== Common shares (108,738) Treasury shares acquired (159,981) (8,185,026) Issued: IWC Resources Corporation acquisition 207,412 10,580,764 NEM Acquisition 5,469 270,064 Employee stock purchase plan 687 35,568 Long-term incentive plan 6,107 456,366 Amortization of unearned compensation 2,364 Other (146) ---------- ---------- ---------- ---------- Balance, June 30, 1997 $ 4 ,005 $1,258,417 147,784,218 (22,316,984) ========== ========== ========== ========== Net income 181,942 $ 181,942 Other comprehensive income, net of tax: Unrealized gain (net of income tax of $1,001) 1,641 1,641 1,641 Realized gain(net income tax of $620) (1,016) (1,016) (1,016) Gain (loss) on foreign currency translation: Unrealized (2,214) (2,214) (2,214) Realized 186 186 186 ---------- Total Comprehensive Income $ 180,539 Dividends: ========== Common shares (116,705) Treasury shares acquired (128,533) (4,987,049) Issued: IWC Resources Corporation acquisition NEM Acquisition Employee stock purchase plan 852 35,440 Long-term incentive plan 8,095 518,444 Amortization of unearned compensation 1,909 Other (685) ---------- ---------- ---------- ---------- Balance, June 30, 1998 $ 2,602 $ 1,203,889 147,784,218 (26,750,149) ========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Cash Flows (In thousands) Three Months Six Months Ended June 30, Ended June 30, -------------------- -------------------- 1998 1997 1998 1997 ======== ======== ======== ======== Cash flows from operating activities: Net income $ 29,445 $ 28,236 $ 90,167 $99,074 Adjustments to reconcile net income to net cash: Depreciation and amortization 63,643 64,414 126,917 122,759 Deferred federal and state income taxes, net (12,610) (20,752) (42,650) (33,095) Deferred investment tax credits, net (1,821) (1,833) (3,642) (3,635) Advance contract payment 475 475 950 950 Change in certain assets and liabilities -* Accounts receivable, net 12,898 5,276 507 19,063 Other receivables 94,656 (29,341) 74,066 (69,352) Electric production fuel 4,742 (4,500) 2,338 (2,149) Materials and supplies 1,456 (237) (540) (17) Natural gas in storage (16,553) (17,109) 23,860 29,966 Accounts payable (4,160) (32,816) (17,630) (60,151) Taxes accrued (67,836) (42,513) 12,477 35,249 Fuel adjustment clause 1,736 4,673 3,304 892 Gas cost adjustment clause 11,147 40,931 63,166 53,159 Accrued employment costs (1,649) 2,896 (17,945) (1,925) Other accruals (4,587) (12,612) (8,593) 12,899 Other, net (9,205) 5,195 (15,412) 8,829 -------- -------- -------- -------- Net cash provided by (used in) operating activities 101,777 (9,617) 291,340 212,516 -------- -------- -------- -------- Cash flows provided by (used in) investing activities: Utilities construction expenditures (64,075) (62,090) (112,278) (108,671) Acquisition of IWC Resources Corporation, net of cash acquired - (82,985) - (288,932) Acquisition of minority interest - (5,641) - (5,641) Proceeds from disposition of assets 714 275 10,419 29,775 Proceeds from settlement of litigation - - - - Other, net (15,228) (425) (41,144) 19,777) -------- -------- -------- -------- Net cash used in investing activities (78,589) (150,866) (143,003) (393,246) -------- -------- -------- -------- Cash flows provided by (used in) financing activities: Issuance of long-term debt 4 271,960 6,375 408,262 Issuance of short-term debt 610,408 321,050 887,329 575,095 Net change in commercial paper 60,600 (113,250) 20,600 (255,555) Retirement of long-term debt (35,026) (38) (37,573) (1,507) Retirement of short-term debt (561,023) (312,875) (867,696) (598,495) Retirement of preferred shares (1,255) (1,252) (1,256) (1,253) Issuance of common shares 3,499 6,847 6,839 215,333 Acquisition of treasury shares (74,684) (45,938) (97,980) (102,529) Cash dividends paid on common shares (29,520) (28,323) (59,309) (55,095) Other, net 117 (583) 238 (468) -------- -------- -------- -------- Net cash provided by (used in) financing activities (26,880) 97,598 (142,433) 183,788 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (3,692) (62,885) 5,904 3,058 Cash and cash equivalents at Beginning of period 40,376 92,276 30,780 26,333 -------- -------- -------- -------- Cash and cash equivalents at End of period $ 6,684 $ 29,391 $ 36,684 $ 29,391 ======== ======== ======== ======== *Net of effect from purchase of IWC Resources Corporation. The accompanying notes to consolidated financial statements are an integral part of this statement.
Consolidated Statement of Cash Flows (In thousands) Twelve Months Ended June 30, -------------------- 1998 1997 ======== ======== Cash flows from operating activities: Net income $181,942 $184,893 Adjustments to reconcile net income to net cash: Depreciation and amortization 253,962 241,617 Deferred federal and state income taxes, net (11,204) (24,311) Deferred investment tax credits, net (7,383) (7,704) Advance contract payment 1,900 1,900 Change in certain assets and liabilities -* Accounts receivable, net (55,925) (69,118) Other receivables 78,371 (66,779) Electric production fuel 12,133 2,265 Materials and supplies 2,042 2,090 Natural gas in storage (2,449) (5,597) Accounts payable 23,954 13,820 Taxes accrued (19,383) 39,543 Fuel adjustment clause 8,882 3,366 Gas cost adjustment clause 20,230 1,891 Accrued employment costs (3,885) 4,595 Other accruals (12,063) 8,163 Other, net 36,157 22,844 -------- -------- Net cash provided by(used in) operating activities 507,281 353,478 -------- -------- Cash flows provided by (used in) investing activities: Utilities construction expenditures (222,538) (214,650) Acquisition of IWC Resources Corporation, net of cash acquired - (288,932) Acquisition of minority interest - (5,641) Proceeds from disposition of assets 16,637 29,775 Proceeds from settlement of litigation 41,069 - Other, net (76,187) (32,428) -------- -------- Net cash used in investing activities (241,019) (511,876) -------- -------- Cash flows provided by (used in) financing activities: Issuance of long-term debt 256,345 409,178 Issuance of short-term debt 1,341,742 1,558,897 Net change in commercial paper 51,510 (118,850) Retirement of long-term debt (360,670) (82,562) Retirement of short-term debt (1,311,425) (1,560,194) Retirement of preferred shares (2,411) (2,411) Issuance of common shares 10,072 219,635 Acquisition of treasury shares (128,528) (159,991) Cash dividends paid on common shares (115,807) (106,292) Other, net 203 (881) -------- -------- Net cash provided by (used in) financing activities (258,969) 156,529 -------- -------- Net increase (decrease) in cash and cash equivalents 7,293 (1,869) Cash and cash equivalents at Beginning of period 29,391 31,260 -------- -------- Cash and cash equivalents at End of period $ 36,684 $ 29,391 ======== ======== *Net of effect from purchase of IWC Resources Corporation. The accompanying notes to consolidated financial statements are an integral part of this statement.
Notes to Consolidated Financial Statements (1) Holding Company Structure: NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding company providing electric energy, natural gas and water to the public through its six wholly-owned regulated subsidiaries (Utilities): Northern Indiana Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline Company (Crossroads); Indianapolis Water Company (IWC); and Harbour Water Corporation (Harbour). Industries' regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy Utilities"; and regulated water subsidiaries (IWC and Harbour) are referred to as "Water Utilities." Industries also provides non-regulated energy/utility-related services including gas marketing and trading; wholesale power marketing; power generation; gas transmission, supply and storage; installation, repair and maintenance of underground pipelines; utility line locating and marking; and related products targeted at customer segments principally through the following wholly-owned subsidiaries: NIPSCO Development Company, Inc. (Development); NI Energy Services, Inc. (Services) (formerly known as NIPSCO Energy Services, Inc.); Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller); and SM&P Utility Resources, Inc. (SM&P). NIPSCO Capital Markets, Inc. (Capital Markets) handles financing for Industries and its subsidiaries, other than Northern Indiana. These subsidiaries, other than the wholesale power marketing operations of Services, are referred to collectively as "Products and Services." On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's subsidiaries include two regulated water utilities (IWC and Harbour) and five non-utility companies including Miller and SM&P. On December 16, 1997, the Board of Directors authorized a two-for-one split of Industries' common stock. The stock split was paid February 20, 1998, to shareholders of record at the close of business January 30, 1998. All references to number of shares reported for the period including per share amounts and stock option data of Industries' common stock reflect the two-for-one stock split as if it had occurred at the beginning of the earliest period. On December 18, 1997, Industries and Bay State Gas Company signed a definitive merger agreement under which Industries will acquire all of the common stock of Bay State Gas Company in a stock-for-stock transaction. Refer to "Purchase of Bay State Gas Company" in Note 4 to Consolidated Financial Statements for a more detailed discussion of the proposed acquisition. (2) Summary of Significant Accounting Policies: Basis of Presentation. The consolidated financial statements include the accounts of majority-owned subsidiaries of Industries after the elimination of significant intercompany accounts and transactions. Investments for which Industries has at least a 20% interest and certain joint ventures are accounted for under the equity method. Investments with less than a 20% interest are accounted for under the cost method. Certain reclassifications were made to conform the prior years' financial statements to the current presentation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating Revenues. Utility revenues are recorded based on estimated service rendered, but are billed to customers monthly on a cycle basis. Electric and gas marketing revenues are recognized as the related commodity is delivered to customers. Construction revenues are recognize on the percentage of completion method whereby revenues are recognized in proportion to costs incurred over the life of each project. Industries records provisions for losses on construction contracts, if any, in the period in which such losses become probable. Depreciation and Maintenance. The Utilities provide depreciation on a straight-line method over the remaining service lives of the electric, gas, water and common properties. The approximated weighted average remaining lives for major components of each electric, gas and water plant are as follows: Electric: Electric generation plant 24 years Transmission plant 26 years Distribution plant 25 years Other electric plant 24 years The depreciation provision for electric utility plant, as a percentage of the original cost, was 3.7% for the three-month period and 3.6% for the six-month and twelve-month periods, ended June 30, 1998, and was 3.6% for the three-month, six-month and twelve-month periods, ended June 30, 1997. Gas: Gas storage plant 18 years Transmission plant 34 years Distribution plant 27 years Other gas plant 24 years The depreciation provision for gas utility plant, as a percentage of the original cost, was 5.1% for the three-month period and 5.2% for the six-month and twelve-month periods, ended June 30, 1998, and was 5.1% for the three-month, six-month and twelve-month periods, ended June 30, 1997. Water: Water source and treatment plant 34 years Distribution plant 68 years Other water plant 13 years The depreciation provision for water utility plant, as a percentage of the original cost, was 2.0% for the three-month, six-month, and the twelve-month periods ended June 30, 1998, and 2.0% for the three month period ended June 30, 1997.
