-----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, LV40dBWWjybEDJiOxI8QaYLgYWGq3ARvIUVIygya6O/jmE0NAiFuL7wiudcpUXmx nDufWrbR3YQP1EqJIRJo8A== 0000950131-99-001784.txt : 19990330 0000950131-99-001784.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950131-99-001784 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIPSCO INDUSTRIES INC CENTRAL INDEX KEY: 0000823392 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 351719974 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09779 FILM NUMBER: 99575284 BUSINESS ADDRESS: STREET 1: 801 E 86TH AVENUE CITY: MERRILLVILLE STATE: IN ZIP: 46410 BUSINESS PHONE: 2198535200 MAIL ADDRESS: STREET 1: 5265 HOHMAN AVENUE CITY: HAMMOND STATE: IN ZIP: 46320-1775 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- NIPSCO INDUSTRIES, INC. FORM 10-K 1998 801 E. 86th Avenue BULK RATE Merrillville, Indiana 46410-6272 U.S. POSTAGE PAID NIPSCO - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9776 NIPSCO Industries, Inc. (Exact name of registrant as specified in its charter) Indiana 35-1719974 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 46410 801 East 86th Avenue (Zip Code) Merrillville, Indiana (Address of principal executive offices) Registrant's telephone number, including area code 219-853-5200 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- Common Shares New York, Chicago and Pacific Preferred Share Purchase Rights New York, Chicago and Pacific Obligations Pursuant to Support New York Agreements with NIPSCO Capital Markets, Inc. Corporate Premium Income Equity Securities New York
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of February 26, 1999, 117,565,614 Common Shares (not including 30,218,604 Common Shares held in treasury), were outstanding. The aggregate market value of the Common Shares (based upon the February 26, 1999 closing price of $25.938 on the New York Stock Exchange) held by nonaffiliates was approximately $3,023,748,754.88. This information reflects the two-for-one stock split which was paid February 20, 1998, to shareholders of record at the close of business on January 30, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the NIPSCO Industries, Inc. 1998 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV of this report. Portions of the Notice of Annual Meeting and Proxy Statement dated March 15, 1999 for the Annual Meeting to be held April 14, 1999 are incorporated by reference into Part III of this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART 1 Item 1. Business OVERVIEW OF CONSOLIDATED BUSINESS NIPSCO Industries, Inc. (Industries) is an energy/utility-based holding company that provides 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 subsidiaries are referred to collectively as "Products and Services". NIPSCO Capital Markets, Inc. (Capital Markets) is a wholly-owned subsidiary of Industries that handles financing requirements for certain subsidiaries of Industries (excluding Northern Indiana). In February 1999, Industries completed its acquisition of Bay State Gas Company (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 had the option of exchanging their shares of Bay State stock for cash, up to an aggregate sum of equal to 50% of the total purchase price (and exercised this option with respect to approximately 43% of the total purchase price). Bay State, one of the largest natural gas utilities in New England, provides natural gas distribution services to more than 300,000 customers in Massachusetts, New Hampshire and Maine. The combined company is the tenth largest local natural gas distribution company in the nation, servicing more than one million gas customers. On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned subsidiary of PacifiCorp., holds a 66% ownership stake in Market Hub Partners, L.P., which stores natural gas in salt caverns. Services currently owns approximately 12% of Market Hub Partners, L.P. The transaction is expected to close in March or April 1999. See "Segments of Business" in the Notes to Consolidated Financial Statements and "Selected Supplemental Information" in the 1998 Annual Report to Shareholders regarding financial information about industry segments and classes of customers served (see Exhibit 13). ELECTRIC, GAS AND WATER OPERATIONS Electric Operations. Northern Indiana, Industries' largest and dominant subsidiary, is a public utility operating company incorporated in Indiana on August 2, 1912 that supplies natural gas 2 and electric energy to the public. It operates in 30 counties in the northern part of Indiana, serving an area of about 12,000 square miles with a population of approximately 2.2 million. At December 31, 1998, Northern Indiana served approximately 420,900 customers with electricity. Northern Indiana owns and operates four coal-fired electric generating stations with net capabilities of 3,179,000 kilowatts (kw), two hydroelectric generating plants with net capabilities of 10,000 kw and four gas-fired combustion turbine generating units with net capabilities of 203,000 kw for a total system net capability of 3,392,000 kw. During the year ended December 31, 1998, Northern Indiana generated 93.3% and purchased 6.7% of its electric requirements. Northern Indiana's 1998 electric control area peak load (the highest level of electrical utility usage in the control area) of 3,100,160 kw was set on July 21, 1998. Northern Indiana's electric control area includes Northern Indiana, Wabash Valley Power Association, Inc. (WVPA) and Indiana Municipal Power Agency (IMPA). Northern Indiana's all-time electric control area peak load of 3,161,200 kw was set on July 14, 1995. Northern Indiana's 1998 internal peak load, which excludes WVPA and IMPA, of 2,810,530 kw was set on June 29, 1998. Northern Indiana's all-time internal peak load of 2,888,450 kw was set on August 6, 1996. Northern Indiana's electric system is interconnected with the systems of American Electric Power, Commonwealth Edison Company (ComEd), Cinergy Services, Inc., Consumers Energy and Ameren Services Corporation, formerly Central Illinois Public Service Company. Electric energy is purchased from, sold to, or exchanged with various other utilities and power marketers under Northern Indiana's power sales and open access transmission tariffs. Northern Indiana provides WVPA with transmission and distribution service, operating reserve requirements and capacity deficiency service, and provides IMPA with transmission service, operating reserve requirements and capacity deficiency service in Northern Indiana's control area. Northern Indiana also engages in sales and services under interconnection agreements with WVPA and IMPA. WVPA provides service to 12 Rural Electric Membership Corporations (REMC's) located in Northern Indiana's control area. IMPA provides service to the municipal electric system of the city of Rensselaer located in Northern Indiana's control area. Northern Indiana and WVPA have executed a supplemental agreement for unit peaking capacity and energy. Unit peaking capacity is the capacity used to serve peak demand from a specific peaking generation unit. Pursuant to this agreement, which runs through December 2001, WVPA purchases 90,000 kw of capacity per month. Northern Indiana serves the Town of Argos as a full requirement customer and provides network integration service to seven municipal wholesale customers. Northern Indiana is a member of the East Central Area Reliability Coordination Agreement (ECAR). ECAR is one of nine regional electric reliability councils established to coordinate planning and operations of member electric utilities regionally and nationally. Fuel Supply. The generating units of Northern Indiana are located at Bailly, Mitchell, Michigan City and Schahfer Generating Stations. Northern Indiana's 13 steam generating units have a net capability of 3,179,000 kw. Coal is the primary source of fuel for all units except for three, which utilize natural gas. In addition, Northern Indiana's four combustion turbine 3 generating units with a net capability of 203,000 kw are fired by gas. Fuel requirements for Northern Indiana's generation for 1998 were supplied as follows: Coal................................................................ 97.5% Natural Gas......................................................... 2.5%
In 1998, Northern Indiana used approximately 8.8 million tons of coal at its generating stations. Northern Indiana has established a normal level of coal stock that is expected to provide adequate fuel supply during the year under all conditions. Annual coal requirements for Northern Indiana's electric generating units through 2002 are estimated to range from 9.7 million tons to 10.2 million tons, depending from year to year upon anticipated sales levels, scheduled maintenance and other variables. These requirements are being met or will be met in part under long-term contracts as follows:
Millions Sulfur tons/Year Content Expiration --------- ------- ---------- 1.3(a) Low 2001 1.25 Low 1999 1.6(b) Low 2002 .864(c) Low 2002 1.0(d) Low 2001 .5(e) Low 2000 1.0(f) High 2002 0.75(g) High 2001 0.375 High 1999
- -------- (a) 1.5 million tons in 1999, 0.4 million tons in 2001. (b) Tentative new contract, 0.7 million tons in 1999, plus or minus 10% 2000, 2001 and 2002, option years in 2001 and 2002, Northern Indiana can terminate 12/31/2000. (c) 0.432 million tons in 1999. (d) Plus or minus 20%, 1.2 million tons in 1999. (e) Option year in 2000, seller can terminate 12/31/1999. (f) Plus or minus 25%, 1.37 million tons in 1999. Plus or minus 25%, 1.0 million tons thereafter. Option years in 2001 and 2002, Northern Indiana can terminate 12/31/2000 or 12/31/2001. (g) 0.5 million tons in 1999. The average cost of coal consumed in 1998 was $26.83 per ton, or 1.50 cents per kilowatt-hour (kwh) generated as compared to $27.42 per ton or 1.54 cents per kwh generated in 1997. Coal Reserves. Included in the previous table of coal contracts is a coal mining contract with Cyprus Shoshone Coal Corporation (Cyprus) under which Cyprus is mining Northern Indiana's coal reserves in the Cyprus mine through the year 2001. The costs of such reserves are being recovered through the rate-making process as such coal reserves are used to produce electricity. NESI Power Marketing Inc. (NPMI). NPMI was involved in wholesale power trading activities in 1998, although it ceased active business operations in March 1998. During 1998, NPMI had sales of approximately 12.4 million megawatt hours (mwh). Fuel Adjustment Clause. Northern Indiana may in some instances adjust metered electric rates through a fuel adjustment clause to reflect changes in fuel costs. See "Summary of Significant Accounting Policies--Fuel Adjustment Clause" in the Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders (see Exhibit 13). 4 Gas Operations. Northern Indiana. At December 31, 1998, Northern Indiana served approximately 671,200 customers with gas. Northern Indiana supplies natural gas of about 1,000 British thermal units (Btu) per cubic foot. In a 24-hour period ended December 22, 1998, Northern Indiana's 1998 maximum day send-out (the maximum amount of gas delivered through Northern Indiana's distribution system to its end use customers) was 1.4 million dekatherms (dth). Northern Indiana's total gas send-out for 1998 was 288.6 million dth, compared to 292.6 million dth in 1997. Agreements have been negotiated with natural gas suppliers to replace former pipeline supplier contracts pursuant to the requirements of the Federal Energy Regulatory Commission (FERC) Order No. 636 (see "FERC Order No. 636" in the Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders (see Exhibit 13)). Northern Indiana also has producer agreements which allow for the purchase of gas either from gas marketers or producers. Northern Indiana has firm transportation agreements with pipelines, which allow Northern Indiana to move its gas through the pipelines' transmission systems. In 1998, all of the gas supplied by Northern Indiana was transported by ANR Pipeline Company (ANR), Crossroads Pipeline Company (Crossroads), Midwestern Gas Transmission Company (Midwestern), Natural Gas Pipeline Company of America (Natural), Panhandle Eastern Pipe Line Company (Panhandle), Tennessee Gas Pipeline Company (Tennessee) and Trunkline Gas Company (Trunkline). The transportation rates of Crossroads and the transportation and storage rates of ANR, Midwestern, Natural, Panhandle, Tennessee and Trunkline to Northern Indiana are subject to change in accordance with rate proceedings filed with the FERC. Approximately 84% of Northern Indiana's 1998 gas supply was purchased on the spot market, generally on less than 30-day agreements. The average price per dth (including FERC Order No. 636 transition charges) in 1998 was $2.49, compared to $3.18 in 1997, and the average cost of purchased gas, after adjustment for transition charges billed to transport customers, was $2.48 per dth, as compared to $3.08 per dth in 1997. Northern Indiana has a curtailment plan (a plan which outlines service to be curtailed in the event of limited gas supply) that has been approved by the Indiana Utility Regulatory Commission (Commission). There were no firm sales curtailments in 1998 and none are expected during 1999. Northern Indiana operates an underground gas storage field at Royal Center, Indiana, which currently has a storage capacity of 6.75 million dth. Withdrawals have been made in the 1998-1999 winter of up to 94,308 dth per day. In addition, Northern Indiana has several gas storage service agreements which make possible the withdrawal of substantial quantities of gas from other storage facilities. All of the storage agreements have limitations on the volume and timing of daily withdrawals. These contracts provide in the aggregate for approximately 29.6 million dth of annual stored volume and allow for approximately 540,000 dth of maximum daily withdrawal. Northern Indiana has a liquefied natural gas plant in LaPorte County which is designed for peak shaving (which stores pipeline natural gas to supplement gas supply during periods of high demand) and has the following capacities: maximum storage of 4 million dth; maximum liquefaction rate (gas to liquid) of 20,000 dth per day; maximum vaporization rate (output to distribution system) of 300,000 dth per day. Kokomo Gas. Kokomo Gas is a public utility operating company incorporated in Indiana in 1917, that supplies natural gas to the public. It operates in the city of Kokomo, Indiana 5 and the surrounding six counties having a population of approximately 100,000, and served approximately 33,800 customers at December 31, 1998. The Kokomo Gas service territory is contiguous to Northern Indiana's gas service territory. Kokomo Gas has a liquefied natural gas plant in Howard County with the following capacities: maximum storage of 400,000 thousand cubic feet (mcf); maximum liquefaction rate (gas to liquid) of 2,850 mcf per day; maximum vaporization rate (output to distribution system) of 30,000 mcf per day. Kokomo Gas also has a gas holder with a storage capacity of 12,000 mcf. Kokomo Gas' total gas send-out for 1998 was 7.4 million dth, compared to 8.7 million dth for 1997. Total transportation volumes for industrial customers in 1998 were 3.3 million dth, compared to 3.6 million dth in 1997. Kokomo Gas purchased gas under a term agreement from NESI Energy Marketing L.L.C., (NEM), a subsidiary of Services, to satisfy all of its system requirements in 1998. NIFL. NIFL is a public utility operating company incorporated in Indiana in 1906, that supplies natural gas to the public. Headquartered in Auburn, Indiana, it operates in five counties in the northeast corner of the state having a population of approximately 66,700, and served approximately 34,380 customers at December 31, 1998. The NIFL service territory is contiguous to Northern Indiana's gas service territory. NIFL's total gas send-out for 1998 was 11.0 million dth, compared to 10.8 million dth for 1997. Total transportation volumes for industrial customers in 1998 were 6.7 million dth, compared to 5.6 million dth in 1997. NIFL purchased gas on the spot market from a number of suppliers and also under term agreements from NI-TEX, Inc. (NI-TEX) and NESI Energy Marketing L.L.C. (NEM) to satisfy all of its system requirements in 1998. Crossroads. Crossroads is a natural gas pipeline company which was approved by FERC to operate as an interstate pipeline in May 1995. Crossroads owns and operates a 201-mile, 20-inch pipeline that extends from Schererville, Indiana, in the northwestern corner of the state, where it takes delivery from the interstate pipeline facilities of Natural Gas Pipeline Company of America, to Cygnet, Ohio, located in northwestern Ohio, where it interconnects with facilities owned by Columbia Gas Transmission Corporation. In December 1997, Crossroads announced plans to construct a 20-mile extension of its pipeline facility in Ohio to a point of interconnection with a unit of Consolidated Natural Gas Company. Construction is anticipated to begin in 2001. Gas Cost Adjustment Clause. Metered gas rates may be adjusted to reflect the cost of purchased gas, contracted gas storage and storage transportation charges. See "Summary of Significant Accounting Policies--Gas Cost Adjustment Clause" in the Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders (see Exhibit 13). Water Operations. The Water Utilities supply water for residential, commercial and industrial uses and for fire protection service in Indianapolis, Indiana and surrounding areas. The territory served by the Water Utilities covers an area of approximately 310 square miles in six counties of central Indiana and the Water Utilities served approximately 253,700 customers at December 31, 1998. The combined maximum daily capacity of the Water Utilities' treatment plants, together with the maximum daily capacity of the three primary well fields, is 235 million gallons per day (MGD). During 1998, the average daily consumption was 132 MGD and the maximum daily consumption was 192 MGD. 6 The principal sources of IWC's present water supply are the White River, which flows through Indianapolis from north to south and is supplemented by Morse Reservoir on a tributary, Cicero Creek; Fall Creek, which flows through Indianapolis from the northeast and is supplemented by Geist Reservoir; the city of Indianapolis' Eagle Creek Reservoir, located on Eagle Creek in northwest Marion County, from which water is purchased under a long-term contract; Geist Well Field, a ground water supply located downstream of Geist Reservoir; and South Well Field located in southern Marion and northern Johnson Counties. The three large surface reservoirs are essential to providing an adequate supply during dry periods. Two are used to supplement low stream flows in the White River and Fall Creek, respectively, and water is drawn directly from the third. The reservoirs are designed to maintain an adequate water supply in the event of a repetition of the worst two-year drought ever recorded in the Indianapolis area. The theoretical dependable supply from the three combined reservoirs including national stream flows represents approximately 63% of the total dependable supply available to IWC with the balance supplied by natural stream flow and wells. Wells constitute the source of supply for Harbour. The Water Utilities have aquifer protection plans for Geist and South Well Fields. Once fully developed, the Geist Well Field will produce 12 to 15 MGD while South Well Field will produce 40 to 50 MGD. The protection plans will guide the Water Utilities' development of these newest major sources of supply, and result in land use plans to protect the aquifer systems from potential contamination sources. PRODUCTS AND SERVICES AND OTHER SUBSIDIARIES IWCR. IWCR is a holding company for the Water Utilities and two other material subsidiaries. SM&P performs underground utility locating and marking services in Indiana and 6 other states. SM&P performed approximately 5.7 million locates and had operating income of $3.7 million for the period ending December 1998. Miller installs, repairs and maintains underground pipelines used in gas, water and sewer transmission and distribution systems. Operating income for Miller for the period ending December 1998 was $5.0 million. Primary. Primary arranges energy-related projects for large energy-intensive facilities and has entered into certain commitments in connection with these projects. Primary offers expertise to large energy customers in managing the engineering, construction, operation and maintenance of these energy-related projects. Primary is the parent of the following material subsidiaries: Harbor Coal Company (Harbor Coal), North Lake Energy Corporation (North Lake), Lakeside Energy Corporation (LEC), Portside Energy Corporation (Portside), and Cokenergy, Inc. (CE). Harbor Coal has invested in a partnership to finance, construct, own and operate a $65 million pulverized coal injection facility which began commercial operation in August 1993. The facility receives raw coal, pulverizes it and delivers it to Ispat Inland, Inc. (Ispat) for use in the operation of its blast furnaces. Harbor Coal is a 50% partner in the project with an Ispat affiliate. Industries has guaranteed the payment and performance of the partnership's obligations under a sale and leaseback of a 50% undivided interest in the facility. North Lake has entered into a lease for the use of a 75-megawatt energy facility located at Ispat. The facility uses steam generated by Ispat to produce electricity which is delivered to Ispat. The facility began commercial operation in May 1996. Industries has guaranteed North Lake's obligations relative to the lease and certain obligations to Ispat relative to the project. 7 LEC has entered into a lease for the use of a 161-megawatt energy facility located at USS Gary Works. The facility processes high-pressure steam into electricity and low-pressure steam for delivery to USX Corporation-US Steel Group. A fifteen-year tolling agreement with US Steel commenced on April 16, 1997 when the facility was placed in commercial operation. Capital Markets guarantees certain limited LEC obligations to the lessor. Portside built and now operates a 63-megawatt energy facility at the Midwest Division of National Steel Corporation (National), to process natural gas into electricity, process steam and heated water to be provided to National for a fifteen-year period. Portside has entered into a lease for use of the facility. Industries has guaranteed certain Portside obligations to the lessor. The facility began commercial operation on September 26, 1997. CE built and now operates an energy facility at Ispat's Indiana Harbor Works to scrub flue gases and recover waste heat from the coke facility constructed by Indiana Harbor Coke Company, LP (Harbor Coke) and to produce process steam and electricity from the recovered heat which is then delivered to Ispat. CE leases these facilities from a third party. CE has a fifteen-year service agreement and a related fifteen-year fuel supply agreement with ISPAT and Harbor Coke. Capital Markets guarantees certain CE obligations relative to the lease. Construction of the project began in January 1997 and the facility began commercial operation on October 1, 1998. 