-----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, NrdSzA8LzT7EOcfM0PdFGqg+tYoZLhVq2h/u0bGIe8wtBI9qfZx+Q06RDdzE36sB pb6ewvY6CedjbYEaJS2wyg== 0000950131-99-000696.txt : 19990210 0000950131-99-000696.hdr.sgml : 19990210 ACCESSION NUMBER: 0000950131-99-000696 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19990208 ITEM INFORMATION: FILED AS OF DATE: 19990209 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: 8-K SEC ACT: SEC FILE NUMBER: 001-09779 FILM NUMBER: 99524536 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 8-K 1 FORM 8-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 February 8, 1999 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) ------------------------------------- NIPSCO Industries, Inc. (Exact Name of Registrant as Specified in its Charter) INDIANA (State or Other Jurisdiction of Incorporation) 1-9779 35-1719974 (Commission File Number) (IRS Employer Identification No.) 801 E. 86TH AVENUE, MERRILLVILLE, INDIANA 46410 (Address of Principal Executive Offices) (Zip Code) (219) 853-5200 (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Item 5. Other Events The purpose of this Current Report is to file certain financial information regarding the Registrant (NIPSCO Industries, Inc.) and its subsidiaries. Such financial information is set forth in the exhibits to this Current Report. Exhibits
Exhibit Number Description of Item ------- ------------------- (23) Consent of Arthur Andersen LLP. (27.1) Financial Data Schedule. (27.2) Restated Financial Data Schedule. (27.3) Restated Financial Data Schedule. (99.1) Financial Information for the Year December 31, 1998. --Management's Discussion and Analysis of Financial Condition and Results of Operations. --Consolidated Statement of Income. --Consolidated Balance Sheet. --Consolidated Statement of Long-Term Debt. --Consolidated Statement of Cash Flows. --Consolidated Statement of Common Shareholders' Equity. --Notes to Consolidated Financial Statements. --Report of Independent Public Accountants. --Selected Supplemental Information. (99.2) Condensed Financial Information of NIPSCO Industries, Inc. and Subsidiaries. --Schedule I--Condensed Balance Sheet. --Schedule I--Condensed Statement of Income. --Schedule I--Condensed Statement of Cash Flows. --Notes to Condensed Financial Statements. (99.3) NIPSCO Industries, Inc. Schedule of Valuation and Qualifying Accounts.
1 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, hereunto duly authorized. NIPSCO Industries, Inc. (Registrant) /s/ Nina M. Rausch By __________________________________ Nina M. Rausch Secretary Date: February 8, 1999 2 EXHIBIT INDEX
Exhibit Number Description of Item ------- ------------------- (23) Consent of Arthur Andersen LLP. (27.1) Financial Data Schedule. (27.2) Restated Financial Data Schedule. (27.3) Restated Financial Data Schedule. (99.1) Financial Information for the Year December 31, 1998. --Management's Discussion and Analysis of Financial Condition and Results of Operations. --Consolidated Statement of Income. --Consolidated Balance Sheet. --Consolidated Statement of Long-Term Debt. --Consolidated Statement of Cash Flows. --Consolidated Statement of Common Shareholders' Equity. --Notes to Consolidated Financial Statements. --Report of Independent Public Accountants. --Selected Supplemental Information. (99.2) Condensed Financial Information of NIPSCO Industries, Inc. and Subsidiaries. --Schedule I--Condensed Balance Sheet. --Schedule I--Condensed Statement of Income. --Schedule I--Condensed Statement of Cash Flows. --Notes to Condensed Financial Statements. (99.3) NIPSCO Industries, Inc. Schedule of Valuation and Qualifying Accounts.
3 EX-23 2 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 8, 1999, on NIPSCO Industries, Inc.'s consolidated financial statements and related schedules as of and for the year ended December 31, 1998, included in this Form 8-K, into NIPSCO Industries, Inc.'s previously filed Form S-8 Registration Statement No. 33-30619; Form S-8 Registration Statement No. 33-30621; Form S-8 Registration Statement No. 333- 08263; Form S-8 Registration Statement No. 333-19981; Form S-8 Registration Statement No. 333-19983; Form S-8 Registration Statement No. 333-19985; Form S-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, Form S-4 Registration Statement No. 333-50537, and Form S-3 Registration Statement No. 333-69279. Chicago, Illinois February 8, 1999 EX-27.1 3 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 PER-BOOK 3,662,104 268,216 606,867 175,218 274,098 4,986,503 311,903 92,365 745,439 1,149,708 56,435 85,613 484,600 217,340 1,183,365 193,700 6,790 1,828 0 0 1,607,124 4,986,503 2,932,778 100,862 2,511,272 2,511,272 421,506 10,584 432,090 137,342 193,886 0 193,886 116,596 35,533 458,307 1.60 1.59
EX-27.2 4 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 3,656,126 235,135 630,708 135,358 279,688 4,937,033 506,987 91,581 666,220 1,264,788 58,841 85,620 481,071 87,709 1,186,854 88,500 54,621 1,828 0 0 1,627,201 4,937,033 2,586,541 106,174 2,175,988 2,175,988 410,553 15,768 426,321 129,298 190,849 0 190,849 114,303 28,093 428,457 1.54 1.53
EX-27.3 5 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 PER-BOOK 3,646,973 244,213 587,844 145,952 275,510 4,900,492 486,921 87,719 701,890 1,276,530 58,841 85,619 485,100 94,302 1,185,661 48,500 55,729 1,828 0 0 1,608,382 4,900,492 779,344 32,343 662,230 662,230 117,114 8,448 125,562 32,497 60,722 0 60,722 29,929 0 189,563 0.49 0.48
EX-27.4 6 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1998 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
EX-27.5 7 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 PER-BOOK 3,648,562 266,343 482,184 172,543 267,598 4,837,230 332,702 88,630 713,386 1,134,718 56,991 85,614 499,609 87,709 1,109,111 151,900 110,222 1,828 0 0 1,599,528 4,837,230 2,986,633 99,719 2,571,919 2,571,919 414,714 8,680 423,394 35,199 288,476 0 288,476 28,244 0 80,456 1.54 1.53
EX-27.6 8 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 3-MOS 3-MOS DEC-31-1997 DEC-31-1997 JAN-01-1997 APR-01-1997 MAR-31-1997 JUN-30-1997 PER-BOOK PER-BOOK 3,621,142 3,618,455 270,635 279,016 592,320 527,662 104,164 117,506 322,312 313,708 4,910,573 4,856,347 574,950 534,514 86,767 89,860 635,399 634,043 1,297,116 1,258,417 61,246 59,996 85,622 85,620 496,698 796,115 102,907 111,131 875,388 812,230 170,900 57,650 154,643 191,296 1,828 1,828 0 0 0 0 1,664,225 1,482,064 4,910,573 4,856,347 659,950 523,186 36,044 16,623 531,364 449,238 531,364 449,238 128,586 73,948 6,367 4,518 134,953 78,466 28,071 33,607 70,838 28,236 0 0 70,838 28,236 26,273 29,962 0 0 305,118 (78,361) 0.59 0.22 0.59 0.22
EX-27.7 9 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 3-MOS 12-MOS DEC-31-1997 DEC-31-1996 JUL-01-1997 JAN-01-1996 SEP-30-1997 DEC-31-1996 PER-BOOK PER-BOOK 3,607,264 3,194,788 231,035 250,144 523,873 511,079 130,358 86,863 303,383 231,469 4,795,913 4,274,343 534,782 477,935 90,499 31,366 641,424 591,230 1,266,705 1,100,501 59,396 61,246 85,620 81,126 495,460 403,983 87,709 112,780 1,113,260 723,123 77,500 313,205 111,722 146,052 1,828 1,828 0 0 0 0 1,496,713 1,330,499 4,795,913 4,274,343 596,315 1,987,948 20,208 107,125 509,480 1,601,640 509,480 1,601,640 86,835 386,308 3,326 11,986 90,161 398,294 34,084 114,435 35,869 176,734 0 119 35,869 176,615 28,244 103,981 0 31,847 129,908 321,011 0.28 1.44 0.28 1.43
EX-27.8 10 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from financial statements of NIPSCO Industries and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 PER-BOOK 3,213,264 223,785 316,581 33,399 212,491 3,999,520 577,707 27,601 516,907 1,122,215 98,651 81,325 354,716 139,170 821,012 121,500 97,649 1,828 0 0 1,161,454 3,999,520 1,769,308 101,897 1,387,431 1,387,431 381,877 1,471 383,348 105,986 175,465 3,063 172,402 100,232 22,473 391,492 1.36 1.35
EX-99.1 11 FINANCIAL INFORMATION EXHIBIT 99.1 NIPSCO Industries, Inc. INDEX Financial Information for the Year Ended December 31, 1998.
Page ---- Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 2 Consolidated Statement of Income.......................................... 11 Consolidated Balance Sheet................................................ 12 Consolidated Statement of Capitalization.................................. 13 Consolidated Statement of Long-Term Debt.................................. 14 Consolidated Statement of Cash Flows...................................... 15 Consolidated Statement of Common Shareholders' Equity..................... 16 Notes to Consolidated Financial Statements................................ 17 Report of Independent Public Accountants.................................. 44 Selected Supplemental Information......................................... 45
1998 Financial Review MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 seven 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); Harbour Water Corporation (Harbour); and Liberty Water Company (Liberty). Industries' regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy Utilities"; and regulated water subsidiaries (IWC, Harbour and Liberty) are referred to as "Water Utilities." Industries also provides non-regulated energy/utility-related services including gas 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). These non-regulated subsidiaries are referred to collectively as "Products and Services." NIPSCO Capital Markets, Inc. (Capital Markets) handles financing requirements for certain subsidiaries of Industries other than Northern Indiana. On March 25, 1997, Industries acquired IWC Resources Corporation (IWCR). IWCR's subsidiaries include the Water Utilities and five non-utility companies providing utility-related services including installation, repair and maintenance of underground pipelines and utility line locating and marking. The two primary non-utility subsidiaries are Miller and SM&P. Industries' results of operations include twelve months of operating results from IWCR for the period ended December 31, 1998 and nine months of operating results from IWCR for the period ended December 31, 1997. Net Income For 1998, net income of Industries increased to $193.9 million, or basic earnings of $1.60 per average common share, compared to $190.8 million, or basic earnings of $1.54 per average common share, for 1997. There were approximately 3.1 million fewer average common shares outstanding in 1998 than in 1997. In 1996, net income was $176.6 million, or basic earnings of $1.44 per average common share. See Selected Supplemental Information regarding revenue and costs associated with delivering gas, electricity and water and providing products and services. Operating Revenues In 1998, operating revenues increased $346.2 million, or 13.4%, over 1997. Operating revenues in 1997 increased $598.6 million, or 30.1%, from 1996. Gas revenues were $637.1 million in 1998, a decrease of $170.1 million from 1997. The decrease in gas revenues was mainly due to decreased deliveries to residential and commercial customers, decreased gas costs per dekatherms (dth) and decreased gas transition costs. During 1998, gas deliveries in dth, which include transportation services, decreased 1.8%. Gas deliveries to residential and commercial customers decreased 20.4% and 23.3%, respectively, reflecting heating degree-days 21.3% lower than 1997. This decrease in deliveries was partially offset by increased deliveries to industrial customers of 3.9% and sales to other utilities. The Energy Utilities had 739,400 gas customers at December 31, 1998. Gas revenues were $807.2 million in 1997, an increase of $7.8 million from 1996. The increase in gas revenues was mainly due to increased gas costs per dth and increased deliveries of gas transported for others, partially offset by decreased sales to residential and commercial customers and decreased gas transition costs. During 1997 gas deliveries in dth, which include transportation services, increased 2.9% over 1996. Gas deliveries to residential and commercial customers decreased 5.1% and 1.6% respectively, due to a warmer heating season than 1996. Gas transportation services increased 4.2% mainly due to increased deliveries of gas transported for industrial customers. The large commercial and industrial customers continue to utilize transportation services provided by the Energy Utilities. Gas transportation customers purchase much of their gas directly from producers and marketers and then pay a transportation fee to have their gas delivered over the Energy Utilities' systems. The Energy Utilities transported 216.5, 203.7 and 194.4 million dth for others in 1998, 1997 and 1996, respectively. In 1998, electric revenues were $1.430 billion, an increase of $243.7 million from 1997. Sales of electricity in kilowatt-hours (kwh) increased 25.5% from 1997. The increase in electric revenue was mainly due to increased sales to residential and commercial customers (increases of 7.8% and 6.3% in kwh, respectively), reflecting a significantly warmer summer in 1998. Wholesale power transactions also increased significantly in a rapidly developing market. The increases were partially offset by a 2.0% kwh reduction in sales to industrial customers, reflecting a full year of operations at two cogeneration projects located at major industrial customers' facilities. At December 31, 1998, Industries had 420,955 electric customers. In 1997, electric revenues were $1.186 billion, an increase of $164.1 million from 1996. The increase was mainly due to increased sales to residential and commercial customers and to increased revenues related to wholesale power marketing transactions. Industrial sales decreased during the period as a result of the two cogeneration projects located at major industrial customers' facilities coming on line during the period. Electric sales increased from 1996 reflecting increased wholesale power marketing transactions partially offset by decreased sales to industrial customers. Water revenues for 1998 were $84.0 million. Water sales to residential and commercial customers accounted for $75.2 million of 1998 revenues. The Water Utilities had sales in millions of gallons (m.g.) of 40,822 during 1998 and served 253,664 customers at December 31, 1998. Water revenues for the period April 1997 through December 1997 were $60.7 million, of which water sales to residential and commercial customers accounted for $54.4 million. The Water Utilities had sales of 32,504 m.g. during the last nine months of 1997 and served 246,643 customers at December 31, 1997. In 1998, Products and Services revenues were $781.7 million, an increase of $249.5 million from 1997. Approximately $205.0 million of this increase is attributable to increased gas marketing activity associated with customer growth and additional sales to existing customers. Miller and SM&P's operating revenues increased $31.7 million reflecting a full year of operations included in 1998. Products and Services revenues in 1997 increased $366.0 million from 1996. The increase was mainly due to an additional $275.4 million in gas marketing revenues resulting from increased sales to existing customers and customer growth and the addition of Miller and SM&P revenues for the last nine months of 1997. The basic steel industry accounted for 36% of natural gas delivered (including volumes transported) and 16% of electric sales during 1998. 2 The components of the changes in operating revenues are shown in the following table:
Year 1998 Year 1997 Compared to Compared to Year 1997 Year 1996 ----------- ----------- (In millions) Gas Revenue Changes Pass through of net changes in purchased gas costs, gas storage and storage transportation costs........ $ (60.6) $ 14.8 Gas transition costs................................. (22.4) (4.3) Changes in sales levels.............................. (95.5) (6.6) Gas transported...................................... 8.4 3.9 ------- ------ Total Gas Revenue Change............................... (170.1) 7.8 ------- ------ Electric Revenue Changes Pass through of net changes in fuel costs............ (4.8) 4.0 Changes in sales levels.............................. 63.9 (9.1) Wholesale electric marketing......................... 184.6 169.2 ------- ------ Total Electric Revenue Change.......................... 243.7 164.1 ------- ------ Water Revenue Change................................... 23.2 60.7 ------- ------ Products and Services Revenue Changes Gas Marketing........................................ 205.0 275.4 Pipeline construction................................ 14.4 47.2 Locate and marking................................... 17.3 48.4 Other................................................ 12.7 (5.0) ------- ------ Total Products and Services Revenue Change............. 249.4 366.0 ------- ------ Total Operating Revenue Change..................... $ 346.2 $598.6 ======= ======