The Utilities follow the practice of charging maintenance and repairs, including the cost of renewals of minor items of property, to maintenance expense accounts, except for repairs of transportation and service equipment which are charged to clearing accounts and redistributed to operating expense and other accounts. When property which represents a retired unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. Plant Acquisition Adjustments. Utility plant includes amounts representing the excess of purchase price over underlying book values associated with the acquisitions of Kokomo Gas, NIFL, IWC and Harbour. These amounts are being amortized over a forty-year period from the respective dates of acquisition. The plant acquisition adjustments net of accumulated amortization were $187.9 million and $190.4 million at June 30, 1998 and December 31, 1997, respectively. Amortization of Software Costs. Industries has capitalized software relating to various technology functions. At the date of installation, Industries estimates that the specific software will have a useful life between five and ten years. The Federal Energy Regulatory Commission (FERC) prescribes certain amortization periods, and Industries' management has determined that, on average, these are reasonable useful life estimates for the portfolio of capitalized software. The Energy Utilities include these amortization estimates, based on useful life, in their quarterly filings with the Indiana Utility Regulatory Commission (Commission). Intangible Assets. The excess of cost over the fair value of the net assets of non-utility subsidiaries acquired is reported as goodwill and is being amortized on a straight-line basis over a weighted average period of 34 years. Other intangible assets approximating $7.7 million are being amortized over a period of eight years. Industries assesses the recoverability of its intangible assets on a periodic basis to confirm that expected future cash flows will be sufficient to support the recorded intangible assets. Accumulated amortization of intangibles at June 30, 1998 and December 31, 1997, was approximately $3.3 million and $1.6 million, respectively. Coal Reserves. Northern Indiana has a long-term mining contract to mine its coal reserves through the year 2001. The costs of these reserves are being recovered through the rate-making process as such coal reserves are used to produce electricity. Power Purchased. Power purchases and net interchange power with other electric utilities under interconnection agreements and wholesale power purchases are included in Cost of Sales under the caption "Power purchased." Accounts Receivable. At June 30, 1998, Northern Indiana had sold $100 million of its accounts receivable under a sales agreement which expires May 31, 2002. Customer Advances and Contributions in Aid of Construction. IWC allows developers to install and provide for the installation of water main extensions, which are to be transferred to IWC upon completion. The cost of the main extensions and the amount of any funds advanced for the cost of water mains installed are included in customer advances for construction and are generally refundable to the customer over a period of ten years. Advances not refunded within ten years are permanently transferred to contributions in aid of construction. Comprehensive Income. Industries adopted SFAS No. 130, "Reporting Comprehensive Income" effective January 1, 1998. The objective of the statement is to report comprehensive income which is a measure of all changes in equity of an enterprise which result from transactions or other economic events during the period other than transactions with shareholders. This information is reported in Industries' Consolidated Statement of Common Shareholders' Equity. Industries' components of accumulated other comprehensive income includes unrealized gains (losses) on available for sale securities and unrealized gains (losses) on foreign currency translation adjustments. The accumulated amounts for these components, respectively, were $2.8 million and $(0.5) million as of April 1, 1997; $5.6 million and $(1.6) million as of April 1, 1998; $2.7 million and $(0.1) million as of January 1, 1997; $4.4 million and $(1.5) million as of January 1, 1998; $1.9 million and $(2.0) million, as of July 1, 1996: and $4.0 million and $(0.1) as of July, 1, 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 Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, -------------------- -------------------- -------------------- (In thousands) 1998 1997 1998 1997 1998 1997 ======== ======== ======== ======== ======== ======== Income taxes $ 76,100 $ 61,700 $ 76,100 $ 61,700 $131,249 $ 81,747 Interest, net of amounts capitalized 32,637 32,544 56,186 44,655 113,892 90,988
Fuel Adjustment Clause. All metered electric rates contain a provision for adjustment in charges for electric energy to reflect increases and decreases in the cost of fuel and the fuel cost of purchased power through operation of a fuel adjustment clause. As prescribed by order of the Commission applicable to metered retail rates, the adjustment factor has been calculated based on the estimated cost of fuel and the fuel cost of purchased power in a future three-month period. If two statutory requirements relating to expense and return levels are satisfied, any under-recovery or over-recovery caused by variances between estimated and actual cost in a given three-month period will be included in a future filing. Northern Indiana records any under-recovery or over-recovery as a current asset or current liability until such time as it is billed or refunded to its customers. The fuel adjustment factor is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. Gas Cost Adjustment Clause. All metered gas rates contain an adjustment factor, which reflects the cost of purchased gas, contracted gas storage and storage transportation charges. The Energy Utilities record any under-recovery or over-recovery as a current asset or current liability until such time it is billed or refunded to 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 factor for each of Kokomo Gas and NIFL is subject to semi-annual hearings by the Commission and remains in effect for a six-month period. If the statutory requirement relating to the level of return is satisfied, any under-recovery or over-recovery caused by variances between estimated and actual cost in a given three-month or six-month period will be included in a future filing. The Northern Indiana gas cost adjustment factor includes a gas cost incentive mechanism (GCIM) which allows Northern Indiana to share any cost savings or cost increases with customers based on a comparison of Northern Indiana's actual gas supply portfolio costs to a market based benchmark price. See note 6, FERC Order No. 636 for a discussion of gas transition cost charges. Natural Gas in Storage. Northern Indiana's natural gas in storage is valued using the last-in, first-out (LIFO) inventory methodology. Based on the average cost of gas purchased in June 1998 and December 1997 the estimated replacement cost of gas in storage (current and non-current) at June 30, 1998 and December 31, 1997 exceeded the stated LIFO cost by approximately $41 million and $42 million, respectively. Certain other subsidiaries of Industries have natural gas in storage valued at average cost. Hedging Activities. Industries utilizes a variety of commodity-based derivative financial instruments to reduce the price risk inherent in its natural gas and electric power marketing activities. The gains and losses on these derivative financial instruments are deferred (Other Current Assets or Other Current Liabilities) pursuant to an identified risk reduction strategy. Such deferrals are recognized in income concurrent with the disposition of the underlying physical commodity. In certain circumstances, a derivative financial instrument will serve to hedge the acquisition cost of gas injected into storage. In this situation, the gain or loss on the derivative financial instrument is deferred as part of the cost basis of gas in storage and recognized upon the ultimate disposition of the natural gas. If a derivative financial instrument contract is terminated early because it is probable that a transaction or anticipated transaction will not occur, any gain or loss as of such date is immediately recognized in earnings. If a derivative financial instrument contract is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and recorded when the associated transaction or anticipated transaction affects earnings. Industries uses commodity futures contracts, options and swaps to hedge the impact of natural gas price fluctuations related to its business activities, including price risk related to the physical location of the natural gas (basis risk). As of June 30, 1998, Industries had open derivative financial instruments representing hedges of natural gas sales of 13.0 billion cubic feet (Bcf), natural gas purchases of 24.2 Bcf and net basis differentials of 23.8 Bcf. The net deferred loss on these derivative financial instruments as of June 30, 1998 was not material. Industries utilizes options to hedge price risk associated with a portion of its fixed price purchase and sale commitments related to electricity. The deferred premiums on these options as of June 30, 1998 were not material. Impact of Accounting Standards. During June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that a company recognize those items as assets or liabilities in the balance sheet and measure them at fair value. This Statement generally provides for matching of the timing of gain or loss recognition of derivatives instruments designated as a hedge with the recognition of changes in the fair value of the hedged asset or liability through earnings. This Statement also provides that the effective portion of a hedging instrument's gain or loss on a forecasted transaction be initially reported in other comprehensive income and subsequently reclassified into earnings when the hedged forecasted transaction affects earnings. Industries expects to adopt this Statement on January 1, 2000, and is currently assessing the impact of adoption on its financial position and results of operations. Regulatory Assets. The Utilities' operations are subject to the regulation of the Commission and, in the case of the Energy Utilities, the FERC. Accordingly, the Utilities' accounting policies are subject to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." The Utilities monitor changes in market and regulatory conditions and the resulting impact of such changes in order to continue to apply the provisions of SFAS No. 71 to some or all of their operations. As of June 30, 1998 and December 31, 1997, the regulatory assets identified below represent probable future revenue to the Utilities associated with certain incurred costs as these costs are recovered through the rate-making process. If a portion of the Utilities' operations becomes no longer subject to the provisions of SFAS No. 71, a write-off of certain regulatory assets might be required, unless some form of transition cost recovery is established by the appropriate regulatory body which would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. Regulatory assets were comprised of the following items:
June 30, December 31, (In thousands) 1998 1997 ========== ========== Unamortized reacquisition premium on debt (Note 19) $ 44,990 $ 46,748 Unamortized R.M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (See below) 64,437 66,546 Bailly scrubber carrying charges and deferred depreciation (See below) 9,413 9,880 Deferred SFAS No. 106 expense not recovered (Note 10) 84,706 87,653 FERC Order No. 636 transition costs (Note 6) 23,985 28,744 Regulatory income tax asset, net (Note 8) 7,141 6,941 Other 4,172 4,261 ---------- ---------- 238,844 250,773 Less: Current portion of regulatory assets 34,501 39,260 ---------- ---------- $ 204,343 $ 211,513 ========== ==========
Carrying Charges and Deferred Depreciation. Upon completion of R. M. Schahfer Units 17 and 18, Northern Indiana capitalized the carrying charges and deferred depreciation in accordance with orders of the Commission until the cost of each unit was allowed in rates. Such carrying charges and deferred depreciation are being amortized over the remaining life of each unit. Northern Indiana has capitalized carrying charges and deferred depreciation and certain operating expenses relating to its scrubber service agreement for its Bailly Generating Station in accordance with an order of the Commission. The accumulated balance of the deferred costs and related carrying charges is being amortized over the remaining life of the scrubber service agreement. Allowance for Funds Used During Construction. Allowance for funds used during construction (AFUDC) is charged to construction work in progress during the period of construction and represents the net cost of borrowed funds used for construction purposes and a reasonable rate upon other (equity) funds. Under established regulatory rate practices, after the construction project is placed in service, Northern Indiana is permitted to include in the rates charged for utility services (a) a fair return on and (b) depreciation of such AFUDC included in plant in service. At January 1, 1996, a pre-tax rate of 5.5% for all construction was being used; effective January 1, 1997 the rate remained at 5.5%; and effective January 1, 1998, the rate increased to 6.0%. Foreign Currency Translation. Translation gains or losses are based upon the end-of-period exchange rate and are recorded as a separate component of other comprehensive income reflected in the Consolidated Statement of Shareholders' Equity. Investments in Real Estate. Development invests in a series of affordable housing projects within the Utilities' service territories. These investments include certain tax benefits, including low-income housing tax credits and tax deductions for operating losses of the housing projects. Development accounts for these investments using the equity method. Investments, at equity, include $35.1 million and $30.1 million relating to affordable housing projects at June 30, 1998 and December 31, 1997, respectively. Income Taxes. Deferred income taxes are recognized as costs in the rate-making process by the commissions having jurisdiction over the rates charged by the Utilities. Deferred income taxes are provided as a result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. These taxes are reversed by a debit or credit to deferred income tax expense as the temporary differences reverse. Investment tax credits have been deferred and are being amortized to income over the life of the related property. (3) Purchase of IWC Resources Corporation: On March 25, 1997, Industries acquired all the outstanding common stock of IWCR for $290.5 million. Industries financed this transaction with debt of approximately $83.0 million and issuance of approximately 10.6 million Industries' common shares. Industries accounted for the acquisition as a purchase. The purchase price was allocated to the assets and liabilities acquired based on their fair values. (4) Purchase of Bay State Gas Company: On December 18, 1997, Industries and Bay State Gas Company (Bay State) signed a definitive merger agreement under which Industries will acquire all of the common stock of Bay State in a stock-for-stock transaction valued at $40 per Bay State share. The transaction is valued at approximately $551 million. Bay State shareholders will have the option of taking up to 50 percent of the total purchase price in cash. Consummation of the merger is subject to certain closing conditions, including the approval by the Securities and Exchange Commission, FERC and state regulatory agencies in Massachusetts, New Hampshire and Maine. The shareholders of Bay State approved the merger on May 27, 1998, and the state regulatory agencies in New Hampshire and Maine have also approved the merger. The transaction is expected to be completed in late 1998. Bay State, one of the largest natural gas utilities in New England, provides natural gas distribution service to more than 300,000 customers in Massachusetts, New Hampshire and Maine. The combined company will be one of the 10 largest natural gas distribution systems in the nation, servicing more than 1 million gas customers. In addition, Industries and Bay State have entered into joint marketing agreements to expand the operation of Bay State's non-regulated energy service companies. (5) NESI Energy Marketing Canada Ltd. Litigation: On October 31, 1996, Services' wholly-owned subsidiary NIPSCO Energy Services Canada Ltd. (NESI Canada) acquired 70% of the outstanding shares of Chandler Energy Inc., a gas marketing and trading company located in Calgary, Alberta, and subsequently renamed it NESI Energy Marketing Canada Ltd. (NEMC). Between November 1 and November 27, 1996, gas prices in the Calgary market increased dramatically. As a result, NEMC was selling gas, pursuant to contracts entered into prior to the acquisition date, at prices substantially below its costs to acquire such gas. On November 27, 1996, NEMC ceased doing business and sought protection from its creditors under the Companies' Creditors Arrangement Act, a Canadian corporate reorganization statute. NEMC was declared bankrupt as of December 12, 1996. Certain creditors of NEMC have filed claims against Industries, Services, Capital Markets and NESI Canada, alleging certain misrepresentations relating to NEMC's financial condition and claiming damages. Industries and its affiliates intend to vigorously defend against such claims and any other claims seeking to assert that any party other than NEMC is responsible for NEMC's liabilities. Industries has fully reserved its investment