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. Primary is evaluating other potential projects with Northern Indiana customers as well as with potential customers outside of Northern Indiana's service territory. Projects under consideration include those which use industrial by-product fuels and natural gas to produce electricity. Services. Services coordinates the energy-related diversification efforts of Industries. At December 31, 1998, Services had four active wholly-owned subsidiaries, and material investment interests in three limited liability entities and two partnerships. NESI Solutions, Inc. (Solutions) was formed on May 1, 1998, as the result of the merger between NESI Energy Services Company (NESCO) and Parkway Engineering and Distribution Company, Inc. (PEDCO). It provides energy solutions, which enhance competitiveness through cost reductions, modernizing infrastructure and improving cost accountabilities. It also markets energy efficient lighting and lighting solutions. NESI Energy Marketing L.L.C. NEM is a limited liability-company which provides natural gas sales and management services to industrial and commercial customers and is also engaged in natural gas marketing activities. NEM also provides gas supply to Northern Indiana, Kokomo Gas and NIFL under spot and/or term contracts. During 1998, NEM had sales of approximately 279.3 million dth. NESI Integrated Energy Resources, Inc. (NIERI) is a wholly-owned subsidiary of Services, is a retail gas marketing company involved in gas supply pilot programs in Indiana, Ohio, and Michigan, serving residential, commercial and light industrial customers. NIPSCO Security Services, Inc. (NIPSCO Security) is a provider of Security services to residential and commercial customers. Services sold the stock of NIPSCO Security to ADT in January 1999. Mid-Tex Gas Storage Company, L.L.P., of which Services owns 32%, operates a salt dome gas storage facility with an operating capacity of 5.7 Bcf. 8 Canor Energy Ltd. (Canor) is a Canadian oil and gas exploration company in which Services owns $34%. As of December 31, 1998, Canor had invested $100.8 million in Canadian exploration and development projects with estimated proven reserves in gas equivalency of 110 Bcf of natural gas. NESI Energy Marketing Canada Ltd. (NEM Canada) is a bankrupt Canadian natural gas marketing company in which Services owns 70%, see "NESI Energy Marketing Canada Ltd. Litigation" in the Notes to Consolidated Financial Statements in the Annual Report to Shareholders (see Exhibit 13). Bristol Resources Production Company, L.L.C., (Bristol), is an oil and gas exploration and production company in which NIPSCO Fuel Company, Inc. owns 64%. Laredo-Nueces Pipeline Company, (Laredo-Nueces) is an intrastate pipeline in Texas in which Services owns 50%. Laredo-Neuces transported 6.5 Bcf of natural gas in 1998. Portland Natural Gas Transmission System (PNGTS) is a 292 mile pipeline being developed in northern New England in which Services owns 9.5%. Development. Development makes various investments, including real estate and venture capital investments. Development is an 79% shareholder in Retyred 99 Ltd., (formerly Elm Energy and Recycling (UK) Ltd.), which owned and operated a tire-fueled electric generating plant in Wolverhampton, England. Retyred 99 Ltd. sold the generating plant in December 1998. In 1998, Development invested in a multiple-family residential housing development in Indianapolis. Development has additional projects within the Utilities' service territories and is considering additional projects within those territories. At December 31, 1998, Development has $34.0 million of investments, at equity, relating to affordable housing projects. These projects are part of the continued commitment by Industries to provide high quality, energy efficient, affordable housing to the residents of a variety of geographic and economic regions served by the Utilities. Capital Markets. Capital Markets provides financing for Industries' subsidiaries other than Northern Indiana and, in certain respects, IWCR and its subsidiaries. As of December 31, 1998, Capital Markets had $108.1 million in commercial paper outstanding, having a weighted average interest rate of 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. 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. Capital Markets also has $130 million of money market lines of credit. As of December 31, 1998, $86.8 million of borrowings were outstanding 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. 9 REGULATION Holding Company Act. Industries is exempt from registration with the Securities and Exchange Commission (SEC) as a "registered holding company" under the Public Utility Holding Company Act of 1935, as amended (Holding Company Act). However, prior approval of the SEC is required under the Holding Company Act if Industries proposes to acquire, directly or indirectly, any securities of other electric or gas public utility companies. There may also be limits on the extent to which Industries and its non-utility subsidiaries can enter into businesses which are not "functionally related" to the electric and gas businesses without raising questions about Industries' exempt status under the Holding Company Act. SEC guidelines established in prior decisions of the SEC require Industries to remain engaged primarily and predominately in the electric and gas businesses and to limit the size of its activities outside of such businesses relative to Industries as a whole. Industries has no present intention of becoming a registered holding company subject to regulation by the SEC under the Holding Company Act. Indiana Utility Regulatory Commission. Industries is not subject to regulation by the Commission as long as it is not a public utility. Industries and its non-utility subsidiaries are subject to certain reporting and information access requirements under Indiana law. Furthermore, certain contracts between Industries or its non-utility subsidiaries and the Energy Utilities must be filed with the Commission. The Utilities are subject to regulation by the Commission as to rates, service, accounts, issuance of securities and in other respects. The Utilities are also subject to limited regulation by local public authorities. Federal Energy Regulatory Commission. Industries is not regulated by the FERC, but any subsidiary, including the Energy Utilities, that engages in FERC jurisdictional sales or activities is subject to such regulation. Northern Indiana's restructuring under Industries was approved by a February 29, 1988 order of the FERC. The order is conditioned upon the FERC's continuing authority to examine the books and records of Industries and its subsidiaries, upon further order of the FERC, and to make such supplemental orders, for good cause, as it may find necessary or appropriate regarding the restructuring. In 1998, about 7% of Northern Indiana's electric revenues were derived from electric service it furnished at wholesale in interstate commerce to other utility companies, power marketers, municipalities and WVPA (see "Item 1. Business-Electric Operations" regarding WVPA). Northern Indiana's wholesale rates and operations are subject to the jurisdiction of the FERC. FERC jurisdiction does not extend to the issuance of securities by Northern Indiana, which are regulated by the Commission. The FERC has declared Northern Indiana, Kokomo Gas and NIFL exempt from the provisions of the Natural Gas Act. RATE MATTERS For a description of Northern Indiana's Alternative Regulatory Plan (ARP) See "Competition and Regulatory Charges" below. On November 14, 1997, IWC petitioned the Commission for approval of new water rates and charges. On March 17, 1998, IWC and the Office of Utility Consumer Counselor (UCC) representing the ratepayers filed a "Stipulation and Settlement Agreement," resolving the issues in the case. This agreement, approved by the Commission on April 8, 1998, provided for an 10 increase in IWC's water rates and charges in two phases. The first phase was an immediate increase of approximately $5,253,000. The second phase approved an additional increase of approximately $4,540,000 on April 8, 1999. The agreement further provided that prior to January 1, 2002, IWC cannot request an additional change in its basic rates and charges nor seek authority to continue allowance for funds used during construction (AFUDC) or defer depreciation on its capital projects after they have been completed and are in service. Effective with the second phase of the increase, IWC will use individual depreciation rates for each plant account as approved by the IWC Commission on January 15, 1997, to produce a composite depreciation rate of 2.21%. 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 with 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 supplier 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 1980's when FERC required interstate pipelines to provide nondiscriminatory transportation service 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 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 Commission approved in 1997 Northern Indiana's ARP which implemented new rates and services that included, among other things, unbundling of services for 11 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. EMPLOYEES Industries had 6,035 employees at December 31, 1998. Of these employees, 2,988 are represented by various local unions. The total number of employees at Northern Indiana was 3,215; at SM&P, 1,094; at Miller, 652; at IWC, 428; and Industries had 646 employees in diversified operations. 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 costs 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 remediation 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 12 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. Clean Air Act. The Clean Air Act Amendments of 1990 (CAAA) impose 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 Environmental Protection Agency (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 13 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. 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 renewals 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. 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 14 risks. Possible scenarios include a system failure in one of 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 effect 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), remediation (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 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 15 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. 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. Item 2. Properties. Overview. The physical properties of the Utilities are located in the State of Indiana, except for Crossroads which owns a 202-mile interstate natural gas pipeline running from northwest Indiana to Cygnet, Ohio. The significant properties owned by other subsidiaries of Industries are: the Southlake Complex, a 325,000 square foot office building located in Merrillville, Indiana, owned by Development; a 36-mile intrastate natural gas pipeline, located in southern Texas, half-owned by NI-TEX; interests in oil and gas exploration and production properties, owned by Fuel; a golf course and surrounding residential development in Chesterton, Indiana, owned by Lake Erie Land Company (a wholly-owned subsidiary of Development); commercial real estate joint ventures, half-owned by KOGAF Enterprises (a wholly-owned subsidiary of Development) located in Kokomo, Indiana; interests in oil and gas producing properties in Canada, owned by NI Canada ULC; and parcels of land for development owned by Waterway Holdings, Inc. Electric. Northern Indiana owns and operates four coal fired electric generating stations with net capabilities of 3,179,000 kw, two hydroelectric generating plants with net capabilities of 10,000 kw and four gas fired combustion turbine generating units with net capabilities of 203,000 kw, for a total system net capability of 3,392,000 kw. Northern Indiana has 291 substations with an aggregate transformer capacity of 23,131,300 kilavolts (kva). Its transmission system with voltages from 34,500 to 345,000 consists of 3,058 circuit miles of line. The electric distribution system extends into 21 counties and consists of 7,814 circuit miles of overhead and 1,497 cable miles of underground primary distribution lines operating at various voltages ranging from 2,400 to 12,500 volts. Northern Indiana has distribution transformers having an aggregate capacity of 11,156,320 kva and 445,117 electric watt-hour meters. 16 Gas. Northern Indiana has an underground storage field at Royal Center and a liquefied natural gas plant in LaPorte County and Kokomo Gas has a liquefied natural gas plant in Howard County, all of which are described under "Item 1. Business--Gas Operations". Northern Indiana has 13,586 miles of gas mains, Kokomo Gas has 760 miles of gas mains and NIFL has 830 miles of gas mains. Water. The Water Utilities' properties consist of land, easements, rights (including water rights), buildings, reservoirs, canals, wells, supply lines, purification plants, pumping stations, transmission and distribution pipes, mains and conduits, meters and other facilities used for the collection, purification and storage of water and the distribution of water to its customers. The water systems extend from well fields and raw water reservoirs on Cicero Creek and Fall Creek, north and northeast of Indianapolis, and from the intake structure in Indianapolis' Eagle Creek Reservoir, northwest of Indianapolis, to the service connections of the ultimate consumers. The Water Utilities have 28,025 fire hydrants and 3,212 miles of water mains. Character of Ownership. Substantially all of the properties of Northern Indiana and IWC are subject to the lien of their respective First Mortgage Indentures. The principal offices and properties of Industries and its subsidiaries are held in fee and are free from other encumbrances, subject to minor exceptions, none of which are of such a nature as to impair substantially the usefulness of such properties. Many of the offices in various communities served are occupied by subsidiaries of Industries under leases. All properties are subject to liens for taxes, assessments and undetermined charges (if any) incidental to construction, it is Industries' practice regularly to pay, as and when due, unless contested in good faith. In general, the electric, gas and water lines and mains are located on land not owned in fee but are covered by necessary consents of various governmental authorities or by appropriate rights obtained from owners of private property. Industries does not, however, generally have specific easements from the owners of the property adjacent to public highways over, upon or under which its electric, gas and water lines and mains are located. At the time each of the principal properties was purchased a title search was made. In general, no examination of titles as to rights-of-way for electric, gas and water lines and mains was made, other than examination, in certain cases, to verify the grantors' ownership and the lien status thereof. Item 3. Legal Proceedings. Industries and its subsidiaries are parties to various pending proceedings, including suits and claims against them for personal injury, death and property damage. The nature of such proceedings and suits and the amounts involved are routine for the kinds of businesses conducted by Industries and its subsidiaries, except as described under the captions "NESI Energy Marketing Canada Ltd. Litigation" and "Environmental Matters" in the Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders (see Exhibit 13). No other material legal proceedings against Industries or its subsidiaries are pending or, to the knowledge of Industries, contemplated by governmental authorities or other parties. Item 4. Submission of Matters to a Vote of Security Holders. None 17 Supplemental Item--Executive Officers of the Registrant. The following is a list of the Executive Officers of the Registrant, including their names, ages and offices held, as of February, 1999.
Years with Name Age Industries Office(s) Held in Past 5 Years ---- --- ---------- ------------------------------ Gary L. Neale**......... 59 9 Chairman, President and Chief Executive Officer since March 1993. Stephen P. Adik......... 55 11 Senior Executive Vice President, Chief Financial Officer and Treasurer since February 1999. Executive Vice President, Chief Financial Officer and Treasurer from January 1994 to January 1999. Patrick J. Mulchay...... 57 37 Executive Vice President of Industries and President and Chief Operating Officer at Northern Indiana since February 1999. Executive Vice President and Chief Operating Officer at Northern Indiana from July 1996 to January 1999. Executive Vice President and Chief Operating Officer of Electric Operations at Northern Indiana from January 1994 to July 1996. Jeffrey W. Yundt........ 53 11(a) Executive Vice President of Industries and President and Chief Executive Officer at Bay State since February 1999. Executive Vice President and Chief Operating Officer of Energy Services, and President of Services* from July 1996 to January 1999. Executive Vice President and Chief Operating Officer of Gas Services from January 1994 to June 1996. Joseph L. Turner, Jr.... 62 11 Senior Vice President of Major Accounts since July 1996. President of Primary* since January 1996 Prior thereto, Group Vice President of Northern Indiana*. James K. Abcouwer....... 44 3 Senior Vice President and Executive Vice President at Services since July 1998. Senior Vice President, Commercial Operations of Northern Indiana* from February 1998 to June 1998. Vice President and General Manager of Customer Services and Distribution of Northern Indiana* from July 1996 to January 1998. Vice President of Gas Supply at Northern Indiana from July 1994 to June 1996. Vice President of Natural Gas at GSC Energy from August 1993 to June 1994. David A. Kelly.......... 60 7 Vice President, Income Tax Management and Executive Vice President and Chief Financial Officer at IWCR* since April 1997.
18
Years with Name Age Industries Office(s) Held in Past 5 Years ---- --- ---------- ------------------------------ Vice President of Administrative Services at NIPSCO Industries Management Services Company* (NIMSC) from January 1997 to April 1997. Prior thereto, Vice President of Real Estate and Taxes at NIMSC*. Thomas J. Aruffo........ 40 --(a) Vice President and Chief Information Officer since February 1999; Vice President Information Service at Bay State from October 1997 to February 1999. Vice President at Fidelity Investments from February 1996 to October 1997; Director Information Systems at Prudential Insurance Company of America from March 1993 to February 1997. Mark T. Maassel......... 44 21 Vice President Regulatory and Governmental Policy since June 1998. Vice President of Marketing and Sales at NIMSC* from July 1996 to June 1998. James T. Morris**....... 55 2(b) Chairman of the Board, President and Chief Executive Officer of IWCR* since May 1991. Mark D. Wyckoff......... 36 7 Vice President of Human Resources since June 1998. Assistant Treasurer since September 1997. Nipsco Development Principal since January 1994. Arthur A. Paquin........ 51 29 Controller of NIMSC* since July 1996. Prior thereto, Controller of Northern Indiana*. Francis P. Girot, Jr.... 54 18 Treasurer of Northern Indiana* and NIMSC* since July 1996.
- -------- *Subsidiary of Industries. **Also a Director. (a) Industries acquired Bay State in February 1999. (b) Industries acquired IWCR in March 1997. The terms of office of the executive officers of Industries are established by Industries' Board of Directors (Board) each year, and each officer serves until the next annual meeting of the Board and/or until his/her successor is duly elected. Throughout the past five years, each of the executive officers of Industries has been continuously in the business of Industries or its subsidiaries, except for Messrs. Abcouwer, Aruffo and Morris. PART II Item 5. Market for Common Equity and Related Stockholder Matters. Industries' common shares are listed and traded on the New York, Chicago and Pacific stock exchanges. The table below indicates the high and low sales price of Industries' common shares, on the composite tape, during the periods indicated. On December 16, 1997, the Board of Directors authorized a two-for- one split of Industries' common stock. The stock split was paid on February 20, 1998, to shareholders of record at the close of business on January 30, 1998. The sales prices and common dividends reported have been restated to reflect the two-for-one stock split. 19
1998 1997 --------------- ----------------- High Low High Low ------ -------- -------- -------- First Quarter........................... 28 1/2 24 21/32 20 1/8 19 Second Quarter.......................... 28 3/8 25 11/16 21 1/8 19 7/16 Third Quarter........................... 32 7/8 26 5/8 21 9/32 20 11/32 Fourth Quarter.......................... 33 3/4 28 24 15/16 21 1/16
As of February 26, 1999, Industries had 36,495 common shareholders of record. The policy of the Board has been to declare cash dividends on a quarterly basis payable on or about the 20th day of February, May, August and November. Industries paid quarterly common dividends of $0.225 per share during 1997 and quarterly common dividends of $0.24 per share during 1998. At its December 18, 1998 meeting, the Board increased the quarterly common dividend to $0.255 per share, payable on February 20, 1999. Holders of Industries' common shares are entitled to receive dividends when, as and if declared by the Board out of funds legally available therefor. Although the Board currently intends to consider the payment of regular quarterly cash dividends on common shares, the timing and amount of future dividends will depend on the earnings of Northern Indiana and other subsidiaries, their financial condition, cash requirements, any restrictions in financing agreements and other factors deemed relevant by the Board. During the next few years, it is expected that the great majority of earnings available for distribution of dividends will depend upon dividends paid to Industries by Northern Indiana. The following limitations on payment of dividends and issuance of preferred stock apply to Northern Indiana: When any bonds are outstanding under its First Mortgage Indenture, Northern Indiana may not pay cash dividends on its stock (other than preferred or preference stock) or purchase or retire common shares, except out of earned surplus or net profits computed as required under the provisions of the maintenance and renewal fund. At December 31, 1998, Northern Indiana had approximately $146.1 million of retained earnings (earned surplus) available for the payment of dividends. Future common share dividends by Northern Indiana will depend upon adequate retained earnings, adequate future earnings and the absence of adverse developments. So long as any shares of Northern Indiana's cumulative preferred stock are outstanding, no cash dividends shall be paid on its common shares in excess of 75% of the net income available therefor for the preceding calendar year unless the aggregate of the capital applicable to stocks subordinate as to assets and dividends, would equal or exceed 25% of the sum of all obligations evidenced by bonds, notes, debentures or other securities, plus the total capital and surplus. At December 31, 1998, the sum of the capital applicable to stocks subordinate to the cumulative preferred stock plus the surplus was equal to 43% of the total capitalization including surplus. In connection with the foregoing discussion, see "Common Share Dividend" in the Notes to Consolidated Financial Statements in the 1998 Annual Report to Shareholders (see Exhibit 13). 20 Item 6. Selected Financial Data.
Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Operating revenues (000's)................ $2,932,778 $2,586,541 $1,987,948 $1,769,308 $1,768,029 Net income (000's)...... $ 193,886 $ 190,849 $ 176,734 $ 175,465 $ 163,987 Earnings per average common share--basic.... $ 1.60 $ 1.54 $ 1.44 $ 1.36 $ 1.24 Earnings per average common share--diluted.. $ 1.59 $ 1.53 $ 1.43 $ 1.35 $ 1.23 Total assets (000's).... $4,986,503 $4,937,033 $4,288,883 $3,999,520 $3,947,138 Long-term obligations and redeemable preferred stock (000's)................ $1,724,400 $1,726,766 $1,188,352 $1,274,379 $1,281,395 Cash dividends declared per common share....... $ 0.975 $ 0.915 $ 0.855 $ 0.795 $ 0.735
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information regarding results of operations, liquidity and capital resources, environmental matters Year 2000 costs, competition and regulatory changes and impact of accounting standards is reported in the 1998 Annual Report to Shareholders under "Management's Discussion and Analysis of Financial Condition and Results of Operations (see Exhibit 13). Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Information regarding market risk is reported in the 1998 Annual Report to Shareholders under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Risk Sensitive Instruments and Positions" (see Exhibit 13). Item 8. Financial Statements and Supplementary Data. The following Consolidated Financial Statements and Supplementary Data are included in the 1998 Annual Report to Shareholders and are hereby incorporated by reference and made a part of this report (see Exhibit 13). (1) Consolidated Financial Statements-- Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheet at December 31, 1998 and 1997 Consolidated Statement of Capitalization at December 31, 1998 and 1997 Consolidated Statement of Long-term Debt at December 31, 1998 and 1997 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Common Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Public Accountants (2) Supplementary Data-- Selected Supplemental Information Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 21 PART III Item 10. Directors and Executive Officers of the Registrant. Information regarding executive officers is included as a supplemental item at the end of Item 4 of Part I of this Form 10-K. Information regarding directors is included at pages 2-7 in the Notice of Annual Meeting and Proxy Statement dated March 15, 1999, for the Annual Meeting of Shareholders to be held on April 14, 1999, which information is incorporated by reference. Item 11. Executive Compensation. Information regarding executive compensation is included at pages 9-12 and 14-20 in the Notice of Annual Meeting and Proxy Statement dated March 15, 1999, for the Annual Meeting of Shareholders to be held on April 14, 1999, which information is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and management is included at pages 8-9 in the Notice of Annual Meeting and Proxy Statement dated March 15, 1999, for the Annual Meeting of Shareholders to be held on April 14, 1999, which information is incorporated by reference. Item 13. Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions is included at page 7 in the Notice of Annual Meeting and Proxy Statement dated March 15, 1999, for the Annual Meeting of Shareholders to be held on April 14, 1999, which information is incorporated by reference. 22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) (1) The Financial Statements filed herewith as a part of this report on Form 10-K are listed on the Index to Financial Statements under Item 8 on page 21. Consolidated Financial Statements-- Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheet at December 31, 1998 and 1997 Consolidated Statement of Capitalization at December 31, 1998 and 1997 Consolidated Statement of Long-term Debt at December 31, 1998 and 1997 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Common Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Public Accountants (2) The following is a list of the Financial Statement Schedules filed herewith as part of this report on Form 10-K:
Schedule Number Description Pages of 1998 10-K -------- ----------- ------------------ I Condensed Financial Information of Registrant 24, 25, 26, 27 & 28 II Valuation and Qualifying Accounts 29, 30 & 31
(3) Exhibits-- The exhibits filed herewith as a part of this report on Form 10-K are listed on the Exhibit Index included on pages 34-38. Each management contract or compensatory plan or arrangement of Industries listed on the Exhibit Index is separately identified by an asterisk. (b) Reports on Form 8-K Form 8-K, dated February 8, 1999, filed on February 9, 1999. Form 8-K, dated February 11, 1999, filed on February 12, 1999. Form 8-K, dated February 12, 1999, filed on February 16, 1999. 23 NIPSCO INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET
December 31, --------------------- 1998 1997 ---------- ---------- (Dollars in Thousands) ASSETS ------ 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. 24 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. 25 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. 26 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 of primary earnings per share. 27 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 =========== =========== ===========
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 January 30, 1998. All references to number of 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 In February 1999, Industries completed its acquisition of Bay State Gas Company (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 had the option of exchanging their shares of Bay State stock for cash, up to an aggregate sum of equal to 50% of the total purchase price (and exercised this option with respect to approximately 43% of the total purchase price). Bay State, one of the largest natural gas utilities in New England, provides natural gas distribution services to more than 300,000 customers in Massachusetts, New Hampshire and Maine. The combined company is the tenth largest local natural gas distribution company in the nation, servicing more than one million gas customers. Event (Unaudited) Subsequent to Date of Auditors' Report On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned subsidiary of PacificCorp., holds a 66% ownership stake in Market Hub Partners, L.P., which stores natural gas in salt caverns. Services currently owns approximately 12% of Market Hub Partners, L.P. The transaction is expected to close in March or April 1999. 28 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 for which Balance Jan. 1, Costs and to 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
29 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 for which Balance Jan. 1, Costs and to 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
30 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 ------ ------ ----------------- ---------- -------- Deductions Additions for ----------------- Purposes Charged for which Balance to Costs Charged Reserves Balance Jan. 1 and to Other were Dec. 31, Description 1996 Expenses Accounts 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
31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of NIPSCO Industries, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in NIPSCO Industries, Inc.'s annual report to shareholders for the year ended December 31, 1998, incorporated by reference in this Form 10-K, and have issued our report thereon dated February 5, 1999. Our audits were made for the purpose of forming an opinion on those consolidated financial statements taken as a whole. The schedules listed on Page 60, Item 14(a)(2) are the responsibility of NIPSCO Industries, Inc.'s management and 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. Chicago, Illinois February 5, 1999 32 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) March 25, 1999 /s/ Gary L. Neale Date ________________________________ By __________________________________ Gary L. Neale, Its Chairman and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Gary L. Neale Chairman, President, ____________________________________ Principal Executive Officer Gary L. Neale and Director /s/ Stephen P. Adik Senior Executive Vice ____________________________________ President, Principal Stephen P. Adik Financial Officer and Principal Accounting Officer /s/ Steven C. Beering Director ____________________________________ Steven C. Beering /s/ James T. Morris Director ____________________________________ James T. Morris /s/ Arthur J. Decio Director ____________________________________ Arthur J. Decio Director ____________________________________ Denis E. Ribordy /s/ Ian M. Rolland Director ____________________________________ Ian M. Rolland /s/ Edmund A. Schroer Director ____________________________________ Edmund A. Schroer /s/ John W. Thompson Director ____________________________________ John W. Thompson /s/ Robert J. Welsh Director ____________________________________ Robert J. Welsh /s/ Dr. Carolyn Y. Woo Director ____________________________________ Dr. Carolyn Y. Woo
33 EXHIBIT INDEX
Exhibit Number Description of Item ------- ------------------- (3.1) Amended and Restated Articles of Incorporation of NIPSCO Industries, Inc. dated May 13, 1998 (incorporated by reference to Exhibit 3 of the NIPSCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). (3.2) Amended and Restated By-laws effective January 30, 1999 (incorporated by reference to Exhibit 3.1 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated February 12, 1999. (4.1) Indenture dated August 1, 1939 between Northern Indiana Public Service Company (Northern Indiana) and Trustees (incorporated by reference to Exhibit 7 to the Northern Indiana Registration Statement (Registration No. 2-5178)). (4.2) Third Supplemental Indenture dated August 1, 1943 (incorporated by reference to Exhibit 7-C to the Northern Indiana Registration Statement (Registration No. 2-5178)). (4.3) Eighteenth Supplemental Indenture dated September 1, 1967 (incorporated by reference to Exhibit 1 to the Northern Indiana Current Report on Form 8-K dated October 9, 1967). (4.4) Nineteenth Supplemental Indenture dated October 1, 1968 (incorporated by reference to Exhibit 1 to the Northern Indiana Current Report on Form 8-K dated November 8, 1968). (4.5) Twenty-third Supplemental Indenture dated March 31, 1972 (incorporated by reference to Exhibit 2 to the Northern Indiana Current Report on Form 8-K dated May 5, 1972). (4.6) Thirty-third Supplemental Indenture dated June 1, 1980 (incorporated by reference to Exhibit 1 to the Northern Indiana Quarterly Report on Form 10-Q for the quarter ended June 30, 1980). (4.7) Forty-first Supplemental Indenture dated July 1, 1991 (incorporated by reference to Exhibit 1 to the Northern Indiana Current Report on Form 8-K dated March 25, 1992). (4.8) Indenture dated as of March 1, 1988, between Northern Indiana and Manufacturers Hanover Trust Company, as Trustee (incorporated by reference to Exhibit 4 to the Northern Indiana Registration Statement (Registration No. 33-44193)). (4.9) First Supplemental Indenture dated as of December 1, 1991, between Northern Indiana and Manufacturers Hanover Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the Northern Indiana Registration Statement (Registration No. 33-63870)). (4.10) Memorandum of Agreement with City of Michigan City, Indiana (incorporated by reference to Exhibit 7 to the Northern Indiana Registration Statement (Registration No. 2-48531)). (4.11) Financing Agreement No. 1 dated November 1, 1988, between Northern Indiana and Jasper County, Indiana regarding $37,000,000 Series 1988A Pollution Control Refunding Revenue Bonds. Identical financing agreements between Northern Indiana and Jasper County, Indiana provide for the issuance of $47,000,000 Series 1988B, $46,000,000 Series 1988C and $24,000,000 Series 1988D Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit 8 to the Northern Indiana Current Report on Form 8-K dated March 16, 1989). (4.12) Financing Agreement dated July 1, 1991, with Jasper County, Indiana regarding $55,000,000 Series 1991 Collateralized Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit 3 to the Northern Indiana Current Report on Form 8-K dated March 25, 1992).
34
Exhibit Number Description of Item ------- ------------------- (4.13) Financing Agreement dated August 1, 1994, with Jasper County, Indiana regarding $10,000,000 Series 1994A, $18,000,000 Series 1994B and $41,000,000 Series 1994C Pollution Control Refunding Revenue Bonds (incorporated by reference to Exhibit 4.16 to the Northern Indiana Annual Report on Form 10-K for year ended December 31, 1994). (4.14) Indenture between NIPSCO Industries, Inc., NIPSCO Capital Markets, Inc. and Chemical Bank as Trustees dated February 1, 1996 (incorporated by reference to Exhibit 1 to the NIPSCO Industries, Inc. Registration Statement (Registration No. 33-65285)). (4.15) Rights Agreement between NIPSCO Industries, Inc. and Harris Trust and Savings Bank, dated February 27, 1990 (incorporated by reference to Exhibit 4.1 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 7, 1990). (4.16) Indenture Agreement between NIPSCO Industries, Inc., NIPSCO Capital Markets, Inc. and Chase Manhattan Bank as trustee dated February 14, 1997 (incorporated by reference to Exhibit 4.1 to the NIPSCO Industries, Inc. Registration Statement (Registration No. 333-22347)). (4.17) Certificate of Trust of NIPSCO Capital Trust I by and among Chase Manhattan Bank Delaware, The Chase Manhattan Bank, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A. Paquin dated December 17, 1998 (incorporated by reference to Exhibit 4.6 to the NIPSCO Industries, Inc. Registration Statement on Form S-3 dated December 18, 1998). (4.18) Declaration of Trust of NIPSCO Capital Trust I by and among NIPSCO Capital Markets, Inc., The Chase Manhattan Bank, Chase Manhattan Bank Delaware, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A. Paquin dated December 17, 1998 (incorporated by reference to Exhibit 4.7 to the NIPSCO Industries, Inc. Registration Statement on Form S- 3 dated December 18, 1998). (4.19) Fourteenth Supplemental Indenture dated as of January 15, 1978, between the Fidelity Bank, and IWC, including as Appendix A the "Restatement of Principal Indenture of Indianapolis Water Company," which, except as otherwise specified, restates the granting clauses and all other sections contained in the First Mortgage dated July 1, 1936, between Fidelity-Philadelphia Trust Company and Registrant as amended by the Fourth, Fifth, Sixth, Eighth, Twelfth and Fourteenth Supplemental Indentures (incorporated by reference to Exhibit 4-B1 to IWC's Annual Report on Form 10-K for the year ended December 31, 1980). (4.20) Eleventh Supplemental Indenture dated as of December 1, 1971 (incorporated by reference to Exhibit 4-B6 to Indianapolis Water Company's (IWC) Annual Report on Form 10-K for the year ended December 31, 1980). (4.21) Seventeenth Supplemental Indenture dated as of March 1, 1989, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A9 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1988). (4.22) Eighteenth Supplemental Indenture dated as of March 1, 1989, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A10 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1988). (4.23) Nineteenth Supplemental Indenture dated as of June 1, 1989, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A9 to IWCR's Registration Statement (Registration No. 33-43939)).
35
Exhibit Number Description of Item ------- ------------------- (4.24) Twentieth Supplemental Indenture dated as of December 1, 1992, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A9 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). (4.25) Twenty-First Supplemental Indenture dated as of December 1, 1992, between Fidelity Bank, National Association and IWC (incorporated by reference to Exhibit 4-A10 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1992). (4.26) Twenty-Second Supplemental Indenture dated as of April 1, 1993, between IWC and Fidelity Bank, National Association (incorporated by reference to Exhibit 4.15 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993). (4.27) Indenture of Trust dated as of December 1, 1992, between City of Indianapolis, Indiana, and IWC to National City Bank, Indiana, as Trustee (incorporated by reference to Exhibit 10-J to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (4.28) Indenture of Trust, City of Indianapolis, Indiana, and IWC to National City Bank, Indiana, as Trustee, dated as of April 1, 1993 (incorporated by reference to Exhibit 4.14 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993). (4.29) Form of First Supplemental Indenture by and among NIPSCO Capital Markets, Inc., NIPSCO Industries, Inc., and The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.1 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated February 16, 1999). (4.30) Indenture of Trust of Town of Fishers and IWC to National City Bank of Indiana, As Trustee, dated as of July 15, 1998 (including Form of $30,000,000 Town of Fishers, Indiana Economic Development Water Facilities Refunding Revenue Bond, Series 1998 (Indianapolis Water Company Project) (incorporated by reference to Exhibit 4.1 to NIPSCO Industries, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 1998). (4.31) Indenture of Trust of City of Indianapolis, Indiana and IWC to National City Bank of Indiana, As Trustee, dated as of July 15, 1998 (including Form of $10,000,000 City of Indianapolis, Indiana Economic Development Water Facilities Refunding Revenue Bonds, Series 1998 (Indianapolis Water Company Project) (incorporated by reference to Exhibit 4.2 to NIPSCO Industries, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 1998). (4.32) Certificate of Trust of NIPSCO Capital Trust I by and among Chase Manhattan Bank Delaware, The Chase Manhattan Bank, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A. Paquin dated December 17, 1998 (incorporated by reference to Exhibit 4.6 to the NIPSCO Industries, Inc. Registration Statement on Form S-3 dated December 18, 1998). (4.33) Declaration of Trust of NIPSCO Capital Trust I by and among NIPSCO Capital Markets, Inc., The Chase Manhattan Bank, Chase Manhattan Bank Delaware, Stephen P. Adik, Francis P. Girot, Jr., and Arthur A. Paquin dated December 17, 1998 (incorporated by reference to Exhibit 4.7 to the NIPSCO Industries, Inc. Registration Statement on Form S- 3 dated December 18, 1998). (4.34) Form of Pledge Agreement by and among NIPSCO Industries, Inc., The First National Bank of Chicago, as Collateral Agent and Securities Intermediary, and The Chase Manhattan Bank, as Purchase Contract (incorporated by reference to Exhibit 4.2 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated February 16, 1999).
36
Exhibit Number Description of Item ------- ------------------- (4.35) Form of Pledge Agreement by and among NIPSCO Industries, Inc., The First National Bank of Chicago, as Collateral Agent and Securities Intermediary, and The Chase Manhattan Bank, as Purchase Contract (incorporated by reference to Exhibit 4.2 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated February 16, 1999). (10.1) Supplemental Life Insurance Plan effective January 1, 1991 (incorporated by reference to Exhibit 2 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 25, 1992). (10.2) Executive Deferred Compensation Plan effective December 1, 1990 (incorporated by reference to Exhibit 3 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated March 25, 1992).* (10.3) Form of Change in Control and Termination Agreements and Schedule of Parties to the Agreements (incorporated by reference to Exhibit 10.3 to the NIPSCO Industries, Inc. 10-K for the year ended December 31, 1997).* (10.4) Nonemployee Director Stock Incentive Plan of NIPSCO Industries, Inc. (As Amended and Restated Effective February 1, 1998). (10.5) NIPSCO Industries, Inc. Long-Term Incentive Plan (As Amended and Restated Effective February 1, 1998). (10.6) Amended and Restated Pension Plan Provisions effective January 1, 1989 (incorporated by reference to Exhibit 17 to the Northern Indiana Current Report on Form 8-K dated March 25, 1992).* (10.7) NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan (As Amended and Restated Effective February 1, 1998). (10.8) First Amendment to NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan. (10.9) NIPSCO Industries, Inc. Directors' Charitable Gift Program effective September 27, 1994 (incorporated by reference to Exhibit 10.8 to the NIPSCO Industries Annual Report on Form 10-K for the year ended December 31, 1996).* (10.10) Employment Agreement (incorporated by reference to Exhibit 10.13 to the NIPSCO Industries, Inc. 10-K for the year ended December 31, 1997).* (10.11) Executive Supplemental Pension Agreement (incorporated by reference to Exhibit 10.14 to the NIPSCO Industries, Inc. 10-K for the year ended December 31, 1997).* (10.12) Agreement dated October 18, 1971, between IWC and Department of Public Works of the City of Indianapolis, Indiana, regarding the purchase of water at Eagle Creek Reservoir (incorporated by reference to Exhibit 5 to IWC's Registration Statement (Registration Statement No. 2-55201)). (10.13) Loan Agreement dated as of December 1, 1992, between IWC and City of Indianapolis, Indiana (incorporated by reference to Exhibit 10-K to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (10.14) Guaranty Agreement dated as of December 1, 1992, between IWCR and National City Bank, Indiana, as Trustee (incorporated by reference to Exhibit 10-L to IWCR's Annual Report on Form 10-K for the year ended December 31, 1992). (10.15) Note Agreement dated as of March 1, 1994, between IWCR and American United Life Insurance Company (incorporated by reference to Exhibit 10.10 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993).
37
Exhibit Number Description of Item ------- ------------------- (10.16) Loan Agreement dated as of April 1, 1993, between IWC and the City of Indianapolis (incorporated by reference to Exhibit 10.11 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993). (10.17) Guaranty Agreement between IWCR and National City Bank, Indiana, as Trustee, dated as of April 1, 1993 (incorporated by reference to Exhibit 10.12 to IWCR's Annual Report on Form 10-K for the year ended December 31, 1993). (12) Ratio of Earnings to Fixed Charges for the Years Ended December 3, 1993, 1994, 1995, 1996 and 1997, and for the Two Month Period Ended September 3, 1998 (incorporated by reference to Exhibit 12 to the NIPSCO Industries, Inc. Registration Statement on Form S-3 dated December 18, 1998). (13) 1998 Annual Report to Shareholders for pages 24-65. (21) List of Subsidiaries. (23) Consent of Arthur Andersen LLP. (27) Financial Data Schedule (incorporated by reference to Exhibit 27.1 to the NIPSCO Industries, Inc. Current Report on Form 8-K dated February 8, 1999).