See "Summary of Significant Accounting Policies--Gas Cost Adjustment Clause" in the Notes to the Consolidated Financial Statements for a discussion of the gas cost incentive mechanism. In addition, see "FERC Order No. 636" to the Notes to Consolidated Financial Statements regarding Federal Energy Regulatory Commission (FERC) Order No. 636 transition costs. Gas Costs The Energy Utilities' gas costs decreased $137.3 million (27.7%) in 1998 due to decreased gas purchases, decreased gas transition costs and decreased gas costs per dth. The average cost for the Energy Utilities' purchased gas in 1998, after adjustment for gas transition costs billed to transport customers, was $2.60 per dth as compared to $3.15 per dth in 1997. Gas costs increased $11.5 million (2.4%) in 1997 due to increased gas costs per dth, which were partially offset by decreased gas transition costs. The average cost for the Energy Utilities' purchased gas in 1997, after adjustment for gas transition costs billed to transport customers, was $3.15 per dth as compared to $3.06 per dth in 1996. Fuel and Purchased Power Cost of fuel for electric generation in 1998 increased mainly as a result of increased production. The average cost per kwh generated decreased 2.7% from 1997 to 1.50 cents per kwh. The cost of fuel for electric generation in 1997 increased mainly as a result of increased production. The average cost per kwh generated decreased 2.3% from 1996 to 1.54 cents per kwh. 3 Power purchased increased $207.9 million in 1998 as a result of increased bulk power purchases and wholesale power marketing activities. Power purchased increased $151.3 million in 1997 as a result of increased wholesale power marketing activities. Cost of Sales: Products and Services The cost of sales for Products and Services increased $234.1 million mainly due to increased purchases of gas of $212.0 million related to gas marketing transactions and the cost of sales for IWCR's non-regulated subsidiaries (including Miller and SM&P) being included for twelve months in 1998 compared to nine months in 1997. In 1997 cost of sales for Products and Services increased $335.5 million mainly due to increased purchases of gas related to gas marketing transactions and the inclusion of nine months of operations at IWCR's non-regulated subsidiaries. Operating Margins Operating margins increased $29.5 million in 1998 to $1.240 billion. Gas operating margin decreased $32.8 million in 1998 due to decreased deliveries to residential and commercial customers reflecting the warmer heating season, partially offset by increased sales to wholesale customers and increased deliveries of gas transported for others. Operating margin from electric sales increased $23.6 million due to increased sales to residential and commercial customers, reflecting a significantly warmer summer in 1998 than in 1997, and increased wholesale transactions, partially offset by decreased sales to industrial customers. The Water Utilities' operating margin increased $23.2 million reflecting the inclusion of a full year of operating results in 1998. Additionally, Miller and SM&P increased Products and Services operating margin $6.7 million during 1998, reflecting the inclusion of a full year of operations. Operating margins increased $95.0 million in 1997 to $1.211 billion. Gas operating margin decreased $3.7 million in 1997 due to decreased sales to residential and commercial customers reflecting mild weather, partially offset by increased sales to wholesale customers and increased deliveries of gas transported for others. Operating margin from electric sales increased $7.5 million in 1997 due to increased sales to residential and commercial customers and increased wholesale transactions partially offset by decreased sales to industrial customers. The Water Utilities contributed $60.7 million to operating margin in 1997, reflecting the March 1997 acquisition of IWCR. Additionally, inclusion of nine months of operating margins for Miller and SM&P increased Products and Services operating margin $28.4 million during 1997. Operating Expenses and Taxes Operating expenses and taxes (except income) in 1998 increased 2.3% from 1997 to $818.9 million and in 1997 increased 9.7% from 1996 to $800.4 million. Operation expense includes an increase of $21.9 million reflecting a full year of operations at IWCR and its subsidiaries. New operations at Primary's subsidiaries increased lease expenses by approximately $10.2 million. These increases were partially offset by decreased operation expenses at Northern Indiana of $23.4 million, mainly due to decreased employee related costs of $11.7 million, decreased sales and marketing activities of $5.7 million and decreased electric production operating costs of $4.3 million. Operation expenses increased $44.2 million in 1997 over 1996. The inclusion of nine months of operations at IWCR and its subsidiaries increased operation expenses $44.1 million in 1997. Additionally, new operations at Primary and Services increased operation expenses $8.4 million in 1997. These increases were partially offset by reduced pension costs, reduced environmental costs of $4.2 million and reduced pollution control facility costs of $4.1 million at Northern Indiana. Maintenance expenses decreased $1.9 million in 1998 from 1997 mainly reflecting decreased maintenance activity for electric production and distribution facilities. Maintenance expenses increased $2.5 million in 1997 from 1996 mainly reflecting the inclusion of nine months of maintenance at the Water Utilities. 4 Depreciation and amortization expense increased $6.7 million in 1998 from 1997 as a result of plant additions and the inclusion of twelve months of depreciation and amortization at IWCR. Depreciation and amortization expense increased $15.8 million in 1997 from 1996 resulting from utility plant additions and the inclusion of nine months of depreciation expenses and amortization of plant acquisition adjustments and intangible assets at IWCR. Other Income (Deductions) decreased $5.2 million in 1998 from 1997 mainly reflecting a loss on the disposition of properties as compared to gains on disposition of properties in the same period a year earlier. Other Income (Deductions) increased $3.8 million in 1997 from 1996 mainly resulting from the disposition of certain oil and natural gas properties during the first quarter of 1997. Interest and other charges increased $8.0 million and $14.9 million in 1998 and 1997, respectively. The 1998 increase reflects twelve months of $300 million of Capital Markets' medium-term notes, $75 million of Capital Markets' Junior Subordinated Deferrable Interest Debentures, Series A and the inclusion of twelve months of interest expense at IWCR. The 1997 increase reflects the issuance of $300 million of Capital Markets' medium-term notes and the inclusion of nine months of interest expense at IWCR. See Notes to Consolidated Financial Statements for a discussion of accounting policies and transactions impacting this analysis. Environmental Matters The operations of Industries are subject to extensive and evolving federal, state and local environmental laws and regulations intended to protect the public health and the environment. Such environmental laws and regulations affect Industries' operations as they relate to impacts on air, water and land. Refer to "Environmental Matters" in the Notes to Consolidated Financial Statements for information regarding certain environmental issues. Liquidity and Capital Resources During the next few years, it is anticipated that the great majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. See Notes to Consolidated Financial Statements for a discussion of the Common Share Dividend. Cash flow from operations at Northern Indiana 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 December 31, 1998 and December 31, 1997, Northern Indiana had $85.6 million and $71.5 million of commercial paper outstanding, respectively. At December 31, 1998, the weighted average interest rate of commercial paper outstanding was 5.62%. In September 1998, Northern Indiana entered into a five-year $100 million revolving credit agreement and a 364-day $100 million revolving credit agreement with several banks. These agreements terminate on September 23, 2003 and September 23, 1999, respectively. The 364-day agreement may be extended at expiration for additional periods of 364 days upon the request of Northern Indiana and agreement by the banks. Under these agreements, Northern Indiana may borrow funds at a floating rate of interest or, at Northern Indiana's request under certain circumstances, a fixed rate of interest for short term periods. These agreements provide financing flexibility to Northern Indiana and may be used to support the issuance of commercial paper. At December 31, 1998, there were no borrowings outstanding under either of these agreements. Concurrently with entering into such agreements, Northern Indiana terminated its then existing revolving credit agreement which would otherwise have terminated on August 19, 1999. 5 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 December 31, 1998, there were no borrowings under these lines of credit. The 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 December 31, 1998 there was $40.5 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 December 31, 1998, there were no borrowings outstanding under this facility. Capital Markets provides financing for Industries, subsidiaries other than Northern Indiana and, in certain respects, IWCR and its subsidiaries. As of December 31, 1998 and December 31, 1997, Capital Markets had $108.1 million and $17.0 million, respectively, of commercial paper outstanding. The weighted average interest rate of commercial paper outstanding was 5.99% at December 31, 1998. In September, 1998, Capital Markets entered into a five-year $100 million revolving credit agreement and a 364-day $100 million revolving credit agreement with several banks. These agreements terminate on September 23, 2003 and September 23, 1999, respectively. The 364-day agreement may be extended at expiration for additional periods of 364 days upon the request of Capital Markets and agreement by the banks. Under these agreements, Capital Markets may borrow, repay and reborrow funds at a floating rate of interest or, at Capital Market's request under certain circumstances, at a fixed rate of interest for short term periods. These agreements provide financing flexibility to Capital Markets and may be used to support the issuance of commercial paper. At December 31, 1998, there were no borrowings outstanding under either of these agreements. Concurrently with entering into such agreements, Capital Markets terminated its then existing revolving credit agreement which would otherwise have terminated on August 19, 1999. Capital Markets also has $130 million of money market lines of credit. As of December 31, 1998 and December 31, 1997, $86.8 million and $20.1 million of borrowings were outstanding, respectively, under these lines of credit. The financial 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 as reflected in the consolidated financial statements of Industries, was approximately $1.3 billion at December 31, 1998. IWCR and its subsidiaries have lines of credit with banks aggregating $92.4 million. At December 31, 1998, and December 31, 1997, $84.1 million and $48.9 million were outstanding under these lines of credit, respectively. IWC issued Refunding Revenue Bonds, Series 1998, on July 15, 1998, in the amount of $40 million. The proceeds from the Series 1998 Bonds were 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 bear interest at 5.05% per annum and mature on July 15, 2028. In February 1999, IWC issued $35 million of ten-year medium term notes at a rate of 5.99% and $45 million of twenty-year medium term notes at a rate of 6.61%. The majority of the proceeds will be used to reduce IWC's existing credit facilities and the remaining proceeds will be used for general corporate purposes. 6 Utility construction expenditures for 1998, 1997 and 1996 were approximately $245 million, $219 million and $208 million, respectively. Industries' total utility plant investment on December 31, 1998, was $6.6 billion. During recent years, Industries has been able to finance its construction program with internally generated funds and expects to be able to meet future commitments through such funds. The Energy Utilities do not anticipate the need to file for retail gas and electric base rate increases in the near future. IWC has agreed to a moratorium on water rate increases until 2002. During 1998, Industries' non-utility subsidiaries acquired interests in other properties and investments totaling approximately $43 million. 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. The transaction is expected to be completed in early 1999. Capital Markets intends to issue up to $345 million of premium income equity securities, each consisting of a trust preferred security and a purchase contract for Industries' common shares, to pay the cash portion of the consideration payable in the Bay State acquisition and to repay short-term indebtedness incurred in connection with the acquisition. Market Risk Sensitive Instruments and Positions The primary market risks to which Industries is exposed and in connection with which Industries uses market risk sensitive instruments are commodity price risk and interest rate risk. Industries engages in price risk management activities related to electricity and natural gas. Price risk arises from fluctuations in energy commodity prices due to changes in supply and demand. Industries actively monitors and limits its exposure to commodity price risk. Industries' price risk management policy allows the use of derivative financial and commodity instruments to reduce (hedge) exposure to price risk of its supply and related purchase and sales commitments of energy, as well as anticipated transactions. As part of this commodity price risk, Industries is exposed to geographic price differentials due primarily to transportation costs and local supply-demand factors. Industries may use basis swaps to hedge a portion of this exposure. For economic reasons or otherwise, Industries does not hedge all of its basis exposure. Industries enters into certain sales contracts with customers based upon a fixed sales price and varying volumes which are ultimately dependent upon the customer's supply requirements. Industries utilizes derivative financial instruments to reduce the commodity price risk based on modeling techniques to anticipate these future supply requirements. Industries continues to be exposed to price risk for the difference between the ultimate supply requirements and those modeled. Although the Energy Utilities are subject to commodity price risk as part of their traditional operations, the current regulatory framework within which the Energy Utilities operate allows for full collection of fuel and gas costs in rates. Consequently, there is limited commodity price risk 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 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 other than monitoring the degree of convergence between the derivative and cash markets are deemed necessary. Industries' daily net commodity position consists of natural gas inventories, commodity purchase and sales contracts and derivative financial and commodity instruments. The fair value of such positions is a summation of 7 the fair values calculated for each commodity by valuing each net position at quotes from exchanges and over-the-counter markets and includes location differentials. Based on Industries' net commodity position at fair value at December 31, 1998, a 10% adverse movement in electric and natural gas market prices would have reduced net income by approximately $0.4 million. However, any such movements in prices are not indicative of actual results and are subject to change. Industries utilizes long-term debt as a primary source of capital in its business. A significant portion of Industries' long-term debt consists of medium-term notes. In addition, the 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 Consolidated Statement of Long-term Debt for detailed information related to Industries' long-term debt outstanding and "Fair Value of Financial Instruments" in Notes to Consolidated Financial Statements for current market valuation of long-term debt. Refer to Summary of "Significant Accounting Policies-Hedging Activities" in Notes to Consolidated Financial Statements for further discussion of Industries' hedging policies. Year 2000 Costs Risks. Year 2000 issues address the ability of electronic processing equipment to process date sensitive information and recognize the last two digits of a date as occurring in or after the year 2000. Any failure in one of Industries' systems may result in material operational and financial risks. Possible scenarios include a system failure in one Industries' generating plants, an operating disruption or delay in transmission or distribution, or an inability to interconnect with the systems of other utilities. In addition, while Industries currently anticipates that its own mission-critical systems will be year 2000 compliant in a timely fashion, it cannot guarantee the compliance of systems operated by other companies upon which it depends. For example, the ability of an electric company to provide electricity to its customers depends upon a regional electric transmission grid, which connects the systems of neighboring utilities to support the reliability of electric power within the region. If one company's system is not year 2000 compliant, then a failure could affect the reliability of all providers within the grid, including Industries. Similarly, Industries' gas operations depend on natural gas pipelines that it does not own or control, and any non-compliance by a company owning or controlling those pipelines may affect Industries' ability to provide gas to its customers. Failure to achieve year 2000 readiness could have a material adverse affect on Industries' results of operations, financial position and cash flows. Industries is continuing its program to address risks associated with the year 2000. Industries' year 2000 program focuses on both its information technology (IT) and non-IT systems, and Industries has been making substantial progress in preparing these systems for proper functioning in the year 2000. State of Readiness. Industries' year 2000 program consists of four phases: inventory (identifying systems potentially affected by the year 2000), assessment (testing identified systems), remediations (correcting or replacing non-compliant systems) and validation (evaluating and testing remediated systems to confirm compliance). By second quarter 1997, Industries had completed the inventory and assessment phases for all of its mission-critical IT systems. Industries also has completed the remediation and validation phases for four of its six major IT components. The remediation and validation phases for the remaining two components are expected to be completed within the next few months, so that Industries expects to conclude the year 2000 program for its mission-critical systems by first quarter 1999. Industries has completed the inventory and assessment phases for all of its non-IT mission- critical systems. Industries has scheduled remediation (including replacement) and validation for its non-IT mission-critical systems throughout 1999. Industries expects to substantially complete its mission-critical year 2000 efforts by June 30, 1999, and to conclude the year 2000 program in the fourth quarter 1999. Because Industries depends on outside suppliers and vendors with similar year 2000 issues, Industries is assessing the ability of those suppliers and vendors to provide it with an uninterrupted supply of goods and services. Industries has contacted its critical vendors and suppliers in order to investigate their year 2000 efforts. In addition, Industries is working with electricity and gas industry groups such as North American Electric 8 Reliability Council, Electric Power Research Institute, and the American Gas