in NEMC. Management believes that any additional loss relating to NEMC would not be material to the results of operations or financial position of Industries. (6) FERC Order No. 636: Since December 1993, the Energy Utilities have paid approximately $140.5 million of interstate pipeline transition costs to pipeline suppliers to reflect the impact of FERC Order No. 636. The Energy Utilities expect that additional transition costs will not be significant. The Commission has approved the recovery of these FERC-allowed transition costs on a volumetric basis from sales and transportation customers. Regulatory assets, in amounts corresponding to the costs recorded but not yet collected, have been recorded to reflect the ultimate recovery of these costs. (7) Environmental Matters: The Utilities have an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. The Utilities intend to continue to evaluate their facilities and properties with respect to these rules and identify any sites that would require corrective action. The Utilities have recorded a reserve of approximately $17 million to cover probable corrective actions as of June 30, 1998; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, the Utilities believe that any corrective actions required, after consideration of insurance coverages and contributions from other potentially responsible parties, will not have a significant impact on the results of operations or financial position of Industries. Because of major investments made in modern environmental control facilities and the use of low-sulfur coal, all of Northern Indiana's electric production facilities now comply with the sulfur dioxide limitations contained in the acid deposition provisions of the Clean Air Act Amendments of 1990 (CAAA). Reflecting this compliance, on December 31, 1997, the Indiana Department of Environmental Management (IDEM) issued the Phase II Acid Rain permits for all four of Northern Indiana's electric generating stations. As discussed below, however, other provisions of the CAAA impose additional requirements on Northern Indiana. On December 19, 1996, the Environmental Protection Agency (EPA) promulgated rules for Phase II of the Acid Rain nitrogen oxides (NOx) reduction program. For Phase I, during the summer of 1997, the EPA formally approved the Acid Rain Early Election permits for the pulverized coal units at D. H. Mitchell and R. M. Schahfer stations. The permits establish the Phase I limits for the NOx emissions on these units until 2007. On December 23, 1997, Northern Indiana submitted an Acid Rain Phase II NOx Compliance Plan to IDEM which included additional controls for two cyclone fired boilers and a plan for emission averaging to achieve the NOx limits for the system by 2000. Northern Indiana plans a project to demonstrate a cost effective combustion control technique on the Unit 12 cyclone fired boiler at Michigan City during 1998. The CAAA also contain other provisions that could lead to limitations on emissions of hazardous air pollutants which may require significant capital expenditures for control of these emissions. Northern Indiana cannot predict what these requirements will be or the costs of complying with these potential requirements. On October 10, 1997, and supplemented on May 11, 1998, the EPA proposed a rule under the nonattainment provisions of the CAAA to reduce emissions transported across state boundaries that allegedly are contributing to nonattainment of the one hour ozone standard in downwind states. Because NOx, along with other factors, contributes to ozone formation, the EPA proposed significant NOx reductions for 22 states, including Indiana, to address the ozone transport issue. These proposals, and any resulting NOx emission limitations, arise under different provisions of the CAAA than the Acid Rain NOx program and can result in additional, more restrictive emission limitations than are imposed under the Acid Rain Program. The EPA has encouraged states to achieve the reductions by requiring controls on electric utilities and large boilers. Northern Indiana is evaluating the EPA's proposal and evaluating potential requirements that could result from any final rule. The EPA issued final rules on July 18, 1997, revising the National Ambient Air Quality Standards for ozone and particulate matter. The revised standards begin a regulatory process that may lead to reductions in particulate, NOx emissions and possibly sulfur dioxide emissions from many sources including Northern Indiana's coal-fired boilers at its generating stations, beyond current CAAA requirements. Northern Indiana cannot predict the costs of complying with future control requirements to meet these new standards. Northern Indiana will continue to closely monitor developments in this area and anticipates the exact nature of the impact of the new standards on its operations will not be known for some time. The EPA has notified Northern Indiana that it is a Apotentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. In December 1997, at the Summit on Climate Change in Kyoto, Japan, 159 nations formally agreed to targets reducing worldwide levels of greenhouse gases. If the U.S. Senate ratifies the agreement, the Kyoto Protocol would impose an obligation on the United States to reduce its emissions of greenhouse gas to a level seven percent below 1990 levels during the period of 2008 to 2012. The impact of this agreement on Northern Indiana is uncertain. Northern Indiana, as a charter member of the Department of Energy's Climate Challenge Program, the electric industries' voluntary reduction effort, has already implemented over 21 projects to voluntarily reduce greenhouse gas emissions. Northern Indiana continues to investigate methods to address reduction in carbon dioxide emissions and will monitor the development of U. S. climate change policy. The Energy Utilities have instituted a program to investigate former manufactured-gas plants where one of them is the current or former owner. The Energy Utilities have identified twenty-eight of these sites and made visual inspections of these sites. Initial samplings have been conducted at eighteen sites. Follow-up investigations have been conducted at eight sites and remedial measures have been selected at five sites. The Energy Utilities will continue their program to assess and cleanup sites. During the course of various investigations, the Energy Utilities have identified impacts to soil, groundwater, sediment and surface water from former manufactured-gas plants. At three sites where residues were noted seeping into rivers, Northern Indiana notified IDEM and the EPA and immediately took steps to contain the material. The Energy Utilities have worked with IDEM or the EPA on investigation or remedial activities at several sites. Three of the sites have been enrolled in the IDEM Voluntary Remediation Program (VRP). The goal of placing these sites in the VRP is to obtain IDEM approval of the selection and implementation of whatever remedial measures, if any, may be required. The Energy Utilities anticipate placing additional sites in the VRP after remedial measures have been selected. Northern Indiana and Indiana Gas Company, Inc. (Indiana Gas) have entered into an agreement covering cost sharing and management of investigation and remediation programs at five former manufactured-gas plant sites at which both companies or their predecessors were former operators or owners. One of these sites is the Lafayette site which Indiana Gas had previously notified Northern Indiana is being investigated and remediated pursuant to an administrative order with IDEM. Northern Indiana also notified Cinergy Services, Inc. (Cinergy) (formerly PSI Energy, Inc.) that it was a former owner or operator of seven former manufactured-gas plants at which Northern Indiana had conducted or was planning investigation or remediation activities. In December 1996, Northern Indiana sent a written demand to Cinergy related to one of these sites, Goshen. Northern Indiana demanded that Cinergy pay Northern Indiana for costs Northern Indiana has already incurred and to be incurred to implement the needed remedy at the Goshen site. In August 1997, Northern Indiana filed suit in federal court against Cinergy seeking recovery of those costs. In 1994, the Energy Utilities approached various companies that provided insurance coverage which the Energy Utilities believe covers costs related to actions taken at former manufactured-gas plants. There has been litigation between Northern Indiana and various insurance companies over covered costs. Northern Indiana has filed claims in state court against various insurance companies, seeking coverage for costs associated with several former manufactured-gas plants and damages for alleged misconduct by some of the insurance companies. The state court action is now proceeding. Northern Indiana has received cash settlements from several of the insurance companies. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of public, governmental and media attention. Recently, researchers from the National Cancer Institute and the Childhood Cancer Group reported they found no evidence that magnetic fields in homes increase the risk of childhood leukemia. This study follows an EMF report released in 1997 by the U.S. National Research Council of the National Academy of Sciences, which concluded, after examining more than 500 EMF studies spanning 17 years, that, among other things, there was insufficient evidence to consider EMF a threat to human health. A new report in June 1998 from a National Institutes of Health panel accepted the position that EMF should be regarded as a "possible human carcinogen". Further panel comments also stated that the risk "is possibly quite small compared to many other public health risks." The Water Utilities are subject to pollution control and water quality control regulations, including those issued by the EPA, IDEM, the Indiana Water Pollution Control Board and the Indiana Department of Natural Resources. Under the Federal Clean Water Act and Indiana's regulations, IWC must obtain National Pollutant Discharge Elimination System (NPDES) permits for discharges from its water treatment stations. Applications for renewal of any expiring permits have been filed and are the subject of ongoing discussions with, but have not been finalized by, IDEM. These permits continue in effect pending review of the current applications. Under the Federal Safe Drinking Water Act (SDWA), the Water Utilities are subject to regulation by the EPA for the quality of water sold and treatment techniques used to make the water potable. The EPA promulgates nationally applicable maximum contaminant levels (MCLs) for contaminants found in drinking water. Management believes the Water Utilities are currently in compliance with all MCLs promulgated to date. The EPA has continuing authority, however, to issue additional regulations under the SDWA. In August 1996, Congress amended the SDWA to allow the EPA more authority to weigh the costs and benefits of regulations being considered in some, but not all, cases. The 1996 amendments do not, however, reduce the number of new standards previously required. Such standards promulgated could be costly and require substantial changes in the Water Utilities' operations. The Water Utilities would expect to recover the costs of such changes through their water rates; however, such recovery may not necessarily be timely. Under a 1991 law enacted by the Indiana Legislature, a water utility may petition the Commission for prior approval of its plans and estimated expenditures required to comply with provisions of, and regulations under, the Federal Clean Water Act and SDWA. Upon obtaining such approval, a water utility may include, to the extent of its estimated costs as approved by the Commission, such costs in its rate base for rate-making purposes and recover its costs of developing and implementing the approved plans if statutory standards are met. The capital costs for such new systems, equipment or facilities or modifications of existing facilities may be included in a water utility's rate base upon completion of construction of the project or any part thereof. While use of this statute is voluntary on the part of a water utility, if utilized, it should allow water utilities a greater degree of confidence in recovering major costs incurred to comply with environmentally related laws on a timely basis. (8) Income Taxes: Industries uses the liability method of accounting for income taxes under which deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. To the extent certain deferred income taxes of the Utilities are recoverable or payable through future rates, regulatory assets and liabilities have been established. Regulatory assets are primarily attributable to undepreciated AFUDC-equity and the cumulative net amount of other income tax timing differences for which deferred taxes had not been provided in the past, when regulators did not recognize such taxes as costs in the rate-making process. Regulatory liabilities are primarily attributable to the Utilities' obligation to credit to ratepayers deferred income taxes provided at rates higher than the current federal tax rate currently being credited to ratepayers using the average rate assumption method and unamortized deferred investment tax credits. The components of the net deferred income tax liability at June 30, 1998 and December 31, 1997, are as follows:
June 30, December 31, (In thousands) 1998 1997 ========= ========= Deferred tax liabilities - Accelerated depreciation and other property differences $ 785,694 $ 779,223 AFUDC-equity 34,067 35,282 Adjustment clauses 9,937 35,253 Other regulatory assets 30,800 31,862 Reacquisition premium on debt 17,647 18,335 Deferred tax assets - Deferred investment tax credits (38,622) (40,017) Removal costs (150,307) (144,111) Other postretirement/postemployment benefits (47,933) (45,298) Other, net (19,266) (3,069) --------- --------- 622,017 667,460 Less: Deferred income taxes related to current assets and liabilities (14,084) 15,645 --------- --------- Deferred income taxes -noncurrent $ 636,101 $ 651,815 ========= =========
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ---------------------- ---------------------- ---------------------- (In thousands) 1998 1997 1998 1997 1998 1997 ========= ========= ========= ========= ========= ========= Current income taxes - Federal $ 25,994 $ 33,940 $ 81,911 $ 80,273 $ 99,764 $ 120,506 State 3,861 5,058 12,148 11,950 17,271 18,279 --------- --------- --------- --------- --------- --------- 29,855 38,998 94,059 92,223 117,035 138,785 --------- --------- --------- --------- --------- --------- Deferred income taxes, net - Federal (11,694) (19,222) (39,500) (30,654) (10,618) (22,655) State (916) (1,530) (3,150) (2,441) (586) (1,656) --------- --------- --------- --------- --------- --------- (12,610) (20,752) (42,650) (33,095) (11,204) (24,311) --------- --------- --------- --------- --------- --------- Deferred investment tax credits, net (1,821) (1,833) (3,642) (3,635) (7,383) (7,704) --------- --------- --------- --------- --------- --------- Total income taxes $ 15,424 $ 16,413 $ 47,767 $ 55,493 $ 98,448 $ 106,770 ========= ========= ========= ========= ========= =========
A reconciliation of total income tax expense to an amount computed by applying the statutory federal income tax rate to pre-tax income is as follows:
Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ---------------------- ---------------------- ---------------------- (In thousands) 1998 1997 1998 1997 1998 1997 ========= ========= ========= ========= ========= ========= Net income $ 29,445 $ 28,236 $ 90,167 $ 99,074 $ 181,942 $ 184,893 Add-Income taxes 15,424 16,413 47,767 55,493 98,448 106,770 Dividend requirements on preferred stocks of subsidiaries 2,128 2,179 4,295 4,346 8,640 8,681 --------- --------- --------- --------- --------- --------- Income before preferred dividend requirements of subsidiaries and income taxes $ 46,997 $ 46,828 $ 142,229 $ 158,913 $ 289,030 $ 300,344 ========= ========= ========= ========= ========= ========= Amount derived by multiplying pre-tax income by the statutory rate $ 16,449 $ 16,390 $ 49,780 $ 55,620 $ 101,161 $ 105,120 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation 998 1,044 1,996 2,088 3,980 4,696 Amortization of deferred investment tax credits (1,821) (1,833) (3,642) (3,635) (7,383) (7,704) State income taxes, net of federal income tax benefit 1,594 1,758 4,746 5,327 10,640 10,225 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate (1,271) (1,518) (2,542) (3,036) (3,569) (6,861) Low-income housing credits (960) (764) (1,920) (1,528) (3,448) (1,009) Nondeductible amounts related to amortization of intangible assets and plant acquisition adjustments 629 515 1,258 611 2,287 804 Other, net (194) 821 (1,909) 46 (5,220) 1,499 --------- --------- --------- --------- --------- --------- Total income taxes $ 15,424 $ 16,413 $ 47,767 $ 55,493 $ 98,448 $ 106,770 ========= ========= ========= ========= ========= =========
(9) Pension Plans: Industries and its subsidiaries have four noncontributory, defined benefit retirement plans covering the majority of their employees. Benefits under the plans reflect the employees' compensation, years of service and age at retirement. The change in the benefit obligation for 1997 and 1996 is as follows:
(In thousands) 1997 1996 ========= ========= Benefit obligation at beginning of year (January 1,) $ 743,634 $ 759,557 Service cost 14,714 16,300 Interest cost 57,938 53,477 Plan amendments 25,096 0 Actuarial (gain) loss 73,818 (39,024) Acquisition of IWCR 15,722 0 Benefits paid (55,166) (46,676) --------- --------- Benefit obligation at end of the year (December 31,)$ 875,756 $ 743,634 ========= =========