- -------- *Management contract or compensatory plan arrangement of NIPSCO Industries, Inc. 38 EX-10.4 2 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN EXHIBIT 10.4 NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN NIPSCO INDUSTRIES, INC. (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998) TABLE OF CONTENTS ----------------- ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION.......................... -1- 1.1 Establishment of the Plan.............................. -1- 1.2 Purpose of the Plan.................................... -1- 1.3 Duration of the Plan................................... -2- ARTICLE 2. DEFINITIONS................................................... -2- ARTICLE 3. ADMINISTRATION................................................ -4- 3.1 The Board of Directors................................. -4- 3.2 Administration by the Board............................ -5- 3.3 Decisions Binding...................................... -5- ARTICLE 4. SHARES SUBJECT TO THE PLAN.................................... -5- 4.1 Number of Shares....................................... -5- 4.2 Lapsed Awards.......................................... -5- 4.3 Adjustments in Authorized Shares....................... -6- ARTICLE 5. ELIGIBILITY AND PARTICIPATION................................. -7- 5.1 Eligibility............................................ -7- 5.2 Actual Participation................................... -7- ARTICLE 6. RESTRICTED STOCK.............................................. -7- 6.1 Initial Grant of Restricted Stock...................... -7- 6.2 Future Grants of Restricted Stock...................... -7- 6.3 Restricted Stock Award Agreement....................... -8- 6.4 Transferability........................................ -8- 6.5 Other Restrictions..................................... -8- 6.6 Certificate Legend..................................... -9- 6.7 Vesting................................................ -9- 6.8 Termination of Directorship............................ -10- 6.9 Voting Rights.......................................... -10- 6.10 Dividends and Other Distributions...................... -10- ARTICLE 7. NONQUALIFIED STOCK OPTIONS.................................... -10- 7.1 Potential Grants of Options............................ -10- 7.2 Option Award Agreement................................. -11- 7.3 Option Price........................................... -11- 7.4 Duration of Options.................................... -11- 7.5 Vesting of Shares Subject to Option.................... -11- 7.6 Termination of Directorship............................ -12- -i- 7.7 Payment................................................ -13- 7.8 Restrictions on Share Transferability.................. -13- 7.9 Nontransferability of Options.......................... -13- ARTICLE 8. CHANGE IN CONTROL............................................. -14- ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION...................... -15- 9.1 Amendment, Modification, and Termination............... -15- 9.2 Awards Previously Granted.............................. -15- ARTICLE 10. MISCELLANEOUS................................................. -16- 10.1 Gender and Number...................................... -16- 10.2 Severability........................................... -16- 10.3 Indemnification........................................ -16- 10.4 Beneficiary Designation................................ -16- 10.5 No Right of Nomination................................. -17- 10.6 Shares Available....................................... -17- 10.7 Additional Compensation................................ -17- 10.8 Successors............................................. -17- 10.9 Requirements of Law.................................... -18- 10.10 Governing Law.......................................... -18- -ii- NONEMPLOYEE DIRECTOR STOCK INCENTIVE PLAN NIPSCO INDUSTRIES, INC. (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998) WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO Industries, Inc. Nonemployee Director Stock Incentive Plan, effective February 1, 1992, as last amended effective December 16, 1997; and WHEREAS, pursuant to Section 9.1 of the Plan, the Company wishes to amend the Plan in certain respects and restate it in a single document; NOW THEREFORE, the Plan is hereby amended and restated, effective February 1, 1998, as follows: ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 Establishment of the Plan. NIPSCO Industries, Inc. hereby establishes an incentive compensation plan to be known as the "NIPSCO Industries, Inc. Nonemployee Director Stock Incentive Plan" (the "Plan"), as set forth in this document. The Plan permits the grant of Restricted Stock and Nonqualified Stock Options to Nonemployee Directors, subject to the terms and provisions set forth herein. Upon approval by the Board of Directors of the Company, subject to ratification within twelve (12) months by an affirmative vote of a majority of Shares present and entitled to vote at the April 8, 1992 annual shareholders meeting at which a quorum was present, the Plan became effective as of February 1, 1992 (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the achievement of long-term objectives of the Company by linking the personal interests of Nonemployee Directors to those of Company shareholders, and to attract and retain Nonemployee Directors of outstanding competence. 1.3 Duration of the Plan. The Plan commenced on February 1, 1992 and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 9 herein, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Award be granted under the Plan on or after April 30, 2002. ARTICLE 2. DEFINITIONS ----------------------- Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: (a) "Award" means, individually or collectively, a grant of Restricted Stock or Nonqualified Stock Options under the Plan. (b) "Award Agreement" means an agreement entered into by and between the Company and a Nonemployee Director, setting forth the terms and provisions applicable to an Award granted under the Plan. (c) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (d) "Board" or "Board of Directors" means the Board of Directors of the Company, and includes any committee of the Board of Directors designated by the Board to administer part or all of the Plan. (e) "Change in Control" of the Company shall be deemed to have occurred if any one of the occurrences of "Change in Control" set forth in the Change in Control and -2- Termination Agreements between the Company and certain executive officers thereof shall have been satisfied. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Company" means NIPSCO Industries, Inc., an Indiana corporation, or any successor thereto as provided in Section 10.8 herein. (h) "Director" means any individual who is a member of the Board of Directors of the Company. (i) "Disability" means a permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Board in good faith, upon receipt of sufficient competent medical advice from one or more individuals, selected by the Board, who are qualified to give professional medical advice. (j) "Employee" means any full-time, nonunion, salaried employee of the Company. For purposes of the Plan, an individual whose only employment relationship with the Company is as a Director, shall not be deemed to be an Employee. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (1) "Fair Market Value" means the average of the highest and lowest quoted selling prices for Shares on the relevant date, or (if there were no sales on such date) the weighted average of the mean between the highest and lowest quoted selling prices on the nearest day before the nearest day after the relevant date, as reported in The Wall Street Journal or a similar publication selected by the Board. -3- (m) "Nonemployee Director" means any individual who is a member of the Board of Directors of the Company, but who is not otherwise an Employee of the Company. (n) "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares, granted under Article 7 herein. (o) "Option" means a Nonqualified Stock Option granted under the Plan. (p) "Parent" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (q) "Participant" means a Nonemployee Director of the Company who has outstanding a viable Award granted under the Plan. (r) "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way, and the Shares are subject to a substantial risk of forfeiture, as provided in Article 6 herein. (s) "Person" shall have the meaning ascribed to such term in Section 3(a) (9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). (t) "Restricted Stock" means an Award granted to a Nonemployee Director pursuant to Article 6 herein. (u) "Shares" means the common shares of NIPSCO Industries, Inc., without par value. ARTICLE 3. ADMINISTRATION -------------------------- 3.1 The Board of Directors. The Plan shall be administered by the Board of Directors of the Company, subject to the restrictions set forth in the Plan. -4- 3.2 Administration by the Board. The Board shall have the full power, discretion, and authority to interpret and administer the Plan in a manner which is consistent with the Plan's provisions. However, in no event shall the Board have the power to determine Plan eligibility, or to determine the number, the value, the vesting period, or the timing, of Awards to be made under the Plan (all such determinations are automatic pursuant to the provisions of the Plan). Notwithstanding the preceding sentence, the Board shall have the authority to designate whether an upcoming grant of Awards shall consist of Restricted Stock or Nonqualified Stock Options. 3.3 Decisions Binding. All determinations and decisions made by the Board pursuant to the provisions of the Plan, and all related orders or resolutions of the Board, shall be final, conclusive, and binding on all persons, including the Company, its stockholders, employees, Participants, and their estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN -------------------------------------- 4.1 Number of Shares. Subject to adjustment as provided in Section 4.3 herein, the total number of Shares available for grant under the Plan may not exceed one hundred thousand (100,000) (two hundred thousand (200,000) after January 30, 1998). 4.2 Lapsed Awards. If any Share of Restricted Stock or Share under an Option granted under the Plan terminates, expires, or lapses for any reason, any such Shares of Restricted Stock and any Shares subject to purchase pursuant to such Option, again shall be available for grant under the Plan. However, in the event that prior to the Award's termination, expiration, or lapse, the holder of the Award at any time received one or more "benefits of ownership" pursuant to such Award (as defined by the Securities and Exchange Commission, pursuant to any rule or interpretation -5- promulgated under Section 16 of the Exchange Act), the Share subject to such Award shall not be made available for regrant under the Plan. 4.3 Adjustments in Authorized Shares. (i) Appropriate adjustments in the aggregate number of Shares issuable pursuant to the Plan, the number of Shares subject to each outstanding Award granted under the Plan and the option price with respect to Options, shall be made to give effect to any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of shares, whether through recapitalization, stock split, reverse stock split, spin-off, spin-out or other distribution of assets to stockholders, stock distributions or combinations of shares, payment of stock dividends, other increase or decrease in the number of such Shares outstanding effected without receipt of consideration by the Company, or any other occurrence for which the Board determines an adjustment is appropriate. (ii) In the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, or an acquisition by the Company of the stock or assets of any other corporation or corporations, there shall be substituted on an equitable basis, as determined by the Board in its sole discretion, for each Share then subject to the Plan, and for each Share then subject to an Award granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which the holders of Shares of the Company are entitled pursuant to such transaction. (iii) Without limiting the generality of the foregoing provisions of this paragraph, any such adjustment shall be deemed to have prevented any dilution or enlargement of a Participant's rights, if such Participant receives in any such adjustment, rights that are substantially similar (after taking into account the fact that the Participant has not paid the applicable option price) to the rights the -6- Participant would have received had he exercised his outstanding Award and become a shareholder of the Company immediately prior to the event giving rise to such adjustment. Adjustments under this paragraph shall be made by the Board, whose decision as to the amount and timing of any such adjustment shall be conclusive and binding on all persons. ARTICLE 5. ELIGIBILITY AND PARTICIPATION ------------------------------------------ 5.1 Eligibility. Persons eligible to participate in the Plan are limited to Nonemployee Directors who are serving on the Board on the date of each scheduled grant under the Plan. 5.2 Actual Participation. All eligible Nonemployee Directors shall receive grants of Restricted Stock and Options pursuant to the terms and provisions set forth in Articles 6 and 7 herein. ARTICLE 6. RESTRICTED STOCK ----------------------------- 6.1 Initial Grant of Restricted Stock. Each person who was a Nonemployee Director on the Effective Date was granted two hundred fifty (250) Shares of Restricted Stock for each year of service as a Nonemployee Director of the Company or its predecessor (The number of years of service was determined as of the date of the first annual meeting of shareholders of the Company following the Effective Date). 6.2 Future Grants of Restricted Stock. Upon each election (or reelection, as applicable) of a Nonemployee Director to serve on the Board, such Nonemployee Director shall be granted one thousand (1,000) (two thousand (2000) after January 30, 1998) Shares of Restricted Stock, subject to the terms of the Plan. Each such grant shall be made as of the first day of the Board term of the -7- newly-elected (or reelected, as applicable) Nonemployee Director, which begins immediately following such election (or reelection, as applicable). In the event that the Board properly designates (pursuant to Section 3.2 herein) that a scheduled Award grant will consist of Options rather than Restricted Stock, then such grant shall be governed by the terms and provisions of Article 7 herein, which shall in such event completely supersede and replace the terms and provisions of this Section 6.2. 6.3 Restricted Stock Award Agreement. Each Restricted Stock grant under the Plan shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period(s) of Restriction, the number of Restricted Stock Shares granted, and such other provisions as the Board shall determine consistent with the Plan. 6.4 Transferability. Except as provided in this Section 6.4, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction specified in the Restricted Stock Award Agreement. However, in no event may any Shares of Restricted Stock granted under the Plan become vested in a Participant prior to six (6) months following the date of its grant. Prior to vesting, all rights with respect to Shares of Restricted Stock granted to a Nonemployee Director under the Plan shall be available during his or her lifetime only to such Director. 6.5 Other Restrictions. The Board shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable, including restrictions imposed under Section 7.8 hereof. Any restriction imposed on Shares of Restricted Stock shall be included in a legend appearing on the certificates representing Shares of Restricted Stock. -8- 6.6 Certificate Legend. In addition to any legends placed on certificates pursuant to Section 6.5 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the Shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the NIPSCO Industries, Inc. Nonemployee Director Stock Incentive Plan, and in a Restricted Stock Award Agreement. A copy of the Plan and such Restricted Stock Award Agreement may be obtained from the Secretary of NIPSCO Industries, Inc." 6.7 Vesting. Except as otherwise provided in the Plan, all Shares of Restricted Stock granted under the Plan shall vest and become freely transferable by the Director according to the following schedule: Annual Cumulative Anniversary Percentage of Percentage of of Grant Date Shares Which Vest Shares Which are Vested ---------------- ------------------ ------------------------ 1 20% 20% 2 20% 40% 3 20% 60% 4 20% 80% 5 20% 100% Regardless of the vesting schedule set forth above, all Shares of Restricted Stock held by a Participant shall immediately become one hundred percent (100%) vested upon the first to occur of the following: (a) The completion of the vesting schedule set forth above; or (b) The death of the Participant; or -9- (c) The Disability of the Participant; or (d) The effective date of a Change in Control of the Company. Following vesting, each Director shall be entitled to have the legend required by Section 6.5 and/or Section 6.6 removed from his or her Share certificate. 6.8 Termination of Directorship. In the event a Participant ceases to be a Director for any reason other than death or Disability, all Shares of Restricted Stock not vested as of the effective date of termination shall be forfeited and shall revert back to the Company (with no further vesting to occur). In the event a Participant ceases to be a Director by reason of death or Disability, all Shares of Restricted Stock granted under the Plan shall immediately vest one hundred percent (100%). 6.9 Voting Rights. During the Period of Restriction, Directors holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to such Shares. 6.10 Dividends and Other Distributions. During the Period of Restriction, Directors holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to such Shares while they are so held. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. ARTICLE 7. NONQUALIFIED STOCK OPTIONS --------------------------------------- 7.1 Potential Grants of Options. In the event that the Board properly designates (pursuant to Section 3.2 herein) that a scheduled Award will consist of Options rather than Restricted Stock, then each eligible Nonemployee Director shall be granted an Option to purchase three thousand (3,000) (six thousand (6000) after January 30, 1998) Shares, subject to the terms and -10- provisions of the Plan. A Nonemployee Director shall be deemed to be eligible for such an Option grant if the Director is elected (or reelected, as applicable) to serve on the Board pursuant to the shareholder vote for which such Award grant is applicable. Each such grant shall be made as of the first day of the Board term of the newly-elected (or reelected, as applicable) Nonemployee Director, which begins immediately following such election (or reelection, as applicable). 7.2 Option Award Agreement. Each Option grant shall be evidenced by an Option Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares available for purchase under the Option, and such other provisions as the Board shall determine. 7.3 Option Price. The purchase price per Share available for purchase under an Option shall equal the Fair Market Value of a Share on the date the Option is granted. 7.4 Duration of Options. Each Option shall expire on the tenth (10th) anniversary date of its grant. 7.5 Vesting of Shares Subject to Option. Participants shall be entitled to exercise Options at any time and from time to time, but no sooner than the time period beginning six (6) months after the grant of the Option, and ending ten (10) years after grant of the Option, and according to the following vesting schedule: Annual Cumulative Anniversary Percentage of Percentage of of Grant Date Options Which Vest Options Which are Vested ---------------- ------------------- ------------------------- 1 20% 20% 2 20% 40% 3 20% 60% 4 20% 80% 5 20% 100% -11- Regardless of the vesting schedule set forth in this Section 7.5, all Options held by a Participant shall immediately become one hundred percent (100%) vested upon the first to occur of the following: (a) The completion of the vesting schedule set forth above; or (b) The death of the Participant; or (c) The Disability of the Participant; or (d) The effective date of a Change in Control of the Company. 7.6 Termination of Directorship. In the event a Participant ceases to be a Director for any reason other than death or Disability, all Options not vested as of the effective date of termination shall be forfeited and shall revert back to the Company (with no further vesting to occur). All Options which are vested as of such date shall remain exercisable for six (6) months following the date the Director's service on the Board terminates, or until their expiration date, whichever period is shorter. To the extent an Option is exercisable immediately following the date of death (or immediately following the date that the Board determines that the definition of Disability is satisfied, as applicable), it shall remain exercisable at any time prior to its expiration date, or for one (1) year after the date of death (or after the date that the Board determines that the definition of Disability is satisfied, as applicable), whichever period is shorter, by the Participant or such person or persons as shall have been named as the Participant's legal representative or beneficiary, or by such persons that have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. Options which vest pursuant to a Change in Control shall remain exercisable throughout their entire term. -12- 7.7 Payment. Options shall be exercised by the delivery of a written notice of exercise to the Secretary of the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent, or (b) by tendering previously acquired Shares having a Fair Market Value at the time of exercise equal to the total Option Price of the Shares for which the Option is being exercised (provided that the Shares tendered upon Option exercise have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), or (c) by a combination of (a) and (b). The proceeds from such a payment shall be added to the general funds of the Company and shall be used for general corporate purposes. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased pursuant to the exercise of the Option. 7.8 Restrictions on Share Transferability. The Board shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan, as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares. 7.9 Nontransferability of Options. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall -13- be exercisable, during his lifetime, only by such Participant. Notwithstanding the preceding provisions of this Section, a Participant, at any time prior to his death, may assign all or any portion of an Option granted to him under the Plan to (i) his spouse or lineal descendant, (ii) the trustee of a trust for the primary benefit of his spouse or lineal descendant, or (iii) a tax-exempt organization as described in Section 501(c)(3) of the Code. In such event the spouse, lineal descendant, trustee or tax-exempt organization will be entitled to all of the rights of the Participant with respect to the assigned portion of such Option, and such portion of the Option will continue to be subject to all of the terms, conditions and restrictions applicable to the Option as set forth herein, and in the related Option Award Agreement, immediately prior to the effective date of the assignment. Any such assignment will be permitted only if (i) the Participant does not receive any consideration therefor, and (ii) the assignment is expressly approved by the Board or its delegate. Any such assignment shall be evidenced by an appropriate written document executed by the Participant, and a copy thereof shall be delivered to the Board or its delegate on or prior to the effective date of the assignment. ARTICLE 8. CHANGE IN CONTROL ------------------------------ In the event of a Change in Control of the Company, all Awards granted under the Plan that are still outstanding and not yet vested, shall become immediately one hundred percent (100%) vested in each Participant, as of the effective date of the Change in Control, and shall remain as such for the remaining life of the Award, as such life is provided herein, and within the provisions of the related Award Agreements. All Options that are outstanding as of the effective date of the Change in Control shall remain exercisable for the remaining lives of the Options. -14- ARTICLE 9. AMENDMENT, MODIFICATION, AND TERMINATION ----------------------------------------------------- 9.1 Amendment, Modification, and Termination. Subject to the terms set forth in this Section 9.1, the Board may terminate, amend, or modify the Plan at any time and from time to time; provided, however, that the provisions set forth in the Plan regarding the amount of securities to be awarded to Directors, the price of securities to be awarded to Directors, and the timing of awards to Directors, may not be amended more than once within any six (6) month period. Without the approval of the shareholders of the Company (as may be required by the Code, by the insider trading rules of Section 16 of the Exchange Act, by any national securities exchange or system on which the Shares are then listed or reported, or by a regulatory body having jurisdiction with respect hereto) no such termination, amendment, or modification may: (a) Increase the total number or value of Shares which may be available for grants of Awards under the Plan, except as provided in Section 4.3 herein; or (b) Change the class of Participants eligible to participate in the Plan; or (c) Materially increase the cost of the Plan, or materially increase the benefits to Participants; or (d) Extend the maximum period after the date of grant during which Options may be exercised; or (e) Change the provisions of the Plan regarding Option Price. 9.2 Awards Previously Granted. Unless required by law, no termination, amendment, or modification of the Plan shall in any manner adversely affect any Award previously granted under the Plan, without the written consent of the Participant holding the Award. -15- ARTICLE 10. MISCELLANEOUS -------------------------- 10.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 10.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 10.3 Indemnification. Each individual who is or shall have been a member of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such individuals may be entitled under the Company's Articles of Incorporation or By-laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 10.4 Beneficiary Designation. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom -16- any benefit under the Plan is to be paid in the event of his or her death (and/or who may exercise the Participant's vested Options following his or her death). Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Board, and will be effective only when filed by the Participant in writing with the Board during his or her lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate (and, subject to the terms and provisions of the Plan, any unexercised vested Options may be exercised by the administrator or executor of the Participant's estate). 10.5 No Right of Nomination. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Company's shareholders. 10.6 Shares Available. The Shares made available pursuant to Awards under the Plan may be either authorized but unissued Shares, or Shares which have been or may be reacquired by the Company, as determined from time to time by the Board. 10.7 Additional Compensation. Shares granted under the Plan shall be in addition to any annual retainer, attendance fees, or other compensation payable to each Participant as a result of his or her service on the Board. 