Association to discuss and evaluate the potential impact of year 2000 problems upon the electric grid systems and pipeline networks that interconnect within each of those industries. Costs. Industries currently estimates that the total cost of its year 2000 program will be between $17 million and $26 million. These costs have been, and will continue to be, funded from operations. Costs related to the maintenance or modification of Industries' existing systems are expensed as incurred. Costs related to the acquisition of replacement systems are capitalized in accordance with Industries' accounting policies. Industries does not anticipate these costs to have a material impact on its results of operations. Contingency Plans. Industries currently is in the process of structuring its contingency plans to address the possibility that any mission-critical system upon which it depends, including those controlled by outside parties, will be non-compliant. This includes identifying alternate suppliers and vendors, conducting staff training and developing communication plans. In addition, Industries is evaluating both its ability to maintain or restore service in the event of a power failure or operating disruption or delay, and its limited ability to mitigate the effects of a network failure by isolating its own network from the non-compliant segments of the greater network. Industries expects to complete these contingency plans during the second quarter of 1999; however, the contingency plans will be under review during the third and fourth quarters of 1999. Competition and Regulatory Changes The regulatory frameworks applicable to the Energy Utilities, at both the state and federal levels, are in the midst of a period of fundamental change. These changes have and will continue to impact the operation, structure and profitability of Industries. At the same time, competition within the electric and gas industries will create opportunities for Industries' subsidiaries to compete for new customers and revenues. Industries' management has taken steps to make the company more competitive and profitable in this changing environment, including partnering on energy projects with major industrial customers, converting some of its generating units to allow use of lower cost, low sulfur coal, providing its gas customers with increased customer choice for new products and services throughout Northern Indiana's service territory, and establishing subsidiaries which provide gas and develop new energy-related products for residential, commercial and industrial customers. The Electric Industry. At the Federal level, FERC issued Order No. 888-A in 1996 which required all public utilities owning, controlling or operating transmission lines to file non-discriminatory open-access tariffs and offer wholesale electricity suppliers and marketers the same transmission service they provide themselves. In 1997, FERC approved Northern Indiana's open-access transmission tariff. Although wholesale customers currently represent a small portion of Northern Indiana's electricity sales, Northern Indiana intends to continue its efforts to retain and add wholesale customers by offering competitive rates and also intends to expand the customer base for which it provides transmission services. At the state level, Industries announced in 1997 that if consensus could be reached regarding electric utility restructuring legislation, Industries would support a restructuring bill during the 1999 session of the Indiana General Assembly. During 1998, Northern Indiana held discussions with the other investor-owned utilities in Indiana regarding the technical and economic aspects of possible legislation leading to greater customer choice. A consensus was not reached. Therefore, Industries does not anticipate that it will be supporting any legislation regarding electric restructuring during the 1999 session of the Indiana General Assembly. However, during 1999, Northern Indiana anticipates continued discussions with all segments of the Indiana electric industry in an attempt to reach a consensus on electric restructuring legislation for introduction during the 2000 Session of the Indiana General Assembly. The Gas Industry. At the Federal level, gas industry deregulation began in the mid 1980s when FERC required interstate pipelines to provide nondiscriminatory transportation services pursuant to unbundled rates. This regulatory change permitted large industrial and commercial customers to purchase their gas supplies either from the Energy Utilities or directly from competing producers and marketers which would then use the Energy 9 Utilities' facilities to transport the gas. More recently, the focus of deregulation in the gas industry has shifted to the states. At the state level, the Indiana Utility Regulatory (Commission) approved in 1997 Northern Indiana's Alternative Regulatory Plan (ARP) which implemented new rates and services that included, among other things, unbundling of services for additional customer classes (primarily residential and commercial users), negotiated services and prices, a gas cost incentive mechanism and a price protection program. The gas cost incentive mechanism allows Northern Indiana to share any cost savings or cost increases with its customers based upon a comparison of Northern Indiana's actual gas supply portfolio cost to a market-based benchmark price. Phase I of Northern Indiana's Customer Choice Pilot Program will end March 31, 1999. This pilot program offered a limited number of residential and commercial customers within the South Bend metropolitan area the right to choose alternative gas suppliers. Phase II of Northern Indiana's Customer Choice Pilot Program will commence April 1, 1999 and continue for a one-year period. During this phase, Northern Indiana plans to offer customer choice to a significantly expanded eligible customer base throughout its gas service territory. The Commission order allows Industries' natural gas marketing subsidiary to participate as a supplier of choice to Northern Indiana customers. In addition, as Northern Indiana has allowed residential and commercial customers to designate alternative gas suppliers, it has also offered new services to all classes of customers including, but not limited to, price protection, negotiated sales and services, gas lending and parking, and new storage services. To date, the Energy Utilities have not been materially affected by competition and management does not foresee substantial adverse affects in the near future unless the current regulatory structure is substantially altered. Industries believes the steps that it has taken to deal with increased competition has had and will continue to have significant positive effects in the next few years. Impact of Accounting Standards Refer to "Summary of Significant Accounting Policies--Impact of Accounting Standards" in the Notes to Consolidated Financial Statements for information regarding certain accounting standard issues. 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, year 2000 issues, 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. 10 NIPSCO INDUSTRIES, INC. CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, ----------------------------------- 1998 1997 1996 ----------- ----------- ----------- (Dollars in thousands, except per share amounts) Operating Revenues: Gas...................................... $ 637,098 $ 807,239 $ 799,395 Electric................................. 1,429,986 1,186,331 1,022,231 Water.................................... 83,979 60,743 -- Products and Services.................... 781,715 532,228 166,322 ----------- ----------- ----------- 2,932,778 2,586,541 1,987,948 ----------- ----------- ----------- Cost of Sales: Gas costs................................ 357,939 495,287 483,777 Fuel for electric generation............. 250,649 238,548 233,215 Power purchased.......................... 412,949 205,031 53,751 Products and Services.................... 670,830 436,748 101,240 ----------- ----------- ----------- 1,692,367 1,375,614 871,983 ----------- ----------- ----------- Operating Margin........................... 1,240,411 1,210,927 1,115,965 ----------- ----------- ----------- Operating Expenses and Taxes (except income): Operation................................ 399,594 390,253 346,059 Maintenance.............................. 74,630 76,552 74,101 Depreciation and amortization............ 256,474 249,804 233,993 Taxes (except income).................... 88,207 83,765 75,504 ----------- ----------- ----------- 818,905 800,374 729,657 ----------- ----------- ----------- Operating Income........................... 421,506 410,553 386,308 ----------- ----------- ----------- Other Income (Deductions).................. 10,584 15,768 11,241 ----------- ----------- ----------- Interest and Other Charges: Interest on long-term debt............... 111,420 102,842 84,255 Other interest........................... 12,794 13,047 16,863 Amortization of premium, reacquisition premium, discount and expense on debt, net..................................... 4,590 4,718 4,605 Dividend requirements on preferred stocks of subsidiaries......................... 8,538 8,691 8,712 ----------- ----------- ----------- 137,342 129,298 114,435 ----------- ----------- ----------- Income before income taxes................. 294,748 297,023 283,114 ----------- ----------- ----------- Income Taxes............................... 100,862 106,174 106,380 ----------- ----------- ----------- Net Income................................. 193,886 190,849 176,734 ----------- ----------- ----------- Dividend requirements on preferred shares.. -- -- 119 ----------- ----------- ----------- Balance available for common shareholders.. $ 193,886 $ 190,849 $ 176,615 =========== =========== =========== Average common shares outstanding--basic... 120,778,077 123,849,126 122,381,500 Basic earnings per average common share.... $ 1.60 $ 1.54 $ 1.44 =========== =========== =========== Diluted earnings per average common share.. $ 1.59 $ 1.53 $ 1.43 =========== =========== =========== Dividends declared per common share........ $ 0.975 $ 0.915 $ 0.855 =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 11 NIPSCO INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET
December 31, ----------------------- 1998 1997 ----------- ----------- (Dollars in thousands) Assets Property, Plant and Equipment: Utility Plant (including construction work in progress of $197,112 and $188,710, respectively): Electric.............................................. $ 4,154,060 $ 4,066,568 Gas................................................... 1,447,945 1,395,140 Water................................................. 663,355 603,013 Common................................................ 364,822 351,350 ----------- ----------- 6,630,182 6,416,071 Less--Accumulated provision for depreciation and amortization......................................... 2,968,078 2,759,945 ----------- ----------- Total utility plant................................... 3,662,104 3,656,126 ----------- ----------- Other property, at cost, less accumulated provision for depreciation.......................................... 86,565 96,028 ----------- ----------- Total Property, Plant and Equipment.............. 3,748,669 3,752,154 ----------- ----------- Investments: Investments, at equity................................ 111,340 82,855 Investments, at cost.................................. 41,609 31,771 Other investments..................................... 28,702 24,499 ----------- ----------- Total Investments................................ 181,651 139,125 ----------- ----------- Current Assets: Cash and cash equivalents............................. 60,848 30,780 Accounts receivable, less reserve of $8,984 and $5,887, respectively................................. 261,971 231,580 Other receivables..................................... 31,780 107,231 Fuel adjustment clause................................ -- 2,679 Gas cost adjustment clause............................ 45,738 89,991 Materials and supplies, at average cost............... 62,818 60,085 Electric production fuel, at average cost............. 32,402 18,837 Natural gas in storage................................ 69,640 61,436 Prepayments and other................................. 41,670 28,089 ----------- ----------- Total current assets............................. 606,867 630,708 ----------- ----------- Other Assets: Regulatory assets..................................... 209,059 211,513 Intangible assets, less accumulated provision for amortization......................................... 65,039 68,175 Prepayments and other................................. 175,218 135,358 ----------- ----------- Total other assets............................... 449,316 415,046 ----------- ----------- $4,986,503 $ 4,937,033 =========== =========== Capitalization and Liabilities Capitalization: Common shareholders' equity........................... $ 1,149,708 $ 1,264,788 Preferred stocks-- Northern Indiana Public Service Company: Series without mandatory redemption provisions.... 81,116 81,123 Series with mandatory redemption provisions....... 56,435 58,841 Indianapolis Water Company: Series without mandatory redemption provisions.... 4,497 4,497 Long-term debt, excluding amounts due within one year............................................... 1,667,965 1,667,925 ----------- ----------- Total capitalization............................. 2,959,721 3,077,174 ----------- ----------- Current Liabilities: Current portion of long-term debt..................... 6,790 54,621 Short-term borrowings................................. 411,040 212,639 Accounts payable...................................... 251,399 226,751 Dividends declared on common and preferred stocks..... 31,072 30,784 Customer deposits..................................... 22,199 22,091 Taxes accrued......................................... 44,939 77,573 Interest accrued...................................... 21,202 19,124 Fuel adjustment clause................................ 6,279 -- Accrued employment costs.............................. 52,121 58,799 Other accruals........................................ 39,022 47,930 ----------- ----------- Total current liabilities........................ 886,063 750,312 ----------- ----------- Other: Deferred income taxes................................. 667,167 651,815 Deferred investment tax credits, being amortized over life of related property............................. 98,177 105,538 Deferred credits...................................... 68,046 73,715 Customer advances and contributions in aid of construction......................................... 118,778 110,145 Accrued liability for postretirement benefits......... 143,870 132,919 Other noncurrent liabilities.......................... 44,681 35,415 ----------- ----------- Total other...................................... 1,140,719 1,109,547 ----------- ----------- Commitments and Contingencies (see notes) $4,986,503 $ 4,937,033 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 12 NIPSCO INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CAPITALIZATION
December 31, ---------------------------------- 1998 1997 ---------------- ---------------- (Dollars in thousands) Common shareholders' equity............... $1,149,708 38.8% $1,264,788 41.1% ---------- ---------- Preferred Stocks, which are redeemable solely at option of issuer: Northern Indiana Public Service Company-- Cumulative preferred stock--$100 par value-- 4 1/4% series--209,051 and 209,118 shares outstanding, respectively... 20,905 20,912 4 1/2% series--79,996 shares outstanding........................ 8,000 8,000 4.22% series--106,198 shares outstanding........................ 10,620 10,620 4.88% series--100,000 shares outstanding........................ 10,000 10,000 7.44% series--41,890 shares outstanding........................ 4,189 4,189 7.50% series--34,842 shares outstanding........................ 3,484 3,484 Premium on preferred stock.......... 254 254 Cumulative preferred stock--no par value-- Adjustable Rate Series A (stated value--$50 per share), 473,285 shares outstanding................. 23,664 23,664 ---------- ---------- 81,116 2.7% 81,123 2.6% ---------- ---------- Redeemable Preferred Stocks, subject to mandatory redemption requirements or whose redemption is outside the control of issuer: Northern Indiana Public Service Company-- Cumulative preferred stock--$100 par value-- 8.85% series--50,000 and 62,500 shares outstanding, respectively... 5,000 6,250 7 3/4% series--33,352 and 38,906 shares outstanding, respectively... 3,335 3,891 8.35% series--51,000 and 57,000 shares outstanding, respectively... 5,100 5,700 Cumulative preferred stock--no par value-- 6.50% series--430,000 shares outstanding........................ 43,000 43,000 ---------- ---------- 56,435 1.9% 58,841 1.9% ---------- ---------- Indianapolis Water Company-- Cumulative preferred stock--$100 par value-- 4 1/2% Series 44,966 shares outstanding......... 4,497 0.2% 4,497 0.2% ---------- ---------- Long-term debt............................ 1,667,965 56.4% 1,667,925 54.2% ---------- ----- ---------- ----- Total capitalization.............. $2,959,721 100.0% $3,077,174 100.0% ========== ===== ========== =====
The accompanying notes to consolidated financial statements are an integral part of this statement. 13 NIPSCO INDUSTRIES, INC. CONSOLIDATED STATEMENT OF LONG-TERM DEBT