The change in the fair value of the plans' assets for the years 1997 and 1996 is as follows:
(In thousands) 1997 1996 ======== ======== Fair value of plan assets at beginning of year (January 1,) $ 790,978 $ 705,541 Actual return on plans' assets 126,695 87,407 Employer contributions 46,440 44,706 Acquisition of IWCR 15,910 0 Benefits paid (55,166) (46,676) --------- --------- Plan assets at fair value at end of the year (December 31,) $ 924,857 $ 790,978 ========= =========
The plans' assets are invested primarily in common stocks, bonds and notes. The plans' funded status as of January 1, 1998 and January 1, 1997 is as follows:
January 1, January 1, (In thousands) 1998 1997 ======== ======== Plan assets in excess of benefit obligation $ 49,101 $ 47,344 Unrecognized net actuarial loss (46,960) (66,976) Unrecognized prior service cost 47,114 25,172 Unrecognized transition amount 32,107 38,062 -------- -------- Prepaid pension costs $ 81,362 $ 43,602 ======== ========
The benefit obligation is the present value of future pension benefit payments and is based on a plan benefit formula which considers expected future salary increases. Discount rates of 7.00% and 7.75% and rates of increase in compensation levels of 4.5% and 5.5% were used to determine the benefit obligation at January 1, 1998 and 1997, respectively. The increase in the benefit obligation at January 1, 1998 was impacted by the decrease in the discount rate from 7.75% to 7.00%. Prepaid pension costs were $98.4 million as of June 30, 1998. The following items are the components of provisions for pensions for the three-month, six-month and twelve-month periods ended June 30, 1998 and June 30, 1997:
Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ---------------------- --------------------- ----------------------- (In thousands) 1998 1997 1998 1997 1998 1997 ========= ========= ========= ========= ========= ========= Service costs $ 6,518 $ 4,809 $ 13,036 $ 9,382 $ 18,104 $ 15,094 Interest costs 21,784 16,816 43,568 33,352 67,804 54,700 Expected return on plan assets (29,253) (20,977) (58,506) (41,480) (143,272) (66,928) Amortization of transition obligation ,833 1,765 3,666 3,353 6,531 5,512 Amortization of prior service costs 2,092 950 4,183 1,900 58,942 2,954 --------- --------- --------- --------- --------- --------- $ 2,974 $ 3,363 $ 5,947 $ 6,507 $ 8,109 $ 11,332 ========= ========= ========= ========= ========= =========
Assumptions used in the valuation and determination of 1998 and 1997 pension expense were as follows:
1998 1997 ====== ====== Discount rate 7.00% 7.75% Rate of increase in compensation levels 4.50% 5.50% Expected long-term rate of return on assets 9.00% 9.00%
The plans' assets are invested primarily in common stocks, bonds, and notes. On July 9, 1998, a substantial portion of the plans' domestic equity investments were hedged against significant movements in the S&P 500 Index. The hedge will expire on December 31, 1998. IWCR participates in several industry-wide, multi-employer pension plans for certain of its union employees at Miller. These plans provide for monthly benefits based on length of service. Specified amounts per compensated hour for each employee are contributed to the trustees of these plans. Contributions of $0.5 million, $0.8 million and $1.9 million were made to these plans for the three-month, six-month and twelve-month periods ended June 30, 1998, respectively. The relative position of each employer participating in these plans with respect to the actuarial present value of accumulated plan benefits and net assets available for benefits is not available. (10) Postretirement Benefits: Industries provides certain health care and life insurance benefits for retired employees. The majority of Industries' employees may become eligible for those benefits if they reach retirement age while working for Industries. The expected cost of such benefits is accrued during the employees' years of service. Northern Indiana's rate-making had historically included the cost of providing these benefits based on the related insurance premiums. On December 30, 1992, the Commission authorized the accrual method of accounting for postretirement benefits for rate-making purposes consistent with SFAS No. 106 AEmployers' Accounting for Postretirement Benefits Other Than Pensions," and authorized the deferral of the differences between the net periodic postretirement benefit costs and the insurance premiums paid for such benefits as a regulatory asset. On June 11, 1997, the Commission issued an order approving the inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with these dates. IWC's current rates include postretirement benefit costs on an accrual basis, including amortization of the regulatory asset that arose prior to inclusion of these costs in the rates. IWC currently remits to a grantor trust amounts collected in rates. The following table sets forth the change in the plans' accumulated postretirement benefit obligation (APBO) for the years 1997 and 1996:
(In thousands) 1997 1996 ========= ========= Accumulated postretirement benefit obligation at beginning of year (January 1,) $ 200,790 $ 257,915 Service cost 5,034 7,352 Interest cost 16,215 18,310 Plan amendments 4,015 (10,482) Actuarial (gain) (10,242) (65,718) Acquisition of IWCR 18,505 0 Benefits paid (10,409) (6,587) --------- --------- Accumulated postretirement benefit obligation at end of the year (December 31,) $ 223,908 $ 200,790 ========= =========
The change in the fair value of the plans' assets for the years 1997 and 1996 is as follows:
(In thousands) 1997 1996 ======== ======== Fair value of plan assets at beginning of year (January 1,) $ 0 $ 0 Employer contributions 12,809 6,587 Benefits paid (10,409) (6,587) -------- -------- Plan assets at fair value at end of the year (December 31,) $ 2,400 $ 0 ======== ========
Following is the funded status for postretirement benefits as of January 1, 1998 and January 1, 1997:
January 1, January 1, (In thousands) 1998 1997 ========= ========= Funded status $(221,508) $(200,790) Unrecognized net actuarial gain (99,117) (89,547) Unrecognized prior service cost 4,195 0 Unrecognized transition amount 176,464 175,012 --------- --------- Accrued liability for postretirement benefits $(139,966) $ 115,325) ========= =========
A discount rate of 7.00%, a pre-Medicare medical trend rate of 8% declining to a long-term rate of 5%, a discount rate of 7.75% and a pre-Medicare medical trend rate of 9% declining to a long-term rate of 6%, were used to determine the APBO at January 1, 1998 and 1997, respectively. The increase in the APBO at January 1, 1998 was `primarily attributable to the inclusion of IWCR's APBO and the decrease in the discount rate from 7.75% to 7.00%. The accrued liability for postretirement benefits was $143.5 million at June 30, 1998. Net periodic postretirement benefits costs, before consideration of the rate-making discussed previously, for the three-month, six-month and twelve-month periods ended June 30, 1998 and June 30, 1997 include the following components:
Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, -------------------- -------------------- -------------------- (In thousands) 1998 1997 1998 1997 1998 1997 ======== ======== ======== ======== ======== ======== Service costs $ 1,487 $ 1,589 $ 2,674 $ 3,049 $ 4,529 $ 7,161 Interest costs 4,073 4,798 8,146 9,258 14,766 17,410 Expected return on plan assets (50) 0 (100) 0 (100) 0 Amortization of transition obligation 2,930 2,970 5,859 5,734 11,683 11,137 Amortization of prior service cost 75 0 150 0 429 0 Amortization of (gain) loss (1,393) (2,786) (6,608) (1,411) -------- -------- -------- -------- -------- -------- $ 7,122 $ 8,343 $ 13,943 $ 16,019 $ 24,699 $ 34,297 ======== ======== ======== ======== ======== ========
Assumptions used in the determination of 1998 and 1997 net periodic postretirement benefit costs were as follows:
1998 1997 ======= ======= Discount rate 7.00% 7.75% Rate of increase in compensation levels 4.50% 5.50%
The pre-Medicare medical trend rates used for 1998 and 1997 were 8% declining to a long-term rate of 5% and 9% declining to a long-term rate of 6%, respectively. The effect of a 1% increase in the assumed health care cost trend rates for each future year would increase the accumulated postretirement benefit obligation at January 1, 1998 by approximately $27.1 million, and increase the aggregate of the service and interest cost components of plan costs by approximately $0.8 million and $1.5 million for the three-month and six-month periods ended June 30, 1998. The effect of a 1% decrease in the assumed health care cost trend rates for each future year would decrease the accumulated postretirement benefit obligation at January 1, 1998 by approximately $22.2 million, and decrease the aggregate of the service and interest cost components of plan costs by approximately $0.6 million and $1.2 million for the three-month and six-month periods ended June 30, 1998. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates, or plan changes. (11) Authorized Classes of Cumulative Preferred and Preference Stocks: Industries - 20,000,000 shares -Preferred -without par value 4,000,000 of Industries' Series A Junior Participating Preferred Shares are reserved for issuance pursuant to the Share Purchase Rights Plan described in Note 17, Common Shares. Northern Indiana - 2,400,000 shares -Cumulative Preferred -$100 par value 3,000,000 shares -Cumulative Preferred -no par value 2,000,000 shares -Cumulative Preference -$50 par value (none outstanding) 3,000,000 shares -Cumulative Preference -no par value (none issued) Indianapolis Water Company - 300,000 shares -Cumulative Preferred -$100 par value Note 12 sets forth the preferred stocks which are redeemable solely at the option of the issuer, and Note 13 sets forth the preferred stocks which are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The Preferred shareholders of Northern Indiana and IWC have no voting rights, except in the event of default on the payment of four consecutive quarterly dividends, or as required by Indiana law to authorize additional preferred shares, or by the Articles of Incorporation in the event of certain merger transactions. (12) Preferred Stocks, Redeemable Solely at the Option of the Issuer, Outstanding at June 30, 1998 and December 31, 1997 :
Redemption Price at June 30, December 31, June 30, (Dollars in thousands) 1998 1997 1998 =========== =========== =========== Northern Indiana Public Service Company: Cumulative preferred stock - $100 par value - 4-1/4% series- 209,057 and 209,118 shares outstanding, respectively $ 20,906 $ 20,912 $101.20 4-1/2% series- 79,996 shares outstanding 8,000 8,000 $100.00 4.22% series - 106,198 shares outstanding 10,620 10,620 $101.60 4.88% series - 100,000 shares outstanding 10,000 10,000 $102.00 7.44% series - 41,890 shares outstanding 4,189 4,189 $101.00 7.50% series - 34,842 shares outstanding 3,484 3,484 $101.00 Premium on preferred stock 254 254 N/A Cumulative preferred stock - no par value - Adjustable rate (6.00% at June 30, 1998), Series A (stated value $50 per share) 473,285 shares outstanding 23,664 23,664 $ 50.00 Indianapolis Water Company: Cumulative preferred stock - $100 par value - Rates ranging from 4.00% to 5.00%, 44,966 shares outstanding 4,497 4,497 $100 - $105 ----------- ----------- $ 85,614 $ 85,620 =========== ===========
During the period July 1, 1996 to June 30, 1998, there were no additional issuances of the above preferred stocks. The foregoing preferred stocks are redeemable in whole or in part at any time upon thirty days' notice at the option of the issuer at the redemption prices shown. (13) Redeemable Preferred Stocks Outstanding at June 30, 1998 and December 31, 1997 : Preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of issuer, excluding sinking fund payments due within one year are as follows:
June 30, December 31, (Dollars in thousands) 1998 1997 =========== =========== Northern Indiana Public Service Company: Cumulative preferred stock -$100 par value - 8.85% series - 50,000 and 62,500 shares outstanding, respectively $ 5,000 $ 6,250 7-3/4% series - 38,906 shares outstanding 3,891 3,891 8.35% series - 57,000 shares outstanding 5,700 5,700 Cumulative preferred stock -no par value - 6.50% series - 430,000 shares outstanding 43,000 43,000 ---------------------------------- $ 57,591 $ 58,841 =========== ===========
The redemption prices at June 30, 1998, as well as sinking fund provisions for the cumulative preferred stocks subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana, are as follows:
Sinking Fund or Series Redemption Price Per Share Mandatory Redemption Provisions ========== ========================== ====================================== Cumulative preferred stock -$100 par value - 8.85% $101.11, reduced periodically 12,500 shares on or before April 1. 8.35% $103.69, reduced periodically 3,000 shares on or before July 1; increasing to 6,000 shares beginning in 2004; noncumulative option to double amount each year. 7-3/4% $104.23, reduced periodically 2,777 shareson or before December 1; noncumulative option to double amount each year. Cumulative preferred stock -no par value - 6.50% $100.00 on October 14, 2002 430,000 shares on October 14, 2002.
Sinking fund requirements with respect to redeemable preferred stocks outstanding at June 30, 1998 for each of the twelve-month periods subsequent to June 30, 1999 are as follows:
Twelve Months Ended June 30,* ============================== 2000 $1,827,700 2001 $1,827,700 2002 $1,827,700 2003 $1,827,700 * Table does not reflect redemptions made after June 30, 1998.
(14) Stock Split: On December 16, 1997, the Board of Directors authorized a two-for-one split of Industries' common stock. The stock split was paid February 20, 1998, to shareholders of record at the close of business January 30, 1998. All references to number of shares reported for the period including per share amounts and stock option data of Industries' common stock reflect the two-for-one stock split as if it had occurred at the beginning of the earliest period. (15) Common Share Dividend: During the next few years, Industries expects that the majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. Northern Indiana's Indenture dated August 1, 1939, as amended and supplemented (Indenture), provides that it will not declare or pay any dividends on any class of capital stock (other than preferred or preference stock) except out of earned surplus or net profits of Northern Indiana. At June 30, 1998, Northern Indiana had approximately $152.7 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. (16) Earnings Per Share: At December 31, 1997, Industries adopted SFAS No. 128 "Earnings per Share." The adoption of this statement required Industries to present basic earnings per share and diluted earnings per share in place of primary earnings per share. Basic earnings per share was computed by dividing net income, reduced for preferred dividends, by the average number of common shares outstanding during the period. The diluted earnings per share calculation assumes conversion of nonqualified stock options into common shares. As a result of adopting the statement, previously reported earnings per share information was restated. The effect of this accounting change on previously reported earnings per share data was insignificant. The net income, preferred dividends and shares used to compute basic and diluted earnings per share is presented in the following table: Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ------------------------ ------------------------ ------------------------ (Dollars in thousands, except per share amounts) 1998 1997 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Basic Weighted Average Number of Shares: Average Common Shares Outstanding 122,180,915 125,655,240 123,022,091 122,404,026 124,156,903 121,935,166 =========== =========== =========== =========== =========== =========== Net Income to be Used to Compute Basic Earnings per Share: Net Income $ 29,445 $ 28,236 $ 90,167 $ 99,074 $ 181,942 $ 184,893 ---------- ---------- ---------- ---------- ---------- ---------- Basic Earnings per Average Common Share $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51 =========== =========== =========== =========== =========== =========== Diluted Weighted Average Number of Shares: Average Common Shares Outstanding 122,180,915 125,655,240 123,022,091 122,404,026 124,156,903 121,935,166 Dilutive effect for Nonqualified Stock Options 456,722 349,514 493,845 346,256 460,905 351,628 ---------- ---------- ---------- ---------- ---------- ---------- Weighted Average Shares 122,637,637 126,004,754 123,515,936 122,750,282 124,617,808 122,286,794 =========== =========== =========== =========== =========== =========== Net Income to be Used to Compute Diluted Earnings per Share: Net Income $ 29,445 $ 28,236 $ 90,167 $ 99,074 $ 181,942 $ 184,893 ----------- ----------- ----------- ----------- ----------- ----------- Diluted Earnings per Average Common Share $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51 =========== =========== =========== =========== =========== ===========