10.8 Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. -17- 10.9 Requirements of Law. The granting of Awards under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 10.10 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Indiana. -18- EX-10.5 3 NIPSCO INDUSTRIES LONG-TERM INCENTIVE PLAN EXHIBIT 10.5 NIPSCO INDUSTRIES, INC. LONG-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998) NIPSCO INDUSTRIES, INC. LONG-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998) TABLE OF CONTENTS ----------------- PAGE ---- 1. Purpose.............................................................. -1- 2. Administration and Delegation........................................ -1- 3. Review and Approval.................................................. -1- 4. Shares Subject to Plan............................................... -2- 5. Participants......................................................... -2- 6. Awards Under the Plan................................................ -2- 7. Nonqualified Stock Options........................................... -2- (a) Option Price.................................................. -2- (b) Exercise at Option............................................ -2- (c) Payment for Shares............................................ -3- (d) Transferability............................................... -3- (e) Rights Upon Termination at Employment......................... -4- 8. Incentive Stock Options.............................................. -4- (a) Option Price.................................................. -4- (b) Exercise of Option............................................ -4- (c) Payment for Shares............................................ -5- (d) Transferability............................................... -5- (e) Rights Upon Termination of Employment......................... -5- 9. Stock Appreciation Rights............................................ -6- (a) Award......................................................... -6- (b) Term.......................................................... -6- (c) Payment....................................................... -7- 10. Performance Units.................................................... -7- (a) Performance Period............................................ -7- (b) Valuation of Units............................................ -7- i (c) Performance Targets........................................... -7- (d) Adjustments................................................... -7- (e) Payments of Units............................................. -8- (f) Termination of Employment..................................... -8- (g) Other Terms................................................... -8- 11. Restricted Stock Awards.............................................. -8- (a) Restriction Period............................................ -8- (b) Restrictions Upon Transfer.................................... -8- (c) Certificates.................................................. -8- (d) Lapse of Restrictions......................................... -9- (e) Termination Prior to Lapse of Restrictions.................... -9- 12. Supplemental Cash Payments........................................... -9- 13. General Restrictions................................................. -9- 14. Rights of a Shareholder.............................................. -10- 15. Right to Terminate Employment........................................ -10- 16. Withholding.......................................................... -10- 17. Non-Assignability.................................................... -10- 18. Non-Uniform Determinations........................................... -11- 19. Adjustments.......................................................... -11- 20. Amendment or Termination............................................. -11- 21. Effect on Other Plans................................................ -12- 22. Duration of the Plan................................................. -12- ii NIPSCO INDUSTRIES, INC. LONG-TERM INCENTIVE PLAN ------------------------ (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998) WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO Industries, Inc. Long-Term Incentive Plan effective April 13, 1988, as last amended effective December 16, 1997; and WHEREAS, pursuant to Section 20 of the Plan, the Company wishes to amend the Plan in certain respects and restate it in a single document; NOW THEREFORE, the Plan is hereby amended and restated, effective February 1, 1998, as follows: 1. PURPOSE. The purpose of the NIPSCO Industries, Inc., Long-Term Incentive Plan (the "Plan") is to further the earnings of NIPSCO Industries, Inc. (the "Company"), its subsidiaries and their subsidiaries. The Plan provides long-term incentives to those officers and key executives who make substantial contributions by their ability, loyalty, industry and invention. The Company intends that the Plan will thereby facilitate securing, retaining, and motivating management employees of high caliber and potential. 2. ADMINISTRATION AND DELEGATION. The Plan shall be administered by the Nominating and Compensation Committee ("Committee") of the Board of Directors of the Company ("Board"). The Committee shall be composed of not fewer than two members of the Board who are "nonemployee directors" of the Company within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"), and "outside directors" of the Company within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder. Subject to the express provisions of the Plan, the Committee may interpret the Plan, prescribe, amend and rescind rules and regulations relating to it, determine the terms and provisions of awards to officers and other key executive employees under the Plan (which need not be identical), and make such other determinations as it deems necessary or advisable for the administration of the Plan. The decisions of the Committee under the Plan shall be conclusive and binding. No member of the Board or of the Committee shall be liable for any action taken, or determination made, hereunder in good faith. Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to indemnification and reimbursement as directors of the Company, pursuant to its by-laws. 3. REVIEW AND APPROVAL. Specific performance goals and details for an award program shall be promulgated by the Committee after consideration of the recommendations of the chief executive officer and shall be submitted to the Board for approval by the majority vote of directors who are not otherwise employed as officers or employees. 4. SHARES SUBJECT TO PLAN. Subject to the provisions of section 19, the shares of common stock of the Company that may be issued, or may be the measure of stock appreciation rights granted, under the Plan shall not exceed in the aggregate 2,500,000 (5,000,000 after January 30, 1998) of the common shares without par value of the Company ("Shares"). Such Shares may be authorized and unissued Shares or treasury Shares. Except as otherwise provided herein, any Shares subject to an option or right which for any reason expires or is terminated, unexercised as to such Shares, shall again be available under the Plan. 5. PARTICIPANTS. Persons eligible to participate shall be limited to those officers and other key executive employees who are in positions in which their decisions, actions and counsel significantly impact upon profitability. Directors who are not otherwise officers or employees shall not be eligible to participate in the Plan. 6. AWARDS UNDER THE PLAN. Awards under the Plan may be in the form of stock options (both options designed to satisfy statutory requirements necessary to receive favorable tax treatment pursuant to any future legislation and options not designed to so qualify under any such future legislation), incentive stock options, stock appreciation rights, performance units or Shares, and restricted Shares or such combinations of the above as the Committee may in its discretion deem appropriate. 7. NONQUALIFIED STOCK OPTIONS. Options shall be evidenced by stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) OPTION PRICE. The purchase price per Share deliverable upon the exercise of an option shall not be less than 100% of the fair market value of the Share on the day the option is granted, as determined by the Committee. For purposes of the Plan, fair market value shall be the average of the high and low prices on the New York Stock Exchange Composite Transactions on the date of the grant. (b) EXERCISE AT OPTION. Each stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the option period shall not commence earlier than six months after the date of the grant of the option nor end later than ten years after the date of the grant of the option. The Committee shall have the power to permit in its discretion an acceleration of the previously determined exercise terms, within the terms of the Plan, under such circumstances and upon such terms and conditions as it deems appropriate. -2- (c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or in any stock option agreement, the optionee shall pay the purchase price of the Shares upon the exercise of any option (i) in cash, (ii) in cash received from a broker-dealer to whom the optionee has submitted an exercise notice consisting of a fully endorsed option (however in the case of an optionee subject to Section 16 of the 1934 Act, this payment option shall only be available to the extent such payment procedures comply with Regulation T issued by the Federal Reserve Board), (iii) by delivering Shares having an aggregate fair market value on the date of exercise equal to the option exercise price, (iv) by directing the Company to withhold such number of Shares otherwise issuable upon exercise of such option having an aggregate fair market value on the date of exercise equal to the option exercise price, (v) by such other medium of payment as the Committee, in its discretion, shall authorize at the time of grant, or (vi) by any combination of (i), (ii), (iii), (iv) and (v). In the case of an election pursuant to (i) or (ii) above, cash shall mean cash or check issued by a federally insured bank or savings and loan association, and made payable to NIPSCO Industries, Inc. In the case of payment pursuant to (ii), (iii) or (iv) above, the optionee's election must be made on or prior to the date of exercise and shall be irrevocable. In lieu of a separate election governing each exercise of an option, an optionee may file a blanket election with the Committee which shall govern all future exercises of options until revoked by the optionee. The Company shall issue, in the name of the optionee, stock certificates representing the total number of Shares issuable pursuant to the exercise of any option as soon as reasonably practicable after such exercise, provided that any Shares purchased by an optionee through a broker-dealer pursuant to clause (ii) above, shall be delivered to such broker-dealer in accordance with 12 C.F.R.(S) 220.3(e)(4), or other applicable provision of law. (d) TRANSFERABILITY. Each stock option agreement shall provide that the option subject thereto is not transferable by the optionee otherwise than by will or the laws of descent or distribution. Notwithstanding the preceding sentence, an optionee, at any time prior to his death, may assign all or any portion of the option to (i) his spouse or lineal descendant, (ii) the trustee of a trust for the primary benefit of his spouse or lineal descendant, or (iii) a tax-exempt organization as described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. In such event the spouse, lineal descendant, trustee or tax-exempt organization will be entitled to all of the rights of the optionee with respect to the assigned portion of such option, and such portion of the option will continue to be subject to all of the terms, conditions and restrictions applicable to the option as set forth herein, and in the related stock option agreement, immediately prior to the effective date of the assignment. Any such assignment will be permitted only if (i) the optionee does not receive any consideration therefor, and (ii) the assignment is expressly approved by the Committee or its delegate. Any such assignment shall be evidenced by an appropriate written document executed by the optionee, and a copy thereof shall be delivered to the Committee or its delegate on or prior to the effective date of the assignment. This paragraph shall apply to all nonqualified stock options granted under the Plan at any time. -3- (e) RIGHTS UPON TERMINATION AT EMPLOYMENT. In the event that an optionee ceases to be an employee for any reason other than death, disability or retirement, the optionee shall have the right to exercise the option during its term within a period of thirty days after such termination to the extent that the option was exercisable at the date of such termination of employment, or during such other period and subject to such terms as may be determined by the Committee. In the event that an optionee dies, retires, or becomes disabled prior to termination of his option without having fully exercised his option, the optionee or his successor shall have the right to exercise the option during its term within a period of twelve months after the date of such termination due to death, disability or retirement, to the extent that the option was exercisable at the date of termination due to death, disability or retirement, or during such other period and subject to such terms as may be determined by the Committee. For purposes of the Plan, the term "disability" shall mean the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The Committee, in its sole discretion, shall determine the date of any disability. For purposes of the Plan, the term "retirement" shall mean retirement as defined in the Company's pension plan. 8. INCENTIVE STOCK OPTIONS. Incentive stock options shall be evidenced by stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) OPTION PRICE. The purchase price per Share of stock deliverable upon the exercise of an option shall not be less than 100% of the fair market value (as defined in subsection 7(a)) of the stock on the day the option is granted, as determined by the Committee except as provided in Section 8(b). (b) EXERCISE OF OPTION. Each stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the option period shall not commence earlier than six months after the date of the grant of the option nor end later than ten years after the date of the grant of the option. The aggregate fair market value (determined with respect to each incentive stock option at the time of grant) of the Shares with respect to which incentive stock options are exercisable for the first time by an individual during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) shall not exceed $100,000. If the aggregate fair market value (determined at the time of grant) of the Shares subject to an option, which first becomes exercisable in any calendar year exceeds the limitation of this Section 8(b), so much of the option that does not exceed the applicable dollar limit shall be an incentive stock option and the remainder shall be a nonqualified stock option; but in all other respects, the original option agreement shall remain in full force and effect. As used in this Section 8, the words "parent" and "subsidiary" shall have the meanings given to them -4- in Section 425(e) and 425(f) of the Internal Revenue Code of 1986, as amended. Notwithstanding anything herein to the contrary, if an incentive stock option is granted to an individual who owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporations, within the meaning of Section 422(b)(6) of the Internal Revenue Code of 1986, as amended, (i) the purchase price of each Share subject to the incentive stock option shall be not less than one hundred ten percent (110%) of the fair market value of the Shares on the date the incentive stock option is granted, and (ii) the incentive stock option shall expire and all rights to purchase Shares thereunder shall cease no later than the fifth anniversary of the date the incentive stock option was granted. (c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or in any stock option agreement, the optionee shall pay the purchase price of the Shares upon the exercise of any option, (i) in cash, (ii) in cash received from a broker-dealer to whom the optionee has submitted an exercise notice consisting of a fully endorsed option (however in the case of an optionee subject to Section 16 of the 1934 Act, this payment option shall only be available to the extent such payment procedures comply with Regulation T issued by the Federal Reserve Board), (iii) by delivering Shares having an aggregate fair market value on the date of exercise equal to the option exercise price, (iv) by directing the Company to withhold such number of Shares otherwise issuable upon exercise of such option having an aggregate fair market value on the date of exercise equal to the option exercise price, (v) by such other medium of payment as the Committee, in its discretion, shall authorize at the time of grant, or (vi) by any combination of (i), (ii), (iii), (iv) and (v). In the case of an election pursuant to (i) or (ii), cash shall mean cash or check issued by a federally insured bank or savings and loan association, and made payable to NIPSCO Industries, Inc. In the case of payment pursuant to (ii), (iii) or (iv) above, the optionee's election must be made on or prior to the date of exercise and shall be irrevocable. In lieu of a separate election governing each exercise of an option, an optionee may file a blanket election with the Committee which shall govern all future exercises of options until revoked by the optionee. The Company shall issue, in the name of the optionee, stock certificates representing the total number of Shares issuable pursuant to the exercise of any option as soon as reasonably practicable after such exercise, provided that any Shares purchased by an optionee through a broker-dealer pursuant to clause (ii) above, shall be delivered to such broker-dealer in accordance with 12 C.F.R. (S) 220.3(e)(4), or other applicable provision of law. (d) TRANSFERABILITY. Each stock option agreement shall provide that it is not transferable by the optionee otherwise than by will or the laws of descent or distribution. (e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee ceases to be an employee for any reason, the optionee (or in the case of his death, his beneficiary or personal representative) shall have the right to exercise the option during the term within a period of ninety days (or in the case of termination of employment because of disability, within a period of one year) after such termination to the extent that the option was -5- exercisable at the date of such termination of employment, or during such other period and subject to such terms as may be determined by the Committee. The provisions of this section 8 shall be construed and applied, and (subject to the limitations of section 20) shall be amended from time to time so as to comply with Section 422 of the Internal Revenue Code of 1986, as amended, or its successors and regulations issued thereunder. 9. STOCK APPRECIATION RIGHTS. Stock appreciation rights shall be evidenced by stock appreciation right agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) AWARD. A stock appreciation right shall entitle the grantee to receive upon exercise the excess of (i) the fair market value of a specified number of Shares at the time of exercise over (ii) a specified price which shall not be less than 100% of the fair market value of the Shares at the time the stock appreciation right was granted, or, if connected with a previously issued stock option, not less than 100% of the fair market value of the Shares at the time such option was granted. A stock appreciation right may be granted in connection with all or any portion of a previously or contemporaneously granted stock option or not in connection with a stock option. (b) TERM. Stock appreciation rights shall be granted for a period of not less than one year nor more than ten years, and shall be exercisable in whole or in part, at such time or times and subject to such other terms and conditions as shall be prescribed by the Committee at the time of grant, subject to the following: (i) No stock appreciation right shall be exercisable in whole or in part, during the six month period starting with the date of grant; and (ii) Stock appreciation rights will be exercisable only during a grantee's employment, except that in the discretion of the Committee a stock appreciation right may be made exercisable for up to thirty days after the grantee's employment is terminated for any reason other than death, disability or retirement. In the event that a grantee dies, retires, or becomes disabled without having fully exercised his stock appreciation rights, the grantee or his successor shall have the right to exercise the stock appreciation rights during their term within a period of twelve months after the date of such termination due to death, disability or retirement to the extent that the right was exercisable at the date of such termination, or during such other period and subject to such terms as may be determined by the Committee. The Committee shall have the power to permit in its discretion an acceleration of previously determined exercise terms, within the terms of the Plan, -6- under such circumstances and upon such terms and conditions as it deems appropriate. (c) PAYMENT. Upon exercise of a stock appreciation right, payment shall be made in cash, in the form of Shares at fair market value, or in a combination thereof, as the Committee may determine. 10. PERFORMANCE UNITS. Performance Units ("Units") shall be evidenced by performance unit agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) PERFORMANCE PERIOD. At the time of award, the Committee shall establish with respect to each Unit award a performance period of not less than two, nor more than five years. (b) VALUATION OF UNITS. At the time of award, the Committee shall establish with respect to each such award a value for each Unit which shall not thereafter change, or which may vary thereafter determinable from criteria specified by the Committee at the time of award. (c) PERFORMANCE TARGETS. At the time of award, the Committee shall establish maximum and minimum performance targets to be achieved with respect to each award during the performance period. The participant shall be entitled to payment with respect to all Units awarded if the maximum target is achieved during the performance period, but shall be entitled to payment with respect to a portion of the Units awarded according to the level of achievement of performance targets, as specified by the Committee, for performance during the performance period which meets or exceeds the minimum target but fails to meet the maximum target. The performance targets established shall relate to corporate, division, or unit performance and may be established in terms of growth in gross revenue, earnings per share, ratio of earnings to shareholders' equity or to total assets or such other performance standards as determined by the Committee in its discretion. Multiple targets may be used and may have the same or different weighting, and they may relate to absolute performance or relative performance as measured against other institutions or divisions or units thereof. (d) ADJUSTMENTS. At any time prior to payment of the Units, the Committee may adjust previously established performance targets and other terms and conditions, including the corporation's, or division's or unit's financial performance for Plan purposes, to reflect major unforeseen events such as changes in laws, regulations or accounting practices, mergers, acquisitions or divestitures or extraordinary, unusual or non-recurring items or events. -7- (e) PAYMENTS OF UNITS. Following the conclusion of each performance period, the Committee shall determine the extent to which performance targets have been attained for such period as well as the other terms and conditions established by the Committee. The Committee shall determine what, if any, payment is due on the Units. Payment shall be made in cash, in the form of Shares at fair market value, or a combination thereof, as the Committee may determine. (f) TERMINATION OF EMPLOYMENT. In the event that a participant holding a Unit award ceases to be an employee prior to the end of the applicable performance period by reason of death, disability or retirement, his Units, to the extent earned under the applicable performance targets, shall be payable at the end of the performance period in proportion to the active service of the participant during the performance period, as determined by the Committee. Upon any other termination of employment, participation shall terminate forthwith and all outstanding Units held by the participant shall be cancelled. (g) OTHER TERMS. The Unit agreements shall contain such other terms and provisions and conditions not inconsistent with the Plan as shall be determined by the Committee. 11. RESTRICTED STOCK AWARDS. Restricted Stock Awards under the Plan shall be in the form of Shares of the Company, restricted as to transfer and subject to forfeiture, and shall be evidenced by restricted stock agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) RESTRICTION PERIOD. Shares awarded pursuant to the Plan shall be subject to such terms, conditions, and restrictions, including without limitation: prohibitions against transfer, substantial risks of forfeiture, attainment of performance objectives and repurchase by the Company or right of first refusal, and for such period or periods as shall be determined by the Committee at the time of grant. The Committee shall have the power to permit in its discretion, an acceleration of the expiration of the applicable restriction period with respect to any part or all of the Shares awarded to a participant. (b) RESTRICTIONS UPON TRANSFER. Shares awarded, and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, except as herein provided, during the restriction period applicable to such Shares. Subject to the foregoing, and except as otherwise provided in the Plan, the participant shall have all the other rights of a shareholder including, but not limited to, the right to receive dividends and the right to vote such Shares. (c) CERTIFICATES. Each certificate issued in respect of Shares awarded to a participant shall be deposited with the Company, or its designee, and shall bear the following legend: -8- "This certificate and the shares represented hereby are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in the NIPSCO Industries, Inc. Long-Term Incentive Plan and an Agreement entered into by the registered owner. Release from such terms and conditions shall obtain only in accordance with the provisions of the Plan and Agreement, a copy of each of which is on file in the office of the Secretary of said Company." (d) LAPSE OF RESTRICTIONS. The Agreement shall specify the terms and conditions upon which any restrictions upon Shares awarded under the Plan shall lapse, as determined by the Committee. Upon the lapse of such restrictions, Shares, free of the foregoing restrictive legend, shall be issued to the participant or his legal representative. (e) TERMINATION PRIOR TO LAPSE OF RESTRICTIONS. In the event of a participant's termination of employment, other than due to death or retirement, prior to the lapse of restrictions applicable to any Shares awarded to such participant, all Shares as to which there still remains unlapsed restrictions shall be forfeited by such participant without payment of any consideration to the participant, and neither the participant nor any successors, heirs, assigns, or personal representatives of such participant shall thereafter have any further rights or interest in such Shares or certificates. 