December 31, ------------------------ 1998 1997 ----------- ----------- (Dollars in thousands) Northern Indiana Public Service Company: First mortgage bonds-- Series T, 7 1/2% --due April 1, 2002.............. $ 39,000 $ 39,500 Series NN, 7.10% --due July 1, 2017............... 55,000 55,000 ----------- ----------- Total........................................... 94,000 94,500 ----------- ----------- Pollution control notes and bonds-- Series A note--City of Michigan City-- 5.70% due October 1, 2003........................ 16,500 18,000 Series 1988 Bonds--Jasper County--Series A, B and C 3.05% weighted average at December 31, 1998, due November 1, 2016................................. 130,000 130,000 Series 1988 Bonds--Jasper County--Series D 3.13% weighted average at December 31, 1998, due November 1, 2007................................. 24,000 24,000 Series 1994 Bonds--Jasper County--Series A 5.15% at December 31, 1998, due August 1, 2010... 10,000 10,000 Series 1994 Bonds--Jasper County--Series B 5.15% at December 31, 1998, due June 1, 2013..... 18,000 18,000 Series 1994 Bonds--Jasper County--Series C 5.15% at December 31, 1998, due April 1, 2019.... 41,000 41,000 ----------- ----------- Total........................................... 239,500 241,000 ----------- ----------- Medium-term notes-- Issued at interest rates between 6.10% and 7.69%, with a weighted average interest rate of 7.00% and various maturities between March 20, 2000 and August 4, 2027................................... 748,025 748,025 ----------- ----------- Unamortized premium and discount on long-term debt, net................................................ (3,567) (4,029) ----------- ----------- Total long-term debt of Northern Indiana Public Service Company................................ 1,077,958 1,079,496 ----------- ----------- Indianapolis Water Company: First mortgage bonds-- Series 5.20%--due May 1, 2001..................... 11,600 11,600 Series 8.00%--due December 15, 2001............... 3,000 3,000 Series 7 7/8%--due March 1, 2019.................. -- 40,000 Series 9.83%--due June 15, 2019................... 5,000 5,000 Series 6.10%--due December 1, 2022................ 5,000 5,000 Series 8.19%--due December 1, 2022................ 10,000 10,000 Series 5.85%--due September 1, 2025............... 18,000 18,000 Series 5.05%--due July 15, 2028................... 40,000 -- ----------- ----------- Total long-term debt of Indianapolis Water Company........................................ 92,600 92,600 ----------- ----------- IWC Resources Corporation: Senior Note Payable--6.31% due March 15, 2001....... 14,000 14,000 Variable Bank Loan--6.62% due August 7, 2003........ 5,600 5,600 ----------- ----------- Total long-term debt of IWC Resources Corporation.................................... 19,600 19,600 ----------- ----------- NIPSCO Capital Markets, Inc.: Subordinated Debentures--Series A, 7 3/4%, due March 31, 2026..................................... 75,000 75,000 Senior Notes Payable--6.78%, due December 1, 2027... 75,000 75,000 Medium-term notes-- Issued at interest rates between 7.38% and 7.99%, with a weighted average interest rate of 7.66% and various maturities between April 1, 2004 and May 5, 2027...................................... 300,000 300,000 ----------- ----------- Total long-term debt of NIPSCO Capital Markets, Inc............................................ 450,000 450,000 ----------- ----------- NIPSCO Development Company, Inc.: Lake Erie Land Company--Notes Payable--9.00%--due July 7, 2004....................................... 2,533 2,637 NDC Douglas Properties, Inc.--Notes Payable-- Interest rates between 6.72% and 8.38% with a weighted average interest rate of 7.87% and maturities through January 1, 2008............... 25,274 23,592 ----------- ----------- Total long-term debt of NIPSCO Development Company, Inc................................... 27,807 26,229 ----------- ----------- Total long-term debt, excluding amounts due within one year................................ $ 1,667,965 $ 1,667,925 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 14 NIPSCO INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (Dollars in thousands) Cash flows from operating activities: Net income............................ $ 193,886 $ 190,849 $ 176,734 Adjustments to reconcile net income to net cash: Depreciation and amortization......... 256,474 249,804 233,993 Deferred federal and state operating income taxes, net.................... (21,941) (1,649) 21,126 Deferred investment tax credits, net.. (7,361) (7,376) (7,408) Advance contract payment.............. 1,900 1,900 (17,100) Change in certain assets and liabilities--* Accounts receivable, net............ (21,137) (37,369) (45,037) Other receivables................... 75,451 (65,047) (30,778) Electric production fuel............ (13,565) 7,646 (12,225) Natural gas in storage.............. (8,204) 3,657 (4,209) Accounts payable.................... 19,785 (18,567) 81,013 Taxes accrued....................... (9,833) 3,389 17,002 Fuel adjustment clause.............. 8,958 6,470 1,152 Gas cost adjustment clause.......... 44,253 10,223 (98,791) Accrued employment costs............ (6,678) 12,135 (2,509) Other accruals...................... (11,641) 11,994 (13,503) Other, net............................ (16,215) 66,498 5,971 ----------- ----------- ----------- Net cash provided by operating activities....................... 484,132 434,557 305,431 ----------- ----------- ----------- Cash flows provided by (used in) investing activities: Utility construction expenditures..... (245,825) (218,931) (207,881) Acquisition of IWC Resources, net of cash acquired........................ -- (288,932) -- Proceeds from disposition of assets... 12,588 35,993 11,049 Proceeds from settlement of litigation........................... -- 41,069 -- Other, net............................ (57,638) (66,561) (22,689) ----------- ----------- ----------- Net cash used in investing activities....................... (290,875) (497,362) (219,521) ----------- ----------- ----------- Cash flows provided by (used in) financing activities: Issuance of long-term debt............ 47,380 658,232 78,366 Issuance of short-term debt........... 2,512,640 1,029,508 1,582,210 Net change in commercial paper........ 105,200 (224,645) 191,705 Retirement of long-term debt.......... (95,631) (324,604) (89,792) Retirement of short-term debt......... (2,420,822) (1,042,224) (1,609,734) Retirement of preferred shares........ (2,413) (2,408) (37,604) Issuance of common shares............. 10,356 218,566 5,716 Acquisition of treasury shares........ (203,976) (133,073) (105,498) Cash dividends paid on common shares.. (116,386) (111,593) (103,190) Cash dividends paid on preferred shares............................... -- -- (766) Other, net............................ 463 (507) 514 ----------- ----------- ----------- Net cash provided by (used in) financing activities............. (163,189) 67,252 (88,073) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................ 30,068 4,447 (2,163) Cash and cash equivalents at beginning of period.............................. 30,780 26,333 28,496 ----------- ----------- ----------- Cash and cash equivalents at end of period................................. $ 60,848 $ 30,780 $ 26,333 =========== =========== ===========
- -------- *Net of effect from purchase of IWC Resources Corporation. The accompanying notes to consolidated financial statements are an integral part of this statement. 15 NIPSCO INDUSTRIES, INC. CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Additional Accum. Common Treasury Paid-In Retained Other Comp. Comp. Common Shares Shares Capital Earnings Other Income Total Income Shares -------- --------- ---------- -------- ------- ----------- ---------- -------- ----------- (Dollars in Thousands) Balance, January 1, 1996................. $870,930 $(293,223) $32,210 $518,837 $(6,278) $ (261) $1,122,215 147,784,218 -------- --------- ------- -------- ------- ------- ---------- -------- ----------- Comprehensive Income Net income.......... 176,734 176,734 176,734 Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized gain (net of income tax of $691).... 1,079 1,079 1,079 Realized........ -- -- -- Gain (loss) on foreign currency translation: Unrealized...... 1,790 1,790 1,790 Realized........ -- -- -- Total Comprehensive Income............... $179,603 ======== Dividends: Preferred shares.... (119) (119) Common shares....... (103,981) (103,981) Treasury shares acquired............. (105,498) -- (105,498) Issued: Employee stock purchase plan....... 329 454 783 Long-term incentive plan................ 5,397 186 (572) 5,011 Amortization of unearned compensation......... 2,570 2,570 Other................ 18 (101) (83) -------- --------- ------- -------- ------- ------- ---------- ----------- Balance, December 31, 1996................. $870,930 $(392,995) $32,868 $591,370 $(4,280) $ 2,608 $1,100,501 147,784,218 ======== ========= ======= ======== ======= ======= ========== =========== Comprehensive Income Net income.......... 190,849 190,849 $190,849 Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized gain (net of income tax of $1,033).. 1,689 1,689 1,689 Realized........ -- -- -- Gain (loss) on foreign currency translation: Unrealized...... (1,430) (1,430) (1,430) Realized........ -- -- -- Total Comprehensive Income............... $191,108 ======== Dividends: Preferred shares.... Common shares....... (114,303) (114,303) Treasury shares acquired............. (133,073) 1 (133,072) Issued: Employee stock purchase plan....... 273 424 697 Long-term incentive plan................ 5,329 116 (443) 5,002 IWC Resources Corporation acquisition......... 152,405 55,007 207,412 Acquisition of minority interest... 4,118 1,351 5,469 Amortization of unearned compensation......... 2,099 2,099 Other................ 1 (126) (125) -------- --------- ------- -------- ------- ------- ---------- ----------- Balance, December 31, 1997................. $870,930 $(363,943) $89,768 $667,790 $(2,624) $ 2,867 $1,264,788 147,784,218 ======== ========= ======= ======== ======= ======= ========== =========== Treasury Shares ------------ Balance, January 1, 1996................. (23,025,026) ------------ Comprehensive Income Net income.......... Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized gain (net of income tax of $691).... Realized........ Gain (loss) on foreign currency translation: Unrealized...... Realized........ Total Comprehensive Income............... Dividends: Preferred shares.... Common shares....... Treasury shares acquired............. (5,587,208) Issued: Employee stock purchase plan....... 41,338 Long-term incentive plan................ 398,000 Amortization of unearned compensation......... Other................ ------------ Balance, December 31, 1996................. (28,172,896) ============ Comprehensive Income Net income.......... Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized gain (net of income tax of $1,033).. Realized........ Gain (loss) on foreign currency translation: Unrealized...... Realized........ Total Comprehensive Income............... Dividends: Preferred shares.... Common shares....... (6,536,928) Treasury shares acquired............. Issued: Employee stock purchase plan....... 34,376 Long-term incentive plan................ 353,066 IWC Resources Corporation acquisition......... 10,580,764 Acquisition of minority interest... 270,064 Amortization of unearned compensation......... Other................ ------------ Balance, December 31, 1997................. (23,471,554) ============
16 NIPSCO INDUSTRIES, INC. CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
Additional Accum. Common Treasury Paid-In Retained Other Comp. Comp. Common Shares Shares Capital Earnings Other Income Total Income Shares -------- --------- ---------- -------- ------- ----------- ---------- -------- ----------- (Dollars in Thousands) Balance, December 31, 1997................. $870,930 $(363,943) $89,768 $667,790 $(2,624) $2,867 $1,264,788 147,784,218 ======== ========= ======= ======== ======= ====== ========== =========== Comprehensive Income. Net income.......... 193,886 193,886 193,886 Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized gain (net of income tax of $873).... 1,429 1,429 1,429 Realized gain (net of income tax of $1,340).. (2,195) (2,195) (2,195) Gain (loss) on foreign currency translation: Unrealized...... (1,157) (1,157) (1,157) Realized........ 186 186 186 Total Comprehensive Income............... $192,149 ======== Dividends: Preferred shares.... Common shares....... (116,596) (116,596) Treasury shares acquired............. (203,976) 2 (203,974) Issued: Employee stock purchase plan....... 341 889 1,230 Long-term incentive plan................ 8,551 575 (1,084) 8,042 Amortization of unearned compensation......... 1,893 1,893 Other................ 2,947 (771) 2,176 -------- --------- ------- -------- ------- ------ ---------- ----------- Balance, December 31, 1998................. $870,930 $(559,027) $94,181 $744,309 $(1,815) $1,130 $1,149,708 147,784,218 ======== ========= ======= ======== ======= ====== ========== =========== Treasury Shares ------------ Balance, December 31, 1997................. (23,471,554) ============ Comprehensive Income. Net income.......... Other comprehensive income, net of tax: Gain/loss on available for sale securities: Unrealized gain (net of income tax of $873).... Realized gain (net of income tax of $1,340).. Gain (loss) on foreign currency translation: Unrealized...... Realized........ Total Comprehensive Income............... Dividends: Preferred shares.... Common shares....... Treasury shares acquired............. (7,309,906) Issued: Employee stock purchase plan....... 42,796 Long-term incentive plan................ 485,144 Amortization of unearned compensation......... Other................ ------------ Balance, December 31, 1998................. (30,253,520) ============
17 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 seven 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); Harbour Water Corporation (Harbour) and Liberty Water Company (Liberty). Industries' regulated gas and electric subsidiaries (Northern Indiana, Kokomo Gas, NIFL and Crossroads) are referred to as "Energy Utilities"; and its regulated water subsidiaries (IWC, Harbour and Liberty) are referred to as "Water Utilities." Industries also provides non-regulated energy/utility-related services including gas 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). These non-regulated subsidiaries are referred to collectively as "Products and Services." NIPSCO Capital Markets, Inc. (Capital Markets) handles financing requirements for certain subsidiaries of Industries other than Northern Indiana. On March 25, 1997 Industries acquired IWC Resources Corporation (IWCR). Industries' results of operations include twelve months of operating results from IWCR for the period ended December 31, 1998 and nine months for the period ended December 31, 1997. 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 below for a more detailed discussion of the proposed acquisition. 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 recognized on the percentage of completion method whereby revenues are recognized in proportion to costs incurred over the life of each project. Industries records provisions for losses on construction contracts, if any, in the period in which such losses become probable. 18 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 approximate weighted average remaining lives for major components of 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 Gas: Gas storage plant.............................................. 18 years Transmission plant............................................. 34 years Distribution plant............................................. 27 years Other gas plant................................................ 24 years Water: Water source and treatment plant............................... 34 years Distribution plant............................................. 68 years Other water plant.............................................. 13 years
The depreciation provision for electric utility plant, as a percentage of the original cost, was 3.7% for 1998, 3.6% for 1997 and 3.7% for 1996. The depreciation provision for gas utility plant, as a percentage of the original cost, was 5.1% for 1998 and 1997, and 5.0% for 1996. The depreciation provision for water utility plant, as a percentage of the original cost, was 2.1% for 1998 and 1997. The Utilities follow the practice of charging maintenance and repairs, including the cost of removal of minor items of property, to maintenance expense accounts, except for repairs of transportation and service equipment which are charged to clearing accounts and redistributed to operating expense and other accounts. When property which represents a retired unit is replaced or removed, the cost of such property is credited to utility plant, and such cost, together with the cost of removal less salvage, is charged to the accumulated provision for depreciation. Amortization of Software Costs Industries 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). 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 $185.4 million and $197.7 million at December 31, 1998 and December 31, 1997, respectively, and are being amortized over a forty-year period from the respective dates of acquisition. 19 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 December 31, 1998 and December 31, 1997 was approximately $4.6 million and $1.1 million, respectively. Coal Reserves Northern Indiana has a long-term mining contract to mine its coal reserves through the year 2001. The costs of these reserves are being recovered through the rate-making process as such coal reserves are used to produce electricity. Power Purchased Power purchases and net interchange power with other electric utilities under interconnection agreements and wholesale power purchases are included in Cost of Sales under the caption "Power purchased." Accounts Receivable At December 31, 1998, Northern Indiana had sold $100 million of its accounts receivable under a sales agreement which expires May 31, 2002. Customer Advances and Contributions in Aid of Construction IWC allows developers to install and provide for the installation of water main extensions, which are to be transferred to IWC upon completion. The cost of the main extensions and the amount of any funds advanced for the cost of water mains installed are included in customer advances for construction and are generally refundable to the customer over a period of ten years. Advances not refunded within ten years are permanently transferred to contributions in aid of construction. Comprehensive Income Industries adopted SFAS No. 130, "Reporting Comprehensive Income" effective January 1, 1998. The objective of the statement is to report comprehensive income which is a measure of all changes in equity of an enterprise which result from transactions or other economic events during the period other than transactions with shareholders. 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 $3.6 million and $(2.5) million as of December 31, 1998; $4.4 million and $(1.6) million as of December 31, 1997; $2.7 million and $(0.1) million as of December 31, 1996 and $1.6 million and $(1.9) million as of January 1, 1996. Statement of Cash Flows For 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. 20 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Cash paid during the periods reported for income taxes and interest was as follows:
1998 1997 1996 -------- -------- ------- (In thousands) Income taxes................................... $127,713 $116,849 $75,795 Interest, net of amounts capitalized........... 118,079 102,361 87,281
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 sales rates contain an adjustment factor, which reflects the increases and decreases in the cost of purchased gas, contracted gas storage and storage transportation charges. The gas cost adjustment factor for Northern Indiana is subject to a quarterly hearing by the Commission and remains in effect for a three-month period. The gas cost adjustment factors for Kokomo Gas and NIFL are subject to semi-annual hearings by the Commission and remain in effect for a six-month period. If the statutory requirement relating to the level of return is satisfied, any under-recovery or over- recovery caused by variances between estimated and actual cost in a given three-month or six-month period will be included in a future filing. 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. Northern Indiana's 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 cost to a market-based benchmark price. See 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 December 1998 and 1997 the estimated replacement cost of gas in storage (current and non-current) at December 31, 1998 and 1997 exceeded the stated LIFO cost by approximately $34 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 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 ultimately recognized in earnings when the associated transaction or anticipated transaction affects earnings. 21 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 December 31, 1998, Industries had open derivative financial instruments representing hedges of natural gas sales of 31.5 billion cubic feet (Bcf), and natural gas purchases of 7.2 Bcf. The net deferred loss on these derivative financial instruments as of December 31, 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. 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. In December 1998, the Emerging Issues Task Force reached consensus on Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF Issue 98-10). EITF Issue 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. Industries adopted EITF Issue 98- 10 on January 1, 1999 and the adoption did not have a significant impact on its financial position or results of operations. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance for the capitalization of certain costs related to computer software developed or obtained for internal use. Industries adopted SOP 98-1 on January 1, 1999 and the adoption did not have a significant impact on its financial position or 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 December 31, 1998 and December 31, 1997, the regulatory assets identified below represent probable future revenue to the Utilities associated with certain incurred costs as these costs are recovered through the rate-making process. If a portion of the Utilities' operations becomes no longer subject to the provisions of SFAS No. 71, a write-off of certain regulatory assets might be required, unless 22 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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:
December 31, December 31, 1998 1997 ------------ ------------ (In thousands) Unamortized reacquisition premium on debt (See Long-Term Debt note).......................... $ 43,233 $ 46,748 Unamortized R. M. Schahfer Unit 17 and Unit 18 carrying charges and deferred depreciation (see below)................................... 62,329 66,546 Bailly scrubber carrying charges and deferred depreciation (see below)...................... 8,945 9,880 Deferral of SFAS No. 106 expense not recovered (See Postretirement Benefits note)............ 81,339 87,653 FERC Order No. 636 transition costs (See FERC Order No. 636 note)........................... 22,093 28,744 Regulatory income tax asset, net............... 18,793 6,941 Other.......................................... 4,936 4,261 -------- -------- 241,668 250,773 -------- -------- Less: Current portion of regulatory assets..... 32,609 39,260 -------- -------- $209,059 $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 pretax 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 5.75%. 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. 23 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Investments In Real Estate Development invests in a series of affordable housing projects within the Utilities' service territory. 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 $34.0 million and $30.1 million relating to affordable housing projects at December 31, 1998 and December 31, 1997, respectively. Income Taxes Deferred income taxes are recognized as costs in the rate-making process by the commissions having jurisdiction over the rates charged by the Utilities. Deferred income taxes are provided as a result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. These taxes are reversed by a debit or credit to deferred income tax expense as the temporary differences reverse. Investment tax credits have been deferred and are being amortized to income over the life of the related property. 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. 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 Massachusetts, New Hampshire and Maine have also approved the merger. The transaction is expected to be completed in early 1999. 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. 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. 24 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Certain creditors of NEMC have filed claims in the Canadian courts 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 financial position or results of operations of Industries. FERC Order No. 636 Since December 1993, the Energy Utilities have paid approximately $140.6 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. Environmental Matters General The operations of Industries are subject to extensive and evolving federal, state and local environmental laws and regulations intended to protect the public health and the environment. Such environmental laws and regulations affect Industries' operations as they relate to impacts on air, water and land. Superfund Because Industries is a "potentially responsible party" (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) at several waste disposal sites, as well as at former manufactured-gas plant sites which it, or its corporate predecessors, own or owned or operated, it may be required to share in the cost of clean up of such sites. Industries instituted a program to investigate former manufactured-gas plant sites where it is the current or former owner which investigation has identified twenty- eight of these sites. Initial sampling has been conducted at twenty sites. Follow-up investigations have been conducted at thirteen sites and remedial measures have been selected at seven sites. Industries intends to continue to evaluate its facilities and properties with respect to environmental laws and regulations and take any required corrective action. In an effort to recover a portion of the remedial costs to be incurred at the manufactured gas plants, Industries approached various companies that provided insurance coverage which Industries believed covered costs related to actions taken and to be taken at former manufactured-gas plant sites. Industries has filed claims in Indiana state court against various insurance companies, seeking coverage for costs associated with several manufactured-gas plant sites and damages for alleged misconduct by some of the insurance companies. Industries has received cash settlements from several insurance companies. Additionally, Industries has settled other actions against other companies relating to cost sharing and management of the investigation and remediation of several former manufactured-gas plant sites at which Industries and such companies or their predecessors were operators or owners. As of December 31, 1998, Industries has recorded a reserve of approximately $19 million to cover probable corrective actions. Industries' ultimate liability in connection with those sites will depend upon many factors, including the volume of material contributed to the site, the number of other PRPs and their financial viability, and the extent of corrective actions required. Based upon investigations and management's understanding of current environmental laws and regulations, Industries believes that any corrective actions required, after consideration of insurance coverages and contributions from other PRPs, will not have a significant impact on its financial position or results of operations. 25 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Clean Air Act The Clean Air Act Amendments of 1990 (CAAA) imposed limits to control acid rain on the emission of sulfur dioxide and nitrogen oxides (NOx) which become fully effective in 2000. All of Northern Indiana's facilities are already in compliance with the sulfur dioxide limits. Northern Indiana has already taken most of the steps necessary to meet the nitrogen oxide limits. The CAAA also contain other provisions that could lead to limitations on emissions of hazardous air pollutants and other air pollutants (including nitrogen oxides as discussed below), which may require significant capital expenditures for control of these emissions. Until specific rules have been issued that affect Industries' facilities, Industries cannot predict what these requirements will be or the costs of complying with these potential requirements. Nitrogen Oxides During 1998, the EPA issued a final rulemaking, the NOx State Implementation Plan (SIP) call, requiring certain states, including Indiana, to reduce NOx levels from industrial and utility boilers to lower regional transport of ozone under the non-attainment provisions of the CAAA. According to the rule, the State of Indiana has until September 1999 to issue regulations implementing the control program. The State of Indiana, as well as some other states, filed a legal challenge in December 1998 to the EPA NOx SIP call rule. Lawsuits have also been filed against the rule by various groups, including industry, labor, cities and towns and chambers of commerce. Industries will participate in the legal challenge as a member of a utility industry group. Any resulting NOx emission limitations could be more restrictive than those imposed on electric utilities under the Acid Rain NOx reduction program described above. Industries is evaluating the EPA's final rule and any potential requirements that could result from the final rule as implemented by the State of Indiana. Industries believes that the costs relating to compliance with the new standards may be substantial, but such costs are dependent upon the outcome of the current litigation and the ultimate control program agreed to by the targeted states and the EPA. Industries will continue to closely monitor developments in this area. The EPA issued final rules revising the National Ambient Air Quality Standards for ozone and particulate matter in July 1997. The revised standards could require additional reductions in sulfur dioxide, particulate matter and NOx emissions from coal-fired boilers (including Industries' generating stations) beyond measures discussed above. Certain implementation proposals, which are not yet final, would target coal-fired utilities in the Midwest and South, including Indiana, for more substantial reductions than other areas and other sources of emissions. Final implementation methods will be set by the EPA as well as state regulatory authorities. Industries believes that the costs relating to compliance with the new standards may be substantial but are dependent upon the ultimate control program agreed to by the targeted states and the EPA. Industries 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. Carbon Dioxide Initiatives are being discussed both in the United States and worldwide to reduce so-called "greenhouse gases" such as carbon dioxide and other by- products of burning fossil fuels. Reduction of such emissions could result in significant capital outlays or operating expenses to Industries. 26 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Clean Water Act and Related Matters Industries' wastewater and water operations are subject to pollution control and water quality control regulations, including those issued by the EPA and the State of Indiana. Under the Federal Clean Water Act and Indiana's regulations, Industries must obtain National Discharge Elimination System (NPDES) permits for water discharges from various facilities, including electric generating and water treatment stations. These facilities either have permits for their water discharge or they have applied for a permit renewal of any expiring permits. 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. In December 1998, EPA promulgated two National Primary Drinking Water rules, the Interim Enhanced Surface Water Treatment Rule and the Disinfectants and Disinfection Byproducts Rule. The Water Utilities must comply with these rules by December 2001. Management does not believe that significant changes will be required to the Water Utilities' operations to comply with these rules; however, some cost expenditures for equipment modifications or enhancements may be necessary to comply with the Interim Enhanced Surface Water Treatment Rule. Additional rules are anticipated to be promulgated under the 1996 amendments. Such standards promulgated could be costly and require substantial changes in the Water Utilities' operations. 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 the 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. Such an addition to rate base, however, would effect a change in water rates and IWC, Industries' principal water utility, has agreed to a moratorium on water rate increases until 2002. Therefore, recovery of any increased costs discussed above may not be timely for IWC. 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 income tax rate currently being credited to ratepayers using the average rate assumption method and unamortized deferred investment tax credits. 27 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components of the net deferred income tax liability at December 31, 1998 and 1997, are as follows:
December 31, ------------------ 1998 1997 -------- -------- (In thousands) Deferred tax liabilities-- Accelerated depreciation and other property differences....................................... $818,748 $779,223 AFUDC-equity....................................... 33,029 35,282 Adjustment clauses................................. 14,965 35,253 Other regulatory assets............................ 29,739 31,862 Reacquisition premium on debt...................... 17,311 18,335 Deferred tax assets-- Deferred investment tax credits.................... (37,236) (40,017) Removal costs...................................... (157,728) (144,111) Other postretirement/postemployment benefits....... (51,754) (45,298) Other, net......................................... (7,783) (3,069) -------- -------- 659,291 667,460 -------- -------- Less: Deferred income taxes related to current assets and liabilities..................................... (7,876) 15,645 -------- -------- Deferred income taxes--noncurrent.................... $667,167 $651,815 ======== ========
Federal and state income taxes as set forth in the Consolidated Statement of Income are comprised of the following:
1998 1997 1996 -------- -------- -------- (In thousands) Current income taxes-- Federal................................... $113,680 $ 98,126 $ 79,938 State..................................... 16,484 17,073 12,724 -------- -------- -------- 130,164 115,199 92,662 -------- -------- -------- Deferred income taxes, net-- Federal................................... (20,426) (1,772) 19,282 State..................................... (1,515) 123 1,844 -------- -------- -------- (21,941) (1,649) 21,126 -------- -------- -------- Deferred investment tax credits, net........ (7,361) (7,376) (7,408) -------- -------- -------- Total income taxes........................ $100,862 $106,174 $106,380 ======== ======== ========
28 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of total income tax expense to an amount computed by applying the statutory federal income tax rate to pretax income is as follows:
1998 1997 1996 -------- -------- -------- (In thousands) Net income................................. $193,886 $190,849 $176,734 Add--Income taxes.......................... 100,862 106,174 106,380 Dividend requirements on preferred stocks of subsidiaries........................... 8,538 8,691 8,712 -------- -------- -------- Income before preferred dividend requirements of subsidiaries and income taxes..................................... $303,286 $305,714 $291,826 ======== ======== ======== Amount derived by multiplying pretax income by statutory rate......................... $106,150 $107,000 $102,139 Reconciling items multiplied by the statutory rate: Book depreciation over related tax depreciation............................ 3,992 4,072 4,621 Amortization of deferred investment tax credits................................. (7,361) (7,376) (7,408) State income taxes, net of federal income tax benefit............................. 9,200 11,220 10,115 Reversal of deferred taxes provided at rates in excess of the current federal income tax rate......................... (4,384) (6,151) (6,644) Low-income housing credits............... (3,840) (3,056) (2,303) Nondeductible amounts related to amortization of intangible assets and plant acquisition adjustments........... 2,516 1,640 385 Other, net................................. (5,411) (1,175) 5,475 -------- -------- -------- Total income taxes..................... $100,862 $106,174 $106,380 ======== ======== ========
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 1998 and 1997 is as follows:
1998 1997 -------- -------- (In thousands) Benefit obligation at beginning of year (January 1,)................................................ $875,756 $743,634 Service cost........................................ 17,093 14,714 Interest cost....................................... 60,686 57,938 Plan amendments..................................... 14,655 25,096 Actuarial loss...................................... 38,773 73,768 Acquisition of IWCR................................. -- 15,772 Benefits paid....................................... (57,924) (55,166) -------- -------- Benefit obligation at end of the year (December 31,)............................................... $949,039 $875,756 ======== ========