(17) Common Shares: On April 8, 1998, shareholders approved an increase in the number of authorized common shares without par value from 200,000,000 shares to 400,000,000 shares. Share Purchase Rights Plan. On February 27, 1990, the Board of Directors of Industries (Board) declared a dividend distribution of one Right for each outstanding common share of Industries to shareholders of record on March 12, 1990. The Rights are not currently exercisable. Each Right, when exercisable, would initially entitle the holder to purchase from Industries one two-hundredth of a Series A Junior Participating Preferred Share, without par value, of Industries at a price of $30 per one two-hundredth of a share. In certain circumstances, if an acquirer obtained 25% of Industries' outstanding shares, or merged into Industries or merged Industries into the acquirer, the Rights would entitle the holders to purchase Industries' or the acquirer's common shares for one-half of the market price. The Rights will not dilute Industries' common shares nor affect earnings per share unless they become exercisable for common shares. The Plan was not adopted in response to any specific attempt to acquire control of Industries. Common Share Repurchases. The Board has authorized the repurchase of Industries' common shares. At June 30, 1998, Industries had purchased approximately 47.7 million shares since 1989 at an average price of $15.14 per share. Approximately 14.4 million additional common shares may be repurchased under the Board's authorization. (18) Long-Term Incentive Plan: Industries has two long-term incentive plans for key management employees that were approved by shareholders on April 13, 1988 (1988 Plan) and April 13, 1994 (1994 Plan), each of which provides for the issuance of up to 5.0 million of Industries' common shares to key employees through 1998 and 2004, respectively. At June 30, 1998, there were 3,847,500 shares reserved for future awards under the 1994 Plan. The 1994 Plan permits the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights and performance units. No incentive stock options or performance units were outstanding at June 30, 1998. Under this Plan, the exercise price of each option equals the market price of Industries' stock on the date of grant. Each option has a maximum term of ten years and vests one year from the date of grant. The stock appreciation rights (SARs) may be exercised only in tandem with stock options on a one-for-one basis and are payable in cash, Industries' common shares or a combination thereof. Restricted stock awards are restricted as to transfer and are subject to forfeiture for specific periods from the date of grant. Restrictions on shares awarded in 1995 lapse five years from date of grant and vesting is variable from 0% to 200% of the number awarded, subject to specific earnings per share and stock appreciation goals. Restrictions on shares awarded in 1997 and 1998 lapse two years from date of grant and vesting is variable from 0% to 100% of the number awarded, subject to specific performance goals. If a participant's employment is terminated prior to vesting other than by reason of death, disability or retirement, restricted shares are forfeited. There were 534,666 and 542,666 restricted shares outstanding at June 30, 1998 and December 31, 1997, respectively. The Industries Nonemployee Director Stock Incentive Plan, which was approved by shareholders, provides for the issuance of up to 200,000 of Industries' common shares to nonemployee directors of Industries. The Plan provides for awards of common shares, which vest in 20% per year increments, with full vesting after five years. The Plan also allows the award of nonqualified stock options. If a director's service on the Board is terminated for any reason other than death or disability, any common shares not vested as of the date of termination are forfeited. As of June 30, 1998, 71,500 shares had been issued under the Plan. Industries accounts for these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for non-qualified stock options. The compensation cost that has been charged against income for restricted stock awards was $0.9, $1.4 and $2.5 million for the three-month, six-month and twelve-month periods ending June 30, 1998, respectively. Had compensation cost for non-qualified stock options been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation," Industries' net income and earnings per share would have been reduced to the following pro forma amounts:
Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, ------------------- ------------------- ------------------- 1998 1997 1998 1997 1998 1997 ======== ======== ======== ======== ======== ======== (Dollars in thousands, except pershare data) Net Income: As reported $ 29,445 $ 28,236 $ 90,167 $ 99,074 $181,942 $184,893 Pro forma 29,230 28,029 89,739 98,660 181,088 184,106 Earnings Per Average Common Share: Basic: As reported $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51 Pro forma 0.23 0.22 0.72 0.80 1.45 1.50 Diluted: As reported $ 0.24 $ 0.22 $ 0.73 $ 0.80 $ 1.46 $ 1.51 Pro forma 0.23 0.22 0.72 0.80 1.45 1.50
The fair value of each option granted used to determine pro forma net income is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the three-month, six-month and twelve-month periods ended June 30, 1998 and June 30, 1997: risk-free interest rate of 6.29% and 6.39%, respectively; expected dividend yield per share of $0.87 and $0.84, respectively; expected option term of five and one-quarter years and five years, respectively; and expected volatilities of 12.7% and 13.2%, respectively. Changes in outstanding shares under option and SARs for the three-month, six-month and twelve-month periods ended June 30, 1998 and June 30, 1997 are as follows:
NONQUALIFIED STOCK OPTIONS -------------------------------------------- Weighted Weighted Average Average Option Option Three Months Ended June 30, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 2,326,600 $ 16.73 2,284,100 $ 15.33 Granted 0 0 Exercised 112,800 15.45 88,700 14.12 Canceled 10,000 20.64 --------- --------- Balance, end of period 2,203,800 16.78 2,195,400 15.38 ======== ======== Shares exercisable 1,693,200 15.61 1,670,500 14.27 ======== ========
NONQUALIFIED STOCK OPTIONS -------------------------------------------- Weighted Weighted Average Average Option Option Six Months Ended June 30, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 2,535,400 $ 16.41 2,360,900 $ 15.33 Granted 0 0 Exercised 313,600 13.59 141,800 14.08 Canceled 18,000 20.64 23,700 18.91 --------- --------- Balance, end of period 2,203,800 16.78 2,195,400 15.38 ======== ======== Shares exercisable 1,693,200 15.61 1,670,500 14.27 ======== ========
NONQUALIFIED STOCK OPTIONS -------------------------------------------- Weighted Weighted Average Average Option Option Twelve Months Ended June 30, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 2,195,400 $ 15.38 2,092,000 $ 14.36 Granted 533,600 20.64 556,600 18.91 Exercised 502,200 14.57 417,700 14.74 Canceled 23,000 20.64 35,500 18.55 --------- --------- Balance, end of period 2,203,800 16.78 2,195,400 15.38 ======== ======== Shares exercisable 1,693,200 15.61 1,670,500 14.27 ======== ======== Weighted average fair value of options granted $ 2.66 $ 2.50 ======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs -------------------------------------------- Option Option Three Months Ended June 30, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47 Exercised 11,200 $ 5.47 0 --------- --------- Balance, end of period 0 11,200 5.47 ======== ======== Shares exercisable 0 11,200 5.47 ======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs -------------------------------------------- Option Option Six Months Ended June 30, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47 Exercised 11,200 $ 5.47 0 --------- --------- Balance, end of period 0 11,200 5.47 ======== ======== Shares exercisable 0 11,200 5.47 ======== ========
NONQUALIFIED STOCK OPTIONS WITH SARs -------------------------------------------- Option Option Twelve Months Ended June 30, 1998 Price 1997 Price ============================ ======== ======= ======== ======= Balance, beginning of period 11,200 $ 5.47 11,200 $ 5.47 Exercised 11,200 5.47 0 --------- --------- Balance, end of period 0 11,200 5.47 ======== ======== Shares exercisable 0 11,200 5.47 ======== ========
The following table summarizes information about non-qualified stock options at June 30, 1998:
OPTIONS OUTSTANDING ------------------------------------------ Number Weighted Average Range of Outstanding at Remaining Weighted Average Option Price June 30, 1998 Contractual Life Option Price ================== =========== =========== ============= $ 5.47 to $ 8.97 91,000 1.75 years $ 8.63 $11.47 to $15.16 566,400 4.92 years $13.37 $16.22 to $20.64 1,546,400 7.73 years $18.51 - ------------------ ----------- ----------- ------------- $ 5.47 to $20.64 2,203,800 6.76 years $16.78 ========
OPTIONS EXERCISABLE ------------------------------------------ Number Range of Exercisable at Weighted Average Option Price June 30, 1998 Option Price ================ ============== ============== $ 5.47 to $ 8.97 91,000 $ 8.63 $11.47 to $15.16 566,400 $13.37 $16.22 to $18.91 1,035,800 $17.45 - ---------------- -------------- -------- $ 5.47 to $18.91 1,693,200 $15.61 ==============
(19) Long-Term Debt: At June 30, 1998 and December 31, 1997, Industries' outstanding long-term debt, excluding amounts due within one year, issued and not retired or canceled was as follows:
June 30, December 31, (Dollars in thousands) 1998 1997 ========== ========== Interest rates between 5.20% and 9.83% with a weighted average interest rate of 7.23% and various maturities between May 1, 2001 and September 1, 2025 $ 187,100 $ 187,100 Pollution control notes and bonds- Interest rates between 3.60% and 5.70% with a weighted average interest rate of 3.85% and various maturities between October 1, 2003 and April 1, 2019 241,000 241,000 Medium-term notes - Interest rates between 6.10% and 7.99% with a weighted average interest rate of 7.19% and various maturities between March 20, 2000 and August 4, 2027 1,048,025 1,048,025 Subordinated Debentures - 7-3/4%, due March 31, 2026 75,000 75,000 Senior Notes Payable - 6.78%, due December 1, 2027 75,000 75,000 Notes payable - Interest rates between 6.31% and 9.00% with a weighted average interest rate of 7.44% and various maturities between August 31, 1999 and January 1, 2008 42,918 40,229 Variable bank loan - 6.66% -due August, 2003 5,600 5,600 Unamortized premium and discount on long-term debt, net (3,791) (4,029) --------- ---------- Total long-term debt, excluding amounts due in one year $,670,852 $1,667,925 ========= ==========
The sinking fund requirements of long-term debt outstanding at June 30, 1998 (including the maturity of Northern Indiana's first mortgage bonds: Series T, 7.50%, due April 1, 2002; Northern Indiana's medium-term notes due from March 20, 2000 to April 21, 2003; NDC Douglas Properties, Inc.'s notes payable due August 15, 1999 through April 1, 2003; IWC's first mortgage bonds: Series 5.20%, due May 1, 2001 and Series 8.00%, due December 15, 2001; and IWCR's senior notes payable, due March 15, 2001), for each of the twelve-month periods subsequent to June 30, 1999 are as follows:
Twelve Months Ended June 30, ================================= 2000 $ 163,664,194 2001 34,722,639 2002 82,487,340 2003 64,128,954
Unamortized debt expense, premium and discount on long-term debt applicable to outstanding bonds are being amortized over the lives of such bonds. Reacquisition premiums are being deferred and amortized. These premiums are not earning a return during the recovery period. Northern Indiana's Indenture, securing the first mortgage bonds issued by Northern Indiana, constitutes a direct first mortgage lien upon substantially all property and franchises, other than expressly excepted property, owned by Northern Indiana. On May 28, 1997, Northern Indiana was authorized to issue and sell up to $217.7 million of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of June 30, 1998, $139.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. IWC's first mortgage bonds are secured by its utility plant. Provisions of trust indentures related to the 8% Series Bonds require annual sinking fund or improvement fund payments amounting to 1/2% of the maximum aggregate amount outstanding. As permitted, this requirement has been satisfied by substituting a portion of permanent additions to utility plant. On July 15, 1998, IWC issued Refunding Revenue Bonds, Series 1998 in the aggregate principal amount of $40 million. The proceeds form the Series 1998 Bonds are to be used to redeem the City of Indianapolis, Indiana 7-7/8% Economic Development Water Facilities Revenue Bonds and the Town of Fishers, Indiana 7-7/8% Economic Development Water Facilities Revenue Bonds. The Series 1998 bonds will bear interest from July 15, 1998, at the rate of 5.05% per annum and will mature on July 15, 2028. Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold $300 million of medium-term notes with various interest rates and maturities. The proceeds from these issuances were used for the purchase of IWCR and to pay other outstanding short-term obligations of Capital Markets. In December 1997, Capital Markets issued and sold $75 million of 6.78% senior notes payable which mature December 1, 2027. The holders of the notes have the right to require Capital Markets to repurchase all or a portion of the notes on December 1, 2007 at a purchase price of the principal amount plus accrued interest thereon. The proceeds from these issuances were primarily used for the payment of Capital Markets Zero Coupon Notes which matured December 1, 1997. The remaining net proceeds were used for general corporate purposes. The obligations of Capital Markets are subject to a Support Agreement between Industries and Capital Markets, under which Industries has committed to make payments of interest and principal on Capital Markets' obligations in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' creditors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse for the benefit of Capital Markets' creditors. The carrying value of the assets of Industries, other than the assets of Northern Indiana, reflected in the consolidated financial statements of Industries, was approximately $1.2 billion at June 30, 1998. (20) Current Portion of Long-Term Debt: At June 30, 1998 and December 31, 1997, Industries' current portion of long-term debt due within one year was as follows:
June 30, December 31, (Dollars in thousands) 1998 1997 =========== ========== First Mortgage Bonds $ 14,509 $ 14,509 Medium-term notes - Interest rates of 5.83% and 5.95% with a weighted average interest rate of 5.86% and various maturities between April 6, 1998 and April 13, 1998 0 35,000 Notes payable - Interest rates of 6.72% and 9.00% with a weighted average interest rate of 7.87% and various maturities between August 15, 1998 and January 29, 1999 4,724 3,612 Sinking funds due within one year 1,500 1,500 ----------- ------------ Total current portion of long-term debt $ 20,733 $ 54,621 =========== ============
(21) Short-Term Borrowings: Northern Indiana and Capital Markets make use of commercial paper to fund short-term working capital requirements. As of June 30, 1998 and December 31, 1997, Northern Indiana had $71.1 million and $71.5 million of commercial paper outstanding, respectively. At June 30, 1998, the weighted average interest rate of commercial paper outstanding was 5.66%. As of June 30, 1998 and December 31, 1997, Capital Markets had $38.0 million and $17.0 million of commercial paper outstanding. At June 30, 1998, the weighted average interest rate of commercial paper outstanding was 5.86%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999. As of June 30, 1998, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit which run to May 31, 1999. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fees to a combination of fees which are mutually satisfactory to both parties. As of June 30, 1998, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of June 30, 1998, there was $41.2 million outstanding under these lines of credit. At December 31, 1997, there was $47.5 million outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At June 30, 1998, there were no borrowings outstanding under this facility. Capital Markets has a $150 million revolving Credit Agreement, which will terminate August 19, 1999. This facility provides short-term financing flexibility to Industries and also serves as the back-up instrument for a commercial paper program. As of June 30, 1998, there were no borrowings outstanding under this agreement. Capital Markets also has $130 million of money market lines of credit. As of June 30, 1998 and December , 1997, $19.0 million and $20.1 million, respectively, were outstanding under these lines of credit. IWCR and its subsidiaries have lines of credit with banks aggregating $93.7 million. As of June 30, 1998 and December 31, 1997, $77.5 million and $48.9 million were outstanding under these lines of credit, respectively. At June 30, 1998 and December 31, 1997, Industries' short-term borrowings were as follows:
June 30, December 31, (In thousands) 1998 1997 ======== ======== Commercial paper $109,100 $ 88,500 Notes payable 143,728 116,469 Revolving loan facility 0 7,670 -------- -------- Total short-term borrowings $252,828 $212,639 ======== ========
(22) Operating Leases: On April 1, 1990, Northern Indiana entered into a twenty-year agreement for the rental of office facilities from Development at a current annual rental payment of approximately $3.4 million. The following is a schedule, by years, of future minimum rental payments, excluding those to associated companies, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 1998:
Twelve Months Ended June 30, ============================== (In thousands) 1999 $ 15,452 2000 13,793 2001 13,471 2002 51,458 2003 10,532 Later years 76,088 -------- Total minimum payments required $180,794 =======
The consolidated financial statements include rental expense for all operating leases as follows:
June 30, June 30, (In thousands) 1998 1997 ======= ======= Three months ended $ 6,583 $ 2,292 Six months ended 11,532 4,540 Twelve months ended 15,831 8,937