12. SUPPLEMENTAL CASH PAYMENTS. Subject to the Company's discretion, stock option, incentive stock option, stock appreciation right, performance unit or restricted stock agreements may provide for the payment of a supplemental cash payment to a participant promptly after the exercise of an option or stock appreciation right, or, at the time of payment of a performance unit or at the end of a restriction period of a restricted stock award. Supplemental cash payments shall be subject to such terms and conditions as shall be provided by the Committee at the time of grant, provided that in no event shall the amount of each payment exceed: (a) In the case of an option, the excess of the fair market value of a Share on the date of exercise over the option price multiplied by the number of Shares for which such option is exercised, or (b) In the case of a stock appreciation right, performance unit or restricted stock award, the value of the Shares and other consideration issued in payment of such award. 13. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the Shares subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of Shares, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of Shares thereunder, such award may not be consummated in whole or in part unless such listing, registration, -9- qualification, consent, approval or agreement shall have been effected or obtained, free of any conditions not acceptable to the Committee. 14. RIGHTS OF A SHAREHOLDER. The recipient of any award under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder with respect thereto unless and until certificates for Shares are issued to him. 15. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in employment or affect any right which his employer may have to terminate the employment of such participant. 16. WITHHOLDING. Whenever the Company proposes or is required to issue or transfer Shares to a participant under the Plan, the Company shall have the right to require the participant to remit to the Company an amount sufficient to satisfy all federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. If such certificates have been delivered prior to the time a withholding obligation arises, the Company shall have the right to require the participant to remit to the Company an amount sufficient to satisfy all federal, state or local withholding tax requirements at the time such obligation arises and to withhold from other amounts payable to the participant, as compensation or otherwise, as necessary. Whenever payments under the Plan are to be made to a participant in cash, such payment shall be net of any amount sufficient to satisfy all federal, state and local withholding tax requirements. In lieu of requiring a participant to make a payment to the Company in an amount related to the withholding tax requirement, the Committee may, in its discretion, provide that at the participant's election, the tax withholding obligation shall be satisfied by the Company's withholding a portion of the Shares otherwise distributable to the participant, such Shares being valued at the fair market value at the date of exercise, or by the participant's delivering to the Company a portion of the Shares previously delivered by the Company, such Shares being valued at their fair market value as of the date of delivery of such Shares by the participant to the Company. For this purpose, the amount of required withholding shall be a specified rate not less than the statutory minimum federal, state and local (if any) withholding rate, and not greater than the maximum federal, state and local (if any) marginal tax rate applicable to the participant and to the particular transaction. Notwithstanding any provision of the Plan to the contrary, a participant's election pursuant to the preceding sentences (a) must be made on or prior to the date as of which income is realized by the recipient in connection with the particular transaction, and (b) must be irrevocable. In lieu of a separate election on each effective date of each transaction, a participant may file a blanket election with the Committee which shall govern all future transactions until revoked by the participant. 17. NON-ASSIGNABILITY. No award under the Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or except as set forth in subsection 7(d). During the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative. -10- 18. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the Plan (including, without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same, and the establishment of values and performance targets) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 19. ADJUSTMENTS. (i) Appropriate adjustments in the aggregate number of Shares issuable pursuant to the Plan, the number of Shares subject to each outstanding award granted under the Plan, the option price with respect to options and connected stock appreciation rights, the specified price of stock appreciation rights not connected to options, and the value for Units, shall be made to give effect to any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of Shares, whether through recapitalization, stock split, reverse stock split, spin-off, spin-out or other distribution of assets to stockholders, stock distributions or combinations of Shares, payment of stock dividends, other increase or decrease in the number of such Shares outstanding effected without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate. (ii) In the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, or an acquisition by the Company of the stock or assets of any other corporation or corporations, there shall be substituted on an equitable basis, as determined by the Committee in its sole discretion, for each Share then subject to the Plan, and for each Share then subject to an award granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which the holders of Shares of the Company are entitled pursuant to such transaction. (iii) Without limiting the generality of the foregoing provisions of this paragraph, any such adjustment shall be deemed to have prevented any dilution or enlargement of a participant's rights, if such participant receives in any such adjustment, rights that are substantially similar (after taking into account the fact that the participant has not paid the applicable option price) to the rights the participant would have received had he exercised his outstanding award and become a shareholder of the Company immediately prior to the event giving rise to such adjustment. Adjustments under this paragraph shall be made by the Committee, whose decision as to the amount and timing of any such adjustment shall be conclusive and binding on all persons. 20. AMENDMENT OR TERMINATION. The Board or the Committee may at any time terminate, suspend or modify the Plan without the authorization of stockholders to the extent allowed by law, including without limitation any rules issued by the Securities and Exchange Commission under Section 16 of the 1934 Act, insofar as shareholder approval thereof is required in order for the Plan to continue to satisfy the requirements of Rule 16b-3 under the 1934 Act. No termination, suspension or modification of the Plan shall adversely affect any right acquired by any participant under an award granted before the date of such termination, suspension or modification, unless such participant shall consent; but it shall be conclusively presumed that any adjustment for changes in -11- capitalization as provided for herein does not adversely affect any such right. Any member of the Board who is an officer or employee of the Company shall be without a vote on any proposed amendment to the Plan, or on any other matter which might affect that member's individual interest under the Plan. 21. EFFECT ON OTHER PLANS. Unless otherwise specifically provided, participation in the Plan shall not preclude an employee's eligibility to participate in any other benefit or incentive plan and any awards made pursuant to the Plan shall not be considered as compensation in determining the benefits provided under any other plan. 22. DURATION OF THE PLAN. The Plan shall remain in effect until all awards under the Plan have been satisfied by the issuance of Shares or the payment of cash, but no award shall be granted more than ten years after the date the Plan is approved by the shareholders, which shall be its effective date of adoption. -12- EX-10.7 4 NIPSCO IND. 1994 LONG-TERM INCENTIVE PLAN EXHIBIT 10.7 NIPSCO INDUSTRIES, INC. 1994 LONG-TERM INCENTIVE PLAN AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998 NIPSCO INDUSTRIES, INC. 1994 LONG-TERM INCENTIVE PLAN As Amended and Restated Effective February 1, 1998 TABLE OF CONTENTS ----------------- Page ---- 1. Purpose............................................................. -1- 2. Administration...................................................... -1- 3. Common Shares Subject to the Plan................................... -1- 4. Participants........................................................ -2- 5. Awards Under the Plan............................................... -2- 6. Section 162(m) Limitations.......................................... -3- 7. NonQualified Stock Options.......................................... -3- (a) Option Price................................................... -3- (b) Exercise of Option............................................. -3- (c) Payment for Shares............................................. -3- (d) Transferability................................................ -4- (e) Rights Upon Termination of Employment.......................... -4- 8. Incentive Stock Options............................................. -5- (a) Option Price................................................... -5- (b) Exercise of Option............................................. -5- (c) Payment for Shares............................................. -5- (d) Transferability................................................ -6- (e) Rights Upon Termination of Employment.......................... -6- 9. Stock Appreciation Rights........................................... -6- (a) Awards......................................................... -6- (b) Term........................................................... -7- (c) Payment........................................................ -7- 10. Performance Units................................................... -7- i (a) Performance Period............................................. -7- (b) Valuation of Units............................................. -7- (c) Performance Targets............................................ -8- (d) Adjustments.................................................... -8- (e) Payments of Units.............................................. -8- (f) Termination of Employment...................................... -8- (g) Other Terms.................................................... -8- 11. Restricted Stock Awards............................................. -8- (a) Restriction Period............................................. -9- (b) Restrictions Upon Transfer..................................... -9- (c) Certificates................................................... -9- (d) Lapse of Restrictions.......................................... -9- (e) Termination Prior to Lapse of Restrictions..................... -9- 12. Supplemental Cash Payments.......................................... -9- 13. General Restrictions................................................ -10- 14. Rights as a Shareholder............................................. -10- 15. Employment Rights................................................... -10- 16. Tax--Withholding.................................................... -10- 17. Change in Control................................................... -11- 18. Amendment or Termination............................................ -11- 19. Effect on Other Plans............................................... -12- 20. Duration of the Plan................................................ -12- ii NIPSCO INDUSTRIES, INC. 1994 LONG-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998) WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan effective April 13, 1994, as last amended effective December 16, 1997 ("Plan"); and WHEREAS, pursuant to Section 18 of the Plan, the Company wishes to amend the Plan in certain respects and restate it in a single document; NOW THEREFORE, the Plan is hereby amended and restated, effective February 1, 1998, as follows: 1. PURPOSE. The purpose of the NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan (the "Plan") is to further the earnings of NIPSCO Industries, Inc. (the "Company") and its subsidiaries. The Plan provides long-term incentives to those officers and key executives who make substantial contributions by their ability, loyalty, industry and invention. The Company intends that the Plan will thereby facilitate securing, retaining, and motivating management employees of high caliber and potential. 2. ADMINISTRATION. The Plan shall be administered by the Nominating and Compensation Committee ("Committee") of the Board of Directors of the Company ("Board"). The Committee shall be composed of not fewer than two members of the Board who are "nonemployee directors" of the Company within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"), and "outside directors" of the Company within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, ("Code"), and the regulations thereunder. Subject to the express provisions of the Plan, the Committee may interpret the Plan, prescribe, amend and rescind rules and regulations relating to it, determine the terms and provisions of awards to officers and other key executive employees under the Plan (which need not be identical), and make such other determinations as it deems necessary or advisable for the administration of the Plan. The decisions of the Committee under the Plan shall be conclusive and binding. No member of the Board or of the Committee shall be liable for any action taken, or determination made, hereunder in good faith. Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to indemnification and reimbursement as directors of the Company, pursuant to its by-laws. 3. COMMON SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 3(b), the shares that may be issued, or may be the measure of stock appreciation rights granted, under the Plan shall not exceed in the aggregate 2,500,000 (5,000,000 after January 30, 1998) of the common shares without par value of the Company (the "Common Shares"). Such shares may be authorized and unissued shares or treasury shares. Except as otherwise provided herein, any shares subject to an option or right which for any reason expires or is terminated, unexercised as to such shares, shall again be available under the Plan. (b) (i) Appropriate adjustments in the aggregate number of Common Shares issuable pursuant to the Plan, the number of Common Shares subject to each outstanding award granted under the Plan, the option price with respect to options and connected stock appreciation rights, the specified price of stock appreciation rights not connected to options, and the value for Units, shall be made to give effect to any increase or decrease in the number of issued Common Shares resulting from a subdivision or consolidation of shares, whether through recapitalization, stock split, reverse stock split, spin-off, spin-out or other distribution of assets to stockholders, stock distributions or combinations of shares, payment of stock dividends, other increase or decrease in the number of such Common Shares outstanding effected without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate. (ii) In the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, or an acquisition by the Company of the stock or assets of any other corporation or corporations, there shall be substituted on an equitable basis, as determined by the Committee in its sole discretion, for each Common Share then subject to the Plan, and for each Common Share then subject to an award granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which the holders of Common Shares of the Company are entitled pursuant to such transaction. (iii) Without limiting the generality of the foregoing provisions of this paragraph, any such adjustment shall be deemed to have prevented any dilution or enlargement of a participant's rights, if such participant receives in any such adjustment, rights that are substantially similar (after taking into account the fact that the participant has not paid the applicable option price) to the rights the participant would have received had he exercised his outstanding award and become a shareholder of the Company immediately prior to the event giving rise to such adjustment. Adjustments under this paragraph shall be made by the Committee, whose decision as to the amount and timing of any such adjustment shall be conclusive and binding on all persons. 4. PARTICIPANTS. Persons eligible to participate shall be limited to those officers and other key executive employees of the Company and its subsidiaries who are in positions in which their decisions, actions and counsel significantly impact upon profitability. Directors who are not otherwise officers or employees shall not be eligible to participate in the Plan. 5. AWARDS UNDER THE PLAN. Awards under the Plan may be in the form of stock options (both options designed to satisfy statutory requirements necessary to receive favorable tax treatment pursuant to any present or future legislation and options not designed to so qualify), incentive stock options, stock appreciation rights, performance units or shares, and restricted shares or such combinations of the above as the Committee may in its discretion deem appropriate. 6. SECTION 162(M) LIMITATIONS. Subject to Section 3(b) of the Plan, the maximum number of options granted to any person who qualifies as an executive officer named from time to time in the -2- summary compensation table in the Company's annual meeting proxy statement and who is employed by the Company on the last day of the taxable year (the "SCT Executives") shall be 25,000 (50,000 after January 30, 1998) options to purchase Common Shares per year and 250,000 (500,000 after January 30, 1998) options to purchase Common Shares during the term of the Plan. The maximum number of restricted stock awards granted to any SCT Executive shall be 25,000 (50,000 after January 30, 1998) Common Shares per year, provided, however, that no more than 25,000 (50,000 after January 30, 1998) Shares of restricted stock may be awarded in any three-year period and that the maximum number of Shares of restricted stock granted to any SCT Executive during the term of the Plan shall be 75,000 (150,000 after January 30, 1998). 7. NONQUALIFIED STOCK OPTIONS. Options shall be evidenced by stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) OPTION PRICE. The purchase price per Common Share deliverable upon the exercise of an option shall not be less than 100% of the fair market value of a Common Share on the day the option is granted, as determined by the Committee. Fair market value of Common Shares for purposes of the Plan shall be the average of the high and low prices on the New York Stock Exchange Composite Transactions on the date of the grant, or on any other applicable date. (b) EXERCISE OF OPTION. Each stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the option exercise period shall not commence earlier than six months after the date of the grant of the option nor end later than ten years after the date of the grant of the option. The Committee shall have the power to permit in its discretion an acceleration of the previously determined exercise terms, within the terms of the Plan, under such circumstances and upon such terms and conditions as it deems appropriate. (c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or in any stock option agreement, the optionee shall pay the purchase price of the Common Shares upon the exercise of any option (i) in cash, (ii) in cash received from a broker-dealer to whom the optionee has submitted an exercise notice consisting of a fully endorsed option (however in the case of an optionee subject to Section 16 of the 1934 Act, this payment option shall only be available to the extent such payment procedures comply with Regulation T issued by the Federal Reserve Board), (iii) by delivering Common Shares having an aggregate fair market value on the date of exercise equal to the option exercise price, (iv) by directing the Company to withhold such number of Common Shares otherwise issuable upon exercise of such option having an aggregate fair market value on the date of exercise equal to the option exercise price, (v) by such other medium of payment as the Committee, in its discretion, shall authorize at the time of grant, or (vi) by any combination of (i), (ii), (iii), (iv) and (v). In the case of an election pursuant to (i) or (ii) above, cash shall mean cash or check issued by a federally insured bank or savings and loan association, and made payable to NIPSCO Industries, Inc. In the case of payment pursuant to (ii), (iii) or (iv) above, the optionee's election must be made on or prior to the date of exercise and shall be irrevocable. In lieu of a separate election governing -3- each exercise of an option, an optionee may file a blanket election with the Committee which shall govern all future exercises of options until revoked by the optionee. The Company shall issue, in the name of the optionee, stock certificates representing the total number of Common Shares issuable pursuant to the exercise of any option as soon as reasonably practicable after such exercise, provided that any Common Shares purchased by an optionee through a broker-dealer pursuant to clause (ii) above, shall be delivered to such broker- dealer in accordance with 12 C.F.R.(S) 220.3(e)(4), or other applicable provision of law. (d) TRANSFERABILITY. Each stock option agreement shall provide that the option subject thereto is not transferable by the optionee otherwise than by will or the laws of descent or distribution. Notwithstanding the preceding sentence, an optionee, at any time prior to his death, may assign all or any portion of the option to (i) his spouse or lineal descendant, (ii) the trustee of a trust for the primary benefit of his spouse or lineal descendant, or (iii) a tax-exempt organization as described in Section 501(c)(3) of the Code. In such event the spouse, lineal descendant, trustee or tax-exempt organization will be entitled to all of the rights of the optionee with respect to the assigned portion of such option, and such portion of the option will continue to be subject to all of the terms, conditions and restrictions applicable to the option as set forth herein, and in the related stock option agreement, immediately prior to the effective date of the assignment. Any such assignment will be permitted only if (i) the optionee does not receive any consideration therefor, and (ii) the assignment is expressly approved by the Committee or its delegate. Any such assignment shall be evidenced by an appropriate written document executed by the optionee, and a copy thereof shall be delivered to the Committee or its delegate on or prior to the effective date of the assignment. This paragraph shall apply to all nonqualified stock options granted under the Plan at any time. (e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee ceases to be an employee for any reason other than death, disability or retirement, the optionee shall have the right to exercise the option during its term within a period of thirty days after such termination to the extent that the option was exercisable at the date of such termination of employment, or during such other period and subject to such terms as may be determined by the Committee. In the event that an optionee dies, retires, or becomes disabled prior to termination of his option without having fully exercised his option, the optionee or his successor shall have the right to exercise the option during its term within a period of three years after the date of such termination due to death, disability or retirement, to the extent that the option was exercisable at the date of termination due to death, disability or retirement, or during such other period and subject to such terms as may be determined by the Committee. For purposes of the Plan, the term "disability" shall mean disability as defined in the Company's Long-Term Disability Plan. The Committee, in its sole discretion, shall determine the date of any disability. For purposes of the Plan, the term "retirement" shall mean retirement as defined in the Company's pension plan. 8. INCENTIVE STOCK OPTIONS. Incentive stock options shall be evidenced by stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: -4- (a) OPTION PRICE. Except as otherwise provided in Section 8(b), the purchase price per share of stock deliverable upon the exercise of an incentive stock option shall not be less than 100% of the fair market value of the Common Shares on the day the option is granted, as determined by the Committee. (b) EXERCISE OF OPTION. Each stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the option period shall not commence earlier than six months after the date of the grant of the option nor end later than ten years after the date of the grant of the option. The aggregate fair market value (determined with respect to each incentive stock option at the time of grant) of the Common Shares with respect to which incentive stock options are exercisable for the first time by an individual during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) shall not exceed $100,000. If the aggregate fair market value (determined at the time of grant) of the Common Shares subject to an option, which first becomes exercisable in any calendar year exceeds the limitation of this Section 8(b), so much of the option that does not exceed the applicable dollar limit shall be an incentive stock option and the remainder shall be a nonqualified stock option; but in all other respects, the original option agreement shall remain in full force and effect. As used in this Section 8, the words "parent" and "subsidiary" shall have the meanings given to them in Section 424(e) and 424(f) of the Code. Notwithstanding anything herein to the contrary, if an incentive stock option is granted to an individual who owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporations, within the meaning of Section 422(b)(6) of the Code, (i) the purchase price of each Common Share subject to the incentive stock option shall be not less than one hundred ten percent (110%) of the fair market value of the Common Shares on the date the incentive stock option is granted, and (ii) the incentive stock option shall expire, and all rights to purchase Common Shares thereunder shall cease, no later than the fifth anniversary of the date the incentive stock option was granted. (c) PAYMENT FOR SHARES. Except as otherwise provided in the Plan or in any stock option agreement, the optionee shall pay the purchase price of the Common Shares upon the exercise of any option, (i) in cash, (ii) in cash received from a broker-dealer to whom the optionee has submitted an exercise notice consisting of a fully endorsed option (however in the case of an optionee subject to Section 16 of the 1934 Act, this payment option shall only be available to the extent such payment procedures comply with Regulation T issued by the Federal Reserve Board), (iii) by delivering Common Shares having an aggregate fair market value on the date of exercise equal to the option exercise price, (iv) by directing the Company to withhold such number of Common Shares otherwise issuable upon exercise of such option having an aggregate fair market value on the date of exercise equal to the option exercise price, (v) by such other medium of payment as the Committee, in its discretion, shall authorize at the time of grant, or (vi) by any combination of (i), (ii), (iii), (iv) and (v). In the case of an election pursuant to (i) or (ii), cash shall mean cash or check issued by a federally insured bank or savings and loan association, and made payable to NIPSCO Industries, Inc. In the case of payment pursuant to (ii), (iii) or (iv) above, the optionee's election must be made on or prior to the date of exercise and shall be irrevocable. In lieu of a separate election governing each -5- exercise of an option, an optionee may file a blanket election with the Committee which shall govern all future exercises of options until revoked by the optionee. The Company shall issue, in the name of the optionee, stock certificates representing the total number of Common Shares issuable pursuant to the exercise of any option as soon as reasonably practicable after such exercise, provided that any Common Shares purchased by an optionee through a broker-dealer pursuant to clause (ii) above, shall be delivered to such broker- dealer in accordance with 12 C.F.R. (S) 220.3(e)(4), or other applicable provision of law. (d) TRANSFERABILITY. Each stock option agreement shall provide that it is not transferable by the optionee otherwise by will or the laws of descent or distribution. (e) RIGHTS UPON TERMINATION OF EMPLOYMENT. In the event that an optionee ceases to be an employee for any reason other than death, disability or retirement, the optionee shall have the right to exercise the option during its term within a period of thirty days after such termination to the extent that the option was exercisable at the date of such termination of employment, or during such other period and subject to such terms as may be determined by the Committee. In the event that an optionee dies, retires, or becomes disabled prior to termination of his option without having fully exercised his option, the optionee or his successor shall have the right to exercise the option during its term within a period of three years after the date of such termination due to death, disability or retirement, to the extent that the option was exercisable at the date of termination due to death, disability or retirement, or during such other period and subject to such terms as may be determined by the Committee. Notwithstanding the foregoing, in accordance with Section 422 of the Code, if an incentive stock option is exercised more than ninety days after termination of employment, that portion of the option exercised after such date shall automatically be a nonqualified stock option, but in all other respects, the original option agreement shall remain in full force and effect. The provisions of this Section 8 shall be construed and applied, and (subject to the limitations of section 20) shall be amended from time to time so as to comply with Section 422 or its successors of the Code and regulations issued thereunder. 