29 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The change in the fair value of the plans' assets for the years 1998 and 1997 is as follows:
1998 1997 -------- -------- (In thousands) Fair value of plan assets at beginning of year (January 1,)....................................... $924,857 $790,978 Actual return on plan assets........................ 85,254 126,695 Employer contributions.............................. 34,843 46,440 Acquisition of IWCR................................. -- 15,910 Benefits paid....................................... (57,924) (55,166) -------- -------- Plan assets at fair value at end of the year (December 31,)..................................... $987,030 $924,857 ======== ========
The plans' assets are invested primarily in common stocks, bonds and notes. The plans' funded status as of December 31, 1998 and December 31, 1997 is as follows:
1998 1997 -------- -------- (In thousands) Plan assets in excess of benefit obligation........... $ 37,991 $ 49,101 Unrecognized net actuarial loss....................... (10,938) (46,959) Unrecognized prior service cost....................... 57,193 47,114 Unrecognized transition amount........................ 26,813 32,107 -------- -------- Prepaid pension costs................................. $111,059 $ 81,363 ======== ========
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 rates of increase in compensation levels of 4.5% were used to determine the benefit obligations at December 31, 1998 and 1997. The long-term portion of prepaid pension cost amounts for 1998 and 1997 are included in "Prepayments and other" in the Consolidated Balance Sheet. The following items are the components of provisions for pensions for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 -------- -------- -------- (In thousands) Service costs............................... $ 17,092 $ 14,438 $ 16,300 Interest costs.............................. 60,686 57,645 53,477 Expected return on plan assets.............. (82,671) (72,253) (63,551) Amortization of transition obligation....... 5,294 5,326 5,422 Amortization of prior service costs......... 4,746 3,501 2,604 -------- -------- -------- $ 5,147 $ 8,657 $ 14,252 ======== ======== ========
Assumptions used in the valuation and determination of 1998, 1997 and 1996 pension expense were as follows:
1998 1997 1996 ----- ----- ----- Discount rate........................................... 7.00% 7.75% 7.25% Rate of increase in compensation levels................. 4.50% 5.50% 5.50% Expected long-term rate of return on assets............. 9.00% 9.00% 9.00%
IWCR participates in several industry-wide, multi-employer pension plans for certain of its union employees at Miller. These plans provide for monthly benefits based on length of service. Specified amounts per compensated hour for each employee are contributed to the trustees of these plans. Contributions of $2.0 million and $1.7 million were made to these plans for the year ended December 31, 1998 and 1997 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. 30 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Postretirement Benefits Industries provides certain health care and life insurance benefits for retired employees. The majority of Industries' employees may become eligible for these benefits if they reach retirement age while working for Industries. The expected cost of such benefits is accrued during the employees' years of service. Northern Indiana's rate-making had historically included the cost of providing these benefits based on the related insurance premiums. On December 30, 1992, the Commission authorized the accrual method of accounting for postretirement benefits for rate-making purposes consistent with SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions," and authorized the deferral of the differences between the net periodic postretirement benefit costs and the insurance premiums paid for such benefits as a regulatory asset. On June 11, 1997, the Commission issued an order approving the inclusion of accrual-based postretirement benefit costs in the rate-making process to be effective February 1, 1997 for electric rates and March 1, 1997 for gas rates. These costs include an amortization of the existing regulatory asset consistent with the remaining amortization period for the transition obligation. Northern Indiana discontinued its cost deferral and began amortizing its regulatory asset concurrent with these dates. IWC's current rates include postretirement benefit costs on an accrual basis, including amortization of the regulatory asset that arose prior to inclusion of these costs in 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) as of December 31, 1998 and 1997:
1998 1997 -------- -------- (In thousands) Accumulated postretirement benefit obligation at beginning of year (January 1,)...................... $223,908 $200,790 Service cost......................................... 5,249 5,034 Interest cost........................................ 15,793 16,215 Plan amendments...................................... (283) 4,015 Actuarial (gain) loss................................ 8,453 (10,242) Acquisition of IWCR.................................. -- 18,505 Benefits paid........................................ (12,519) (10,409) -------- -------- Accumulated postretirement benefit obligation at end of the year (December 31,).......................... $240,601 $223,908 ======== ========
The change in the fair value of the plan assets for the years 1998 and 1997 is as follows:
1998 1997 -------- -------- (In thousands) Fair value of plan assets at beginning of year (January 1,)........................................ $ 2,400 $ -- Actual Return on plan assets ........................ 1,103 -- Employer contributions............................... 10,637 12,809 Participant contributions............................ 1,282 -- Benefits paid........................................ (12,519) (10,409) -------- -------- Plan assets at fair value at end of the year (December 31,)...................................... $ 2,903 $ 2,400 ======== ========
31 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Following is the funded status for postretirement benefits as of December 31, 1998 and 1997:
1998 1997 --------- --------- (In thousands) Funded status...................................... $(237,698) $(221,508) Unrecognized net actuarial gain.................... (87,087) (99,117) Unrecognized prior service cost.................... 3,873 4,195 Unrecognized transition amount..................... 164,436 176,464 --------- --------- Accrued liability for postretirement benefits...... $(156,476) $(139,966) ========= =========
A discount rate of 7%, a pre-Medicare medical trend rate of 7% declining to a long-term rate of 5%; a discount rate of 7%, and a pre-Medicare medical trend rate of 8% declining to a long-term rate of 5%, were used to determine the APBO at December 31, 1998 and 1997, respectively. Net periodic postretirement benefit costs, before consideration of the rate-making discussed previously, for the years ended December 31, 1998, 1997 and 1996 include the following components:
1998 1997 1996 ------- ------- ------- (In thousands) Service costs.................................. $ 5,249 $ 4,904 $ 7,352 Interest costs................................. 15,793 15,878 18,311 Expected return on plan assets................. (216) -- -- Amortization of prior service cost............. 322 279 -- Amortization of transition obligation.......... 11,745 11,558 11,593 Amortization of (gain) loss.................... (5,747) (5,844) (554) ------- ------- ------- $27,146 $26,775 $36,702 ======= ======= =======
Assumptions used in the determination of 1998, 1997 and 1996 net periodic postretirement benefit costs were as follows:
1998 1997 1996 ---- ---- ---- Discount rate.......................................... 7.00% 7.75% 7.25% Rate of increase in compensation levels................ 4.50% 5.50% 5.00% Assumed annual rate of increase in health care benefits.............................................. 8.00% 8.00% 9.00% Assumed ultimate trend rate............................ 5.00% 6.00% 6.00%
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 December 31, 1998 by approximately $30.6 million, and increase the aggregate of the service and interest cost components of plan costs by approximately $3.0 million for the year ended December 31, 1998. The effect of a 1% decrease in the assumed health care cost trend rates for each future year would decrease the accumulated postretirement benefit obligation at December 31, 1998 by approximately $23.9 million, and decrease the aggregate of the service and interest cost components of plan costs by approximately $2.3 million. Amounts disclosed above could be changed significantly in the future by changes in health care costs, work force demographics, interest rates, or plan changes. Preferred and Preference Shares Industries is authorized to issue 20,000,000 shares of Preferred Shares, without par value. Four million shares are designated Series A Junior Participating Preferred Shares and are reserved for issuance pursuant to the Share Purchase Rights Plan described in Common Shares. 32 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The authorized classes of par value and no par value cumulative preferred and preference stocks of Northern Indiana are as follows: Cumulative Preferred--$100 par value--2,400,000 shares; Cumulative Preferred--no par value--3,000,000 shares; Cumulative Preference--$50 par value--2,000,000 shares (none outstanding); and Cumulative Preference--no par value--3,000,000 shares (none outstanding). 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. The redemption prices at December 31, 1998 for the cumulative preferred stock, which is redeemable solely at the option of Northern Indiana and IWC, in whole or in part, at any time upon thirty days' notice, are as follows:
Redemption Price Per Series Share ------ ---------- Northern Indiana Public Service Company: Cumulative preferred stock--$100 par value-- 4 1/4% $101.20 4 1/2% $100.00 4.22% $101.60 4.88% $102.00 7.44% $101.00 7.50% $101.00 Cumulative preferred stock--no par value-- adjustable rate (6.00% at December 31, 1998), Series A (stated value $50 per share)................................ $ 50.00 Indianapolis Water Company: Cumulative preferred stock--$100 par value--rates ranging from 4% to 5%............................... $100-$105
The redemption prices at December 31, 1998, as well as sinking fund provisions, for the cumulative preferred stock subject to mandatory redemption requirements, or whose redemption is outside the control of Northern Indiana, are as follows:
Sinking Fund Or Mandatory Series Redemption Price Per Share Redemption ------- -------------------------- ------------------------- Cumulative preferred stock--$100 par value-- 8.85% $100.74, reduced periodically 12,500 shares on or before April 1. 8.35% $103.44, 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. 7.75% $104.06, reduced periodically 2,777 shares on or before December 1; noncumulative option to double amount each year. Cumulative preferred stock--no par value-- 6.50% $ 100.00 on October 14, 2002 430,000 shares on October 14, 2002.
33 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Sinking fund requirements with respect to redeemable preferred stocks outstanding at December 31, 1998 for each of the four years subsequent to December 31, 1999 are as follows:
Year Ending December 31, ------------------------ 2000......................................................... $1,827,700 2001......................................................... $1,827,700 2002......................................................... $1,827,700 2003......................................................... $1,827,700
Stock Split On December 16, 1997, the Board of Directors authorized a two-for-one split of Industries' common shares. 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 common shares reported, including per share amounts and stock option data of Industries' common shares, reflect the two-for-one stock split as if it had occurred at the beginning of the earliest period. 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 December 31, 1998, Northern Indiana had approximately $146.1 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. Earnings Per Share Industries determines earnings per share in accordance with the provisions of SFAS No. 128 "Earnings per Share," which requires Industries to present basic earning per share and diluted earnings per share. Basic earnings per share is 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. 34 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The net income, preferred dividends and shares used to compute basic and diluted earnings per share is presented in the following table:
1998 1997 1996 ------------ ------------ ------------ (Dollars in thousands, except per share amounts) Basic Weighted Average Number of Shares: Average Common Shares Outstanding.... 120,778,077 123,849,126 122,381,500 ============ ============ ============ Net Income to be Used to Compute Basic Earnings per Average Common Share: Net Income........................... $ 193,886 $ 190,849 $ 176,734 Dividend requirements on Preferred Shares.............................. -- -- 119 ------------ ------------ ------------ Balance Available for Common Shareholders........................ $ 193,886 $ 190,849 $ 176,615 ============ ============ ============ Basic Earnings per Average Common Share................................. $ 1.60 $ 1.54 $ 1.44 ============ ============ ============ Diluted Weighted Average Number of Shares: Average Common Shares Outstanding.... 120,778,077 123,849,126 122,381,500 Dilutive effect for Nonqualified Stock Options....................... 556,799 374,344 323,367 ------------ ------------ ------------ Weighted Average Shares............ 121,334,876 124,223,470 122,704,867 Net Income to be Used to Compute Diluted Earnings per Average Common Share: Net Income........................... $ 193,886 $ 190,849 $ 176,734 Dividend requirements on Preferred Shares.............................. -- -- 119 ------------ ------------ ------------ Balance Available for Common Shareholders........................ $ 193,886 $ 190,849 $ 176,615 ============ ============ ============ Diluted Earnings per Average Common Share................................. $ 1.59 $ 1.53 $ 1.43 ============ ============ ============
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 share of 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, subject to certain limits. At December 31, 1998, Industries had purchased approximately 51.3 million shares since 1989 at an average price of $16.12 per share. Approximately 10.7 million additional common shares may be repurchased under the Board's authorization. 35 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-Term Incentive Plans 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 April 1998 and April 2004, respectively. At December 31, 1998, there were 3,244,700 shares reserved for future awards under the 1994 Plan. The Plans permit the following types of grants, separately or in combination: nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights and performance units. No incentive stock options or performance units were outstanding at December 31, 1998. Under the Plans, the exercise price of each option equals the market price of Industries' common stock on the date of grant. Each option has a maximum term of ten years and vests one year from the date of grant. Stock appreciation rights (SARs) may be granted only in tandem with stock options on a one-for-one basis and are payable in cash, Industries' common shares, or a combination thereof. There were no SARs outstanding at December 31, 1998. 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, 542,666 and 524,000 restricted shares outstanding at December 31, 1998, 1997 and 1996, 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 December 31, 1998, 71,500 shares were issued under the Plan. Industries accounts for these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for nonqualified stock options. The compensation cost that was charged against net income for restricted stock awards was $2.7 million, $1.8 million and $2.1 million for the years ending December 31, 1998, 1997 and 1996 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 average common share would have been reduced to the following pro forma amounts:
Year Ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- (In thousands, except per share amounts) Net Income: As reported................................. $193,886 $190,849 $176,734 Pro forma................................... 192,764 189,999 176,087 Earnings Per Average Common Share: Basic: As reported............................... $ 1.60 $ 1.54 $ 1.44 Pro forma................................. 1.59 1.53 1.43 Diluted: As reported............................... $ 1.59 $ 1.53 $ 1.43 Pro forma................................. 1.59 1.52 1.43
36 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of each option granted as 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 years ended December 31, 1998, 1997 and 1996 respectively: Risk-free interest rate of 5.70%, 6.29%, and 6.39%; expected dividend yield of $0.67, $0.87 and $0.84 per share; expected option term of five and one-quarter years for 1998 and 1997 and five years for 1996; and expected volatility of 12.7% for 1998 and 1997 and 13.2% for 1996. Changes in outstanding shares under option and SARs for 1996, 1997 and 1998, are as follows:
Nonqualified Nonqualified Stock Options Stock Options with SARs ------------------- ---------------- Weighted Average Option Option Year Ended December 31, 1996 Options Price Options Price ---------------------------- --------- -------- -------- ------ Balance at beginning of year........ 2,202,100 $14.31 11,200 $5.47 Granted........................... 556,600 $18.91 -- Exercised......................... (368,000) $14.51 -- Cancelled......................... (29,800) $16.88 -- --------- ------ -------- ----- Balance at end of year.............. 2,360,900 $15.33 11,200 $5.47 ========= ====== ======== ===== Shares exercisable.................. 1,812,300 $14.25 11,200 $5.47 ========= ====== ======== ===== Weighted average fair value of options granted.................... $2.50 ========= Weighted Average Option Option Year Ended December 31, 1997 Options Price Options Price ---------------------------- --------- -------- -------- ------ Balance at beginning of year........ 2,360,900 $15.33 11,200 $5.47 Granted........................... 533,600 $20.64 -- Exercised......................... (330,400) $15.29 -- Cancelled......................... (28,700) $19.21 -- --------- ------ -------- ----- Balance at end of year.............. 2,535,400 $16.41 11,200 $5.47 ========= ====== ======== ===== Shares exercisable.................. 2,006,800 $15.30 11,200 $5.47 ========= ====== ======== ===== Weighted average fair value of options granted.................... $2.66 ========= Weighted Average Option Option Year Ended December 31, 1998 Options Price Options Price ---------------------------- --------- -------- -------- ------ Balance at beginning of year........ 2,535,400 $16.41 11,200 $5.47 Granted........................... 607,000 $29.22 -- Exercised......................... (457,700) $14.88 (11, 200) 5.47 Cancelled......................... (33,400) $16.07 -- --------- ------ -------- ----- Balance at end of year.............. 2,651,300 $19.61 -- -- ========= ====== ======== ===== Shares exercisable.................. 2,046,300 $16.77 -- -- ========= ====== ======== ===== Weighted average fair value of options granted.................... $4.28 =========
37 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about non-qualified stock options at December 31, 1998: OPTIONS OUTSTANDING
Weighted Average Weighted Range Number Remaining Average of Option Outstanding at Contractual Option Price December 31, 1998 Life Price ---------------- ----------------- ----------- -------- $ 8.53 to $ 8.97 88,000 1.52 years $ 8.62 $11.47 to $18.91 1,488,100 7.91 years $16.03 $20.64 to $29.22 1,075,200 9.47 years $25.47 ---------------- --------- ---------- ------ $ 8.53 to $29.22 2,651,300 7.29 years $19.61 ================ ========= ========== ======
OPTIONS EXERCISABLE
Average Range Number Remaining of Option Exercisable at Option Price December 31, 1998 Price ---------------- ----------------- --------- $ 8.53 to $ 8.97 88,000 $ 8.62 $11.47 to $18.91 1,488,100 $16.03 $20.64 470,200 $20.64 ---------------- --------- ------ $ 8.53 to $20.64 2,046,300 $16.77 ================ ========= ======
Long-Term Debt The sinking fund requirements and maturities of long-term debt outstanding at December 31, 1998 (including the maturity of Northern Indiana's first mortgage bonds: Series T, 7 1/2%, due April 1, 2002; Northern Indiana's medium-term notes due from March 20, 2000 to July 8, 2003; Northern Indiana's Pollution Control Note, Series A, City of Michigan City 5.70% due October 1, 2003; and NDC Douglas Properties, Inc.'s notes payable due January 1, 2000 through October 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 and August 7, 2003), for each of the four years subsequent to December 31, 1999 are as follows:
Year Ending December 31, ------------------------ 2000........................ $164,150,865 2001........................ $ 53,718,777 2002........................ $ 64,988,989 2003........................ $140,913,520
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 owned by Northern Indiana, other than expressly excepted property. On May 28, 1997, Northern Indiana was authorized to issue and sell up to $217,692,000 of its Medium-Term Notes, Series E, with various maturities, for purposes of refinancing certain first mortgage bonds and medium-term notes. As of December 31, 1998, $139.0 million of the medium-term notes had been issued with various interest rates and maturities. The proceeds from these issuances were used to pay short-term debt incurred to redeem its First Mortgage Bonds, Series N, and to pay at maturity various issues of Medium-Term Notes, Series D. 38 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) IWC's first mortgage bonds are secured by its utility plant. Provisions of trust indentures related to the 8% Series Bonds require annual sinking or improvement payments amounting to .50% of the maximum aggregate amount outstanding. As permitted, this requirement has been satisfied by substituting a portion of permanent additions to utility plant. IWC issued Refunding Revenue Bonds, Series 1998 on July 15, 1998, in the amount of $40 million. The proceeds from the Series 1998 Bonds were 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 bear interest at 5.05% per annum and mature on July 15, 2028. In February 1999, IWC issued $35 million of ten-year medium term notes at a rate of 5.99% and $45 million of twenty-year medium term notes at a rate of 6.61%. The majority of the proceeds will be used to reduce IWC's existing credit facilities and the remaining proceeds will be used for general corporate purposes. 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 outstanding short-term obligations of Capital Markets. In December 1997, Capital Markets issued and sold $75 million of 6.78% senior notes 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. Proceeds from the sale of these notes were primarily used to pay Capital Markets' Zero Coupon Notes which matured December 1, 1997. The remaining balance of the proceeds were used for Industries' general corporate purposes. The financial 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 as reflected in the consolidated financial statements of Industries, was approximately $1.3 billion at December 31, 1998. 39 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Current Portion of Long-Term Debt At December 31, 1998 and 1997, Industries' current portion of long-term debt due within one year was as follows:
December 31, December 31, 1998 1997 ------------ ------------ (Dollars in thousands) First mortgage bonds........................... $ -- $14,509 Medium-term notes-- Interest rates between 5.83% and 5.95% with a weighted average interest rate of 5.86% and maturities between April 6, 1998 and April 13, 1998.................................... -- 35,000 Notes payable-- Interest rates between 6.72% and 9.00% with a weighted average interest rate of 7.87% and maturities between January 1, 1999 and December 22, 1999........................... 4,790 3,612 Sinking funds due within one year.............. 2,000 1,500 ------ ------- Total current portion of long-term debt.... $6,790 $54,621 ====== =======
Short-Term Borrowings Northern Indiana and Capital Markets make use of commercial paper to fund short-term working capital requirements. As of December 31, 1998 and December 31, 1997, Northern Indiana had $85.6 million and $71.5 million of commercial paper outstanding, respectively. At December 31, 1998, the weighted average interest rate of commercial paper outstanding was 5.62%. As of December 31, 1998 and December 31, 1997, Capital Markets had $108.1 million and $17.0 million of commercial paper outstanding. At December 31, 1998, the weighted average interest rate of commercial paper outstanding was 5.99%. In September 1998, Northern Indiana entered into a five-year $100 million revolving credit agreement and a 364-day $100 million revolving credit agreement with several banks. These agreements terminate on September 23, 2003 and September 23, 1999, respectively. The 364-day agreement may be extended at expiration for additional periods of 364 days upon the request of Northern Indiana and agreement by the banks. Under these agreements, Northern Indiana may borrow funds at a floating rate of interest or, at Northern Indiana's request under certain circumstances, a fixed rate of interest for short term periods. These agreements provide financing flexibility to Northern Indiana and may be used to support the issuance of commercial paper. At December 31, 1998, there were no borrowings outstanding under either of these agreements. Concurrently with entering into such agreements, Northern Indiana terminated its then existing revolving credit agreement which would otherwise have terminated on August 19, 1999. 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 December 31, 1998, there were no borrowings under these lines of credit. The 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 December 31, 1998 and 1997, $40.5 million and $47.5 million of borrowings were outstanding under these lines of credit. 40 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Northern Indiana has a $50 million uncommitted finance facility. At December 31, 1998 and 1997, there were no borrowings outstanding under this facility. In September 1998, Capital Markets entered into a five-year $100 million revolving credit agreement and a 364-day $100 million revolving credit agreement with several banks. These agreements terminate on September 23, 2003 and September 23, 1999, respectively. The 364-day agreement may be extended at expiration for additional periods of 364 days upon the request of Capital Markets and agreement by the banks. Under these agreements, Capital Markets may borrow funds at a floating rate of interest or, at Capital Market's request under certain circumstances, a fixed rate of interest for a short term period. These agreements provide financing flexibility to Capital Markets and may be used to support the issuance of commercial paper. At December 31, 1998, there were no borrowings outstanding under either of these agreements. Concurrently with entering into such agreements, Capital Markets terminated its then existing revolving credit agreement which would otherwise have terminated on August 19, 1999. Capital Markets also has $130 million of money market lines of credit. As of December 31, 1998 and 1997, $86.8 million and $20.1 million, respectively, of borrowings were outstanding under these lines of credit. IWCR and its subsidiaries have lines of credit with banks aggregating $92.4 million. At December 31, 1998, $84.1 million and $48.9 million, respectively, were outstanding under these lines of credit. At December 31, 1998 and 1997, Industries' short-term borrowings were as follows:
December 31, December 31, 1998 1997 ------------ ------------ (In thousands) Commercial paper-- Weighted average interest rate of 5.83% at December 31, 1998........................... $193,700 $ 88,500 Notes payable-- Issued at interest rates between 4.96% and 6.50% with a weighted average interest rate of 5.85% and various maturities between January 11, 1999 and December 31, 1999...... 217,340 116,469 Revolving loan facility........................ -- 7,670 -------- -------- Total short-term borrowings................ $411,040 $212,639 ======== ========
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 December 31, 1998:
Year Ending December 31, (In thousands) ------------------------ -------------- 1999....................................................... $ 29,804 2000....................................................... 29,466 2001....................................................... 29,154 2002....................................................... 59,590 2003....................................................... 75,464 Later years................................................ 237,108 -------- Total minimum payments required............................ $460,586 ========
41 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The consolidated financial statements include rental expense for all operating leases as follows:
Year Ending December 31, (In thousands) ------------------------ -------------- 1998..................................................... $23,700 1997..................................................... 8,839 1996..................................................... 8,121
Commitments Industries estimates 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 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 million. Primary arranges energy-related projects for large energy-intensive customers and offers such customers, nationwide expertise in managing the engineering, construction, operation and maintenance of such projects. Primary through its subsidiaries Harbor Coal Company, North Lake Energy Corporation, Lakeside Energy Corporation, Portside Energy Corporation, and Cokenergy, Inc., has entered into partnering arrangements with several of Industries' largest industrial customers, principally steel mills, to service a portion of their energy needs. In order to serve its customers under the partnering arrangements, Primary, through its subsidiaries, has or expects to enter into certain operating lease commitments to lease these energy-related projects which have a combined capacity of 393 megawatts Industries, principally through its subsidiary Capital Markets, guarantees certain of Primary's obligations under each lease, which are included in the Operating Leases table above. Primary has advanced approximately $31.8 million and $107.2 million, at December 31, 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. 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. 42 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Investments: The fair value of some investments is estimated based on market prices for those or similar investments. Long-term debt/Preferred stock: The fair value of long-term debt and preferred stock is estimated based on the quoted market prices for the same or similar issues or on the rates offered to Industries for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value. The carrying values and estimated fair values of Industries' financial instruments are as follows:
December 31, 1998 December 31, 1997 --------------------- --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- (In thousands) Cash and cash equivalents.... $ 60,848 $ 60,848 $ 30,780 $ 30,780 Investments.................. 36,594 36,028 32,625 32,886 Long-term debt (including current portion)............ 1,674,755 1,769,934 1,722,546 1,718,897 Preferred stock.............. 143,876 140,420 146,289 139,814
A substantial portion 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. 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 following table shows the basic steel industry percentage of gas revenue (including transportation services) and electric revenue for 1998, 1997 and 1996:
Basic Steel Industry 1998 1997 1996 -------------------- ---- ---- ---- Gas revenue percent........................................ 3% 4% 1% Electric revenue percent................................... 13% 17% 22%
43 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Quarterly Financial Data(a) The following data summarize certain operating results for each of the quarters of 1998 and 1997:
1998 Quarters Ended ------------------------------------ March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- (Dollars in thousands, except per share amounts) Operating revenues................ $779,344 $652,408 $747,792 $753,234 Operating expenses................ 662,230 573,365 650,844 624,833 -------- -------- -------- -------- Operating income.................. 117,114 79,043 96,948 128,401 Other income (deductions)......... 8,448 (931) 2,870 197 Interest and other charges........ 32,497 33,243 35,199 36,403 Income taxes...................... 32,343 15,424 21,492 31,603 -------- -------- -------- -------- Net income........................ 60,722 29,445 43,127 60,592 Dividend requirements on preferred shares........................... -- -- -- -- -------- -------- -------- -------- Balance available for common shareholders..................... $ 60,722 $ 29,445 $ 43,127 $ 60,592 ======== ======== ======== ======== Basic earnings per average common share(a)......................... $ 0.49 $ 0.24 $ 0.36 $ 0.51 ======== ======== ======== ======== Diluted earnings per average common share(a).................. $ 0.48 $ 0.24 $ 0.35 $ 0.51 ======== ======== ======== ======== Market price for the quarter: High............................. $ 28.375 $ 28.313 $ 32.875 $ 33.625 Low.............................. $ 24.750 $ 25.813 $ 26.625 $ 28.875 1997 Quarters Ended ------------------------------------ March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- (Dollars in thousands, except per share amounts) Operating revenues................ $659,950 $523,187 $596,315 $807,089 Operating expenses................ 531,364 449,239 509,905 685,480 -------- -------- -------- -------- Operating income.................. 128,586 73,948 86,410 121,609 Other income (deductions)......... 9,403 4,308 3,764 (1,707) Interest and other charges........ 28,071 33,607 34,084 33,536 Income taxes...................... 39,080 16,413 20,221 30,460 -------- -------- -------- -------- Net income........................ 70,838 28,236 35,869 55,906 Dividend requirements on preferred shares........................... -- -- -- -- -------- -------- -------- -------- Balance available for common shareholders..................... $ 70,838 $ 28,236 $ 35,869 $ 55,906 ======== ======== ======== ======== Basic earnings per average common share(a)......................... $ 0.59 $ 0.22 $ 0.28 $ 0.44 ======== ======== ======== ======== Diluted earnings per average common share(a).................. $ 0.59 $ 0.22 $ 0.28 $ 0.44 ======== ======== ======== ======== Market price for the quarter: High............................. $ 20.125 $ 21.125 $ 21.282 $ 49.875 Low.............................. $ 19.000 $ 19.438 $ 20.344 $ 42.125
- -------- (a) Because of the combined mathematical effect of common shares repurchased and issued and the cyclical nature of net income during the year, the sum of earnings per share data for any four quarterly periods may vary slightly from the earnings per share data for the equivalent twelve-month period. Segments of Business Industries adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" during 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. 44 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 45 NIPSCO INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following tables provide 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. In addition, Adjustments have been made to the segment information to arrive at information included in the results of operations and financial position of Industries. These adjustments include unallocated corporate assets, revenues and expenses and the elimination of intercompany receivables and payables. The accounting policies of the operating segments are the same as those described in "Summary of Significant Accounting Policies."