(23) Commitments: The Utilities estimate that approximately $1.019 billion will be expended for construction purposes for the period from January 1, 1998 to December 31, 2002. Substantial commitments have been made by the Utilities in connection with their programs. Northern Indiana has entered into a service agreement with Pure Air, a general partnership between Air Products and Chemicals, Inc. and Mitsubishi Heavy Industries America, Inc., under which Pure Air provides scrubber services to reduce sulfur dioxide emissions for Units 7 and 8 at Bailly Generating Station. Services under this contract commenced on June 15, 1992 with annual charges approximating $20 million. The agreement provides that, assuming various performance standards are met by Pure Air, a termination payment would be due if Northern Indiana terminates the agreement prior to the end of the twenty-year contract period. During the fourth quarter of 1995, Northern Indiana entered into a ten year agreement with IBM to perform all data center, application development and maintenance, and desktop management. Annual fees under the agreement are estimated at $20.6 million. (24) Primary Energy: Primary arranges energy-related projects for large energy-intensive facilities and has entered into certain commitments in connection with these projects. Primary offers large energy customers, nationwide, expertise in managing the engineering, construction, operation and maintenance of these energy-related projects. Primary is the parent of the following subsidiaries: Harbor Coal Company (Harbor Coal); North Lake Energy Corporation (North Lake); Lakeside Energy Corporation (LEC); Portside Energy Corporation (Portside); and Cokenergy, Inc. (CE). Harbor Coal has invested in a partnership to finance, construct, own and operate a $65 million pulverized coal injection facility which began commercial operation in August 1993. The facility receives raw coal, pulverizes it and delivers it to Inland Steel Company (Inland Steel) for use in the operation of its blast furnaces. Harbor Coal is a 50% partner in the project with an Inland Steel affiliate. Industries has guaranteed the payment and performance of the partnership's obligations under a sale and leaseback of a 50% undivided interest in the facility. North Lake has entered into a lease for the use of a 75-megawatt energy facility located at Inland Steel. The facility uses steam generated by Inland Steel to produce electricity which is delivered to Inland Steel. The facility began commercial operation in May 1996. Industries has guaranteed North Lake's obligations relative to the lease and certain obligations to Inland Steel relative to the project. LEC has entered into a lease for the use of a 161-megawatt energy facility located at USS Gary Works. The facility processes high-pressure steam into electricity and low-pressure steam for delivery to USX Corporation-US Steel Group. The fifteen-year tolling agreement with US Steel commenced on April 16, 1997 when the facility was placed in commercial operation. Capital Markets guarantees LEC's security deposit obligations relative to the lease and certain limited LEC obligations to the lessor. Portside has entered into an agreement with National Steel Corporation (National) to utilize a new 63-megawatt energy facility at National's Midwest Division to process natural gas into electricity, process steam and heated water for a fifteen-year period. Portside has entered into a lease with a third-party lessor for use of the facility. Industries has guaranteed certain Portside obligations to the lessor. Construction of the project began in June 1996 and the facility began commercial operation on September 26, 1997. CE has entered into a fifteen-year service agreement with Inland Steel and the Indiana Harbor Coke Company, LP (Harbor Coke), a subsidiary of Sun Company, Inc. This agreement provides that CE will utilize a new energy facility at Inland Steel's Indiana Harbor Works to scrub flue gases and recover waste heat from Harbor Coke's coke facility and produce process steam and electricity from the recovered heat which will be delivered to Inland Steel. CE has entered into a lease for the use of these facilities with a third party lessor. Capital Markets guarantees certain CE obligations relative to the lease. Construction of the project began in January 1997. The facility is now conducting startup operations with commercial operation being anticipated before December 31, 1998. Primary has advanced approximately $33 million and $107 million, at June 30, 1998 and December 31, 1997, respectively, to the lessors of the energy related projects discussed above. These net advances are included in "Other Receivables" in the Consolidated Balance Sheet and as a component of operating activities in the Consolidated Statement of Cash Flows. Primary is evaluating other potential projects with Northern Indiana customers as well as with potential customers outside of Northern Indiana's service territory. Projects under consideration include those which use industrial by-product fuels and natural gas to produce electricity. (25) Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short maturity of those instruments. Investments: The fair value of the majority of investments is based on market prices for those or similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock is estimated based on the quoted market prices for the same or similar issues or on the rates offered to Industries for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. The carrying values and estimated fair values of Industries' financial instruments (excluding derivatives) are as follows:
June 30, 1998 December 31, 1997 ----------------------- ----------------------- Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value ========== ========== ========== ========== Cash and cash equivalents $ 36,684 $ 36,684 $ 30,780 $ 30,780 Investments 44,868 44,160 32,625 32,886 Long-term debt (including current portion) 1,691,585 1,734,806 1,722,546 1,718,897 Preferred stock 144,777 136,896 146,289 139,814
The majority of the long-term debt relates to utility operations. The Utilities are subject to regulation, and gains or losses may be included in rates over a prescribed amortization period, if in fact settled at amounts approximating those above. (26) Customer Concentrations: Industries' utility subsidiaries supply natural gas, electric energy and water. Natural gas and electric energy are supplied to the northern third of Indiana. The water utilities serve Indianapolis, Indiana and surrounding areas. Although the Energy Utilities have a diversified base of residential and commercial customers, a substantial portion of their electric and gas industrial deliveries are dependent upon the basic steel industry. The basic steel industry accounted for 2% and 4% of gas revenue (including transportation services) and 15% and 21% of electric revenue for the twelve months ended June 30, 1998 and June 30, 1997, respectively. (27) Business Segments: Industries adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" during the first quarter of 1998. SFAS No. 131 establishes standards for reporting information about operating segments in financial statements and disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Industries has four reportable operating segments: Gas, Electric, Water and Gas Marketing. The Gas segment includes regulated gas utilities which provide natural gas distribution and transportation services. The Electric segment is comprised principally of Northern Indiana, a regulated electric utility, which generates, transmits and distributes electricity. In addition, the Electric segment includes a wholesale power marketing operation which markets wholesale power to other utilities and electric power marketers. The Water segment includes regulated water utilities which provide distribution of water supply to the public. The Gas Marketing segment provides natural gas marketing and sales to wholesale and industrial customers. The Other Products and Services category includes a variety of energy-related businesses, such as installation, repair and maintenance of underground pipelines; utility line locating and marking; transmission of natural gas through pipelines; the arrangement of energy-related projects for large energy-intensive facilities; and other energy-related products. Industries' reportable segments are operations that are managed separately and meet the quantitative thresholds required by SFAS No. 131. Revenues for each of Industries' segments are principally attributable to customers in the United States. Additional revenues, which are insignificant to Industries' consolidated revenues, are attributable to customers in Canada and the United Kingdom. The following tables provides information about Industries' business segments. Industries uses income before interest and other charges and income taxes as its primary measurement for each of the reported segments. Adjustments have been made to the segment information to arrive at information included in the results of operations and financial position of Industries. Such adjustments include unallocated corporate revenues and expenses and the elimination of intercompany transactions, a majority of which are intercompany receivables. The accounting policies of the operating segments are the same as those described in Note 2, "Summary of Significant Accounting Policies."
Other (In thousands) Gas Products For the three months ended June 30, 1998 Gas Electric Water Marketing &Services Adjustments Total - ------------------------------------------------------------------------------------------------------------------- Operating revenues $ 110,345 $ 345,639 $ 20,857 $139,931 $ 65,252 $ (29,616) $ 652,408 Other Income (Deductions) $ 369 $ 84 $ 118 $ 654 $ 7,567 $ (9,723) $ (931) Depreciation and amortization $ 18,808 $ 38,956 $ 1,874 $ 51 $ 3,901 $ 53 $ 63,643 Income before Interest and Other Charges and Income Taxes $ (2,712) $ 77,018 $ 6,966 $ 2,022 $ 6,723 $ (11,905) $ 78,113 Assets $ 890,340 $2,522,108 $585,706 $ 79,619 $1,367,838 $(631,609) $4,814,002 Other (In thousands) Gas Products For the three months ended June 30, 1997 Gas Electric Water Marketing &Services Adjustments Total - ------------------------------------------------------------------------------------------------------------------- Operating revenues $ 121,010 $ 271,657 $ 18,795 $81,587 $ 62,370 $ (32,232) $ 523,187 Other Income (Deductions) $ 146 $ 44 $ 456 $ 1,477 $ 1,827 $ 358 $ 4,308 Depreciation and amortization $ 18,345 $ 38,823 $ 2,567 $ 100 $ 4,223 $ 356 $ 64,414 Income before Interest and Other Charges and Income Taxes $ 3,067 $ 68,104 $ 5,918 $ 2,726 $ 1,172 $ (2,731) $ 78,256 Assets $ 917,942 $2,570,068 $531,972 $56,329 $1,218,763 $(438,727) $4,856,347 Other (In thousands) Gas Products For the six months ended June 30, 1998 Gas Electric Water Marketing &Services Adjustments Total - ------------------------------------------------------------------------------------------------------------------- Operating revenues $ 353,080 $ 669,473 $ 38,566 $314,797 $ 119,098 $ (63,262) $1,431,752 Other Income (Deductions) $ 975 $ 174 $ 219 $ 1,171 $ 25,503 $ (20,525) $ 7,517 Depreciation and amortization $ 37,522 $ 77,724 $ 3,690 $ 117 $ 7,758 $ 106 $ 126,917 Income before Interest and Other Charges and Income Taxes $ 46,015 $ 150,778 $ 11,858 $ 2,133 $ 19,014 $ (26,126) $ 203,674 Assets $ 890,340 $2,522,108 $585,706 $ 79,619 $ 1,367,838 $(631,609) $4,814,002 Other (In thousands) Gas Products For the six months ended June 30, 1997 Gas Electric Water Marketing &Services Adjustments Total - ------------------------------------------------------------------------------------------------------------------- Operating revenues $ 454,410 $ 532,314 $ 18,795 $170,373 $ 87,710 $ (80,465) $1,183,137 Other Income (Deductions) $ 565 $ 251 $ 456 $ 2,354 $ 11,045 $ (960) $ 13,711 Depreciation and amortization $ 36,203 $ 77,104 $ 2,567 $ 114 $ 6,363 $ 408 $ 122,759 Income before Interest and Other Charges and Income Taxes $ 62,102 $ 138,003 $ 5,918 $ 6,180 $ 9,367 $ (5,325) $ 216,245 Assets $ 917,942 $2,570,068 $ 531,972 $ 56,329 $ 1,218,763 $(438,727) $4,856,347 Other (In thousands) Gas Products For the twelve months ended June 30,1998 Gas Electric Water Marketing &Services Adjustments Total - ------------------------------------------------------------------------------------------------------------------- Operating revenues $ 705,909 $1,323,490 $ 80,514 $625,410 $ 243,383 $(143,550) $2,835,156 Other Income (Deductions) $ 1,231 $ 559 $ 1,228 $ 2,166 $ 46,020 $ (41,630) $ 9,574 Depreciation and amortization $ 74,166 $ 154,465 $ 7,245 $ 235 $ 14,731 $ 3,121 $ 253,962 Income before Interest and Other Charges and Income Taxes $ 72,777 $ 325,019 $ 28,826 $ 3,124 $ 43,664 $ (59,659) $ 413,751 Assets $ 890,340 $2,522,108 $ 585,706 $ 79,619 $ 1,367,838 $(631,609) $4,814,002 Other (In thousands) Gas Products For the twelve months ended June 30, 1997 Gas Electric Water Marketing &Services Adjustments Total - ------------------------------------------------------------------------------------------------------------------- Operating revenues $ 805,463 $1,061,890 $ 18,795 $285,140 $ 140,655 $(155,020) $2,156,923 Other Income (Deductions) $ 1,025 $ 1,041 $ 456 $ 3,786 $ 18,893 $ (1,515) $ 23,686 Depreciation and amortization $ 70,583 $ 150,048 $ 2,567 $ 135 $ 20,637 $ (2,353) $ 241,617 Income before Interest and Other Charges and Income Taxes $ 89,282 $ 306,328 $ 5,918 $ 11,462 $ 4,255 $ (8,976) $ 408,269 Assets $ 917,942 $2,570,068 $ 531,972 $ 56,329 $ 1,218,763 $(438,727) $4,856,347
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Holding Company - NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding company providing electric energy, natural gas and water to the public through its six wholly-owned regulated subsidiaries (Utilities): Northern Indiana Public Service Company (Northern Indiana); Kokomo Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc. (NIFL); Crossroads Pipeline Company (Crossroads); Indianapolis Water Company (IWC); and Harbour Water Corporation (Harbour). Industries' regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy Utilities"; and regulated water subsidiaries (IWC and Harbour) are referred to as "Water Utilities." Industries also provides non-regulated energy/utility-related products and services including gas marketing and trading; wholesale electric marketing; power generation; gas transmission, supply and storage; installation, repair and maintenance of underground pipelines; utility line locating and marking; and related products targeted at customer segments principally through the following wholly-owned subsidiaries: NIPSCO Development Company, Inc. (Development); NI Energy Services, Inc. (Services); Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller); and SM&P Utility Resources, Inc.(SM&P). NIPSCO Capital Markets, Inc. (Capital Markets) handles financing for Industries and its subsidiaries, other than Northern Indiana. These subsidiaries, other than the wholesale power marketing operations of Services, are referred to collectively as "Products and Services." On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's subsidiaries include two regulated water utilities (IWC and Harbour) and five non-utility companies providing utility-related products and services including installation, repair and maintenance of underground pipelines and utility line locating and marking. The two primary non-utility subsidiaries are Miller and SM&P. Industries' results of operations include three, six and twelve months of operating results from IWCR for the three-month, six-month and twelve-month periods ended June 30, 1998, and three months for the three-month, six-month, and twelve-month periods ended June 30, 1997. The discussion below excludes the comparative results of IWCR operations for the six-month and twelve-month periods as such discussion would not be meaningful. Revenues - Total operating revenues for the twelve months ended June 30, 1998 increased $678.2 million as compared to the twelve months ended June 30, 1997. The increase includes $153.9 million reflecting twelve months of operating revenues from IWCR for the period. Gas revenues decreased $99.6 million, electric revenues increased $261.6 million and Products and Services revenues, excluding IWCR, increased $362.3 million, as compared to the same period in 1997. The decrease in gas revenues was mainly due to decreased sales to residential and commercial customers reflecting unusually warm weather during the first quarter of 1998, decreased industrial sales, decreased gas transition costs and decreased gas cost per dekatherm (dth), partially offset by increased wholesale sales and increased deliveries of gas transported for others. The increase in electric revenues was mainly due to increased sales to residential and commercial customers due to warmer weather during the second quarter of 1998, and increased wholesale electric marketing volumes, partially offset by decreased sales to industrial customers. Increased volumes in gas marketing to existing and new customers resulted in an increase of $358.1 million in Products and Services revenues for the twelve-month period ended June 30, 1998. For the twelve months ended June 30, 1998, volumes in gas marketing were 224.3 million dth, an increase of 141.0 million dth over the same period in 1997. Total operating revenues for the six months ended June 30, 1998 increased $248.6 million as compared to the six months ended June 30, 1997. The increase includes $45.8 million reflecting six months of operating revenues from IWCR for the period. Gas revenues decreased $101.3 million, electric revenues increased $137.1 million and Products and Services revenues, excluding IWCR, increased $167.0 million, as compared to the same period in 1997. The decrease in gas revenues was largely attributable to decreased sales to residential and commercial customers due to unusually warm weather during the first quarter of 1998, decreased gas costs per dekatherm (dth), decreased sales to industrial customers and decreased gas transition costs which were partially offset by increased wholesale sales and increased deliveries of gas transported for others. The increase in electric revenues was mainly due to increased wholesale electric marketing activities and wholesale transactions, and increased sales to residential and commercial customers due to warmer weather during second quarter of 1998. Increased volumes in gas marketing to existing and new customers resulted in an increase of $165.0 million in Products and Services revenues for the six-month period ended June 30, 1998. For the six months ended June 30, 1998, volumes in gas marketing were 126.9 million dth, an increase of 78.6 million dth over the same period in 1997. Total operating revenues for the three months ended June 30, 1998 increased $129.2 million as compared to the three months ended June 30, 1997. Gas revenues decreased $10.7 million, electric revenues increased $74.0 million, water revenues increased $2.1 million, and Products and Services revenues, increased $63.8 million compared to the same period in 1997. The decrease in gas revenues was mainly attributable to decreased sales to residential and commercial customers as a result of warmer weather during the second quarter of 1998, decreased sales to industrial customers and decreased gas transition costs partially offset by increased sales to wholesale customers and incerased gas cost per dth. The increase in electric revenues was mainly attributable to increased sales to residential and commercial customers due to warmer weather, increased sales to industrial customers and increased wholesale electric marketing activities. Increased volumes in gas marketing resulted in an increase of $58.2 million in Products and Services revenues for the three-month period ended June 30, 1998. For the three months ended June 30, 1998, gas marketing volumes were 68.1 million dth, an increase of 60.0 million dth compared to the three months ended June 30, 1997. The basic steel industry accounted for 33% of natural gas delivered (including volumes transported) and 18% of electric sales for the Energy Utilities for the twelve months ended June 30, 1998. The components of the variations in gas, electric, water and Products and Services revenues are shown in the following table:
Variations from Prior Periods ----------------------------------------- June 30, 1998 Compared to June 30, 1997 ----------------------------------------- Three Six Twelve (In thousands) Months Months Months ========= ========= ========= Gas Revenue - Pass through of net changes in purchased gas costs, gas storage, and storage transportation costs $ 19,564 $ (24,889) $ (22,241) Gas transition costs (6,103) (13,586) (19,164) Changes in sales levels (24,584) (64,303) (61,435) Gas transported 458 1,448 3,286 --------- --------- --------- Gas Revenue Change (10,665) (101,330) (99,554) --------- --------- --------- Electric Revenue -- Pass through of net changes in fuel costs 3,899 (1,061) 2,540 Changes in sales levels 23,658 22,980 17,009 Wholesale electric marketing 46,425 115,240 242,051 --------- --------- --------- Electric Revenue Change 73,982 137,159 261,600 --------- --------- --------- Water Revenue Change 2,062 19,771 61,719 --------- --------- --------- Products and Services Revenues - Gas marketing 59,984 164,980 358,077 Pipeline construction (558) 10,592 43,134 Locate and marking 1,978 13,264 44,414 Other 2,438 4,179 8,843 --------- --------- --------- Products and Services Revenue Change 63,842 193,015 454,468 --------- --------- --------- Total Revenue Change $ 129,221 $ 248,615 $ 678,233 ========= ========= =========
See "Summary of Significant Accounting Policies - Gas Cost Adjustment Clause" in the Notes to Consolidated Financial Statements for a discussion of gas cost incentive mechanism. Also, see Note 6 to Notes to Consolidated Financial Statements regarding FERC Order No. 636 transition costs. Gas Costs - The Energy Utilities' gas costs decreased $1.2 million, $77.6 million and $76.2 million for the three-month, six-month and twelve-month periods ended June 30, 1998, respectively. Gas costs decreased for the six-month and twelve-month periods due to decreased gas purchases, decreased gas transition costs and decreased gas costs per dth. The average cost for the Energy Utilities' purchased gas for the three-month, six-month and twelve-month periods ended June 30, 1998, after adjustment for gas transition costs billed to transport customers, was $2.87, $2.71 and $2.96 per dth, respectively, as compared to $2.60, $3.10 and $3.14 per dth for the same periods in 1997. Fuel and Purchased Power - The cost of fuel for electric generation increased $10.8 million, $8.0 million and $10.7 million for the three-month, six-month and twelve-month periods ended June 30, 1998, compared to the 1997 periods, mainly as a result of increased production of electricity. Power purchased increased $57.4 million, $124.0 million and $239.3 million for the three-month, six-month and twelve-month periods ended June 30, 1998, respectively, reflecting increased purchases of wholesale power for non-regulated marketing activities which were partially offset by decreased bulk power purchases at Northern Indiana. Cost of Products and Services - The cost of sales for Products and Services increased $427.5 million for the twelve months ended June 30, 1998. The increase includes $65.5 million reflecting twelve months of cost of sales from IWCR for the period. Increased volumes in gas marketing activities increased cost of sales $372.2 million for the twelve-months ended June 30, 1998, compared to June 30, 1997. The cost of sales for Products and Services increased $187.1 million for the six-months ended June 30, 1998, compared to the 1997 period. The increase includes $20.5 million related to the cost of sales for IWCR in the current period. Increased volumes in gas marketing activities increased cost of sales $171.6 million for the six months ended June 30, 1998, compared to June 30, 1997. The cost of sales for Products and Services increased $61.6 million for the three-months ended June 30, 1998, compared to the 1997 period mainly due to increased volumes in gas marketing activities, which increased cost of sales $62.2 million for the three months ended June 30, 1998, compared to June 30, 1997. Operating Margins - Operating margins for the twelve months ended June 30, 1998 increased $76.9 million from the same period a year ago. The increase in operating margins includes $88.4 million related to twelve months of IWCR operations in the period. The operating margin from gas deliveries decreased $23.0 million due to decreased sales to residential and commercial customers reflecting unusually warm weather in the first quarter of 1998 and decreased industrial sales which were partially offset by increased sales to wholesale customers, and increased deliveries of gas transported for others. Electric operating margin increased $11.7 million mainly as a result of increased sales to residential and commercial customers due to warmer weather and increased wholesale transactions, which were partially offset by additional wholesale power marketing costs incurred during the final week of June 1998. The operating margin for Products and Services, excluding IWCR, decreased $0.2 million. Operating margins for the six months ended June 30, 1998 increased $7.1 million from the same period a year ago. The increase in operating margins includes $25.3 million related to six months of IWCR operations in the current period. Gas operating margin decreased $23.7 million due to decreased sales to residential and commercial customers reflecting unusually warm weather during the first half of 1998 and decreased industrial sales, partially offset by increased wholesale sales and increased deliveries of gas transported for others. Electric operating margin increased $5.2 million mainly as a result of increased sales to residential and commercial customers due to warmer weather and increased wholesale transactions, which were partially offset by additional wholesale power marketing costs incurred during the final week of June 1998. The operating margin for Products and Services, excluding IWCR, increased $0.3 million. Operating margins for the three months ended June 30, 1998 increased $0.6 million from the same period a year ago. Gas operating margin decreased $9.5 million due to decreased sales to residential and commercial customers reflecting mild weather during the period and decreased industrial sales, partially offset by increased wholesale sales and increased delivery of gas transported for others. Electric operating margin increased $5.7 million mainly as a result of warmer weather and increased wholesale transactions, which were partially offset by additional wholesale power marketing costs incurred during the final week of June 1998. Water operating margin increased $2.1 million in the current period due to increased volumes sold and increased water rates for Indianapolis Water Company effective April 8, 1998. The operating margin for Products and Services increased $2.3 million, primarily reflecting increased operating margin from Primary Energy subsidiaries. Operating Expenses and Taxes - Operation expenses increased $35.1 million for the twelve-month period ended June 30, 1998. Operation expense includes an increase of $62.4 million reflecting a full year of operations of IWCR for the twelve-month period ended June 30, 1998. New operations at Primary Energy subsidiaries increased lease expenses by approximately $11.0 million. This increase was partially offset by decreased operation expenses at Northern Indiana of $23.0 million for the twelve-month period ended June 30, 1998, mainly as a result of decreased marketing activity of $10.0 million, decreased environmental costs of $3.1 million, and decreased insurance costs of $1.7 million. Operation expenses, excluding IWCR, for the six months ended June 30, 1998 decreased $10.4 million. Operation costs at Northern Indiana decreased $16.0 million for the six months ended June 30, 1998 mainly reflecting decreased employee related costs of $7.7 million and decreased marketing activity of $5.6 million, partially offset by increased operating expenses of Primary Energy subsidiaries. Operating expenses decreased $5.4 million for the three month period ended June 30, 1998 compared to the same period in 1997 primarily due to decreased employee related costs at Northern Indiana. Maintenance expenses increased $5.2 million for the twelve-month period ended June 30, 1998, mainly reflecting maintenance expenses of the Water Utilities and increased maintenance activity at Northern Indiana. Maintenance expenses increased $1.6 million for the six-month period ended June 30, 1998, mainly reflecting maintenance expenses of the Water Utilities and increased maintenance activity at Northern Indiana. Maintenance expenses increased $1.2 million for the three-month period ended June 30, 1998 mainly reflecting increased electric production maintenance activity at Northern Indiana. Depreciation and amortization expense increased $4.1 million and $12.3 million for the six-month and twelve-month periods ended June 30, 1998, respectively, primarily reflecting depreciation and amortization at IWCR. Depreciation and amortization expense decreased $0.8 million for the three-month period ended June 30, 1998, primarily as a result of a reclassification of oil and gas properties partially offset by increased utility plant depreciation. Other Income (Deductions) - Other Income (Deductions) decreased $5.2 million, $6.2 million and $14.1 million for the three-month, six-month and twelve-month periods ended June 30, 1998, respectively. Other Income (Deductions) for the three-month and six-month periods decreased primarily as a result of lower equity earnings in certain oil and gas investments. Other Income (Deductions) for the twelve-month period ended June 30, 1998 decreased primarily as a result of the above mentioned items as well as a loss on the disposition of property during the current period as compared to gains on disposition of properties in the same period a year ago. Interest and Other Charges - Interest and other charges increased for the three-month, six-month and twelve-month periods ended June 30, 1998 reflecting the issuance of $300 million of Capital Markets' medium-term notes, $75 million of Capital Markets' Junior Subordinated Deferrable Interest Debentures, Series A and interest expense at IWCR. See Notes to Consolidated Financial Statements for a discussion of accounting policies and transactions impacting this analysis. Net Income - Industries' net income for the twelve-month period ended June 30, 1998 was $181.9 million compared to $184.9 million for the twelve-month period ended June 30, 1997. Net income for the six months ended June 30, 1998 was $90.1 million compared to $99.1 million for the six months ended June 30, 1997. Net income for the three months ended June 30, 1998 was $29.4 million compared to $28.2 million for the three months ended June 30, 1997. Environmental Matters - The Utilities have an ongoing program to remain aware of laws and regulations involved with hazardous waste and other environmental matters. It is the Utilities' intent to continue to evaluate their facilities and properties with respect to these rules and identify any sites that would require corrective action. The Utilities have recorded a reserve of approximately $17 million to cover probable corrective actions as of June 30, 1998; however, environmental regulations and remediation techniques are subject to future change. The ultimate cost could be significant, depending on the extent of corrective actions required. Based upon investigations and management's understanding of current laws and regulations, the Utilities believe that any corrective actions required, after consideration of insurance coverages and contributions from other potentially responsible parties, will not have a significant impact on the results of operations or financial position of Industries. The EPA has notified Northern Indiana that it is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and may be required to share in the cost of cleanup of several waste disposal sites identified by the EPA. The sites are in various stages of investigation, analysis and remediation. At each of the sites, Northern Indiana is one of several PRPs, and it is expected that remedial costs, as provided under CERCLA, will be shared among them. At some sites Northern Indiana and/or the other named PRPs are presently working with the EPA to clean up the sites and avoid the imposition of fines or added costs. Refer to Note 7 "Environmental Matters" for a more detailed discussion of the status of certain environmental issues. Liquidity and Capital Resources - During the next few years, it is anticipated that the majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. See Note 15 of Notes to Consolidated Financial Statements for a discussion of the Common Share dividend. Cash flow from operations has provided sufficient liquidity to meet current operating requirements. Because of the seasonal nature of the utility business and the construction program, Northern Indiana makes use of commercial paper intermittently as short-term financing. As of June 30, 1998 and December 31, 1997, Northern Indiana had $71.1 million and $71.5 million of commercial paper outstanding, respectively. At June 30, 1998, the weighted average interest rate of commercial paper outstanding was 5.66%. Northern Indiana has a $250 million revolving Credit Agreement with several banks which terminates August 19, 1999. As of June 30, 1998, there were no borrowings outstanding under this agreement. In addition, Northern Indiana has $14.2 million in lines of credit. The credit pricing of each of the lines varies from either the lending banks' commercial prime or market rates. Northern Indiana has agreed to compensate the participating banks with arrangements that vary from no commitment fees to a combination of fees which are mutually satisfactory to both parties. As of June 30, 1998, there were no borrowings under these lines of credit. The Credit Agreement and lines of credit are also available to support the issuance of commercial paper. Northern Indiana also has $273.5 million of money market lines of credit. As of June 30, 1998 there was $41.2 million outstanding under these lines of credit. Northern Indiana has a $50 million uncommitted finance facility. At June 30, 1998, there were no borrowings outstanding under this facility. During recent years, Northern Indiana has been able to finance its construction program with internally generated funds and expects to be able to meet future commitments through such funds. As of June 30, 1998 and December 31, 1997, Capital Markets had $38.0 million and $17.0 million of commercial paper outstanding. At June 30, 1998, the weighted average interest rate of commercial paper outstanding was 5.86%. Capital Markets has a $150 million revolving Credit Agreement which will terminate August 19, 1999. This facility provides short-term financing flexibility to Industries and also serves as the backup instrument for a commercial paper program. As of June 30, 1998, there were no borrowings outstanding under this agreement. Capital Markets also has $130 million of money market lines of credit. As of June 30, 1998 and December 31, 1997, $19.0 million and $20.1 million, respectively, of borrowings were outstanding under these lines of credit. Between March 27, 1997 and May 7, 1997, Capital Markets issued and sold $300 million of medium-term notes with various