9. STOCK APPRECIATION RIGHTS. Stock appreciation rights shall be evidenced by stock appreciation right agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) AWARDS. A stock appreciation right shall entitle the grantee to receive upon exercise the excess of (i) the fair market value of a specified number of shares of the Company Common Shares at the time of exercise over (ii) a specified price which shall not be less than 100% of the fair market value of the Common Shares at the time the stock appreciation right was granted, or, if connected with a previously issued stock option, not less than 100% of the fair market value of Common Shares at the time such option was granted. A stock appreciation right may be granted in connection with all of any portion of a previously or contemporaneously granted stock option or not in connection with a stock option. -6- (b) TERM. Stock appreciation rights shall be granted for a period of not less than one year nor more than ten years, and shall be exercisable in whole or in part, at such time or times and subject to such other terms and conditions, as shall be prescribed by the Committee at the time of grant, subject to the following: (i) No stock appreciation right shall be exercisable in whole or in part, during the six-month period starting with the date of grant; and (ii) Stock appreciation rights will be exercisable only during a grantee's employment, except that in the discretion of the Committee a stock appreciation right may be made exercisable for up to thirty days after the grantee's employment is terminated for any reason other than death, disability or retirement. ln the event that a grantee dies, retires, or becomes disabled without having fully exercised his stock appreciation rights, the grantee or his successor shall have the right to exercise the stock appreciation rights during their term within a period of three years after the date of such termination due to death, disability or retirement to the extent that the right was exercisable at the date of such termination or during such other period and subject to such terms as may be determined by the Committee. The Committee shall have the power to permit in its discretion an acceleration of previously determined exercise terms, within the terms of the Plan, under such circumstances and upon such terms and conditions as it deems appropriate. (c) PAYMENT. Upon exercise of a stock appreciation right, payment shall be made in cash, in the form of Common Shares at fair market value, or in a combination thereof, as the Committee may determine. 10. PERFORMANCE UNITS. Performance Units ("Units") shall be evidenced by performance unit agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) PERFORMANCE PERIOD. At the time of award, the Committee shall establish with respect to each Unit award a performance period of not less than two, nor more than five, years. (b) VALUATION OF UNITS. At the time of award, the Committee shall establish with respect to each such award a value for each Unit which shall not thereafter change, or which may vary thereafter determinable from criteria specified by the Committee at the time of award. (c) PERFORMANCE TARGETS. At the time of award, the Committee shall establish maximum and minimum performance targets to be achieved with respect to each award during the performance period. The participant shall be entitled to payment with respect to all Units awarded if the maximum target is achieved during the performance period, but shall be entitled to payment with respect to a portion of the Units awarded according to the level of achievement of performance -7- targets, as specified by the Committee, for performance during the performance period which meets or exceeds the minimum target but fails to meet the maximum target. The performance targets established shall relate to corporate, division, or unit performance and may be established in terms of growth in gross revenue, earnings per share, ratio of earnings to shareholders' equity or to total assets or such other performance standards as determined by the Committee in its discretion. Multiple targets may be used and may have the same or different weighting, and they may relate to absolute performance or relative performance as measured against other institutions or divisions or units thereof. (d) ADJUSTMENTS. At any time prior to payment of the Units, the Committee may adjust previously established performance targets and other terms and conditions, including the corporation's, or division's or unit's financial performance for Plan purposes, to reflect major unforeseen events such as changes in laws, regulations or accounting practices, mergers, acquisitions or divestitures or extraordinary, unusual or non-recurring items or events. (e) PAYMENTS OF UNITS. Following the conclusion of each performance period, the Committee shall determine the extent to which performance targets have been attained for such period as well as the other terms and conditions established by the Committee. The Committee shall determine what, if any, payment is due on the Units. Payment shall be made in cash, in the form of Common Shares at fair market value, or in a combination thereof, as the Committee may determine. (f) TERMINATION OF EMPLOYMENT. In the event that a participant holding a Unit award ceases to be an employee prior to the end of the applicable performance period by reason of death, disability or retirement, his Units, to the extent earned under the applicable performance targets, shall be payable at the end of the performance period in proportion to the active service of the participant during the performance period, as determined by the Committee. Upon any other termination of employment, participation shall terminate forthwith and all outstanding Units held by the participant shall be canceled. (g) OTHER TERMS. The Unit agreements shall contain such other terms and provisions and conditions not inconsistent with the Plan as shall be determined by the Committee. 11. RESTRICTED STOCK AWARDS. Restricted Stock Awards under the Plan shall be in the form of Common Shares of the Company, restricted as to transfer and subject to forfeiture, and shall be evidenced by restricted stock agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) RESTRICTION PERIOD. Restricted Common Shares awarded pursuant to the Plan shall be subject to such terms, conditions, and restrictions, including without limitation: prohibitions against transfer, substantial risks of forfeiture, attainment of performance objectives and repurchase by the Company or right of first refusal, and for such period or -8- periods as shall be determined by the Committee at the time of grant. The Committee shall have the power to permit in its discretion, an acceleration of the expiration of the applicable restriction period with respect to any part or all of the Common Shares awarded to a participant. (b) RESTRICTIONS UPON TRANSFER. Common Shares awarded, and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, except as herein provided, during the restriction period applicable to such Shares. Subject to the foregoing, and except as otherwise provided in the Plan, the participant shall have all the other rights of a shareholder including, but not limited to, the right to receive dividends and the right to vote such Shares. (c) CERTIFICATES. Each certificate issued in respect of Common Shares awarded to a participant shall be deposited with the Company, or its designee, and shall bear the following legend: "This certificate and the shares represented hereby are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in the NIPSCO Industries, Inc. 1994 Long-Term incentive Plan and an Agreement entered into by the registered owner. Release from such terms and conditions shall obtain only in accordance with the provisions of the Plan and Agreement, a copy of each of which is on file in the office of the Secretary of said Company." (d) LAPSE OF RESTRICTIONS. A restricted stock agreement shall specify the terms and conditions upon which any restrictions upon Common Shares awarded under the Plan shall lapse, as determined by the Committee. Upon the lapse of such restrictions, Common Shares, free of the foregoing restrictive legend, shall be issued to the participant or his legal representative. (e) TERMINATION PRIOR TO LAPSE OF RESTRICTIONS. In the event of a participant's termination of employment, other than due to death, disability or retirement, prior to the lapse of restrictions applicable to any Common Shares awarded to such participant, all Shares as to which there still remains unlapsed restrictions shall be forfeited by such participant without payment of any consideration to the participant, and neither the participant nor any successors, heirs, assigns, or personal representatives of such participant shall thereafter have any further rights or interest in such Shares or certificates. 12. SUPPLEMENTAL CASH PAYMENTS. Subject to the Company's discretion, stock option, incentive stock option, stock appreciation right, performance unit or restricted stock agreements may provide for the payment of a supplemental cash payment to a participant promptly after the exercise of an option or stock appreciation right, or, at the time of payment of a performance unit or at the end of a restriction period of a restricted stock award. Supplemental cash payments shall be subject to such -9- terms and conditions as shall be provided by the Committee at the time of grant, provided that in no event shall the amount of each payment exceed: (a) In the case of an option, the excess of the fair market value of a Common Share on the date of exercise over the option price multiplied by the number of Common Shares for which such option is exercised, or (b) In the case of a stock appreciation right, performance unit or restricted stock award, the value of the Common Shares and other consideration issued in payment of such award. 13. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the Common Shares subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of Common Shares, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of Common Shares thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained, free of any conditions not acceptable to the Committee. 14. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan, unless otherwise provided by the Plan, shall have no rights as a shareholder with respect thereto unless and until certificates for Common Shares are issued to the recipient. 15. EMPLOYMENT RIGHTS. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in employment or affect any right which his employer may have to terminate the employment of such participant. 16. TAX--WITHHOLDING. Whenever the Company proposes or is required to issue or transfer Common Shares to a participant under the Plan, the Company shall have the right to require the participant to remit to the Company an amount sufficient to satisfy all federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Common Shares. If such certificates have been delivered prior to the time a withholding obligation arises, the Company shall have the right to require the participant to remit to the Company an amount sufficient to satisfy all federal, state or local withholding tax requirements at the time such obligation arises and to withhold from other amounts payable to the participant, as compensation or otherwise, as necessary. Whenever payments under the Plan are to be made to a participant in cash, such payment shall be net of any amount sufficient to satisfy all federal, state and local withholding tax requirements. In lieu of requiring a participant to make a payment to the Company in an amount related to the withholding tax requirement, the Committee may, in its discretion, provide that, at the participant's election, the tax withholding obligation shall be satisfied by the Company's withholding a portion of the Common Shares otherwise distributable to the participant, such Common Shares being valued at their fair market value at the date of exercise, or by the participant's delivering to -10- the Company a portion of the Common Shares previously delivered by the Company, such Common Shares being valued at their fair market value as of the date of delivery of such Common Shares by the participant to the Company. For this purpose, the amount of required withholding shall be a specified rate not less than the statutory minimum federal, state and local (if any) withholding rate, and not greater than the maximum federal, state and local (if any) marginal tax rate applicable to the participant and to the particular transaction. Notwithstanding any provision of the Plan to the contrary, a participant's election pursuant to the preceding sentences (a) must be made on or prior to the date as of which income is realized by the recipient in connection with the particular transaction, and (b) must be irrevocable. In lieu of a separate election on each effective date of each transaction, a participant may file a blanket election with the Committee which shall govern all future transactions until revoked by the participant. 17. CHANGE IN CONTROL. (a) Effect of Change in Control. Notwithstanding any of the provisions of the Plan or any agreement evidencing awards granted hereunder, upon a Change in Control of the Company (as defined in Section 17(b)) all outstanding awards shall become fully exercisable and all restrictions thereon shall terminate in order that participants may fully realize the benefits thereunder. Further, the Committee, as constituted before such Change in Control, is authorized, and has sole discretion, as to any award, either at the time such award is granted hereunder or any time thereafter, to take any one or more of the following actions: (i) provide for the exercise of any such award for an amount of cash equal to the difference between the exercise price and the then fair market value of the Common Shares covered thereby had such award been currently exercisable; (ii) provide for the vesting or termination of the restrictions on any such award; (iii) make such adjustment to any such award then outstanding as the Committee deems appropriate to reflect such Change in Control; and (iv) cause any such award then outstanding to be assumed, by the acquiring or surviving corporation, after such Change in Control. (b) Definition of Change in Control. A "Change in Control" of the Company shall be deemed to have occurred if any one of the occurrences of a "Change in Control" set forth in the Change in Control and Termination Agreements between the Company and certain executive officers thereof shall have been satisfied. 18. AMENDMENT OR TERMINATION. The Board or the Committee may at any time terminate, suspend or modify the Plan without the authorization of shareholders to the extent allowed by law, including without limitation any rules issued by the Securities and Exchange Commission under Section 16 of the 1934 Act, insofar as shareholder approval thereof is required in order for the Plan to continue to satisfy the requirements of Rule 16b-3 under the 1934 Act. No termination, suspension or modification of the Plan shall adversely affect any right acquired by any participant under an award granted before the date of such termination, suspension or modification, unless such participant shall consent; but it shall be conclusively presumed that any adjustment for changes in capitalization as provided for herein does not adversely affect any such right. 19. EFFECT ON OTHER PLANS. Unless otherwise specifically provided, participation in the Plan shall not preclude an employee's eligibility to participate in any other benefit or incentive plan and -11- any awards made pursuant to the Plan shall not be considered as compensation in determining the benefits provided under any other plan. 20. DURATION OF THE PLAN. The Plan shall remain in effect until all awards under the Plan have been satisfied by the issuance of Common Shares or the payment of cash, but no award shall be granted more than ten years after the date the Plan is approved by the shareholders, which shall be its effective date of adoption. -12- EX-10.8 5 1994 LONG-TERM INCENTIVE PLAN EXHIBIT 10.8 FIRST AMENDMENT TO NIPSCO INDUSTRIES, INC. 1994 LONG-TERM INCENTIVE PLAN WHEREAS, NIPSCO Industries, Inc. (the "Company") adopted the NIPSCO Industries, Inc. 1994 Long-Term Incentive Plan ("Plan"), effective April 13, 1994, as amended and restated effective February 1, 1998; and WHEREAS, pursuant to Section 18 of the Plan, the Company deems it to be in its best interest to amend the Plan as described below; NOW THEREFORE, the Plan is hereby amended by the addition of the following Section 21, effective as of December 1, 1998: 21. ASSUMPTION OF OPTIONS. Pursuant to the terms of Section 5.22 of the Amended and Restated Agreement and Plan of Merger by and among the Company, Acquisition Gas Company, Inc., a wholly owned subsidiary of the Company, and Bay State Gas Company ("Bay State"), dated as of December 18, 1997 and amended and restated as of March 4, 1998 and further amended as of November 16, 1998 (as may be further amended, restated or supplemented, the "Agreement'), and at the Effective Time defined in the Agreement, each outstanding stock option issued under the Bay State Gas Company 1989 Key Employee Stock Option Plan ("Bay State Stock Option Plan"), shall be assumed by the Company. Each such stock option ("Assumed Option") shall be deemed to constitute an option to acquire Common Shares in an amount and at a purchase price determined pursuant to Section 5.22 of the Agreement. Each Assumed Option shall be subject to all of the terms and conditions applicable to options granted under the Plan. Notwithstanding the preceding sentence: (1) if the employment of the holder of an Assumed Option with the Company and its subsidiaries terminates for any reason other than death, disability, retirement or Cause, he, or his legal representatives or beneficiary, may exercise the Assumed Option at any time within three months immediately following such termination of employment, but not later than the expiration of the term of such Assumed Option; (2) if the holder of an Assumed Option that is a non-qualified stock option terminates employment with the Company and its subsidiaries because of death, disability or retirement, he, or his legal representatives or beneficiary, may exercise the Assumed Option at any time during the term of such Assumed Option to the extent he was entitled to exercise it at the date of death, disability or retirement; (3) if the holder of an Assumed Option that is an incentive stock option terminates employment with the Company and its subsidiaries because of death, his legal representatives or beneficiary may exercise the Assumed Option at any time during the term of such Assumed Option to the extent he was entitled to exercise it at the date of death; (4) if the holder of an Assumed Option that is an incentive stock option terminates employment with the Company and its subsidiaries because of disability or retirement, he, or his legal representatives or beneficiary, may exercise the Assumed Option at any time within three months immediately following such termination of employment, but not later than the expiration of the term of such Assumed Option; (5) if the employment of the holder of an Assumed Option with the Company and its subsidiaries terminates for Cause, the Assumed Option shall expire as of the date of such termination of employment. For purposes of this Section, "Cause" shall have the same meaning as defined in the holder's severance agreement with the Company or any of its subsidiaries in effect on the date of termination of employment. If the holder has not entered into a severance agreement with the Company or any subsidiary that is in effect on the date of termination of employment, or if the term "Cause" is not defined therein, Cause shall mean the holder's conviction for the commission of a felony, or the holder's fraud or dishonesty which has resulted in or is likely to result in material economic damage to the Company or any subsidiary. Each Assumed Option shall be evidenced by an amended and restated stock option agreement entered into as of the Effective Time by and among the Company, Bay State and the applicable optionee. This First Amendment has been executed by the Company, by its duly authorized officer, on this ____ day of December, 1998. NIPSCO Industries, Inc. By: -------------------------------------- 2 EX-13 6 1998 ANNUAL REPORT TO SHAREHOLDERS 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 are the responsibility of Industries' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NIPSCO Industries, Inc. and subsidiaries as of 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 conformity with generally accepted accounting principles. Chicago, Illinois February 5, 1999 Arthur Andersen LLP 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 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. 2 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. 3 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" in 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. 4 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. 5 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 interest payments on $300 million of Capital Markets' medium-term notes and $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. 6 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 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. 7 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. In February 1999, Industries completed its acquisition of Bay State Gas Company (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. Capital Markets issued $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. On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned subsidiary of PacifiCorp., holds a 66% ownership stake in Market Hub Partners, L.P., which stores natural gas in salt caverns. Services currently owns approximately 12% of Market Hub Partners, L.P. The proposed acquisition is part of Industries' strategy to build a system of assets to serve the natural gas market. The transaction is expected to close in March or April 1999. 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 8 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 of 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 9 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 10 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 impact of accounting standards not yet adopted. 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. 11 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. 12 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. 13 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. 14 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. 15 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. 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, 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) ============
17 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) ============
18 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. In February 1999, Industries completed its acquisition of Bay State in a stock-for-stock transaction. Refer to Purchase of Bay State Gas Company below for a more detailed discussion of the 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. 19 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. 20 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. 21 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. 22 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 23 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.... 62,329 66,546 Bailly scrubber carrying charges and deferred depreciation.................................. 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, the Utilities are 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. 24 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 In February 1999, Industries completed its acquisition 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. Bay State, one of the largest natural gas utilities in New England, provides natural gas distribution services to more than 300,000 customers in Massachusetts, New Hampshire and Maine. The combined company will be the 10th largest natural gas distribution company 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. 25 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. 26 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. 27 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. 28 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 ======== ======== ========
29 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 ======== ========
30 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. 31 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 of 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 ======== ========
32 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. 33 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:
Series Redemption Price Per Share Sinking Fund Or Mandatory 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.