Other Gas Products Adjust- 1998 Gas Electric Water Marketing & Services ments Total - ---- ---------- ---------- -------- --------- ---------- --------- ---------- (In thousands) Operating revenues...... $ 637,098 $1,429,986 $ 83,979 $657,692 $263,069 $(139,046) $2,932,778 Other Income (Deductions)........... $ 1,720 $ 553 $ 712 $ 2,017 $ 4,877 $ 705 $ 10,584 Depreciation and amortization........... $ 75,547 $ 156,844 $ 11,589 $ 332 $ 11,954 $ 208 $ 256,474 Income before Interest and Other Charges and Income Taxes........... $ 67,217 $ 341,433 $ 23,460 $ 5,006 $ 6,614 $ (11,640) $ 432,090 Assets.................. $ 930,240 $2,514,791 $619,505 $121,574 $483,243 $ 317,150 $4,986,503 Capital Expenditures.... $ 62,981 $ 124,044 $ 59,265 $ 24 $ 11,325 $ -- $ 257,639 Investment in equity-- method investees....... $ -- $ -- $ -- $ 6,707 $104,633 $ -- $ 111,340 Other Gas Products Adjust- 1997 Gas Electric Water Marketing & Services ments Total - ---- ---------- ---------- -------- --------- ---------- --------- ---------- (In thousands) Operating revenues...... $ 807,239 $1,186,331 $ 60,743 $480,986 $211,996 $(160,754) $2,586,541 Other Income (Deductions)........... $ 821 $ 637 $ 1,465 $ 3,349 $ 10,936 $ (1,440) $ 15,768 Depreciation and amortization........... $ 73,017 $ 153,843 $ 8,241 $ 233 $ 13,336 $ 1,134 $ 249,804 Income before Interest and Other Charges and Income Taxes........... $ 88,950 $ 312,243 $ 19,363 $ 7,085 $ 13,121 $ (14,441) $ 426,321 Assets.................. $ 965,473 $2,507,905 $565,717 $ 94,690 $500,706 $ 302,542 $4,937,033 Capital Expenditures.... $ 64,009 $ 115,012 $ 39,910 -- -- -- $ 218,931 Investment in equity-- method investees....... $ -- $ -- $ -- $ 6,710 $ 76,145 $ -- $ 82,855 Other Gas Products Adjust- 1996 Gas Electric Water Marketing & Services ments Total - ---- ---------- ---------- -------- --------- ---------- --------- ---------- (In thousands) Operating revenues...... $ 799,395 $1,022,231 $ N/A $229,922 $ 81,851 $(145,451) $1,987,948 Other Income (Deductions)........... $ 479 $ 897 $ N/A $ 2,790 $ 8,927 $ (1,852) $ 11,241 Depreciation and amortization........... $ 68,584 $ 146,444 $ N/A $ 34 $ 18,773 $ 158 $ 233,993 Income before Interest and Other Charges and Income Taxes........... $ 97,139 $ 301,525 $ N/A $ 12,964 $ (4,427) $ (9,652) $ 397,549 Assets.................. $1,006,270 $2,575,995 $ N/A $ 87,209 $355,243 $ 264,166 $4,288,883 Capital Expenditures.... $ 61,221 $ 146,660 $ N/A -- -- -- $ 207,881 Investment in equity-- method investees....... $ -- $ -- $ N/A $ 6,462 $ 45,798 $ -- $ 52,260
The following table reconciles total reportable segment income before interest and other charges and income taxes to Industries' consolidated net income for each of the years ending 1998, 1997 and 1996 as follows:
1998 1997 1996 -------- -------- -------- Income before Interest and Other Charges and Income Taxes................................ $432,090 $426,321 $397,549 Interest and Other Charges................... 137,342 129,298 114,435 Income Taxes................................. 100,862 106,174 106,380 -------- -------- -------- Net Income................................. $193,886 $190,849 $176,734 ======== ======== ========
46 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of NIPSCO Industries, Inc.: We have audited the accompanying consolidated balance sheet and consolidated statements of capitalization and long-term debt of NIPSCO Industries, Inc. (an Indiana corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements and the schedules referred to below are the responsibility of Industries' management. Our responsibility is to express an opinion on these consolidated financial statements and schedules 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 December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in connection with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules appearing in Exhibit 99.2 and Exhibit 99.3 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois February 5, 1999 47 SELECTED SUPPLEMENTAL INFORMATION
Year Ended December 31, -------------------------------- Gas Statistics 1998 1997 1996 - -------------- ---------- ---------- ---------- Operating Revenues ($000's): Residential (including home heating)......... $ 385,030 $ 479,461 $ 422,646 Commercial................................... 124,903 164,359 141,193 Industrial................................... 62,003 78,531 70,062 Gas transported for others................... 45,035 43,226 33,536 Other*....................................... 20,127 41,662 131,958 ---------- ---------- ---------- Total...................................... $ 637,098 $ 807,239 $ 799,395 ========== ========== ========== Deliveries in dth (000's): Residential (including home heating)......... 63,514 79,816 84,146 Commercial................................... 24,256 31,640 32,164 Industrial................................... 12,824 16,989 17,732 Gas transported for others................... 216,505 203,728 194,397 Other........................................ 23,090 14,201 8,263 ---------- ---------- ---------- Total...................................... 340,189 346,374 336,702 ========== ========== ========== Customers Served--End of Year: Residential (including home heating)......... 678,989 669,833 659,742 Commercial................................... 55,918 55,124 54,300 Industrial................................... 4,414 4,408 4,234 Other........................................ 79 84 80 ---------- ---------- ---------- Total...................................... 739,400 729,449 718,356 ========== ========== ========== - -------- * Includes deferred gas cost revenue of $(42,055), $(11,075) and $95,843, respectively. Year Ended December 31, -------------------------------- Electric Statistics 1998 1997 1996 - ------------------- ---------- ---------- ---------- Operating Revenues ($000's): Residential.................................. $ 290,738 $ 272,619 $ 269,906 Commercial................................... 267,996 253,299 247,808 Industrial................................... 405,302 416,741 428,273 Street lighting.............................. 8,740 8,697 8,549 Wholesale.................................... 430,420 214,206 43,272 Other**...................................... 26,790 20,769 24,423 ---------- ---------- ---------- Total...................................... $1,429,986 $1,186,331 $1,022,231 ========== ========== ========== Sales in kilowatt-hours (000's): Residential.................................. 2,936,762 2,723,990 2,700,234 Commercial................................... 3,162,511 2,974,703 2,886,940 Industrial................................... 8,794,481 8,971,926 9,318,353 Street lighting.............................. 57,607 57,764 56,413 Wholesale.................................... 14,480,608 8,688,014 1,678,346 Other........................................ 64,037 84,935 100,265 ---------- ---------- ---------- Total...................................... 29,496,006 23,501,332 16,740,551 ========== ========== ========== Customers Served--End of Year: Residential.................................. 372,383 368,907 365,011 Commercial................................... 44,961 43,802 42,911 Industrial................................... 2,737 2,764 2,725 Other........................................ 874 885 874 ---------- ---------- ---------- Total...................................... 420,955 416,358 411,521 ========== ========== ==========
- -------- ** Includes deferred fuel cost revenue of $(8,880), $(5,223) and $1,980, respectively. 48 SELECTED SUPPLEMENTAL INFORMATION--(Continued)
Year Ended December 31, ----------------------- Water Statistics 1998 1997*** 1996 - ---------------- ------- ------- ------- Operating Revenues ($000's): Residential........................................... $55,281 $39,570 $ -- Commercial............................................ 19,942 14,763 -- Industrial............................................ 4,227 3,015 -- Other................................................. 4,529 3,395 -- ------- ------- ------- Total............................................... $83,979 $60,743 $ -- ======= ======= ======= Sales in millions of gallons (000's): Residential........................................... 22,454 18,095 -- Commercial............................................ 13,029 10,345 -- Industrial............................................ 4,392 3,310 -- Other................................................. 947 754 -- ------- ------- ------- Total............................................... 40,822 32,504 -- ======= ======= ======= Customers Served--End of Year: Residential........................................... 232,333 225,627 -- Commercial............................................ 17,265 17,083 -- Industrial............................................ 348 347 -- Other................................................. 3,718 3,586 -- ------- ------- ------- Total............................................... 253,664 246,643 -- ======= ======= =======
- -------- *** Amounts are for the period April 1997 through December 1997. 49 EX-99.2 12 CONDENSED FINANCIAL INFORMATION EXHIBIT 99.2 NIPSCO Industries, Inc. and Subsidiaries INDEX
Page ---- Condensed Financial Information of NIPSCO Industries, Inc. and Subsidiaries. Schedule I-Condensed Balance Sheet..................................... 1 Schedule I-Condensed Statement of Income............................... 2 Schedule I-Condensed Statement of Cash Flows........................... 3 Notes to Condensed Financial Statements................................ 4
EXHIBIT 99.2 NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET
December 31, --------------------- ASSETS 1998 1997 ------ ---------- ---------- (Dollars in Thousands) Property: Property in service.......................................... $ 2,681 $ 2,625 Work in progress............................................. 12,599 5,147 Less: accumulated depreciation............................... 927 713 ---------- ---------- Total property........................................... 14,353 7,059 ---------- ---------- Investments (principally investments in wholly-owned subsidiaries)............................................... 1,410,999 1,407,789 ---------- ---------- Current Assets: Cash and cash equivalents.................................... 10,165 6,172 Amounts receivable from subsidiaries......................... 76,676 85,056 Prepayments.................................................. 27,637 21,971 ---------- ---------- Total current assets..................................... 114,478 113,199 ---------- ---------- Other (principally notes receivable from associated companies). 355,117 323,672 ---------- ---------- $1,894,947 $1,851,719 ========== ========== CAPITALIZATION AND LIABILITIES ------------------------------ Capitalization: Common shares................................................ $ 870,930 $ 870,930 Additional paid-in capital................................... 94,181 89,768 Retained earnings............................................ 744,309 667,790 Other...................................................... 1,856 1,813 Less: Treasury shares........................................ 559,027 363,943 Currency translation adjustment............................ 2,541 1,570 ---------- ---------- Total capitalization..................................... 1,149,708 1,264,788 Current Liabilities: Dividends declared on common and preferred stock............. 29,970 29,535 Amounts payable to subsidiaries.............................. 13,041 31,818 Other........................................................ 1,723 2,589 ---------- ---------- Total current liabilities................................ 44,734 63,942 ---------- ---------- Other (principally notes receivable to associated companies)... 700,505 522,989 ---------- ---------- Commitments and Contingencies (Note 3) $1,894,947 $1,851,719 ========== ==========
The accompanying notes to condensed financial statements are an integral part of this statement. 1 EXHIBIT 99.2 NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF INCOME
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (Dollars in Thousands except per share amounts) Equity in net earnings of subsidiaries........................ $ 211,525 $ 202,680 $ 185,106 ------------ ------------ ------------ Other income (deductions): Administrative and general expense. (14,196) (12,117) (10,167) Interest income.................... 31,874 27,272 21,443 Interest expense................... (48,444) (37,652) (20,604) Other, net......................... 1,012 (143) 1,543 ------------ ------------ ------------ (29,754) (22,640) (7,785) ------------ ------------ ------------ Net income before income taxes....... 181,771 180,040 177,321 Income taxes......................... 12,115 (10,809) 587 ------------ ------------ ------------ Net income........................... 193,886 190,849 176,734 Dividend requirements on preferred shares.............................. -- -- 119 ------------ ------------ ------------ Balance available for common shareholders........................ $ 193,886 $ 190,849 $ 176,615 ============ ============ ============ Average common shares outstanding- basic............................... 120,778,077 123,849,126 122,381,500 Basic earnings per average common share............................... $ 1.60 $ 1.54 $ 1.44 ============ ============ ============ Diluted earnings per average common share............................... $ 1.59 $ 1.53 $ 1.43 ============ ============ ============
The accompanying notes to condensed financial statements are an integral part of this statement. 2 EXHIBIT 99.2 NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS
Year Ended December 31, ------------------------------- 1998 1997 1996 --------- --------- --------- (Dollars in Thousands) Net cash provided by operating activities...... $ 177,487 $ 147,528 $ 183,867 --------- --------- --------- Cash flows provided by (used in) investing activities: Acquisition of IWC Resources................. -- (288,932) -- Acquisition of minority interest............. -- (5,461) -- Capital expenditures......................... (7,451) (5,000) (22) Sale of property............................. (56) (5) 83 --------- --------- --------- Net cash provided by (used in) investing activities................................ (7,507) (299,398) 61 --------- --------- --------- Cash flows provided by (used in) financing activities Issuance of common shares.................... 10,356 218,566 5,716 Increase in notes payable to subsidiaries.... 175,012 205,396 133,298 Increase (decrease) in notes receivable from subsidiaries................................ (30,993) (21,709) (82,740) Redemption of cumulative preferred shares with mandatory redemption provisions........ -- -- (35,000) Cash dividends paid on common shares......... (116,386) (111,593) (103,190) Cash dividends paid on preferred shares...... -- -- (766) Acquisition of treasury shares............... (203,976) (133,073) (105,498) --------- --------- --------- Net cash provided by (used in) financing activities................................ (165,987) 157,587 (188,180) --------- --------- --------- Net increase (decrease) in cash and cash equivalents................................... 3,993 5,717 (4,252) Cash and cash equivalents at beginning of year. 6,172 455 4,707 --------- --------- --------- Cash and cash equivalents at end of year....... $ 10,165 $ 6,172 $ 455 ========= ========= =========
The accompanying notes to condensed financial statements are an integral part of this statement. 3 EXHIBIT 99.2 NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Dividends from Subsidiaries Cash dividends paid to NIPSCO Industries, Inc. (Industries) by its consolidated subsidiaries were (in thousands of dollars): $207,400, $188,175, and $184,750 in 1998, 1997, and 1996, respectively. 2. Support Agreement The financial obligations of NIPSCO Capital Markets, Inc. (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 Public Service Company (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 stock and assets of Northern Indiana as reflected in the consolidated financial statements of Industries, was approximately $1.3 billion at December 31, 1998. 3. Contingencies 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. 4. Earnings Per Share Industries determines earnings per share in accordance with the provisions of SFAS No. 128 "Earnings per Share", which requires Industries to present basic earning per share and diluted earnings per share in place. The net income, preferred dividends and shares used to compute basic and diluted earnings per share is presented in the following table:
1998 1997 1996 ----------- ----------- ----------- (Dollars in Thousands except Per Share Amounts) Basic Weighted Average Number of Shares: Average Common Shares Outstanding........ 120,778,077 123,849,126 122,381,500 =========== =========== =========== Net income to be Used to Compute Basic Earnings per Average Common Share: Net Income............................... $ 193,886 $ 190,849 $ 176,734 Dividend requirements on Preferred Shares.................................. -- -- 119 ----------- ----------- ----------- Balance Available for Common Shareholders............................ $ 193,886 $ 190,849 $ 176,615 =========== =========== =========== Basic Earnings per Average Common Share.... $ 1.60 $ 1.54 $ 1.44 =========== =========== =========== Diluted Weighted Average Number of Shares: Average Common Shares Outstanding........ 120,778,077 123,849,126 122,381,500 Dilutive effect for Nonqualified Stock Options................................. 556,799 374,344 323,367 ----------- ----------- ----------- Weighted Average Shares.................. 121,334,876 124,223,470 122,704,867 Net Income to be Used to Computed Diluted Earnings per Average Common Share: Net Income............................... $ 193,886 $ 190,849 $ 176,734 Dividend requirements on Preferred Shares.................................. -- -- 119 ----------- ----------- ----------- Balance Available for Common Shareholders............................ $ 193,886 $ 190,849 $ 176,615 =========== =========== =========== Diluted Earnings per Average Common Share.. $ 1.59 $ 1.53 $ 1.43 =========== =========== ===========
4 5. Stock Split On December 16, 1997, the Board of Directors authorized a two-for-one split of Industries' common shares. The stock split was paid February 20, 1998 to shareholders of record at the close of business on January 30, 1998. All references to number of common shares reported, including per share amounts and stock option data of Industries' common shares, reflect the two-for-one stock split as if it had occurred at the beginning of the earliest period. 6. 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. 7. 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 Massachusetts, New Hampshire and Maine have also approved the merger. The transaction is expected to be completed in early 1999. 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. 5 EX-99.3 13 SCHEDULE OF VALUATION EXHIBIT 99.3 NIPSCO INDUSTRIES, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 1998
Col. A Col. B Col. C Col. D Col. E ------ ------ --------------------- ------------ -------- Additions Deductions --------------------- for Purposes Balance Charged to Charged to for which Balance Jan. 1, Costs and Other Reserves Dec. 31, Description 1998 Expenses Accounts were Created 1998 ----------- ------- ---------- ---------- ------------ -------- (Dollars in Thousands) Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable............. $ 5,887 $14,635 $ -- $11,538 $ 8,984 Reserve for investments, at equity.............. $ 1,762 $ -- $ -- $ 729 $ 1,033 Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Injuries and damages reserve................ $ 6,499 $ 5,681 $ -- $ 4,743 $ 7,437 Environmental reserves.. $19,366 $ 5,103 $ -- $ 5,359 $19,110 Other................... $ 3,928 $ 3,243 $ -- $ 43 $ 7,128
1 EXHIBIT 99.3 NIPSCO INDUSTRIES, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 1997
Col. A Col. B Col. C Col. D Col. E ------ ------ -------------------------- ------------ -------- Additions Deductions -------------------------- for Purposes Balance Charged to Charged to for which Balance Jan. 1, Costs and Other Reserves Dec. 31, Description 1997 IWCR Expenses Accounts were Created 1997 ----------- ------- ---- ---------- ---------- ------------ -------- (Dollars in Thousands) Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable........... $ 5,569 $ 25 $6,573 $-- $6,280 $ 5,887 Reserve for investments, at equity............... $ 1,953 $-- $ -- $-- $ 191 $ 1,762 Reserve for investments, at cost. $ -- $-- Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Injuries and damages reserve.............. $ 4,376 $757 $6,603 $-- $5,237 $ 6,499 Environmental reserves............. $16,789 $-- $9,489 $-- $6,912 $19,366 Other................. $ 4,471 $-- $ 30 $-- $ 573 $ 3,928
2 EXHIBIT 99.3 NIPSCO INDUSTRIES, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED DECEMBER 31, 1996
Col. A Col. B Col. C Col. D Col. E ------ ------ --------------------- ------------ -------- Additions Deductions --------------------- for Purposes Balance Charged to Charged to for which Balance Jan. 1, Costs and Other Reserves Dec. 31, Description 1996 Expenses Accounts were Created 1996 ----------- ------- ---------- ---------- ------------ -------- (Dollars in Thousands) Reserves Deducted in Consolidated Balance Sheet from Assets to Which They Apply: Reserve for accounts receivable........... $7,264 $ 6,912 $-- $8,607 $ 5,569 Reserve for investments, at equity............... $ 850 $ 1,103 $-- $ -- $ 1,953 Reserves Classified Under Reserve Section of Consolidated Balance Sheet: Injuries and damages reserve.............. $1,837 $ 4,875 $-- $2,336 $ 4,376 Environmental reserves............. $5,006 $15,862 $-- $4,079 $16,789 Other................. $4,091 $ 380 $-- $ -- $ 4,471
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