interest rates and maturities. The proceeds from these issuances were used for the purchase of IWCR and to pay other outstanding short-term obligations of Capital Markets. The obligations of Capital Markets are subject to a Support Agreement between Industries and Capital Markets, under which Industries has committed to make payments of interest and principal on Capital Markets' obligations in the event of a failure to pay by Capital Markets. Restrictions in the Support Agreement prohibit recourse on the part of Capital Markets' creditors against the stock and assets of Northern Indiana which are owned by Industries. Under the terms of the Support Agreement, in addition to the cash flow of cash dividends paid to Industries by any of its consolidated subsidiaries, the assets of Industries, other than the stock and assets of Northern Indiana, are available as recourse for the benefit of Capital Markets' creditors. The carrying value of the assets of Industries, other than the assets of Northern Indiana, reflected in the consolidated financial statements of Industries, was approximately $1.2 billion at June 30, 1998. On March 25, 1997, Industries acquired all the outstanding common stock of IWCR for $290.5 million. Industries financed this transaction with debt of approximately $83.0 million and issuance of approximately 10.6 million Industries' common shares. Industries accounted for the acquisition as a purchase and the purchase price was allocated to the assets and liabilities acquired based on their fair values. IWCR and its subsidiaries have lines of credit with banks aggregating $93.7 million. At June 30, 1998, $77.5 million of borrowings were outstanding under these lines of credit. Industries does not expect the effects of inflation at current levels to have a significant impact on its results of operations, ability to contain cost increases, or the Utilities' need to seek timely and adequate rate relief. The Energy Utilities do not anticipate the need to file for gas and electric base rate increases in the near future. Year 2000 Costs- Industries has several major projects underway to modify portions of its systems for proper functioning in the year 2000. These include a project to evaluate Industries' proprietary software and to work with each of Industries' software vendors to assure that appropriate steps are being take to mitigate the problem in each vendor's software or, in some cases, to replace software with year 2000 compliant software; a project to identify and mitigate any problems wherever they exist in Industries' systems ranging from equipment used in Northern Indiana's generating stations to Industries' phone system that have date information embedded within them; and an initiative to assure that each entity that electronically receives information from Industries or sends information to Industries is aware of the steps that Industries is taking and is taking appropriate steps of its own to address the problem. Consistent with its plan, Industries expects to be year 2000 compliant with some systems as early as the third quarter 1998 and other systems no later than the third quarter of 1999. Industries is currently in the process of structuring its contingency plans with respect to the potential nonperformance of certain of its information systems and embedded systems as a result of year 2000 problems, and estimates that those plans will be complete by the third quarter of 1999. Industries is currently working with utility industry groups to evaluate the potential impact of the Year 2000 computer problems on the interconnected national electric grid and pipeline network. Industries estimates that costs to become year 2000 compliant will be approximately $17-$26 million, including acquisition costs of new systems which will be capitalized consistent with Industries' accounting policies. Costs related to maintenance or modification of Industries' systems have been and will be expensed as incurred. Industries does not anticipate the related costs will have a material impact on its results of operations, nor does Industries currently anticipate any disruption of its ability to deliver service as a result of the year 2000 issue. Competition - The Energy Policy Act of 1992 (Energy Act) allows FERC to order electric utilities to grant access to transmission systems by third-party power producers. The Energy Act specifically prohibits federally mandated wheeling of power for retail customers. On April 24, 1996, FERC issued its Order No. 888-A which opens wholesale power sales to competition and requires public utilities owning, controlling, or operating transmission lines to file non-discriminatory open access tariffs that offer others the same transmission service they provide themselves. Northern Indiana filed its tariff as did virtually all other transmission owners subject to FERC jurisdiction. Order No. 888-A also provides for the recovery of stranded costs - that is, costs that were prudently incurred to serve wholesale power customers and that could go unrecovered if these customers use open access to move to another supplier. FERC expects this rule will accelerate competition and bring lower prices and more choices to wholesale energy customers. On November 25, 1997, FERC issued Order No. 888-B on rehearing, affirming in all important respects its earlier Order No. 888-A. Although wholesale customers represent a relatively small portion of Northern Indiana's sales, Northern Indiana will continue its efforts to retain and add customers by offering competitive rates. In January 1997 and January 1998, legislation was introduced in the Indiana General Assembly addressing electric utility competition and deregulation. Neither bill was passed. Northern Indiana has begun discussions with other utilities and its largest customers on the technical and economic aspects of possible legislation to allow customer choice. If Industries believes that consensus legislation is possible, Industries would support a deregulation bill in the January 1999 Indiana General Assembly. Operating in a competitive environment will place added pressures on utility profit margins and credit quality. Increasing competition in the electric utility industry has already led the credit rating agencies to apply more stringent guidelines in making credit rating determinations. Competition within the electric utility industry will create opportunities to compete for new customers and revenues, as well as increase the risk of the loss of customers. Industries' management has taken steps to make the company more competitive and profitable in the changing utility environment, including partnering on energy projects with major industrial customers and conversions of some of its generating units to allow use of lower cost, low sulfur coal. FERC Order No. 636 shifted primary responsibility for gas acquisition, transportation and peak days' supply from pipelines to local gas distribution companies such as the Energy Utilities. Although pipelines continue to transport gas, they no longer provide sales service. The Energy Utilities believe they have taken appropriate steps to ensure the continued acquisition of adequate gas supplies at reasonable prices. The mix of gas revenues from retail sales, interruptible retail sales, firm transportation service and interruptible transportation services has changed significantly over the past several years. The deregulation of the gas industry, since the mid-1980s, allows large industrial and commercial customers to purchase their gas supplies directly from producers and use the Energy Utilities' facilities to transport the gas. Transportation customers pay the Energy Utilities only for transporting their gas from the pipeline to the customers' premises. The Commission has approved Northern Indiana's Alternative Regulatory Plan (ARP) which implements new rates and services that include, among other things, further unbundling of services for additional customer classes, increased customer choice for sources of natural gas supply, negotiated services and prices, gas cost incentive mechanism and a price protection program. The gas cost incentive mechanism allows Northern Indiana to share any gas cost savings or cost increases with its customers based on a comparison of Northern Indiana's actual gas supply portfolio costs to a market based benchmark price. The first pilot program was launched in January 1998 and the first gas volumes flowed under this program in April 1998. The Commission order allows the natural gas marketing affiliate of Northern Indiana to participate as a supplier of choice to customers on the Northern Indiana system. Northern Indiana offers customers a price protection service (PPS) which allows residential customers to purchase gas at a fixed price or capped price for a specific period of time. To date, the Energy Utilities' system has not been materially affected by competition, and management does not foresee substantial adverse effects in the near future, unless the current regulatory structure is substantially altered. The Energy Utilities believe the steps they are taking to deal with increased competition will have significant, positive effects in the next few years. Forward Looking Statements - This report contains forward looking statements within the meaning of the securities laws. Forward looking statements include terms such as "may", "will", "expect", "believe", "plan" and other similar terms. Industries cautions that, while it believes such statements to be based on reasonable assumptions and makes such statements in good faith, there can be no assurance that the actual results will not differ materially from such assumptions or that the expectations set forth in the forward looking statements derived from such assumptions will be realized. Investors should be aware of important factors that could have a material impact on future results. These factors include, but are not limited to, weather, the federal and state regulatory environment, the economic climate, regional, commercial, industrial and residential growth in the service territories served by Industries' subsidiaries, customers' usage patterns and preferences, the speed and degree to which competition enters the utility industry, the timing and extent of changes in commodity prices, changing conditions in the capital and equity markets and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of Industries. Item 3. Quantitative and Qualitative Disclosures About Market Risk The primary market risks to which Industries is exposed and in connection with which Industries uses market risk sensitive instruments are commodity price risk and interest rate risk. Industries engages in price risk management activities related to electricity and natural gas. Price risk arises from fluctuations in energy commodity prices due to changes in supply and demand. Industries actively monitors and limits its exposure to commodity price risk. Industries' price risk management policy allows the use of derivative financial and commodity instruments to reduce (hedge) exposure to price risk of its commodity supplies and related purchase and sales commitments of energy, as well as related anticipated transactions. Industries utilitizes contracts for the forward purchase of natural gas and electricity and natural gas futures and options to manage its power and gas marketing businesses. As part of its commodity price risk, Industries is exposed to geographic price differentials due primarily to transportation costs and local supply-demand factors. Industries uses basis swaps to hedge a portion of this exposure. For economic reasons or otherwise, Industries does not hedge all of its basis exposure. Industries enters into certain sales contracts with customers based upon a fixed commodity sales price and varying volumes which are ultimately dependent upon the customer's supply requirements. Industries utilizes financial instruments to reduce the commodity price risk based on modeling techniques that anticipate these future supply requirements. Industries continues to be exposed to commodity price risk for the difference between the ultimate supply requirements and those modeled. Although the Energy Utilities are subject to commodity price risk as part of their traditional operations, the current regulatory framework within which the Energy Utilities operate allows for collection of fuel and gas costs in rate-making. Consequently, there is limited commodity price risk for the Energy Utilities after consideration of the related rate-making. However, as the utility industry deregulates, the Energy Utilities will be providing services without the benefit of the traditional rate-making allowances and will therefore be more exposed to commodity price risk. Because the commodities covered by Industries' derivative financial and commodity instruments are substantially the same commodities that Industries buys and sells in the physical market, no special correlation studies are deemed necessary other than monitoring the degree of convergence between the derivative and cash markets. Industries' daily net commodity position consists of natural gas inventories, natural gas and power purchase and sales contracts and derivative financial and commodity instruments. The fair value of such positions is a summation of the fair values calculated for each commodity by valuing each net position at quotes from exchanges and over-the-counter counterparties and includes location differentials. Based on Industries' net commodity position at fair value at June 30, 1998, a 10% adverse movement in electric and natural gas market prices would have reduced net income by approximately $2.0 million. However, any such movement in prices is not indicative of actual results and is subject to change. Refer to Summary of Significant Accounting Policies-Hedging Activities for further discussion of Industries' hedging policies. Industries utilizes long-term debt as a primary source of capital in its business. A significant portion of the total debt portfolio includes a medium-term note program, the interest component of which resets on a periodic basis to reflect current market conditions. The Energy Utilities utilize longer term fixed price debt instruments which have been and will be refinanced at lower interest rates if Industries deems it to be economical. Refer to Notes to Consolidated Financial Statements for detailed information related to Industries' long-term debt outstanding and the fair value of financial instruments for the current market valuation of long-term debt. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Industries and its subsidiaries are parties to various pending proceedings, including suits and claims against them for personal injury, death and property damage. Such proceedings and suits, and the amounts involved are routine litigation and proceedings for the kinds of businesses conducted by Industries and its subsidiaries, except as described under Note 5 (NESI Energy Marketing Canada Ltd. Litigation) and Note 7 (Environmental Matters) in the Notes to Consolidated Financial Statements under Part I, Item 1 of this report on Form 10-Q, which notes are incorporated by reference. No other material legal proceedings against Industries or its subsidiaries are pending or, to the knowledge of Industries, contemplated by governmental authorities or other parties. Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. Any shareholder proposal submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934 for presentation to Industries' 1999 Annual Meeting of Shareholders will be considered untimely for purposes of Rules 14a-4 and 14a-5 if notice thereof is received by Industries after November 9, 1998. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 23 - Consent of Arthur Andersen LLP Exhibit 27 - Financial Data Schedule Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Industries hereby agrees to furnish the Commission, upon request, any instrument defining the rights of holders of long-term debt of Industries not filed as an exhibit herein. No such instrument authorizes long-term debt securities in excess of 10% of the total assets of Industries and its subsidiaries on a consolidated basis. (b) Reports on Form 8-K. None Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NIPSCO Industries, Inc. (Registrant) /s/ STEPHEN P. ADIK -------------------------------------------------- Stephen P. Adik Executive Vice President, Chief Financial Officer, Treasurer and Chief Accounting Officer Date: August , 1998 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 NIPSCO Industries, Inc.'s previously filed Form S-8 Registration Statement No. 33-30619; Form S-8 Registration Statement No. 33-30621; Forms S-8 Registration Statement No. 333-08263; Form S-8 Registration Statement No. 333-19981; Form S-8 Registration Statement No. 333-19983; Form S-8 Registration Statement No. 333-19985; Form S-8 Registration Statement No. 333-59151; Form S-8 Registration Statement No. 333-59153; Form S-3 Registration Statement No. 333-22347; Form S-3 Registration Statement No. 333-26847; Form S-3 Registration Statement No. 333-39911, and Form S-4A Registration Statement No. 333-50537. /s/ Arthur Andersen LLP Chicago, Illinois August , 1998 EX-27 3
UT This schedule contains summary financial information extracted from the financial statements of NIPSCO Industries, Inc. for three months ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 APR-01-1998 JUN-30-1998 PER-BOOK 3,653,579 256,628 475,234 158,039 270,522 4,814,002 414,912 87,742 701,235 1,203,889 57,591 85,614 485,100 143,728 1,185,661 109,100 20,733 1,828 0 0 1,520,758 4,814,002 652,408 15,424 573,365 573,365 79,043 (931) 78,112 33,243 29,445 0 29,445 29,962 0 101,777 1.46 1.46
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