34 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. 35 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. 36 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
37 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 =========
38 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. 39 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 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. 40 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 respectively, were outstanding under these lines of credit. 41 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 ========
42 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 $1.283 billion will be expended for construction purposes for the period from January 1, 1999 to December 31, 2003. 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. 43 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%
44 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. 45 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. 46 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 ======== ======== ========
EVENT (Unaudited) Subsequent to Date of Auditors' Report On February 9, 1999, Industries agreed to acquire TPC Corporation, a natural gas marketing and storage company. Houston-based TPC Corporation, a wholly-owned subsidiary of PacifiCorp., holds a 66% ownership stake in Market Hub Partners, L.P., which stores natural gas in salt caverns. Services currently owns approximately 12% of Market Hub Partners, L.P. The transaction is expected to close in March or April 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 Gas marketing................................ 657,692 480,986 229,922 Other*....................................... 20,127 41,662 131,958 ---------- ---------- ---------- Total...................................... $1,294,790 $1,288,225 $1,029,317 ========== ========== ========== Volumes 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 Gas marketing................................ 279,282 148,728 59,598 Other........................................ 23,090 14,201 8,263 ---------- ---------- ---------- Total...................................... 619,471 495,102 396,300 ========== ========== ========== 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.
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.
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------- ---------- ---------- Operating Revenues Gas (000's)............................................................... $ 637,098 $ 807,239 $ 799,395 Electric ($000's)......................................................... 1,429,986 1,186,331 1,022,231 Water ($000's)............................................................ 83,979 60,743 -- Products and Services ($000's)............................................ 781,715 532,228 166,322 ----------- ----------- ----------- Total Operating Revenues................................................ $ 2,932,778 $ 2,586,541 $ 1,987,948 Operating Margin ($000's).................................................. $ 1,240,411 $ 1,210,927 $ 1,115,965 Operating Income ($000's).................................................. $ 421,506 $ 410,553 $ 386,308 Net Income ($000's)........................................................ $ 193,886 $ 190,849 $ 176,734 Shares outstanding at year end............................................. 117,530,698 124,312,664 119,611,322 Number of common shareholders.............................................. 36,277 37,373 35,339 Basic earnings per average common share.................................... $ 1.60 $ 1.54 $ 1.44 Diluted earnings per average common share.................................. $ 1.59 $ 1.53 $ 1.43 Return on average common equity............................................ 16.1% 16.1% 15.9% Times interest earned (pre-tax)............................................ 3.13 3.43 3.62 Dividends paid per share................................................... $ 0.96 $ 0.90 $ 0.84 Dividend payout ratio...................................................... 60.0% 58.4% 58.3% Market values during the year: High..................................................................... $ 33.625 $ 24.938 $ 20.125 Low...................................................................... $ 24.750 $ 19.000 $ 17.625 Close.................................................................... $ 30.437 $ 24.719 $ 19.813 Book value of common shares................................................ $ 9.78 $ 10.17 $ 9.20 Market-to-book ratio at year end........................................... 311.2% 243.1% 215.4% Total Assets ($000's)...................................................... $ 4,986,503 $ 4,937,033 $ 4,288,883 Utility construction expenditures ($000's)................................. $ 245,825 $ 218,931 $ 207,881 Capitalization: Common shareholders' equity ($000's)..................................... $ 1,149,708 $ 1,264,788 $ 1,100,501 Preferred and preference stock-- Northern Indiana Public Service Company: Series without mandatory redemption provision ($000's)............... $ 81,116 $ 81,123 $ 81,126 Series with mandatory redemption provisions ($000's)................. $ 56,435 $ 58,841 $ 61,246 NIPSCO Industries, Inc.: Series with mandatory redemption provision ($000's).................. $ -- $ -- $ -- Indianapolis Water Company: Series without mandatory redemption provision ($000's)............... $ 4,497 $ 4,497 $ -- Long-Term debt ($000's).................................................... $ 1,667,965 $ 1,667,925 $ 1,127,106 ----------- ----------- ----------- Total Capitalization ($000's).......................................... $ 2,959,721 $ 3,077,174 $ 2,369,979 Number of employees........................................................ 6,035 5,984 4,168
Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------- ---------- ---------- ........................................................................ Operating Revenues Gas (000's)............................................................... $ 691,402 $ 681,909 $ 714,229 Electric ($000's)......................................................... 1,030,923 994,492 963,643 Water ($000's)............................................................ -- -- -- Products and Services ($000's)............................................ 46,983 91,628 59,387 ----------- ----------- ----------- Total Operating Revenues................................................ $ 1,769,308 $ 1,768,029 $ 1,737,259 Operating Margin ($000's).................................................. $ 1,074,820 $ 1,014,566 $ 1,001,542 Operating Income ($000's).................................................. $ 381,877 $ 353,452 $ 355,918 Net Income ($000's)........................................................ $ 175,465 $ 163,987 $ 156,140 Shares outstanding at year end............................................. 124,759,192 127,810,778 131,657,676 Number of common shareholders.............................................. 37,299 39,172 41,038 Basic earnings per average common share.................................... $ 1.36 $ 1.24 $ 1.15 Diluted earnings per average common share.................................. $ 1.35 $ 1.23 $ 1.15 Return on average common equity............................................ 15.5% 14.6% 14.6% Times interest earned (pre-tax)............................................ 3.72 3.61 3.61 Dividends paid per share................................................... $ 0.78 $ 0.72 $ 0.72 Dividend payout ratio...................................................... 57.4% 58.1% 58.1% Market values during the year: High..................................................................... $ 19.250 $ 16.500 $ 17.438 Low...................................................................... $ 14.625 $ 13.063 $ 13.063 Close.................................................................... $ 19.125 $ 14.875 $ 16.438 Book value of common shares................................................ $ 9.00 $ 8.67 $ 8.31 Market-to-book ratio at year end........................................... 212.5% 171.6% 197.8% Total Assets ($000's)...................................................... $ 3,999,520 $ 3,947,138 $ 3,912,324 Utility construction expenditures ($000's)................................. $ 192,966 $ 202,545 $ 180,852 Capitalization: Common shareholders' equity ($000's)..................................... $ 1,122,215 $ 1,107,848 $ 1,094,672 Preferred and preference stock-- Northern Indiana Public Service Company: Series without mandatory redemption provision ($000's)............... $ 81,325 $ 86,389 $ 97,753 Series with mandatory redemption provisions ($000's)................. $ 63,651 $ 66,057 $ 68,462 NIPSCO Industries, Inc.: Series with mandatory redemption provision ($000's).................. $ 35,000 $ 35,000 $ 35,000 Indianapolis Water Company: Series without mandatory redemption provision ($000's)............... $ -- $ -- $ -- Long-Term debt ($000's).................................................... $ 1,175,728 $ 1,180,338 $ 1,192,500 ----------- ----------- ----------- Total Capitalization ($000's).......................................... $ 2,477,919 $ 2,475,632 $ 2,488,387 Number of employees........................................................ 4,356 4,441 4,602
Year Ended December 31, 1992 1991 1990 - ------------------------------------------------------------------------------------------- ---------- ---------- ........................................................................ Operating Revenues Gas (000's)............................................................... $ 666,221 $ 601,920 $ 625,159 Electric ($000's)......................................................... 916,135 933,241 895,836 Water ($000's)............................................................ -- -- -- Products and Services ($000's)............................................ -- -- -- ----------- ----------- ----------- Total Operating Revenues................................................ $ 1,582,356 $ 1,535,161 $ 1,520,995 Operating Margin ($000's).................................................. $ 927,089 $ 919,951 $ 885,262 Operating Income ($000's).................................................. $ 246,217 $ 254,354 $ 247,777 Net Income ($000's)........................................................ $ 136,648 $ 133,388 $ 125,361 Shares outstanding at year end............................................. 131,516,700 133,343,230 137,748,458 Number of common shareholders.............................................. 38,097 39,346 41,285 Basic earnings per average common share.................................... $ 1.00 $ 0.97 $ 0.90 Diluted earnings per average common share.................................. $ 0.99 $ 0.96 $ 0.89 Return on average common equity............................................ 13.1% 12.9% 12.7% Times interest earned (pre-tax)............................................ 3.17 2.93 2.81 Dividends paid per share................................................... $ 0.62 $ 0.58 $ 0.52 Dividend payout ratio...................................................... 62.0% 59.8% 57.8% Market values during the year: High..................................................................... $ 13.313 $ 13.500 $ 9.625 Low...................................................................... $ 11.250 $ 9.250 $ 7.825 Close.................................................................... $ 13.250 $ 12.875 $ 9.438 Book value of common shares................................................ $ 7.87 $ 7.59 $ 7.30 Market-to-book ratio at year end........................................... 168.4% 169.6% 129.3% Total Assets ($000's)...................................................... $ 3,807,941 $ 3,647,557 $ 3,625,181 Utility construction expenditures ($000's)................................. $ 172,329 $ 168,958 $ 152,280 Capitalization: Common shareholders' equity ($000's)..................................... $ 1,034,530 $ 1,011,666 $ 1,005,982 Preferred and preference stock-- Northern Indiana Public Service Company: Series without mandatory redemption provision ($000's)............... $ 97,917 $ 98,710 $ 99,374 Series with mandatory redemption provisions ($000's)................. $ 70,668 $ 53,978 $ 59,358 NIPSCO Industries, Inc.: Series with mandatory redemption provision ($000's).................. $ 35,000 $ 35,000 $ 35,000 Indianapolis Water Company: Series without mandatory redemption provision ($000's)............... $ -- $ -- $ -- Long-Term debt ($000's).................................................... $ 1,054,454 $ 1,068,708 $ 1,165,682 ----------- ----------- ----------- Total Capitalization ($000's).......................................... $2,292,569 $ 2,268,062 $ 2,365,396 Number of employees........................................................ 4,648 4,600 4,547
Year Ended December 31, 1989 1988 - ------------------------------------------------------------------------------------------- ---------- ........................................................................ Operating Revenues Gas (000's)............................................................... $ 677,262 $ 620,723 Electric ($000's)......................................................... 882,303 903,461 Water ($000's)............................................................ -- -- Products and Services ($000's)............................................ -- -- ----------- ----------- Total Operating Revenues................................................ $ 1,559,565 $ 1,524,184 Operating Margin ($000's).................................................. $ 900,035 $ 863,213 Operating Income ($000's).................................................. $ 252,807 $ 257,923 Net Income ($000's)........................................................ $ 72,112/b/ $ 103,449 Shares outstanding at year end............................................. 138,738,984 146,620,420 Number of common shareholders.............................................. 43,763 47,324 Basic earnings per average common share.................................... $ 0.50/b/ $ 0.70 Diluted earnings per average common share.................................. $ 0.49/b/ $ 0.70 Return on average common equity............................................ 7.2%/b/ 10.4% Times interest earned (pre-tax)............................................ 2.02 2.38 Dividends paid per share................................................... $ 0.42 $ 0.30 Dividend payout ratio...................................................... 84.0% 42.9% Market values during the year: High..................................................................... $ 9.813 $ 7.063 Low...................................................................... $ 6.563 $ 4.313 Close.................................................................... $ 9.688 $ 6.938 Book value of common shares................................................ $ 6.96 $ 7.02 Market-to-book ratio at year end........................................... 139.2% 98.9% Total Assets ($000's)...................................................... $ 3,657,718 $ 3,684,721 Utility construction expenditures ($000's)................................. $ 150,786 $ 116,874 Capitalization: Common shareholders' equity ($000's)..................................... $ 965,437 $ 1,028,554 Preferred and preference stock-- Northern Indiana Public Service Company: Series without mandatory redemption provision ($000's)............... $ 99,874 $ 99,937 Series with mandatory redemption provisions ($000's)................. $ 66,309 $ 75,189 NIPSCO Industries, Inc.: Series with mandatory redemption provision ($000's).................. $ -- $ -- Indianapolis Water Company: Series without mandatory redemption provision ($000's)............... $ -- $ -- Long-Term debt ($000's).................................................... $ 1,261,760 $ 1,308,303 ----------- ----------- Total Capitalization ($000's).......................................... $ 2,393,380 $ 2,511,983 Number of employees........................................................ 4,825 4,946
/b/Earnings per share were reduced by $0.72 due to the $82.0 million refund, less associated tax benefits of $30.3 million, related to the Bailly N1 generating unit. 48 EX-21 7 LIST OF SUBSIDIARIES EXHIBIT 21 NIPSCO INDUSTRIES, INC. LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1998 All subsidiaries are incorporated in Indiana, except for Retyred 99, Ltd., which is incorporated in United Kingdom; Inventory Management and Distribution Company, L.L.C., Laredo Nueces Pipeline Company, MidTex Gas Storage Company, L.L.P. and NFCO Acquisition Company, which are incorporated in Texas; N Squared Aviation LLC, Market Hub Partners, Inc., Market Hub Partners L.P., NI-TEX Gas Services and Bristol Resources Production Company, L.L.C. which are incorporated in Delaware; Sun Power Corporation which is incorporated in California; Progeni, Inc. which is incorporated in Illinois; and NESI Energy Marketing Canada Ltd., NIPSCO Energy Services Canada Limited, NESI Energy Marketing Canada, Inc. and Canor Energy Ltd., which are incorporated in Alberta, Canada; NI Canada ULC which is incorporated in Nova Scotia, Canada; Portland Natural Gas Transmission System which is incorporated in Maine. All subsidiaries are wholly- owned unless otherwise indicated. NIPSCO Industries Management Services Company Hamilton Harbour Insurance Services, Ltd. NIPSCO Capital Markets, Inc. IWC Resources Corporation Its subsidiaries are: Indianapolis Water Company Harbour Water Corporation Liberty Water Corporation Utility Data Corporation Waterway Holdings, Inc. IWC Services, Inc. Its subsidiary is: White River Environmental Partnership (1) SM&P Utility Resources, Inc. Miller Pipeline Corporation Primary Energy, Inc. Its subsidiaries are: Harbor Coal Company Lakeside Energy Corporation North Lake Energy Corporation Portside Energy Corporation Cokenergy, Inc. Whiting Clean Energy, Inc. Ironside Energy Corporation Northern Indiana Public Service Company Its subsidiaries are: NIPSCO Exploration Company, Inc. Shore Line Shops Incorporated NI Energy Services, Inc. (formerly known as NIPSCO Energy Services, Inc.) Its subsidiaries are: Market Hub Partners, Inc. (3) Market Hub Partners, L.P. (2) 37 Inventory Management and Distribution Company, L.L.C. (3) NI Telecomm, Inc. NIPSCO Fuel Company, Inc. Its subsidiaries are: NFCO Acquisition Company Bristol Resources Production Company, L.L.C. (4) NEM Acquisition Corp. Crossroads Pipeline Company NI-TEX, Inc. Laredo Nueces Pipeline Company (5) NESI Energy Marketing, L.L.C. (7) (8) Green Fuels, Inc. NESI Power Marketing, Inc. NESI Integrated Energy Resources, Inc. NIPSCO Energy Services Canada Ltd. Its subsidiary is: NESI Energy Marketing Canada, Ltd. (10) NI-TEX Gas Services, Inc. MidTex Gas Storage Company, L.L.P. (6) NI Energy Services Transportation, Inc. NI Energy Services Development Corp. Its subsidiary is: Portland Natural Gas Transmission System (14) NESI Solutions, Inc. NESI Canadian Holdings, Inc. NI Canada ULC. Its subsidiary is: Canor Energy Ltd. (9) NIPSCO Security Services, Inc. NIPSCO Development Company, Inc. Its subsidiaries are: Analytic Systems Laboratories, Inc. (12) Retyred 99, LTD. Protonics Research, Inc. (12) International Polymer Corp. JOF Transportation Company KOGAF Enterprises, Inc. Lake Erie Land Company, Inc. Its subsidiary is: SCC Services, Inc. N Squared Aviation, LLC (13) NDC Douglas Properties, Inc. NIPSCO International Power Systems Company Cardinal Property Management, Inc. Progeni, Inc. Sun Power Corporation (11) Customer Information Servcies, Inc. Kokomo Gas and Fuel Company Its subsidiary is: KGF Trading Company Northern Indiana Fuel and Light Company, Inc. Its subsidiary is: Northern Indiana Trading Company, Inc. _______________ (1) Majority-owned interest of IWC Services, Inc. (2) Minority-owned partnership of NI Energy Services, Inc. 38 (3) Minority-owned interest of NI Energy Services, Inc. (4) Majority-owned interest of NIPSCO Fuel Company, Inc. (5) 50% owned interest of NI-TEX, Inc. (6) Minority-owned interest of NI-TEX Gas Services, Inc. (7) Majority-owned interest of NI Energy Services, Inc. (8) Minority-owned interest of NEM Acquisition Corporation. (9) Minority-owned interest of NI Canada ULC (10) Majority-owned by NIPSCO Energy Services Canada Ltd. (11) Minority-owned subsidiary of NIPSCO Development Company, Inc. (12) Minority-owned subsidiary of NIPSCO Development Company, Inc. (13) Minority-owned interest of NIPSCO Development Company, Inc. (14) Minority-owned interest of NI Energy Services Development Corp. 39 EX-23 8 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-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. 333-69279; Form S-3 Registration Statement No. 333-22347; Form S-3 Registration Statement No. 333- 26847 and Form S-3 Registration Statement No. 333-39911. Chicago, Illinois March 25, 1999 39 -----END PRIVACY-ENHANCED MESSAGE-----